The globalisation of financial markets has increased the
incidence of global fraud. However, regulation, especially in the
sense of private enforcement through class actions, depends on a
political and legal system built around state sovereignty. The
United States class action procedure has been used against a
foreign corporation by foreign investors who purchased the
corporation's securities on a foreign securities exchange. The
scenario is often referred to as a "foreign-cubed" or
"F-cubed" securities class action. < /p>
The extra-territorial operation of US securities laws is of
significance because it provides a mechanism for addressing
cross-border securities fraud and creates the possibility of
conflict between the US approach to securities regulation and the
approach taken in other countries, such as Australia. This opens
the way for forum-shopping. The US may become the magnet
jurisdiction for securities class actions.
The Supreme Court of the United States will consider the
extra-territorial operation of US securities laws for the first
time in Morrison v National Australia Bank. It is likely that it
will determine how accessible US class actions are to foreign
plaintiffs, which in turn will have ramifications for the exposure
of Australian corporations to US securities class actions.
The plaintiffs in Morrison v NAB 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
expected life. 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. The trial judge, upheld on appeal, dismissed the
claims on the basis that the court did not have jurisdiction.
On 30 November 2009 the Supreme Court of the United States
agreed to hear the appeal in Morrison v National Australia Bank
The use of the US class action procedure by foreign investors is
seen by some as an effective deterrent against global fraud. This
has been well illustrated by the Bernard Madoff Ponzi scheme which
has resulted in various class actions on behalf of foreign
However, even if that were true, Australia has a sophisticated
class actions mechanism in the form of Part IVA of the Federal
Court of Australia Act 1976 (Cth) that has been available for use
by shareholders since 1992 and has been employed in such notable
cases as King v GIO and Dorajay Pty Ltd v Aristocrat Leisure Ltd.
As such, the rationale for invoking US jurisdiction in a case which
has its closest connection with Australia is not clear. The Supreme
Court's decision is likely to consider fundamental issues about
sovereignty and the limits of court jurisdiction of importance to
the developing global economy.
In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
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