Archive for October 28th, 2008

For those interested in the internationalization of class action law, be sure to read the Second Circuit’s decision in Morrison v. National Australia Bank Ltd., 2008 WL 4660742 (2d Cir. Oct. 23, 2008).  (Thanks to  The 10b-5 Daily and Point of Law for tipping me off to the decision).

I have previously commented on the trend in efforts to expand securities class actions filed in U.S. Courts against foreign defendants to include foreign nationals who bought stock on foreign exchanges.  (See entries dated July 31 and Sept. 6).   Courts and commentators have begun to refer to these cases as “foreign cubed” class actions.  These earlier entries summarized United States district court opinions addressing whether foreign investors who bought stock on a foreign exchange should be included as members of a class or subclass in a securities class action in a U.S. court.  This analysis has focused on the court’s prediction of whether courts in the foreign jurisdiction would recognize the a judgment in a U.S. class action as preclusive as to absent class members.

The Morrison decision addresses the circumstances in which a U.S. court has subject matter jurisdiction to resolve a dispute between foreign investors and a foreign company at all.  The court rejected the argument that there should be a bright-line rule prohibiting jurisdiction by U.S. courts in all “foreign cubed” class actions.  Instead, the court reiterated an analytical framework that it had previously adopted in other cases involving securities claims against foreign defendants.  Here are the highlights of that analytical framework:

  • U.S. jurisdiction is governed by a “conduct test” and an “effects test,” which are to be analyzed together in some cases to give the court “a better picture of whether there is sufficient United States involvement to justify the exercise of jurisdiction . . . .” Morrison, slip op. at 8 (however, in Morrison, the appellant was relying solely on the “conduct test” so the court focused on that element.)
  • The “effects test” looks to whether the alleged wrongful conduct “had a substantial effect on the United States or upon United States citizens.”  Morrison, slip op. at 8
  • The “conduct test” requires that “the defendant’s conduct in the United States [be] more than merely preparatory to the fraud, and [that] particular acts or culpable failures to act within the United States directly cause[] losses to foreign investors abroad” for subject matter jurisdiction to exist.”  Morrison, slip op. at 11 n.6 (quoting Alfadda v. Fenn, 935 F.2d 475, 478 (2d Cir. 1991)).

Technically, much of the opinion is dicta because in the end the court affirmed the lower court’s dismissal for lack of subject matter jurisdiction, holding that not enough of the conduct giving rise to the securities fraud claims occurred in the United States.  The plaintiffs had argued that the “conduct test” could be satisfied because allegedly falsified numbers that had been communicated to investors in Australia had been prepared in Florida by a U.S. subsidiary.  Weighing a variety of factors, the court concluded that the portion of the conduct that took place in Florida was not significant enough to justify the exercise of jurisdiction.  Among other factors, the court noted that the subsidiary’s corporate obligations were exclusively to its parent and that the actual communication of the allegedly false statements was carried out in Australia by the publicly traded parent.  Another important consideration was the impact of the U.S. Supreme Court recent decision in Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008), holding that an act of deception without public disclosure is, at best, too remote in the chain of causation to support proof of reliance in a securities fraud case.

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