The Steve Miller Band had a major hit song, “Living in the U.S.A.” But increasingly, it is difficult to know if a securities lawsuit may live in the U.S. or belongs in a foreign jurisdiction, as reflected in recent decisions by federal courts.
The turning point was the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010). Prior to Morrison, the Second Circuit Court of Appeals had adopted a standard—followed by other Circuits—characterized as the “conduct-and-effects” test for determining whether U.S. courts had jurisdiction over a securities transaction: “(1) whether the wrongful conduct occurred in the United States, and (2) whether the wrongful conduct had a substantial effect in the United States or upon United States citizens..” See, e.g., SEC v. Berger, 322 F. 3d 187, 192-93 (2d Cir. 2003).
In Morrison, Australians filed suit in the United States against an Australian bank for allegedly concealing financial problems at a Florida mortgage-servicing company that the bank acquired. Plaintiffs brought claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Second Circuit affirmed dismissal of the suit, holding that jurisdiction was lacking under the conduct-and-effects analysis because the fraudulent scheme occurred outside the U.S. The Supreme Court, while agreeing that dismissal was justified, rejected the conduct-and-effects standard, finding that the controlling issue was not jurisdiction, but rather, the presumption against extraterritorial application of federal statutes in the absence of express Congressional support. Because of this presumption, Section 10(b) and Rule 10b-5 applied only in connection with the purchase or sale of a security where that security was listed on a U.S. stock exchange, or the transaction occurred in the U.S. 561 U.S. at 273.
After Morrison, the analysis of extraterritorial jurisdiction falls into two categories – actions by the Securities and Exchange Commission (SEC), and private lawsuits.
SEC Actions
Almost simultaneous with the Morrison decision, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, which included a provision (Section 929(p)(b)) conferring jurisdiction on U.S. federal courts for any action filed by the SEC alleging a violation of the antifraud laws involving either: (a) conduct within the U.S. constituting significant steps in furtherance of the violation (even if the transaction occurred outside the U.S.); or (b) conduct occurring outside the U.S. that has a foreseeable substantial effect within the U.S.
Critics charged that Congress had codified the conduct-and-effects test that Morrison had repudiated. However, the Tenth Circuit Court of Appeals in SEC v. Scoville, 913 F.3d 1204 (2019), held that Dodd-Frank reflected the Congressional intent that the substantive antifraud provisions of the securities laws should apply extraterritorially in SEC actions. Other courts similarly have endorsed the SEC’s jurisdiction where there were sufficient contacts between the alleged fraudulent scheme and the U.S. See, e.g., SEC v. Montano, 2020 WL 5534653 (D. Fla. July 24, 2020) (following Scoville, holding defendant took significant steps in pursuing fraud in U.S.); SEC v. Terraform Labs Pte Ltd, 2022 WL 2066414 (2d Cir. June 8, 2022) (jurisdiction where defendants purposefully availed themselves of U.S. by promoting digital assets to U.S. consumers and investors).
Private Actions
Determining whether jurisdiction exists in private litigation has become more problematic. Morrison instructs parties and courts to ask whether a securities transaction “occurred in the United States,” but what does that mean? One formulation, adopted by the Ninth Circuit, is the “irrevocable liability” test: whether the purchaser of a security incurred irrevocable liability within the U.S. to take and pay for a security or the seller incurred irrevocable liability within the U.S. to deliver the security. See Stoyas v. Toshiba Corp., 896 F.3d 933, 949 (9th Cir. 2018). Thus, the analysis focuses on the nature of the securities transaction, and not the underlying fraud allegations. And even if a plaintiff purchased a security in the U.S., it would not be considered a domestic transaction if it only became binding outside the U.S. In addition to the Ninth Circuit, the “irrevocable liability” test also has been adopted by the First, Second and Third Circuits.
But even that analysis does not always control. For example, while the Second Circuit has adopted the “irrevocable liability” test, several decisions have held that although a transaction might be domestic, jurisdiction still is absent if the transaction is “predominantly foreign.” See, e.g., Cavello Bay Reinsurance Ltd. v. Stein, 961F.3d 161 (2d Cir. 2021); Parkcentral Global HUB Ltd. v. Porsche Automobile Holdings SE, 763 F. 3d 198 (2d Cir. 2014).
A separate analysis applies to RICO allegations. A private RICO plaintiff must allege and prove a domestic injury to its business or property. RJR Nabisco, Inc. v. European Community, 579 U.S. 325 (2016). Therefore, the plaintiff must show an injury to property occurred in the U.S. See City of Almaty v. Khrapunov, 956 F. 3d 1129 (9th Cir. 2020) (expenditure of funds to trace allegedly stolen funds of initial theft outside U.S. was not domestic injury); Fund Liquidation Holdings LLC v. UBS AG, 2021 WL 4482826 (S.D.N.Y. Sept. 30, 2021) (use of U.S. wires to send fraudulent confirmations and receive money and sending communications through U.S. did not constitute domestic injury).
Like much of securities law, even simple questions about the territorial reach of the law can have complicated answers. Particularly when filing or defending securities litigation actions involving foreign parties or transactions, it is important to have experienced, competent counsel who is up-to-date on the latest legal developments.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.
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