Second Circuit Endorses Extraterritorial Limitation for Criminal Securities Fraud Prosecutions

by Orrick, Herrington & Sutcliffe LLP

On August 30, 2013, the United States Court of Appeals for the Second Circuit handed down its decision in United States v. Vilar, which unequivocally limits the U.S. government’s ability to use Section 10(b) of the Securities Exchange Act of 1934 in criminal prosecutions involving extraterritorial conduct. No. 10-521-CR (2d Cir. Aug. 30, 2013).  In so doing, the court made clear that the Supreme Court’s territorial limitation on private securities fraud actions, originally set forth in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), also applies to criminal prosecutions.  While the Dodd-Frank Act may in the future affect the scope and longevity of the Vilar decision, at least for the time being, Vilar makes it all the more difficult for U.S. prosecutors to pursue securities fraud where the purchase or sale of securities occurred outside the U.S.

The Morrison Decision

In Morrison, the Supreme Court rejected the extraterritorial application of Section 10(b) and Rule 10b-5 in a case involving only private parties.  The Court put an end to the widely used "conduct" and "effects" tests, which focused on where the wrongful conduct occurred and whether it had a substantial effect on the U.S. or its citizens.  Id. at 2879-81; Vilar, slip op. at 11.  Instead, Morrison held that Section 10(b) reaches conduct "only in connection with 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." 130 S. Ct. at 2888.  Using the so-called transactional test, the Court, in affirming dismissal of the complaint at issue, focused on the fact that the securities at issue were not listed on a U.S. exchange and "all aspects of the purchases complained of . . . occurred outside the United States."  Id.

The Vilar Decision

While lower courts have applied Morrison to civil enforcement actions, such as those brought by the Securities and Exchange Commission, its applicability to criminal matters had not yet been expressly addressed.  In Vilar, the Second Circuit was definitive: "(1) the presumption against extraterritoriality applies to criminal statutes, and (2) the presumption against extraterritoriality applies to Section 10(b)." Vilar, slip op. at 11-12.  Through its decision, the court sent a clear message: "United States law governs domestically but does not rule the world." Id. at 12 (internal citation omitted).  According to the Vilar court, the securities laws are no exception.  Id. at 15.

According to the Second Circuit, the evidence presented at trial, viewed in the light most favorable to the government, showed that: Alberto Vilar and Gary Alan Tanaka were investment managers and advisers for approximately twenty years.  Id. at 5.  In 1986, they began offering certain clients the opportunity to invest in Guaranteed Fixed Rate Deposit Accounts.  Id.  According to Vilar and Tanaka, most of the funds would be invested in high-quality deposits with "guaranteed" rates of return and the rest would be invested in "emerging growth" stocks.  Id. at 5.  Contrary to their promise, Vilar and Tanaka allegedly invested all of the capital in technology and biotechnology stocks; these investors lost millions of dollars when the dot-com bubble burst.  Id. at 6.  In the wake of the loss, Vilar and Tanaka allegedly offered a false investment opportunity to a long-standing client.  Id.  Vilar and Tanaka actually used the client’s funds for their own personal expenses, including repaying a victim of their previous investment scheme, making a mortgage payment, and donating to a charity. Id. at 6-7.  The client ultimately reported Vilar and Tanaka to the SEC, which brought a civil enforcement action in 2005.  See SEC v. Amerindo Inv. Advisors, Inc., No. 05-5231, 2013 WL1385013 (S.D.N.Y. filed June 1, 2005); Vilar, slip op. at 7.

The Department of Justice followed suit and charged Vilar and Tanaka with a number of crimes, including securities fraud in violation of Section 10(b) and Rule 10b-5. See Vilar, slip op. at 7.  While Vilar was convicted on all counts and Tanaka only on some, both were convicted of securities fraud in 2008 and sentenced in 2010. Id. at 7-8.  On appeal, Vilar and Tanaka argued—among other things—that their conduct was extraterritorial and, therefore, Section 10(b) and Rule 10b-5 did not apply.  Id. at 8.

The Vilar court explained at great length that the fact that a matter is criminal, as opposed to civil, does not impact the Section 10(b) analysis from an extraterritoriality standpoint.  The proper test in both contexts, the Second Circuit held, is the Morrison transactional test.  The Vilar court first reiterated that unless a statute has a "clear indication of an extraterritorial application, it has none."  Vilar, slip op. at 12 (internal citation omitted).  It next made clear that the presumption against extraterritoriality generally applies to criminal statutes, especially statutes proscribing "crimes against private individuals or their property."  Id. at 12-13 (internal citation omitted). The exception lies in instances where a statute’s underlying purpose involves the government’s right to defend itself, a circumstance the court held was not present in Vilar.  Id. at 12-13.  According to the court, Section 10(b) is an example of the rule rather than the exception.  The Vilar court next emphasized that "[a] statute either applies extraterritorially or it does not," and rejected the government’s argument that Section 10(b) should be interpreted differently in criminal matters and civil matters.  Id. at 16.

