Corporate Governance

Morrison v. Nat'l Austl. Bank Petition for Certiorari: An Opportunity to Fix the Circuit Split

By Charles Nichols

This post is the first of a series looking into the certiorari, merit, and amicus briefs filed in Morrison v. Nat'l Austl. Bank Ltd., No. 07-0583-cv, 2008 U.S. App. LEXIS 21986, (2d Cir. 2008).  As mentioned in my introduction, the blog covered the decision of the Second Circuit.  This discussion focuses on the petition for certiorari following the Second Circuit's decision.

The petition for certiorari presents three main questions.  First, whether the anti-fraud provisions of the U.S. securities laws extend to transnational cases where (1) the corporation conducted a substantial amount of business in the U.S.; (2) the company's stock trades on the New York Stock Exchange ('NYSE'); (3) the parent company files financial statements with the Securities and Exchange Commission ('SEC'); and (4) whether the accounting fraud originated from a Florida based subsidiary.  The second question presented is whether the Supreme Court should set out a policy to resolve the split among the circuits.  The third question is whether the Second Circuit erred by not adopting the SEC's proposed test for determining subject matter jurisdiction in foreign cubed fraud cases.

The text of the Exchange Act of 1934 says nothing with regard to the applicability of the statute to transnational cases.  However, since the enactment of the Exchange Act, the courts have extended subject matter jurisdiction to international securities fraud cases.  See SEC v. Berger, 322 F.3d 187, 192 (2d Cir. 2003).  Despite widespread recognition by lower courts, the Supreme Court has not taken up this issue.  This brings our analysis to the second, and most prevalent issue, the need for the Supreme Court to address the split among the circuits on this issue of jurisdiction.

This petition centers on the lack of consensus among the circuits with regard to finding subject matter jurisdiction in transnational fraud cases.  All jurisdictions interpret the 'conduct' test differently.  The Second Circuit's interpretation of the test focuses 'on the nature of the conduct within the United States as it relates to carrying out the alleged fraudulent scheme.'  More restrictively, the D.C. Circuit requires that the domestic conduct itself constitute a securities violation.  Some circuits have imposed a lower burden, requiring the domestic action to be more than mere preparation and a direct cause of the loss in question.  Furthermore, other circuits have been entirely less restrictive in finding subject matter jurisdiction, requiring only a fraction of the overall activity to further a fraudulent scheme to took place domestically.  In light of this confusion, the Second Circuit in Morrison asked the SEC to submit an amicus brief with a suggested approach to the issue.

The SEC rejected both the most and least restrictive approaches followed by the circuit courts.  The proposed standard would apply the antifraud provisions of securities laws to transnational fraud cases only if (1) it results exclusively or principally in overseas losses; (2) if the domestic conduct is material to the success of the fraud; and (3) forms a substantial part of the scheme.  The SEC also noted that the increased prevalence of transnational fraud cases and crimes such as the Madoff ponzi scheme require a more common standard.  Unfortunately, after requesting this suggestion, the Second Circuit did not follow or investigate it further. 

In their petition for certiorari, Petitioners have asked the Court to consider this proposition by the SEC.  The petition concludes by emphasizing the need for a clear-cut procedure for transnational fraud cases.  The petitioners acknowledge that a Supreme Court decision is the only way to make such a standard clear and binding, and this case provides an opportunity for that decision.  They also argue that the need for a clear procedure is evident through the divided opinions of the circuits.  The opinion of the SEC agrees there is a need for a clear-cut approach to subject matter jurisdiction in international securities fraud cases and that this case offers an opportunity for that change.  The next post will detail the brief filed by the SEC pursuant to this petition for certiorari. 

The primary materials for this post are available on the DU Corporate Governance website.

Full post as published by The Race to the Bottom on September 24, 2009 (boomark / email).