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No. 08-1191
In the Supreme Court of the United States
ROBERT MORRISON, ET AL., PETITIONERS
v.
NATIONAL AUSTRALIA BANK LTD., ET AL.
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
BRIEF FOR THE UNITED STATES AS AMICUS CURIAE
DAVID M. BECKER
General Counsel
MARK D. CAHN
Deputy General Counsel
JACOB H. STILLMAN
Solicitor
MARK PENNINGTON
Assistant General Counsel
WILLIAM K. SHIREY
Counsel to the General
Counsel
Securities and Exchange
Commission
Washington, D.C. 20549
ELENA KAGAN
Solicitor General
Counsel of Record
MALCOLM L. STEWART
Deputy Solicitor General
ANTHONY A. YANG
Assistant to the Solicitor
General
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217
QUESTION PRESENTED
Petitioners alleged that respondents—an Australian
parent company, its wholly-owned Florida-based subsidiary, and individual officials of the two companies—
engaged in a transnational securities fraud in violation
of Section 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. 78j. Petitioners further alleged that they suffered injury after the Florida subsidiary provided false
accounting figures to the foreign parent, the parent incorporated the false information into its own financial
reports and other public statements, petitioners purchased stock in the parent at prices inflated by the misstatements, and the price of petitioners’ stock fell when
the misstatements were exposed. The question presented is as follows:
Whether the courts below correctly dismissed petitioners’ private suit because of the attenuated link between petitioners’ alleged injury and the United States
component of the alleged fraudulent scheme.
(I)
TABLE OF CONTENTS
Page
Interest of the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
A. The courts of appeals have consistently and
correctly held that Section 10(b) reaches at
least some transnational fraudulent schemes
that cause injury outside the United States . . . . . . . . 6
B. The nexus between a fraudulent scheme, a
private plaintiff, and the United States is
not relevant to the court’s subject-matter
jurisdiction, but bears on the applicability
of Section 10(b)’s substantive prohibition
and implied private right of action . . . . . . . . . . . . . . . . 8
C. Although petitioners adequately alleged a
substantive violation of Section 10(b), the
link between the United States component
of the scheme and petitioners’ injury is too
attenuated to support a private suit . . . . . . . . . . . . . . 11
D. Petitioners have identified no decision indicating that another court of appeals would have
allowed their private suit to go forward . . . . . . . . . . . 17
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
TABLE OF AUTHORITIES
Cases:
Alstom SA Sec. Litig., In re, 406 F. Supp. 2d 346
(S.D.N.Y. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Arbaugh v. Y&H Corp., 546 U.S. 500 (2006) . . . . . . . . . . 8, 9
Basic Inc. v. Levinson, 485 U.S. 224 (1988) . . . . . . . . . . . . 10
(III)
IV
Cases—Continued:
Page
Bersch v. Drexel Firestone, Inc., 519 F.2d 974
(2d Cir.), cert. denied, 423 U.S. 1018 (1975) . . . . . . . . 8, 19
CP Ships Ltd. Sec. Litig., In re, 578 F.3d 1306
(11th Cir. 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Central Bank of Denver, N.A. v. First Interstate
Bank of Denver, N.A., 511 U.S. 164 (1994) . . . . . . . 10, 13
Continental Grain (Austl.) Pty. Ltd. v. Pacific
Oilseeds, Inc., 592 F.2d 409 (8th Cir. 1979) . . . . . 8, 19, 20
Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) . . . . . . . 2
EEOC v. Arabian Am. Oil Co., 499 U.S. 244 (1991) . . . . . . 7
Europe & Overseas Commodity Traders, S.A. v.
Banque Paribas London, 147 F.3d 118 (2d Cir.
1998), cert. denied, 525 U.S. 1139 (1999) . . . . . . . . . . . . . 6
F. Hoffman-La Roche Ltd v. Empagran, 542 U.S.
155 (2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Foley Bros. v. Filardo, 336 U.S. 281 (1949) . . . . . . . . . . . . . 7
Grunenthal GmbH v. Hotz, 712 F.2d 421 (9th Cir.
1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 20
IIT v. Vencap, Ltd., 519 F.2d 1001 (2d Cir. 1975) . . . . . 8, 19
Itoba Ltd. v. Lep Group PLC, 54 F.3d 118 (2d Cir.
