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1 December 2009

US Supreme Court Grants Certiorari in Securities Fraud Case

Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), authorizes the Securities and Exchange Commission (“SEC”) to promulgate rules forbidding “any manipulative or deceptive device or contrivance” used in connection with the purchase or sale of securities. Section 10(b) has long been understood to support a private cause of action against persons or entities violating SEC Rule 10b-5, which generally prohibits the use of deceptive acts or schemes to buy or sell securities. Courts are divided, however, on the extent to which transnational frauds are actionable under this rule. Today, the Supreme Court granted certiorari in Morrison v. National Australia Bank Ltd., No. 08-1191, to determine the appropriate standard for identifying domestic conduct sufficient to support a private claim of transnational securities fraud. The issue is one of substantial importance to the business community, because it will define the scope of liability for foreign corporations and corporations doing business with foreign entities.

In Morrison, foreign shareholders of National Australia Bank (“NAB”), an Australian corporation, filed suit alleging that NAB had defrauded its shareholders by overvaluing its mortgage holdings in its wholly owned subsidiary HomeSide Lending Inc., a Florida-based corporation. The district court dismissed the suit, and the Second Circuit affirmed, holding that the conduct that “comprises the heart of the alleged fraud” occurred in Australia at the behest of NAB. 547 F.3d 167, 175. Courts have articulated different standards for determining whether there is a sufficient connection to the United States to permit a private action under Rule 10b-5. At one extreme, the District of Columbia Circuit has required domestic conduct sufficient to satisfy every element of Rule 10b-5. At the other extreme, the Third, Eighth, and Ninth Circuits have stated that domestic conduct need only be a “significant” or “substantial” part of the fraudulent scheme. The Second, Fifth, and Seventh Circuits arguably take an intermediate approach.

The foreign shareholders in this case petitioned for certiorari, urging the Supreme Court to resolve the conflict. The Court requested the views of the Solicitor General. In her amicus brief, the Solicitor General acknowledged that there is a division of authority on the applicable standard but recommended that the Court deny certiorari because, according to the Solicitor General, the result in this case would be the same under any standard. The Court disagreed with the recommendation and granted certiorari.

Absent extensions, amicus briefs in support of the petitioners will be due on January 21, 2010, and amicus briefs in support of the respondents will be due on February 23, 2010. Any questions about this case should be directed to Dan Himmelfarb (+1 202 263 3035) in our Washington, DC office.

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