Supreme Court rules no cause of action for foreign plaintiffs in securities fraud litigation

Supreme Court rules no cause of action for foreign plaintiffs in securities fraud litigation

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[JURIST] The US Supreme Court [official website; JURIST news archive] on Thursday ruled [opinion, PDF] 8-0 in Morrison v. National Australia Bank [Cornell LII backgrounder] that the Securities and Exchange Act of 1934 (SEA) [text, PDF] does not provide a cause of action to foreign plaintiffs suing for misconduct occurring on foreign stock exchanges. The court held that, as a general rule, unless a statute specifically states that it applied extraterritorially, it only applies within the territorial jurisdiction of the US. The court upheld the ruling [opinion, PDF] of the US Court of Appeals for the Second Circuit but found that the lower court had erred in its reasoning. The lower court had dismissed the claim brought under § 10(b) of the SEA due to a lack of subject matter jurisdiction [Cornell LII backgrounder] because the majority of the activity the plaintiff was suing for had occurred outside of US jurisdiction. In rejecting this rationale, the Supreme Court stated that what conduct § 10(b) covered was not a jurisdiction question but a merits one, over which the lower courts have jurisdiction. Despite this, the court held that the case should still be dismissed for the failure to state a claim upon which relief can be granted [FRCP 12(b)(6) text] because of the lack of extraterritoriality in § 10(b). In affirming the decision of the lower court, Justice Antonin Scalia stated:

Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States. This case involves no securities listed on a domestic exchange, and all aspects of the purchases complained of by those petitioners who still have live claims occurred outside the United States. Petitioners have therefore failed to state a claim on which relief can be granted. We affirm the dismissal of petitioners’ complaint on this ground.

Justice John Paul Stevens filed a concurring opinion, which Justice Ruth Bader Ginsburg joined. In his concurrence, Stevens agreed with the judgment but criticized the scope of the court’s reasoning, stating:

The Court instead elects to upend a significant area of securities law based on a plausible, but hardly decisive, construction of the statutory text. In so doing, it pays short shrift to the United States’ interest in remedying frauds that transpire on American soil or harm American citizens, as well as to the accumulated wisdom and experience of the lower courts. I happen to agree with the result the Court reaches in this case. But “I respectfully dissent,” once again, “from the Court’s continuing campaign to render the private cause of action under § 10 (b) toothless.”

Justice Stephen Breyer also filed a concurring opinion, and Justice Sonia Sotomayor did not take part in the case.

The lawsuit was brought by Australian shareholders of the National Australia Bank [corporate website]. The bank purchased a mortgage servicing company based in Florida in 1998 and devalued the listed assets of that company three years later. The shareholders bought stock in National Australia Bank on a foreign stock exchange before the devaluation and brought suit against the bank, alleging that its officers had deliberately manipulated financial models in order to make its mortgage servicing rights appear more valuable. The court heard oral arguments [transcript, PDF; JURIST report] in the case in March and granted certiorari [JURIST report] in November.