Oral argument in the National Australia Bank case took place this morning. By all accounts, it does not appear that the U.S. Supreme Court is likely to embrace the broad extraterritorial application of the antifraud provisions of the federal securities laws.
Already facing a tough battle, the petitioners could not have been happy to learn that in the Court's audience were several justices of the Supreme Court of Canada. And whether it was out of deference to their foreign guests, or genuine concern about the policy ramifications of allowing foreign investors access to the U.S. courts, the Court's questioning was hostile from the start.
A few highlights (based on the official transcript):
(1) The Court appeared uninterested in the petitioners' suggestion that it might be appropriate to remand the case to the Second Circuit without rendering a decision. Justice Scalia's verdict: "There is no reason to send it back."
(2) Justice Ginsburg started out the substantive questioning with what would turn out to be the quote of the day - "[T]his case is Australian plaintiff, Australian defendant, shares purchased in Australia. It has 'Australia' written all over it." The justices pressed this theme repeatedly, with questions about the existence of a United States interest, potential interference with the regulation of foreign securities markets, and the connection between the fraud and the United States.
(3) As for the respondents and the government (which received 10 minutes of argument time), the justices appeared interested in exploring the utility of a bright-line test - i.e., barring any claims based on transactions involving shares of foreign issuers purchased or sold on foreign exchanges. Counsel for the respondents was asked about the effect on Americans who purchased stock on foreign exchanges (J. Stevens) and given a hypothetical wherein the fraudulent conduct took place in the United States and the stock purchase took place overseas (J. Breyer). The government, which advocated a test focusing on whether "significant conduct material to the fraud's success occured in the United States," was asked about whether its test was simply too complicated to be workable (C.J. Roberts).
As the U.S. Supreme Court gets ready to hear oral arguments in the National Australia Bank case today, here is all the information necessary to set the stage.
(1) There has been late supplemental briefing on the issue of whether the Supreme Court should remand the case back to the Second Circuit. According to the petitioners, all of the parties agree that the Second Circuit should not have decided the case on the basis of subject matter jurisdiction. The Second Circuit therefore should have the opportunity to reconsider its decision based on recent relevant Supreme Court decisions. The respondents disagree, arguing that the "jurisdictional label used by the court of appeals made no difference to the outcome of this case" and the real question before the Court is the substantive extraterritoriality issue.
(2) If amicus filings are a contest, the win goes to the respondents. There are three amicus briefs filed in support of the petitioners and fourteen amicus briefs filed in support of the respondents (including three separate briefs from the governments of France, Australia, and the United Kingdom).
1) There were 103 settlements in 2009. The aggregate value of those settlements was $3.8 billion (a 35% increase over 2008).
(2) The average settlement amount was $37 million. Although this number is a significant increase over the 2008 average ($28.4 million), it is only slightly higher than the historical average of $34.4 million for cases settled from 1996 through 2008 (excluding the top four settlements).
(3) Since 1996, almost 60% of cases settle for less than $10 million and 80% settle for less than $25 million. The distribution of settlements in 2009 follows this same pattern.
The press release accompanying the report can be found here.
Quote of note (PR - Professor Grundfest): "The classic litigation risk factors continue to run true to form. If a lawsuit is prosecuted by a large pension fund, involves a parallel SEC proceeding, and alleges accounting violations, then defendants can be expected to pay higher amounts."
(1) The "group pleading" doctrine allows plaintiffs to rely on a presumption that statements in corporate documents are the collective work of individuals with direct involvement in the everyday business of the company. In its Tellabs decision, the U.S. Supreme Court declined to address whether this presumption is permissible under the PSLRA's heightened pleading standards, but noted that there is "a disagreement among the circuits" on the issue. The New York Law Journal has a column (March 12 - subscrip. req'd) discussing the circuit split and recent "group pleading" decisions.
Quote of note: "Ultimately, as is clear from Tellabs, [the issue] is likely to be resolved by the Supreme Court. As suggested by Tellabs, the odds are the Supreme Court will conclude that a generalized assumption based on a defendant's 'title' with no supporting evidence cannot constitute the particularity required by the PSLRA."
(2) While the U.S. Supreme Court considers the National Australia Bank case, decisions in foreign-cubed cases are still being issued. In Copeland v. Fortis, 2010 WL 569865 (S.D.N.Y. Feb. 18, 2010), the plaintiffs alleged that Fortis, a Belgium-based provider of banking and insurance services, mislead investors concerning its financial condition. The primary markets for Fortis securities, however, were overseas (the only alleged trading in the U.S. was American Depository Shares on the over-the-counter market). In apply the "conduct" and "effects" tests for subject matter jurisdiction, the court found: (a) that any U.S. conduct was "ancillary to the fraud committed in Belgium," and (b) the plaintiffs had failed to provide sufficient allegations about the number and percentage of U.S. investors to establish that the effect of the fraud on the U.S. was substantial. The court dismissed the complaint.
Quote of note: "I have no doubt that some Fortis investors are U.S. residents, and that Fortis's alleged fraud had some effect upon U.S. investors and the U.S. securities market. From the allegations in the complaint, however, I cannot determine that the effect was 'substantial.' Plaintiffs bear the burden of demonstrating that subject matter jurisdiction exists, and these plaintiffs have not met that burden."
Supreme Court Justice Sandra Day O'Connor may be retired, but she is not done creating securities law. Last year, she sat with the Fifth Circuit by designation and wrote an opinion on loss causation. In February, it was the Sixth Circuit and her opinion concerns the scope of the Securities Litigation Uniform Standards Act ("SLUSA"), which precludes certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities.
In Demings v. Nationwide Life Ins. Co., 2010 WL 364335 (6th Cir. Feb. 3, 2010), the Sheriff of Orange County Florida brought a class action on behalf of all public employers who sponsor § 457 deferred-compensation plans alleging that Nationwide implemented a scheme under which it improperly received revenue-sharing payments from mutual funds and mutual fund advisors that should have gone to the plan participants. The district court found that the case was precluded by SLUSA because the substance of the sheriff's claim was a covered class action alleging that "Nationwide misrepresented a relationship with mutual fund advisors, or, at a minimum, failed to disclose material facts about the relationship."
On appeal, the sheriff argued that his suit was subject to SLUSA's "state actions" exception, which exempts certain suits brought by states, political subdivisions thereof, and state pensions plans from SLUSA's preclusive effect. By its plain terms, however, the state actions exception only applies to a covered entity that brings an action "on its own behalf." Although the sheriff might be a "political subdivision," his complaint sought to bring an action on behalf of the deferred-compensation plan. In the absence of any allegation that the sheriff had the authority to bring an action as the plan, the district court was entitled not to consider that possibility. Moreover, the "state actions" exception requires the members of the proposed class to be "named plaintiffs . . . that have authorized participation, in such action." The sheriff was attempting to bring a class action on behalf of a prospective class of unnamed sponsors of deferred-compensation plans.
Holding: Affirmed dismissal based on SLUSA preclusion.