On March 28, 2017, the U.S. District Court for the District of Salt Lake City granted the SEC’s request for a preliminary injunction in SEC v. Traffic Monsoon, LLC. The SEC’s complaint was brought in connection with Traffic Monsoon’s operation as a web traffic exchange, in which it sold several different products designed to deliver “clicks” or “visits” to the websites of its customers, which the SEC alleged violated Exchange Act Section 10(b) and Rule 10b-5. In its argument against the SEC’s request for a preliminary injunction, Traffic Monsoon relied on Morrison v. Nat’l Australia Bank Ltd. to assert that Exchange Act Sections 10(b) and Section 17 do not authorize a U.S. district court to enjoin activity related to foreign transactions, claiming that approximately 90% of Traffic Monsoon’s customers purchased products over the internet while located outside the United States. In Morrison, the Supreme Court replaced the longstanding “conduct and effects test” with the “transactional test,” holding that Section 10(b) and Rule 10b-5 could be applied only in 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.
In Traffic Monsoon, the defendants claimed that notwithstanding the passage of Section 929P(b) of the Dodd-Frank Act, which reinstated the conduct and effects test that had been repudiated in Morrison, the SEC lacked jurisdiction in Traffic Monsoon in accordance with Morrison’s transactional test. Section 929P(b) clarified, among other things, that U.S. district courts have jurisdiction over Exchange Act Section 10(b) and Section 17(a) actions brought by the SEC if the conduct and effects test has been satisfied. However, the Traffic Monsoon court disagreed with the defendants’ claim, holding that the legal context in which Section 929P(b) was drafted, legislative history and express purpose of Section 929P(b) all point to a congressional intent that Section 10(b) and Section 17(a) should be applied to extraterritorial transactions to the extent that the conduct and effects test can be satisfied. Using the conducts and effects test, the Traffic Monsoon court found that the SEC had jurisdiction to bring an injunction against the defendants, given that Traffic Monsoon was conceived and created in the United States, along with the promotion of its products. This decision is notable because it represents the first time that a U.S. district court has affirmatively held that Section 929P(b) supersedes Morrison. More importantly, it functions as a warning to issuers that their foreign activities may nevertheless be subject to liability under U.S. securities laws, even if other U.S. district courts have continued to use Morrison’s transactional test.
A copy of the Traffic Monsoon decision is available at: http://static.reuters.com/resources/media/editorial/20170404/secvtrafficmonsoon–opinion.pdf.