Extraterritorial reach of Section 10(b) and Rule 10b-5 Liability: Supreme Court Ruling in Morrison v. National Australia Bank Limited (June 28, 2010)
On June 24, 2010, in Morrison v. National Australia Bank Limited, (No. 08-1191), the United States Supreme Court (the “Supreme Court”) upheld a U.S. Court of Appeals decision that dismissed, for lack of jurisdiction, a class-action suit against National Australia Bank Limited (“NAB”) by Australian investors (the “Investors”) seeking damages for fraud under Section 10(b) and Rule 10b-5 in a Federal District Court in relation to a sale of securities traded on the Australian Securities Exchange. The Supreme Court’s decision states that Section 10(b) does not provide a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges.
The Investors argued before the Supreme Court that the Federal District Court had jurisdiction to hear their case because HomeSide Lending, Inc., a mortgage servicer, which was a Florida-based subsidiary owned by NAB, committed fraud in the United States. The Investors allege that NAB committed U.S. securities fraud (including Section 10(b) and Rule 10b-5 violations under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) by manipulating financial models to increase the value of its mortgage portfolio. NAB purchased HomeSide Lending, Inc. in 1998 and later sold it to Washington Mutual, Inc.
Update on Extraterritorial reach of Section 10(b) and Rule 10b-5 Liability: Supreme Court Ruling in Morrison v. National Australia Bank Limited
However, Supreme Court Justice Antonin Scalia wrote in the Supreme Court’s majority decision that neither the deception nor the location of HomeSide Lending, Inc. formed a sufficient nexus with the United States to permit a U.S. court to hear the case, ultimately rejecting the argument that Section 10(b) of the Exchange Act could be applied extraterritorially. He stated that, “The Exchange Act’s focus is not on the place where the deception originated, but on purchases and sales of securities in the United States. Section 10(b) applies only to transactions in securities listed on domestic exchanges and domestic transactions in other securities.” The Supreme Court’s decision replaces the conduct and effects test long applied by the U.S. Court of Appeals Second Circuit in similar cases, where the analysis focused on whether a wrongful conduct had a substantial effect in the U.S. and whether the wrongful conduct occurred in the U.S.
The Supreme Court’s decision makes it unlikely that foreign shareholders will be able to bring successful lawsuits in U.S. courts relating to misconduct in connection with Regulation S transactions involving a foreign investor’s purchase of a foreign issuer’s securities on a foreign exchange, also known as foreign-cubed securities lawsuits.
For further information, please see the following:
Full text of Supreme Court opinion: http://www.supremecourt.gov/opinions/09pdf/08-1191.pdf
Full text of Second Court of Appeals opinion: http://www.sifma.org/regulatory/briefs/2007/NAB.pdf