Earlier this week, the United States Supreme Court granted certiorari in Morrison v. National Australia Bank Ltd. (08-1191), a case involving a question of transnational securities and the application of US securities fraud laws.
The case was brought by four Australian shareholders against National Australia Bank and HomeSide Lending, which formerly was its mortgage unit located in Florida.
The appeal will determine when the United States' securities fraud laws apply in transnational securities dealings. The high court will review the appellate court's upholding of a dismissal of the lawsuit. The intermediate appellate court determined that the United States courts had no jurisdiction in the matter, since the alleged fraud at the center of the allegations occurred outside the United States.
A few basic facts. National Australia Bank purchased HomeSide Lending in 1998 for $1.22 billion and several years later announced write-downs amounting to $2.2 billion. After this occurred, the bank's stock value fell 13% in Australia and several HomeSide executives resigned.
The bank eventually reported to the SEC that it had applied incorrect interest assumptions in valuing the mortgages over time. They miscalculated the amount of time it would take for borrowers to pay back loans, and thus the fees associated with those loans. Later, HomeSide was sold to Washington Mutual and picked up in 2008 by JPMorgan Chase when it purchased Wamu's assets.
Specifically, the questions presented in the case are as follows:
1) Do anti-fraud provisions of U.S. securities laws extend to transnational frauds when (a) foreign-based parent company conducted substantial business in United States, its American Depository Receipts were traded on New York Stock Exchange, and its financial statements were filed with Securities and Exchange Commission, and (b) claims arose from massive accounting fraud perpetrated by American citizens at parent company's Florida-based subsidiary and were merely reported from overseas in parent company's financial statements?
(2) Should this court, which has never addressed issue of whether subject matter jurisdiction may extend to claims involving transnational securities fraud, set forth policy to resolve three-way conflict among circuits (i.e., District of Columbia Circuit versus Second, Fifth, and Seventh Circuits versus Third, Eighth, and Ninth Circuits)?
(3) Should Second Circuit have adopted SEC's proposed standard for determining proper exercise of subject matter jurisdiction in transnational securities fraud cases, as set forth in SEC's amicus brief submitted at request of Second Circuit, and should Second Circuit have adopted SEC's finding that subject matter jurisdiction exists here due to "material and substantial conduct in furtherance of" securities fraud that occurred in United States?
In their effort to have the Supreme Court accept the case, the shareholders' attorneys argued that the appellate courts are divided as to when the US has jurisdiction over transactional securities fraud. They advocated that the anti-fraud provisions of the securities laws apply to transnational securities frauds even when overseas investors suffer the resulting financial losses. This they argued is proper if the domestic conduct was material to the scheme's success and a substantial part of the alleged fraud.
The Securities and Exchange Commission represented by the U.S. Justice Department, argued that the lower courts had correctly dismissed the lawsuit and urged the Supreme Court to reject the appeal. The government advocated that a private plaintiff should be required to demonstrate a direct causal link between injury and the component of the scheme involved in the United States.
The case will be heard and decided in 2010.
Related Web Resources
For more information on the USSC case docket for the Morrison case, click here.
