Corporate Governance

In re Royal Bank of Scotland Group PLC Securities Litigation: Interpreting the "Spirit" of Morrison

By Misty Dalke

In In re Royal Bank of Scotland PLC Securities Litigation, S.D.N.Y., 09 Civ. 300 (DAB) 1/11/2011, the court dismissed the plaintiffs' claims on the basis of the Supreme Court's decision in Morrison. 

Royal Bank of Scotland ('RBS'), a British bank, has two U.S. subsidiaries: Greenwich Capital Markets and Citizens Financial Group.  Through its investment banking arm and subsidiaries, RBS had $68 billion in exposure to subprime securities.   RBS acquired additional exposure to the subprime market when it acquired 38 % of ABN Amro for $38 billion. In April 2008, RBS announced a $11.6 billion asset write down as a result of its exposure to subprime securities.  In January 2009, RBS reported a loss of $41.3 billion for the year, causing share values to drop more than 65%. 

The plaintiffs brought an action against RBS in July 2009 asserting ten counts of violations of U.S. securities laws in connection with purchases of RBS ordinary shares made through the open market and public offerings between March 2007 and January 2009.  Plaintiffs allege RBS filed false and misleading statements about its subprime exposure and failed to properly impair goodwill stemming from the ABN Amro acquisition which in turn strengthened RBS' balance sheet. 

RBS sought dismissal based upon the Supreme Court's decision in Morrison v. National Australia Bank Ltd. Morrison, decided in June 2010, held that section 10(b) only extended to securities listed on an American exchange and did not extend to transactions that occured in a foreign location. 

Although RBS shares were traded on a foreign exchange, Plaintiffs asserted that Section 10(b) applied because RBS also sold ADRs on an American exchange.  The court rejected the argument noting, 'the idea that a foreign company is subject to U.S. Securities laws everywhere it conducts foreign transactions merely because it has 'listed' some securities in the United States is simply contrary to the spirit of Morrison.' 

Plaintiffs next argued that the U.S. Securities laws were applicable under the transactional test in Morrison. According to plaintiffs, the purchase of the ADRs occurred within the U.S., rending the antifraud provisions applicable.  The court rejected the argument noting that, under Morrison, the Exchange Act did not not reach transactions that, while conducted in the U.S., affected exchanges in a foreign country.   Because the ADRs "referenced" shares traded on a foreign stock exchange, they were not subject to Section 10(b). 

The court granted defendants' motion to dismiss.  The opinion in Royal Bank may be found on the DU Corporate Governance website. 

Full post as published by The Race to the Bottom on March 21, 2011 (boomark / email).