Utah District Court Limits Reach Of Morrison By Holding That Section 10(b) Of The Exchange Act And Section 17(a) Of The Securities Act Can Be Applied Extraterritorially In Actions Brought By The SEC And The United States
04/11/2017On March 28, 2017, the U.S. District Court for the District of Utah granted the Securities and Exchange Commission’s (“SEC”) motion for a preliminary injunction in a securities fraud case against Traffic Monsoon, LLC, an advertising services company which allegedly ran a Ponzi scheme involving a pay-per-click advertisement program. SEC v. Traffic Monsoon, LLC, No. 2:16-CV-00832-JNP, (D. Utah Mar. 28, 2017) (order granting preliminary injunction) (“Order”). The injunction hinged, in part, on the district court’s conclusion that the SEC can bring securities fraud enforcement actions under Section 10(b) of the Exchange Act of 1934 (“Exchange Act”) and Sections 17(a)(1) and (3) of the Securities Act of 1933 (“Securities Act”) in connection with foreign transactions. In so ruling, the District Court limited the holding of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, 561 U.S. 247 (2010), in which the Supreme Court held that Section 10(b) applied only to transactions in securities listed on domestic exchanges and domestic transactions in other securities.
According to the SEC’s complaint, Traffic Monsoon sold packages, called AdPacks, to investors who promised to provide increased traffic to the investors’ websites, and the investors could, in turn, earn a 10% return on the AdPacks if they provided traffic to other websites. Complaint, SEC v. Traffic Monsoon, LLC, No. 2:16-CV-00832-JNP, (D. Utah July 26, 2016). The SEC alleged that because Traffic Monsoon made all payments to investors using funds from new investors, it violated the antifraud provisions in Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Exchange Act, and it requested a preliminary injunction freezing all of Traffic Monsoon’s assets related to the alleged scheme. In response, Traffic Monsoon pointed to the fact that “approximately 90% of its customers purchased AdPacks over the internet while located outside the United States,” and argued, relying on Morrison, that these are foreign transactions out of the SEC’s reach, such that any injunction freezing its assets must be limited to an amount sufficient to refund money paid by U.S.-based customers.
The District Court rejected Traffic Monsoon’s argument based on Section 929P(b) of the Dodd-Frank Act. This provision amended the Securities Act and the Exchange Act to grant jurisdiction to United States District Courts for any “action or proceeding brought or instituted by the [SEC] or the United States” alleging a violation of Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act 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.” While on its face Section 929P(b) addresses jurisdiction, the District Court reasoned that the provision evidenced Congress’s intent that Section 10(b) and Section 17(a) be applied extraterritorially, based on the language and legislative history of the provision and the legislative purpose served by allowing for extraterritoriality. The District Court made clear, however, that its holding was limited to actions brought by the SEC and the United States and that Morrison was still the law with respect to private causes of action.
The District Court further found that “‘conduct within the United States . . . constitute[d] significant steps in furtherance of the violation’ of Rule 10b-5 and Section 17(a),” and thus the SEC could bring an enforcement action that covered all of the transactions in the alleged scheme. Finally, the District Court stated that its decision appears to be one of first impression and certified the order for interlocutory appeal pursuant to 28 U.S.C. § 1292(b).
If adopted more broadly by other courts, the reasoning in this decision could expand significantly the SEC’s and DOJ’s ability to prosecute securities fraud claims involving foreign transactions, so long as there is significant U.S. conduct or a foreseeable substantial effect within the United States.