Corporate & Securities Law

By Jim Hamilton

Oral Argument Set and Merits Brief Filed in Supreme Court Case Involving Extraterritorial Reach of US Securities Laws

The US Supreme Court has scheduled oral argument for March 29, 2010 on the extraterritorial reach of the US federal securities laws in what appears to be the first foreign cubed case to ever reach the Court. The investors recently filed their merits brief. The Court agreed to review a Second Circuit panel ruing that the US federal securities laws did not apply to foreign investors alleging fraudulent statements by a foreign issuer when the conduct in the US was merely preparatory to the fraud and the acts directly causing loss to investors occurred outside the US. The panel described itself as an American court, not the world?s court, which cannot expend resources resolving cases that do not affect Americans or involve fraud emanating from America. Morrison v. National Australian Bank, Ltd., Dkt. No. 08-1191.

This is the so-called foreign-cubed securities fraud action, said the appeals panel, and it is judged by the same standard of any extraterritorial application of the federal securities laws, which is whether actions in the US directly caused the loss to investors. The panel described itself as an American court, not the world?s court, which cannot expend resources resolving cases that do not affect Americans or involve fraud emanating from America.

The rapid globalization of financial markets in recent years has cast into stark relief issues surrounding the international reach of US securities laws. Since the federal securities laws are silent on their international reach, federal courts developed tests, including the conduct test, which focuses on the nature of the conduct within the US as it relates to carrying out the alleged fraudulent scheme

A three-way split has developed among the federal Circuit Courts of Appeal as to the proper scope of jurisdiction when conduct within the US results in fraud in connection with a transaction outside the US. The predominant difference among the Circuits is the degree to which the US-based conduct must be related causally to the fraud and the resulting harm to justify the application of the federal securities laws.The Third, Eighth and Ninth Circuits have held that jurisdiction may be exercised when conduct within the US furthered the alleged fraud The Second, Fifth and Seventh Circuits have established a more restrictive test, holding that jurisdiction may be exercised only when conduct occurring within the US directly caused the alleged losses. Finally, the District of Columbia Circuit has adopted the most stringent test, holding that jurisdiction is proper only when the fraudulent statements or misrepresentations originate in the United States, are made with scienter and in connection with the purchase or sale of securities, and directly cause the harm to those who claim to be defrauded, even if reliance and damages occur elsewhere.

In their merits brief, the investors said that the Second Circuit ruling diminishes the effectiveness of the Exchange Act and divests the SEC of critical enforcement powers. There is no jurisdictional safe harbor in the Exchange Act, said the brief, yet that is what the Second Circuit created, thereby allowing an unregulated launching point for fraud generated in the US so long as the ultimate transaction was elsewhere.

According to the brief, the information that rendered the statements in Australia false was fabricated in the US by a wholly-owned subsidiary of the Australian entity with the expectation that it would be distributed to foreign and domestic investors. The activity in the US was, at the very least, part of a single fraudulent scheme to inflate the bank?s stock price.

Full post as published by Jim Hamilton's World of Securities Regulation on January 25, 2010 (boomark / email).