The Supreme Court's decision in Morrison v NAB
curbs the extra-territorial operation of US securities laws.
The extra-territorial operation of US securities laws has been
curbed by the United States Supreme Court in Morrison v
National Australia Bank (08-1191), by requiring the purchase
or sale of the security to be made in the United States, or involve
a security listed on a domestic exchange.
The facts in Morrison v NAB
The plaintiffs are residents of Australia, who purchased
National Australia Bank Limited's ("NAB") ordinary
shares on an Australian exchange.
In February 1998, NAB acquired HomeSide Lending Inc., an
American mortgage service provider. HomeSide calculated the present
value of the fees it would generate from servicing mortgages in
future years using a valuation method, booked that amount on its
balance sheet as an asset called a Mortgage Servicing Right
("MSR"), and then amortised the value of the MSR over its
In 2001, NAB revealed that the interest assumptions and the
valuation model used by HomeSide to calculate the MSR were
incorrect and resulted in an overstatement in the value of its
servicing rights. When NAB disclosed the error its share price
Notwithstanding that they were Australian residents trading
securities in an Australian company in Australia, the plaintiffs
commenced their class action against NAB in the Southern District
of New York.
They relied on section 10(b) of the Securities Exchange
Act of 1934 which prohibits any manipulative or deceptive
device or contrivance in connection with the purchase or sale of
any security registered on a national securities exchange or any
security not so registered.
The trial judge, upheld on appeal, dismissed the claims on the
basis that the court did not have jurisdiction. The Supreme Court
of the United States agreed to hear the appeal.
Supreme Court upholds decision but substitutes new test
The Supreme Court relied on the longstanding principle of
American law that legislation of Congress is meant to apply only
within the territorial jurisdiction of the United States, unless a
contrary intent appears. The Court found that section 10(b) is not
The US Supreme Court therefore adopted a transactional test for
the application of section 10(b): whether the purchase or sale is
made in the United States, or involves a security listed on a
This replaced the previous tests for the application of section
10(b) that required either (1) an "effects test," ie.
"whether the wrongful conduct had a substantial effect in the
United States or upon United States citizens," or (2) a
"conduct test," "whether the wrongful conduct
occurred in the United States."
The Supreme Court's application of the presumption against
extra-territorial operation was bolstered by the amicus briefs from
a number of other countries, including Australia, which led the
Court to observe:
"The probability of
incompatibility with the applicable laws of other countries is so
obvious that if Congress intended such foreign application "it
would have addressed the subject of conflicts with foreign laws and
Like the United States, foreign countries regulate their
domestic securities exchanges and securities transactions occurring
within their territorial jurisdiction. And the regulation of other
countries often differs from ours as to what constitutes fraud,
what disclosures must be made, what damages are recoverable, what
discovery is available in litigation, what individual actions may
be joined in a single suit, what attorney's fees are
recoverable, and many other matters."
Will the US Congress act?
Although applying settled rules of US statutory construction the
Court was clearly concerned with conflicts among national
regulatory regimes and forum shopping:
"While there is no reason to
believe that the United States has become the Barbary Coast for
those perpetrating frauds on foreign securities markets, some fear
that it has become the Shangri-La of class-action litigation for
lawyers representing those allegedly cheated in foreign securities
The lawyer for the investors opined that the ruling
"severely limits investors' remedies against securities
fraud and it creates a risk that the U.S. will become a center for
fraudulent activity," and further stated that "We're
hopeful Congress in its current work on financial regulatory reform
will overrule this decision."
Similarly Justice Stevens, who concurred in the judgment,
finding that the case "has Australia written all over it"
dissented "from the Court's continuing campaign to render
the private cause of action under §10(b) toothless."
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