547 F.3d 167 (2nd Cir. 2008), 07-0583, Morrison v. National Australia Bank Ltd.

Docket Nº:07-0583-cv.
Citation:547 F.3d 167
Party Name:Robert MORRISON, individually and on behalf of all others similarly situated, Russell Leslie Owen, Brian Silverlock and Geraldine Silverlock, Plaintiffs-Appellants, Maria Kennedy, Harvard B. Kolm and Norman Hauge, Plaintiffs, v. NATIONAL AUSTRALIA BANK LTD., Homeside Lending Inc., Frank Cicutto, Hugh Harris, Kevin Race and W. Blake Wilson, Defendan
Case Date:October 23, 2008
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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547 F.3d 167 (2nd Cir. 2008)

Robert MORRISON, individually and on behalf of all others similarly situated, Russell Leslie Owen, Brian Silverlock and Geraldine Silverlock, Plaintiffs-Appellants,

Maria Kennedy, Harvard B. Kolm and Norman Hauge, Plaintiffs,

v.

NATIONAL AUSTRALIA BANK LTD., Homeside Lending Inc., Frank Cicutto, Hugh Harris, Kevin Race and W. Blake Wilson, Defendants-Appellees.

No. 07-0583-cv.

United States Court of Appeals, Second Circuit.

October 23, 2008

Argued: July 18, 2008.

Thomas A. Dubbs (James W. Johnson and Barry Michael Okun, on the brief), Labaton Sucharow & Rudoff LLP, New York, NY, for Appellants Robert Morrison,

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Russell Leslie Owen, Brian Silverlock and Geraldine Silverlock.

George T. Conway III, Wachtell, Lipton, Rosen & Katz, New York, NY, for Appellees National Australia Bank Limited and Frank Cicutto.

A. Graham Allen, Rogers Towers, P.A., Jacksonville, FL, for Appellees Hugh Harris, Kevin Race and W. Blake Wilson.

Eric Seiler, Friedman Kaplan Seiler & Adelman LLP, New York, NY, for Appellee Washington Mutual Bank, S.A., as successor in interest to HomeSide Lending, Inc.

Louis R. Cohen, Ali M. Stoeppelwerth, Justin S. Rubin, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, DC; Daniel C. Richenthal, Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY; Daniel J. Popeo, Paul D. Kamenar, Washington Legal Foundation, Washington, DC for Washington Legal Foundation, Amicus Curiae in Support of Appellees.

John K. Villa, Richard A. Olderman, Williams & Connolly LLP, Washington, DC; Susan Hacker, Association of Corporate Counsel for The Association of Corporate Counsel, Amicus Curiae in Support of Appellees.

Deborah M. Buell, Giovanni P. Prezioso, Andrew A. Bernstein, David H. Herrington, Anna A. Makanju, Cleary Gottlieb Steen & Hamilton LLP, New York, NY; Ira D. Hammerman and Kevin M. Carroll, Securities Industry and Financial Markets Association, Washington, DC; Robin S. Conrad and Amar D. Sarwal, National Chamber Litigation Center, Inc., Washington, DC; Charlene B. Flick, United States Council for International Business, New York, N.Y. for the Securities Industry and Financial Markets Association, the Chamber of the Commerce of the United States of America, the United States Council for International Business, and the Association Francaise des Entreprises Privees, Amici Curiae in Support of Appellees.

Brian G. Cartwright, Andrew N. Vollmer, Jacob H. Stillman, Mark Pennington, William K. Shirey, Securities and Exchange Commission, Washington, DC, Amicus Curiae in Response to the Court's Request.

Before: NEWMAN, CALABRESI, B.D. PARKER, Circuit Judges.

B.D. PARKER, JR., Circuit Judge:

BACKGROUND

This appeal requires us to revisit the vexing question of the extraterritorial application of the securities laws, Rule 10b-5 in particular. Founded in 1858, headquartered in Melbourne, and incorporated under Australian law, the National Australia Bank (“ NAB" ) calls itself Australia's largest bank. In 2000, its Australian business accounted for roughly 55% of its assets and revenues, with its international operations responsible for the remainder. NAB's approximately 1.5 billion “ ordinary shares" (the equivalent of American common stock) trade on the Australian Securities Exchange, the London Stock Exchange, the Tokyo stock exchange, and the New Zealand stock exchange. While NAB's ordinary shares do not trade on United States exchanges, its American Depository Receipts 1 (“ ADRs" ) trade on the New York Stock Exchange.

In February 1998, NAB acquired HomeSide Lending Inc., an American mortgage

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service provider headquartered in Jacksonville, Florida, for $1.22 billion. HomeSide serviced mortgages in exchange for fees. By March of 2000, HomeSide, as a wholly owned subsidiary of NAB, held the rights to service $18 billion of mortgages, making it America's sixth biggest mortgage service company.

