- Jurisdiction — Class actions
Foreign Securities and the Jurisdiction to Prescribe
20.01 In Morrison v National Australia Bank Ltd,1 the United States Supreme Court held that purchasers of shares in the Australian Defendant who had purchased those shares on an Australian securities exchange could state no cause of action under United States law, and in particular under section 10(b) of the Securities and Exchange Act 1934 and SEC rule 10b-5.
20.02 When analysed as a question of whether United States law provided a cause of action on such facts, it is hardly surprising that the Supreme Court reached the conclusion it did. The casual observer might well ask, ‘If I buy shares in an Australian company on an Australian stock exchange, what has United States law got to do with it, and why should I be entitled to look to United States law to provide me with a remedy?’ Such an inquiry places proper emphasis on the law governing the claim, and providing (or not providing) an available cause of action. To say that United States law provides no remedy does not mean to say that the disappointed investor has no remedy available, merely that he has no available remedy prescribed by United (p. 380) States law—but he might have one prescribed by the law of Australia, which seems the more natural place to look for redress if it is to be available at all.
20.03 Granted that the facts of Morrison had some connection with the United States, in the sense that allegedly fraudulent conduct involving the manipulation of financial models had taken place in Florida. But the cause of action relied on crystallized only when the claimants bought their shares, and that happened in Australia, on an Australian exchange. Approached in terms of conventional choice of law analysis, there is nothing at all surprising in the conclusion that in such a case one should look to the law of Australia to identify whether an available cause of action exists, and not to the law of the United States, which had nothing whatsoever to do with the key component of the complaint, namely the Australian purchase and sale.
… we think that the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States. Section 10(b) does not punish deceptive conduct, but only deceptive conduct ‘in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered’. […] Those purchase and sale transactions are the objects of the statute’s solicitude. It is those transactions that the statute seeks to ‘regulate’ […]; it is parties or prospective parties to these transactions that the statute seeks to ‘protec[t]’ […]. And it is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies.
20.05 So much for choice of law, and for the law to be applied in determining whether the claimant has a complaint to bring. But at earlier stages of the litigation process in Morrison, and indeed at the stage when the relevant issues came to be referred to the Supreme Court, the essential question posed was assumed to be one of ‘subject-matter jurisdiction’.3 It was only in the Supreme Court itself that the issue presented for determination was re-characterized as a merits question, namely whether the petitioners’ factual allegations stated a claim that entitled them to relief under United States law.4 The view of the Supreme Court was that the earlier emphasis on subject-matter jurisdiction obscured the true nature of the inquiry, and needed to be abandoned in order for the proper analysis to reveal itself. This being the case, it is appropriate to ask how the earlier (misplaced) emphasis came (p. 381) about, and indeed what is meant by ‘subject-matter jurisdiction’ in this context. It is suggested that separating out the choice of law and jurisdiction analyses, and then in turn separating out the different components of the jurisdiction analysis, is key to a clear understanding of Morrison.
Under international law, a state is subject to limitations on
(a) jurisdiction to prescribe, i.e., to make its law applicable to the activities, relations or status of persons, or the interests of persons in things, whether by legislation, by executive act or order, by administrative rule or regulation, or by determination of a court;
(b) jurisdiction to adjudicate, i.e., to subject persons or things to the process of its courts or administrative tribunals, whether in civil or commercial proceedings, whether or not the state is a party to the proceedings;
(c) jurisdiction to enforce, i.e., to induce or compel compliance or to punish non-compliance with its laws or regulations, whether through the courts or by use of executive, administrative, police, or other non-judicial action.
20.07 In England, as Professor Trevor Hartley has recently observed in an influential article dealing with asset freezing and other orders of the English Court,6 jurisdiction to prescribe is sometimes called ‘subject-matter jurisdiction’. That term is however used in a different sense in the United States, where:
It is usually concerned with whether the subject matter of a dispute puts it outside the jurisdiction of a court, e.g. whether a bankruptcy court can hear a case that does not concern bankruptcy. In practice, the term is most often used in connection with the question whether a case may be heard by the federal courts as distinct from the state courts7.
20.09 Morrison was not concerned with jurisdiction to enforce, in the sense described earlier, and so that aspect may be disregarded. But it was concerned with jurisdiction to adjudicate, and with ‘subject-matter jurisdiction’ (in the American sense), and with jurisdiction to prescribe (sometimes called ‘subject-matter jurisdiction’ in England).
