In an important victory for foreign public companies that have operations or business dealings in the United States, the Supreme Court rejected an attempt by foreign shareholders to sue a foreign company in the U.S. under U.S. anti-fraud laws. In Morrison v. National Australia Bank, the Court affirmed the dismissal of fraud claims brought in New York court by Australian shareholders against the Melbourne, Australia-based National Australia Bank, Ltd. (“NAB”). The claims were based on alleged acts of fraud committed by NAB’s United States subsidiary, Homeside Lending, Inc. In rejecting plaintiffs’ claims, the Supreme Court held that Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and SEC Rule 10b-5 issued thereunder, applied only to fraud in connection with a security listed on an American stock exchange or otherwise purchased in the United States. In reaching its decision, the Court, in a majority opinion written by Justice Scalia, overruled over 40 years of appellate precedent, largely created by the Second Circuit, and rejected the test proposed by the Solicitor-General. The decision confirms the Court’s strict approach to the implied cause of action under Rule 10b-5 that is apparent in its other recent decisions in this area.
Justice Scalia’s opinion relied on the “presumption against extraterritoriality,” the longstanding canon of statutory interpretation that legislation applies only within the territorial jurisdiction of the United States unless Congress intends otherwise. As Section 10(b) is silent regarding any extraterritorial application, and no clear indication exists elsewhere in the statute, the Court held that it has no application outside of the United States. Furthermore, because Section 10(b) only prohibits fraud “in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered,” its reach was limited to fraud in connection with securities listed on American exchanges or otherwise bought or sold in the United States. It was not enough that some fraudulent activity occurred in the United States, even if that was a material part of the fraudulent scheme. Justice Scalia wryly noted “the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.”
The opinion has several important ramifications.
First, the biggest immediate impact is on the so-called “foreign-cubed” cases: claims brought in federal courts under Section 10(b) and Rule 10b-5 by foreign investors who purchased securities in foreign companies on foreign exchanges. These lawsuits had become increasingly popular, and while many had been dismissed, as had the complaint in this case, some had been permitted to proceed. These claims are now categorically beyond the reach of federal securities laws and the federal courts.
Second, the decision prohibits any claim by an investor who purchased securities on a foreign exchange. Securities class actions involving multinational companies frequently include in the plaintiff class investors who purchased their shares on foreign exchanges as well as investors who purchased shares in the United States. Under this ruling, anyone who purchased a security outside the United States must now be excluded from the class.
Third, the decision is a blow to the SEC. In the amicus brief submitted by the Solicitor-General, she argued that Section 10(b) reached international fraud where there is “significant conduct in the United States that is material to the fraud’s success.” The SEC argued that as Section 10(b) applied to this conduct and, therefore, the SEC could investigate and bring enforcement proceedings even if foreign investors may not be able to recover for losses suffered as a result of this fraud. The Court categorically rejected this argument as unsupported by either statute or precedent. While it is likely that other provisions of the Securities Exchange Act could apply to such fraudulent conduct and the SEC may still have some jurisdiction, the inapplicability of Section 10(b), the primary anti-fraud provision in the Act, is a severe loss to the Commission with regard to international fraud.
Finally, Justice Scalia is scathing in his criticism of previous appellate authority that found some extraterritorial application of Section 10(b). Justice Scalia dismissed these opinions, which date back to 1967, as “judicial-speculation-made-law.” Justice Scalia re-affirms the primacy of the statutory text in determining the scope of Section 10(b) and Rule 10b-5. But, as Justice Stevens notes in his concurrence, the entire area of Section 10(b) jurisprudence consists almost entirely of “judge-made rules, which give concrete meaning to Congress’ general command.” Ever since its decision in Blue Chip Stamps in 1975, the Supreme Court has been consistently limiting the scope of section 10(b) and rejecting the expansive versions of its reach advocated by private plaintiffs and the SEC. The decision in Morrison continues this somewhat hostile approach to liability under Section 10(b), noting that instead of becoming a “Barbary Coast for those perpetrating frauds on foreign securities markets, some fear that [the United States] has become the Shangri-La of class-action litigation.”