Parkcentral v. Porsche, No. 11-397 (2d Cir. 2014)

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Plaintiffs, international hedge funds, filed suit alleging violations of U.S. securities laws because defendants made various fraudulent statements and took various manipulative actions to deny and conceal Porsche's intention to take over Volkswagen AG (VW), a German corporation. The securities transactions upon which plaintiffs brought suit were so-called "securities-based swap agreements" relating to the stock of VW. The district court granted defendants' motion to dismiss the complaint because the swaps were essentially transactions in securities on foreign exchanges. The court affirmed on the basis of different reasoning, concluding that the imposition of liability under section 10(b) of the Securities Exchange Act, 15 U.S.C. 78j(b), on these foreign defendants with no alleged involvement in plaintiffs' transactions, on the basis of defendants' largely foreign conduct, for losses incurred by plaintiffs in securities-based swap agreements based on the price movements of foreign securities would constitute an impermissibly extraterritorial extension of the statute. The court remanded for further proceedings.

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11 397 cv (L) Parkcentral v. Porsche 11 397 cv(L) Parkcentral v. Porsche 1 2 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT 3 August Term, 2011 (Argued: February 24, 2012 4 Decided: August 15, 2014) 5 Docket Nos. 11 397 cv(L),* 11 403 cv(CON), 6 11 416 cv(CON),* 11 418 cv(CON), 11 428 cv(CON), 11 447 cv(CON) 7 8 9 PARKCENTRAL GLOBAL HUB LIMITED, et al., Plaintiffs Appellants, 10 v. 11 12 13 PORSCHE AUTOMOBILE HOLDINGS SE, f/k/a DR. ING. H.C. F. PORSCHE AG, WENDELIN WIEDEKING, HOLGER P. HÃ RTER, Defendants Appellees.*** 14 15 Before: LEVAL, SACK, AND HALL, Circuit Judges. Appeal by the plaintiffs from a judgment of the United States District 16 17 Court for the Southern District of New York (Harold Baer, Jr., Judge) dismissing 18 the plaintiffs claims pursuant to Federal Rule of Civil Procedure 12(b)(6). The 19 district court concluded that the plaintiffs securities fraud claims, based on their * The appeals in 11 397 cv(L) and 11 416 cv(CON) were withdrawn by stipulation on May 15, 2013. ** The Clerk of Court is respectfully instructed to amend the caption as set forth above. * 1 11 397 cv (L) Parkcentral v. Porsche 1 execution of securities based swap agreements referencing the price of 2 Volkswagen stock trading on foreign exchanges, represented an impermissibly 3 extraterritorial application of United States securities laws. We agree although 4 for reasons somewhat different from those set forth by the district court and 5 conclude that the district court s judgment of dismissal should be affirmed. 6 AFFIRMED, but REMANDED to permit the district court to consider 7 granting leave to plaintiffs to file one or more amended complaints should one or 8 more motions to that effect be made. Judge Leval joins in this per curiam opinion and concurs in a separate 9 10 opinion. 11 12 13 14 15 16 17 18 19 20 21 22 JAMES B. HEATON, III (Kaspar J. Stoffelmayr, on the brief), Bartlit Beck Herman Palenchar & Scott LLP, Chicago, IL, David Parker, Kleinberg, Kaplan, Wolff & Cohen P.C., New York, NY, Jay W. Eisenhofer, James J. Sabella, Grant & Eisenhofer P.A., New York, NY, Thomas E. Redburn, Jr., Sheila A. Sadighi, Lowenstein Sandler PC, Roseland, NJ, Marc L. Greenwald, Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY, for Plaintiffs Appellants. 23 24 25 ROBERT J. GIUFFRA, JR. (John L. Warden, William J. Williams, Jr., Suhana S. Han, Alexander J. Willscher, on the brief), 2 11 397 cv (L) Parkcentral v. Porsche 1 2 3 Sullivan & Cromwell LLP, New York, NY, for Defendant Appellee Porsche Automobil Holding SE. 4 5 6 7 Jay B. Kasner, Scott D. Musoff, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendant Appellee Dr. Wendelin Wiedeking. 8 9 10 11 Michael J. Chepiga, Paul C. Curnin, Emma Lindsay, Alexandra C. Pitney, Simpson Thacher & Bartlett LLP, New York, NY, for Defendant Appellee Holger P. HÃ¤rter. 12 13 14 15 16 17 18 Meredith E. Kotler, Cleary Gottlieb Steen & Hamilton LLP, New York, NY, Giovanni P. Prezioso, Lee F. Berger, Cleary Gottlieb Steen & Hamilton LLP, Washington, DC, for Amici Curiae Securities Industry and Financial Markets Association and Chamber of Commerce of the United States of America. 19 20 21 22 23 Ira D. Hammerman, Kevin M. Carroll, Securities Industry and Financial Markets Association, Washington, DC, for Amicus Curiae Securities Industry and Financial Markets Association. 24 25 26 27 28 Robin S. Conrad, Sheldon Gilbert, National Chamber Litigation Center Inc., Washington, DC, for Amicus Curiae Chamber of Commerce of the United States of America. 29 30 31 32 33 34 Andrew J. Pincus, Marc R. Cohen, Alex C. Lakatos, Paul W. Hughes, Mayer Brown LLP, Washington, DC, for Amici Curiae The Federation of German Industries, Mouvement Des Entreprises De France, Economiesuisse, European Banking Federation, Association of 3 11 397 cv (L) Parkcentral v. Porsche 1 2 German Banks, German Issuers, and The Swiss Bankers Association. 3 4 5 6 7 Richard W. Painter, University of Minnesota Law School, Minneapolis, MN, Ronald J. Colombo, Hofstra University Law School, Hempstead, NY, for Amici Curiae Law Professors. 8 PER CURIAM: In Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), the Supreme 9 10 Court established that, by virtue of the presumption against extraterritorial 11 application of U.S. statutes, § 10(b) of the Securities Exchange Act of 1934, the 12 basic antifraud provision of the U.S. securities laws, has no extraterritorial 13 application, and no civil suit under that section may be brought unless 14 predicated on a purchase or sale of a security listed on a domestic exchange or on 15 a domestic purchase or sale of another security. See id. at 267 ( And it is in our 16 view only transactions in securities listed on domestic exchanges, and domestic 17 transactions in other securities, to which § 10(b) applies. ). In Absolute Activist 18 Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), this Court set forth the 19 means to be used to determine when a transaction in securities is domestic 20 such that it may furnish the basis for a suit under that section. We concluded 21 that in order for such a transaction to qualify as domestic, the parties [must] 4 11 397 cv (L) Parkcentral v. Porsche 1 incur irrevocable liability to carry out the transaction within the United States or 2 . . . title [to the securities must be] passed within the United States. Id. at 69. 3 In this case, the securities transactions upon which the plaintiffs brought 4 suit were so called securities based swap agreements relating to the stock of 5 Volkswagen AG ( VW ), a German corporation; the amount of gain and loss in 6 the transactions depended on prices of VW stock recorded on foreign exchanges. 7 The parties accused of fraud are Porsche Automobil Holding SE ( Porsche ), also 8 a major German corporation, and its executives. Their allegedly fraudulent 9 statements consisted of assertions about Porsche s intentions with respect to the 10 stock of VW; their statements were made primarily in Germany, but were also 11 accessible in the United States and were repeated here by the defendants. The 12 thorny issue presented by this appeal is how to apply the rules established by the 13 Morrison and Absolute Activist decisions to this case. 14 The plaintiffs, more than thirty international hedge funds, employed 15 securities based swap agreements pegged to the price of VW shares, which trade 16 on European stock exchanges, to bet that VW stock would decline in value. The 17 positions they took through their swap agreements were roughly economically 18 equivalent to short positions in VW stock, in that they would gain to the extent 5 11 397 cv (L) Parkcentral v. Porsche 1 VW stock declined in value and would lose to the extent it rose. Plaintiffs allege 2 that, in 2008, defendants made various fraudulent statements and took various 3 manipulative actions to deny and conceal Porsche s intention to take over VW. 4 The plaintiffs allege that they relied on defendants fraudulent denial of 5 Porsche s intention to take over VW in making their swap agreements. When, in 6 October 2008, Porsche made its true intentions public, the price of VW shares 7 rose dramatically, causing the plaintiffs to suffer large losses. The plaintiffs brought the instant complaints in the United States District 8 9 Court for the Southern District of New York against Porsche and two of its 10 corporate officers alleging, among other things, that the defendants fraudulent 11 statements and manipulative actions violated U.S. securities laws. Following the 12 Supreme Court s decision in Morrison, the defendants moved to dismiss the 13 complaint because the plaintiffs swap agreements referenced securities trading 14 on foreign exchanges. The district court (Harold Baer, Jr., Judge) granted the 15 defendants motion, concluding that the swaps were essentially transactions in 16 securities on foreign exchanges. We affirm the judgment, although on the basis of different reasoning. In 17 18 our view, the imposition of liability under § 10(b) on these foreign defendants 6 11 397 cv (L) Parkcentral v. Porsche 1 with no alleged involvement in plaintiffs transactions, on the basis of the 2 defendants largely foreign conduct, for losses incurred by the plaintiffs in 3 securities based swap agreements based on the price movements of foreign 4 securities would constitute an impermissibly extraterritorial extension of the 5 statute. Our ultimate conclusion that this suit seeks impermissibly to extend 6 § 10(b) extraterritorially depends in some part on the particular character of the 7 unusual security at issue. For reasons explained below, we express no view 8 whether we would have reached the same result if the suit were based on 9 different transactions. Out of an abundance of caution, however, we remand the 10 matter to the district court so that it may consider motions, if any, by one or more 11 of the plaintiffs to amend their complaints in response to our decision on this 12 appeal. BACKGROUND 13 Because this case comes to us on appeal from the district court s grant of 14 15 the defendants motion to dismiss, the facts are drawn from the plaintiffs 16 complaints, accepting all well pleaded allegations in the complaint as true and 17 drawing all reasonable inferences in the plaintiff[s ] favor, Bigio v. Coca Cola Co., 18 675 F.3d 163, 169 (2d Cir. 2012) (internal quotation marks and brackets omitted), 19 and augmented by matters of which we may and do take judicial notice, see 7 11 397 cv (L) Parkcentral v. Porsche 1 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007) ( [C]ourts must 2 consider the complaint in its entirety, as well as other sources . . . , in particular, 3 documents incorporated into the complaint by reference, and matters of which a 4 court may take judicial notice. ); ATSI Commc ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 5 87, 98 (2d Cir. 2007) ( [W]e may consider . . . legally required public disclosure 6 documents filed with the SEC, and documents possessed by or known to the 7 plaintiff and upon which it relied in bringing the suit. ). 