(p. 382) 20.10 As to jurisdiction to adjudicate, this is usually divided into two sub-categories: jurisdiction in personam, and jurisdiction in rem. It seems to have been assumed in Morrison that the United States courts were entitled to exercise in personam jurisdiction over the defendant, National Australia Bank, presumably on the basis that it had sufficient ‘minimum contacts’ with the United States.8 Certainly the personal jurisdiction of the United States courts over the defendant bank was not in question in any aspect of the reasoning by the Supreme Court.
Subject-matter jurisdiction […] refers to a tribunal’s power to hear a case. […] It presents an issue quite separate from the question whether the allegations the plaintiff makes entitle him to relief. […] The District Court here had jurisdiction under 15 U.S.C. Section 78aa to adjudicate the question whether Section 10(b) applies to National’s conduct.
20.12 Section 78aa provides (in relevant part) that, ‘The district courts of the United States […] shall have exclusive jurisdiction of violations of the [Exchange Act] or the rules and regulations thereunder […]’. In other words, the District Court had jurisdiction to hear any claim under section 10(b), and to grant relief in respect of such a claim, if one could be stated.
20.13 So much for jurisdiction to adjudicate, and ‘subject-matter jurisdiction’ in the American sense. What separates the majority from the minority in Morrison is really a difference of view about jurisdiction to prescribe. The minority opinion, in short, is that there was jurisdiction to prescribe, ie to make orders or determinations in respect of sales of securities on stock exchanges outside the United States, and that that jurisdiction had been exercised by Congress in enacting section 10(b), and by a body of judicial opinion which had developed over time interpreting the meaning of section 10(b). The majority opinion on the other hand, was that even if in theory the jurisdiction to prescribe existed, in respect of the type of behaviour in question (ie sales on foreign exchanges), it had not on the facts been exercised by Congress and that was the end of the inquiry.
20.14 Would it ever be permissible, in terms of jurisdiction to prescribe, for the United States Congress or the United States courts, to seek to regulate by means of the (p. 383) application of United States law, the activities of issuers of securities on non-United States exchanges?
20.15 The reasoning in Morrison is largely directed towards interpreting what Congress had in fact done in enacting section 10(b)—was it intended to have some degree of transnational or extraterritorial effect or not? The minority said yes, but the majority said no. There is no direct engagement with the separate question of what it would be permissible for the United States to do as a matter of its international jurisdiction to prescribe—but there are some indications in the judgment of Justice Scalia that, in the view of the majority, seeking to regulate sales of securities on foreign exchanges by reference to United States law would be an excess of international jurisdiction and would infringe international comity.
20.16 Controversy over the extraterritorial application of United States laws has a long history. It is not the purpose of this short chapter to analyse that history. Suffice it to say that in one of the most celebrated examples of the phenomenon, Hartford Fire Insurance Co v California,10 a majority in the United States Supreme Court held that United States anti-trust law could be applied to British (and other non-American) insurance companies with regard to their activities on the London reinsurance market. But in a powerful dissent, Justice Scalia disagreed with that approach, on the footing that such extraterritorial application of the relevant United States statute (the Sherman Act) would involve an excess of the jurisdiction to prescribe.11 It seems likely that Justice Scalia would have had these same factors in mind in dealing with the issues presented in Morrison. Certainly it is clear that the majority were acutely aware of the danger in practical terms of overstepping the mark.
20.17 Many parties, including a number of foreign States (the United Kingdom, the Commonwealth of Australia, and the Republic of France) filed amicus briefs in Morrison. These emphasized the interference with foreign (ie non-United States) securities regulation that an expansive interpretation of section 10(b) would produce.12 Justice Scalia commented: ‘The probability of incompatibility with the applicable laws of other countries is so obvious that if Congress intended such foreign application “it would have addressed the subject of conflicts with foreign laws and procedures”.’13
20.18 Note here that the majority are not saying that it would have been beyond the jurisdiction of Congress to legislate in respect of such matters, merely that given the obvious difficulties and potential for conflict it seems logical to assume that it did not intend to do so. But in reality there may not be much between these (p. 384) propositions. The thrust of the observations made by those who filed amicus briefs seems consistent with the idea that it would be an unacceptable arrogation of jurisdiction for the United States to legislate in respect of the listing and sale of securities on foreign exchanges, in the same way that (for example) it would be inconsistent with international comity for the United Kingdom Parliament (or the English courts) to seek to extend the provisions of the Financial Services and Markets Act 2000 to regulate the sale of securities on the New York Stock Exchange.
