In the first federal appellate court opinion to interpret Section 929P(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the 10th Circuit Court of Appeals issued a decision last week that makes it easier for the U.S. Securities and Exchange Commission (the “SEC”) to bring enforcement actions in connection with securities law violations that take place outside the United States.
Affirming a grant of injunctive relief, the 10th Circuit in SEC v. Scoville and Traffic Monsoon held that the SEC can rely on the broader “conduct-and-effects test” to determine whether the U.S. federal securities laws reach conduct outside the United States, rather than having to satisfy the more stringent test set out in 2010 by the U.S. Supreme Court in Morrison v. National Australia Bank.
The case involves an enforcement action by the SEC, which alleged that Charles Scoville and his company, Traffic Monsoon, LLC (together, the “defendants”), violated the antifraud provisions of the U.S. federal securities laws1 by operating a Ponzi scheme involving the sale of bundled internet advertising services that allowed a purchaser to share in some of Traffic Monsoon’s revenue (“Adpacks”). The district court granted the SEC’s request for injunctive relief, rejecting the defendants’ arguments that the U.S. federal securities laws did not apply because the Adpacks were not securities and almost all the Adpacks purchasers resided outside the United States.
The 10th Circuit affirmed, holding that the Adpacks were securities.2 More importantly, however, the 10th Circuit agreed with the lower court that the U.S. federal securities laws reached Traffic Monsoon’s sales to customers outside the United States because, applying the conduct-and-effects test, the company undertook significant conduct in the United States to make those sales to persons abroad.
United States of the servers housing the company’s website4 – constituted significant steps in furtherance of the violation of Rule 10b-5 and Section 17(a).
Under this decision, SEC enforcement actions can now reach a much broader range of conduct extraterritorially than actions by private plaintiffs can – at least in cases brought in the 10th Circuit, which covers Colorado, Kansas, New Mexico, Oklahoma, Utah and Wyoming. Neither the Second Circuit (covering New York) nor the Ninth Circuit (covering California) has addressed the issue yet. The defendants have not yet indicated whether they will appeal the decision to the Supreme Court.