Senior SEC counsel and the U.S. Solicitor General filed an amicus brief urging the U.S. Supreme Court to let the dismissal of a fraud action against an Australian bank stand. While the government lawyers stated that the 2nd Circuit erred in characterizing the issue as one of subject matter jurisdiction, they believed that the court was correct in holding that the suit should not proceed (In re National Australia Bank Securities Litigation).
The investors filed suit against the largest bank of Australia in federal court in New York. The bank had acquired a mortgage service provider based in the United States that had, according to the complaint, used faulty accounting methods that resulted in the dissemination by the bank of public filings and statements containing materially false and misleading statements. The trial court dismissed the action on jurisdictional grounds, and the 2nd Circuit affirmed.
As stated in the brief, both courts improperly read the case as one of subject matter jurisdiction. The nexus between the plaintiffs, the fraudulent scheme, and the United States is not, however, relevant to the court’s subject matter jurisdiction in the view of the government lawyers. They wrote that "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." According to the SEC lawyers and the solicitor general the "geography" of an alleged fraudulent scheme is "irrelevant" to the district court’s subject matter jurisdiction.
Contacts between the parties, the fraud and the country are relevant, according to the brief, to the applicability of Section 10(b)’s substantive prohibition and the implied private right of action. The government lawyers asserted that the determination whether a fraudulent scheme violated Section 10(b) depends in part on the location of the actions taken to effectuate it. The prohibition of the use of a “manipulative or deceptive device or contrivance” in connection with the purchase or sale of a security does not apply if the scheme bears an insufficient connection to the United States.
In addition, the brief stated that the transnational character of the scheme and any resulting harms may bear on the availability of Section 10(b)’s private right of action. The cross-border nature of some claims could hinder the ability of plaintiffs to establish a direct causal link between the violations and their injuries.
The government lawyers conceded that the plaintiffs had adequately alleged a substantive violation of Section 10(b). They criticized the 2nd Circuit's “heart of the alleged fraud” approach which could limit Section 10(b)’s coverage to transnational frauds in which domestic conduct predominates. Such a reading, in their view, would not adequately protect the government’s law enforcement interests.
In this case, however, the brief argued that the link between the Florida subsidiary's alleged false statements and the ultimate harm to petitioners was too indirect to support liability. The U.S. company had no authority to direct or control the reporting of its parent's financial results, and the causal chain of the investor losses included significant intervening events outside this country, including the inflation of the stock price in the Australian trading market. The brief concluded that 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."
The brief may be found here.
.