1995), cert. denied, 516 U.S. 1044 (1996) . . . . . . . . . . . . . 6
Kauthar SDN BHD v. Sternberg, 149 F.3d 659
(7th Cir. 1998), cert. denied, 525 U.S. 1114
(1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 8, 18
Pasquantino v. United States, 544 U.S. 349 (2005) . . . . . . . 7
Robinson v. TCI/US W. Commc’ns, Inc., 117 F.3d
900 (5th Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SEC v. Berger, 322 F.3d 187 (2d Cir. 2003) . . . . . . . . . . 8, 16
V
Cases—Continued:
Page
SEC v. Kasser, 548 F.2d 109 (3d Cir.), cert. denied,
431 U.S. 938 (1977) . . . . . . . . . . . . . . . . . . . . 7, 8, 13, 18, 19
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta,
Inc., 128 S. Ct. 761 (2008) . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Superintendent of Ins. v. Bankers Life & Cas. Co.,
404 U.S. 6 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Zoelsch v. Arthur Andersen & Co., 824 F.2d 27
(D.C. Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21, 22
Statutes and regulation:
Securities Act of 1933, 15 U.S.C. 77a et seq. . . . . . . . . . . . . 6
Securities Exchange Act of 1934, 15 U.S.C. 78a
et seq.:
15 U.S.C. 78j(b) (§ 10(b)) . . . . . . . . . . . . . . . . . . passim
15 U.S.C. 78u(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
15 U.S.C. 78u(d)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 11
15 U.S.C. 78u(d)(3)(A) . . . . . . . . . . . . . . . . . . . . . . . 2, 11
15 U.S.C. 78aa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
17 C.F.R. 240.10b-5 (Rule 10b-5) . . . . . . . . . . . . . . . . . . 1, 2, 3
Miscellaneous:
Hannah L. Buxbaum, Multinational Class
Actions Under Federal Securities Law:
Managing Jurisdictional Conflict,
46 Colum. J. Transnation’l L. 14 (2007) . . . . . . . . . . . . . 14
Investor Protection Act of 2009, H.R. 3817,
111th Cong., 1st Sess. (2009) . . . . . . . . . . . . . . . . . . . . . . . 6
1 Restatement (Third) of Foreign Relations Law
(1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
In the Supreme Court of the United States
No. 08-1191
ROBERT MORRISON, ET AL., PETITIONERS
v.
NATIONAL AUSTRALIA BANK LTD., ET AL.
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
BRIEF FOR THE UNITED STATES AS AMICUS CURIAE
INTEREST OF THE UNITED STATES
This brief is filed in response to the Court’s order
inviting the Solicitor General to express the views of the
United States. In the view of the United States, the
Court should deny the petition for a writ of certiorari.
STATEMENT
1. This case involves a private suit filed pursuant to
Section 10(b) of the Securities Exchange Act of 1934
(Exchange Act), 15 U.S.C. 78j(b), and Rule 10b-5, 17
C.F.R. 240.10b-5. Section 10(b) makes it unlawful “[t]o
use or employ, in connection with the purchase or sale of
any security * * * , any manipulative or deceptive device or contrivance in contravention of such rules and
regulations as the [Securities and Exchange] Commission may prescribe.” 15 U.S.C. 78j(b). Rule 10b-5, pro(1)
2
mulgated by the Securities and Exchange Commission
(SEC or Commission), prohibits various deceptive acts
and schemes in connection with the purchase or sale of
securities. 17 C.F.R. 240.10b-5.
The Commission is authorized to bring enforcement
actions to prevent and punish violations of Section 10(b).
See 15 U.S.C. 78u(d)(1) (suits for injunctive relief); 15
U.S.C. 78u(d)(3)(A) (suits for civil penalties). “Though
the text of the Securities Exchange Act does not provide
for a private cause of action for § 10(b) violations, the
Court has found a right of action implied in the words of
the statute and its implementing regulation.” Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128
S. Ct. 761, 768 (2008) (citing Superintendent of Ins. v.
Bankers Life & Cas. Co., 404 U.S. 6, 13 n.9 (1971)). “In
a typical § 10(b) private action a plaintiff must prove
(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of
a security; (4) reliance upon the misrepresentation or
omission; (5) economic loss; and (6) loss causation.”
Ibid. (citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336,
341-342 (2005)).
2. Respondent National Australia Bank (NAB) is
organized under the laws of Australia and is that country’s largest bank. NAB is headquartered in Melbourne,
Australia, and its ordinary shares (the Australian equivalent of common stock) trade on the Australian securities exchanges. In 1998, NAB acquired respondent
HomeSide Lending, Inc. (HomeSide), located in Jacksonville, Florida. At all times relevant to this case,
HomeSide was a wholly-owned subsidiary of NAB.
HomeSide was a mortgage service provider, and its
principal source of income was the fees that it generated
3
for servicing mortgages. The present value of those fees
was calculated using an internal valuation model and
was booked by NAB on its balance sheet as an asset
called Mortgage Servicing Rights (MSR). Pet. App. 2a4a.
Petitioners filed this putative class action on behalf
of non-U.S. shareholders of NAB who had purchased
stock between April 1, 1999, and September 3, 2001.
The complaint alleged that respondents, who include
HomeSide, NAB, and individual officers and directors of
the two companies, had violated Section 10(b) and Rule
10b-5 by making false and misleading statements that
inflated the prices of NAB’s securities and caused losses
to the class members who had purchased at inflated
prices. Pet. App. 4a-5a.
The allegations of securities fraud in this suit stem
from the calculation of HomeSide’s MSR. The complaint
alleged that between 1998 and 2001, HomeSide and its
three principal executive officers (respondents Hugh
Harris, Kevin Race, and W. Blake Wilson) had deliberately overvalued HomeSide’s mortgage portfolio by
modifying the various assumptions in the computer data
that HomeSide used to produce the MSR valuations.
