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Legal Update

Southern District of New York Limits Application of Morrison in Criminal Case

26 July 2011
Mayer Brown Legal Update

On March 16, 2011, Judge Paul A. Crotty of the District Court of the Southern District of New York rejected US defendants’ motion to dismiss an indictment based on Morrison, finding that the securities, mail and wire fraud allegations did not require extraterritorial application of US laws because the crimes were ultimately committed in the United States. U.S. v. Mandell, Case No. 09-0662 (S.D.N.Y. Mar. 16, 2011).

While most lower courts deciding cases under Morrison have focused on the true territorial location of the transactions at issue—as required by Morrison—Judge Crotty focused on the defendants’ conduct and the location of the parties involved. In Morrison, the US Supreme Court held that Section 10(b) of the Securities Exchange Act of 1934 (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.”

The crux of the indictment in Mandell involved allegations that Ross Mandell and Adam Harrington fraudulently secured investor money and used it for their own benefits. Specifically, Mandell, used Thornwater Company (Thornwater) to solicit investors to purchase private placement shares in US companies, though none of the Thornwater ventures resulted in a sale of securities in a public offering. Rather, according to the indictment, Mandell misappropriated the funds into his new company, Sky Capital Holdings (Sky Capital), whose stock was traded on the London Stock Exchange’s Alternative Investment Market (AIM) from 2002 to 2006. With Harrington’s assistance as Mandell’s senior broker, the two defendants artificially inflated market prices of Sky Capital stock, misrepresented its potential for legitimate growth to new investors, and promised high returns in Sky Capital stock while pocketing the proceeds.

Judge Crotty found that most of the alleged conduct occurred domestically: the defendants resided in the United States and organized their companies domestically (except for one UK entity); the defendants’ scheme was orchestrated in the United States and any money generated overseas was transferred to the United States; all investor accounts were maintained at brokerage offices in the United States; and many of the defrauded investors were located in the United States.

Although several of the trades occurred on the London Stock Exchange, Judge Crotty determined that the alleged fraud “deal[t] with a very broad range of alleged fraudulent, manipulative and deceptive practices and schemes,” all of which were “orchestrated from and occurred here in the United States.” In fact, he found that any foreign elements to the scheme were “ancillary” to the defendants’ largely domestic fraud, and those elements “should not be allowed to exempt the crimes charged … from prosecution.”

In other words, while Justice Scalia noted, in Morrison, that “the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case,” Judge Crotty has taken the approach that genuinely domestic fraudulent conduct should not escape prosecution under US laws whenever there exists some foreign activity. He continued that “there is no apparent reason—and certainly no good reason—why the fraudulent and manipulative schemes charged here should not be prosecuted because some trades, which were actually part of the fraudulent and manipulative schemes, were executed on a foreign exchange.”

Judge Crotty also appeared to place significant reliance on those cases holding that “the United States is free to protect its citizens from fraud.” The same logic supported the defendants’ indictment on mail and wire fraud charges. For this principle, the Judge Crotty cited United States v. Bowman, where the Supreme Court held, in the process of reinstating an indictment against a ship’s engineer for planning and executing fraud while at sea, that some statutes “are such that to limit their locus to the strictly territorial jurisdiction would … leave open a large immunity for frauds as easily committed by citizens on the high seas and in foreign countries as at home.”1 In that decision, Chief Justice Taft went on to explain that some statutes’ extraterritorial applicability is self-evident, even absent any clear statement of congressional intent.

The Dodd–Frank Wall Street Reform and Consumer Protection Act overruled Morrison as it applies to cases brought by the United States and the Securities and Exchange Commission, codifying the “conduct” and “effects” tests for government actions based on violations of US securities laws. Although Judge Crotty provided that “the Court need not pass on the applicability of the recent Congressional amendment to the Securities Exchange Act, made in the wake of the Morrison decision,” his analysis is similar to those courts that have applied the “conduct” and “effects” tests in similar matters.

The Mandell case is currently being tried in New York federal court, and jury deliberations are scheduled to take place in late July.

For more information about the Mandall decision, Morrison, or any other matter raised in this Legal Update, please contact , , , or .

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