Morrison v. National Australia Bank (08-1191)

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Appealed from the United States Court of Appeals for the Second Circuit (Jan. 11, 2010)

Oral argument: Mar. 29, 2010


Respondent National Australia Bank (“NAB”) is an Australian corporation with significant U.S. operations. In 2001, NAB acknowledged flaws in the method that its Florida subsidiary, HomeSide Lending, had used in calculating the value of its mortgages and recording this value on its balance sheet. This recognition led to a drop both in NAB’s stock and ADR values. Petitioners, who represent a class of Australian and American shareholders, brought suit against NAB for alleged violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934. The Second Circuit dismissed the case for lack of subject matter jurisdiction. On appeal, Petitioners argue that the Securities and Exchange Act applies to foreign commerce, while NAB argues that there is a presumption against extraterritorial application of Congressional acts. The Supreme Court’s decision in this case will strike a balance between providing a U.S. forum for litigation between international parties and furnishing a recourse for international shareholders who fall victim to the fraudulent activity of international corporations with significant American operations.

Questions presented

1. Whether the antifraud provisions of the United States securities laws extend to transnational frauds where: (a) the foreign-based parent company conducted substantial business in the United States, its American Depository Receipts were traded on the New York Stock Exchange and its financial statements were filed with the Securities Exchange Commission ("SEC"); and (b) the claims arose from a massive accounting fraud perpetrated by American citizens at the parent company's Florida-based subsidiary and were merely reported from overseas in the parent company's financial statements.

2. Whether this Court, which has never addressed the issue of whether subject matter jurisdiction may extend to claims involving transnational securities fraud, should set forth a policy to resolve the three-way conflict among the circuits (i.e., District of Columbia Circuit versus the Second, Fifth and Seventh Circuits versus the Third, Eighth and Ninth Circuits).

3. Whether the Second Circuit should have adopted the SEC's proposed standard for determining the proper exercise of subject matter jurisdiction in transnational securities fraud cases, as set forth in the SEC's amicus brief submitted at the request of the Second Circuit, and whether the Second Circuit should have adopted the SEC's finding that subject matter jurisdiction exists here due to the "material and substantial conduct in furtherance of” the securities fraud that occurred in the United States.



Whether federal subject matter jurisdiction exists for foreign shareholders in actions against a foreign-based company, where the claims arose from a massive accounting fraud perpetrated by American citizens at the foreign-based company’s Florida subsidiary.



Headquartered in Australia, Respondent National Australia Bank (“NAB”) derives approximately 55% of its assets and revenues from its Australian operations and its remaining revenues from operations abroad. . Although none of NAB’s $1.5 billion worth of “ordinary shares” (functionally equivalent to American common stock) trade on exchanges in the United States, its American Depository Receipts (“ADRs”)—which represent shares of foreign stock and grant a right to obtain the foreign stock that they represent—trade on the New York Stock Exchange.

In 1998, NAB acquired HomeSide Lending (“HomeSide”), a Florida mortgage service provider. . By 1999, HomeSide was the sixth largest mortgage service company in the United States and accounted for 5.4% of NAB’s profits. To calculate its profits, HomeSide reflected the value of its mortgages by calculating the present value of their expected profits, recording that value on its balance sheet as an asset known as Mortgage Servicing Rights (“MSR”), and then amortizing the MSR’s value over its expected life.

In 2001, NAB acknowledged flaws in HomeSide’s valuation model relating to the interest rate that HomeSide had used in valuing its MSRs. .Ultimately, HomeSide’s calculations effectively overstated the value of its servicing rights. As a result, NAB disclosed in July 2001 that it would incur a $450 million write-down, and again in September 2001, it disclosed a second $1.75 billion write-down; in response, the value of both its ordinary shares and ADRs first dropped 5% in July, and then subsequently dropped by 13% and 11.5% respectively in September.

