WASHINGTON — Three Australians want to sue for fraud after buying shares of Melbourne-based National Australia Bank on an Australian stock exchange.
So what are they doing in an American court?
That's the question the company will pose to the Supreme Court in arguments this week. Although the case stems from alleged wrongdoing by a former U.S. subsidiary of National Australia, the bank says that is too weak a connection to trigger litigation under American securities laws.
Plaintiffs' lawyers have been wooing overseas investors to press class-action suits in U.S. courts against foreign companies, says James Cox, a securities law professor at Duke University. A ruling favoring National Australia could blunt those efforts, benefiting companies including Vivendi, which is fighting a lawsuit that seeks more than $9 billion.
"Getting caught in the class-action mills is something legitimately feared by foreign issuers," said Cox, co-author of a law school casebook on securities law.
Vivendi is seeking to overturn a Jan. 29 jury finding that the company misled investors 57 times from 2000 to 2002. Americans at the time held only 25 percent of the company's ordinary shares, according to papers the company filed at the Supreme Court.
Vivendi, Infineon Technologies, Alstom and European Aeronautic Defense & Space all filed briefs saying the case might affect similar lawsuits they are facing. Such cases are known as foreign cubed lawsuits because they involve non-U.S. issuers, shareholders and transactions.
In the case before the justices, the shareholders say HomeSide Lending, formerly a Florida-based mortgage-service subsidiary of NAB, fraudulently overvalued its assets.
The shareholders contend that the core of the alleged fraud occurred in the United States at HomeSide, giving American courts authority to consider the case and apply U.S. securities laws.
The shareholders also say National Australia, through its New York office, made hedging transactions to offset risks at HomeSide. The investors say HomeSide employees notified the parent company of the fraud more than a year before National Australia disclosed it publicly. "NAB participated in the fraud at HomeSide through its activities in the United States," the shareholders argued in their appeal.
The 2nd Circuit rejected that reasoning, saying in its 3-0 ruling that National Australia compiled and issued its allegedly misleading public statements in Australia. National Australia acquired HomeSide in 1998, then sold it to Washington Mutual in 2002.
National Australia is urging the Supreme Court to adopt what it says would be a straightforward test: barring shareholders from suing under the 1934 Securities Exchange Act unless they either bought or sold stocks in the United States.
The Obama administration and the Securities and Exchange Commission are backing National Australia, though their proposed standard wouldn't go as far in shielding overseas companies.
The government would allow lawsuits by those who bought shares abroad only if the losses they suffered were "directly caused" by the U.S. component of an alleged fraud. The proposed standard would largely leave intact the SEC's authority to press fraud cases against foreign-based companies.
Thirty-five foreign institutional investors, with almost $2 trillion under management, are supporting the National Australia shareholders at the Supreme Court.