The complaint further alleged that the HomeSide respondents generated the false MSR valuations in the
United States and then transmitted those figures to
Australia for incorporation into NAB’s financials. Petitioners also alleged that the NAB respondents (NAB
and its CEO, respondent Frank Cicutto) had learned
that HomeSide’s MSR valuations were false but had
nevertheless incorporated those figures into NAB’s own
public filings and related public statements. Pet. App.
4a, 9a, 27a-28a.
4
In July 2001, NAB announced that it would book a
charge of $450 million because of a fiscal year writedown
of the value of HomeSide’s MSR. Following the July
writedown, the price of NAB’s ordinary shares fell by
more than 5%. In September 2001, NAB announced that
it would incur a further $1.75 billion writedown. Following the September writedown, the price of NAB’s ordinary shares on the Australian market fell by nearly 13%.
Petitioners’ complaint alleged that they and other class
members suffered economic loss as a result of the decline in value of NAB’s stock. Pet. App. 3a-4a, 26a-27a.
3. The district court dismissed petitioners’ suit,
holding that it lacked subject-matter jurisdiction because the alleged fraud had an insufficient connection to
the United States. Pet. App. 23a-45a. The court stated
that “HomeSide’s alleged conduct * * * amounts to, at
most, a link in the chain of an alleged overall securities
fraud scheme that culminated abroad.” Id. at 41a. The
court observed that the alleged deceptive conduct of the
HomeSide respondents “would be immaterial to [petitioners’] Rule 10b-5 claim but-for (i) the allegedly knowing incorporation of HomeSide’s false information; (ii) in
public filings and statements made abroad; (iii) to investors abroad; (iv) who detrimentally relied on the information in purchasing securities abroad.” Id. at 41a-42a.
The district court concluded that, “[o]n balance, it is the
foreign acts—not any domestic ones—that ‘directly
caused’ the alleged harm here.” Id. at 42a.
4. The court of appeals affirmed. Pet. App. 1a-22a.
The court identified two principal reasons for its conclusion that the district court lacked subject-matter jurisdiction over petitioners’ suit.
a. The court of appeals framed the issue before it as
“what conduct comprises the heart of the alleged fraud.”
5
Pet. App. 18a. The court stated that “[t]he actions taken
and the actions not taken by NAB in Australia were
* * * significantly more central to the fraud and more
directly responsible for the harm to investors than the
manipulation of the numbers in Florida.” Id. at 19a.
The court further observed that “NAB, not HomeSide,
is the publicly traded company and its executives—
assisted by lawyers, accountants, and bankers—take
primary responsibility for the corporation’s public filings, for its relations with investors, and for its statements to the outside world.” Ibid.
b. The court of appeals also relied in part on the
attenuated connection between any misconduct in the
United States and the injury petitioners claimed to have
suffered. The court noted “the striking absence of any
allegation that the alleged fraud affected American investors or America’s capital markets” and observed that
petitioners seek to represent a class made up entirely
“of foreign plaintiffs who purchased on foreign exchanges.” Pet. App. 20a. The court also emphasized
“the lengthy chain of causation between the American
contribution to the misstatements and the harm to investors.” Id. at 21a. The court noted that petitioners “do
not contend that HomeSide sent any falsified numbers
directly to investors.” Ibid. Rather, it explained, “while
HomeSide may have been the original source of the
problematic numbers, those numbers had to pass
through a number of checkpoints manned by NAB’s
Australian personnel before reaching investors.” Ibid.
DISCUSSION
Although the court of appeals erred in treating the
question before it as one of “subject matter jurisdiction,” the court correctly concluded that petitioners’
6
private suit could not go forward. And although the
courts of appeals have not been entirely uniform in their
analysis of Section 10(b)’s application to transnational
frauds, petitioners cite no decision indicating that another circuit would have allowed their suit to proceed.
The petition therefore should be denied.1
A. The Courts Of Appeals Have Consistently And Correctly
Held That Section 10(b) Reaches At Least Some Transnational Fraudulent Schemes That Cause Injury Outside The United States
The text of the Exchange Act is silent as to its transnational reach. See Itoba Ltd. v. Lep Group PLC, 54
F.3d 118, 121 (2d Cir. 1995), cert. denied, 516 U.S. 1044
(1996). In the absence of clear congressional guidance,
the courts have attempted “[t]o discern whether Congress would have wished the precious resources of the
United States courts and law enforcement agencies to be
devoted to” such transnational securities transactions.
Europe & Overseas Commodity Traders, S.A. v. Banque
Paribas London, 147 F.3d 118, 125 (2d Cir. 1998) (inter1
Congress is presently considering a legislative proposal that would
address the transnational reach of the antifraud provisions of the Securities Act of 1933, 15 U.S.C. 77a et seq., and the Exchange Act. On
October 15, 2009, Representative Paul Kanjorski, a subcommittee
chairman on the House Financial Services Committee, introduced the
Investor Protection Act of 2009, H.R. 3817, 111th Cong., 1st Sess.
Section 215 of this bill would amend both Acts to provide that the
district courts of the United States have jurisdiction over violations of
the antifraud provisions that involve a transnational fraud if there is
“conduct within the United States that constitutes significant steps in
furtherance of the violation, even if the securities transaction occurs
outside the United States and involves only foreign investors.” The
possibility that Congress may address this issue directly in the
relatively near future provides an additional reason for this Court to
deny the petition.
