On November 1, 2012, Robert Bartlett will present at The Ohio State University “Do Institutional Investors Value the 10b-5 Private Right of Action? Evidence from Investor Trading Behavior Following Morrison v. National Australia Bank Ltd. (2010).” Using an abrupt change in U.S. securities law, this paper examines the value institutional investors place on the private right of action under Rule 10b-5 of the Securities Exchange Act of 1934. In June 2010, a combination of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank Ltd. and Congress’ prompt response to it ensured that U.S. institutional investors would henceforth no longer be permitted to pursue private 10b-5 actions against many of the non-U.S. issuers in their international equity portfolios. Rather, the U.S. antifraud regime that had increasingly been used by institutional investors to police foreign issuers would thereafter be limited to the domain of the SEC. With this new regime of 10b-5 enforcement, however, came one critical exception for U.S. investors seeking to maintain their power to bring private 10b-5 actions: Investors purchasing securities traded on a U.S. stock exchange could continue to bring 10b-5 actions against the issuing company regardless of its domicile. In effect, the combination of this new bright-line rule and the fact that so many non-U.S. firms trade on both foreign and U.S. exchanges provided investors with something that had historically been difficult to achieve—the power to choose whether a security comes with the right to sue under Rule 10b-5.
By analyzing a proprietary data set of equity trades made by 356 institutional investors during the thirty month period surrounding Morrison, this paper examines whether investors reallocated their international buy-orders in cross-listed issuers from foreign markets to U.S. exchanges to exercise this newfound power. Notwithstanding the oft-voiced concerns among institutional investors that Morrison would encourage such a reallocation, the results of this study reveal a remarkable persistence in the allocation of investors’ purchase orders following the decision. Indeed, the overall trend in the fifteen months following Morrison was a modest decrease in U.S.-exchanged based purchases even after controlling for ADR trading costs. Overall, the absence of any significant change in trading behavior among this large sample of investors suggests that whatever concerns animate institutional investors’ public policy positions when it comes to Rule 10b-5 are not necessarily shared by their trading desks.