On November 30, 2009, the United States Supreme Court granted certiorari in Morrison v. National Australia Bank Ltd., a case with important implications for foreign public companies that have established a presence in the United States. The Supreme Court is expected to answer a question that has generated considerable debate among securities lawyers: under what circumstances will federal securities laws apply to claims brought in the United States (1) by a foreign plaintiff; (2) against a foreign issuer; and (3) for losses sustained on securities purchased outside the United States. These "foreign-cubed" cases test the transnational reach of the United States securities laws.
In Morrison, plaintiffs who purchased shares of National Australia Bank ("NAB") abroad brought a class action lawsuit in New York for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 against NAB and its US subsidiary, HomeSide Lending, Inc. ("HomeSide"). Plaintiffs claimed that HomeSide overstated the value of its assets and sent the incorrect asset valuations to NAB's headquarters for use in preparing NAB's public securities filings in Australia. The US District Court dismissed the case for lack of subject matter jurisdiction and the US Court of Appeals for the Second Circuit affirmed.
The Second Circuit did not adopt a bright-line rule against foreign-cubed securities class actions. Rather, the court applied a fact-specific "conduct test" to determine whether the foreign plaintiffs can invoke US securities laws in suing foreign issuers to recover losses sustained on foreign exchanges. Under this test, jurisdiction exists only if activities in the US were more than "merely preparatory" to the alleged fraud and culpable acts in the US caused losses to investors abroad. The Second Circuit relied on the following three factors in determining that the plaintiffs failed to meet this test:
- NAB's actions were "significantly more central to the fraud and more directly responsible for the harm to investors than the manipulation of the numbers" in the US.
- There was a "striking absence" of any allegation that the alleged fraud affected US investors or US capital markets.
- The lengthy chain of causation between the American contribution to the allegedly false public filings and harm to investors weighed against exercising jurisdiction.
Courts of Appeals in other circuits have applied different approaches when deciding the transnational reach of the federal securities laws. For example, the Ninth, Third, and Eighth Circuits require only that some activity designed to further a fraudulent scheme occur within the US. The Securities and Exchange Commission has recommended that courts adopt an intermediate approach, accepting jurisdiction over foreign-cubed cases when conduct in the US is material to the fraud's success and forms a substantial component of the fraudulent scheme.
The Supreme Court in Morrison is expected to resolve this dispute and adopt a unified federal standard for asserting jurisdiction in foreign-cubed cases. The decision, expected by summer 2010, will be important to foreign companies with operations or subsidiaries in the US. The Supreme Court's decision will affect these companies' securities litigation risk assessment, including their oversight of US operations' securities law compliance, and the types and amount of insurance coverage needed to protect the company and its directors and officers in the event of US securities class action litigation.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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