Morrison v. National Australia Bank

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Argued March 29, 2010. Decided June 24, 2010.

Docket: 08-1191

Issue: Whether the judicially implied private right of action under Section 10(b) of the Securities and Exchange Act of 1934 should, in the absence of any expression of congressional intent, be extended to permit fraud-on-the-market claims by a class of foreign investors who purchased, on a foreign securities exchange, foreign stock issued by a foreign company.

1 Briefs and Documents
2 Opinion Recap
3 Oral Argument Recap
4 Pre-Argument Articles
- 4.1 Argument Preview
5 Links and Further Information
- 5.1 Media Links
- 5.2 From the Blogosphere

Briefs and Documents

Decision

AFFIRMED in a 9-0 decision with an opinion written by Justice Scalia. Justice Breyer filed an opinion concurring in part and in the judgment. Justice Stevens filed an opinion concurring in the judgment, joined by Justice Ginsburg. Justice Sotomayor took no part in the proceedings.

Oral Argument

Transcript (March 29, 2010)

Merits Briefs

Amicus Briefs

Certiorari-Stage Documents

Opinion Recap

Lyle Denniston originally wrote the following for SCOTUSblog:

Analysis

Dismantling a legal edifice built up by lower courts over nearly a half-century, the Supreme Court on June 24 ruled that America’s main law against securities fraud does not apply to investment deals that occur outside of this country, even if they have some domestic impact or effect. For the first time, the Court declared that the most-used U.S. stock fraud law cannot be used in American courts to challenge a “transnational” securities deal involving a company whose stock is not traded in the U.S., and when the trade does not occur inside the U.S. With evident sarcasm, Justice Antonin Scalia’s opinion for the Court rapped Circuit Courts for having created, by judicial invention, the authority to decide such lawsuits when filed by private investors. This, Scalia said, is “judicial-speculation-made-law.”

Section 10-b of the Securities Exchange Act of 1934, the law at issue, does not “focus…upon the place where the deception originated, but upon purchases and sales of securities in the United States,” the Court ruled in a case involving an Australian bank and Australian investors, whose complaint has a link to faulty financial information generated in Florida.. “Only transactions in securities listed on domestic exchanges, and domestic transactions in other securities” are covered by this provision, it stressed.

The Court was unanimous (although Justice Sonia Sotomayor did not take part) in ruling that this particular lawsuit could not go forward, but the Justices actually split 6-2 on the question of whether the securities fraud provision does reach, at least some of the time, beyond this country’s shores. Justice John Paul Stevens, joined by Justice Ruth Bader Ginsburg, protested in a separate opinion that the new decision was part of “the Court’s continuing campaign” to “render toothless” the right of private investors to sue to enforce Section 10-b. (The case did not deal with the U.S. Securities and Exchange Commission’s authority, but only with private investors’ lawsuits.)

The Court finally took on the issue, after years of declining to review it in a series of cases. It did so in a case involving three Australian investors who had bought stock in their home country’s largest bank, National Australia Bank. The bank’s stock is traded only on foreign markets, and not in the U.S. Their lawsuit contended that a subsidiary of the bank in Jacksonville, Fla. — HomeSide Lending Inc. — had miscalculated interest rates on mortgages it was servicing, causing the parent bank to have to make millions of dollars in write-downs. The investors contended that the HomeSide statements were false and misleading, thus affecting the value of their investment in the bank’s stock. The investors took their case to the Supreme Court after having it dismissed in lower courts for having an insufficient link to the U.S.

Justice Scalia’s opinion was tartly critical of the Second Circuit Court, which had started in 1968 a trend that eventually spread to all of the other Circuit Courts, to develop an interpretation of Section 10-b that gave it — in at least some cases — a reach beyond the United States’ own territory. The entire project was built on the premise that courts could determine what Congress would have intended, in allowing private investors’ fraud claims to go forward in U.S. courts based on transnational deals, if it had thought about the particular transaction. The Court on Thursday, however, concluded that this entire effort was misguided, and that the controlling issue was a long-standing “presumption” that U.S. laws did not apply beyond this country unless Congress had expressly said they did. There is no such indication in Section 10-b, the Court concluded.

The juridical project nullified by the new ruling had grown mainly out of the work of a highly respected Second Circuit Judge, Henry J. Friendly. Justice Stevens, in his separate opinion, referred to the Second Circuit as the “Mother Court of securities law” and to Judge Friendly as the “master arborist” tending to “a judicial oak which has grown from little more than a legislative acorn.” Justice Scalia countered with a footnote saying that the lower courts had not been tending to “the same mighty oak,” but, by their varying interpretations of how to apply the doctrine, “are in reality tending each its own botanically distinct tree.”

