Northern District of Illinois Applies Morrison v. National Australia Bank Ltd. in Ruling Against SEC

The Northern District of Illinois recently handed down a decision that further interpreted the contours of the Supreme Court’s 2010 decision in Morrison v. National Australia Bank Ltd., which held that Section 10(b) of the Exchange Act is not extraterritorial. In Securities and Exchange Commission v. Benger, Magistrate Judge Jeffrey Cole granted a motion for partial summary judgment as to some claims against the defendants because the stock sales at issue were not “domestic transactions” as defined by Morrison.

In Benger, the SEC alleged that the defendants – a group of distribution and escrow agents based in the United States (the “Distribution Agents”) – had violated Section 10(b) by engaging in an international “boiler room” scheme in which they took a 60 percent commission from foreign investors’ proceeds without disclosing such commissions to the investors. The Distribution Agents retained sales agents in foreign countries to make cold calls primarily to the elderly in those countries, during which they employed high-pressure sales tactics, fraudulent misrepresentations and false identities to secure sales. One of the stocks being sold was Integrated Biodiesel Industries, Ltd. (IBI), which accounted for approximately 35 percent of the $44 million yielded in the scheme. IBI is a St. Vincent and Grenadines company with its principal place of business in Brazil.

The defendants moved for summary judgment as to the claims relating to IBI, arguing that Section 10(b) did not apply because “the issuers of the stock were foreign, the investors were foreign, and the stock sales transactions were foreign.” The SEC, however, argued that the Distribution Agents were in the United States while aiding and abetting the fraud by putting together stock purchase agreements (SPAs) and receiving and distributing the proceeds.

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