8 Porsche s Alleged Scheme to Acquire VW 9 Porsche, the well known German automobile manufacturer, is also an 10 active investor in various securities and derivatives. Indeed, in the fiscal year 11 ending July 31, 2008, the company, under the direction of defendants Chief 12 Executive Officer Wendelin Wiedeking and Chief Financial Officer Holger 13 HÃ¤rter, derived eighty eight percent of its total profits from its investments and 14 twelve percent of its total profits from selling motor vehicles. From late 2005 through 2007, Porsche gradually increased its investment in 15 16 VW, another well known German automobile manufacturer, whose shares trade 17 primarily on European exchanges. At the time, a German statute known as the 18 VW Law limited any one VW shareholder s voting rights to twenty percent of 8 11 397 cv (L) Parkcentral v. Porsche 1 the total voting rights, regardless of how many VW shares the shareholder 2 actually owned. In the face of public speculation that the European Court of 3 Justice would soon invalidate the VW Law, Porsche claimed publicly that its 4 acquisition of these shares was intended to prevent a hostile takeover of VW, 5 with which it had important business relationships. Porsche also disavowed any 6 intention to obtain a controlling interest in VW then defined by the VW Law as 7 eighty percent of the company s outstanding shares, or seventy five percent of 8 the shares in the event that other stakeholders agreed to vote in favor of a 9 domination agreement. 1 By the end of 2007, Porsche had become VW s largest 10 shareholder, owning thirty one percent of the company. The plaintiffs allege that in spite of its public assurances to the contrary, at 11 12 least as early as February 2008, Porsche had developed a secret plan to acquire 13 the minimum seventy five percent interest needed to gain control of VW.2 14 Porsche s problem was that VW s stock was held in large part by parties who Under German law, [a] domination agreement between an acquiring firm and a target firm allows the acquiring firm to control the target firm s decisions. Third Amended Complaint ¶ 6, Elliot Assocs., L.P. v. Porsche Automobil Holding SE, 10 Civ. 532 (S.D.N.Y. July 21, 2010) (the Elliott Compl. ). 2 According to German press accounts published nearly a year after the fact, representatives of Porsche met with officials from the State of Lower Saxony which held approximately twenty percent of VW s stock in February 2008, and informed them of this plan. 1 9 11 397 cv (L) Parkcentral v. Porsche 1 either did not want to, or could not for political or other reasons, sell it. As a 2 result, VW s float the amount of shares available to the public for trading 3 was insufficient to allow Porsche to acquire a seventy five percent stake outright. 4 But if those shareholders unwilling to sell could nevertheless be induced to lend 5 their shares to third parties engaged in short sales of VW stock, the shares would 6 temporarily enter the market, giving Porsche the opportunity to buy them.3 This 7 became the core of Porsche s strategy. The plaintiffs allege that Porsche induced them to bet on a decline in the 8 9 price of VW shares, Third Amended Complaint ¶ 5, Elliot Assocs., L.P. v. Porsche 3 Short selling is accomplished by selling stock which the investor does not yet own; normally this is done by borrowing shares from a broker at an agreed upon fee or rate of interest. . . . The short seller is obligated, however, to buy an equivalent number of shares in order to return the borrowed shares [at a later date]. . . . [T]he short seller [typically] makes this covering purchase using the funds he received from selling the borrowed stock. Herein lies the short seller s potential for profit: if the price of the stock declines after the short sale, he does not need all the funds to make his covering purchase; the short seller then pockets the difference. On the other hand, there is no limit to the short seller s potential loss: if the price of the stock rises, so too does the short seller s loss, and since there is no cap to a stock s price, there is no limitation on the short seller s risk. . . . Selling short, therefore, actually involves two separate transactions: the short sale itself and the subsequent covering purchase. Zlotnick v. TIE Commc ns, 836 F.2d 818, 820 (3d Cir. 1988). 10 11 397 cv (L) Parkcentral v. Porsche 1 Automobil Holding SE, 10 Civ. 532 (S.D.N.Y. July 21, 2010) (the Elliott Compl. ), 2 principally by express[ly] den[ying] that it would take over VW in the near 3 future, and thus making VW s shares appear[] increasingly overvalued relative 4 to the shares of other publicly traded automobile companies, id. ¶ 2. The 5 plaintiffs allege that, by concealing its intention to acquire control of VW, 6 Porsche led them to conclude erroneously that the demand for VW stock was 7 lower than it actually was. For these and other reasons, the plaintiffs then 8 entered into various short sale transactions involving VW stock and into 9 securities based swap agreements economically equivalent to short sales of VW 10 stock standing to gain if VW share price fell, and to lose if it rose. 11 To tap into the market for VW shares offered by short sellers such as the 12 plaintiffs, Porsche purchased call options. These gave Porsche the right to buy 13 VW shares at a specified future date and price.4 To hedge against Porsche s 14 exercise of its option rights, its call option counterparties bought and held the 4 An option . . . is a purchased right to buy or sell property at a fixed or floating price. If not exercised within the contractually specified period, an option expires and the buyer of the option loses the acquisition price. A call option gives the option holder the right to buy shares of an underlying security at a particular price . . . . Magma Power Co. v. Dow Chem. Co., 136 F.3d 316, 321 n.2 (2d Cir. 1998) (citation omitted). 11 11 397 cv (L) Parkcentral v. Porsche 1 VW shares that short sellers had sold into the market. The plaintiffs allege that 2 Porsche took various steps to conceal its acquisition of call rights, including 3 buying a sufficiently small number of call options from each of many 4 counterparties so that no one counterparty would acquire enough VW stock for 5 hedging purposes as to trigger legal disclosure requirements. Throughout this period, Porsche made repeated public statements 6 7 disclaiming any intention to acquire a controlling share of VW, and denying that 8 it was trying to obtain a seventy five percent stake. The plaintiffs investment 9 managers located in New York City and elsewhere in the United States 10 concluded, based on the publicly available information, that Porsche was unable 11 or unwilling to acquire control of VW. Because Porsche s strategy had avoided 12 triggering counterparty disclosures, the investment managers remained unaware 13 that Porsche could at any moment exercise rights to purchase large numbers of 14 VW shares. 15 The October 2008 Short Squeeze 16 Porsche financed its purchase of call options by selling put options on VW 17 stock. These options obligated Porsche to pay its counterparties the difference 18 between a pre set strike price and the actual price of VW stock if the actual 12 11 397 cv (L) Parkcentral v. Porsche 1 price fell below the strike price.5 While revenue from its sale of put options 2 allowed Porsche to covertly fund its purchase of call options, the strategy also 3 carried risks. If the price of VW stock fell, the difference between the share price 4 and the strike price would increase, exposing Porsche to potentially massive 5 liability. Indeed, Porsche had entered into so many of these contracts that it 6 risked insolvency in the event VW stock price fell precipitously. Through the first three quarters of 2008, VW s share price continued to rise 7 8 and Porsche s strategy proceeded as planned. As the global financial crisis 9 became increasingly serious in late October 2008, however, VW s stock price 10 began a sharp decline. By October 24, 2008, the price had fallen thirty nine 11 percent from its average closing price between October 1 and October 17, 2008. 12 As a result, Porsche s liability to its put option counterparties grew dramatically. A put option is the right to sell a security at a specified price; thus, the value of a put option increases as the price of the underlying security falls. Magma Power Co., 136 F.3d at 321 n.2. Because Porsche was the seller of put options, the amount Porsche owed to its counterparties increased as the value of VW stock fell. And the plaintiffs allege that unlike Porsche s call options, which entitled Porsche to purchase actual shares, its put options were cash settled, meaning only a cash payment changed hands. Although in theory an option contract is to be settled by the purchase or sale of the optioned security in accordance with the rights created by the option contract, in practice settlement is generally effectuated by a cash payment representing the difference between the market price and the strike price. Dow Jones & Co. v. Int l Secs. Exch., 451 F.3d 295, 298 (2d Cir. 2006). 5 13 11 397 cv (L) Parkcentral v. Porsche 1 The plaintiffs allege that, in a bid to shore up VW s share price and avert disaster, 2 Porsche finally decided to disclose its theretofore secret plan to the public. On 3 Sunday, October 26, 2008, the company issued a press release entitled Porsche 4 Heads for Domination Agreement, revealing that Porsche had acquired 74.1 5 percent of VW through a combination of direct holdings and call options. 