The Second Circuit ultimately affirmed the convictions on the basis that Vilar and Tanaka had engaged in fraud in connection with a "domestic" purchase or sale of securities. Id. at 52-53. The court explained that a transaction is domestic "when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed within the United States."  Id. at 19 (citing Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 69 (2d Cir. 2012)). Key to the Second Circuit in Vilar was that—although the securities were not listed on an American exchange and the defendants engaged in various foreign conduct in connection with the alleged fraud—one set of victims signed and renewed an agreement with Vilar and Tanaka in Puerto Rico, another did so in New York, and a third executed certain documents necessary for the investment in New York as well. Id. at 19-21.

Although dealing with the same set of facts, the Second Circuit and the district judge charged with the SEC’s parallel civil enforcement differed in their analysis of the evidence against Vilar and Tanaka.  Id. at 20, n. 11.  The district judge, in applying Morrison, granted summary judgment to the SEC as to the New York transaction, but denied summary judgment on the securities fraud claims as to the Puerto Rico transaction because Vilar may have sent an offer letter from abroad and, under Puerto Rico law, a contract agreed to by mail might be considered to be executed at the place where the offer was made.  Vilar, slip op. at 20, n. 11 (citing Amerindo, 2013 WL 1385013, at *6-*8).  The Second Circuit disagreed, holding that "territoriality under Morrison concerns where, physically, the purchaser or seller committed him or herself, not where, as a matter of law, a contract is said to have been executed." Vilar, slip op. at 20, n.11.

The Impact of the Dodd-Frank Act on Section 10(b) and Extraterritoriality

The Vilar court did not consider the Dodd-Frank Act in its decision. Section 929P of the Dodd-Frank Act amended the Exchange Act by adding a new section entitled "Extraterritorial Jurisdiction."  This addition states that federal district courts shall have jurisdiction over actions brought by the SEC or the United States alleging a violation of the antifraud provisions of the Exchange Act 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."  Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 § 929P(b)(1), Pub. L. No. 111-203, 124 Stat. 1376, 1864 (2010) (codified at 15 U.S.C. § 77v(c)).  This new provision was signed into law shortly after the Supreme Court handed down the Morrison decision; the Vilar defendants’ alleged misconduct and criminal convictions predated the Dodd-Frank Act.

Questions abound as to the meaning and scope of Section 929P, which will be worked out in the courts.  One recent example where the parties directly pitted Morrison against the Dodd-Frank provision is SEC. v. Chicago Convention Ctr., LLC, Case No. 13 C 982, 2013 WL 4012638 (N.D. Ill. Aug. 6, 2013).  The defendants argued that, "under the ‘transactional’ test set forth in Morrison, the SEC cannot assert a claim against them because the transactions at issue here were not ‘domestic transactions’"; the SEC, on the other hand, argued that Dodd-Frank "superseded Morrison and revived the previously applied ‘conducts and effects’ test for SEC actions." Id. at *2.  The district court—noting that "whether the ‘transactional’ test or the ‘conducts and effects’ test governs this suit" was "a complicated question"—concluded that it did not need to resolve it "because the SEC has stated a claim under either inquiry." Id.


Despite the frank language of the Vilar decision, much remains to be seen.  The extent to which it will impact other cases and its interplay with Dodd-Frank will be especially interesting.  The petitioners have indicated that they intend to continue fighting their convictions, recently filing a motion requesting an extension of time to file their petition for rehearing.1  In the meantime, the Vilar decision unquestionably circumscribes the pursuit of criminal actions under Section 10(b) and Rule 10b-5 where extraterritorial conduct is involved.

Petitioners requested an additional month (until October 11, 2013) to file their petition for rehearing, apparently intending to argue that, among other things, the underlying indictments should have been dismissed because they did not address the "domestic transaction" element of the criminal charges. See Decl. Supp. Extension for Reh’g and Stay ¶¶ 3-5, Vilar, No. 10-521-CR (2d Cir. Sept. 5, 2013).

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.

© Orrick, Herrington & Sutcliffe LLP | Attorney Advertising

Written by:

Orrick, Herrington & Sutcliffe LLP

Orrick, Herrington & Sutcliffe LLP 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.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

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.


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 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:

- 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.