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Tenth Circuit Extends SEC Exterritorial Reach Final

Thu 24 Jan, 2019 | News by Carl Schoeppl   vCard & Kyle G. DeValerio   vCard

On January 24, 2019, the Tenth Circuit Court of Appeals issued an opinion in SEC v. Scoville, No. 17-4059, 2019 WL 302867 (10th Cir. Jan. 24, 2019), holding that the antifraud provisions of the federal securities laws apply to sales of securities outside the United States under the statutory conduct-and-effects test added by the Dodd-Frank Act. In Scoville, the Tenth Circuit upheld preliminary asset freeze, injunction, and receivership orders the district court issued in an SEC enforcement action against an internet advertising company selling securities to customers outside the United States in an international Ponzi scheme.

In reaching this conclusion, the Tenth Circuit applied the conduct-and-effects test added to the federal securities laws by the Dodd-Frank Act in 2010 which provides a federal district court with jurisdiction over an SEC enforcement action alleging a violation of the antifraud provisions involving: (1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.

In Scofield, the appellant contended that even though Dodd-Frank amended the jurisdictional provisions of the federal securities laws, Congress did not expressly state that the antifraud provisions apply extraterritorially relying upon Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 255 (2010)(Supreme Court held, contrary to decades of circuit- level authority, that § 10(b) did not apply outside the United States, because Congress did not address whether that provision applied extraterritorially and “[w]hen a statute gives no clear indication of an extraterritorial application, it has none.”) and its progeny. In rejecting this argument, the Tenth Circuit concluded that given the context and historical background surrounding the enactment of the Dodd-Frank amendments to the jurisdictional provisions of the federal securities laws, it is clear that Congress has “affirmatively and unmistakably” indicated that the substantive antifraud provisions of the federal securities laws apply extraterritorially when the statutory conduct-and-effects test is satisfied.

Implications:

The decision in Scoville represents a post Morrison circuit- level validation of the expansion of the extraterritorial reach of the antifraud provisions of the federal securities laws outside the United States under Dodd-Frank and signifies that the SEC will aggressively pursue Ponzi schemes and other securities frauds even if sales of securities predominantly occur abroad if the statutory conduct-and-effects test is met.