Will the SEC Take an Expansive Approach to the Extraterritorial Reach of Its Jurisdiction?

This article examines whether the U.S. Securities and Exchange Commission (SEC) may take a more expansive approach to the extraterritorial reach of its jurisdiction in light of the recent decision by the U.S. Court of Appeals for the Tenth Circuit in SEC v. Scoville, 913 F.3d 1204 (10th Cir. 2019), which held, in the context of an SEC enforcement matter, that the Dodd-Frank Act superseded the Supreme Court’s decision in Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010), which limited the SEC’s ability to enforce the federal securities laws to conduct that took place within the United States. This article also considers Scoville’s potential impact in light of other decisions, particularly the decision by the U.S. Court of Appeals for the Second Circuit in United States v. Hoskins, 902 F.3d 69 (2d Cir. 2018), which takes a potentially more limited approach to the government’s extraterritorial jurisdiction in the context of the Foreign Corrupt Practices Act (FCPA). Although it remains to be seen whether other circuit courts will align with the Tenth Circuit’s decision in Scoville, this decision may alter and expand the playing field when navigating an SEC investigation or litigation.

The Jurisdictional Framework. Prior to the Supreme Court’s decision in Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010), the SEC could bring extraterritorial claims under the federal securities laws based on the “conduct-and-effects” test. Under that test, courts examined “(1) whether the wrongful conduct occurred in the United States, and (2) whether the wrongful conduct had a substantial effect in the United States or upon United States citizens.” Morrison v. Nat’l Austl. Bank Ltd., 547 F.3d 167, 171 (2d Cir. 2008).

In Morrison, the Supreme Court rejected this approach, limiting the substantive application of the antifraud provisions of the federal securities laws to transactions that take place within the United States. Specifically, Morrison held that §10(b) of the Securities Exchange Act applies “only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” Morrison, 561 U.S. at 273.

On the day Morrison was decided, June 24, 2010, the Dodd-Frank conference committee also held its final meeting. Actions Overview H.R.4173-111th Cong. (2009-2010). The next month, §929P(b) of Dodd-Frank amended the antifraud provisions in the 1933 and 1934 securities acts to add language regarding extraterritorial jurisdiction. On its face, the Dodd-Frank Act conferred jurisdiction over “(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. §78aa (2010).

While various lower courts have analyzed the potential implications of this legislation (see infra), until recently, no circuit court had held that Dodd-Frank superseded Morrison.

‘Scoville’: The Tenth Circuit’s Broad Interpretation of the SEC’s Extraterritorial Reach. On Jan. 24, 2019, the Tenth Circuit ruled that the antifraud provisions of the federal securities laws apply extraterritorially in SEC enforcement cases where the §929P(b) “conduct-and-effects” test is met.

The SEC initially brought an enforcement action against Charles Scoville and his company, Traffic Monsoon, an Internet traffic exchange business. Traffic Monsoon sold online advertising services including “Adpacks.” SEC v. Traffic Monsoon, 245 F. Supp. 3d 1275 (D. Utah 2017). The SEC alleged that Adpack purchasers could share in Traffic Monsoon’s revenue, thus qualifying Adpacks as investment contract “securities” under the Securities Act of 1933. The SEC also argued that Adpacks operated as a Ponzi scheme in securities because revenue shares were financed through the sale of Adpacks to other customers. The SEC sought, and the district court granted, a preliminary injunction halting Traffic Monsoon’s sale of Adpacks. Id. at 1304.

Scoville argued that the SEC’s claims did not reach the majority of Adpack sales because they were principally sold to customers outside the United States. The SEC, by contrast, argued that Dodd-Frank reflected Congress’s clear intent to apply extraterritorially the antifraud provisions of the securities laws. See SEC v. Scoville, 913 F.3d 1204, 1215-18 (10th Cir. 2019). The Tenth Circuit affirmed the district court’s decision, holding that, “through the 2010 Dodd-Frank Act,” Congress “‘affirmatively and unmistakably’ directed that the antifraud provisions of the federal securities laws apply extraterritorially in an enforcement action.” Id. at 1215 (citations omitted).

‘Hoskins’: The Second Circuit’s More Limited Approach to Extraterritorial Jurisdiction. On Aug. 24, 2018, in a closely watched decision, the Second Circuit ruled that the government is precluded from employing theories of conspiracy or complicity to charge foreign nationals acting abroad with violations of the FCPA without a showing that the defendant was acting as an employee, officer, director, or agent of a U.S. entity, and thus otherwise covered by the statute.