20.19 The wholesale rejection by the majority in Morrison of the so-called ‘conduct’ and ‘effects’ tests, developed over time by the Court of Appeals for the Second Circuit but adopted elsewhere in the United States, is likewise consistent with the notion that these ‘judge-made rules’14 represented an excess of the jurisdiction to prescribe, although the point is not expressed in such clear terms.
20.20 The Supreme Court received submissions from the United States Solicitor General, to the effect that a new test should be adopted—representing a departure from the ‘conduct’ and ‘effects’ tests.15 The proposed test was as follows, ‘A transnational securities fraud violates S. 10(b) when the fraud involves significant conduct in the United States that is material to the fraud’s success’.16
20.21 This was said by the Solicitor General to ‘accord with prevailing notions of international comity’, and therefore to be justified as a matter of the United States courts’ own international jurisdiction. What to make of this?
20.22 The point cannot easily be dismissed. It is certainly true that the English courts have on many occasions taken the view that they have international jurisdiction, on the footing that the matter in question has a ‘sufficient connection’ with England. To the extent that the English practice represents evidence of ‘prevailing notions of international comity’, it seems (at least as a matter of first impression) to lend weight to the Solicitor General’s argument.
20.23 There are a number of English law examples. Section 221 of the Insolvency Act 1986 gives the English court an apparently unrestricted power to wind-up in England any ‘unregistered company’, which includes overseas companies; but it is well settled that that power will only be exercised where (amongst other things) the foreign company has a ‘sufficient connection’ with England: see, eg Stocznia Gdanska SA v Latreefers Inc.17
(p. 385) 20.24 The requirement establishes an important threshold, and if it is not fulfilled then the court will not act because to do so would be to exercise an exorbitant jurisdiction contrary to international comity: per Lawrence Collins J (as he then was) in Re Drax Holdings.18 Essentially the same requirement has been recognized in relation to the courts’ power to make orders under sections 238 and 239 of the Insolvency Act 1986 (transactions at an undervalue and preferences).19 To put the matter another way, if the dispute does have a ‘sufficient connection’ with England, then the English courts will assume they are justified in acting, having regard to internationally recognized principles on the limits of the exercise of jurisdiction.
It is a strong thing to restrain a defendant who is not resident within the jurisdiction from disposing of assets outside the jurisdiction. But where the defendant is domiciled within the jurisdiction such an order cannot be regarded as exorbitant or as going beyond what is internationally acceptable.
Consequently the mere fact that an order is in personam and is directed towards someone who is subject to the personal jurisdiction of the English Court does not exclude the possibility that the making of the order would be contrary to international law or comity, and outside the subject-matter jurisdiction of the English Court.
20.27 On the facts, the order was justified. The order was sought in support of enforcement of an English judgment. There was a sufficient connection from the point of view of the English Court’s international jurisdiction because the proceedings on the merits had been conducted in England; the defendant had participated in those proceedings; and the proposed order required it to perform acts which had a genuine connection with England, namely compliance with the English judgment.24
20.28 What of the Solicitor General’s proposed reformulation of the relevant test, in light of these English authorities? Is the fact that significant and material conduct has occurred in the United States, sufficient to justify the United States’ intervention and to confer jurisdiction to prescribe? It is suggested that the answer is no for the following reasons.
20.29 One must ask the question: jurisdiction to prescribe, but in respect of what? Morrison was concerned with the jurisdiction to prescribe a remedy, or to create a cause of action, in respect of defects in sales of securities taking place on foreign (ie non-United States) exchanges. It is difficult to see why, as a matter of international jurisdiction, the United States legislature (or for that matter the United States courts) should feel it appropriate to prescribe a remedy under the law of the United States in respect of such matters, or why United States law should have anything to say about regulating the conduct of those who choose to issue securities on such exchanges. There is no ‘sufficient connection’ (to use the English phraseology) with the facts making up the essential components of the intended cause of action, namely the purchase and sale of the relevant securities, to justify United States law intervening.