Petitioner Robert Morrison, an American citizen, and two other citizens of Australia who purchased NAB ADR shares on the New York Stock Exchange (“Morrison”) brought suit against HomeSide, NAB, and various individual officers and directors, alleging violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934. . NAB moved to dismiss the complaint, alleging that the court lacked subject matter jurisdiction and that Morrison had failed to state a claim. The district court granted the motion based on lack of subject matter jurisdiction. In affirming the district court’s decision, the Second Circuit found that several key factors—including the fact that the fraudulent statements came out of NAB’s Australian headquarters, the absence of any effect of such fraud on America or Americans, and the long causal chain linking HomeSide’s actions to the information that investors received—indicated that it lacked subject matter jurisdiction. The Second Circuit also found it material that it is NAB’s lawyers, accountants, and bankers who take primary responsibility for the corporation’s public filings, not those of HomeSide. Morrison appealed, and the U.S. Supreme Court granted certiorari on November 30, 2009.



Petitioner Robert Morrison argues that the Securities Exchange Act of 1934 (“Exchange Act”) applies to foreign commerce and urges the Court to adopt the SEC’s “material or substantial” test to resolve the circuit split at issue. . According to Morrison, such application has international consequences consistent with respect for traditional standards of sovereignty, territoriality, and international comity. National Australia Bank (“NAB”) in turn argues that, in interpreting the statute, the Court should apply the presumption against extraterritoriality and the presumption that congressional action does not intend to violate another sovereign’s laws to deny extraterritorial application of the Exchange Act. ,

Amici curiae, MN Services Vermogensbeheer B.V. et al. (“MN Services”) argues that the fact that NAB listed itself on the New York Stock Exchange without any desire to raise capital illustrates a larger trend: by making securities voluntarily available in American markets, foreign issuers demonstrate a willingness to comply with stringent American standards for disclosure and liability Consequently, because U.S. regulations are viewed as the “gold standard for purposes of accurate and complete disclosure,” evidence shows that a foreign company’s stock “generally rises on news that it is listing in the U.S. and will be subject to U.S. securities laws,” because of the increased confidence this compliance spawns in investors. Amici curiae, Alecta Pensionsförkäkring, et al. (“Alecta”), points out that failure to apply U.S. Securities regulations and rights for private causes of action to foreign investors would thus adversely impact the United States’ own interest in maintaining its reputation as a safe and reliable place to conduct business and to invest.

On the other hand, the Securities Industry and Financial Markets Association, et al. (“SIAFMA”), argue that the increased costs from compliance and private causes of action would discourage new international investment in the United States, particularly at a time where American markets are vulnerable The United Kingdom also writes on as amicus curiae, and additionally questions whether it is even necessary for the United States to police international securities, given that most investors are fully aware of the regulatory regime that they buy into when they invest in securities internationally. , The European Aeronautic Defense & Space Co. further points out that because the U.S. procedures for discovery, fee arrangement, and class actions conflict with European policies, subjecting foreign corporations to onerous American standards may undermine the policy choices that the corporation’s home jurisdiction has made and undermine the role of the home jurisdiction’s judiciary.

On the other hand, MN Services argues that denying the protections of the Exchange Act to foreign investors who purchase securities outside the United States completely ignores the fact that modern securities markets transcend national boundaries. However, the Yale Law School Capital Markets and Financial Instruments Clinic indicates that extraterritorial application of the American fraud-on-the-market doctrine would place American courts in an uncomfortable international position. Because the doctrine requires shareholders to prove that they were trading on an efficient market, applying the doctrine internationally would require courts to assess the effectiveness of foreign regulatory regimes, a determination that domestic courts are not in an appropriate position to make.

Nonetheless, the Australian Shareholders’ Association and The Australian Council of Super Investors (“ASA”) argue that, because these regulatory schemes are expensive to develop and implement, the United States should set an example by using its funds to enforce conduct that adversely impacts foreign investors in order to demonstrate the value of such enforcement. ASA also argues that American failure to enforce such laws risks inviting reciprocal responses from foreign jurisdictions, ultimately prevents investors from seeking any redress against international fraudulent conduct, and effectively amounts to “exporting” the fraud that occurs within its borders. The United Kingdom points out, however, that failure to impose securities standards on foreign transactions would not necessarily “leave an enforcement void”; shareholders still retain a state right of action for common law fraud, the SEC can still choose to bring forth an enforcement action, and the shareholder could always use the legal system in place in the corporation’s home jurisdiction to press a claim.

