F-Cubed, or All F-ed Up?

by Thomas Brom

Insurance lawyer Kevin M. LaCroix recalls addressing an international conference on directors and officers' liability in London last March. "When I told the EU executives about their exposure to securities litigation in U.S. federal courts, you could have heard a pin drop," says LaCroix, who writes The D&O Diary blog from Beachwood, Ohio.

The European execs should have known. In the past decade enterprising plaintiffs attorneys have won multimillion-dollar securities-fraud settlements in American courts in class actions involving Lernout & Hauspie (Belgium), Daimler AG (Germany), and Ahold (The Netherlands), among others.

The suits are called "f-cubed" litigation because they are filed on behalf of classes that include foreign investors who purchased foreign issues on foreign exchanges. According to New York?based Mayer Brown, the number of such class actions filed last year hit a new high of 36.

How is f-cubed litigation even possible? To unlock the door to federal court, plaintiffs must first establish subject-matter jurisdiction. This means showing, under the "conduct test" and the "effects test," that there is a nexus between the alleged securities fraud and U.S. citizens. The cases are fact-intensive, often involving accounting conduct by a foreign company's U.S.-based subsidiary.

There are other bars to entry as well. Plaintiffs invariably rely on section 10(b) of the Securities Exchange Act of 1934?and Congress was silent on its extraterritorial reach. For mixed classes, certification is another huge hurdle. And then there's the issue of comity: whether a U.S. court should exercise jurisdiction without considering the legitimate sovereign interests of other nations.

These questions were addressed last year in a significant decision by the Second Circuit (Morrison v. Nat'l Australia Bank Ltd., 2008 WL 4660742 (2d Cir. (2008)). In its first opinion in an f-cubed case, the circuit upheld a trial court's dismissal but declined to prohibit jurisdiction in all such cases. "[W]e are leery of rigid bright-line rules because we cannot anticipate all the circumstances in which the ingenuity of those inclined to violate the securities laws should result in their being subject to American jurisdiction," the appellate court stated. "That being said, we are an American court, not the world's court, and we cannot and should not expend our resources resolving cases that do not affect Americans or involve fraud emanating from America."

Plaintiffs in Morrison appealed to the U.S. Supreme Court (Morrison v. National Australia Bank Ltd. (No. 08-1191)). In June the Court invited the views of U.S. Solicitor General Elena Kagan, who is expected to consult with attorneys at the Securities and Exchange Commission.

"Inviting the views of the solicitor general suggests that someone on the Court is interested in taking the case," says Lyle Roberts, a partner in the Washington, D.C., office of Dewey & LeBoeuf and author of the blog The 10b-5 Daily. "Morrison has all the earmarks of a good test case."

In mid-August the chances that the Court would grant cert got even better when the Eleventh Circuit filed a decision in another f-cubed case (In re CP Ships Ltd. Sec. Litig., 2009 WL 2462367 (11th Cir. Aug. 13, 2009)). The circuit court affirmed the trial court's finding of subject-matter jurisdiction against a Canadian company headquartered in London that had been sued in federal court for the conduct of a corporate officer in Florida.

George T. Conway, a partner in the New York office of Wachtell, Lipton, Rosen & Katz who represents National Australia Bank, contends that the CP Ships opinion is consistent with Morrison. "The Eleventh Circuit went out of its way not to create a circuit conflict," Conway says. In a recent article, he condemns f-cubed litigation as "an act of legal imperialism," borrowing a phrase from Justice Stephen Breyer in a recent antitrust case.

"That's just talk from defense lawyers," responds Steven J. Toll, a partner in the Washington, D.C., office of Cohen, Milstein, Sellers & Toll and lead counsel in CP Ships. "Global securities fraud is best addressed by the U.S. class action system, which affords investors a means to get redress."

There's no mystery about Toll's enthusiasm. U.S. courts provide civil juries, discovery, class action procedures, the availability of punitive and treble damages, the absence of a loser-pays rule, and?in securities litigation?the fraud-on-the-market theory that presumes shareholder reliance on an issuer's misrepresentations. According to a 2008 study by Pricewaterhouse-Coopers, foreign plaintiffs brought 9 percent of all securities class actions filed in U.S. courts in the past decade.

Interestingly, the SEC has some skin in the game as well. Its enforcement division also brings actions alleging international securities fraud, and it makes good use of a global reach. In Morrison the SEC filed an amicus brief that sided with the appellant investors, arguing for jurisdiction when conduct in the United States is material to the fraud's success.

"Should the Supreme Court grant cert, we would hope the SEC would file an amicus brief consistent with its Second Circuit brief," says James W. Johnson, a partner in the New York office of Labaton Sucharow and lead counsel for petitioners in Morrison.

Conway's concerns about legal imperialism could be offset by efforts within the EU?and Canada?to increase protections for their own investors. In May, for instance, the Amsterdam Court of Appeals authorized defendant Royal Dutch Shell to fund a $381 million securities settlement it reached with more than 150 institutional investors in 17 EU countries, Canada, and Australia. Royal Dutch Shell was first sued in a U.S. court, and then made subject to the Dutch Act on Collective Settlements of Mass Damages, enacted in 2005.

"The Dutch Act was created with consumer class actions in mind," says insurance lawyer LaCroix. "It was adapted to securities litigation by creative plaintiffs lawyers. Ontario and other Canadian provinces, by contrast, recently have developed a system of private civil securities litigation, and recognize the fraud-on-the-market theory."

LaCroix concludes: "If the U.S. courts foreclose f-cubed cases, I believe there will be pressure to adopt securities class actions in some of these other jurisdictions."

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