7
nal quotation marks and citation omitted), cert. denied,
525 U.S. 1139 (1999). In applying the Exchange Act to
different sets of facts involving alleged transnational
frauds, courts have relied in large measure on “policy
considerations and the courts’ best judgment.” Kauthar
SDN BHD v. Steinberg, 149 F.3d 659, 664 (7th Cir.
1998), cert. denied, 525 U.S. 1114 (1999).
Respondents rely (Br. in Opp. 21) on the “longstanding principle of American law ‘that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United
States.’ ” EEOC v. Arabian Am. Oil Co., 499 U.S. 244,
248 (1991) (quoting Foley Bros. v. Filardo, 336 U.S. 281,
285 (1949)). That interpretive rule provides a sound
basis for concluding that Section 10(b) does not apply
when a fraudulent scheme with no effects in the United
States is hatched and executed entirely outside this
country. But when a scheme to commit securities fraud
is executed in part through domestic conduct and in part
through conduct occurring outside the United States,
that presumption does not identify the type or amount
of domestic conduct that will bring the scheme within
the reach of Section 10(b).
In particular, the presumption against extraterritorial application of United States law does not suggest
that fraudulent conduct for which this country serves as
a base of operations will fall outside Section 10(b)’s coverage just because the effects of the fraud are experienced elsewhere. Cf. Pasquantino v. United States, 544
U.S. 349, 371-372 (2005). Even in cases involving foreign
victims who suffer harm overseas, courts have been “reluctant to conclude that Congress intended to allow the
United States to become a ‘Barbary Coast,’ as it were,
harboring international securities ‘pirates.’ ” SEC v.
8
Kasser, 548 F.2d 109, 116 (3d Cir.), cert. denied, 431
U.S. 938 (1977). In addition, by extending federal securities laws to prohibit fraudulent domestic conduct that
injures overseas investors, the United States can reasonably expect other countries to offer comparable protection to American investors. See IIT v. Vencap, Ltd.,
519 F.2d 1001, 1017 (2d Cir. 1975); see also Kauthar, 149
F.3d at 667. The courts have therefore concluded that
Section 10(b) can apply not only when fraudulent conduct has effects within the United States, but also when
conduct relevant to the fraud occurred in the United
States but the effects were experienced abroad. See,
e.g., id. at 665-666; Kasser, 548 F.2d at 116.
B. The Nexus Between A Fraudulent Scheme, A Private
Plaintiff, And The United States Is Not Relevant To The
Court’s Subject-Matter Jurisdiction, But Bears On The
Applicability Of Section 10(b)’s Substantive Prohibition
And Implied Private Right Of Action
The courts of appeals that have addressed the issue
of the transnational reach of Section 10(b) have uniformly described it as one of “subject matter jurisdiction.” See, e.g., Pet. App. 22a; SEC v. Berger, 322 F.3d
187, 192 (2d Cir. 2003); Continental Grain (Austl.) Pty.
Ltd. v. Pacific Oilseeds, Inc., 592 F.2d 409, 413 (8th Cir.
1979) (Continental Grain); Kasser, 548 F.2d at 116;
Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 984 (2d
Cir.), cert. denied, 423 U.S. 1018 (1975). This Court’s
more recent decisions, however, have emphasized the
need for greater precision in the use of the term “jurisdiction.” See, e.g., Arbaugh v. Y&H Corp., 546 U.S. 500,
510 (2006); Br. in Opp. 11 n.7. In Arbaugh, this Court
announced a general rule that “when Congress does not
rank a statutory limitation on coverage as jurisdictional,
9
courts should treat the restriction as nonjurisdictional
in character.” 546 U.S. at 516.
Jurisdiction over suits alleging violations of the Exchange Act is established by 15 U.S.C. 78aa. That provision states without qualification that the district courts
and the courts of United States Territories “shall have
exclusive jurisdiction of violations of this chapter or the
rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability
or duty created by this chapter or the rules and regulations thereunder.” 15 U.S.C. 78aa (emphases added). If
a particular suit is otherwise an appropriate means of
enforcing a “liability or duty created by” the Exchange
Act or rules promulgated thereunder by the Commission, Section 78aa unambiguously vests the district
courts with jurisdiction to resolve it. Cf. Arbaugh, 546
U.S. at 514-515 (noting that the statutory provisions
governing jurisdiction over Title VII suits did not contain any employee-numerosity requirement, and that the
numerosity requirement at issue was set forth in a separate provision that did “not speak in jurisdictional
terms”) (citation omitted).
Thus, under the plain terms of Section 78aa, the geography of an alleged fraudulent scheme—i.e., whether
it was conceived and executed in whole or in part outside
the United States—is irrelevant to the district court’s
subject-matter jurisdiction. Rather, that geography is
potentially relevant to two non-jurisdictional issues
bearing on the plaintiff ’s entitlement to relief. Cf. Arbaugh, 546 U.S. at 503 (noting “the distinction between
two sometimes confused or conflated concepts: federalcourt ‘subject-matter’ jurisdiction over a controversy;
and the essential ingredients of a federal claim for relief ”).
