Extraterritorial Application of Criminal Securities Fraud Liability Second Circuit Extends Morrison v. National Australia Bank Ltd. to Criminal Cases; Rules that Section 10(b) Does Not Reach Fraud Committed Abroad SUMMARY On August 30, 2013, the Second Circuit answered a question left open in the Supreme Court s landmark decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010): do the limits imposed in Morrison on extraterritorial civil liability encompass criminal and SEC enforcement cases? In United States v. Vilar, et al., 2013 WL 4608948 (2d Cir. Aug. 30, 2013), the Second Circuit held that in criminal cases, Section 10(b) of the Securities Exchange Act of 1934 does not extend to extraterritorial conduct. As we discuss below, however, the decision may have limited effect on authorities enforcement efforts because of jurisdiction-conferring provisions of Dodd-Frank. BACKGROUND From July 1986 through May 2005, defendants Vilar and Tanaka worked as investment advisors managing approximately $9 billion. The defendants were alleged to have run two fraudulent investment schemes: (1) a Guaranteed Fixed Rate Deposit Accounts ( GFRDA ) program, with respect to which they allegedly lied about the riskiness of their investments of clients funds; and (2) a Small Business Investment Company ( SBIC ) venture, with respect to which they allegedly convinced a client to invest $5 million in a fund by falsely representing to her that they had obtained a federal SBIC license, and then used her funds to satisfy personal and corporate obligations. 1 In August 2006, the Department of Justice charged Vilar and Tanaka with, among other crimes, securities fraud in violation of Section 10(b), and conspiracy to commit securities fraud. In November 2008, a jury New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com
convicted both defendants, and in 2010, the district court sentenced Vilar and Tanaka to terms of imprisonment and ordered them to make restitution and forfeiture payments totaling nearly $90 million. 2 On appeal, the defendants argued principally that the conduct underlying their securities fraud convictions did not fall within the reach of Section 10(b) because the conduct occurred outside the U.S. 3 DISCUSSION In Morrison, the Supreme Court held that Section 10(b) does not apply extraterritorially in private civil actions, but reaches only fraud conducted in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States. 4 In Vilar, the Second Circuit held that the general presumption against extraterritorial application of statutes applies with equal force to criminal statutes in general and to Section 10(b) in particular. 5 The presumption against extraterritoriality provides that absent a clear indication of an extraterritorial application, [a statute] has none. 6 Vilar explained that the Supreme Court and the Second Circuit traditionally apply the presumption in criminal cases as well as civil ones, unless the statute at issue either contain[s] a clear indication of Congress s intent to provide for extraterritorial application or relate[s] to crimes against the United States government. 7 Because Section 10(b) serves primarily to prohibit crimes against individuals and their property, it does not fall within the narrow class of statutes aimed at protecting the right of the government to defend itself, 8 as to which the presumption against extraterritoriality does not apply. The court also noted that the policy underlying the presumption against extraterritoriality the desire to avoid tension between U.S. laws and other nations laws applies with equal force in criminal and civil cases. In the alternative, Vilar reasoned that because the Supreme Court in Morrison had already determined that Section 10(b) does not apply extraterritorially in civil cases, if the Second Circuit were to hold otherwise with respect to criminal cases, it would establish the dangerous principle that judges can give the same statutory text different meanings in different cases. 9 Despite this conclusion, the court affirmed Vilar s and Tanaka s convictions, finding no doubt that the jury would have convicted the defendants for violating Section 10(b) in connection with a domestic purchase or sale of securities, even though the securities involved in the fraudulent schemes were not listed on any U.S. exchange. 10 The court held that fraud in connection with securities not listed on a U.S. exchange can nevertheless involve domestic transactions where (i) the parties incur[red] irrevocable liability to carry out the transaction[s] within the United States or (ii) title [wa]s passed within the United States. 11 As found by the jury, defendants conduct met this test. Certain victims of the GFRDA scheme entered into and renewed their agreement with the defendants in Puerto Rico, and another victim signed her agreement in New York. The victim of the SBIC scheme met with Vilar and committed to participate in defendants program in New York. 12-2-