6 Complaint ¶ 66, Viking Global Equities LP v. Porsche Automobil Holdings SE, 10 Civ. 7 8073 (S.D.N.Y. Oct. 22, 2010) ( Viking Compl. ). The release explained that 8 Porsche hoped to increase [its VW stake] to 75% in 2009, paving the way to a 9 domination agreement. Id. And it stated that the disclosure of the actual extent 10 of Porsche s ownership of VW should give so called short sellers . . . the 11 opportunity to settle their relevant positions without rush and without facing 12 major risks. Id. The irony of that statement may have been unintentional, but on the 13 14 following day, all hell broke loose. Viking Compl. ¶ 67 (quoting Mike Esterl 15 and Edward Taylor, As Giant Rivals Stall, Porsche Engineers a Financial Windfall, 16 Wall St. J., Nov. 8, 2008, at A1). With Porsche holding 74.1 percent of VW s 17 shares, and the German State of Lower Saxony holding another twenty percent, 18 just 5.9% of the company s outstanding shares remained theoretically available 14 11 397 cv (L) Parkcentral v. Porsche 1 for purchase. Short sellers obligated to acquire and return nearly thirteen 2 percent of VW s outstanding shares to the parties from whom they had 3 borrowed them found themselves facing a severe shortage. Compounding the 4 problem, a substantial proportion of the 5.9 percent in the float was held by 5 index funds that would not or could not sell some or all of their shares. As the market absorbed the news of Porsche s takeover plan, the price of 6 7 VW stock began to skyrocket, leaving short sellers scrambling to purchase the 8 shares they needed to unwind their short sales and limit their losses. That flurry 9 of activity caused the price of VW stock to rise even more rapidly, further 10 increasing the short sellers losses and increasing their desperation to buy shares. 11 This vicious cycle a short squeeze led the price of VW stock to nearly 12 quintuple from its price during the preceding week. Indeed, for several hours, 13 VW became the most valuable corporation in the world measured by market 14 capitalization. To satisfy some of this demand, Porsche agreed to release five 15 percent of its holdings, obtaining a huge windfall as a result. 16 When the dust had settled, parties with short positions in VW had lost an 17 estimated total of $38.1 billion, and VW s share price had fallen back to roughly 15 11 397 cv (L) Parkcentral v. Porsche 1 2007 levels. German authorities later investigated Porsche and its executives, 2 including Wiedeking and HÃ¤rter, in connection with these events. 3 The Plaintiffs Securities based Swap Agreements 4 The transactions in which plaintiffs incurred the losses that are the subject 5 of this suit were synthetic investments, known as securities based swap 6 agreements.6 These investments were economically equivalent to short sales 7 referencing VW shares. 8 A securities based swap agreement is a private contract between two 9 parties in which they agree to exchange cash flows that depend on the price of a 10 reference security, here VW shares. Elliot Compl. ¶ 2 n.2; see also Don M. 11 Chance, Essays in Derivatives 43 (1998) ( An equity swap is an agreement 12 between two parties for each to make to the other a series of payments in which 13 at least one party s payments [are] based on the return on a stock or index. ). 14 The U.S. securities laws in effect at the time of the events at issue defined such a 15 swap as a swap agreement . . . of which a material term is based on the price, 16 yield, value, or volatility of any security or any group or index of securities, or The securities laws use the term security based swap agreement in 15 U.S.C. § 78c, but use the term securities based swap agreement in 15 U.S.C. § 78j(b). Because this opinion focuses on § 10(b), we use the latter term throughout this opinion. 6 16 11 397 cv (L) Parkcentral v. Porsche 1 any interest therein. SEC v. Rorech, 720 F. Supp. 2d 367, 404 (S.D.N.Y. 2010) 2 (quoting section 206B of the Gramm Leach Bliley Act, Pub. L. No. 106 102, 113 3 Stat. 1338 (1999), amended by Pub. L. No. 106 554, § 301(a), 114 Stat. 2763, 2763A 4 451 (2000) (hereafter Gramm Leach Bliley Act )).7 5 A securities based swap agreement is a separate and distinct financial 6 instrument from the security it references. See Gramm Leach Bliley Act, § 206A. 7 Securities based swap agreements are designed to roughly replicate the 7 The Dodd Frank Act amended the Commodity Exchange Act (CEA) and the Securities Exchange Act of 1934 (Exchange Act) to provide statutory definitions for the terms swap, security based swap, mixed swap and security based swap agreement. As amended, the CEA defines swaps broadly to include any agreement . . . that provides on an executory basis for the exchange . . . of 1 or more payments based on the value or level of 1 or more . . . rates, currencies, commodities, securities, instruments of indebtedness, indices, quantitative measures, or other financial or economic interests or property of any kind . . . and that transfers, as between the parties to the transaction, in whole or in part, the financial risk associated with a future change in any such value or level without also conveying a current or future direct or indirect ownership interest in an asset (including any enterprise or investment pool) or liability that incorporates the financial risk so transferred. This broad statutory definition is subject to numerous exclusions. Mark D. Young, et al., CFTC and SEC Adopt Rules Defining Swap and Security Based Swap (Aug. 15, 2012), available at http://www.skadden.com/insights/cftc and sec adopt rules defining swap and security based swap (last visited Aug. 7, 2014) (footnotes omitted). 17 11 397 cv (L) Parkcentral v. Porsche 1 economic effect of owning the referenced share of stock for one counterparty, 2 and shorting the referenced share of stock for the other counterparty, without 3 either party taking an actual ownership interest in the reference security. The 4 plaintiffs allege that because they took the short side of these synthetic 5 investments, the swap agreement[s] [would] generate[] gains as the price of 6 VW shares declined and [would] generate[] losses as the price of VW shares rose, 7 achieving an economic result similar to a short sale. Elliot Compl. ¶ 2 n.2. Because securities based swap agreements do not involve the actual 8 9 ownership, purchase, or sale of the reference security, the securities laws 10 describe swaps as transactions in which the counterparties agree to make certain 11 transfers without also conveying a current or future direct or indirect 12 ownership interest. Gramm Leach Bliley Act § 206A. Instead, the parties agree 13 to exchange payments calculated by applying the change in price of the reference 14 security in this case, VW shares to a pre determined notional amount set by 15 the parties. The parties are free to select any notional amount they choose, 16 regardless of the number of shares actually trading in the reference security.8 This feature of swap agreements facilitates the ability of swap investors to wager on the value of a stock in quantities that are unrelated to the amount of stock available. Amici have argued that this multiplier effect could impose 8 18 11 397 cv (L) Parkcentral v. Porsche 1 Thus, as bilateral agreements to pay money on the occurrence or nonoccurrence 2 of wholly independent events, securities based swap agreements are essentially 3 wagers on changes in the price of the reference securities. Although securities based swap agreements are, in the ways just 4 5 discussed, different from transactions in many other, less exotic securities, which 6 involve actual transfer of shares, they also share some features with other types 7 of securities. For example, a cash settled option, like these swap agreements, 8 gives the right to payments based on future change in the value of the stock it 9 references, rather than any right or obligation to delivery of the stock itself. See 10 Caiola v. Citibank, N.A., N.Y., 295 F.3d 312, 324 27 (2d Cir. 2002) (discussing cash 11 settled options). liability beyond the appropriate limits of § 10(b). See Br. of Amicus Curiae Law Professors at 28 ( Swap traders, for example could enter into billions of dollars of swaps referencing the value of stock in a corporation owning a single coffee shop off Wall Street if they wanted to. ). Their argument highlights a matter that we do not decide today: whether a party to even a domestic securities based swap agreement may, on that basis alone, have statutory standing to sue a non counterparty who merely functioned as an issuer of or trader in the securities referenced by the swap. That question, which concerns the scope of § 10(b) s requirement of deceptive conduct in connection with the purchase or sale of a security or securities based swap agreement, is not before this Court. See 15 U.S.C. § 78j(b). 19 11 397 cv (L) Parkcentral v. Porsche 1 Geography of the Dispute 2 Inasmuch as this appeal involves the applicability of the securities laws to 3 claims involving foreign elements, the location of certain key events, entities, and 4 instruments is essential to our analysis. The plaintiffs have, to varying degrees, alleged that they entered into the 5 6 swap agreements referencing VW shares in the United States. Some of the 7 plaintiffs allege that their investment managers took all steps necessary to 8 transact the securities based swap agreements from their offices in New York 9 City. E.g., Elliott Compl. ¶ 149. Others allege that their investment managers 10 signed a confirmation required by [the] . . . swap counterparty in New York 11 City. Id. ¶ 151. Still others allege more specifically that their swap transactions 12 were entered into, terminated, and based entirely in the United States, with 13 Deutsche Bank in New York acting as the counterparty, Complaint ¶ 3, 14 Parkcentral Global Hub Ltd. v. Porsche Automobil Holdings SE, No. 10 Civ. 8074 15 (S.D.N.Y. Oct. 22, 2010), or that their swap agreements were entered into with 16 New York based Morgan Stanley in the United States, Complaint ¶ 2, 17 Bluemountain Equity Alternatives Master Fund L.P. v. Porsche Automobil Holding SE, 18 No. 10 Civ. 8084 (S.D.N.Y. Oct. 25, 2010), or that their counterparties were acting 19 on behalf of financial institutions located in New York, Complaint ¶ 39, Black 20 11 397 cv (L) Parkcentral v. Porsche 1 Diamond Offshore Ltd. v. Porsche Automobil Holding SE, No. 10 Civ. 4155 (S.D.N.Y. 2 July 23, 2010) ( Black Diamond Compl. ). The swap agreements contained New 3 York choice of law provisions and forum selection clauses designating New 4 York federal and state courts as the forum in which legal disputes would be 5 heard. See, e.g., Elliott Compl. ¶ 149. The plaintiffs do not allege, however, that 6 Porsche was a party to any securities based swap