10
First, the determination whether a fraudulent
scheme violates Section 10(b) depends in part on the
location of the actions taken to effectuate it. Even if the
defendant has engaged in the type of conduct at which
Section 10(b) is directed—i.e., the use of a “manipulative
or deceptive device or contrivance” “in connection with
the purchase or sale of [a] security”—Section 10(b) does
not apply if the scheme bears an insufficient connection
to the United States.
Second, in a private suit like this one, the transnational character of the scheme and any resulting harms
may bear on the availability of Section 10(b)’s private
right of action. Plaintiffs who invoke this right of action
are always required to prove more than that the defendant violated the statute. Cf. Central Bank of Denver,
N.A. v. First Interstate Bank of Denver, N.A., 511 U.S.
164, 172 (1994) (Central Bank) (identifying, as distinct
issues, questions concerning “the scope of conduct prohibited by § 10(b)” and “questions about the elements of
the 10b-5 private liability scheme”). In cases involving
wholly domestic conduct, a private plaintiff must establish a direct causal link between the defendant’s violation and injury to himself. See, e.g., Basic Inc. v. Levinson, 485 U.S. 224, 243 (1988) (holding that “reliance is
an element of a Rule 10b-5 cause of action” because it
“provides the requisite causal connection between a defendant’s misrepresentation and a plaintiff ’s injury”);
p. 2, supra. Similarly, in cases involving transnational
fraud, the private plaintiff should be required to demonstrate a direct causal link between his injury and the
component of the scheme that occurred in the United
States. See pp. 13-16, infra. In effect, the required
nexus in such a suit becomes triangulated: it is not
merely between this country and the fraud, but between
11
this country’s part of the fraud and the individual’s alleged injury.
In an enforcement action brought by the Commission, by contrast, the transnational character of the
fraudulent scheme is relevant only to the question
whether the defendants’ conduct violated Section 10(b).
Under the plain terms of the statutory provisions that
govern SEC enforcement suits, “[w]henever it shall appear to the Commission that any person has violated any
provision of [the Exchange Act], * * * the Commission
may bring an action in United States district court to
seek, and the court shall have jurisdiction to impose,
upon a proper showing, a civil penalty to be paid by the
person who committed such violation.” 15 U.S.C.
78u(d)(3)(A). The SEC has similarly broad and unqualified authority to bring an action for injunctive relief
“[w]henever it shall appear to the Commission that any
person is engaged or is about to engage in acts or practices constituting a violation of any provision of [the Exchange Act].” 15 U.S.C. 78u(d)(1). Thus, so long as a
particular fraudulent scheme bears a sufficient connection to the United States to bring it within Section
10(b)’s substantive prohibition, the Commission may
pursue an enforcement action.
C. Although Petitioners Adequately Alleged A Substantive
Violation Of Section 10(b), The Link Between The
United States Component Of The Scheme And Petitioners’ Injury Is Too Attenuated To Support A Private Suit
In holding that petitioners’ claims should be dismissed, the court of appeals relied on two distinct rationales. First, the court stated that the issue before it
“boils down to what conduct comprises the heart of the
alleged fraud,” Pet. App. 18a, and concluded that “[t]he
12
actions taken and the actions not taken by NAB in Australia were * * * significantly more central to the
fraud * * * than the manipulation of the numbers in
Florida,” id. at 19a. That analysis, which suggests that
the conduct alleged in this case did not violate Section
10(b), is erroneous. In addition, however, the court reasoned that petitioners sued “solely on behalf of foreign
plaintiffs who purchased on foreign exchanges,” id. at
20a, and noted “the lengthy chain of causation between
the American contribution to the misstatements and the
harm to investors,” id. at 21a. Those aspects of the case
provide a sound basis for concluding that petitioners
were not entitled to invoke the implied private right of
action under Section 10(b).
1. The increasing integration of the world’s securities markets has expanded legitimate investment and
capital-raising opportunities, but it has also created an
increased potential for novel transnational securitiesfraud schemes. As business transactions and fraudulent
schemes become more and more internationally dispersed, cases are increasingly likely to arise in which no
single country can meaningfully be described as the
“heart” of the fraud. See, e.g., In re Alstom SA Sec.
Litig., 406 F. Supp. 2d 346, 372 (S.D.N.Y. 2005). If all
countries interpreted their securities laws in accordance
with the “heart of the alleged fraud” approach that the
Second Circuit articulated here (see Pet. App. 18a), the
perpetrators of such schemes could escape accountability in any jurisdiction. And even apart from that concern, a “heart of the fraud” approach, which appears to
limit Section 10(b)’s coverage to transnational frauds in
which domestic conduct predominates, would not adequately protect the government’s law enforcement interests. The United States may have a substantial interest
13
in preventing the use of this country as a location for
even a minor part of an international fraud. See Kasser,
supra.
To address both concerns, Section 10(b)’s coverage
should not be limited to transnational frauds in which
domestic conduct predominates. Rather, it is sufficient
if the scheme involves significant conduct within the
United States that is material to the fraud’s success.
