Transnational Securities Fraud Regulation: Problems and Solutions

Transnational Securities Fraud Regulation: Problems and Solutions Joshua G. Urquhart* I. INTRODUCTION Although modern exchanges have existed since Elizabethan England, until recently the purchase and sale of securities was largely unregulated.1 As a result, investors were only protected from fraud and other misbehavior by the oftentimes inadequate common law.2 However, for the past sixty years, Rule 10b-5 of the Securities Exchange Act of 1934 ("Exchange Act") has protected US investors from securities fraud and prevented wrongdoers operating in this country from defrauding the purchasers of securities, both at home and abroad.3 Although no other nation has enacted legislation of such massive scope and sweeping coverage, many countries have passed laws with the same general purpose-to eliminate fraud and protect investors from unfair trade practices in domestic securities markets.4 Perhaps not surprisingly, the original drafters of the Exchange Act did not directly address the applicability of their law to transnational securities transactions.5 At the time, the "web of international connections in the securities market was then not nearly as extensive or complex as it has become," and as a result, commonplace transnational transactions were simply not contemplated by the legislature of the 1930's.6 Since the passage of the Exchange Act, however, the world securities market has changed dramatically, perhaps in more ways than even the courts a decade ago could have hypothesized. First, the increasing number of multinational corporations with only nominal nationality has resulted in companies that issue stocks in scores of countries and are listed on multiple foreign exchanges.7 Due to advances in telecommunications, international travel and shipping and global financial liberalization, what were once a large number of relatively isolated markets have, to a large extent, merged into an interconnected marketplace. Many corporations are no longer associated with only one nation; instead, they are really global citizens.8 Thus, any fraud will affect investors and markets in potentially dozens of nations.9 Second, the Internet has recently emerged as a popular way to buy and sell securities for an enormous number of investors.10 Anyone with access to a computer, modem, and telephone line can instantly access information submitted by authors throughout the world at a negligible cost. As such, the medium is ideally suited for many types of securities transactions. Internet posters can publish corporate reports (both official and unofficial), investment "tips," and other information on the Web, and then simultaneously solicit investors based on that information. In many countries (including, to some extent, the United States), the laws governing securities regulation have yet to match these gains in technology.11 Because of the increasingly international character of securities markets, domestic enforcement officials must now choose either to extend the reach of their antifraud laws to largely foreign transactions or to deny much-needed protection to their own citizens and markets. Due to the lack of legislative guidance, American courts have tried to "fill in the gaps" when deciding whether to enforce lOb-5 extraterritorially.12 In practice, this has resulted in US courts sometimes adjudicating securities fraud claims that have little impact on the United States itself. Because American securities fraud laws are perhaps the most plaintiff-friendly in the world, their extraterritorial application has resulted in US courts becoming almost a worldwide forum for many parties seeking redress not offered by their own countries. This situation has two undesirable consequences: first, US courts are forced to spend their limited judicial resources on matters that do not invoke substantial domestic interests, and second, American antifraud laws are superseding the oftentimes intentionally less strict foreign regulations that govern the same transactions, thereby creating an American hegemony in the field of transnational securities regulation. …