agreements referencing VW 7 stock, or that it participated in the market for such swaps in any way. Although the securities based swap agreements in this case may have been 8 9 concluded domestically, the VW shares they referenced appear to trade only on 10 foreign exchanges. VW shares trade on the Frankfurt Stock Exchange and 11 international stock exchanges in Switzerland, Luxembourg, and the UK. 12 Complaint ¶ 36, Seneca Capital LP v. Porsche Automobil Holdings SE, No. 10 Civ. 13 8161 (S.D.N.Y. Oct. 27, 2010). The plaintiffs do not allege that they are traded on 14 any United States exchange.9 VW had two sponsored, unlisted American depositary receipt ( ADR ) programs based in New York. An ADR is an instrument that represents a specified amount of a foreign security that has been deposited with a foreign branch or agent of the depositary, known as the custodian. The holder of an ADR is not the title owner of the underlying shares. Pinker v. Roche Holdings Ltd., 292 F.3d 361, 367 (3d Cir. 2002) (citations to Bruce L. Hertz, American Depository 9 21 11 397 cv (L) Parkcentral v. Porsche Porsche s allegedly deceptive conduct occurred primarily in Germany, 1 2 although the plaintiffs allege that some of Porsche s statements denying any 3 intention to acquire control of VW were made into the United States or were 4 available here. See, e.g., Viking Compl. ¶ 44 (listing statements made to 5 investment managers in New York or to German and international media); Elliot 6 Compl. ¶¶ 83 85 (listing statements plaintiffs believe Porsche directed into the 7 United States, and that Porsche executives either made in telephone calls or on 8 visits to the United States). As stated, German authorities undertook to 9 investigate Porsche and its executives in relation to these events. 10 District Court Proceedings 11 On January 25, 2010, the plaintiffs filed the complaint in Elliott Associates 12 L.P. v. Porsche Automobil Holding SE, No. 10 Civ. 532 ( Elliott ), in the United 13 States District Court for the Southern District of New York, alleging violations of 14 the federal securities laws and common law fraud. The plaintiffs claimed that 15 Porsche, Wiedeking, and HÃ¤rter lied about Porsche s intent to take over VW and 16 hid the extent of Porsche s control of VW from the market through manipulative Receipts, 600 P.L.I./Comm. 237 (1992), omitted). Nothing in the record before us suggests that swap counterparties could not designate an ADR rather than the security linked to the ADR as a swap s reference security if they wished. They did not, however, do so in this case. 22 11 397 cv (L) Parkcentral v. Porsche 1 options trades. In June 2010, Elliott was consolidated before Judge Baer with 2 another case involving substantially the same allegations filed May 20, 2010, 3 Black Diamond Offshore Ltd. v. Porsche Automobile Holding SE, No. 10 Civ. 4155 4 ( Black Diamond ). See Elliott Assocs. v. Porsche Automobil Holding SE, 759 F. Supp. 5 2d 469, 470 (S.D.N.Y. 2010). Following two amendments to the Elliott complaint, 6 the Supreme Court decided Morrison v. National Australia Bank Ltd., 561 U.S. 247 7 (2010). The parties agreed that a further amendment to each complaint would be 8 necessary in light of that decision. The Third Amended Complaint in Elliott and 9 the Amended Complaint in Black Diamond were filed on July 21 and July 23, 2010, 10 respectively. The defendants moved to dismiss both complaints pursuant to Federal 11 12 Rule of Civil Procedure 12(b)(6) based principally on Morrison. Before the 13 motions were fully submitted, four related actions were filed in the Southern 14 District against the defendants arising out of the same operative facts Viking 15 Global Equities LP v. Porsche Automobil Holdings SE, No. 10 Civ. 8073; Parkcentral 16 Global Hub Ltd. v. Porsche Automobil Holdings SE, No. 10 Civ. 8074; Bluemountain 17 Equity Alternatives Master Fund L.P. v. Porsche Automobil Holding SE, No. 10 Civ. 18 8084; and Seneca Capital LP v. Porsche Automobil Holdings SE, No. 10 Civ. 8161. By 23 11 397 cv (L) Parkcentral v. Porsche 1 stipulation of the parties in all six actions, it was agreed that the district court s 2 ruling on the pending motions to dismiss in Elliott and Black Diamond would 3 apply in the New Actions, . . . as if the Court had issued those rulings in the 4 New Actions. Elliott Assocs., 759 F. Supp. 2d at 470 n.1. 5 On December 30, 2010, the district court granted the defendants motion to 6 dismiss the plaintiffs federal law claims with prejudice, and declined to exercise 7 supplemental jurisdiction over the plaintiffs common law claims. The plaintiffs 8 filed this timely appeal. DISCUSSION 9 10 We review de novo a district court s dismissal of a complaint under Rule 11 12(b)(6), accepting all of the complaint s factual allegations as true and drawing 12 all reasonable inferences in the plaintiffs favor. Forest Park Pictures v. Universal 13 Television Network, Inc., 683 F.3d 424, 429 (2d Cir. 2012). The complaint must state 14 a claim that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 15 (2007). A claim has facial plausibility when the plaintiff pleads factual content 16 that allows the court to draw the reasonable inference that the defendant is liable 17 for the misconduct alleged. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Dismissal 18 is appropriate when it is clear from the face of the complaint, and matters of 24 11 397 cv (L) Parkcentral v. Porsche 1 which the court may take judicial notice, that the plaintiff s claims are barred as a 2 matter of law. Conopco, Inc. v. Roll Int l, 231 F.3d 82, 86 (2d Cir. 2000). I. 3 Liability for Foreign Conduct Under the Federal Securities Laws A. 4 The Antifraud Provision of the Exchange Act Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), makes it 5 6 unlawful [t]o use or employ, in connection with the purchase or sale of any 7 security . . . or any securities based swap agreement[,] any manipulative or deceptive 8 device or contrivance in contravention of such rules and regulations as the 9 [Securities and Exchange] Commission may prescribe as necessary or 10 appropriate in the public interest or for the protection of investors. 15 U.S.C. 11 § 78j(b) (footnote omitted; emphasis added). Rule 10b 5, promulgated by the 12 Commission pursuant to § 10(b), provides: 13 14 15 It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, 16 (a) To employ any device, scheme, or artifice to defraud, 17 18 19 20 (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or 21 22 23 (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, 25 11 397 cv (L) Parkcentral v. Porsche in connection with the purchase or sale of any security. 1 2 17 C.F.R. § 240.10b 5. The underlying purpose of Section 10(b) is to remedy 3 deceptive and manipulative conduct with the potential to harm the public 4 interest or the interests of investors. Morrison v. Nat l Australia Bank Ltd., 547 5 F.3d 167, 170 (2d Cir. 2008) ( Morrison Ct. App. ) (internal quotation marks 6 omitted), abrogated in part on other grounds, aff d on other grounds, 561 U.S. 247 7 (2010) ( Morrison ).10 B. 8 9 Applicability in Cases Involving Extraterritorial Conduct: Morrison and Absolute Activist 10 Morrison and Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 11 (2d Cir. 2012) ( Absolute Activist ), comprise the principal case authority in this 12 Circuit governing the application of § 10(b) and Rule 10b 5 to claims involving 13 extraterritorial conduct. The securities laws insofar as they affect securities based swaps and securities based swap agreements have been amended since 2010. Although these amendments, if applicable to the case at bar would not, so far as we can tell, affect the analysis here, they are unlikely to be applicable because the facts in issue occurred before the amendments became effective. See Caiola v. Citibank, N.A., N.Y., 295 F.3d 312, 327 (2d Cir. 2002) ( Elementary considerations of fairness dictate that individuals should have an opportunity to know what the law is and to conform their conduct accordingly; settled expectations should not be lightly disrupted. (quoting Landgraf v. USI Film Prods., 511 U.S. 244 (1994))). 10 26 11 397 cv (L) Parkcentral v. Porsche 1. Morrison. In the Supreme Court s 2010 opinion in Morrison, the 1 2 plaintiffs alleged that National Australia Bank ( NAB ), an Australian 3 corporation, misrepresented the value of assets held by one of its U.S. 4 subsidiaries. Its allegedly fraudulent valuations had originated in the statements 5 of the U.S. subsidiary. Morrison, 561 U.S. at 251 53. The plaintiffs, Australian 6 nationals who had purchased shares of NAB on Australian exchanges, brought 7 an action against NAB in the Southern District of New York alleging violations of 8 § 10(b) and Rule 10b 5. Id. at 252 53. NAB moved to dismiss the complaint. 9 Applying the so called conduct and effects test, the district court granted the 10 motion. We affirmed because [t]he acts performed in the United States did not 11 comprise the heart of the alleged fraud. Id. at 253 (quoting Morrison Ct. App., 12 547 F.3d at 175 76) (brackets omitted). The Supreme Court began by asserting the longstanding principle of 13 14 American law that legislation of Congress, unless a contrary intent appears, is 15 meant to apply only within the territorial jurisdiction of the United States. 16 Morrison, 561 U.S. at 255 (internal quotation marks omitted) (quoting EEOC v. 17 Arabian Am. Oil Co., 499 U.S. 244, 248 (1991) ( Aramco )). This canon of 18 [statutory] construction, which the Court had previously labeled the 27 11 397 cv (L) Parkcentral v. Porsche 1 presumption against extraterritoriality, see Aramco, 499 U.S. at 248, is based on 2 the assumption that Congress ordinarily legislates with respect to domestic, not 3 foreign matters. Morrison, 561 U.S. at 255. Under this presumption, [w]hen a 4 statute gives no clear indication of an extraterritorial application, it has none. 5 Id. Applying the presumption to § 10(b), the Court observed that [o]n its face, 6 § 10(b) contains nothing to suggest it applies abroad. Id. at 262. Nor did the 7 statute s general reference to foreign commerce in the definition of interstate 8 commerce . . . defeat the presumption against extraterritoriality. Id. at 263. 