Focusing entirely on the presumption against overseas application of U.S. law, the Scalia opinion examined the text of Section 10-b, and found “nothing to suggest it applies abroad.” The opinion flatly rejected the argument — supported in part by the U.S. Securities and Exchange Commission — that domestic effects of a transnational securities deal can sometimes come under Section 10-b.

Using a metaphor of his own, Scalia wrote that “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 case is Morrison, et al., v. National Australia Bank, et al. (08-1191). The lead name on the case, Robert Morrison, is that of an American who had sought to sue on behalf of a class of American investors, but his claim was dismissed on grounds not at issue in the appeal. As Justice Scalia noted, his name remained in the case title without explanation.

Oral Argument Recap

Lyle Denniston originally wrote the following for SCOTUSblog:

In a hearing that seemed tailored for its international audience — six members of the Canadian Supreme Court sat, raptly attentive, in the front spectators’ row, the U.S. Supreme Court on March 29 explored ways to sharply limit or perhaps even forbid private securities fraud lawsuits in U.S.courts that might intrude on foreign governments’ powers to police their own stock markets. Little sentiment was expressed on the bench in favor of allowing foreign investors to come to America to sue for fraud that occurred mainly overseas, even if there were some connection to the United States. The case was Morrison, et al., v. National Australia Bank, et al. (08-1191).

“This case,” Justice Ruth Bader Ginsburg said tellingly, “has Australia written all over it….Isn’t the most appropriate choice of law that of Australia, not the United States?” Neither Ginsburg nor any other Justice who spoke up seemed to accept the retort of the lawyer for the foreign investors that “the case has Florida written all over it.” Perhaps the only real issue was whether the Court would put up a bar only to investors’ lawsuits, or might even restrict the Securities and Exchange Commission’s powers to reach trans-national frauds — if the Court were to reach that side of the case.

It was mere coincidence that six of the nine members of Canada’s highest court were on hand; they are paying a return visit to the Justices in Washington, and will be in town for a few days of seminars and other encounters. They laughed heartily when Justice Stephen G. Breyer asked one of his typically meandering questions, with several convoluted points, and yet wound up insisting that “That’s all one question.” Whether it was made as a gesture to them or not, one of the lawyers at the lectern also brought up a recent case of securities misconduct involving the Toronto stock exchange. Overall, the hearing had much more of an offshore than domestic cast to it — to the evident frustration of the lawyer seeking to revive his clients’ fraud case, scuttled in lower U.S. courts even though the lawsuit had tried to keep its focus on mortgage shenanigans in Florida.

The case at one time had an American investor in it, but as it reached the Court, only three Australians who bought stock in that country’s largest private bank, and did so on Australia’s stock market, remained involved. That set of facts alone seemed to significantly impress the Justices. But they also clearly had taken notice of the fact that the governments of Australia, Britain and France had submitted briefs urging the Court not to let American courts enforcing U.S. law tread on other countries’ sovereign territory. In fact, most of the Justices reacted with more sympathy to the foreign governments’ submissions than they did to those of the U.S. government’s lawyer at the lectern, who spent ten quite uncomfortable moments trying to defend an opaquely worded legal standard.

Although Justice Sonia Sotomayor has taken herself out of the case (as usual, without explanation), there seemed little risk that the Court was heading toward a 4-4 split on the case — a result that would simply uphold a Second Circuit Court ruling dismissing the Australian investors’ lawsuit as beyond the reach of the U.S. Securities Exchange Act. If any Justice were leaning in favor of that lawsuit, it was not apparent Monday.

Thomas A. Dubbs, the New York lawyer for the Australian investors, argued energetically that what was actually involved in the case was “hard-core fraudulent conduct” that occurred in Florida, and that was designed to use “phony” statistics to shore up the financial reputation of the Australian bank. The Florida-based subsidiary of the bank, HomeSide Lending, Inc., was America’s sixth largest mortgage service provider, and it definitely was using “a deceptive device” to influence the stock value of the parent bank, Dubbs contended.

But, from his very opening, Dubbs met only skepticism. When Justice Breyer became the first to bring up the foreign governments’ amici briefs, Dubbs tried, without obvious success, to argue that there actually was no conflict between those nations’ laws and the U.S. securities fraud law. Justice Antonin Scalia responded by acting out the role of the Australian government, saying to the Australian investors that they were “dragging” the U.S. courts into what was Australia’s business. That pattern did not change throughout Dubbs’ presentation.