The Department of Justice (DOJ) alleged that Lawrence Hoskins, a U.K citizen and employee of a U.K. subsidiary of power and transportation company Alstom S.A., directed and authorized corrupt payments by a U.S. subsidiary of Alstom to Indonesian officials. See U.S. v. Hoskins, 123 F. Supp. 3d 316 (D. Conn. 2015). The DOJ argued that Hoskins violated the FCPA because he directed and authorized corrupt payments by a U.S. subsidiary of Alstom to foreign officials. Id. at 320. The district court ruled that the government cannot use accomplice or conspiracy-related charges to extend liability under the FCPA beyond the explicit categories of persons identified in the statute. Id. at 327.

The Second Circuit affirmed in part and reversed in part. The court affirmed the lower court’s ruling that Hoskins, a foreign national, could not be liable for an FCPA violation without a showing that he was acting as an employee, officer, director, or agent of Alstom’s U.S. subsidiary. See U.S. v. Hoskins, 902 F.3d 69 (2d Cir. 2018). However, the court reversed the lower court’s ruling that prohibited the government from attempting to establish that Hoskins was liable as an agent of Alstom’s U.S. subsidiary for conspiring with foreign nationals who committed relevant acts while in the United States.

The court examined the text and legislative history of the FCPA, ultimately determining that the FCPA’s “omission of the class of persons under discussion was not accidental, but instead was a limitation created with surgical precision to limit its jurisdictional reach.” Id. at 84. Further, the court held that the presumption against extraterritoriality independently “bars the government from using the conspiracy and complicity statutes to charge Hoskins with any offense that is not punishable under the FCPA.” Id. at 97. The Second Circuit explained that, under controlling precedent, the government must “establish a ‘clearly expressed congressional intent to’ allow conspiracy and complicity liability to broaden the extraterritorial reach of the statute,” and the government had not established such intent with respect to the FCPA. Id. at 95 (citation omitted).

The Implications of 'Scoville' on the SEC’s Approach to Extraterritorial Jurisdiction. If followed, Scoville, which is a decision of first impression at the circuit court level, has the potential to dramatically expand the scope of the SEC’s extraterritorial reach. Still, Hoskins demonstrates an unwillingness on the part of certain courts to expand extraterritorial jurisdiction and casts at least some doubt on whether the government will now be emboldened to broadly pursue more cases involving extraterritorial conduct.

Hoskins followed a line of Supreme Court cases relying on the presumption against extraterritoriality to reject claims brought against foreign nationals for conduct occurring abroad in connection with other federal statutes. See, e.g., RJR Nabisco v. European Cmty., 136 S. Ct. 2090, 2100 (2016); Kiobel v. Royal Dutch Petroleum Co., 569 U.S. 108, 125 (2013); Morrison, 561 U.S. at 255. Yet, notwithstanding the Second Circuit’s decision in Hoskins, lower court opinions in the Second Circuit are not uniform. Compare SEC v. Tourre, 2013 WL 2407172, at *1 n.4 (S.D.N.Y. June 4, 2013) (“Because the Dodd-Frank Act effectively reversed Morrison in the context of SEC enforcement actions, the primary holdings of this opinion affect only pre-Dodd-Frank conduct.”), with In re Optimal U.S. Litig., 865 F. Supp. 2d 451, 456 n.28 (S.D.N.Y. 2012) (“Although I recognize that another S.D.N.Y. judge has … extended the reach of the Exchange Act to foreign parties entering into a transaction referencing U.S. securities, I cannot reconcile this holding with the presumption against extraterritoriality in Morrison.”). One Northern District of Illinois case—though refusing to confront the issue directly—concluded that §929P(b) “may be jurisdictional” though “it is unclear, however, whether the Court’s analysis should stop there because it is possible that this interpretation would create superfluity or contradict the legislative intent.” See SEC v. Chi. Convention Ctr., 961 F. Supp. 2d 905, 916 (N.D. Ill. 2013).

Given the lack of clarity in the law, the SEC may take an expansive view of its extraterritorial reach in investigating potential securities violations, and even in bringing actions. Such an approach would present litigation risks for both the government and defendants, but it is a risk of which counsel should be aware in defending a case with an extraterritorial nexus.

Ann-Elizabeth Ostrager is a partner in Sullivan & Cromwell’s litigation group, and a member of both the firm’s criminal defense and investigations group and labor and employment group. Morgan Schusterman, an associate in the firm’s litigation group, contributed to the preparation of this article.