The Supreme Court’s decision in this case will balance the American interest in not serving as a forum for litigation between international parties and providing a private cause of action against fraudulent activity by companies who perform business domestically. Morrison’s victory would likely heighten investor confidence and subsequently increase willingness to invest in U.S. securities, at the expense of potential conflicts with regulatory frameworks of other sovereign nations. In contrast, a ruling in NAB’s favor would result in an increased willingness on the part of international businesses to carry out operations in the United States. It might, however, also mean that international investors of companies with American operations who assume U.S. securities laws protect them and provide a cause of action in American courts will not receive the benefits of such protection.



Petitioners, Robert Morrison and other individuals who bought shares of National Australia Bank American Depository Receipts (“ADR”) on the New York Stock Exchange (“Morrison”), and Respondent, National Australia Bank (“NAB”), both agree that this case is about statutory interpretation and turns upon the language in Section 10(b) of the Securities Exchange Act of 1934 (“SEA”). Section 10(b) is an anti-fraud provision that gives a private right of action to purchasers and makes it unlawful for any person to engage in any act that would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. The main issue here is whether a “foreign cubed” class action—foreign plaintiffs, suing a foreign issuer, based on transactions in a foreign country—does not properly belong in a US. Court.

Does the language of Section 10(b) of the Securities Exchange Act of 1934 confer jurisdiction over “foreign cubed” claims?

Morrison argues that there is strong precedent establishing that courts cannot reject subject matter jurisdiction conferred upon them by Congress. In support of this argument, Morrison cites Supreme Court cases stating that the issue of subject matter jurisdiction is determined from statutory interpretation of the language in the statute’s jurisdictional provisions. With these rulings in mind, Morrison argues that the language in § 10(b) of the SEA does not limit jurisdiction to conduct affecting only Americans or the American exchange. Morrison reaches this conclusion by identifying key statutory language in the SEA that supports an expansive reach of § 10(b) to include all fraudulent activity undertaken within the United States. One of the conditions of a § 10(b) violation is the use of interstate commerce, or of the mails, and Morrison points out that the term “interstate commerce” is defined by the SEA to include “commerce . . . between any foreign country and any state.” Morrison contends that the fraud in this case involved HomeSide’s accounting practices in the United States; fraud perpetrated through filings with the Securities Exchange Commission (“SEC”), and perpetration through press releases. Morrison contends that this activity therein occurred in the United States, involved interstate commerce and communications through the U.S. mail, which sufficed to confer subject matter jurisdiction.

NAB counters that §10(b) should not be interpreted to apply extraterritorially. NAB finds support in a canon of construction that applies a presumption against extraterritoriality, indicating that unless there is a clear Congressional intent, courts must construe the force of the statute to apply only to the territorial limits of the United States. NAB lists three main reasons why this presumption against extraterritoriality exists: 1) Congress generally enacts laws with domestic issues in mind, 2) the principle of comity strives to avoid conflict with the laws of other nations, and 3) this presumption gives deference to Congress and its expertise in foreign relations. With this canon of construction in mind, NAB contends that Morrison has failed to show any specific language in the SEC Act of 1934 demonstrating Congressional intent that the statute should apply abroad. NAB refutes Morrison’s argument that looks to the definition of “interstate commerce” to find extraterritorial application in § 10(b) by arguing that the language Morrison relies on is “boilerplate language,” and that the Supreme Court has repeatedly rejected such language as insufficient indication of congressional intent.

Should the Supreme Court adopt the SEC’s proposed test for determining the proper application of subject matter jurisdiction in transnational securities fraud cases?