IMPLICATIONS After Vilar, the authorities cannot pursue, within the Second Circuit, criminal or civil enforcement charges under Section 10(b) on the basis of purely extraterritorial fraudulent conduct. Accordingly, criminal authorities and the SEC will have to establish a connection between an alleged fraud and (i) U.S. listed securities or (ii) domestic securities transactions. The authorities may, however, seek to link fraudulent trades in non U.S. listed securities to trades in related securities listed on American exchanges, as in SEC v. Cañas Maillard, et al., No. 13-CV-5299 (S.D.N.Y.), in which the SEC has alleged insider trading of non U.S. listed securities whose prices were based on prices of U.S. listed stock. 13 Failing a connection to U.S. listed securities, liability will turn on whether the parties have incurred an obligation with respect to the relevant transaction, or passed title to the securities at issue, within the United States. In such a scenario, the presence or absence of negotiations occurring within the United States may be dispositive. The impact of Vilar may be limited, given Congress s 2010 amendment to the Exchange Act in the Dodd- Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank conferred federal district courts jurisdiction over securities fraud proceedings brought by the SEC or the United States alleging fraudulent transactions that relate to non U.S. listed securities and occur entirely outside the United States. 14 Authorities may contend that in actions brought after the amendment s enactment, courts should read Section 10(b) s substantive scope as coextensive with its expressly extraterritorial jurisdictional reach. 15 If this argument is successful, Vilar s impact will be limited to alleged fraud schemes that preceded the passage of Dodd-Frank. * * * Copyright Sullivan & Cromwell LLP 2013-3-
ENDNOTES 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Vilar, 2013 WL 4608948, at *2. Id. at *3. The defendants raised several additional claims on appeal, which the court rejected as without merit or declined to review. Vilar, 2013 WL 4608948, at *4 (citing 130 S. Ct. at 2888) (emphases added). As a 2011 opinion of the United States District Court for the Southern District of New York held, under Morrison, Section 10(b) does not apply to a transaction in securities dually listed on a U.S. exchange and a foreign exchange when the actual purchase or sale occurs over the foreign exchange. Nor does Section 10(b) apply to purchases or sales of securities made by investors in the United States over a foreign exchange. In re UBS AG Sec. Litig., No. 07 civ. 11225 (RJS), 2011 WL 4059356 (S.D.N.Y. Sept. 13, 2011); see also In re Smart Tech., Inc. S holder Litig., No. 11 civ. 7673 (KBF), 2013 WL 139559, at *12 n.11 (S.D.N.Y. Jan. 11, 2013). Vilar, 2013 WL 4608948, at *5. Id. at *5 (citing Morrison, 130 S. Ct. at 2878) (internal quotation marks omitted). Vilar, 2013 WL 4608948, at *6; see United States v. Bowman, 260 U.S. 94 (1922); United States v. Siddiqui, 699 F.3d 690 (2d Cir. 2012); United States v. Al Kassar, 660 F.3d 108 (2d Cir. 2011). Vilar, 2013 WL 4608948, at *5 (internal quotation marks omitted). Id. at *8. Id. at *10 *11. Id. at *9 (citing Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 69 (2d Cir. 2012)). Vilar, 2013 WL 4608948, at *9 *11. The court remanded the cases against Vilar and Tanaka for resentencing, ordering the district court to (i) consider the effect of the Second Circuit s holding on the application of the relevant sentencing guideline and (ii) recalculate the restitution order to provide only for victims who purchased defendants securities domestically. See SEC Litig. Release No. 22768 (Aug. 1, 2013). 15 U.S.C. 78aa(b). See S.E.C. v. Chicago Convention Center, LLC, No. 13 C 982, 2013 WL 4012638, at *10 n.1 (N.D. Ill. Aug. 6, 2013). -4-
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