The Second Circuit Court of Appeals has affirmed the dismissal of an “F-Cubed” securities class action -- i.e., a securities class action brought by foreign investors who purchased shares in a foreign company on a foreign stock exchange -- on subject matter jurisdiction grounds. Morrison et al. v. National Australia Bank Ltd., Docket No. 07cv583 (Oct. 23, 2008). The Morrison case is the Second Circuit’s first decision addressing whether a U.S. court has subject matter jurisdiction to hear an F-Cubed securities class action.
Shareholder plaintiffs brought suit against an Australian bank whose shares, although traded on a number of foreign stock exchanges, do not trade on any U.S. exchange (only the bank’s American Depository Receipts trade in the United States). Plaintiffs’ securities class action suit, filed in the United States District Court for the Southern District of New York, alleged that the bank had falsely inflated the fees that its American subsidiary was expected to receive in connection with its mortgage servicing operations.
Before the lower court and on appeal, the plaintiffs asserted that the case satisfied the “conduct test” for extraterritorial application of Section 10(b) of the Securities and Exchange Act (that is, that, although the defendant is located abroad, the wrongful conduct took place with the United States). The Southern District dismissed the case for lack of subject matter jurisdiction.
On appeal, the Second Circuit affirmed, holding that, although the American subsidiary sent allegedly false financial information to the Australian bank, it was ultimately the responsibility of the bank to verify and properly disclose this information. Thus, under the “conduct test,” the Court concluded, the wrongful conduct complained of – the bank’s failure to verify, and improper disclosure of, the subsidiary’s financial information – took place outside of the United States. The Court further noted as significant that the plaintiffs did not even seek to argue that the defendants’ alleged conduct satisfied the “effects test” for extraterritorial application, apparently conceding that the alleged conduct had had no effect on the United States or its citizens. Finally, the Court reasoned that the long causal chain between the subsidiary’s conduct and the bank’s disclosures (the numerous “checkpoints” through which this financial information had to pass) further weighed against the exercise of subject matter jurisdiction in this case.
Although the Court ultimately found that the conduct test had not been satisfied in this instance, the Court did note that, under different factual circumstances, it would be appropriate to exercise subject matter jurisdiction over F-Cubed plaintiffs. In so holding, the Court acknowledged that the exercise of subject matter jurisdiction over F-Cubed actions could result in conflicts in the application of U.S. and foreign anti-fraud laws, but reasoned that “the anti-fraud enforcement objectives [of foreign countries] are broadly similar” and that declining all F-Cubed securities class actions would undermine the “goal of preventing the export of fraud from America.”