Source: https://www.paulweiss.com/practices/litigation/securities-litigation/publications/10th-circuit-reinstates-conduct-and-effects-test-in-sec-enforcement-actions-superseding-morrison?id=28175
Timestamp: 2019-04-18 13:28:31+00:00

Document:
As the Tenth Circuit acknowledged, the United States Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), rejected a judge-made version of the “conduct-and-effects” test. More specifically, Morrison disapproved case law in which the lower federal courts had developed and applied the “conduct-and-effects” test to determine when the antifraud provisions of the federal securities laws extend to extraterritorial securities transactions. In the Tenth Circuit’s view, however, the Dodd-Frank Act, which became effective less than three weeks after the Supreme Court announced its decision in Morrison, reinstated the “conduct-and-effects” test for actions brought by the SEC or the United States. Private actions under the antifraud provisions of the federal securities laws will continue to be governed by the more restrictive approach to extraterritoriality described in Morrison.
Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) prohibits the use of “any manipulative or deceptive device” “in connection with the purchase or sale of any security.” Section 17(a) of the Securities Act of 1933 (the “Securities Act”) prohibits the use of “any device, scheme, or artifice to defraud” “in the offer or sale of any securities.” Neither statute, however, states whether these antifraud provisions cover securities transactions that occur outside the United States.
The Supreme Court’s 2010 decision in Morrison rejected this test. As a general matter, there is a “longstanding principle of American law ‘that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’” Morrison held that because there was “no affirmative indication in the Exchange Act that § 10(b) applies extraterritorially[,] . . . it does not.” Morrison accordingly held that Section 10(b) does not apply to securities transactions that occur outside the United States. Morrison also clarified that whether Section 10(b) applies extraterritorially does not involve a question of subject-matter jurisdiction, but rather a question concerning the merits of the claim.
Just weeks after the Supreme Court issued its decision in Morrison, the Dodd-Frank Act became effective. As relevant here, Dodd-Frank amended the jurisdictional sections of both the Exchange Act and the Securities Act to state that federal courts “shall have jurisdiction” over actions “brought or instituted by the [Securities and Exchange] Commission or the United States” under the antifraud provisions of those statutes if the actions satisfy the statutory “conduct-and-effects” test that is quoted in the first paragraph of this alert. Dodd-Frank did not amend the substantive antifraud provisions.
Dodd-Frank thus appears to indicate that if an action is brought by the SEC or the United States, and if the action satisfies the statutory “conduct-and-effects” test, the antifraud provisions of the federal securities laws will apply. Dodd-Frank, however, sought to achieve that result through amendments to the jurisdictional sections of the Exchange Act and the Securities Act, whereas Morrison had explained that extraterritorial application of the securities laws does not involve a jurisdictional question. Arguably, then, Dodd-Frank’s amendments had not overcome the limits placed by Morrison on the substantive scope of the antifraud provisions in the two statutes.
In Scoville, the SEC initiated a civil enforcement action under the federal securities laws against Traffic Monsoon, LLC, an internet traffic exchange business, and its principal, Charles Scoville. The SEC alleged that the business was a Ponzi scheme. Traffic Monsoon sold “Adpacks,” which guaranteed purchasers a certain number of visits to their websites and clicks on their advertisements. Ninety percent of all Adpacks were purchased by people who live outside the United States.
The district court entered a preliminary injunction that barred the continued operation of the business and granted other relief. Scoville appealed to the Tenth Circuit and argued, among other things, that the antifraud provisions of the federal securities laws did not apply to Adpack purchases made by people outside the United States.
At least in the Tenth Circuit, the SEC and the United States may bring actions for alleged federal securities fraud based on transactions that occurred outside the United States if the actions satisfy the “conduct-and-effects” test, as codified in the Dodd-Frank Act. Private actions for federal securities fraud, in contrast, will continue to be governed by Morrison.
 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 929P(b), 124 Stat. 1376, 1864-65 (2010) (amending Section 22 of the Securities Act of 1933 by adding new subsection (c), 15 U.S.C. § 77v(c), and amending Section 27 of the Securities Exchange Act of 1934 by adding new subsection (b), 15 U.S.C. § 78aa(b)).
 See Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir. 1968); Leasco Data Processing Equip. Corp. v. Maxwell, 468 F.2d 1326 (2d Cir. 1972).
 SEC v. Berger, 322 F.3d 187, 192 (2d Cir. 2003).
 EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991) (quoting Foley Bros., Inc. v. Filardo, 336 U.S. 281, 285 (1949)).
 Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 265 (2010).
 Securities Act § 22(c), 15 U.S.C. § 77v(c); Exchange Act § 27(b), 15 U.S.C. § 78aa(b).
 SEC v. Scoville, No. 17-4059, 2019 WL 302867, at *9 (10th Cir. Jan. 24, 2019).

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