The Supreme Court, the SEC, and International Issuers: Public Enforcement after Morrison v. National Australia Bank

Abstract

This Article examines SEC enforcement policies and seeks to find the optimum approach to enforcement against foreign private issuers. My previous empirical study of securities class actions against foreign firms identified a number of crucial developments that mainly occurred after Morrison v. National Australia Bank. In Morrison, the Supreme Court sought to limit the extraterritorial reach of the anti-fraud provisions of the U.S. securities law. The Court has scaled down the exposure of foreign issuers to securities liability risk, particularly in class-action litigation. If the Supreme Court in Morrison has created a risky enforcement lacuna on the side of private class actions against foreign corporations, how should the SEC adjust its enforcement strategy? To answer this question, this Article presents an empirical survey of SEC enforcement actions against foreign issuers between 2005 and 2016. The results suggest that the SEC consistently pursues a lenient enforcement approach in this area. This low-key policy is the Commission’s dominant strategy. The Article also discusses post-Morrison doctrinal developments, market trends, and red flags potentially indicative of an increased risk of fraud. Although the traditional low-key enforcement policy may attract some foreign “lemons” in the post-Morrison environment, the SEC should not depart from its dominant strategy and engage in more enforcement actions. Instead, the warning signs identified in this paper call for better preventive monitoring. The Article suggests a number of low-cost fraud prevention policies, including promoting cooperation with foreign firms, using new data analysis programs, and galvanizing market “gatekeepers.” Through implementing the mechanisms suggested in this Article, the SEC may reach a more efficient level of deterrence without ramping up enforcement and increasing the costs of foreign firms seeking to access American capital markets.