The allegations in petitioners’ complaint satisfy that
standard. According to those allegations, the false information that was released to the public in Australia was
generated in the United States with the expectation that
it would be incorporated into NAB’s financial statements. The conduct of HomeSide and its officers within
the United States thus was not peripheral or merely
preparatory, but was an integral component of the overall scheme. Because the scheme had a sufficient connection to the United States to bring it within Section
10(b)’s substantive prohibition, the SEC could have pursued an enforcement action based on the facts alleged in
petitioners’ complaint. See p. 11, supra. To the extent
the court of appeals concluded that the scheme as alleged did not violate Section 10(b), its analysis is incorrect.
2. “[B]ecause Congress did not create a private
§ 10(b) cause of action and had no occasion to provide
guidance about the elements of a private liability
scheme,” crafting the details of the private right of action is of necessity the responsibility of the courts,
guided by any available evidence of what restrictions the
1934 Congress would have imposed if it had enacted an
express cause of action. Central Bank, 511 U.S. at 173.
The plaintiff in every private Section 10(b) action must
allege certain facts, such as economic loss and a causal
14
connection between that injury and the defendant’s misconduct, that are not elements of a Section 10(b) violation and that the Commission need not prove in its own
enforcement actions. See pp. 2, 10-11, supra. When a
foreign plaintiff in a private Section 10(b) suit alleges
that he was injured outside the United States by transnational securities fraud, the plaintiff should be required
to prove that his loss resulted not simply from the fraudulent scheme as a whole, but directly from the component of the scheme that occurred in the United States.
“[T]his Court ordinarily construes ambiguous statutes to avoid unreasonable interference with the sovereign authority of other nations.” F. Hoffman-La Roche
Ltd v. Empagran S.A., 542 U.S. 155, 164 (2004). Application of substantive federal antifraud provisions to
transnational schemes usually will not interfere with
comity among different nations because there is broad
international consensus regarding the need for such regulation. See 1 Restatement (Third) of Foreign Relations
Law § 416 note 3, at 301 (1987) (“United States securities regulation * * * has not resulted in state-to-state
conflict.”). The Commission, moreover, routinely works
with its overseas counterparts to develop coordinated
approaches to transnational securities-fraud enforcement. See 15 U.S.C. 78u(a)(2).
Certain aspects of private securities-fraud litigation
—e.g., utilization of the fraud-on-the-market theory and
the class-action device, both of which are potentially
implicated in this case—may, however, create the potential for conflict among nations. See generally Hannah L.
Buxbaum, Multinational Class Actions Under Federal
Securities Law: Managing Jurisdictional Conflict, 46
Colum. J. Transnation’l L. 14, 61-64 (2007). In addition,
other nations might perceive affording a private remedy
15
to foreign plaintiffs as circumventing the causes of action and remedies (and the limitations thereon) that
those nations provide their own defrauded citizens, particularly if the plaintiff ’s principal grievance appears
directed at another foreign entity. Absent indications of
a contrary congressional intent, the judicially-created
private right of action under Section 10(b) should be
tailored so as to minimize the likelihood of such international friction.
In addition, invocation of the Section 10(b) right of
action by foreign plaintiffs risks diverting the resources
of United States courts to the redress of harms having
only an attenuated connection to this country. Requiring a direct causal connection between the foreign plaintiff ’s injury and the United States component of a transnational scheme alleviates that danger. The Commission, by contrast, is a federal law-enforcement agency
that can be expected to take account of national interests (including the national interest in ensuring that this
country does not become a safe haven for wrongdoers)
when it determines whether particular enforcement
suits represent sound uses of its own resources and
those of the federal courts.
In this case, the link between HomeSide’s alleged
false statements and the ultimate harm to petitioners
was too indirect to support liability in a private suit. As
the court of appeals explained, “while HomeSide may
have been the original source of the problematic numbers, those numbers had to pass through a number of
checkpoints manned by NAB’s Australian personnel
before reaching investors.” Pet. App. 21a. In allegedly
incorporating the false numbers into NAB’s financial
reports and other public statements, NAB personnel
were not acting under the direction and control of
16
HomeSide, but rather were exercising independent
judgment as officers of HomeSide’s parent corporation.2
Petitioners’ allegations thus posit a “lengthy chain of
causation between what HomeSide did and the harm to
investors,” ibid., and that causal chain includes significant intervening events outside this country, including
the inflation of the stock price in the Australian trading
market. The indirectness of the link between the Florida component of the scheme and petitioners’ injuries
does not negate the existence of a Section 10(b) violation, but it provides a sound basis for dismissing petitioners’ private suit.3
2
A different analysis might be appropriate if the American mastermind of a transnational fraud scheme directed and controlled subordinates who carried out his instructions abroad. In that context, the actions of the foreign agents could reasonably be attributed to the domestic principal rather than treated as intervening causes of foreign plaintiffs’ injuries.
3
The Commission’s amicus brief in the Second Circuit argued that
petitioners’ allegations in this case were sufficient to survive a motion
to dismiss. See Pet. App. 77a. The Commission made clear, however,
that its brief was premised on acceptance of existing Second Circuit
precedents. See id. at 55a n.2. Based on its view that the application of
Section 10(b) to transnational frauds involves a question of subjectmatter jurisdiction, the Second Circuit had previously held that private
suits and SEC enforcement actions alleging such frauds are subject to
the same limitations. See Berger, 322 F.3d at 193. The Commission in
this case therefore had no occasion to discuss the distinct requirements,
beyond the need to allege and prove a substantive violation of Section
10(b), that apply to private plaintiffs who invoke the implied right of
action.