9 Thus finding no affirmative indication in the Exchange Act that § 10(b) applies 10 extraterritorially, the Court conclude[d] that it does not. Id. at 265. The Court criticized our Circuit s use of the conduct and effects test for its 11 12 disregard of the presumption against extraterritoriality, further criticizing the 13 test as unpredictable and difficult to administer. Id. at 257 59. Rejection of the 14 conduct and effects test did not end the inquiry. The Court acknowledged that 15 the presumption here (as often) [was] not self evidently dispositive, [and] its 16 application require[d] further analysis. Id. at 266. In response to the plaintiffs 17 emphasis on the fact that NAB s allegedly false statements had originated in the 18 United States, the Court observed that it would be a rare case of prohibited 28 11 397 cv (L) Parkcentral v. Porsche 1 extraterritorial application that lacks all contact with the territory of the United 2 States, and added that the presumption against extraterritorial application 3 would be a craven watchdog indeed if it retreated to its kennel whenever some 4 domestic activity is involved in the case. Id. (emphasis in original). The Court 5 went on to consider what it referred to as the focus of congressional concern 6 expressed by the statute. Id. (quoting Aramco, 499 U.S. at 255). 7 8 9 10 11 12 13 14 15 [T]he focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States. Section 10(b) does not punish deceptive conduct, but only deceptive conduct in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered. 15 U.S.C. § 78j(b). Those purchase and sale transactions are the objects of the statute s solicitude. . . . [I]t is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies. 16 Morrison, 561 U.S. at 266 67 (citation omitted; emphasis added). With regard to 17 securities not registered on domestic exchanges, the Court concluded, the 18 statute s exclusive focus [is] on domestic purchases and sales. Id. at 268 19 (emphases in original). Not deception alone, but deception with respect to 20 certain purchases or sales is necessary for a violation of the statute. Id. at 272. 21 The Court also reject[ed] the notion that the Exchange Act reaches 22 conduct in this country affecting exchanges or transactions abroad because 29 11 397 cv (L) Parkcentral v. Porsche 1 [t]he probability of incompatibility with the applicable laws of other countries is 2 so obvious that if Congress intended such foreign application it would have 3 addressed the subject of conflicts with foreign laws and procedures. Id. at 269 4 (quoting Aramco, 499 U.S. at 256). The Court observed that securities 5 regulation[s] of other countries often differ[] from ours as to what constitutes 6 fraud, what disclosures must be made, what damages are recoverable, . . . and 7 many other matters. Id. And it predicted that [t]he transactional test we have 8 adopted whether the purchase or sale is made in the United States, or involves 9 a security listed on a domestic exchange would avoid the interference with 10 foreign securities regulation that application of § 10(b) abroad would produce. 11 Id. at 269 70. 12 Under Morrison, then, [s]ection 10(b) reaches the use of a manipulative or 13 deceptive device or contrivance only in connection with the purchase or sale of a 14 security listed on an American stock exchange, and the purchase or sale of any 15 other security in the United States. 11 Id. at 273. Because that case involve[d] no 11 In response to Morrison, Congress amended the securities acts to provide that [t]he district courts of the United States . . . shall have jurisdiction of an action or proceeding brought or instituted by the Commission or the United States alleging a violation of the antifraud provisions of this chapter involving (1) conduct within the United States that 30 11 397 cv (L) Parkcentral v. Porsche 1 securities listed on a domestic exchange, and all aspects of the purchases 2 complained of by [the plaintiffs] . . . occurred outside the United States, the 3 Court affirmed the dismissal of the complaint. Id. 2. Absolute Activist. After Morrison, but while the instant appeal was 4 5 pending, this Court decided Absolute Activist. That appeal required us to 6 determine under what circumstances the purchase or sale of a security that is 7 not listed on a domestic exchange should be considered domestic within the 8 meaning of Morrison. Absolute Activist, 677 F.3d at 66 67. The plaintiffs, nine 9 Cayman Islands based hedge funds, bought shares in companies incorporated in 10 the United States, whose shares traded only over the counter, directly from those 11 companies. Id. at 63. The district court dismissed the complaint on the grounds constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States. 15 U.S.C. § 78aa(b); id. § 77v(c) (extending jurisdiction of suits brought under § 17(a) of the Securities Act of 1933 in the same fashion). The import of this amendment is unclear, however, because Morrison itself explicitly held that the Court there had jurisdiction to decide the case under the version of § 78aa then in force, even if the presumption against extraterritoriality meant that the plaintiffs failed on the merits. See Morrison v. Nat l Austl. Bank Ltd., 561 U.S. 247, 253 54 (2010). 31 11 397 cv (L) Parkcentral v. Porsche 1 that the allegations, including the foreign identity of the purchasers, did not state 2 a domestic claim in light of Morrison. Id. at 65. On appeal, we concluded that a securities transaction is domestic when 3 4 the parties incur irrevocable liability to carry out the transaction within the 5 United States or when title is passed within the United States. Id. at 69. 6 Therefore, 7 8 9 10 11 12 13 in order to adequately allege the existence of a domestic transaction [under Morrison], it is sufficient for a plaintiff to allege facts leading to the plausible inference that the parties incurred irrevocable liability within the United States: that is, that the purchaser incurred irrevocable liability within the United States to take and pay for a security, or that the seller incurred irrevocable liability within the United States to deliver a security. 14 Id. at 68. Alternatively, we held that it is sufficient for the plaintiff to allege that 15 title to the shares was transferred within the United States. Id. (citing and 16 quoting Quail Cruises Ship Mgmt. Ltd. v. Agencia de Viagens CVC Tur Limitada, 645 17 F.3d 1307, 1310 11 (11th Cir. 2011)). Because the complaint in Absolute Activist contained only conclusory 18 19 allegations as to where liability became irrevocable or title changed hands, we 20 remanded with instructions to the district court to allow the plaintiffs leave to 21 amend. Id. at 69 71. 32 11 397 cv (L) Parkcentral v. Porsche In reaching these conclusions, we rejected the plaintiffs argument that 1 2 the identity of the securities should be used to determine whether a securities 3 transaction is domestic and that where, as in th[at] case, the securities [were] 4 issued by United States companies and [were] registered with the SEC, the 5 transactions [were] domestic within the meaning of Morrison. Id. at 68. That 6 argument was belied by the wording of the test announced in Morrison 7 because [t]he second prong of that test refers to domestic transactions in other 8 securities, not transactions in domestic securities or transactions in securities 9 that are registered with the SEC. Id. at 68 69 (citation omitted). We could not 10 therefore conclude that the identity of the security necessarily has any bearing 11 on whether a purchase or sale is domestic within the meaning of Morrison. Id. at 12 69. We also rejected proposed tests that would have looked to the identity of 13 14 the buyer and seller, the identity of the broker, or whether, in addition to a 15 domestic transaction, some fraudulent acts occurred in the United States, 16 reasoning that the transactional test announced in Morrison does not require 17 that each defendant alleged to be involved in a fraudulent scheme engage in 18 conduct in the United States. Id. at 68 69. 33 11 397 cv (L) Parkcentral v. Porsche II. 1 2 The District Court s Application of Morrison and the Arguments on Appeal As explained in the Background section of this opinion, the claims of the 3 4 operative complaints were based only on the plaintiffs securities based swap 5 agreements referencing VW shares. The defendants moved to dismiss, arguing 6 that Morrison precluded an action based on securities based swap agreements 7 referencing foreign shares, even if the swap agreements themselves were as the 8 plaintiffs alleged concluded in the United States. The district court agreed with the defendants. It rejected the plaintiffs 9 10 contention that whether § 10(b) applies to a transaction depends only on where 11 the transaction occurs as a narrow reading of Morrison. Elliott Assocs., 759 F. 12 Supp. 2d at 474 (emphasis in original). The court turned instead to what it 13 considered the Morrison Court s principal concern avoid[ing] interference 14 with foreign securities regulation that application of § 10(b) abroad would 15 produce. Id. (quoting Morrison, 561 U.S. at 269). It concluded that it would 16 contravene the intention of the Supreme Court in Morrison to extend 17 extraterritorial application of the Exchange Act s antifraud provisions to virtually 18 any situation in which one party to a swap agreement is located in the United 19 States. Id. Indeed, [s]uch a holding would turn Morrison s presumption 34 11 397 cv (L) Parkcentral v. Porsche 1 against extraterritoriality on its head, especially when [b]oth the issuer of the 2 reference security, VW, and the perpetrator of the alleged fraud, Porsche, are 3 located in Germany. Id. at 476. To reconcile Morrison s instructions with its understanding of the Court s 4 5 desire to avoid interference with foreign regulation, the district court reasoned 6 that we must consider the economics of the swaps to determine how to apply 7 Morrison to securities based swaps that reference stocks traded abroad. Id. at 8 475. Since the economic value of securities based swap agreements is 9 intrinsically tied to the value of the reference security, the nature of the reference 10 security must play a role in determining whether a transnational swap 11 agreement may be afforded the protection of § 10(b). Id. at 476. Because the 12 [p]laintiffs swaps were the functional equivalent of trading the underlying VW 13 shares on a German exchange[,] . . . the economic reality is that [the swaps] are 14 essentially transactions conducted upon foreign exchanges and markets, and 15 not domestic transactions that merit the protection of § 10(b). Id. (quoting 16 Morrison, 561 U.S. at 263, 267). Based on this understanding of securities based 17 swap agreements, the court concluded that [a]lthough Morrison permits a cause of action by a plaintiff who has concluded a domestic transaction in other securities, this appears 18 19 35 11 397 cv (L) Parkcentral v. Porsche to mean purchases and sales of securities explicitly solicited by the issuer in the U.S., rather than transactions in foreign traded securities or swap agreements that reference them where only the purchaser is located in the United States. 