Analysis: Curb on securities suits?
In a hearing that seemed tailored for its international audience — four members of the Canadian Supreme Court sat, raptly attentive, in the front spectators’ row, the U.S. Supreme Court on Monday explored ways to sharply limit or perhaps even forbid private securities fraud lawsuits in U.S.courts that might intrude on foreign governments’ powers to police their own stock markets. Little sentiment was expressed on the bench in favor of allowing foreign investors to come to America to sue for fraud that occurred mainly overseas, even if there were some connection to the United States. The case was Morrison, et al., v. National Australia Bank, et al. (08-1191).
“This case,” Justice Ruth Bader Ginsburg said tellingly, “has Australia written all over it….Isn’t the most appropriate choice of law that of Australia, not the United States?” Neither Ginsburg nor any other Justice who spoke up seemed to accept the retort of the lawyer for the foreign investors that “the case has Florida written all over it.” Perhaps the only real issue was whether the Court would put up a bar only to investors’ lawsuits, or might even restrict the Securities and Exchange Commission’s powers to reach trans-national frauds — if the Court were to reach that side of the case.
It was mere coincidence that four of the nine members of Canada’s highest court were on hand; they are paying a return visit to the Justices in Washington, and will be in town for a few days of seminars and other encounters. They laughed heartily when Justice Stephen G. Breyer asked one of his typically meandering questions, with several convoluted points, and yet wound up insisting that “That’s all one question.” Whether it was made as a gesture to them or not, one of the lawyers at the lectern also brought up a recent case of securities misconduct involving the Toronto stock exchange. Overall, the hearing had much more of an offshore than domestic cast to it — to the evident frustration of the lawyer seeking to revive his clients’ fraud case, scuttled in lower U.S. courts even though the lawsuit had tried to keep its focus on mortgage shenanigans in Florida.
The case at one time had an American investor in it, but as it reached the Court, only three Australians who bought stock in that country’s largest private bank, and did so on Australia’s stock market, remained involved. That set of facts alone seemed to significantly impress the Justices. But they also clearly had taken notice of the fact that the governments of Australia, Britain and France had submitted briefs urging the Court not to let American courts enforcing U.S. law tread on other countries’ sovereign territory. In fact, most of the Justices reacted with more sympathy to the foreign governments’ submissions than they did to those of the U.S. government’s lawyer at the lectern, who spent ten quite uncomfortable moments trying to defend an opaquely worded legal standard.
Although Justice Sonia Sotomayor has taken herself out of the case (as usual, without explanation), there seemed little risk that the Court was heading toward a 4-4 split on the case — a result that would simply uphold a Second Circuit Court ruling dismissing the Australian investors’ lawsuit as beyond the reach of the U.S. Securities Exchange Act. If any Justice were leaning in favor of that lawsuit, it was not apparent Monday.
Thomas A. Dubbs, the New York lawyer for the Australian investors, argued energetically that what was actually involved in the case was “hard-core fraudulent conduct” that occurred in Florida, and that was designed to use “phony” statistics to shore up the financial reputation of the Australian bank. The Florida-based subsidiary of the bank, HomeSide Lending, Inc., was America’s sixth largest mortgage service provider, and it definitely was using “a deceptive device” to influence the stock value of the parent bank, Dubbs contended.
But, from his very opening, Dubbs met only skepticism. When Justice Breyer became the first to bring up the foreign governments’ amici briefs, Dubbs tried, without obvious success, to argue that there actually was no conflict between those nations’ laws and the U.S. securities fraud law. Justice Antonin Scalia responded by acting out the role of the Australian government, saying to the Australian investors that they were “dragging” the U.S. courts into what was Australia’s business. That pattern did not change throughout Dubbs’ presentation.
The Australian bank’s lawyer, George T. Conway II of New York, immediately seized on the foreign governments’ briefs to supplement his core argument that the Court simply should not apply U.S. law to trans-national activity unless Congress had clearly mandated that that be done — a point that he repeatedly traced back to 1804, and the Charming Betsy precedent written by Chief Justice John Marshall.. He said the investors were trying to use their lawsuit to carry off “a massive transfer of wealth” outside of Australia.
While Conway conceded to Justice Ginsburg that “some of the conduct [challenged by the investors] occurred in Florida,” he said the Court had not been prepared in the past to extend U.S. law overseas without a clear congressional mandate to do so, even in cases where there were links to the U.S. As his final point, the bank’s lawyer said this case involved “exactly the kind of financial imperialism” that would seriously offend foreign governments.
The federal government, in the case to support dismissal of the Australians’ lawsuit but also to try to persuade the Court to leave open a chance to enforce the Securities Exchange Act in some trans-national fraud cases, sent assistant to the Solicitor General Matthew D. Roberts to argue. He had barely begun when Chief Justice John G. Roberts, Jr., said that the government’s proposed legal standard “had a lot of moving parts” that was so complex it “would defeat the whole purpose” of defining the law’s scope. He had unusual difficulty trying to sort out a complex hypothetical suggested by Justice Breyer, involving someone who tried to sell the Brooklyn Bridge to an investor in Germany.
Ultimately, Justice Ginsburg gave him a bit of an assist, suggesting that perhaps what the government was asking was to draw a distinction between the SEC’s powers of enforcement against a trans-national fraud, and private investors’ attempting to do so. That is exactly what the government was proposing, the federal lawyer said. And he readily accepted Justice Scalia’s suggestion that the Court could resolve this particular case by curbing such fraud cases when brought by private investors on their own, without saying anything at all about the SEC’s authority.
The key point in Dubbs’ brief rebuttal was one intended to keep the Court focused directly on the language of the fraud law, saying that the Court “should not take an eraser to the words of the statute” to scuttle lawsuits like the one filed by his clients.