Morrison v. National Australia Bank Ltd.

• Author: Pender, James
• Position: Securities fraud provisions

Abstract

The United States (US) Supreme Court recently overturned more than 40 years of US Federal Court of Appeal jurisprudence in holding that US anti-fraud provisions do not apply to securities listed on a non-US stock exchange, even if the alleged fraud occurs or has an effect within the US or on US citizens. In determining whether US anti-fraud provisions apply to securities fraud, US courts traditionally applied the 'conduct and effect' test. This test required courts to firstly decide whether the alleged fraudulent conduct had occurred in the US, and secondly, whether it had a substantial effect in the US or upon US citizens. (1) However, in Morison p National Australia Bank Ltd, the Supreme Court adopted a new 'transactional' test. Under this test, the Court held that. US anti-fraud provisions will only apply to:

1. transactions in securities that. either occur in the US; or

2. transactions in securities that are listed on a US stock exchange.

I The facts

In February 1998, National Australia Bank Limited (NAB) bought HomeSide Lending Inc (HomeSide), an American mortgage servicing company based in Florida. Over the following three years, NAB's financial reports included figures that outlined the success of HomeSide's business. However, in July 2001, NAB announced that it would be writing down the value of HomeSide's assets by US$450 million and then again by a further US$1.75 billion in September 2001. As a result, the value of NAB shares listed on the Australian Stock Exchange (ASX) fell sharply.

The plaintiffs in the case were Australian residents who had purchased shares in NAB on the ASX. They alleged that HomeSide had manipulated financial models so as to artificially inflate the value of the company and that NAB was aware of this deception by July 2000, but did nothing about it. The plaintiffs brought an action against NAB in the Southern District Court of New York, alleging violations of section 10(b) of the Securities Exchange Act 1934 ('Exchange Act'), which stipulates:

It shall be unlawful for any person, directly or indirectly, by the use of any means of instrumentality of interstate commerce or of the mails or of any facility of any national securities exchange [...] (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange [...] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. (2) Despite NAB being a Melbourne-based bank incorporated in Australia and listed on the ASX, the plaintiffs chose to bring the action in US courts. These factual scenarios have been referred to in the US as 'foreign-cubed' securities actions in that they involve a foreign (or non-US) plaintiff suing a foreign issuer in respect of shares listed on a foreign exchange. (3)

At first instance, the Southern District Court of New York applied the 'conduct and effect' test. It found that the alleged fraud had insufficient connection with the US and that, as such, the Court lacked subject-matter jurisdiction to hear the case. On appeal to the Second Circuit, the Court affirmed the 'conduct and effect' test and once again dismissed the plaintiff's' appeal for lack of subject-matter jurisdiction.

II The US Supreme Court's decision

Justice Scalia delivered the opinion of the majority of the US Supreme Court. (4) It found...