A case that began as an SEC enforcement action against an Internet advertising company has now reached the Supreme Court's calendar for a potential re-examination of its landmark decision in Morrison v. National Australia Bank, 561 U.S. 247 (2010). Specifically, at its upcoming November 1 conference, the Supreme Court is scheduled to consider a certiorari petition questioning the impact of §929P(b) of the Dodd-Frank Act on the extraterritorial reach of SEC and criminal securities fraud actions. Scoville v. Securities and Exchange Commission, No. 18-1566.

'Morrison' and Dodd-Frank

As is now well known, in Morrison, the Supreme Court held that §10(b) of the Exchange Act does not apply extraterritorially, but only to "transactions in securities listed on domestic exchanges" or "domestic transactions in other securities." 561 U.S. at 265, 267. In addition to setting forth this transactional standard, Morrison emphasized that the reach of §10(b) is a merits question (what conduct is prohibited) and not a subject matter jurisdiction one (does the court have power to hear the case). 561 U.S. at 254.

One month after Morrison was decided, the Dodd-Frank Act was enacted. Section 929P(b) of the Act added language to the "Jurisdiction of offenses and suits" sections of the Securities Act and Exchange Act providing that "the district courts of the United States … shall have jurisdiction over any action or proceeding brought or instituted by the [SEC] or the United States alleging a violation of" the antifraud provisions "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), 78aa(b). While the substantive antifraud sections remained unchanged, these amendments have been viewed by some as a return to a "conduct and effects" test for extraterritorial application that existed pre-Morrison.

Scoville

Petitioner Scoville operated an Internet advertising company, Traffic Monsoon, which sold "AdPacks" predominantly to a non-U.S. clientele. For $50, an AdPack purchaser's website would receive a certain amount of Internet traffic to improve its search engine rankings. A purchaser could also earn the $50 back plus an additional $5 by clicking on enough other AdPack members' websites and sharing in the company's revenue. Brilliant business plan or Ponzi scheme? Traffic Monsoon members thought the former, spending some $173 million on new purchases of AdPacks. The SEC said the latter, calling the AdPacks securities whose sale violated the antifraud provisions of the securities laws, namely §17(a) of the Securities Act and §10(b) of the Exchange Act. SEC v. Traffic Monsoon and Scoville., 16-cv-00832-JNP (D. Utah). It moved for, and obtained, a preliminary injunction, an asset freeze, and the appointment of a receiver in the District of Utah.

In opposition to the preliminary injunction, Scoville and Traffic Monsoon had argued that AdPack sales to foreign purchasers were not covered by the antifraud provisions under the holding of Morrison. The district court rejected the argument in light of §929P(b)'s amendments, and the Tenth Circuit affirmed. SEC v. Scoville, 913 F.3d 1204 (10th Cir. 2019). While the circuit agreed that Dodd-Frank amended the applicable jurisdictional sections and not the substantive antifraud provisions themselves, it concluded that the context and legislative history of the Act showed that "Congress undoubtedly intended that the substantive antifraud provisions should apply extraterritorially when the statutory conduct-and-effect test is satisfied." Id. at 1218. It thus concluded that although AdPack purchasers were principally located overseas, the standard had been satisfied by the defendants' conduct within the United States, including Scoville's creating the site while residing in Utah and hosting it on U.S.-based servers. Id. at 1219.

Scoville now urges the Supreme Court to revisit the distinction between the substantive and jurisdictional provisions of the securities laws and to confirm that Dodd-Frank did not alter Morrison's holding. Petition for a Writ of Certiorari. He argues that under established rules of statutory construction, a plain language textual analysis of §929P(b)'s amendments shows that they relate to subject matter jurisdiction only and "do not change the extraterritorial reach of the substantive provisions." Id. at 18-19. As a result, any extratextual references to Congressional intent are inapplicable and should not have been considered by the Tenth Circuit. Moreover, to the extent legislative history should be considered, Scoville maintains that the court should look to the Congress that initially drafted the securities laws and not to those that drafted Dodd-Frank. Finally, he argues that since the antifraud provisions carry criminal exposure, the rule of lenity should apply to resolve any ambiguity about extraterritoriality in favor of defendants; the reach of the statute should be not extended without explicit Congressional authorization. Id.

Scoville is not alone in his views. A group of law professors submitted an amici brief in support of his position, agreeing with his textual analysis and noting that practitioners need to "be able to rely on the clear statutory text of the securities laws without fear that a court will look to legislative history to invoke an interpretation that is contrary to the statute's plain text." Brief of Securities Law Scholars as Amici Curiae in Support of Petitioner, at 10. This need for clarity, they argue, is especially important given the severe criminal penalties associated with violation of the securities laws. Moreover, they maintain that the legislative history does not, in any case, support a Congressional desire to extend application of the antifraud provisions extraterritorially, and that Congress could have clarified the scope of the antifraud provisions in the time since the Act's passage. The amici add that Morrison's policy concerns about interfering with other nations' abilities to regulate their own securities markets should be respected. Id.

While the petitioner and amici's focus on the statutes' text, the SEC joins the Tenth Circuit in highlighting Morrison's language that "context can be consulted," when assessing if a law applies extraterritorially. Brief for the Respondent in Opposition, at 14, 18 (quoting Morrison, 561 U.S. at 265). The SEC argues that the court below properly determined that the Dodd-Frank Act's amendments reflected Congressional intent to rebut the presumption against extraterritoriality. It maintains that the "only plausible inference is that Congress intended to authorize the government to bring enforcement actions for extraterritorial frauds that satisfy the conduct-and-effects test." Id.at 19. It further disputes the significance of the merits versus jurisdiction distinction and contends that Scoville's reading of the amendments would render them superfluous if they simply confirmed jurisdiction that courts already have. The SEC urges that the petition should be denied because no Circuit split exists and because Scoville's case is still ongoing and may be resolved on other grounds. Id.

Conclusion

Whether or not the Supreme Court grants Scoville's certiorari petition, the evolution of the Dodd-Frank versus Morrison discussion is worthy of attention. The SEC has espoused §929P(b) to support extending the reach of its enforcement actions, and the government has cited the principle in criminal proceedings as well. For example, in United States v. Boustani, 18 CR 481 (E.D.N.Y.), the government recently cited the Tenth Circuit's Scoville opinion in opposition to the Lebanese defendant's initial motion to dismiss a securities fraud conspiracy count and other charges due to impermissible extraterritorial application. Id. (Dkt. Nos. 113, at 20) (citing Scoville, and adding that "even if this Court were to find that the securities fraud conspiracy charge against Boustani were extraterritorial, such a charge is permissible, because the Dodd-Frank Act made clear that the United States may bring Section 10(b) claims extraterritorially where there is significant conduct or significant foreseeable effects in the United States."). As the Supreme Court considers whether to review these issues further, the reach of the securities laws over cases with foreign connection will remain up for dispute.

Vera M. Kachnowski is of counsel at Schlam Stone & Dolan, specializing in white-collar defense and complex civil litigation.