The Northern District of Illinois recently handed down a
decision that further interpreted the contours of the Supreme
Court's 2010 decision in Morrison v. National Australia
Bank Ltd., which held that Section 10(b) of the Exchange Act
is not extraterritorial. In Securities and Exchange Commission
v. Benger, Magistrate Judge Jeffrey Cole granted a motion for
partial summary judgment as to some claims against the defendants
because the stock sales at issue were not "domestic
transactions" as defined by Morrison.
In Benger, the SEC alleged that the defendants – a
group of distribution and escrow agents based in the United States
(the "Distribution Agents") – had violated Section
10(b) by engaging in an international "boiler room"
scheme in which they took a 60 percent commission from foreign
investors' proceeds without disclosing such commissions to the
investors. The Distribution Agents retained sales agents in foreign
countries to make cold calls primarily to the elderly in those
countries, during which they employed high-pressure sales tactics,
fraudulent misrepresentations and false identities to secure sales.
One of the stocks being sold was Integrated Biodiesel Industries,
Ltd. (IBI), which accounted for approximately 35 percent of the $44
million yielded in the scheme. IBI is a St. Vincent and Grenadines
company with its principal place of business in Brazil.
The defendants moved for summary judgment as to the claims
relating to IBI, arguing that Section 10(b) did not apply because
"the issuers of the stock were foreign, the investors were
foreign, and the stock sales transactions were foreign." The
SEC, however, argued that the Distribution Agents were in the
United States while aiding and abetting the fraud by putting
together stock purchase agreements (SPAs) and receiving and
distributing the proceeds.
"Domestic Transaction" Under Morrison
Because IBI shares had never been registered with the SEC or
traded on any United States markets or exchanges, the ultimate
question in the case was whether purchases of IBI were
"domestic transactions" under Morrison. In cases
regarding securities not registered on domestic exchanges,
"the question under Morrison is where the stock
purchase transaction occurred, not the locus of the bulk of the
fraudulent activity." Judge Cole noted that Morrison
"specifically rejected" the argument that Section 10(b)
extends to cases in which "the fraud involves significant
conduct in the United States that is material to the fraud's
success."
Under the terms of the SPAs, IBI was not irrevocably bound by an
offer to purchase shares until it accepted the investor's
offer, which was received in Brazil from the defendants in the
United States. The defendants had no authority to accept or reject
an offer submitted by a potential investor. IBI would then issue a
share certificate, send it to the defendants, who would send it to
the foreign investor outside the United States.
The SEC argued that because the Distribution Agents were
authorized to receive offers and send the certificates to investors
on IBI's behalf, this activity operated as IBI's acceptance
within the United States. The court rejected this argument, noting
that the SPAs and escrow agreements said nothing about acceptance
being contingent upon or effectuated by the defendants sending
certificates to investors. Instead, "all they were doing was
forwarding IBI's acceptance, which had occurred previously in
Brazil." Thus, the Distribution Agents did not have the
authority to accept the offer and it was only accepted outside of
the United States.
While the court noted that "a lot of activity" occurred
in the United States, "[t]he sale's only connection with
the United States was the fact that IBI employed escrow agents in
the United States as intermediaries between it and the
investors." Ultimately, however, the contract was formed in
Brazil because that was where all the acceptances occurred. Thus,
the court reasoned that "[i]n the end, this was a sale of
shares in a foreign company to foreign investors." Based on
that conclusion, the court granted the defendants' motion for
partial summary judgment.
Impact of 2010 Dodd-Frank Act
Notably, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 included a provision that provides that Section 10(b) has extraterritorial reach in cases brought by the SEC and the Department of Justice (DOJ), even if the securities transaction occurs outside the United States and involves only foreign investors.1 While the Benger court did not address this issue – presumably because the conduct at issue preceded enactment of the Dodd-Frank Act – the provision may contravene the Morrison and Benger holdings in similar cases brought by the SEC or DOJ addressing post-Dodd-Frank conduct.
Footnotes
1 Section 929p(b)(2) of Title IX of the Dodd-Frank Act provides jurisdiction over SEC and DOJ enforcement actions if the fraud involves: (1) conduct within the United States that constitutes a significant step in furtherance of the violation, even if the securities transaction occurs outside the United States and involved only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect in the United States.
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