Morrison v. National Australia Bank Ltd.
561 U. S. (2010)
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Rule of Law:
Section 10(b) of the Securities Exchange Act of 1934 does not apply extraterritorially. It provides a cause of action only for transactions involving (1) securities listed on a domestic U.S. exchange or (2) domestic purchases or sales of other securities.
Facts:
- National Australia Bank Limited (National) is an Australian bank whose Ordinary Shares are traded on foreign exchanges, but not on any U.S. exchange.
- In 1998, National acquired HomeSide Lending, Inc., a mortgage-servicing company headquartered and operated in Florida.
- From 1998 to 2001, executives at HomeSide in Florida allegedly manipulated the company's financial models to fraudulently overstate the value of its mortgage-servicing rights.
- National incorporated these inflated asset values into its official financial statements and public reports, which touted HomeSide's success.
- Russell Leslie Owen and Brian and Geraldine Silverlock, all Australian citizens, purchased National's Ordinary Shares on Australian stock exchanges.
- On July 5 and September 3, 2001, National announced massive writedowns of HomeSide's value, causing the price of National's Ordinary Shares to plummet.
Procedural Posture:
- Russell Leslie Owen and other Australian investors (petitioners) filed a class-action lawsuit against National Australia Bank and others (respondents) in the U.S. District Court for the Southern District of New York.
- The lawsuit alleged violations of Section 10(b) of the Securities Exchange Act of 1934.
- The District Court granted respondents' motion to dismiss for lack of subject-matter jurisdiction.
- Petitioners, as appellants, appealed the dismissal to the U.S. Court of Appeals for the Second Circuit, with respondents as appellees.
- The Second Circuit affirmed the District Court's dismissal.
- The U.S. Supreme Court granted certiorari to review the Second Circuit's decision.
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Issue:
Does Section 10(b) of the Securities Exchange Act of 1934 provide a cause of action for foreign plaintiffs who purchased securities of a foreign issuer on foreign exchanges, where some of the alleged deceptive conduct occurred in the United States?
Opinions:
Majority - Justice Scalia
No, Section 10(b) does not provide a cause of action under these circumstances. U.S. statutes are presumed to apply only domestically unless Congress provides a clear, affirmative indication of extraterritorial application. The Court finds no such indication in the Exchange Act. The various 'conduct' and 'effects' tests created by the Courts of Appeals are rejected as unpredictable, inconsistent, and an improper form of judicial policymaking that disregards this presumption. The proper focus of Section 10(b) is not where the deceptive conduct occurred, but where the securities transaction took place. Therefore, the statute applies only to transactions in securities listed on domestic exchanges and to domestic transactions in other securities. Since petitioners purchased foreign securities on a foreign exchange, their claim falls outside the reach of Section 10(b).
Concurring - Justice Breyer
No, Section 10(b) does not apply. The securities at issue are not registered on any U.S. national securities exchange. The relevant purchases of these unregistered securities took place entirely in Australia and involved only Australian investors. In accordance with the presumption against extraterritoriality, Section 10(b) does not cover such transactions.
Concurring - Justice Stevens
No, the petitioners failed to state a claim, but the majority's reasoning is flawed. The Court should have adhered to the long-standing 'conduct and effects' test developed by the Second Circuit, which represents decades of judicial wisdom and has been tacitly approved by Congress. The majority's new, rigid 'transactional test' is a departure from established precedent and misapplies the presumption against extraterritoriality by treating it as a clear statement rule. Although the majority's new rule is incorrect, the petitioners' claim would also fail under the proper 'conduct and effects' test because this case is overwhelmingly Australian and lacks a sufficient connection to the United States to justify applying U.S. law.
Analysis:
This decision fundamentally altered the international reach of U.S. securities law, replacing the flexible, judicially-crafted 'conduct and effects' tests with a rigid, bright-line 'transactional test.' The ruling provides greater predictability for foreign issuers not listed on U.S. exchanges and significantly limits the ability of the U.S. to serve as a forum for global securities class actions. By focusing exclusively on the location of the transaction, the Court narrowed the scope of Section 10(b), potentially leaving investors, including Americans, without a U.S. federal remedy for frauds conceived and executed in the U.S. if the final securities purchase occurs abroad.
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