The U.S. Supreme Court ruled yesterday that America’s main law against securities fraud does not apply to investment deals that occur outside of this country, even if they have some domestic impact or effect.
In the opinion, the Court declared that U.S. securities fraud law cannot be used in American courts to challenge a “transnational” securities deal involving a company whose stock is not traded in the U.S., and when the trade does not occur inside the U.S. The Court finally took on the issue, after years of declining to review it in a series of so-called “F-Cubed” securities cases.
The Opinion is embedded in its entirety below:
The case under review involved an Australian bank and Australian investors, whose only link to the U.S. was faulty financial information generated in Florida. The investors took their case to the Supreme Court after having it dismissed in lower courts for having an insufficient link to the U.S.
The Court held that Section 10-b of the Securities Exchange Act of 1934, the law at issue, does not “focus…upon the place where the deception originated, but upon purchases and sales of securities in the United States.”
Always one top speak his mind, Justice Scalia penned a scathing opinion critical of the Second Circuit Court, which had started in 1968 a trend that eventually spread to all of the other Circuit Courts, to develop an interpretation of Section 10-b that gave it — in at least some cases — a reach beyond the United States’ own territory.
The decades-old trend started by the Second Circuit was premised on the view that courts could determine what Congress would have intended, in allowing private investors’ fraud claims to go forward in U.S. courts based on transnational deals, if it had thought about the particular transaction.
Yesterday, however, the Court concluded that the trend was misguided, and that the controlling issue was a long-standing “presumption” that U.S. laws did not apply beyond this country unless Congress had expressly said they did. There is no such indication in Section 10-b, the Court concluded.
The Court got this one right. While I’m all for seeking redress on behalf of investors, if the transaction in question was not traded in the U.S. and the trade does not occur in the U.S., then investors will have to seek relief in foreign courts. I’ll discuss that in a future post.
What do you think?