1 2 3 4 5 Id. Accordingly, the district court granted the defendants motion to dismiss 6 7 the § 10(b) claims, as well as the subsidiary § 20(a) claims against Wiedeking and 8 HÃ¤rter. Id. at 476 77. It declined to exercise supplemental jurisdiction over the 9 plaintiffs common law fraud claims. Id. at 477. On appeal, the plaintiffs urge us to reject the district court s functional 10 11 approach to analyzing swaps. They argue that [b]ecause § 10(b) applies with 12 equal force to securities and securities based swap agreements, Pls. Br. 20 13 (citing 15 U.S.C. § 78j(b)), [u]nder Morrison, § 10(b) reaches transactions in 14 securities based swap agreements within the territorial United States, id. at 21. 15 Because the [p]laintiffs pleaded that they transacted within the territorial United 16 States in securities based swap agreements[,] . . . §10(b) protects plaintiffs 17 transactions. Id. at 21 22. After Morrison, it is that simple. Pls. Reply Br. 4. Porsche counters that [b]ecause Section 10(b), by its terms, applies to 18 19 swaps to the same extent as to securities, the swaps were not covered by 20 § 10(b) because the shares [referenced by the swaps] clearly were not covered. 36 11 397 cv (L) Parkcentral v. Porsche 1 Porsche Br. 4 5. It argues that Congress sought through the [Commodity 2 Futures Modernization Act of 2000 (the CFMA ), Pub. L. No. 106 554, 114 Stat. 3 2763 (2000)] to treat security based swaps the same as direct stock purchases and 4 sales [of the reference security] to which the swaps are functionally equivalent. 5 Id. at 28 (emphasis in original). Absent [a] clear [expression of congressional] 6 intent [to the contrary], the Court must presume that Congress intended for 7 Section 10(b) to apply only to [swap agreements] that reference U.S. traded 8 securities. To do otherwise would create greater protection for transactions in 9 swaps referencing foreign traded securities than for transactions in the 10 underlying securities those swaps reference. Id. at 31. And Porsche warns that 11 the plaintiffs proposed rule would cause interference with foreign securities 12 markets and the securities regulations of foreign sovereigns, such as Germany. 13 [F]oreign issuers all over the world could be subjected to Section 10(b) claims in 14 a U.S. court, no matter where their shares trade and regardless of their adherence 15 to their own local law, simply by virtue of a private contract entered into 16 between private parties without the issuers (or, here, a market participant s) 17 control or even knowledge. Id. at 33 34. 37 11 397 cv (L) Parkcentral v. Porsche III. 1 Analysis 2 As a matter of first principles, the Supreme Court has said that it is 3 acutely aware . . . that [it] sit[s] to decide concrete cases and not abstract 4 propositions of law and has therefore decline[d] to lay down . . . broad 5 rule[s] . . . to govern all conceivable future questions in [an] area. Upjohn Co. v. 6 United States, 449 U.S. 383, 386 (1981); see also New York v. United States, 326 U.S. 7 572, 575 (1946) ( One of the greatest sources of strength of our law is that it 8 adjudicates concrete cases and does not pronounce principles in the abstract. ); 9 United States v. Blackburn, 461 F.3d 259, 262 n.2 (2d Cir. 2006) (stating that we are 10 empowered to decide concrete cases and not abstract principles ). One of the 11 principal distinction[s] between courts and legislatures [is that] the former 12 usually act retrospectively, settling disputes between persons, [while] the latter 13 usually act prospectively, setting the general rules for future conduct. Simmons 14 v. Lockhart, 931 F.2d 1226, 1230 (8th Cir. 1991). We are of course bound by Morrison and Absolute Activist in determining 15 16 whether § 10(b), and Rule 10b 5 promulgated by the Securities and Exchange 17 Commission pursuant thereto, applies to the defendants alleged conduct. We 18 must proceed cautiously in applying teachings the Morrison Court developed in a 19 case involving conventional purchases and sales of stock to derivative securities, 38 11 397 cv (L) Parkcentral v. Porsche 1 like securities based swap agreements, that vest parties with rights to payments 2 based on changes in the value of a stock. A question of potentially determinative importance for this case is 3 4 whether, under Morrison, a domestic transaction in a security (or a transaction in 5 a domestically listed security) in addition to being a necessary element of a 6 domestic § 10(b) claim is also sufficient to make a particular invocation of 7 § 10(b) appropriately domestic. If a domestic transaction in a security is not only 8 necessary but also sufficient to justify the application of § 10(b) to otherwise 9 foreign facts, and the plaintiffs securities based swap agreements (which we 10 assume for these purposes were executed and performed in the United States) 11 are deemed domestic transactions under Absolute Activist, then all other 12 questions would drop away. The mere fact that the plaintiffs based their suit on 13 a domestic transaction would make § 10(b) applicable to allegedly fraudulent 14 conduct anywhere in the world. In such a case, these complaints would properly 15 invoke a domestic application of § 10(b). Morrison established two important rules about the applicability of § 10(b). 16 17 First, Morrison held that, because Congress did not indicate an intention that 18 § 10(b) should apply extraterritorially, the presumption against extraterritoriality 39 11 397 cv (L) Parkcentral v. Porsche 1 dictates that § 10(b) has no extraterritorial application. Morrison, 561 U.S. at 265. 2 Second, Morrison ruled that § 10(b) does not apply unless the suit is predicated 3 on either a domestic securities transaction or a transaction in a domestically 4 listed security. Id. at 267. Because neither was present in the case before it, the 5 Court held that the invocation of § 10(b) was impermissibly extraterritorial, and 6 the complaint failed to state a valid claim. On careful consideration of Morrison s words and arguments as applied to 7 8 the facts of this case, we conclude that, while that case unmistakably made a 9 domestic securities transaction (or transaction in a domestically listed security) 10 necessary to a properly domestic invocation of § 10(b), such a transaction is not 11 alone sufficient to state a properly domestic claim under the statute. We reach 12 this conclusion for several reasons. First, and most important, the Court did not say that such a transaction 13 14 was sufficient to make the statute applicable. The language the Court used was 15 consistent with the description of necessary elements rather than sufficient 16 conditions. See id. at 267 ( And it is in our view only transactions in securities 17 listed on domestic exchanges, and domestic transactions in other securities, to 18 which § 10(b) applies. (emphasis added)). The Court never said that an 40 11 397 cv (L) Parkcentral v. Porsche 1 application of § 10(b) will be deemed domestic whenever such a transaction is 2 present. Second, a rule making the statute applicable whenever the plaintiff s suit is 3 4 predicated on a domestic transaction, regardless of the foreignness of the facts 5 constituting the defendant s alleged violation, would seriously undermine 6 Morrison s insistence that § 10(b) has no extraterritorial application. It would 7 require courts to apply the statute to wholly foreign activity clearly subject to 8 regulation by foreign authorities solely because a plaintiff in the United States 9 made a domestic transaction, even if the foreign defendants were completely 10 unaware of it. Such a rule would inevitably place § 10(b) in conflict with the 11 regulatory laws of other nations. The principal reason that the Court reject[ed] the notion that the 12 13 Exchange Act reaches conduct in this country affecting exchanges or transactions 14 abroad, id. at 269, was not that Congress lacked the power to do so. Indeed, the 15 Court implied the contrary. See id. at 255 (explaining that the presumption is not 16 a limit upon Congress s power to legislate ). But [t]he probability of 17 incompatibility with the applicable laws of other countries [in the case of 18 transfers of shares of common stock] is so obvious that if Congress intended such 41 11 397 cv (L) Parkcentral v. Porsche 1 foreign application it would have addressed the subject of conflicts with foreign 2 laws and procedures in the statute. Id. at 269 (citation and internal quotation 3 marks omitted). The Court apparently thought that, if an extraterritorial 4 application of federal law would likely be incompatible with foreign law, and 5 that application was intended by Congress, Congress would have addressed the 6 conflict. The corollary of that proposition is that if an application of the law 7 would obviously be incompatible with foreign regulation, and Congress has not 8 addressed that conflict, the application is one which Congress did not intend. Applying that axiom to this case illustrates the problem with treating the 9 10 location of a transaction as the definitive factor in the extraterritoriality inquiry. 11 If the domestic execution of the plaintiffs agreements could alone suffice to 12 invoke § 10(b) liability with respect to the defendants alleged conduct in this case, 13 then it would subject to U.S. securities laws conduct that occurred in a foreign 14 country, concerning securities in a foreign company, traded entirely on foreign 15 exchanges, in the absence of any congressional provision addressing the 16 incompatibility of U.S. and foreign law nearly certain to arise. That is a result 17 Morrison plainly did not contemplate and that the Court s reasoning does not, we 18 think, permit. 