Meet the New Fraud, Same as the Old Fraud: 10th Circuit Holds Anti-Fraud Provisions of Securities Act Once Again Apply Abroad
On January 24, 2019, the Tenth Circuit held in SEC v. Scoville that the antifraud provisions of the federal securities laws once again have extraterritorial application, providing the government new ammunition as it seeks to expand the reach of federal securities laws.1
The case revolves around an alleged Ponzi scheme involving the sale of “Adpacks” by “internet traffic exchange business” Traffic Monsoon, LLC. Traffic Monsoon and its sole owner-operator Charles Scoville sold “Adpacks” that entitled members to receive a certain number of “clicks” to their website and a share in Traffic Monsoon’s revenue. For $50 a consumer could purchase an Adpack that, if the customer clicked on a certain amount of ads for other purchasers, could be redeemed for a total of $55. Soon, many customers focused on buying the packs solely to take advantage of their 10% return.
What the SEC alleged, however, was that the returns were being funded by the sale of Adpacks to new customers, making the entire endeavor an illegal Ponzi scheme. The SEC initiated a civil enforcement action against Charles Scoville and his company Traffic Monsoon. Scoville challenged the enforcement action, contending that the antifraud provisions of the exchange act did not reach sales or offers to sell securities to persons living outside of the United States, which amounted to 90% of Traffic Monsoon’s Adpack sales.
While federal courts had held for decades that the antifraud provisions of the federal securities laws applied to the sale or offer to sell securities to persons abroad, in 2010, the Supreme Court upended that scheme, announcing in Morrison v. National Australia Bank Limited that the securities acts gave no clear indication of extraterritorial application, and thus had no such application.2
10th Circuit Revives Conduct and Effects
In Scoville, the Tenth Circuit held that Congress “affirmatively and unmistakably”3 amended the 1933 and 1934 securities acts to apply extraterritorially by specifically including language in the 2010 Dodd-Frank Act which invokes the “conduct and effects” test that had been used by circuit courts for decades prior to the Morrison decision.4
In so doing, the Court became the first federal appellate court to hold that the Dodd-Frank Act’s amendments to federal securities law abrogated the Supreme Court’s holding in Morrison.5
Why This Matters
Though both the SEC and DOJ have previously contended that Dodd-Frank reestablished extraterritorial application of federal securities antifraud provisions, the Tenth Circuit’s decision in Scoville is significant.6 With a newly minted precedent under its belt, the SEC or DOJ should be confident in increasing the enforcement of the securities laws abroad.
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1 SEC v. Scoville, 913 F.3d 1204 (10th Cir. 2019), available at https://www.ca10.uscourts.gov/opinions/17/17-4059.pdf.
2 561 U.S. 247 (2010).
3 Scoville, 913 F.3d at 1215.
4 The language in Dodd-Frank as quoted in Scoville, 913 F.3d at 1215 reads:
“The district courts of the United States and the United States courts of any Territory shall have jurisdiction of an action or proceeding brought or instituted by the Commission or the United States alleging a violation of section 77q(a) of this title [Section 17(a) of the 1933 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.
15 U.S.C. § 77v(c) (bracketed material added).”
5 Other appellate courts have been receptive to the same reasoning, but none have directly held as such. For example, in a citation to Morrison, the Fifth Circuit commented that Morrison had been “superseded” by Dodd-Frank. United States v. Vasquez, 899 F.3d 363, 373 (5th Cir. 2018), as revised (Aug. 24, 2018) (“This presumption against extraterritoriality is a canon of statutory interpretation, not a limit on Congress’s power.” Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 255, 130 S. Ct. 2869, 177 L. Ed. 2d 535 (2010), superseded by statute, Dodd-Frank Wall Street Reform and Consumer Protection Act[.]”).
6 See, e.g., S.E.C. v. Tourre, No. 10 CIV. 3229 KBF, 2013 WL 2407172, at *1 (S.D.N.Y. June 4, 2013) (“[Dodd-Frank] effectively reversed Morrison in the context of SEC enforcement actions[.]”); Government’s Consolidated Response In Opposition To Defendant McLellan’s Pre-Trial Motions, United States v. McLellan, Crim. No. 16-10094-LTS-MBB (D. Mass. June 12, 2017), ECF No. 170, at 23–29.
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