Corporate & Securities Law

By Jim Hamilton

UK and France Ask US Supreme Court Not to Expand Extraterritorial Reach of Federal Securities Laws

With oral argument looming in a case involving a foreign investor?s action arising out of a foreign company?s securities offering on a foreign exchange, the UK and the Republic of France have asked the US Supreme Court not to allow the application of the federal securities laws to these foreign-cubed actions. In separate amicus briefs, the UK and France cited international comity in urging the Court not to allow the application of Rule 10b-5 to upset the delicate balance that foreign nations have struck in regulating securities fraud and thereby offend the sovereign interests of foreign nations.

The Supreme Court has scheduled oral argument for March 29, 2010 on the extraterritorial reach of the US federal securities laws in what appears to be the first foreign-cubed case to ever reach the Court. The Court is reviewing a Second Circuit panel ruling 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 outside the US. Morrison v. National Australian Bank, Ltd., CA-2, Dkt. No. 08-1191

The UK argued that the proper recognition of the sovereignty of other nations, the development of sophisticated regulation of the issuance and trading of securities within numerous nations, the globalization of capital markets, and international comity all combine to support a finding that the US federal courts lack jurisdiction to consider foreign-cubed cases. The Court should rule that foreign purchasers of securities on a foreign exchange who are injured by misleading statements made outside of the United States by a foreign issuer have no private right of action under Rule 10b-5.

It was argued that the UK and France have sophisticated financial regulatory systems and substantive and procedural rules for remedying securities fraud and their approach to securities regulation and litigation differs in important respects from that of the U.S. Moreover, these differences represent legitimate policy choices and sovereign interests that ought to be respected by the United States.

Thus, under the major national regulatory schemes, issuers face different substantive disclosure requirements and plaintiffs confront different burdens in establishing a contravention of those requirements. Such differences arise even as between jurisdictions that have well-developed securities regulatory regimes, such as the U.K. and the U.S.

Further, jurisdiction in U.S. courts brings a host of procedural ramifications that are potentially inconsistent or in conflict with the policy choices made in other jurisdictions, including France and the U.K. Such matters include the scope of discovery, the availability of class actions or other forms of multi-party litigation, and the availability of opt-out classes.

Nations have a strong interest in regulating their own capital markets, developing disclosure rules to govern their own issuers, deciding how and when class action shareholder litigation should occur and determining the penalties for violations of such laws. Such decisions vary among countries with different regulatory, legislative and financial concerns. U.S. judicial interference in those decisions risks damaging the mutual respect that comity is meant to protect and could be perceived as an attempt to impose American economic, social and judicial values Expansive extraterritorial application of the Rule 10b-5 private right of action risks undermining the kind of global regulatory cooperation that the current economic situation demands and the G-20
calls for.

Perhaps most importantly, sovereign nations should be allowed and expected to use their own well-developed legal and regulatory regimes to address alleged securities fraud. A failure to recognize that other valid enforcement regimes exist as an alternative to the expansion of the Rule 10b-5 private right of action threatens the legitimacy of the U.S. legal system, as well as that of the legal and regulatory regimes of other sovereign nations.

The French brief also argued that allowing foreign-cubed securities actions could unfairly expose foreign companies to different regulation than their own governments have decided is fair. Especially troubling is the potential for US courts to hand down large damages in a foreign-cubed case that would greatly exceed what would be available in the company?s home jurisdiction and may substantially affect the foreign company?s financial condition. Most foreign nations have erected their own regulatory methods to combat fraud, said amici, sometimes specifically rejecting the US approach of private actions by plaintiffs? attorneys working on a contingency fee basis.

France rejected the argument that ruling against US jurisdiction in a foreign-cubed case would make the US a haven for fraud. In foreign-cubed securities frauds, noted the brief, the foreign country on whose exchange the fraud took place will provide a remedy for the securities fraud in accordance with its own laws. If related fraud occurs in the US, that separate fraud can be addressed by US authorities.

Full post as published by Jim Hamilton's World of Securities Regulation on March 25, 2010 (boomark / email).