Unclear Words, Clear Intent: Tenth Circuit Revives Extraterritorial Application of Federal Securities Laws
Recently, in SEC v. Scoville, the U.S. Court of Appeals for the Tenth Circuit held that the Dodd-Frank Act authorized extraterritorial enforcement of federal securities laws’ antifraud provisions by the government. This case is particularly notable in that it is the first circuit court case to clarify the ambiguous relationship between the Supreme Court’s rejection of extraterritorial application in Morrison v. National Australia Bank and the Dodd-Frank Act Section 929P(b)’s embrace of extraterritorial application.
Until 2010, courts around the country, following the Second Circuit’s lead, typically used the “conduct and effects test” in determining extraterritorial application of the antifraud provisions of the federal securities laws. Under this test, if the fraudulent conduct occurred in the U.S. or had substantial effect in the U.S. or upon American citizens, the antifraud provisions applied.
In June 2010, in Morrison v. National Australia Bank, the Supreme Court expressly rejected this conduct and effects test. Holding that the presumption against extraterritoriality applied, the Supreme Court held that (1) whether the antifraud provisions apply extraterritorially is not a subject matter jurisdiction question but a merits question and (2) the antifraud provisions apply only to “transactions in securities listed on domestic exchanges and domestic transactions in other securities,” adopting the so-called “transaction test.”
Less than a month later, in July 2010, Section 929P(b) of the Dodd-Frank Act appeared to partially override Morrison. It provided that the U.S. federal courts “have jurisdiction” over SEC and Justice Department actions alleging violation of the antifraud provisions of the federal securities laws, as long as the violation involves “conduct within the United States that constitutes significant steps in furtherance of the violation” or “conduct occurring outside the United States that has a foreseeable substantial effect within the United States.” Thus, at least for SEC and Justice Department actions, the Dodd-Frank Act appeared to revive the conduct and effects test.
Confusion between Morrison and the Dodd-Frank Act
However, what appeared to be a straightforward legislative override turned out not to be so straightforward. Since Morrison specified that the question of extraterritorial application of the federal securities laws is not one of subject matter jurisdiction but one of merits, and Section 929P(b) only touched on “jurisdiction,” it was unclear whether Section 929P(b) actually overrides Morrison.
SEC v. Scoville
In SEC v. Scoville, the Tenth Circuit clarified this relationship between Morrison and Section 929P(b) of the Dodd-Frank Act and held that Section 929P(b) does indeed revive the conduct and effects test. The Tenth Circuit held that while the words used in Section 929P(b) may be less than precise, the Congressional intent for extraterritorial application is clear. The court attributed the wording of Section 929P(b) to the fact that Morrison (and its holding on the merits question vs. the subject matter jurisdiction question) was issued only days before the final version of the Dodd-Frank Act.
Scoville thus clarifies that the landscape of extraterritorial application of the antifraud provisions is now a bifurcated one. For private actions, the transaction test still applies. On the other hand, for actions brought by the SEC or the Justice Department, the world is mostly back to early 2010, pre-Morrison, with a tweaked version of conduct and effects test.