The Australian bank’s lawyer, George T. Conway II of New York, immediately seized on the foreign governments’ briefs to supplement his core argument that the Court simply should not apply U.S. law to trans-national activity unless Congress had clearly mandated that that be done — a point that he repeatedly traced back to 1804, and the Charming Betsy precedent written by Chief Justice John Marshall.. He said the investors were trying to use their lawsuit to carry off “a massive transfer of wealth” outside of Australia.

While Conway conceded to Justice Ginsburg that “some of the conduct [challenged by the investors] occurred in Florida,” he said the Court had not been prepared in the past to extend U.S. law overseas without a clear congressional mandate to do so, even in cases where there were links to the U.S. As his final point, the bank’s lawyer said this case involved “exactly the kind of financial imperialism” that would seriously offend foreign governments.

The federal government, in the case to support dismissal of the Australians’ lawsuit but also to try to persuade the Court to leave open a chance to enforce the Securities Exchange Act in some trans-national fraud cases, sent assistant to the Solicitor General Matthew D. Roberts to argue. He had barely begun when Chief Justice John G. Roberts, Jr., said that the government’s proposed legal standard “had a lot of moving parts” that was so complex it “would defeat the whole purpose” of defining the law’s scope. He had unusual difficulty trying to sort out a complex hypothetical suggested by Justice Breyer, involving someone who tried to sell the Brooklyn Bridge to an investor in Germany.

Ultimately, Justice Ginsburg gave him a bit of an assist, suggesting that perhaps what the government was asking was to draw a distinction between the SEC’s powers of enforcement against a trans-national fraud, and private investors’ attempting to do so. That is exactly what the government was proposing, the federal lawyer said. And he readily accepted Justice Scalia’s suggestion that the Court could resolve this particular case by curbing such fraud cases when brought by private investors on their own, without saying anything at all about the SEC’s authority.

The key point in Dubbs’ brief rebuttal was one intended to keep the Court focused directly on the language of the fraud law, saying that the Court “should not take an eraser to the words of the statute” to scuttle lawsuits like the one filed by his clients.

Pre-Argument Articles

Argument Preview

The following was originally written by Lyle Denniston for SCOTUSblog.

The securities fraud law — a key provision of the Securities Exchange Act — has been in force for three-quarters of a century, but the Supreme Court has never ruled on whether it can be enforced against trans-national fraud. Every U.S. Circuit Court has faced the issue, but there is a wide disagreement about its reach. Now, with investing — and fraud — an increasingly multi-national activity, the Supreme Court will attempt to sort out the conflict in a case involving an Australian bank with a U.S. subsidiary, based in Florida, that serviced home mortgages. It is not an issue in the case, but the subsidiary eventually got caught up in the sub-prime mortgage meltdown in the U.S. economy, and got absorbed by a troubled financial institution. Three Australian investors who claimed fraud remain in the case. The case has attracted a broad international following.

Background

When Congress passed the Securities Exchange Act in 1934, it said nothing at all about whether its anti-fraud provisions would apply to investment deals that took place at least partly outside the United States. Only one thing remains clear to this day: if a fraudulent deal arose and was carried out entirely overseas, the Act does not apply. The usual assumption is that, unless Congress says otherwise, a U.S. laws applies only inside the country. Investors in this country and abroad, however, have sought over the years to extend the law’s reach beyond America’s borders. A number of lawsuits, for example, have been filed in U.S. courts by foreign investors who claimed they were defrauded by Bernard Madoff’s “Ponzi” scheme, which they say was “exported” to foreign soil. Federal courts thus have attempted to work out what Congress might have intended, had it thought about it. They have not agreed on an answer.

Much of the focus in the federal courts has been on ways to apply the test most often used — that is, the “conduct” test, an inquiry into whether there has been significant conduct inside the U.S., as part of an alleged international fraud.

Some of the lower courts, while imagining that Congress would have wanted the law to reach fraud that did harm to investors or markets within the U.S., have urged Congress to step in and fill the gap in the Act’s language. In the absence of a response from Congress, every Circuit Court in the U.S. has taken on the issue, searching for a formula for applying the bare language of the Act’s Section 10(b). That section makes it illegal for anyone, using the instruments of interstate commerce, a market, or the mail, to employ “any manipulative or deceptive device or contrivance” that would harm investors or “the public interest.”

In the Second Circuit Court, based in New York and thus the country’s busiest court in securities cases, this is the formula: “We look to whether the harm was perpetrated here or abroad and whether it affected domestic markets and investors. This binary inquiry calls for the application of the ‘conduct test’ and the ‘effects test.’ We ask: (1) whether the wrongful conduct occurred in the United States, and (2) whether the wrongful conduct had a substantial effect in the United States or upon United States citizens. Where appropriate, the two parts of the test are applied together because an admixture or combination of the two often gives a better picture of whether there is sufficient United States involvement to justify the exercise the exercise of jurisdiction by an American court.”

