June 24, 2010

Supreme Court Decides Morrison v. National Australia Bank, Ltd.

On June 24, 2010, the Supreme Court decided Morrison v. National Australia Bank Ltd., No. 08-1191, holding that section 10(b) of the Securities and Exchange Act of 1934 and SEC Rule 10b-5 apply only in connection with the purchase or sale of a security listed on an American stock exchange and the purchase or sale of any other security in the United States, and therefore do not permit a foreign investor to sue foreign and American defendants in connection with securities traded on foreign exchanges. This is the so-called "foreign cubed" case, as it involved foreign plaintiffs suing foreign defendants in United States courts for misconduct in connection with securities traded on a foreign exchange.

National Australia Bank Limited was once the largest bank in Australia. Its shares traded on the Australian Stock Exchange Limited and on other foreign exchanges, but never on any United States exchange. In 1998, the Bank bought HomeSide Lending, a mortgage-servicing company headquartered in Florida. From 1998 to 2001, the Bank's annual reports touted the success of HomeSide's business, and HomeSide's executives (who lived in Florida) did the same. In 2001, the Bank significantly wrote down the value of HomeSide's assets, and the price of the Bank's shares dropped dramatically.

A group of Australian plaintiffs sued the Bank, HomeSide, and several of their executives in federal court in New York, alleging that HomeSide and its executives manipulated HomeSide's financial models to make the business look more valuable than it really was. They sought to represent a class of investors in the Bank's stock. The district court dismissed the lawsuit on jurisdictional grounds, holding that the acts in the United States were only one link in a chain of a scheme that culminated in a foreign country. The Second Circuit affirmed, agreeing that the acts performed in the United States did not "compris[e] the heart of the alleged fraud."

The Supreme Court affirmed, but on different grounds. The Court first held that the Second Circuit was wrong in looking at the issue as one of subject-matter jurisdiction. The question in the case is what conduct Section 10(b) reaches, and that is a merits question that has nothing to do with a federal court's power to hear the case. This holding continued the Court's recent string of cases holding that the question whether a statute applies to a given course of conduct is generally not a jurisdictional question.

On the merits, the Court began with the strong presumption that federal laws apply only within the United States, unless Congress clearly says otherwise. The Court held that this presumption applies to section 10(b) as well, casting aside lower federal court decisions suggesting that Congress's silence in section 10(b) about its extraterritorial application allowed courts to divine Congress's intent.

The Court noted that the case did have some connection to the United States—HomeSide was based in Florida, and its executives allegedly made fraudulent statements there—but it observed that very few cases brought in United States courts have absolutely no connection to the United States. The Court held that the focus of the Exchange Act is not on the place where the deception originated, but rather on purchase or sale transactions of securities in the United States. The Exchange Act applies only to transactions of securities listed on domestic exchanges or transactions of other securities that occur domestically. The Court rejected the government's proposed test , which would involve asking whether fraud involves "significant conduct in the United States that is material to the fraud's success," holding that there is no support in the Act for such a test.

Justice Scalia delivered the opinion of the Court, in which Chief Justice Roberts and Justices Kennedy, Thomas, and Alito joined. Justice Breyer filed an opinion concurring in part and concurring in the judgment. Justice Stevens filed an opinion concurring in the judgment, in which Justice Ginsburg joined. Justice Sotomayor took no part in the decision of the case.

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