In the Courts

Apparently acknowledging the significance of the defendants' claim with respect to the extraterritorial application of securities fraud legislation, the court addressed this argument first in its opinion. Id. The government lodged two arguments in response: first, that the geographic limit set under Morrison applied only to civil enforcement under Section 10(b) and Rule 10b-5, and, in the alternative, that the conduct at issue in this case was not extraterritorial in that some of the transactions were in fact “domestic transactions in other securities.” Id.

The court rejected the government's first argument, reasoning that the Supreme Court's Morrison holding applies equally in the criminal context, noting that the presumption against extraterritoriality applies to criminal statutes “except in situations where the law at issue is aimed at protecting 'the right of the government to defend itself.'” Id. at *5 (citing United States v. Bowman, 260 U.S. 94, 43 S.Ct. 39, 67 L.Ed. 149 (1922)). The court further pointed out that the presumption against extraterritoriality “is a method of interpreting a statute, which has the same meaning in every case.” Id. at *7. Thus, as the Supreme Court had already decided in Morrison that the statutes at issue do not apply extraterritorially, the specific application in this case was not relevant.

Holding that the statutes at issue do not have extraterritorial effect in the criminal context, the court then considered “whether the jury would have found, beyond a reasonable doubt, that [the defendants] engaged in fraud in connection with a domestic purchase or sale of securities” based on the evidence offered. Id. at *9. On this point, the courts cited a prior opinion, holding that a “securities transaction is domestic when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed within the United States.” Id. (citing Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 69 (2d Cir.2012)).

Ultimately, while the court's decision is significant for its broader implications, the holding with respect to extraterritoriality was not of great consequence to the defendants: The court found that the district court's failure to require proof that the securities transactions were domestic did not affect the outcome of the proceedings because a jury would have found based on the evidence presented that the defendants in fact engaged in the domestic purchase or sale of securities as part of the schemes at issue. Id. The court affirmed the lower court's decision with respect to each of the defendants' other legal challenges to their convictions, but remanded the case for recalculation of the appropriate loss and forfeiture amounts, and directed the district court to limit restitution to victims of the scheme who purchased securities domestically. Id. at *1.

In the Courts and Business Crimes Hotline were written by Associate Editors Jamie A. Schafer and Matthew J. Alexander, respectively. Both are Associates at Kirkland & Ellis LLP, Washington, DC.

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Second Circuit: Section 10(b) and Rule 10b-5 Do Not Apply to Extraterritorial
Securities Fraud

On Aug. 30, 2013, the United States Court of Appeals for the Second Circuit held in United States v. Vilar, — F.3d —, 2013 WL 4608948, *1 (2d Cir. Aug. 30, 2013) that criminal liability under the Securities fraud prohibitions of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 does not extend to conduct relating to the extraterritorial purchase or sale of securities. The case is the latest in a series of decisions following Morrison v. National Australia Bank Ltd., in which the U.S. Supreme Court confirmed that U.S. securities fraud legislation only proscribed fraud in connection with “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” ”' U.S. ”', 130 S.Ct. 2869, 2884, 177 L.Ed.2d 535 (2010).

United States v. Vilar involved two prominent investment managers who were convicted by a jury in 2008 on multiple counts of securities fraud, investment adviser fraud, mail fraud, wire fraud and money laundering. Id. at *3. One defendant was sentenced to five years' imprisonment and the other to nine years' imprisonment. Id. Both were ordered to pay nearly $35 million in restitution to the victims of their schemes. Id. On appeal, the defendants raised many challenges to their convictions and the legitimacy of their sentences, including, most notably, an argument that the conduct underlying their convictions was extraterritorial and, thus, not within the conduct proscribed under Section 10(b) or Rule 10b-5 as interpreted under Morrison. Id.

Apparently acknowledging the significance of the defendants' claim with respect to the extraterritorial application of securities fraud legislation, the court addressed this argument first in its opinion. Id. The government lodged two arguments in response: first, that the geographic limit set under Morrison applied only to civil enforcement under Section 10(b) and Rule 10b-5, and, in the alternative, that the conduct at issue in this case was not extraterritorial in that some of the transactions were in fact “domestic transactions in other securities.” Id.

The court rejected the government's first argument, reasoning that the Supreme Court's Morrison holding applies equally in the criminal context, noting that the presumption against extraterritoriality applies to criminal statutes “except in situations where the law at issue is aimed at protecting 'the right of the government to defend itself.'” Id . at *5 (citing United States v. Bowman , 260 U.S. 94, 43 S.Ct. 39, 67 L.Ed. 149 (1922)). The court further pointed out that the presumption against extraterritoriality “is a method of interpreting a statute, which has the same meaning in every case.” Id. at *7. Thus, as the Supreme Court had already decided in Morrison that the statutes at issue do not apply extraterritorially, the specific application in this case was not relevant.

Holding that the statutes at issue do not have extraterritorial effect in the criminal context, the court then considered “whether the jury would have found, beyond a reasonable doubt, that [the defendants] engaged in fraud in connection with a domestic purchase or sale of securities” based on the evidence offered. Id. at *9. On this point, the courts cited a prior opinion, holding that a “securities transaction is domestic when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed within the United States.” Id . (citing Absolute Activist Value Master Fund Ltd. v. Ficeto , 677 F.3d 60, 69 (2d Cir.2012)).

Ultimately, while the court's decision is significant for its broader implications, the holding with respect to extraterritoriality was not of great consequence to the defendants: The court found that the district court's failure to require proof that the securities transactions were domestic did not affect the outcome of the proceedings because a jury would have found based on the evidence presented that the defendants in fact engaged in the domestic purchase or sale of securities as part of the schemes at issue. Id. The court affirmed the lower court's decision with respect to each of the defendants' other legal challenges to their convictions, but remanded the case for recalculation of the appropriate loss and forfeiture amounts, and directed the district court to limit restitution to victims of the scheme who purchased securities domestically. Id. at *1.

In the Courts and Business Crimes Hotline were written by Associate Editors Jamie A. Schafer and Matthew J. Alexander, respectively. Both are Associates at Kirkland & Ellis LLP, Washington, DC.

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