American securities law is at an important crossroads, and the direction it takes will affect investors well into the future. For decades, federal securities law protected U.S. domiciled and citizen investors against fraud affecting the securities they purchased, even if purchased on foreign markets. Under the longstanding conduct and effects tests, the antifraud provisions of U.S. securities law covered all conduct that injured American investors. Fraudsters could not escape a private right of action for securities fraud by consummating a transaction abroad.
The U.S. Supreme Court’s June 2010 ruling in Morrison v. National Australia Bank [1] changed the landscape for U.S. investors. In Morrison—a dispute about the territorial reach of the antifraud provisions of U.S. securities law—the Supreme Court rejected four decades of federal court jurisprudence applying the conduct and effects tests and adopted a new rule that focuses narrowly on the location where securities were purchased and sold. Under prior law, if the fraud involved conduct in the United States or had an effect in the United States, victims had a private right to bring suit. Under Morrison’s new test, so long as the fraud relates to securities that trade only on foreign exchanges or other foreign platforms, no amount of harm to American investors triggers the antifraud protection of U.S. securities law, even if investors submitted their orders from the United States.