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Hannah Buxbaum
IU School of Law--Bloomington

Last modified: Tuesday, October 28, 2008

Indiana Law professor available to comment on Second Circuit securities fraud decision

Oct. 28, 2008

BLOOMINGTON, Ind. -- A recent decision by the U.S. Court of Appeals leaves room for foreign plaintiffs to continue filing "foreign-cubed" securities fraud claims in American courts -- claims that are brought by foreign investors, against foreign issuers, on the basis of investment transactions on foreign markets, but that seek the application of U.S. securities law.

Hannah Buxbaum

Hannah Buxbaum

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Hannah L. Buxbaum, Professor of Law and Associate Dean for Research at the Indiana University School of Law--Bloomington, said the Court's ruling -- the first one issued by the Second Circuit on the topic of "foreign-cubed" claims -- presents the risk of conflict between U.S. and foreign regulatory systems.

"The difficulty with the decision is that the existing jurisdictional rules on which the court continued to rely are simply not up to the task of regulating today's globalized securities markets," Buxbaum said. "Those rules rely on judicially created standards that are now almost 40 years old and have been applied in inconsistent and unpredictable ways by the federal courts."

In Morrison v. National Australia Bank Ltd., the U.S. Court of Appeals for the Second Circuit decided not to implement a bright-line rule blocking "foreign-cubed" securities litigation, opting instead to handle such litigation on a case-by-case basis. The case stems from the overstatement of profits by National Australia Bank as a result of incorrect assumptions in the valuation model used by its U.S. subsidiary, HomeSide Lending Inc., to calculate its mortgage servicing fees. National Australia Bank was forced to write down more than $2 billion in 2001, causing shares of the bank, as well as its American Depository Receipts, to drop in value. Though the bank's shares are not traded on U.S. markets, foreign investors nevertheless sued in the U.S., seeking damages under American anti-fraud rules.

The Court cited Buxbaum's article, Multinational Class Actions Under Federal Securities Law: Managing Jurisdictional Conflict, 46 Columbia Journal of Transnational Law 46 (2007), in its decision.

"The application of U.S. law in foreign-cubed cases presents the danger -- underappreciated by the Second Circuit -- that these lawsuits will bring the U.S. regulatory regime into unacceptable conflict with foreign regulatory systems," Buxbaum said. "Last week's decision assumes that when U.S. law and foreign law agree on the substantive objective of preventing securities fraud, disagreements as to the enforcement mechanism chosen should be irrelevant. My analysis of foreign-cubed securities cases indicates that this is simply not the case."

Buxbaum said that Congress -- if it chooses to clarify the reach of U.S. anti-fraud provisions into global markets, as the Second Court urged it to do -- has to balance the need for effective regulation of securities fraud with the need to avoid interference by U.S. courts in foreign legal systems.