17
D. Petitioners Have Identified No Decision Indicating That
Another Court Of Appeals Would Have Allowed Their
Private Suit To Go Forward
Petitioners contend (Pet. 2-4, 11-14) that the courts
of appeals are divided regarding the amount of domestic
conduct necessary to proceed on transnational securityfraud claims in federal court. More specifically, petitioners identify what they contend is a three-way circuit
split in which the Third, Eighth, and Ninth Circuits require a “lesser quantum” of conduct; the Second, Fifth
and Seventh Circuits “set a mid-course”; and the D.C.
Circuit applies “the most restrictive approach.” Pet. 1213 (emphasis and citation omitted). In fact, the differences among the circuits are much less pronounced than
petitioners contend. For the most part, the circuits have
agreed that private Section 10(b) suits may go forward
if conduct within the United States is a “significant” or
“substantial” part of the fraudulent scheme and the domestic conduct “directly causes” the plaintiff ’s injury.
And while the approaches of the various courts of appeals have not been entirely uniform, petitioners identify no case indicating that any other circuit would have
allowed their suit to go forward.
1. Petitioners’ assertion of a circuit conflict rests
principally on quotations from two courts of appeals.
See Pet. 12; Reply Br. 2-3. The Fifth Circuit has suggested that “[t]he circuits are divided” based on its view
that the Third, Eighth, and Ninth Circuits require a
“lesser quantum of conduct” than the Second Circuit’s
standard, which the Fifth Circuit adopted. Robinson v.
TCI/US W. Commc’ns, Inc., 117 F.3d 900, 905-906 (5th
Cir. 1997). The Seventh Circuit made a similar observation in adopting the Second Circuit’s formulation, which
requires that an alleged transnational securities fraud
18
with no domestic effect involve domestic conduct that
“directly causes the plaintiff ’s alleged loss” and constitute more than “merely preparatory” action. Kauthar,
149 F.3d at 667; see id. at 665-666 (quoting Robinson
and noting that courts “have articulated a number of
methodologies”). Neither opinion, however, identifies a
concrete (let alone a frequently recurring) fact pattern
in which these circuits would reach conflicting results.
Petitioners emphasize (Pet. 12) the Third Circuit’s
statement in Kasser, 548 F.2d at 114, that a securitiesfraud plaintiff must show “at least some [domestic] activity designed to further a fraudulent scheme.” Contrary to petitioner’s suggestion, however, that statement
does not purport to define the amount of domestic conduct needed to bring a fraudulent scheme within Section
10(b)’s coverage. Kasser itself involved much more than
“some” domestic activity. The Kasser defendants had
“unleash[ed] from this country a pervasive scheme to
defraud a foreign corporation”: “significant conduct”
had occurred in the United States to advance that
scheme, and such conduct “was essential to the plan to
defraud.” Id. at 111-112, 114-115. 4 Kasser, moreover,
was an SEC enforcement action, and the court held that
“a district court does have jurisdiction in an SEC suit
for injunctive relief under the federal securities laws,
4
In Kasser, the principal defendant (Kasser) was a United States
resident who “largely owned and dominated” the two corporate defendants, one of which was a Delaware corporation. 548 F.2d at 111. Numerous acts “essential” to the fraud—including negotiations with the
victim corporation, the execution of a key investment contract, the
drafting of other contracts executed abroad, the use of the United
States mails and telephones to further the scheme, and the transmittal
of fraudulently procured proceeds to and from this country—were performed in the United States. Id. at 111, 115.
19
given circumstances such as are presented here.” Id. at
112. The court thus had no occasion to consider what
distinct limitations might apply to private suits brought
by foreign plaintiffs. Cf. pp. 13-16, supra.
The Eighth Circuit subsequently concluded that Kasser was consistent with its own requirement that “significant conduct” occur in this country as part of a fraudulent scheme. Continental Grain, 592 F.2d at 419 (quoting Kassar, 548 F.2d 111-112). In holding that the private plaintiffs’ suit could go forward, the court in Continental Grain endorsed the requirements, drawn from
Second Circuit precedents, that the defendant’s conduct
within the United States must be more than “merely
preparatory” and that it must “directly cause the
losses.” Id. at 420 (quoting Vencap, Ltd., 519 F.2d at
1018, and Bersch, 519 F.2d at 993). The fraudulent
scheme in Continental Grain was “devised and completed in the United States”: domestic letters and telephone calls ensured that material information would be
concealed from a prospective buyer, and the resulting
contract with that victim was executed in the United
States by a United States citizen-resident and a United
States corporation. Ibid.; see id. at 411-413.
