In the first so-called “foreign-cubed” securities class action to reach the Second Circuit, the appeals court affirmed the dismissal on jurisdictional grounds of claims asserted against the National Australia Bank (NAB) for violations of Section 10(b) of the Securities and Exchange Act and Rule 10b-5 arising from alleged misstatements included in NAB’s filings with the Securities and Exchange Commission. A ”foreign-cubed” action is a claim brought by a foreign plaintiff against a foreign issuer with respect to securities transactions occurring in a foreign country.

The Second Circuit declined NAB’s argument that a bright-line rule should be set that jurisdiction should never be asserted in foreign-cubed actions, explaining that it was “leery” of establishing a rigid rule because “we cannot anticipate ... the ingenuity of those inclined to violate the securities laws.” Instead, the court determined that the usual rule governing the extraterritorial reach of Section 10(b) should be applied. Accordingly, the court applied its two-part “conduct test” and “effects test” to determine whether the assertion of jurisdiction over NAB was appropriate. Under these tests, a court asks “(i) whether the wrongful conduct occurred in the United States, and (ii) whether the wrongful conduct had a substantial effect in the United States or upon United States citizens.” Further, in evaluating the conduct in issue, the court focuses on that which is central or at the heart of the fraudulent scheme and not on acts that are “merely prepatory” or ancillary.

Applying these tests, the Second Circuit found that the plaintiffs failed to satisfy either. With respect to the “effects test,” the court ruled that plaintiffs failed to contend that NAB’s conduct had “any meaningful effect on America’s investors or its capital markets.” Under the “conduct test,” the court found that NAB’s U.S.-based subsidiary’s alleged manipulation of its internal records and its transmission of falsely inflated performance results to NAB in Australia which NAB then used to create and distribute its SEC filings were not sufficient to support the assertion of jurisdiction over NAB.

The court ruled that NAB (i) was responsible for overseeing its subsidiaries’ operations and ensuring the accuracy of its public statements, and (ii) had the ability to monitor the accuracy of its subsidiaries’ numbers before transmitting them to investors. Accordingly, the court concluded that “[t]he actions taken and the actions not taken by NAB in Australia were ... significantly more central to the fraud and more directly responsible for the harm to investors” than any alleged conduct in America. (Morrison v. National Australia Bank Ltd., 2008 WL 4660742 (2d Cir. Oct. 23, 2008))