No Safe Haven

“Foreign-cubed” cases are actions brought against a foreign issuer, on behalf of a class that includes not only investors who purchased the securities in question on a U.S. securities exchange, but also foreign investors who purchased the securities on a foreign securities exchange. These cases raise a number of jurisdictional issues.

In Morrison v. National Australia Bank Ltd., 2008 WL 4660742 (2nd Cir. Oct. 23, 2008), the court considered whether it should exercise subject matter jurisdiction over the claims brought by the foreign purchasers of the bank’s ordinary shares (the lower court had dismissed the domestic purchasers’ claims on other grounds). The court declined to impose a “bright-line ban” on foreign purchaser claims, expressing concern that “securities cheaters . . . should not be given greater protection from American securities laws because they carry a foreign passport or victimize foreign shareholders.”

Instead, the court applied its existing “conduct test” for subject matter jurisdiction. Under the conduct test, the plaintiffs needed to adequately allege that “activities in this country were more than merely preparatory to a fraud and culpable acts or omissions occurring here directly caused losses to investors abroad.” The court found that this test was not met: “the fact that the fraudulent statements at issue emanated from NAB’s corporate headquarters in Australia, the complete lack of any effect on America or Americans, and the lengthy chain of causation between [the false numbers communicated to NAB by its U.S. subsidiary] and the statements that reached investors – add up to a determination that we lack subject matter jurisdiction.”

Holding: Dismissal affirmed (note that the Second Circuit did not address a related issue that was recently raised in a S.D.N.Y. case – whether the fraud-on-the-market theory is applicable to foreign purchasers).

Quote of note: “[W]e are leery of rigid bright-line rules because we cannot anticipate all the circumstances in which the ingenuity of those inclined to violate the securities laws should result in their being subject to American jurisdiction. That being said, we are an American court, not the world’s court, and we cannot and should not expend our resources resolving cases that do not affect Americans or involve fraud emanating from America. In our view, the ‘conduct test’ balances these competing concerns adequately and we decline to place any special limits beyond the ‘conduct test’ on ‘foreign-cubed’ securities fraud actions.”