Following the acquisition, HomeSide's operations were profitable. In HomeSide's first year, it earned A$313 2 million in mortgage servicing fees, and contributed to NAB's net profits. In 1999, NAB announced A$153 million in profits from HomeSide, which accounted for approximately 5.4% of NAB's A$2.82 billion in profits for the year. For the 2000 fiscal year, NAB reported that HomeSide generated A$141 million in profits, 4.1% of its total profits of A$3.37 billion.

HomeSide's accounting practices spawned this litigation. HomeSide calculated the present value of the fees it would generate from servicing mortgages in future years using a valuation model, booked that amount on its balance sheet as an asset called Mortgage Servicing Rights (“ MSR" ), and then amortized the value of that asset over its expected life.

In 2001, NAB revealed that the interest assumptions in the valuation model used by HomeSide to calculate the MSR were incorrect and resulted in an overstatement in the value of its servicing rights. In July 2001, NAB disclosed that it would incur a $450 million write-down due to a recalculation in the value of HomeSide's MSR. NAB's ordinary shares and its ADRs both fell more than 5% on the news. In September 2001, NAB announced a second write-down of $1.75 billion of the value of HomeSide's MSR, causing NAB's ordinary shares to plummet by 13% and its ADRs to drop by more than 11.5% on the NYSE. In an amended Form 10-Q filed with the SEC in December 2001, NAB restated previously issued financial statements to reflect the July and September adjustments.

Plaintiffs, four individuals who purchased NAB shares, sued NAB, HomeSide, and various individual officers and directors (collectively “ Defendants" ) in the Southern District of New York, alleging violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § § 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The Plaintiffs claimed that “ NAB's subsidiary HomeSide knowingly used unreasonably optimistic valuation assumptions or methodologies" and that various of the Defendants made materially false and misleading statements in SEC filings, annual reports and press releases regarding HomeSide's profitability, economic health, and its contribution to NAB. HomeSide allegedly falsified the MSR in Florida and then sent the data to NAB in Australia, where NAB personnel disseminated it via public filings and statements.

Three of the plaintiffs who purchased their shares abroad (Russell Leslie Owen, Brian Silverlock, and Geraldine Silverlock) (“ Foreign Plaintiffs" ) sought to represent a class of nonAmerican purchasers of NAB ordinary shares, while the fourth plaintiff, Robert Morrison (“ Domestic Plaintiff" ), who purchased ADRs, sought to represent a class of American purchasers during a proposed class period of April 1, 1999 through September 3, 2001.

Defendants moved to dismiss the complaint for lack of subject matter jurisdiction under Rule 12(b)(1), and for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. See

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In re Nat'l Austl. Bank Sec. Litig., No. 03 Civ. 6537(BSJ), 2006 WL 3844465, at *1, 2006 U.S. Dist. LEXIS 94162, at *3 (S.D.N.Y. Oct. 25, 2006). The district court (Jones, J. ) granted the motion, and dismissed the claims of the Foreign Plaintiffs for lack of subject matter jurisdiction and those of the Domestic Plaintiff for failure to state a claim.3 This appeal followed.

DISCUSSION

I.

“ Determining the existence of subject matter jurisdiction is a threshold inquiry and a claim is properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) when the district court lacks the statutory or constitutional power to adjudicate it." Arar v. Ashcroft, 532 F.3d 157, 168 (2d Cir.2008) (internal citations and quotation marks omitted). “ A plaintiff asserting subject matter jurisdiction has the burden of proving by a preponderance of the evidence that it exists." Makarova v. United States, 201 F.3d 110, 113 (2d Cir.2000). “ In reviewing a district court's dismissal of a complaint for lack of subject matter jurisdiction, we review factual findings for clear error and legal conclusions de novo." Maloney v. Soc. Sec. Admin., 517 F.3d 70, 74 (2d Cir.2008) (per curiam). “ [T]he court must take all facts alleged in the complaint as true and draw all reasonable inferences in favor of plaintiff," Natural Res. Def. Council v. Johnson, 461 F.3d 164, 171 (2d Cir.2006) (citation and internal quotation marks omitted), but “ jurisdiction must be shown affirmatively, and that showing is not made by drawing from the pleadings inferences favorable to the party asserting it." APWU v. Potter, 343 F.3d 619, 623 (2d Cir.2003). In resolving a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1) a district court may consider evidence outside the pleadings. Makarova, 201 F.3d at 113.

“ Only Congress may determine a lower federal court's subject-matter jurisdiction." Kontrick v. Ryan, 540 U.S. 443, 452, 124 S.Ct. 906, 157 L.Ed.2d 867 (2004) (citing U.S. Const., art. III, § 1). When Congress wrote the Securities Exchange Act, however, it omitted any discussion of its application to transactions taking place outside of the United States.4 See Itoba Ltd. v. Lep Group PLC, 54 F.3d 118, 121 (2d Cir.1995) ( “ It is well recognized that the Securities Exchange Act is silent as to its extraterritorial application." (citing Alfadda v. Fenn, 935 F.2d 475, 478 (2d Cir.1991))). Therefore, when faced with securities law claims with an international component, we turn to “ the underlying purpose of the anti-fraud provisions as a guide" to “ discern ‘ whether Congress would have wished the precious resources of the United...

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