Tenth Circuit Holds That Dodd-Frank Act Granted SEC Extraterritorial Authority
02/11/2019On January 24, 2019, the United States Court of Appeals for the Tenth Circuit affirmed a decision by the United States District Court for the District of Utah holding that the Dodd-Frank Act of 2010 grants the Securities and Exchange Commission (“SEC”) authority to enforce extraterritorially the antifraud provisions of the federal Securities Act of 1933 and the Securities Exchange Act of 1934. SEC v. Scoville, No. 17-CV-4059 (10th Cir. 2019). Months before the Dodd-Frank Act was passed, the Supreme Court in Morrison v. National Australia Bank, 561 U.S. 247, 265 (2010), held that, given the general presumption against extraterritorial application of U.S. laws and the lack of clear indicia of congressional intent to the contrary, the federal securities laws did not apply extraterritorially. But the Tenth Circuit concluded in Scoville that the Dodd-Frank Act “affirmatively and unmistakably” evidenced Congress’s intent to allow the SEC and the U.S. to enforce the federal securities laws whenever the “conducts-and-effects” test is met, effectively rendering Morrison inapplicable to SEC and other government enforcement actions while not disturbing its impact on private securities actions.
Scoville originated from a July 2016 enforcement action against an internet traffic exchange company (the “Company”) and its founder, in which the SEC alleged that the Company was running an unlawful Ponzi scheme. The Company sold buyers “clicks” for their websites to boost its position in search engine results. Allegedly, the Company misled customers in a number of ways, including by promising them a share in the Company’s revenue if they purchased an “Adpack” and clicked on a certain number of ads for the websites of the Company’s other customers. Approximately ninety percent of Adpack purchasers were located outside the United States.
The SEC’s enforcement action against the Company alleged that the Adpacks constituted securities, and that their sale violated Sections 17(a)(1) and (a)(3) of the Securities Act and Section 10(b) of the Securities Exchange Act, as amended by the Dodd-Frank Act. The district court ruled in favor of the SEC, granting a preliminary injunction against defendants, enjoining them from continuing to run their internet traffic exchange, freezing defendants’ assets, and appointing a receiver over the Company’s assets. The Company and its founder filed an interlocutory appeal, arguing that federal securities laws could not apply to sales abroad, given the Supreme Court’s holding in Morrison.
In Morrison, the Supreme Court applied the general presumption against extraterritoriality, which requires courts to assume a statute only applies to domestic conduct unless there is a “clear indication” of extraterritorial application, to its interpretation of Section 10(b) of the Securities Exchange Act. Morrison, 561 U.S. at 265. Concluding a “clear indication” of congressional intent for extraterritoriality was lacking, it rejected decades of circuit court precedent and held that Section 10(b) did not apply to activity outside the U.S. The Dodd-Frank Act, however, which was passed only months after Morrison was decided, amended the securities laws interpreted in Morrison by adding a key provision—Section 929P(b). This section expanded the scope of both the Securities Act and the Exchange Act to cover SEC enforcement actions against “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” and “conduct occurring outside the United States that has a foreseeable substantial effect within the United States.” The Tenth Circuit agreed with the lower court that this timing and language indicated an “affirmative and unmistakab[le]” rebuttal to the presumption against extraterritoriality for SEC actions.
In further support of its conclusion, the Tenth Circuit found that a separate provision of the Dodd-Frank Act—Section 929Y—which directed the SEC to receive public comment and conduct a study on whether private actions brought under the antifraud provisions should be extended extraterritorially, showed that Congress thought it was passing a statute granting the SEC extraterritorial enforcement authority. And the court found the title of Section 929P(b), “Strengthening Enforcement by the Commission,” to be further evidence that Congress intended to make explicitly clear that Dodd-Frank’s antifraud provisions applied extraterritorially.
Applying this conclusion to the facts of the case, the Tenth Circuit held that because the Company was conceived of, created, and promoted by its founder while he was living in Utah, and used servers in the United States to conduct its business, there were sufficient U.S.-based conduct and effects to support the enforcement action. The Tenth Circuit additionally rejected defendants’ additional arguments that its products did not qualify as securities subject to Dodd-Frank, and its contention that the SEC failed to show a likelihood of success in proving all necessary elements of the antifraud claims.