In this case, the Second Circuit was asked to apply only the “conduct” test. That led it to rule that the Act’s 10(b) did not apply, thus it upheld a federal judge’s dismissal of the specific fraud claim.

(It should be noted, in passing, that while the case retains the name of a U.S. investor, Robert Morrison, in its title, his claim was dismissed by a federal judge for a failure to claim that he suffered any damages. As the case went through the Circuit Court, and as it now unfolds in the Supreme Court, three Australians continue the case, but the title remains unchanged.)

The investors, pursuing a class-action remedy, had bought stock on the Australian Stock Exchange of that country’s largest bank, National Australia Bank. Its stock is traded on other country’s markets, but not in the U.S. (Some of its indirect-interest instruments — “depositary receipts” — are traded on the New York Stock Exchange.) A subsidiary of the Bank, formerly called HomeSide Lending Inc., based in Jacksonville, Fla., collected mortgage payments from homeowners, made payments to investors in mortgage-backed securities and to insurance companies, and it paid taxes. It made collections based upon rights to service the underlying mortgages.

Initially, HomeSide made significant profits. But through errors or miscalculations in its accounting, based upon estimates of where mortgage interest rates would go, HomeSide misjudged the revenue it would get. The Bank, as a result, had to make a more than $3 billion write-down on book value. (That led the Bank to sell the subsidiary to Washington Mutual, Inc., a company that landed some seven years later in the midst of the sub-prime mortgage fracas in the U.S., and wound up with its banking assets being taken over by J.P. Morgan Chase & Co., and bankruptcy.)

After the massive write-downs, the Bank’s stock price plummeted in Australia and elsewhere. The miscalculations had been reported in financial statements the Bank had made in Australia to regulators there. The investors, in their class-action claims, argued that the Bank, HomeSide, and four officers made false and misleading statements in filings with the U.S. Securities and Exchange Commission, especially regarding HomeSide’s financial health. They claimed that HomeSide had falsified its financial data in Florida, giving the scheme a close link to the U.S.

The Bank and the others sued asked the District Court to dismiss the case, arguing that the U.S. stock fraud law did not reach the transaction, claiming it occurred mainly in Australia with little or no impact in the U.S. The chain between anything that happened in Florida and what happened abroad was too disconnected, they contended. The District Court dismissed the case, and the Second Circuit agreed. It said the scheme mainly involved actions or inaction by the Bank, and ruled that there was essentially no impact on U.S. investors or U.S. markets. (Recall that American investor Robert Morrison was out of the case at that point.)

The three Australian investors filed their petition for review in the Supreme Court on March 22 last year. Focusing primarily on what the petition said was a three-way split in the Circuit Courts on the trans-national application of Section 10(b), the investors raised three questions: whether the fraud provision applies to “transnational frauds” with links to the U.S., whether the Court would resolve the split, and whether the Second Circuit should have adopted the views the SEC had laid out in an amicus brief — that is, whether the scheme was furthered by “material and substantial conduct” in the U.S.

The Bank and others sued argued in response that there was no conflict among the Circuit Courts, that the decision below was bound by its special facts, and that the mix of circumstances was novel and unusual. The only lower court ruling in disagreement on the core issue, the brief in opposition contended, was a District Court decision approving a settlement.

After examining the case initially, the Supreme Court asked the U.S. Solicitor General to provide the federal government’s views. Solicitor General Elena Kagan urged the Court to deny review. While saying that the Circuit Courts “have not been entirely uniform” on the core issue, she contended that the Australian investors had failed to show that their lawsuit would be allowed to go forward in any other Circuit Court. Kagan, however, went on to discuss at some length a standard for applying Section 10(b) that might make it reach some trans-national frauds. The law, she said, should not be limited to transactions in which domestic conduct is the predominant factor. It is sufficient, she suggested, if a scheme involved significant conduct within the U.S. that was “material” to the success of the fraud.

Seeking to answer the Solicitor General, the Australian investors’ lawyers argued that their lawsuit, in fact, would have gone forward under the tests laid out in three other Circuit Courts — the Third, Eighth and Ninth. Joining in urging the Court to grant review was the National Association of Shareholder and Consumer Attorneys, arguing that “the reach of the United States securities laws has become increasingly important as news stories break almost daily about frauds of international scope.”

The Supreme Court, obviously sensing that it was time for some guidance, turned aside the Solicitor General’s suggestion and granted review last November 30, with new Justice Sonia Sotomayor, a former Second Circuit judge, recused. (She was not on the Circuit Court panel that decided this case.)

