In the recent case of Loginovskaya v. Batratchenko (2d Cir. 2014), the US Court of Appeals for the Second Circuit evaluated the extraterritorial scope of an important US law – the Commodity Exchange Act ("CEA"). The Court applied the principle of the landmark 2010 Morrison decision from the US Supreme Court – namely, statutes that contain no express indication of extraterritorial effect have none – and found the relevant law did not apply extraterritorially. The Court's decision is particularly relevant in the context of private individuals attempting to pursue claims in relation to overseas transactions on the basis of US financial services legislation. The decision also highlights the distinction between litigation brought by private individuals and enforcement actions by the US Government, which may still seek to apply US laws to extraterritorial conduct.
This case involved allegations of wrongdoing that occurred almost entirely outside of the US. Loginovskaya, a Russian citizen, claimed to have been defrauded by the Thor Group, a financial services organisation based in New York and helmed by Oleg Batratchenko, a US citizen living in Russia. In 2006, Batratchenko allegedly solicited Loginovskaya to invest in Thor, pitching her with brochures and investment memoranda written in Russian. Loginovskaya ultimately entered into two investment contracts with Batratchenko, executed in Russia, and transferred more than USD 700,000 to a Thor bank account in New York. When Loginovskaya sought to withdraw her investments in 2009 and 2010, Thor refused and offered purportedly false excuses as to why the funds were unavailable. Loginovskaya subsequently learned that Thor used her funds to invest in a failed real estate venture in which Batratchenko had a personal interest.
In January 2012, Loginovskaya commenced an action in federal court against Batratchenko, numerous Thor entities and other individual defendants alleging both common-law claims (including fraud) and a violation of the CEA, which governs conduct on certain regulated exchanges. The district court first found that the section of the CEA creating a private right of action did not have extraterritorial effect. The court then concluded that the complained-of transactions occurred abroad and dismissed her claims as impermissibly extraterritorial. The court then declined to exercise jurisdiction over her non-federal claims. Loginovskaya appealed.
A majority of a three-judge panel of the Court of Appeals upheld the first instance decision, confirming the presumption against extraterritoriality established in Morrison. This presumption required the Court to first evaluate the section of the CEA affording litigants a private cause of action for substantive violations of the law. This section was silent as to extraterritorial effect. The Court then scrutinised the private right of action and noted that all of its subsections authorised claims over different types of illegal transactions; from this, the Court reasoned that the focus of the statute was domestic conduct or transactions in the US. The Court then carried that position to its obvious conclusion – "the CEA creates a private right of action for persons anywhere in the world who transact business in the United States, and does not open our courts to people who choose to do business elsewhere."
Loginovskaya argued that the Morrison analysis should not apply to procedural provisions like the private right of action, but the Court rejected this distinction, finding Morrison to clearly state its application to "all statutes." Loginovskaya also asserted – and the Court did not dispute – that a substantive antifraud provision of the CEA appeared to regulate the conduct of domestic commodities market participants, like Thor, in other countries. Loginovskaya thus argued that the Court's position would create a divide between conduct reachable by the private right of action and by the US government in circumstances where US regulators are taking enforcement action against overseas firms. But the Court saw nothing untoward with this arrangement, noting that Congress was free to create different remedies for different classes of litigants. The Court drew attention to the comments made by Stevens J in Morrison, noting the differences between the scope of actions that may be brought by the Securities and Exchange Commission and those brought by private parties. The Court further commented that this distinction does not restrict the ability of an individual to bring a claim before a regulator such as the Commodity Futures Trading Commission, even if they cannot bring an action in federal court.
Loginovskaya was thus left to argue that her transactions with Thor were domestic, but this she could not do – the Court noted that her contracts (which were with a single Thor entity) were negotiated and signed in Russia. The downstream investments made by that Thor entity in the US, including with other Thor investment vehicles, did not change the nature of the initial transaction. Nor did the fact that Loginovskaya wired money to Thor's New York accounts to complete the transaction – this was merely one aspect of an otherwise foreign investment arrangement.
This decision demonstrates that US courts continue to enforce and apply the presumption against extraterritoriality to all types of statutes, often to the detriment of private plaintiffs. In particular, this decision demonstrates that the Morrison presumption against extraterritoriality – and its litigation benefits – will not always apply in relation to actions brought by a governmental entity. As in the case of the CEA, regulators may possess broader authority than private litigants to apply substantive provisions to conduct occurring abroad than is available to individual litigants. Recent events also demonstrate that regulators are not hesitant to use that authority, or even to bend the Morrison principle where a defendant is unlikely to clarify the scope of a statute in court. The Court's willingness to draw a distinction between the extraterritorial reach of private individuals and government regulators is particularly interesting. Firms will take some comfort from this decision in that although the reach of US regulators in respect of certain overseas conduct is well established, the US Courts appear to be taking a more pragmatic approach in relation to attempts by private litigants to expand the jurisdiction of US law to overseas transactions.