Expanding the Reach of the United States Securities Laws (1993)

I. INTRODUCTION The Second Circuit's recent decision in Alfadda v. Fenn(1) (Alfadda) illustrates that extraterritorial application of United States securities laws remains controversial issue.(2) Not only do the circuits vary in their treatment of the issue, but it appears that even the Second Circuit, typically regarded as including the judicial experts on securities law interpretation, may be reaching unpredictable results.(3) While there have been many proposals on how ameliorate the uncertainty, Alfadda raises the problem of discerning what the current law is, and in what direction it is moving. Alfadda v. Fenn concerned suit based on Rule 10b-5 of the Securities Exchange Act of 1934(4) (Exchange Act) and the Racketeer Influenced and Corrupt Organizations Act(5) (RICO) for fraudulent sales that took place outside the United States.(6) The plaintiffs in Alfadda were foreign purchasers of foreign holding company's securities who sued the corporation, its three foreign subsidiaries and two American officers in the United States. Jurisdiction was the only issue on appeal. The court, in reversing the district court's denial of subject matter jurisdiction, had decide whether the nature and amount of fraudulent conduct alleged have taken place in the United States was sufficient confer federal jurisdiction.(7) This Note examines the issue of extraterritorial jurisdiction over transnational securities fraud by first reviewing the Exchange Act's relevant provisions and the American Law Institute's most recent recommendations in the Restatement (Third) of Relations Law of the United States(8) (Restatement Third). The Note next surveys the caselaw in the Second Circuit and other circuits. Finally the Note examines the Alfadda case, arguing that the Second Circuit's decision sheds little light on the substantive direction of the law in this area, and concluding that courts will invariably find subject matter jurisdiction over foreigners' claims. II. The Extraterritotial Reach of Rule 10b-5 in Transnational Securities Fraud: Codified Provisions The Securities Exchange Act of 1934 employs system of disclosure insure the maintenance of fair and honest in securities transactions and to protect interstate commerce.(9) Congress found such regulation necessary because the securities exchanges and over-the-counter markets were determined be affected with national public interest.(10) The Act defines interstate commerce as trade, commerce, transportation, or communication . . . between any foreign country and any State . . . .(11) Thus the goal of protecting interstate commerce presumes extraterritorial application. However, nothing in the language of the anti-fraud provisions of the Exchange Act defines or limits the scope of their extraterritorial application. Rather, section 10(b)(12) and Rule 10b-5,(13) the principal anti-fraud provisions, broadly prohibit the use of any manipulative devices by means of interstate commerce in connection with the purchase or sale of securities. The only express limit the Act provides is found in section 30, entitled Foreign Securities Exchanges.(14) Section 30(b) makes the provisions of the Act inapplicable persons transacting a business in securities without the jurisdiction of the United States.(15) The Exchange Act's guidance on the question of congressional intent apply securities laws extraterritorially is ambiguous at best. While Rule 10b-5 addresses transactions that are transnational in nature, section 30(b) appears exempt only those transactions that are completely foreign. Thus, the courts must determine the manner and extent of section 10(b) and Rule 10b-5's application in instances of transnational securities fraud. In making such determination, international law principles serve better define the reach of the securities laws. The Restatement Third specifically addresses the extraterritorial reach of United States securities laws for the first time. …