WASHINGTON (CN) – Lawyers argued before the Supreme Court on Monday over whether a key provision of the Securities and Exchange Act should protect foreign fraud victims when the alleged scammer has a U.S. subsidiary. “This case has ‘Australia’ written all over it,” Justice Ruth Bader Ginsburg said. The law’s scope is pivotal, as courts increasingly face lawsuits over transnational fraud.
Three Australians who bought stock in National Australia Bank, the country’s largest bank, filed a class action when the bank was forced to write down more than $1.75 billion on HomeSide Lending, a U.S. mortgage service provider the bank bought in 1998.
The bank had to sell the Florida-based subsidiary after HomeSide miscalculated how much revenue it would receive from mortgage-backed securities in 2001. Investors said the bank, HomeSide and four officers made false and misleading statements in SEC filings. When those statements were revealed in Australia, they allegedly caused the bank’s stock price to plummet.
The bank sought dismissal, claiming the alleged fraud is “fundamentally foreign in nature.” (The sole U.S. plaintiff, Robert Morrison, had been dismissed from the lawsuit for failing to show injury. The remaining plaintiffs are all Australian.)
The district court said it lacked jurisdiction, and the 2nd Circuit in Manhattan agreed. The Supreme Court must now decide how much of the alleged fraud stemmed from the United States, and whether U.S. laws — not Australian laws — provide the proper remedy.
Justice Antonin Scalia echoed Ginsburg’s jurisdictional concerns.
“You are talking about a misrepresentation, if there was one in this case, made in Australia to Australian purchasers,” he told the investors’ attorney, Thomas Dubbs. “It ought to be up to [Australian courts] to decide that issue, and here you are dragging the American courts into it.”
Dubbs insisted that “the people who committed the fraud on a nuts-and-bolts level” were HomeSide officers in Florida, “so to that extent it is a Florida case.”
But the bank’s attorney, George T. Conway III, cited the longstanding principle that U.S. law doesn’t apply outside the United States unless Congress explicitly says otherwise. Extending the law overseas would intrude on the “sovereign authority” of other nations, Conway argued.
Chief Justice John Roberts, echoing the U.S. solicitor general’s argument in a friend-of-the-court brief, appeared concerned that not applying U.S. law would “risk allowing the United States to become a base for orchestrating securities fraud for export.”
“It would allow things like masterminds in the United States, engineering international boiler room schemes in which they direct agents in foreign countries to make fraudulent representations that victimize investors,” he said.
Conway countered that other countries should be able to “judge for themselves what kind of rules they want to have for people who buy shares on their own exchanges.” Expanding the anti-fraud provision would “amount to exactly the sort of legal imperialism that this court rejected,” he added.
Also arguing before the justices was Matthew D. Roberts, assistant to the solicitor general, who said the anti-fraud provision does apply to international fraud, but said the Australian investors hadn’t met their burden in this case.
The test, he said, was whether “significant conduct material to the fraud’s success occurs in the United States.” Narrowing that standard would “erode ethical standards in the securities industry and undermine investor confidence, and it could lead to diminished protections for United States citizens targeted by foreign fraudsters,” the government argued.
When this “significant conduct” standard is met, Roberts argued, the SEC should be in charge of enforcement actions, not private investors. He said a private investor has an even higher standard of proof.
Justices Stephen Breyer and Scalia took issue with parts of the government’s test: Breyer questioned its “feasibility,” while Scalia said it doesn’t seem “appropriate” for a jurisdictional question.
Chief Justice Roberts asked the government’s lawyer, “Do you have any indication that our friends around the world are comfortable with your tests?”
Roberts responded that the amicus briefs for the bank want to limit the private right of action, not necessarily SEC actions.
The amicus briefs lean heavily against the investors’ lawsuit by a count of 14 to 3. Those siding with the bank include the governments of Australia, Britain and France, various international securities and business organizations, and professors of law and finance.
A final ruling is expected by late spring or early summer.
Justice Sonia Sotomayor, formerly a 2nd Circuit judge, did not participate in oral arguments.