It’s
too bad for Fabrice Tourre, the former Goldman Sachs securities trader, that the
portfolio manager on Goldman’s notorious
ABACUS investment vehicle, isn’t a foreign company. If it were, Tourre might have entirely escaped Securities and
Exchange Commission charges that he engaged in securities fraud in structuring
and marketing theABACUS
synthetic collateralized debt obligation.
Under
a June 10 ruling by Manhattan federal district court judge Barbara Jones,
Tourre is off the hook for allegedly defrauding ABACUS investors IKB and ABN
Amro because they’re foreign companies that dealt with overseas-based Goldman
entities. So at least for those companies,
Tourre’s actions fall outside the purview of U.S. courts under the U.S. Supreme
Court’s 2010 Morrison
v. National Australia Bank opinion. Here’s Judge
Jones’s 41-page opinion—the first in which a federal district court
judge has applied Morrison in an SEC enforcement case--and here’s the Reuters
story on the ruling.
Tourre still has lots to worry about. In an odd,
split-the-baby conclusion, Judge Jones drew a distinction between Goldman’s
“offers” and “sales” of ABACUS securities, and ruled that, despite Morrison,
the SEC can proceed with certain claims involving IKB and ABN Amro under the
Exchange Act. Tourre’s lawyers at Allen & Overy will undoubtedly
challenge Judge Jones’s novel interpretation on that point. More predictably,
Judge Jones ruled that Morrison doesn’t apply to the SEC’s allegations that
Tourre deceived the U.S.-based ACA Management, which served as the ABACUS
portfolio selection agent, and ACA Capital, an investor, for failing to
disclose that the hedge fund Paulson & Co., had been involved in picking
the securities underlying ABACUS and was betting on the CDO to tank. Tourre’s
lawyers have said they’re confident they’ll be able to defend those
allegations.
The
big question for other SEC defendants,
though, is whether Tourre’s successful invocation of Morrison to knock out at
least some of the SEC’s charges is a one-off event. That’s shaping up as a
fascinating battle that’s going to pit Congressional intent against some
supposedly bungled legislative drafting.
In
July 2010, as Tourre’s lawyers were working on a motion to dismiss the SEC’s
April complaint against their client based on the Supreme Court’s June 2010
Morrison ruling, Congress passed the Dodd-Frank Act, which contains provisions
explicitly intended to undo Morrison’s restrictions on enforcement actions
involving foreign securities transactions—exactly Tourre’s defense. Dodd-Frank
adds a phrase to the 1933 and 1934 securities laws stating that “the district
courts of the United States…shall have jurisdiction of an action or proceeding
brought by or instituted by the [SEC] or the United States alleging a violation
of the antifraud provisions.”
At
the time, a sheaf of law firm client alerts (see here,
here,
here,
and here,
for example) reported that Dodd-Frank, in a response to Morrison, had restored
power to the SEC and DOJ to bring actions involving overseas securities. That
was clearly Congress’s intent, based on the June
30, 2010 Congressional Record. Under that reading of Dodd-Frank, Tourre
fell into a narrow crack when he challenged the SEC charges under Morrison
because Dodd-Frank hadn’t been passed when his case began, so he could assert
it as a defense. Securities defendants in the post Dodd-Frank era could forget
about any Morrison defense.
Or
can they? A subsequent crop of Dodd-Frank interpreters have taken a close look
at the language of the Morrison-rollback provision and concluded that Congress
didn’t accomplish what it intended. George Conway III of Wachtell,
Lipton, Rosen & Katz—who won the Morrison case at the Supreme Court—got
the Dodd-Frank revisionism started with an August 2010 post at the Harvard
Corporate Governance blog. “The provision unambiguously addresses only the ‘jurisdiction’
of the ‘district courts of the United States’ to hear cases involving
extraterritorial elements; its language clearly does not expand the geographic
scope of any substantive regulatory provision,” Conway wrote. “That is a
crucial, and likely fatal, omission. In [Morrison], the Supreme Court
reiterated the longstanding principle that the territorial scope of a federal
law does not present a question of ‘jurisdiction,’ of a ‘tribunal’s power to
hear a case,’ but rather a question of substance—of ‘what conduct’ does the law
‘prohibit’? The new law does not address that issue, and accordingly does not
expand the territorial scope of the government’s enforcement powers at all.”
Law
professors, including Richard Painter of the University of Minnesota, Genevieve
Beyea of Texas Tech, and Adam
Pritchard of the University of Michigan, reached similar conclusions. “The
language that Congress used—at the behest of the SEC—quite clearly creates
jurisdiction,” Pritchard said. “Unfortunately, this was never a question about
jurisdiction.” According to Pritchard, the Supreme Court’s Morrison ruling
never curtailed the jurisdiction of U.S. courts to hear securities fraud cases
involving foreign transactions, but curbed their power to apply U.S. securities
fraud laws to such transactions. Congress’s language in the Dodd-Frank Act, he told OTC, doesn’t extend the fraud laws.
“There’s a gap between Congress’s intent and the language in the law,”
Pritchard said. “It’s a really poor job of drafting.”
Will
future courts look to Congressional intent or the language of the law to decide
whether the SEC or DOJ can bring fraud cases involving foreign securities?
Justice Antonin Scalia, in the Morrison ruling, made clear that, as far
as he’s concerned, statutory language trumps intent. But we’ll have to see if
lower courts follow his lead.
(Reporting
by Alison Frankel)