Tuesday, March 30, 2010
The U.S. Supreme Court heard oral argument yesterday in Morrison v. National Australia Bank(Download Morrison Transcript), the securities class action involving foreign plaintiffs that purchased shares of a foreign issuer abroad suing foreign defendants for Rule 10b-5 fraud. The Second Circuit dismissed the plaintiffs' claim, relying on a balancing test developed by Judge Friendly over 30 years ago.
The difficulty that petitioners faced from the outset was that, as Justice Ginsburg expressed it, this case "has 'Australia' written all over it." Petitioners' attorney argued that, to the contrary, this case has "'Florida' written all over it because Florida is where the numbers were doctored, Florida is where the fraudulent conduct in putting the phony assumptions into the valuation portfolio were done," but it does not appear (from my reading of the transcript) that the Justices were persuaded. As several Justices noted, the communication of the doctored numbers took place in Australia, where the documents were prepared by the Australian bank.
The hard question put to respondents' attorney was suppose that Schmidt, a citizen of Germany, flies to New York and meets Jones in a New York hotel, where Jones persuades him that he owns the Brooklyn Bridge, and Schmidt buys shares in Jones' company on the German exchange. Should the U.S. courts not take jurisdiction over this dispute? Petitioners' attorney appeared to waffle on this, but ultimately argued that any balancing test that would allow application of U.S. law would infringe the sovereign authority of other nations. Judge Breyer wondered how it would hurt the interests of a foreign nation if the court asserted jurisdiction over a case that involved terribly bad conduct that took place in the U.S.
Finally, the United States argued as amicus curiae. The government's position is driven by its concern that it would not be able to go against those who hatch a fraud in the U.S. that is directed against foreign investors -- e.g., boiler rooms operating here that target only foreign investors. Thus, it argued for a distinction between government actions and private claims. The Justices worried that sorting out significant from insignificant frauds, and domestic from overseas conduct, might not prove so easy.
Finally, I'd like to applaud Professor Margaret V. Sachs (UGeorgia), whose groundbreaking scholarship in this area was repeatedly referenced by Justice Breyer, who took an active role in questioning all three attorneys. Justice Breyer asked each attorney to square their positions with Professor Sachs'. In 1990, Professor Sachs took on the "received wisdom" of Judge Friendly, who believed that Congress did not address the question of extraterritoriality in the 34 Act. To the contrary, asserts Professor Sachs, Congress was aware, in 1934, of overseas securities markets, and Congress made a deliberate choice not to extend federal securities laws to overseas transactions.