The (obvious) difficulty with foreign-cubed cases is that they just don't feel like they should be decided under U.S. law. As Justice Ginsburg said at argument yesterday, "I mean, this case is Australian plaintiff, Australian defendant, shares purchased in Australia. It has 'Australia' written all over it." And I think in fact the Court will have no problem concluding that f-cubed cases are not governed by U.S. securities law. But the bright-line test advocated by respondents, under which U.S. law would apply only if the securities transaction in question took place in the United States, wouldn't just foreclose those cases -- it would also foreclose cases involving American investors who had invested abroad. Would that be throwing the baby out with the bathwater?
A portion of the argument was devoted to distinguishing these different kinds of "conduct" cases. Case 1: someone comes to the U.S. and fraudulently induces a U.S. investor to purchase shares of a foreign issuer on a foreign exchange. Case 2: a foreign investor who purchases securities of a foreign issuer on a foreign exchange is harmed by fraud some component of which takes place within the United States. As the Justices recognized, the strength of the U.S. regulatory interest presented in these two cases is very different: Case 1 involves harm to a U.S. investor, while Case 2 does not. And this is precisely the problem with the conduct test as it has developed over the years. In the 1972 Leasco case that first articulated that test, the plaintiff was a U.S. investor (Case 1). But it was later expanded to cover cases brought by foreign investors, on the theory that the U.S. should not become a haven for fraudulent conduct aimed abroad, creating the f-cubed problem (Case 2).
So is the Court likely to eliminate the private right of action of a U.S. investor, harmed by fraud occurring within the United States, simply because the securities transaction in question took place abroad? (Justice Stevens asked that question of counsel for respondents, and Justice Breyer pushed on it a bit; CJ Roberts confirmed that at least U.S. investors in ADRs would be able to sue. Justice Scalia seemed a bit skeptical, though maybe I'm reading in there.) I don't know -- that would make for a consistent position, in terms of protecting the ability of individual nations to regulate transactions on their own markets (more on international relations to come), but the lower courts at least have been extremely reluctant to leave defrauded U.S. investors without a U.S. cause of action.
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