The Financial Times recently wrote glowingly of legal innovation. It claimed that lawyers were innovative because they were able to convince the Supreme Court last year to limit the application of federal fraud provisions in a case involving the purchase of a U.S. servicer of residential mortgages by a foreign bank. (Morrison v. National Australia Bank) This is a field that is close to the epicenter of the financial meltdown in the U.S. economy.

The lawyers argued that U.S. law should not apply to a scheme to defraud investors that was culminated abroad when the foreign bank purchased the U.S. firm. The Supreme Court held that the presumption of territoriality was not overcome; therefore, Rule 10(b)(5) did not have extraterritorial reach. There was plenty of evidence that fraudulent acts took place in the United States. The Financial Times argued incredibly that by adopting such a position the court helps protect corporations from unreasonable liability. Thus, it promotes foreign investment in the U.S. Really?

Given the obvious fact that the fraud in this case was perpetuated by a U.S. company doing business in the U.S. and related to valuation of U.S. assets, the court’s decision is baffling. Money and investors tend to go where legal systems provide protection and predictability. In case of fraud corporate investors want an opportunity to have a fair and transparent adjudication.

It seems uncontestable that investors want to know that once a cross-border fraudulent scheme is detected, they get a fair hearing in a well developed legal system against  corporations participating in the fraud.  (The Russian Federation is finding out that its shaky legal system of rules, prosecutions, courts and arbitrations is a huge stumbling block for encouraging foreign and domestic investors.)

In light of the continuing and growing financial chaos it doesn’t make sense for U.S. courts to shut its doors to global investors contesting cross-border financial transactions involving the purchase of American companies doing business in the United States and involving valuation of U.S. assets. Laws drafted years ago need to be interpreted in context of today’s globalized  environment. The decision of the Supreme Court amounts to corporate protectionism that places the court on the wrong side of history. The Supreme Court should be far less restrictive in reading economic legislation.

It is in the genuine interest of all investors that U.S. courts welcome litigation of this sort. Not all innovation is good.