SEC Disagrees with Supreme Court’s Anti-U.S. Investor Morrison Decision

by Jeff McCord

SEC Disagrees with Supreme Court’s Anti-U.S. Investor Morrison Decision and Favors Clearly Defined Private Right of Action against Foreign Wrongdoers, rather than Abolition of U.S. Investors’ Legal Rights, SEC Staff Study Asserts

May 9, 2012

The U.S. Solicitor General and the US Securities and Exchange Commission recommended the Supreme Court continue to permit U.S. investors who suffer losses as part of a transnational securities fraud to take legal action in US Courts against the foreign perpetrators. That position was stated in briefs filed with the Supreme Court before the Court’s controversial June 24, 2010 Morrison v. National Australia Bank decision curtailing the right of U.S. investors to sue foreign wrongdoers unless the securities at issue are listed on a U.S. stock exchange.
In a study released last month, the SEC Staff said the Commission stands by the views expressed in its pre-decision brief, which also recommended the Court adopt a standard authorizing U.S. private investor actions when the U.S. component of the fraud directly causes investors’ injuries. The April SEC study was required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. [See SEC staff study here.]

The majority of public comments (44 of 72 respondents) on Morrison submitted to the SEC supported overturning restoring Americans’ right to take action in US courts against foreign-listed companies who defraud them. Indeed, all the letters to the SEC from investors and investor representatives – including 30 pension funds — supported restoring the private right of action. To do so will require Congressional action.

SEC Staff Found No Evidence that Private Actions Cause Economic Harm
There is no economic rationale for the Morrison decision, the SEC study found. Although the U.S. Chamber of Commerce and other anti-consumer legal “reform” proponents have long claimed that “frivolous” lawsuits impose unfair economic burdens on companies and discourage foreign companies from listing on U.S. securities exchanges, the SEC staff found no evidence backing such assertions.   

“Considering both the existing economic research and the results of our analysis, we are unable to document evidence of either economic costs or economic benefits that could be clearly and directly linked to extending a private right of action.”

[See appendix B, page B-1 of SEC Staff report].
SEC Staff Restate’s Importance of Private Actions in Law Enforcement

Moreover, on page one of its Morrison study, the SEC staff re-stated the Commission’s long-standing position (affirmed in several Supreme Court decisions) that meritorious private lawsuits are an important supplement to civil and criminal law-enforcement actions. Such private actions are part of the superior U.S. securities regulatory system that provides foreign companies who list here with an “investor protection premium.”

 The SEC staff explained:

“Another question raised . . . is whether greater exposure to U.S. securities laws and regulations would cause an increase in firm value. The primary focus on whether a firm can increase value through bonding to U.S. securities laws has been [the subject of several] studies of cross-listings. Many of these studies have concluded that there is a valuation premium associated with cross-listing a foreign firm on a U.S. exchange.
. . . In addition to a possible valuation premium, evidence of bonding includes improved corporate governance for firms that cross-list on U.S. exchanges. Specifically, economists have found evidence of a reduced cost of capital . . .
. . . Economists have also found evidence that firms with U.S. cross-listings obtain: (a) better access to larger capital markets (“segmentation hypothesis”), (b) increased liquidity for shareholders, (c) increased visibility (“recognition hypothesis”), and (d) an improvement in price discovery (“information channel”).”

[See pages B-4 through B-7 of SEC study]
Morrison Unnecessarily Restricts Investor Protection and Imposes $2.2 billion “Tax” on Pension Funds Forced to Buy ADRs

Commenting on the SEC staff study and Morrison decision, Salvatore J. Graziano, Esq., a partner with Bernstein Litowitz Berger & Grossman, LLP and president of the National Association of Shareholder & Consumer Attorneys said

“Congress should overturn Morrison to restore investors’ full range of protection against fraud, enable investors to recover their losses, and to help deter fraud and other wrongdoing in the United States by corporations who operate or cause harm in the United States, but list their securities overseas. Restoration of investors’ private right of action against such companies also would help United States pension funds comply with covenants directing them to reduce risk by diversifying portfolios geographically and by industry; but, at the same time, not limiting protections afforded by Unites States securities laws. Morrison unnecessarily limits those protections and the choices of pension funds.”

And, according to one analysis cited by SEC staff, Morrison also imposes a de facto tax upon those pension funds seeking to diversify by purchasing American Depositary Receipts (ADRs) — negotiable securities traded on US exchanges representing underlying foreign securities, which themselves do not trade in the US. ADRs, however, are generally less liquid (harder to sell quickly) than the actual shares traded on a foreign exchange, and may cost pension funds more to buy and hold than purchasing the underlying foreign securities directly on a non-US exchange.

The SEC staff cited an analysis of virtually all US funds with international equity investments. The study found a substantial “tax” imposed upon pension funds that choose ADRs because of Morrison:

“[T]he amount of those assets are $819 billion and the amount to maintain that investment in ADRs, given their increased pricing, would amount to an additional “tax” for the use of American law of $2.2 billion. To impose this additional tax solely so Americans can utilize the laws that Congress has passed for their benefit is fundamentally unfair and puts funds and their fiduciaries in a fundamentally unfair position having to choose to pay increased costs for ADRs or to purchase international securities on foreign exchanges.”

[See page 47 of SEC study.]
Congress Should Overturn Morrison and Restore U.S. Investors’ Rights

As a matter of simple justice and investor protection, Congress should restore the right of American citizens to take action in U.S. courts against foreign-listed companies who defraud them. Will Congress have the back-bone to stand up to multinational corporate interests and do so?
That question will likely only be answered after the November federal elections.

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crossposted with The Investor Advocate