Perhaps obviating the need for US Supreme Court review of a case involving the extraterritorial reach of the federal securities laws, House draft legislation would provide for the transnational reach of the antifraud provisions of the Securities Act, the Exchange Act, and the Investment Advisers Act. At the Court’s invitation, the Solicitor General and the SEC filed a brief in which they urged the Court not to take the case, partially because of the pending legislation. The Investor Protection Act, HR 3817, passed the Financial Services Committee this month and could be voted on by the full House in December as part of overall financial reform. There is currently no companion provision in the Senate draft legislation, the Restoring American Financial Stability Act. The case, Morrison v. National Australian Bank, Ltd., Dkt. No. 08-1191, is scheduled for a Supreme Court conference on November 24, 2009, at which time the Court will consider whether to hear it.
Section 215 of the Investor Protection Act would amend the federal securities laws to provide that US district courts 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 occurred outside the U.S. and involved only foreign investors, or, conduct occurring outside the U.S. that has a foreseeable substantial effect within the U.S.
In Morrison, a Second Circuit panel ruled that the US federal securities laws did not apply to foreign investors alleging fraudulent statements by a foreign issuer when the conduct in the US was merely preparatory to the fraud and the acts directly causing loss to investors occurred in a foreign country. This is the so-called foreign-cubed securities fraud action, said the appeals panel, and it is judged by the same standard of any extraterritorial application of the federal securities laws, which is whether actions in the US directly caused the loss to investors. The panel described itself as an American court, not the world’s court, which cannot expend resources resolving cases that do not affect Americans or involve fraud emanating from America. Morrison v. National Australian Bank, Ltd., CA-2, No.07-0583, Oct. 23, 2008
The rapid globalization of financial markets in recent years has cast into stark relief issues surrounding the international reach of US securities laws. Since the federal securities laws are silent on their international reach, federal courts developed tests, including the conduct test, which focuses on the nature of the conduct within the US as it relates to carrying out the alleged fraudulent scheme
A three-way split has developed among the federal Circuit Courts of Appeal as to the proper scope of jurisdiction when conduct within the US results in fraud in connection with a transaction outside the US. The predominant difference among the Circuits is the degree to which the US-based conduct must be related causally to the fraud and the resulting harm to justify the application of the federal securities laws.The Third, Eighth and Ninth Circuits have held that jurisdiction may be exercised when conduct within the US furthered the alleged fraud The Second, Fifth and Seventh Circuits have established a more restrictive test, holding that jurisdiction may be exercised only when conduct occurring within the US directly caused the alleged losses.
Finally, the District of Columbia Circuit has adopted the most stringent test, holding that jurisdiction is proper only when the fraudulent statements or misrepresentations originate in the United States, are made with scienter and in connection with the purchase or sale of securities, and directly cause the harm to those who claim to be defrauded, even if reliance and damages occur elsewhere.
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