42 11 397 cv (L) Parkcentral v. Porsche For all these reasons, we conclude that, while a domestic transaction or 1 2 listing is necessary to state a claim under § 10(b), a finding that these transactions 3 were domestic would not suffice to compel the conclusion that the plaintiffs 4 invocation of § 10(b) was appropriately domestic.12 5 * * * 6 Because, in the case of securities not listed on domestic exchanges, a 7 domestic transaction is necessary but not necessarily sufficient to make § 10(b) 8 applicable, we need not decide whether the plaintiffs transactions satisfy the 9 standards of Absolute Activist for domestic transactions, because we think it clear 10 that the claims in this case are so predominantly foreign as to be impermissibly 11 extraterritorial. To begin with, the application of § 10(b) to the defendants would so 12 13 obviously implicate the incompatibility of U.S. and foreign laws that Congress 14 could not have intended it sub silentio. Cf. Morrison, 561 U.S. at 269 ( [I]f 15 Congress intended such foreign application it would have addressed the subject We recognize that in many instances, especially where the parties to the suit were the parties to the transaction, the fact that the transaction was domestic might well be deemed sufficient to compel the conclusion that the invocation of § 10(b) is also domestic. 12 43 11 397 cv (L) Parkcentral v. Porsche 1 of conflicts with foreign laws and procedures. (internal quotation marks 2 omitted)). The complaints concern statements made primarily in Germany with 3 respect to stock in a German company traded only on exchanges in Europe. 4 Were this suit allowed to proceed as pleaded, it would permit the plaintiffs, by 5 virtue of an agreement independent from the reference securities, to hale the 6 European participants in the market for German stocks into U.S. courts and 7 subject them to U.S. securities laws. The potential for regulatory and legal 8 overlap and conflict would have been obvious to any legislator who considered 9 the possibility that the statute would result in such an application. Indeed, the 10 fraudulent acts alleged in the complaint have been the subject of investigation by 11 German regulatory authorities and adjudication in German courts. Although we 12 recognize that the plaintiffs allege that the false statements may have been 13 intended to deceive investors worldwide, we think that the relevant actions in 14 this case are so predominantly German as to compel the conclusion that the 15 complaints fail to invoke § 10(b) in a manner consistent with the presumption 16 against extraterritoriality. Morrison, 561 U.S. at 266. The complaints thus fail to 17 state a claim upon which relief may be granted. 44 11 397 cv (L) Parkcentral v. Porsche 1 In concluding that these complaints do not state a claim upon which relief 2 may be granted, we do not suggest that the presence of some foreign element in 3 a transaction necessarily means that Congress did not intend to include it in the 4 coverage of § 10(b). To borrow Morrison s metaphor as to the effect of a minor 5 domestic element on the nature of an overwhelmingly foreign transaction: 6 Section 10(b) would indeed be a craven watchdog against securities fraud if it 7 retreated to its kennel whenever a fraud involved some foreign activity.13 The 8 potential for incompatibility between U.S. and foreign law is just one form of 9 evidence that a particular application of a statute is extraterritorial. It is neither a 10 safe harbor nor the only relevant consideration in the extraterritoriality analysis. 11 It predominates in this case because of the dominance of the foreign elements we 12 have outlined above. Our decision today in no way forecloses the application of § 10(b) to 13 14 govern fraud in connection with transactions in securities based swap For it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States. But the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case. Morrison, 561 U.S. at 266. 13 45 11 397 cv (L) Parkcentral v. Porsche 1 agreements where the transactions are domestic and where the defendants are 2 alleged to have sufficiently subjected themselves to the statute. The conclusion we have reached on these facts cannot, of course, be 3 4 perfunctorily applied to other cases based on the perceived similarity of a few 5 facts. In a world of easy and rapid transnational communication and financial 6 innovation, transactions in novel financial instruments which market 7 participants can freely invent to serve the market s needs of the moment can 8 come in innumerable forms of which we are unaware and which we cannot 9 possibly foresee. We do not purport to proffer a test that will reliably determine 10 when a particular invocation of § 10(b) will be deemed appropriately domestic or 11 impermissibly extraterritorial. We believe courts must carefully make their way 12 with careful attention to the facts of each case and to combinations of facts that 13 have proved determinative in prior cases, so as eventually to develop a 14 reasonable and consistent governing body of law on this elusive question. We 15 have neither the expertise nor the evidence to allow us to lay down, in the 16 context of the single case before us, a rule that will properly apply the principles 17 of Morrison to every future § 10(b) action involving the regulation of securities 18 based swap agreements in particular or of more conventional securities 46 11 397 cv (L) Parkcentral v. Porsche 1 generally. Neither do we see anything in Morrison that requires us to adopt a 2 bright line test of extraterritoriality when deciding every § 10(b) case. While 3 over time a series of judicial opinions may collectively result in one or more such 4 standards, we do not think it appropriate in this case of first impression to 5 attempt to set forth a comprehensive rule or set of rules that will govern all 6 future cases to come before this Court. Perhaps, in the final analysis, Congress 7 and the Securities and Exchange Commission might be in a better position to 8 craft broader rules in this area in light of their access to hearings, including the 9 testimony of experts, their competence to make policy decisions, and their 10 constitutionally and statutorily ordained roles as makers of law and rules.14 It is 11 enough to say that we think our decision in this case is compelled by the text of Congress directed the Securities and Exchange Commission to carry out a study to determine the extent to which private rights of action under the antifraud provisions of the Securities and Exchange Act of 1934 . . . should be extended to cover domestic conduct in connection with foreign transactions or foreign conduct with domestic effects. Dodd Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111 203, § 929Y, 124 Stat 1376, 1871 (2010). But that study, released in April 2012, offered only general options without advocating for any particular approach, further underscoring the complexity of these matters. See SEC Staff, Study on the Cross Border Scope of the Private Right of Action Under Section 10(b) of the Securities Exchange Act of 1934 (2012), available at http://www.sec.gov/news/studies/2012/929y study cross border private rights.pdf. 14 47 11 397 cv (L) Parkcentral v. Porsche 1 the Exchange Act and the principles underlying the Supreme Court s decision in 2 Morrison, as applied to our facts. We therefore affirm the district court s dismissal of the complaints. 3 4 Recognizing, however, that our decisions here and in Absolute Activist have 5 elaborated on the standards set forth in Morrison in such a way that the plaintiffs 6 might conceivably be able to draft amended complaints that would invoke a 7 domestic application of § 10(b), we remand to allow the district court to entertain 8 a motion to amend the complaints. CONCLUSION 9 For the reasons stated above, we AFFIRM the dismissal of the complaints 10 11 and REMAND for further proceedings consistent with this opinion. 48 1 LEVAL, Circuit Judge, concurring: 2 I concur fully in the opinion of the court. I add this separate concurrence to 3 explain my understanding of an aspect of the Morrison opinion, in relation to our 4 ruling. Our opinion concludes that the relevant actions in this case are so 5 predominantly German as to compel the conclusion that the complaints fail to 6 invoke § 10(b) in a manner consistent with the presumption against 7 extraterritoriality. Op. 44. In reaching that conclusion, we do not identify, or rely on, any single 8 9 factor or bright line rule. Our opinion states that the conclusion is based on a 10 number of facts. The claims focus on statements of a prominent German 11 company, primarily made in Germany, concerning the stock of another 12 prominent German company, which is traded on foreign exchanges, but not on 13 any domestic exchange. The defendants were not parties to, nor did they 14 participate in, the plaintiffs swap agreements. These agreements referenced the 15 German company s stock but did not give the plaintiffs any ownership interest in 16 that stock. The alleged fraud has been investigated by German authorities and 17 was the subject of adjudication in German courts. Consideration of all those facts 18 leads us to observe, Were this suit allowed to proceed as pleaded, it would 1 1 permit the plaintiffs, by virtue of an agreement independent from the reference 2 securities, to hale the European participants in the market for German stocks into 3 U.S. courts and subject them to U.S. securities laws. The potential for regulatory 4 and legal overlap and conflict would have been obvious . . . . Op. 44. There is language in the Supreme Court s Morrison opinion which might 5 6 be read as commanding that only bright line, single factor rules may be 7 employed to determine when an invocation of § 10(b) would be impermissibly 8 extraterritorial. Among Morrison s criticisms of this circuit s longstanding test 9 was that the presence or absence of any single factor which was considered 10 significant in other cases . . . [wa]s not necessarily dispositive in future cases. 11 Morrison v. Nat l Austl. Bank Ltd., 561 U.S. 247, 259 (2010). If Morrison intended to 12 command that only bright line, or single factor, tests be used, we would of 13 course be required in this case to identify and follow a single factor, or bright 14 line, test to govern our determination. As I understand Morrison, however, that 15 was not its meaning. I believe it would be a mistake, and a harmful one, to so 16 construe Morrison. Indeed, reading Morrison to permit only bright line rules 17 would likely undermine its principal holding that § 10(b) has no extraterritorial 2 1 application, while also providing unscrupulous domestic securities dealers with 2 easy options to escape the coverage of the antifraud statute. Morrison criticized the test the lower courts had been using on several 3 4 different grounds. The principal criticism was that it disregard[ed] the 5 presumption against extraterritoriality. See id. at 255. Instead of presuming that 6 Congress does not legislate extraterritorially absent clear indication of contrary 7 intent, under the conduct and effects test, courts inquir[ed] whether it would be 8 reasonable (and hence what Congress would have wanted) to apply [§ 10(b)] to a 9 given situation. Id. at 257. 