March 9, 2012

The Second Circuit Clarifies the US Supreme Court's Ruling on the Extraterritorial Reach of US Securities Laws

Arnold & Porter Advisory

In 2010, for the first time, the US Supreme Court ruled on the extraterritorial reach of the US Securities laws, in Morrison v. National Australia Bank. The Court held that the US securities laws only apply to "transactions in securities listed on domestic exchanges and domestic transactions in other securities." However, in its decision, the Court did not provide guidance on what constitutes "domestic transactions in other securities." In a March 1, 2012 ruling by the Second Circuit Court of Appeals, in Absolute Activist Value Master Fund Limited v. Ficeto (Absolute Activist), on appeal from the United States District Court for the Southern District of New York, the Second Circuit helped to provide such guidance. The Second Circuit concluded that, in order to sufficiently allege a "domestic transaction in other securities" when seeking relief under US securities laws, plaintiffs must assert that irrevocable liability was incurred or that title was transferred in the United States. Although the Second Circuit determined that the plaintiffs' complaint in Absolute Activist should be dismissed for failing to state a claim under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, the plaintiffs were given the opportunity to replead their allegations in order to show that the securities purchases were "domestic transactions" under the Second Circuit's enumerated guidance.

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