20.30 In Morrison, the Solicitor General relied on the earlier Supreme Court decision in Pasquantino v United States25 as support for the proposed ‘significant and material conduct’ test. There, the Supreme Court concluded that the ‘wire-fraud statute’26 was violated by defendants who ordered liquor over the telephone from a store in Maryland, with the intention of smuggling it into Canada. But the statute in that case prohibited ‘any scheme or artifice to defraud’— ie fraud simpliciter—without any requirement that it be in connection with any particular transaction. Thus, the relevant ‘offence was complete the moment [the defendants] executed their scheme in the United States’, and it was ‘this domestic element of [the defendants’] conduct’ that was being punished.27
20.31 What this case shows is that a domestic court, faced with a statutory provision of apparently unlimited scope, may nonetheless act in a manner consistent with international comity by reading down the meaning of the statutory language, so that it applies only in cases where there is a significant and material connection with the jurisdiction in question.
20.32 But Morrison was not concerned with a general provision directed at punishing all acts of deception of whatever nature. It was concerned very specifically with (p. 387) acts of deception in connection with the sale and purchase of securities. Where such sales and purchases take place, as a matter of fact, on a foreign exchange, it is rather difficult to see how there can ever be a sufficiently material connection between the transactional mechanics of the sale and the United States, to justify the United States legislating to provide a United States law remedy for the disappointed investor.
20.33 To put the matter another way, to the extent that the relevant employees within National Australia Bank’s Florida-based subsidiary engaged in acts of duplicity and fraud in Florida, which were complete when their fraudulent scheme was executed within the United States, no one could complain about such individuals being punished in the United States. More particularly, any provisions of United States law under which they were prosecuted could not be criticized as representing an excess of the United States’ jurisdiction to prescribe.
20.34 But the case is different where the fraudulent scheme is not completed in the United States, and where what is at stake is not fraud simpliciter, but instead the provision of redress in the form of a damages claim against a foreign issuer, which crystallizes as a cause of action only when there is a sale and purchase of securities on an exchange abroad, such exchange no doubt being subject to its own laws and regulations governing the issue of securities.
20.35 Justice Stevens in Morrison, speaking for the minority, gave two examples in his judgment of supposed injustice arising from the application of the majority’s new ‘bright line’ rule.28 The first involves an American investor who buys shares in a company listed only on an overseas exchange, but where the company has a major subsidiary in New York, and it is in New York City that business executives have masterminded a massive fraud. The second involves those same fraudulent executives knocking on doors in Manhattan and circulating misrepresentations there. American investors in such cases would, says Justice Stevens, be barred from seeking relief under section 10(b).29
20.36 That may be so, but with respect, it overstates the problem. The fact that section 10(b) is inapplicable does not mean that the hypothetical investors are without a remedy. It simply means that they have no cause of action under section 10(b) itself. But they no doubt will have claims available to them in the jurisdiction where the relevant securities are issued, under the law of that State—which will almost certainly provide redress in cases of fraud. They may even be able to bring their foreign law claims against the issuer in the United States, if they can establish personal jurisdiction there.
20.37 Morrison tells one nothing about the circumstances in which a foreign (non-United States) defendant can be brought before the United States courts to answer the (p. 388) claims of United States investors: it is not a case about personal jurisdiction, only about jurisdiction to prescribe. All it does is tell us that United States law—in the form of section 10(b)—will not be applicable to the substance of those claims. But a claim for fraud under some relevant foreign law may do just as well.
20.38 It is hopefully not going too far to suggest that all civilized systems of law will provide redress for fraud in some form or another. The fact that the individual components of such foreign law causes of action may be different from those under section 10(b) does not mean that they are deficient and unfit for purpose, merely that they perhaps address the same problems in a different way.
2 Morrison (n 1) at 17–18 (references are to page numbers in the majority opinion delivered by Justice Scalia, unless otherwise stated).
3 Morrison (n 1) at 4.
4 Morrison (n 1) at 5.
7 Hartley (n 6) at 195, fn 5.
9 Morrison (n 1) at 4–5.
11 Hartford Fire is referred to by Professor Hartley in this context in his article (n 6) at 196.
12 Morrison (n 1) at 20–1.
13 Morrison (n 1) at 20, citing EEOC v Arabian American Oil Co, 499 US 244, 256 (1991).
14 Morrison (n 1) at 11, per Justice Scalia.
15 Morrison (n 1) at 21.
16 Morrison (n 1) at 21.
28 Morrison (n 1) minority opinion of Justice Stevens at 12–13.
29 (n 1) at 13.