How American Are American Depositary Receipts? ADRs Rule 10B-5 Suits, and Morrison v. National Australia Bank

Abstract

Over the previous several decades, federal courts employed two tests—the conduct test and effects test—to determine whether a securities fraud suit with foreign elements was sufficiently connected to the United States to proceed in American courts. In its 2010 decision in Morrison v. National Australia Bank Ltd, the U.S. Supreme Court held that only domestic transactions may be subject to securities fraud suits. The Court then created a bright-line test to determine which transactions were domestic. Unfortunately, the Court’s resultant “transactional test” was not the model of clarity that it hoped to be. In particular, American Depositary Receipts (“ADRs”) frustrate the Court’s quest for clarity because, as foreign securities attempting to transform themselves into domestic securities, they occupy a borderland that is difficult to reconcile with Morrison’s transactional test. This Note analyzes the reasoning of Morrison as well as the district court cases that have implemented the Court’s transactional test. Based on these cases, this Note argues that the determination of whether the purchase and sale of ADRs qualifiy as domestic transactions should depend on the extent to which the issuer has purposefully entered the U.S. market and its regulatory system.