Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), authorizes the Securities and Exchange Commission (“SEC”) to promulgate rules forbidding “any manipulative or deceptive device or contrivance” used in connection with the purchase or sale of securities. Section 10(b) has long been understood to support a private cause of action against persons or entities violating SEC Rule 10b-5, which generally prohibits the use of deceptive acts or schemes to buy or sell securities. The courts of appeals had taken different views as to whether this antifraud provision applies when the securities in question were bought or sold abroad.
On June 24, 2010, in Morrison v. National Australia Bank Ltd., No. 08-1191, the Supreme Court issued an important decision on the extraterritorial reach of American securities laws, holding that Section 10(b) applies only to purchases or sales of securities that occur on a domestic U.S. exchange or otherwise occur within the United States. The ruling precludes so-called “f-cubed” claims—claims by foreign investors who bought shares in foreign corporations listed on foreign exchanges.
In Morrison, foreign shareholders of National Australia Bank (“NAB”), an Australian corporation, filed suit alleging that NAB had defrauded its shareholders by overvaluing its mortgage holdings in its wholly owned subsidiary HomeSide Lending Inc., a Florida-based corporation. The district court dismissed the suit, and the Second Circuit affirmed, holding that the conduct that “comprises the heart of the alleged fraud” occurred in Australia at the behest of NAB. 547 F.3d 167, 175.
The Supreme Court affirmed, but with significantly different reasoning. In an opinion by Justice Scalia, the Court concluded that Section 10(b) has no extraterritorial reach because “there is no affirmative indication in the Exchange Act that §10(b) applies extraterritorially.” Slip op. 16. In delineating what conduct is sufficiently domestic for purposes of the statute, the Court recognized a bright-line rule: “it is . . . only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which §10(b) applies.” Id. at 18. This is because “the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States.” Id. at 17. The Court expressly “reject[ed] the notion that the Exchange Act reaches conduct in this country affecting exchanges or transactions abroad.” Id. at 20.This rule applies to federal regulators and civil plaintiffs alike.
Justice Breyer concurred in part and concurred in the judgment. He concluded that, because the purchases at issue “took place entirely in Australia and involved only Australian investors,” the presumption against extraterritoriality barred application of the Exchange Act. Slip op. 1 (opinion of Breyer, J.). Justice Breyer noted, however, that state law and other federal statutes (such as those prohibiting mail and wire fraud) might nonetheless apply to fraudulent activity occurring within the United States.
Justice Stevens, joined by Justice Ginsburg, concurred only in the judgment. He disputed the Court’s bright-line rule, arguing instead that Section 10(b) applies to certain domestic fraud relating to foreign transactions. Justice Sevens nevertheless agreed with the result in the case because “the bulk or the heart of the fraud” occurred outside the United States. Slip op. 13 (opinion of Stevens, J.).
Mayer Brown filed an amicus brief in support of NAB on behalf of the International Chamber of Commerce, the Swiss Bankers Association, Economiesuisse, the Federation of German Industries, and the French Business Confederation, which the Supreme Court cited in its opinion.
The financial regulatory reform legislation now being debated in Congress includes a provision that, if enacted, would have the effect of restricting application of the Court’s decision today to private actions under Section 10(b). That provision grants the Securities and Exchange Commission authority to take enforcement action with respect to “conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States.”