United States v. Vilar: new limits on extraterritorial securities enforcement

by DLA Piper
Contact

In  United States v. Vilar, the Second Circuit Court of Appeals has offered another data point in the federal courts’ ongoing efforts to define the extraterritorial reach of the federal securities laws. 

Although we expect regulators to argue that Vilar has limited application, the Second Circuit has, in fact, curtailed efforts to extend criminal liability to the extraterritorial purchase or sale of securities.

In Vilar, decided on August 30, the Second Circuit applied the “presumption against extraterritoriality” to claims of criminal liability under Section 10(b) of the Securities Exchange Act.  In doing so, the Second Circuit expressly extended the Supreme Court’s 2010 decision in Morrison v. National Australia Bank Ltd. – a civil case in which the Court barred federal fraud suits by foreign investors over foreign-traded securities – to criminal actions brought by the Department of Justice. 

Rejecting the government’s argument that Morrison only applies to civil actions, the Second Circuit concluded that criminal and civil defendants alike can only be found liable under Section 10(b) if the fraud occurred in connection with “a security listed on a U.S. exchange” or with “a security purchased or sold in the United States.”

Because none of the securities at issue in Vilar were listed on an American exchange, the Second Circuit followed Morrison and questioned whether the securities transactions constituted a domestic purchase or sale of securities.  The Second Circuit held that a securities transaction is considered domestic “when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed in the United States.”  (See the decision here).  The Second Circuit concluded that, because certain alleged victims entered into and renewed agreements in Puerto Rico and New York, a jury would have found that the defendants engaged in fraud in connection with a domestic purchase or sale of securities and upheld the defendants’ convictions.  By focusing on the nature of the securities transaction, the Second Circuit’s analysis in Vilar materially limits the conduct that is susceptible to criminal liability.

Questions remain re Morrison, Dodd-Frank

An open question remains, however, on the relationship of Morrison and its progeny, now including Vilar, and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Enacted after the Supreme Court’s decision in Morrison, certain provisions of Dodd-Frank amend the Exchange Act (and other securities laws) to expressly acknowledge the federal courts’ extraterritorial reach when enforcing the federal securities laws.  The Exchange Act now provides that the courts have jurisdiction over actions by the SEC or DOJ involving “(1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.”  15 U.S.C. § 78aa(b).

The government did not invoke this provision of Dodd-Frank in Vilar – presumably because there was no plausible argument for its retroactive application.  Going forward, while we can expect the government to argue that Dodd-Frank reestablishes the extraterritorial reach that Morrison and Vilar have curtailed, the chances of success appear slim because Dodd-Frank does nothing to actually expand the geographic reach of the substantive provisions of the Exchange Act.  Rather, Dodd-Frank’s extraterritorial jurisdiction provision exclusively focuses on the federal courts’ jurisdiction.

A coming test case?

SEC v. Cañas Maillard, a civil enforcement action filed in the Southern District of New York in July, may present a test case for the government to attempt to assert its extraterritorial muscle in reliance on Dodd-Frank.1  In Cañas Maillard, the SEC has accused two Spanish citizens – one a high-ranking official at a Spanish bank, the other a close friend of the bank official – of committing insider trading in the securities of a Canadian company listed on the NYSE.

The SEC alleges that the bank official learned that a prospective buyer retained his bank to help underwrite the buyer’s confidential proposed acquisition of the Canadian target company.  After learning that his bank had approved financing for the transaction, the bank official purchased the equivalent of 30,000 shares of the target company’s stock through a derivative product (which the SEC describes as “highly-leveraged securities”) available in Europe known as contracts-for-difference (CFDs).  The bank official also informed his friend about the acquisition and advised him to trade, resulting in the friend’s purchase of 1,393 NYSE-traded shares of the target company.

The predicate for the SEC’s assertion of jurisdiction is the target company’s NYSE listing and the fact that some of the trades at issue occurred on the NYSE.  Although the CFD trades did not occur in the United States, the SEC alleges that the CFDs were purchased through the Luxembourg-based affiliate of an American bank and that the bank purchased an equivalent amount of the underlying NYSE-traded shares to hedge its risk on the CFDs.  While the SEC therefore appears primed to assert that the federal securities laws reach the CFD trades, following the analysis that the Second Circuit applied in Vilar, the CFD trades, which did not obligate the purchaser with regard to a US security, should be deemed foreign securities traded on a foreign exchange.  Under Morrison and its progeny, the SEC should not be permitted to base liability on those foreign securities, and the bank official’s liability should be limited to tipping material non-public information to his friend.

As of the date of this alert, the defendants in Cañas Maillard have not responded to the SEC’s allegations, but DLA Piper will continue to monitor the case for further developments.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© DLA Piper | Attorney Advertising

Written by:

DLA Piper
Contact
more
less

DLA Piper on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!