Facts
- National Australia Bank Ltd. (NAB), an Australian bank, acquired HomeSide Lending, Inc., a Florida-based mortgage servicer.
- Investors alleged HomeSide manipulated valuation models to overstate mortgage-servicing rights and that NAB incorporated the inflated values into public financial statements.
- In 2001, NAB announced large write-downs of HomeSide-related assets, and NAB’s share price fell.
- The remaining plaintiffs were Australian investors who purchased NAB ordinary shares on foreign securities exchanges.
- Plaintiffs sued NAB, HomeSide, and certain officers under §10(b) and §20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.
- The district court dismissed for lack of subject-matter jurisdiction; the Second Circuit affirmed under its “conduct and effects” test.
Issues
- Whether the extraterritorial reach of §10(b) is a subject-matter jurisdiction question or a merits question.
- Whether §10(b) provides a cause of action for foreign plaintiffs alleging fraud connected to securities transactions executed on foreign exchanges.
Decision
- The Supreme Court affirmed the judgment dismissing the complaint but held the lower courts mischaracterized the basis for dismissal.
- The Court ruled that §10(b)’s territorial reach is a merits issue; federal courts had subject-matter jurisdiction under the Exchange Act’s jurisdictional grant, and dismissal should proceed under Rule 12(b)(6), not Rule 12(b)(1).
- The Court held §10(b) does not apply to claims based on purchases of foreign securities on foreign exchanges, even if some alleged deceptive conduct occurred in the United States.
- The Court rejected the Second Circuit’s “conduct” and “effects” tests and adopted a transactional test limiting §10(b) to:
- transactions in securities listed on domestic exchanges; and
- domestic transactions in other securities.
Legal Principles
- A statute is presumed to apply only domestically absent a clear indication of extraterritorial application.
- The scope of conduct a federal statute reaches generally concerns the merits, not the court’s adjudicatory power.
- For §10(b), the relevant focus is the location of the securities transaction, not the location where deceptive conduct originated.
- §10(b) applies only to purchases or sales of securities listed on U.S. exchanges and to other purchases or sales that occur in the United States.
Conclusion
The Court limited §10(b) to domestic exchange-listed securities and other domestic transactions, eliminating judge-made conduct-and-effects standards for transnational securities fraud and requiring dismissal on the merits when the relevant purchases or sales occur abroad.