In late 2000-early 2001, a Belgian speech-recognition software firm by the name of Lernout & Hauspie imploded in an accounting scandal over its misreporting of non-existent revenues. That scandal immediately spawned a slew of lawsuits by angry U.S. shareholders of the firm, which up to the time of its collapse had been quite the little darling of the American bull market. (Why, the Fool even considered the company for Rule Breaker status at one point.)

The lawsuits soon spread beyond Lernout itself. After all, the company was going bankrupt, and plaintiffs' lawyers usually want at least one defendant in a case to have the wherewithal to pay the fees. Enter Klynveld Peat Marwick Goerdeler Bedrijfsrevisoren (KPMG-B), the Belgian office of Big Four auditor KPMG (no longer associated with BearingPoint (NYSE:BE), which used to be KPMG Consulting). KPMG-B was the auditor for the now-defunct Lernout, and for that reason -- and because KPMG-B is still solvent -- it quickly drew the attention of the plaintiffs' lawyers.

The plaintiffs initially made some headway in the case. But when they requested that the auditor produce records of its audit work for Lernout, for use in the trial in Boston, KPMG-B declined, citing Belgian confidentiality rules that forbid the release of audit workpapers prepared for a client.

When the plaintiffs continued to insist that KPMG-B turn over the papers, the auditor took the unusual step of filing suit against the plaintiffs themselves -- in Belgian court -- demanding that the plaintiffs be fined $1.2 million for each day they continued to ask KPMG-B to turn over the papers.

That move spawned further court orders and appeals in the U.S. The upshot is that the U.S. First Circuit Court of Appeals on Monday affirmed a lower court's order that KPMG-B turn over the papers. Unless the auditor complies, the lower court may rule in favor of the plaintiffs and award them billions of dollars in damages. (Which still leaves the problem of enforcing the award abroad.)

The moral of this story: Investing abroad brings with it a whole new set of risks. (See Bill Mann's recent warning to investors in Altria Group (NYSE:MO), R.J. Reynolds (NYSE:RJR), and British American Tobacco (AMEX:BTI).) Whether or not KPMG-B's actions here are justified under Belgian law, the entire European Union is developing stronger privacy and confidentiality protections than we are used to here in the U.S. The downside to this trend is that U.S. investors in European companies may have limited remedies when things go badly with their investments.

Motley Fool contributor Rich Smith owns no shares in any companies mentioned in this article.