Supreme Court finds no U.S. cause of action in
“F-cubed” case

A new Supreme Court decision should help quell the fears of those who think the United States “has become the Shangri-La of class action litigation for lawyers representing those allegedly cheated in foreign securities markets.” Morrison v. National Australia Bank Ltd., No. 08, 1191. The case presented what is known as an “F-cubed” situation — a foreign purchaser of securities by a foreign issuer on a foreign exchange. Considering the extraterritorial reach of the U.S. securities laws, the Court held that Section 10(b) of the Securities and Exchange Act of 1934 provided no such cause of action. According to the Court, that statute reaches fraudulent behavior only in connection with domestic transactions.

The Respondents in National Australia were National Australia Bank, a foreign bank whose shares are not traded in the United States, and HomeSide lending, a mortgage servicing company headquartered in Florida. Petitioners were Australians who bought shares of National Australia before it was forced to write down the value of HomeSide’s assets. According to Petitioners, HomeSide fraudulently inflated its financial position—and National knew it. The district court dismissed the case for lack of subject matter jurisdiction, and the Second Circuit affirmed under its "conduct-and-effects" test, holding that the acts performed in the United States did not “compris[e] the heart of the alleged fraud.”

In an opinion by Justice Scalia, the Supreme Court affirmed on different procedural and substantive grounds, holding that the petitioners failed to state a claim because the Exchange Act gave no clear indication that Section 10(b) applied abroad. “When a statute gives no clear indication of an extraterritorial application,” the Court declared, “it has none.” In so holding, the Court rejected a “collection of tests for divining” the extraterritorial application of Section 10(b), tests it criticized as “complex in formulation and unpredictable in application.” In their place, the court laid down a bright-line test that asks simply “whether the purchase or sale is made in the United States or involves a security listed on a domestic exchange.” Because that could not be said of the transactions in National Australia, the petitioners failed to state a claim.

Concurring in part and in the judgment, Justice Breyer would have affirmed based solely on the presumption against extraterritoriality and the language of the statute. Justices Stevens and Ginsburg, for their part, would have affirmed under the Second Circuit’s “conduct-and-effects” test.