On July 26, 2011, a jury in the Southern District of New York convicted Ross Mandell, the founder of Sky Capital Holdings, Ltd. (“Sky Capital”), of defrauding investors in a $140 million investment scheme. The “boiler room” scheme involved highpressure sales tactics, inducing investors to purchase virtually worthless stock in two Sky Capital entities. The defendants were accused of diverting the invested funds to personal uses and infl ating the stock prices by, among other things, refusing to allow some investors to sell their stock. Mandell and a former Sky Capital broker, Adam Harrington, were convicted on all counts, including securities fraud, mail and wire fraud, and conspiracy to commit the foregoing offenses.
Mandell’s conviction comes in the wake of a decision from earlier this year that the United States Supreme Court’s decision in Morrison v. Nat’l Australia Bank Ltd. did not preclude the jury’s consideration of Mandell’s fraudulent scheme, despite the extraterritorial nature of the investments at issue. See United States v. Mandell, Case No. 09 Cr. 0662 (S.D.N.Y. Mar. 16, 2011). The stock of Sky Capital Holdings, Ltd. was traded on the Alternative Investment Market (“AIM”) of the London Stock Exchange. Mandell and Harrington, thus, moved to dismiss an indictment against them on the grounds that, under Morrison, the U.S. securities laws could not apply to the extraterritorial trading. In Morrison, the Supreme Court held that Section 10(b) of the Exchange Act applies only to “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.”
On March 16, 2011, Judge Paul Crotty denied Mandell and Harrington’s motion to dismiss, fi nding that the crimes, as alleged, did not require extraterritorial application of U.S. laws because the criminal conduct occurred in the United States. Judge Crotty distinguished Morrison, which involved Australian investors who had purchased shares of an Australian bank on an Australian exchange, on the basis that the parties involved in Mandell were located in the United States. While most courts applying Morrison in the year since it was published focus on the location of the transaction, i.e., the location of the exchange on which the trades were executed, Judge Crotty focused on the acts that constituted the alleged fraudulent conduct—acts that occurred in the United States.
In his opinion, Judge Crotty noted the following U.S. connections: (1) the defendants were U.S. residents, (2) the defendants’ companies were U.S. companies, except for one U.K. company, (3) cold calls and other solicitations for investments were made from the United States, (4) many of the solicited investors were U.S. residents, (5) the investment accounts were maintained at a Wall Street brokerage fi rm and (6) the proceeds from the foreign trades were transferred back to the United States. Given these connections, Judge Crotty held that “[t]he use of a foreign exchange, which perhaps has lighter or reduced regulation, should not be allowed to exempt the crimes charged in the superseding indictment from prosecution.”
Judge Crotty’s decision provides a mirror image to the reasoning of the Morrison opinion; while Morrison noted that the presumption against extraterritorial application of U.S. laws would be hollow if it was overcome whenever some domestic activity was involved, Judge Crotty’s position is that a U.S. crime should not escape prosecution simply because of the existence of some foreign activity. Judge Crotty noted a “broad range of alleged fraudulent, manipulative and deceptive practices and schemes which were orchestrated from and occurred here in the United States” and stated that “it may be inferred that execution of the foreign trades was ancillary to the fraudulent scheme being conducted here in the United States.”
Judge Crotty’s analysis appears nearly identical to the “conduct and effects” test, which he notes in his decision was the test used by the Morrison district and circuit courts. While the Supreme Court in Morrison affi rmed the lower courts’ dismissal of the action, it did so on the basis of the location of the transactions, not the location of the “conduct and effects.” If, indeed, Judge Crotty was applying the “conduct and effects” test, he did so with the apparent support of the legislature. Since the Morrison decision, Dodd-Frank codifi ed the “conduct and effects” test for securities fraud enforcement actions brought by the government, effectively overruling Morrison in criminal cases. However, Judge Crotty specifi cally noted that Dodd- Frank was not the basis for his decision—“the Court need not pass on the applicability of the recent Congressional amendment to the Securities Exchange Act”—in light of his opinion that U.S. laws were not being applied extraterritorially.
After his conviction, Mandell’s attorney stated to the press that Mandell will appeal the Morrison issue and that Mandell and his counsel “think ultimately that the Second Circuit Court of Appeals and the Supreme Court will say that Morrison applies equally to civil as well as criminal cases.”1
On August 26, 2011, Mandell fi led a motion with the district court for acquittal, or, in the alternative, a new trial, arguing that the foreign nature of the trades at issue were fundamental to the government’s case, not an ancillary matter as argued by the prosecutors. Accordingly, Mandell argues, Morrison precludes the conviction based on these foreign trades.