Morrison additionally argues that the Court should adopt the test proposed by the SEC in determining the jurisdictional reach of the statute. The “Materiality” and “Substantiality” test proposes that the antifraud provisions of the securities law should apply when the alleged fraud involves significant conduct within the United States that is material to the fraud’s success. Morrison argues that this test should be adopted by the Court in this case because it is consistent with the SEA, which does not focus on the location of the fraudulent scheme, but rather the manner in which the scheme was conducted. It also provides a workable standard in the face of the realities of a transnational economy, while simultaneously respecting the sovereign interests at stake. Morrison contends that U.S. securities law should be applied here, where HomeSide’s conduct in Florida, and NAB’s activity in the United States, was a part of a single scheme to fraudulently inflate NAB’s stock price, while the activities in Australia were merely ministerial acts.

NAB responds, arguing that the fact that some underlying fraud occurred in Florida is irrelevant here, because § 10(b) deals with securities fraud, and HomeSide’s conduct was not securities fraud, but rather pertained to business operations. NAB points out that the activities that related to securities fraud in this case stemmed from NAB’s communication to the public of its consolidated financials (from Australia), and not the internal transfer of accounting information from the Florida subsidiary to the Australia headquarters. NAB also argues that the private right of action conferred by §10(b) should be narrowed to require that plaintiffs have purchased or sold securities in the United States. NAB points out that the Supreme Court has previously found it proper to consider the practical consequences of any expansion to the § 10(b) private right of action, and NAB contends that respect for foreign nations and their sovereignty should be of sufficient practical consideration here.

Would the extension of the antifraud provisions of the United States securities law to cover “foreign cubed” claims interfere with the sovereign authority of other nations?

Morrison first contends that the American interest in governing all conduct within American territory trumps other nations’ interest in sovereign authority. Morrison supports this by citing Supreme Court cases and the Restatement (Third) of Foreign Relations Law, which states that the jurisdiction within the nation’s own territory is “necessarily exclusive and absolute.” In addition, Morrison argues that even if foreign nationals are affected, the application of American securities fraud law does not conflict with foreign law, because there is universal agreement that fraud should be discouraged. Morrison finds support for this both in observations by the Second Circuit Court of Appeals and in the Restatement (Third) of Foreign Relations Law § 416, which summarized that U.S. securities regulations “[have] not resulted in state-to-state conflict.”

NAB counters by presenting another canon of construction applied by some courts that presumes against interference with the sovereign authority of other nations if any other possible interpretation remains. NAB cites multiple Supreme Court cases stating that courts must assume that Congress intended to follow “principles of customary international law.” With this edict in mind, NAB argues by analogizing to an antitrust case involving a “foreign cubed” plaintiff, where the Court held that it was unreasonable to apply the Sherman Act to “foreign conduct insofar as that conduct causes independent foreign harm and that foreign harm alone gives rise to the plaintiff’s claim.” In addition, NAB refutes Morrison’s contention that American securities regulations do not conflict with foreign law. NAB agues that the design of a securities regulatory scheme and enforcement system implicates a multitude of policy questions, which nations disagree upon; other sovereign nations should be free to decide these questions for themselves.



In this case, the U.S. Supreme Court will decide whether the United States securities laws have extraterritorial application to “foreign-cubed” securities class actions, where the corporation in question has significant American operations. The Supreme Court’s decision will determine the accessibility of an American forum for international litigants and will implicate how foreign issuers and dealers navigate the U.S. securities market. If Morrison’s claim prevails, the increased investor confidence in U.S. securities will be accompanied by potential conflicts with foreign regulatory systems. Alternatively, a decision for NAB will promote increased operation and investment by international businesses in the U.S. However, this could also mean that international investors who place confidence on U.S. securities regulations when making investments might later be disappointed to find that these protections do not apply to them.



Prepared by: Lilian Balasanian and Tamilia Chiu

Edited by: Katie Worthington

Additional Sources

· Wex: Law about Subject Matter Jurisdiction

· Bloomberg: National Australia Bank Fraud Case Gets High Court Query (June 1, 2009)

· ClassActionsBlawgs: Second Circuit Unwilling to Reject “Foreign Cubed” Class Actions Categorically (October 28, 2009)

· Bringing ‘Foreign-Cubed’ Actions in American Courts (Dec. 2, 2008)


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