U.S. Supreme Court justices appeared hostile on Monday toward so-called “foreign-cubed” securities fraud class actions in which the plaintiffs and stock issuers are foreign and the alleged fraud took place on foreign soil.
The Court heard arguments in Morrison v. National Australia Bank, brought by Australian investors in U.S. courts to challenge statements made by Australia’s largest bank. A district court judge and the U.S. Court of Appeals for the 2d Circuit sided with the bank in finding no U.S. jurisdiction over the suit.
International companies and foreign governments including France, the United Kingdom and Australia, filed briefs in the case arguing against jurisdiction for U.S. courts. Even though class actions have been reined in lately, plaintiffs face more favorable rules here than they would in most foreign courts. The briefs by the foreign nations assert that if the Australian bank loses, U.S. courts will interfere with the policy choices they have made in regulating securities.
Speaking of the case before the Court, Justice Ruth Bader Ginsburg said at one point, “It has Australia written all over it.” She added, “Isn’t the most appropriate choice the law of Australia rather than the law of the United States?”
Thomas Dubbs of Labaton Sucharow in New York, who represents the plaintiffs, said that “From our point of view, it has Florida written all over it.” He asserted that the inaccurate information that misled Australian investors was generated in Florida, the base of HomeSide Lending, a bank subsidiary that allegedly overvalued its portfolio in 1998. The subsidiary, a mortgage services company, had “2 million American homes” in its portfolio, Dubbs said, giving the fraud enough of a U.S. connection to give U.S. federal courts jurisdiction.
But Ginsburg was unconvinced, noting that the information provided by the Florida subsidiary was made public in Australian securities filings. “The communication was done in Australia by the Australian bank,” she said.
That kind of exchange was repeated with other justices who showed skepticism that this kind of litigation belonged in U.S. courts.
“Wouldn’t your clients have adequate remedy under Australian law in Australia, in the Australian court system?” asked Justice Samuel Alito Jr. And even if the remedy is not adequate, Alito said, “what United States interest is there?”
“We might or we might not,” said Dubbs, adding that U.S. courts have an interest in punishing fraud that originates within its borders.
“You are dragging the American courts into it,” said Justice Antonin Scalia, dubiously. When Dubbs replied that “a misrepresentation was made in the United States,” Scalia shot back, “Not to these plaintiffs.” The Australian bank made those misrepresentations in Australia, Scalia was asserting.
George Conway III of Wachtell, Lipton, Rosen & Katz, the lawyer for the Australian bank, had an easier time at the podium. He argued that a “presumption against extraterritoriality” has been imbedded in U.S. law since the Charming Betsy case of 1804. U.S. securities law has “nothing that comes even close” to a clear statement stating its intention that the law should cover disputes like the one before the Court.
Matthew Roberts, assistant to the U.S. solicitor general, advanced the government’s fence-straddling argument against a private cause of action in the Australia bank case, but in favor of jurisdiction for the U.S. Securities and Exchange Commission itself to pursue the case. “Significant conduct material to the fraud’s success occurred in the United States,” Roberts said.
But even that position ran into some skepticism. “Do you have any indication that our friends around the world are comfortable with your test?” asked Chief Justice John Roberts Jr.
The high court may have been particularly sensitive to how foreigners viewed the case on Monday. Before the arguments began, the chief justice announced that six justices of the Supreme Court of Canada were in the Court chamber as part of a legal exchange between the two countries.
Justice Sonia Sotomayor left the Court as arguments began, reflecting her decision to recuse in the case. She was on the 2d Circuit when that court issued its decision in 2008.
Tony Mauro can be contacted at firstname.lastname@example.org.