Investors purchasing securities of the big transnational corporation have to take into consideration certain pricing factors, such as consolidated accounting statement of the issuer. Can a securities fraud complaint be heard by a U.S. federal court at the place of residence of the separate subdivision engaged in the commission of fraudulent act which affected the price of securities? The answer provided by U.S. federal courts is: under the right circumstances, yes.

The 2nd U.S. Court of Appeals, in Morrison v. National Australia Bank Ltd., 07-0583-CV, ruled on the claim of the purchasers of the ordinary shares of the Australian corporation.

The U.S. company owned by the Australian corporation unlawfully had booked as an asset the amount of the overstated financial results calculated as the present value of the fees its business would generate in the future. Later, the grossly overstated revenues were incorporated by the Australian corporation into the consolidated reporting, which led to the fall in value of the shares and, as a result, losses of the purchasers.

The defendants urged to preclude the exercise of subject matter jurisdiction since the conduct had no effect within the United States. The defendants contended that to do otherwise would result in such extremities, as bringing the securities laws into conflict with those of other jurisdictions.

The 2nd Circuit rejected defendants' argument having regarded it as groundless. In analyzing the issue on appeal, the 2nd Circuit applied the usual subject matter jurisdiction test which dictated that subject matter jurisdiction would exist “if activities in this country were more than merely preparatory to a fraud and culpable acts or omissions occurring here directly caused losses to investors abroad”. Herewith, the court acknowledged that this test would be rather difficult to apply in the case, and went on to conclude that the jurisdiction shall be determined on a case-by-case basis.