16 September 2013
On August 30, 2013, the US Court of Appeals for the Second Circuit ruled in United States v. Vilar that the presumption against extraterritoriality applies to federal criminal prosecutions under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act).1 The Second Circuit’s decision addressed some of the questions left unanswered in the US Supreme Court’s 2010 decision in Morrison v. National Australia Bank.
Federal statutes are presumed not to have effect outside of the territorial jurisdiction of the United States absent a clearly expressed affirmative intent by Congress.2 In Morrison, the Supreme Court invoked this so-called presumption against extraterritoriality to hold that civil actions for securities fraud under Section 10(b) of the Exchange Act cannot be based on foreign conduct, but rather must concern “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.”3 Because Morrison involved a private civil action, however, the Court did not consider whether or how the presumption against extraterritoriality would apply in enforcement actions brought by the Securities and Exchange Commission or in criminal prosecutions brought by the Department of Justice.4
In Vilar, the Second Circuit addressed whether the presumption against extraterritoriality extended to criminal prosecutions under Section 10(b). The Second Circuit concluded that the presumption applied regardless of whether the underlying case was civil or criminal. Nonetheless, it affirmed the defendants’ convictions upon finding that the transactions in question were based at least in part on domestic conduct. Thus, while the defendants won the threshold question of whether Section 10(b) applies to foreign conduct, they lost the issue as to whether their conduct could serve to support their convictions.
The underlying prosecution arose out of a dot-com-era securities fraud. The defendants were convicted of defrauding clients by lying about how clients’ funds would be invested. In addition, the defendants were convicted for using an unlicensed Small Business Investment Company account to transfer client funds into their personal accounts.5 On appeal, the defendants argued that their convictions could not stand in light of the presumption against extraterritoriality because their criminal conduct took place entirely offshore.
Relying on Morrison and United States v. Bowman, a Supreme Court case from 1922, the Second Circuit reasoned that the presumption against extraterritoriality applied to all statutes, civil or criminal, unless the statute was designed to protect the government’s right to defend itself.6 Concluding that Section 10(b) was designed to protect private individuals and their property, and not the government’s interest in defending itself from fraud or obstruction, the court found that the presumption against extraterritoriality applied.7
Notably, the Second Circuit rejected the government’s assertion that Section 10(b) or Rule 10b-5 should be interpreted differently in the criminal and civil contexts in order to permit extraterritorial application in the criminal context.8 The court noted that accepting the government’s argument “would establish the dangerous principle that judges can give the same statutory text different meanings in different cases.”9
Having invoked the presumption against extraterritoriality, the Second Circuit then went on to consider whether the defendants’ convictions were based on domestic or foreign conduct. The court had little difficulty concluding that the conduct was, in fact, domestic. The court noted that several aspects of the criminal conduct took place in New York or Puerto Rico, such as meetings, correspondence, the exchange of money and contract formation.
Vilar’s importance to future securities fraud cases is uncertain. In Section 929P of the Dodd-Frank Act, which was enacted after, and thus not applicable to the conduct at issue in, Vilar, Congress seemingly attempted to limit Morrison to private civil securities actions, but it did so by granting federal courts jurisdiction to hear criminal and SEC enforcement actions based on foreign conduct. But Morrison did not involve jurisdictional issues; the Supreme Court held that the Exchange Act did not apply to foreign conduct. As a result, it is not clear whether Congress’ action in passing Section 929P restored the pre-Morrison “conduct and effects” test or whether the extraterritorial application of the antifraud provisions of the Exchange Act remains barred by Morrison’s presumption against extraterritoriality.10
Vilar’s most durable legacy may be its impact on how courts analyze the extraterritorial reach of criminal laws generally. For example, in the wake of Vilar, the presumption against extraterritoriality may be applied to the Bank Secrecy Act to prohibit criminal prosecution of violations that occur entirely abroad. Just as Morrison energized the presumption against extraterritoriality in the civil context, Vilar may have opened a new frontier of statute-by-statute litigation concerning the extraterritorial application of criminal statutes.
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1 United States v. Vilar, No. 10-521-CR, 2013 WL 4608948, at *1 (2d Cir, Aug. 30, 2013).
2 Morrison v. National Australia Bank Ltd., 130 S.Ct. 2869, 2879-80 (2010).
3 Id. at 2884.
4 Vilar, 2013 WL 4608948 at *1.
5 Id. at *2-3.
6 Id. at *5-6.
6 Vilar, 2013 WL 4608948 at *1.
7 Id. at *6-7 (quoting Bowman, 260 US. at 98).
8 Id. at *7-8.
9 Id. (quoting Clark v. Martinez, 543 U.S. 371, 386 (2005)).
10 See SEC v. Chicago Convention Center, LLC, No. 13 C 982, 2013 WL 4012638, at *5 (N.D.Ill. Aug. 6, 2013).