01 Dec 2009

Australian shareholders, an Australian company, and a US class action? US Supreme Court to decide

The globalisation of financial markets has increased the incidence of global fraud. However, regulation, especially in the sense of private enforcement through class actions, depends on a political and legal system built around state sovereignty. The United States class action procedure has been used against a foreign corporation by foreign investors who purchased the corporation's securities on a foreign securities exchange. The scenario is often referred to as a "foreign-cubed" or "F-cubed" securities class action.

The extra-territorial operation of US securities laws is of significance because it provides a mechanism for addressing cross-border securities fraud and creates the possibility of conflict between the US approach to securities regulation and the approach taken in other countries, such as Australia. This opens the way for forum-shopping. The US may become the magnet jurisdiction for securities class actions.

The Supreme Court of the United States will consider the extra-territorial operation of US securities laws for the first time in Morrison v National Australia Bank. It is likely that it will determine how accessible US class actions are to foreign plaintiffs, which in turn will have ramifications for the exposure of Australian corporations to US securities class actions.


The plaintiffs in Morrison v NAB are residents of Australia, who purchased National Australia Bank Limited's ("NAB") ordinary shares on an Australian exchange.

In February 1998, NAB acquired HomeSide Lending Inc., an American mortgage service provider. HomeSide calculated the present value of the fees it would generate from servicing mortgages in future years using a valuation method, booked that amount on its balance sheet as an asset called a Mortgage Servicing Right ("MSR"), and then amortised the value of the MSR over its expected life. In 2001, NAB revealed that the interest assumptions and the valuation model used by HomeSide to calculate the MSR were incorrect and resulted in an overstatement in the value of its servicing rights. When NAB disclosed the error its share price fell.

Notwithstanding that they were Australian residents trading securities in an Australian company in Australia, the plaintiffs commenced their class action against NAB in the Southern District of New York. The trial judge, upheld on appeal, dismissed the claims on the basis that the court did not have jurisdiction.

On 30 November 2009 the Supreme Court of the United States agreed to hear the appeal in Morrison v National Australia Bank (08-1191).


The use of the US class action procedure by foreign investors is seen by some as an effective deterrent against global fraud. This has been well illustrated by the Bernard Madoff Ponzi scheme which has resulted in various class actions on behalf of foreign investors.

However, even if that were true, Australia has a sophisticated class actions mechanism in the form of Part IVA of the Federal Court of Australia Act 1976 (Cth) that has been available for use by shareholders since 1992 and has been employed in such notable cases as King v GIO and Dorajay Pty Ltd v Aristocrat Leisure Ltd. As such, the rationale for invoking US jurisdiction in a case which has its closest connection with Australia is not clear. The Supreme Court's decision is likely to consider fundamental issues about sovereignty and the limits of court jurisdiction of importance to the developing global economy.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.