On 24 June 2010, in a historic decision, the US Supreme Court swept away four decades of case law and categorically rejected a highly vexatious species of class action litigation, namely "f-cubed" securities law suits.

The significance of "f-cubed claims"

Securities fraud class actions are big business in the US. Typically, you might expect about 200 new securities fraud claims to be made each year and in 2009 there were 103 settlements with a combined settlement value of $3.83bn. Over the past ten years, the US plaintiff bar has increasingly recruited "foreign" shareholders to swell the size of the plaintiff class, and therefore the resulting damages awards or settlements. This recruitment of foreign investors creates the so called "f-cubed" claim. These are claims brought by foreign investors in a foreign company whose shares are transacted on a foreign exchange. In other words, these claims have three cumulative foreign elements or are "f-cubed".

The increase in the number of "f-cubed" claims is immensely significant to the London commercial D&O and FI insurance markets, as about 15% of all US securities class actions are now launched against non US companies. As if the claims are not big enough, the quantum of the ongoing Credit Suisse, UBS, RBS, CIBC, Société Générale and Fortis class actions are hugely magnified by the potential presence of the European investors – they typically represent over 90% of the class.

The historical approach of the US courts has been to accept these "f-cubed" claims if the egregious conduct took place in the US. In other words, the issue was whether the US courts had jurisdiction over the dispute. The test has proved to be deceptively complex and the outcome of each case uncertain, although the high water mark of the f-cubed claims is unquestionably Vivendi, where the US court accepted jurisdiction, leading to the recent jury award in January 2010 estimated to be worth $9bn. The spectre of "f-cubed" claims has led many commentators to describe the US as being a "Shangri- La" for class action lawyers.

Slowing the "f-cubed" train

The Second Circuit Court of Appeals slowed the enthusiasm for "f-cubed" claims in the case of Morrison v National Australia Bank.

A number of Australian shareholders who had purchased shares in this Australian bank on the Sydney Stock Exchange joined a US class action alleging securities fraud arising from the alleged deceptive conduct and statements made by the bank's Floridia subsidiary, HomeSide.  

The Court of Appeal's carefully considered the allegations and found that the centre of gravity or the "heart of the fraud" took place in Australia, with the result that the US Courts did not have jurisdiction.

This was an important decision, taking the wind out of the sails of US class action lawyers. But it was based upon the peculiar facts of this case and it did not create a "bright line rule". "F-cubed" claims would still be allowed under this analysis if the heart of the fraud took place in the US.

The derailing of the "f-cubed" train

The Supreme Court has now, in the Morrison v National Australia Bank case, issued a historic judgment that has derailed the fcubed train.

The Supreme Court has effectively swept away four decades of case law, stating that the jurisdictional test of whether the egregious conduct took place in the US was the wrong test to apply. Instead, the Supreme Court said that relevant US securities legislation only applied to share transactions that took place within the US.

This creates a "bright line rule", bringing certainty and doing away with the earlier jurisprudential jumble. There is now no need analyse the complex jurisdiction/ conduct test. The issue is now simple – did the share transaction take place in the US? If not, the investors cannot utilise the US securities laws or the favourable US class action procedures. This is the end of "fcubed" claims.

It must now follow that Vivendi will press on with the appeal of the award made against it in the securities fraud trial in January 2010, since the majority of the plaintiff class bought their shares in the French exchange, disqualifying them from relief under the US securities laws. In other words, this development should massively reduce the damages ultimately paid. Indeed, Vivendi made special representations to the Supreme Court arguing for this result, as did the governments of the UK, France and Australia.


The process of the creative US plaintiff bar jetting around the globe recruiting foreign investors to swell the size of the plaintiff class will now be brought to a halt. The Supreme Court has, in its historic judgment, brought an end to the "f-cubed" claims.

This is an immensely important decision for the London commercial D&O and FI insurance markets, which otherwise faced an increasing number of such claims.

It should also make the underwriting of risks a little more certain, because underwriters will be confident that their exposure to US class actions will be limited to the company's ADR listing. Whilst this brings certainty, it does not of course remove risk because these ADR listings can be substantial, as in the case of BP where 28% of its equity is held as ADRs.

Morrison v National Australia Bank Supreme Court (no- 08 1191)

The US Supreme Court has ruled investors who purchased shares on non-US exchanges cannot bring securities class actions in the US. This means those investors cannot utilise the uniquely favourable US legislative framework or class action procedures.

RPC Partner Simon Goldring comments:

This historic decision is good news for the London commercial D&O and FI insurance markets as it:  

  • creates a clear and certain legal test  
  • brings to an end the spectre of "f-cubed" claims  
  • substantially reduces the exposure of non-US listed companies and their directors to US securities class actions  
  • brings increased certainty to the underwriting process