2d Cir. To Hear Case of Investors Who Trumped Morrison01/27/2012 | Reuters
You have to give the lawyers at Kirby McInerney a lot of credit. In a case called Dandong v. Pinnacle Performance, they represent a group of Singapore investors who bought complex notes issued by a Cayman Islands-based Morgan Stanley vehicle that sold the Singapore-registered securities only in Singapore, under a contract that called for disputes to be litigated in Singapore. You might think Morgan Stanley was pretty well insulated from a U.S. suit over the now-worthless notes, particularly in light of the U.S. Supreme Court’s prohibition against applying U.S. securities laws to foreign-traded instruments in Morrison v. National Australia Bank.
But Kirby McInerney figured out a way to get around Morrison. The Dandong investors didn’t sue under U.S. securities laws. Instead, they brought a case in Manhattan federal court asserting New York state and common-law fraud, negligent misrepresentation, and breach of fiduciary duty. (The tactic of suing under state laws to avoid Morrison dismissal isn’t unprecedented, but it’s relatively untested.)
Morgan Stanley’s lawyers from Simpson Thacher & Bartlett raised all the defenses you would expect. They argued that the court doesn’t have jurisdiction over the defendants, all Morgan Stanley entities based outside of the United States. They cited the Singapore forum-selection clause in the investors’ contract and said international comity required the case to be heard there. They said some investors had already brought actions in Singapore, so the New York court owed deference. They also said Singapore was the most convenient forum, since investors and defendants are based there.
None of those arguments worked with U.S. District Judge Leonard Sand. On Oct. 31, Sand denied Morgan Stanley’s motion to dismiss, ruling that the Singapore investors had shown sufficient evidence that Morgan Stanley bankers in New York and London concocted the allegedly designed-to-fail Pinnacle notes. (The judge also found that the contract’s forum-selection clause was unclear; the Singapore mandate, he said, appeared to apply only to one sort of dispute, and other parts of the contract called for disputes to be resolved under London and New York law.)
Morgan Stanley had one more trick up its sleeve. After Sand ruled that the case could proceed in New York, the bank asked Singapore’s high court for a ruling on whether the Pinnacle investors could bring claims outside of Singapore. Kirby McInerney then asked Sand, the New York judge, to enjoin Morgan Stanley from pursuing the Singapore ruling. Sand granted a temporary restraining order, then a preliminary injunction barring the defendants from acting to impede the U.S. case against them.
Earlier this month the Morgan Stanley defendants appealed Sand’s preliminary injunction ruling to the U.S. Court of Appeals for the Second Circuit, which subsequently granted an expedited appeal. They also asked the appellate court to reverse Sand’s “clearly erroneous” rejection of the bank’s forum selection and forum non conveniens arguments. “The district court’s injunction effectively prevents a Singapore court from regulating the conduct of Singapore residents,” said Morgan Stanley’s Jan. 11 brief. “This injunction therefore strikes at the heart of Singaporean sovereignty and harms international comity between the United States and Singapore.”
Morrison, which went unmentioned in Sand’s motion-to-dismiss decision, gets star billing in the Morgan Stanley appellate brief, as well as an amicus brief filed this week by U.S., Asian, European, Australian, and global securities industry groups represented by O’Melveny & Myers.
“In Morrison v. National Australia Bank, the Supreme Court recognized that U.S. courts should not be in the business of regulating foreign securities transactions,” the amicus brief said. “Although Morrison involved the application of the federal securities laws, plaintiffs here seek exactly what the Court rejected in Morrison -- the regulation of completely foreign securities transactions by U.S. courts under U.S. domestic law -- and much of Morrison’s analysis is equally applicable in this context.”
If the Second Circuit disagrees and permits Sand’s rulings to stand, expect a flood of securities plaintiffs to take the same course as the Singapore investors. This is definitely a case to watch.
Kirby McInerney’s reply brief for the Pinnacle investors is due next week; Kirby partner Daniel Hume didn’t return my call.
(Reporting by Alison Frankel)