10 The second criticism was that, in this disregard of the presumption, id. at 11 255, lower court rulings in cases such as Schoenbaum v. Firstbrook, 405 F.2d 200 (2d 12 Cir. 1968), and Leasco Data Processing Equip. Corp. v. Maxwell, 468 F.2d 1326 (2d 13 Cir. 1972), had applied § 10(b) inappropriately in circumstances that should have 14 been governed by foreign law. See Morrison, 561 U.S. at 257 ( With Schoenbaum 15 and Leasco on the books, the Second Circuit had excised the presumption against 16 extraterritoriality from the jurisprudence of § 10(b) . . . . ). 17 Thus, Morrison s principal criticisms of the lower court jurisprudence, for 18 their failure to guard against inappropriate extraterritorial extension of § 10(b), 3 1 had nothing to do with the courts employment of a flexible test. What is more, 2 the vice addressed by Morrison s principal criticisms has been substantially cured 3 by Morrison s holding. Morrison commands that § 10(b) not be given 4 extraterritorial application. Consequently, the main purpose for which courts 5 now must find a useful test is to ensure, in transnational circumstances, that 6 § 10(b) not be given extraterritorial application, while preserving the domestic 7 coverage that Congress intended. Among the main reasons for which we 8 conclude that Morrison s domestic transaction test must be viewed as necessary, 9 but not necessarily sufficient, to justify the invocation of § 10(b) is that otherwise 10 application of the test would in some cases defeat the presumption against 11 extraterritoriality. Given that § 10(b) suits may be brought not only against 12 participants in a securities transaction but against any entity that perpetrated a 13 deception in connection with the purchase or sale, applying § 10(b) whenever a 14 suit arises out of a domestic transaction would require that the United States 15 statute be applied inappropriately in many circumstances to foreign conduct far 16 more suitably governed by foreign law. There are substantial further reasons why I believe Morrison cannot be 17 18 understood as intending to prohibit the use of flexible, multi factor tests to guard 4 1 against extraterritorial application of § 10(b). Most important, the Supreme Court 2 itself in Kiobel v. Royal Dutch Petroleum Co., 569 U.S. , 133 S. Ct. 1659 (2013), has 3 construed Morrison and its presumption against extraterritoriality in a manner 4 that calls for employment of a flexible, multi factor analysis. The Court stated 5 that claims under the Alien Tort Statute could be domestic under Morrison, even 6 if based on foreign conduct, if they touch and concern the territory of the United 7 States . . . with sufficient force to displace the presumption against extraterritorial 8 application. Id. at 1669. Whether foreign acts touch and concern the territory of 9 the United States with sufficient force to displace the presumption is not a 10 question susceptible to resolution by any bright line, single factor test. Second, because multi factor tests are so frequently employed in United 11 12 States law for all sorts of purposes, we would expect that, if the Supreme Court 13 intended to rule that only bright line, single factor tests can be recognized as 14 valid law, it would state that message with unmistakable clarity. I see no such 15 clear condemnation of multi factor tests in the Morrison discussion. The gist of Morrison s criticism of the conduct and effects test as 16 17 unpredictable the criticism susceptible to misinterpretation was that, as courts 18 attributed an intent to Congress that coincided with whatever the particular 5 1 court thought to be good policy for the particular case, Morrison, 561 U.S. at 2 259, courts came to apply the test so inconsistently and unpredictably that it was 3 not a test at all. See id. at 255 56 ( That has produced a collection of tests for 4 divining what Congress would have wanted, complex in formulation and 5 unpredictable in application. ); id. at 259 n.4. ( Even if one thinks that the 6 conduct and effects tests are numbered among Judge Friendly s many fine 7 contributions to the law, his successors, though perhaps under the impression 8 that they nurture the same mighty oak, are in reality tending each its own 9 botanically distinct tree. ). In short, I do not read the Supreme Court s criticism as based on the failure 10 11 of the lower courts to use a bright line, or single factor, test, but rather on the 12 Supreme Court s perception that the lower courts had been disguising as a test 13 an unprincipled approach to decision making based on little more than the 14 various courts assessment of good policy for each particular case. There are in my view still further important reasons to doubt that the 15 16 Supreme Court intended by those unclear words to command that only bright 17 line tests could qualify as acceptable law. Use of a bright line, or single factor, 18 test for that sort of question would be at odds with the tendency of modern 6 1 jurisprudence and would lead to seriously undesirable results, likely to be 2 incompatible with the main objectives of the Morrison opinion. The question whether application of § 10(b) to a particular set of 3 4 transnational facts would be impermissibly extraterritorial has much in common 5 with the choice of law question that arises when a court must determine which 6 state or nation s law most appropriately governs a case involving interstate or 7 transnational facts. Over the last half century, at least in the absence of a binding 8 contractual selection by the parties, courts have overwhelmingly abandoned 9 bright line tests in favor of more subtle and flexible inquiries for such questions 10 because their complexity does not lend itself to reliable analysis by a bright line 11 test. See, e.g., Eli Lilly Do Brasil, Ltda. v. Federal Express Corp., 502 F.3d 78 (2d Cir. 12 2007) (conducting a multi factor analysis under the Restatement (Second) of 13 Conflict of Laws); Hataway v. McKinley, 830 S.W.2d 53, 56 59 (Tenn. 1992) 14 (describing states rejection of the bright line rule of lex loci delicti in favor of 15 more flexible approaches in tort cases); see also Restatement (Second) of 16 Conflict of Laws §§ 145, 148, 188 (1971); Symeon C. Symeonides, Choice of Law in 17 the American Courts in 2010: Twenty Fourth Annual Survey, 59 Am. J. Comp. L. 303, 18 331 (2011) (categorizing states choice of law methodologies); Symeon C. 7 1 Symeonides, Choice of Law in the American Courts in 1993 (and in the Six Previous 2 Years), 42 Am. J. Comp. L. 599, 600 612 (1994) (collecting cases). The Supreme 3 Court s reasoning in Kiobel, which, as noted above, called for a flexible inquiry 4 upon applying Morrison to the Alien Tort Statute, is consistent with the modern 5 approach to such questions. Furthermore, any bright line, or single factor, test for determining whether 6 7 an application of § 10(b) is appropriately domestic would likely suffer from 8 serious defects. A test so insensitive to changes of context would almost certainly 9 be either under inclusive, failing to protect the domestic securities markets and 10 thus failing to carry out Congress s purpose, or (as with Morrison s domestic 11 transaction requirement if construed as not only necessary but also sufficient to 12 make § 10(b) applicable) over inclusive, compelling applications of § 10(b) to 13 foreign conduct far more appropriately covered by foreign law, and thus 14 contradicting the main thrust of Morrison.1 Because § 10(b) applies not only to frauds by a party to a securities transaction against the counterparty, but also to any frauds that are in connection with a securities transaction, the mere fact that the securities transaction was domestic does not prevent application of the statute to frauds that are in all other respects foreign. Applying § 10(b) in such cases of overwhelmingly foreign facts could not be reconciled with Morrison s admonition that the presumption against extraterritoriality is not a timid sentinel that retreat[s] . . . whenever some domestic activity is involved in the case. Morrison, 561 U.S. at 266. Notably, 1 8 Additionally, a bright line rule would perversely offer safe harbors for 1 2 fraud. Bright line rules can be highly beneficial in many circumstances, 3 especially those involving good faith dealings, because they support 4 predictability and permit good faith enterprises to plan for allocation of risk. But 5 this same quality makes bright line rules problematic when employed to govern 6 those who operate in bad faith. Bright line rules (unless seriously over inclusive) 7 would permit unscrupulous securities dealers to design their transactions with 8 their victims so as to stay on the side of the line that is outside the reach of the 9 statute. Defrauded victim investors would have no recourse to the law Congress 10 passed to secure the integrity of U.S. securities markets. This would defeat the 11 longstanding principle enunciated by the Supreme Court that § 10(b) should be 12 construed not technically and restrictively, but flexibly to effectuate its remedial 13 purposes, SEC v. Zandford, 535 U.S. 813, 819 (2002) (internal quotation marks Morrison did not confront this kind of scenario, in which all the other facts point in the opposite direction from the solitary fact that triggers the bright line rule. In Morrison, the most significant facts uniformly corroborated the impermissible extraterritoriality of this invocation of the statute. Not only were the securities transactions conducted in Australia among Australians, but the case involved foreign plaintiffs suing [primarily] foreign [as well as some] American defendants for [foreign] misconduct in connection with securities traded on foreign exchanges. Id. at 250 51 (emphasis added). 9 1 omitted), and to protect against fraudulent practices, which constantly vary, 2 Superintendent of Ins. of N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971). 3 For all these reasons, most particularly the Supreme Court s own words 4 and reasoning in Morrison, and in Kiobel when it undertook to apply the rule of 5 Morrison, I do not read Morrison as prohibiting the use of a flexible, multi factor 6 test to ensure that § 10(b) not be applied extraterritorially. 10

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