Briefs on the Merits

Relying on the language of Section 10(b), the Australian investors contended that “a federal violation occurs whenever a fraud is committed in connection with the purchase or sale of any security,” if any one of three conditions is met: using an instrument of commerce, or the U.S. mail, or any national securities market — to carry on a securities fraud. Since the word “or” separates those three, the merits brief argued, any one is sufficient. In this case, they noted, their lawsuit claimed that the Bank had engaged in fraud through interstate commerce in the U.S., and through the use of U.S. mail. Focusing solely on whether a U.S. securities market was involved (which it was not), the Circuit Court simply dropped the other based for applying Section 10(b), the brief argued.

Citing a decision earlier this Term (Union Pacific v. Locomotive Engineers, 08-604), the investors’ brief said that “the lower courts are without authority to disclaim the subject matter jurisdiction that Congress has given them.”

The Bank’s brief on the merits relied on three broad arguments, the net effect of which would be that the courts simply had no business filling in the gap that Congress had left in the Securities Exchange Act. First, the brief contended that allowing this particular lawsuit to go forward would unleash “claims of hundreds of thousands of investors who have no connection to the U.S. or to U.S. securities markets.” Second, it argued that federal courts for four decades have been disregarding the principle that a U.S. law does not reach beyond American shores unless Congress very explicitly says that it does. That principle, it asserted, goes all the way back to Chief Justice John Marshall and the Charming Betsy ruling in 1804. And, finally, the brief advanced a foreign policy plea: extending this law overseas would intrude on the “sovereign authority” of other nations.

The federal government, now fully involved in the case, renewed its argument that Section 10(b) should reach trans-national securities fraud when “significant conduct material to the fraud’s success occurs in the United States.” The Court should not narrow the Section below that standard, the Solicitor General argued, because that “would risk permitting the United States to become a base for orchestrating securities frauds for expert. That approach would erode ethical standards in the securities industry and undermine investor confidence, and it could lead to diminished protections for United States citizens targeted by foreign fraudsters.”

Still, the Solicitor General said, when that standard has been met, it should be the SEC that should undertake an enforcement action. Merely because there has been a claimed violation of Section 10(b), she added, a private individual such as an investor would not have enough basis for pursuing a private lawsuit. For such a lawsuit to go forward, the government brief insisted, the investor should have to prove “a direct causal link between the violation and his own economic injury.” That, the brief spelled out, would require proof that the injury was “a direct result of the component of the fraud that occurred in the United States.” The lawsuit by the Australian investors, the brief concluded, would not meet that standard, and thus was rightly dismissed.

Amicus Briefs

The friends-of-court filings in the case, numerically, lean heavily against the Australians’ lawsuit, and against an expansive reading for Section 10(b) for trans-national frauds. The raw count is 14 to 3. Among those siding with the Australian bank are the governments of its own country, as well as those of Britain and France, a host of international securities and other business organizations, and assorted professors (and law students) of law and finance. Supporting the Australian investors are a group representing Australian investors in general, plus a trio of investment funds in the Netherlands, Scotland and England, and several international pension funds.

Analysis

The Court has perhaps three ways to approach the case. First, it could focus explicitly on the language of the Securities Exchange Act, ignoring policy factors and concluding simply that the text dictates either that there simply is no extra-territorial reach because the words are not there, or that the words do reach any fraud that involves one of the means spelled out in the law. Second, it could look to some policy considerations, as the Solicitor General and others have suggested, and give the Act a compromise reading so that it sometimes reached trans-national frauds. And, third, it could focus on the fact that this specific lawsuit at issue is one by private investors, and rule that, whatever the law might mean for purposes of SEC’s enforcement powers, it does not allow private lawsuits to target trans-national frauds.

There may be variations on those approaches, but the Court does seem to be fairly closely divided now between blocs that seek to focus on the specific words of federal laws or, alternatively, to look to other guides for congressional intent. There is also a strong and perhaps emerging bloc within the Court that is skeptical to creating new private rights to sue under federal statutes that do not explicitly authorize such claims. Whether the Court will be moved by the specter of the Bernard Madoff episode, creating the image of the U.S. as a cradle of global scandal, seems doubtful unless policy considerations become dominant in the review. To some degree, if the Court is inclined to trust the SEC and the Solicitor General, it might well embrace the somewhat straddling approach that they have put forward.

In any event, it does appear that the Court is poised, at least, at least to begin answering a question that has eluded a uniform approach in the lower courts. A final ruling is expected by late spring or early summer.

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