First Circuit Rejects "Predominantly Foreign" Exception to Morrison’s "Domestic Transactions" Test

Two circuit courts have now rejected the Second Circuit's "predominantly foreign" exception to Morrison's "domestic transactions" test, which raises the prospect of inconsistent decisions and increases the likelihood of Supreme Court review.

On May 10, 2021, in SEC v. Morrone, the First Circuit affirmed a district court order granting partial summary judgment in favor of the Securities and Exchange Commission ("SEC") on securities laws claims against senior executives of Bio Defense Corporation related to an alleged scheme in which unregistered shares of the company's stock were sold to foreign investors. In reaching its conclusion that the stock sales were "domestic transactions" under the Supreme Court's decision Morrison v. National Australia Bank Ltd. and therefore subject to the federal securities laws, the First Circuit for the first time adopted the "irrevocable liability" test created by the Second Circuit in Absolute Activist Value Master Fund Ltd. v. Ficeto. The First Circuit then determined that Bio Defense had incurred irrevocable liability for the transactions in the United States because the subscription agreements at issue were executed by Bio Defense's founder in Boston, and the shares were then sent from Boston to investors abroad. The First Circuit also rejected the defendants' argument that even if irrevocable liability was incurred in the United States, the SEC's claims were nonetheless "so predominantly foreign as to be impermissibly extraterritorial," finding that the Second Circuit's "predominantly foreign" exception was inconsistent with Morrison and in any event did not apply.

What is the Significance?

The First Circuit's decision is important because it adds to the list of circuit courts that have concluded that the "irrevocable liability" test is the appropriate standard for assessing whether securities transactions qualify as "domestic transactions" under Morrison and are therefore subject to the federal securities laws. However, SEC v. Morrone is also significant because it is now the second circuit court decision that has expressly rejected the "predominantly foreign" exception created by the Second Circuit in Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE and most recently applied in Cavello Bay Reinsurance, Ltd. v. Stein in January 2021. While the Supreme Court declined to address this circuit split following the Ninth Circuit's rejection of the "predominantly foreign" exception in Stoyas v. Toshiba Corp., the First Circuit's decision in SEC v. Morrone could give the Supreme Court another chance to provide clarity on the reach of the federal securities laws.

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