On 20 January 2015, the federal appellate court based in Pennsylvania addressed whether a criminal defendant based outside the United States could be subject to liability for manipulative securities transactions under Section 10(b) of the Securities and Exchange Act of 1934 in light of the US Supreme Court's landmark decision in Morrison v. National Australia Bank precluding extraterritorial applications of Section 10(b). In Morrison, the Supreme Court ruled that Section 10(b) does not apply extraterritorially to so-called "foreign-cubed" claims―i.e., claims where "(1) foreign plaintiffs [are] suing (2) a foreign issuer in an American court for violations of American securities laws based on securities transactions in (3) foreign countries." The court in Georgiou addressed what it described as a question of first impression: "whether the purchases and sales of securities issued by US companies through US market makers acting as intermediaries for foreign entities constitute 'domestic transactions' under Morrison."
The defendant Georgiou was convicted of securities fraud, conspiracy to defraud the US and wire fraud, sentenced to 300 months of prison time, and ordered to pay over $55 million in restitution. These charges were based on his manipulation of the markets for four stocks by artificially inflating their share prices, selling shares at inflated prices and using shares as collateral to fraudulently borrow funds on margin.
In Morrison, the Court limited the application of Section 10(b) to transactions involving the purchase or sale of a security that (1) is "listed on an American stock exchange" or (2) takes place "in the United States." The Court here agreed with Georgiou's argument that because all of the stocks at issue were listed and traded in the over-the-counter market, they did not qualify as being listed on "national securities exchanges."
The Court held, however, that the transactions at issue qualified under Morrison's second prong, for transactions that take place in the US. Adopting the approach taken by courts in several other jurisdictions, the Court held that the location of a securities transaction is determined by the place where "irrevocable liability to carry out the transaction" is incurred. Factors relevant to "irrevocable liability" include the location of contract formation or execution, order placement, passing of title, the exchange of funds and the location of the defendant's business. On the other hand, marketing in the US, a party's US residency or citizenship, and the deception's origination in the US have been held to be insufficient to subject a defendant to liability under Section 10(b). Two key factors that distinguished this case from Morrison were that the transactions here involved shares of US companies and that at least one transaction (and likely many) for each of the stocks was executed through a US market maker (sometimes at the defendant's direction).
While the Court held that a transaction's being conducted in the US over-the-counter market does not subject the transaction to Section 10(b), it noted that courts in other jurisdictions have suggested otherwise. How a court assesses this factor will therefore depend on the jurisdiction in which the case is litigated. On the other hand, the Court's adoption of the "irrevocable liability" test goes along with courts in several other jurisdictions that have already taken this approach and thus reflects a more common standard for how Morrison is applied. More fundamentally, as we have explained in past editions of this newsletter, courts consider context-specific factors rather than taking a mechanical approach to applying the standard set forth in Morrison. The overall connection of the transactions to the US played an important role in the Court's decision here and should do so in future cases as well.
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