The Ninth Circuit subsequently “adopt[ed] the Continental Grain test.” Grunenthal GmbH v. Hotz, 712
F.2d 421, 425 (1983). The court explained that, under
that standard, “[t]he conduct in the United States cannot be merely preparatory . . . and must be material,
that is, directly cause the losses.” Id. at 424 (quoting
Continental Grain, 592 F.2d at 420). The court further
concluded that its “[a]ssertion of jurisdiction under the
facts of [Grunenthal] [wa]s not inconsistent with the
approach taken by the Second Circuit.” Id. at 426. In
Grunenthal, the pertinent sales contract procured by
20
fraud was executed in the United States immediately
after fraudulent conduct in a face-to-face Los Angeles
meeting that directly “induced [the victim] to execute
the agreement.” Id. at 425; see id. at 423.
Petitioners, by contrast, allege that they suffered
losses on an Australian stock exchange because of fraudulent financial statements prepared in and distributed
from Australia by an Australian corporation. In none of
the circuits discussed above would this conduct have
sufficed to allow petitioners’ suit to go forward.
2. In one respect, the decision below appears to impose a standard more demanding than the approaches
previously adopted by the Second Circuit and other
courts of appeals. By framing the question before it as
“what conduct comprises the heart of the alleged fraud,”
Pet. App. 18a, the court of appeals suggested that Section 10(b) covers only those transnational frauds in
which domestic conduct predominates. Other courts of
appeals, by contrast, have focused on whether conduct
within the United States is “significant” or “substantial”
rather than “merely preparatory” to the fraud.
In addition to concluding that Australia was the
“heart” of the alleged fraud, however, the court of appeals relied on the “lengthy chain of causation between
what HomeSide did [in the United States] and the harm
to investors.” Pet. App. 21a. That aspect of the court’s
analysis is consistent with decisions of other circuits,
which have required private Section 10(b) plaintiffs to
show that conduct within the United States “directly”
caused their losses. See Grunenthal, 712 F.2d at 424
(citation omitted); Continental Grain, 592 F.2d at 420
(citation omitted). Petitioners identify no case in which
a court of appeals has allowed a private Section 10(b)
suit to go forward despite a similarly attenuated link
21
between the United States component of a fraudulent
scheme and the plaintiff ’s ultimate harm. Because the
indirectness of the causal chain in this case provides an
independent basis for dismissing petitioners’ private suit
(see pp. 13-16, supra), the apparent inconsistency between the court’s “heart of the alleged fraud” analysis
and decisions of other courts of appeals does not warrant this Court’s review.5
3. In Zoelsch v. Arthur Andersen & Co., 824 F.2d 27
(1987), the D.C. Circuit adopted a “more restrictive test”
that requires that a defendant’s “domestic conduct comprise all the elements * * * necessary to establish a
violation of section 10(b) and Rule 10b-5.” Id. at 31. The
D.C. Circuit’s adoption of that standard was based in
part on the court’s mistaken view that the Second Circuit “seem[ed]” to require that showing. Ibid.; see Pet.
App. 11a-12a n.6 (“disavow[ing]” Zoelsch’s characterization of Second Circuit’s jurisprudence); cf. Zoelsch, 824
F.2d at 36 (Wald, J., concurring in the judgment) (“find[ing] it unnecessary” to adopt the court’s test because
the alleged conduct in Zoelsch was insufficient “even
under the less strict approach adopted by the Third,
Eighth, and Ninth Circuits”). Zoelsch therefore does reflect a division of authority on the appropriate standard
5
The Eleventh Circuit’s decision in In re CP Ships Ltd. Sec. Litig.,
578 F.3d 1306 (2009), which was issued after the petition for a writ of
certiorari was filed in this case, is also consistent with the ruling below.
The Eleventh Circuit discussed at some length the court of appeals’ decision in this case, and concluded that the facts before it “satisf[ied] the
Morrison application of the Second Circuit test.” Id. at 1316 n.11. The
court explained in particular that, “in the instant case, and unlike Morrison, the Complaint indicates no lengthy chain of causation between
the American contribution to the misstatements and the harm to investors. Rather, the causation here was direct and immediate.” Id. at
1316.
22
for determining when courts may entertain private Section 10(b) suits alleging transnational securities frauds.6
This case, however, would not be a suitable vehicle
for resolving that division. Petitioners do not contend
that they could prevail under Zoelsch’s restrictive test.
See Reply Br. 1. Because the court of appeals correctly
held that petitioners’ suit could not go forward even under the Second Circuit’s less demanding approach, the
choice between the two standards would not affect the
outcome in this case.
CONCLUSION
The petition for a writ of certiorari should be denied.
Respectfully submitted.
DAVID M. BECKER
General Counsel
MARK D. CAHN
Deputy General Counsel
JACOB H. STILLMAN
Solicitor
MARK PENNINGTON
Assistant General Counsel
WILLIAM K. SHIREY
Counsel to the General
Counsel
Securities and Exchange
Commission
ELENA KAGAN
Solicitor General
MALCOLM L. STEWART
Deputy Solicitor General
ANTHONY A. YANG
Assistant to the Solicitor
General
OCTOBER 2009
6
The court in Zoelsch expressly reserved the question whether a less
demanding standard might be appropriate for enforcement suits
brought by the Commission than for actions by private plaintiffs. 824
F.3d at 33 n.3; see pp. 10-11, supra.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.