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Can the SEC Bring Enforcement Actions Against International Schemes?

The SEC’s International Reach Against Fraudsters

Yes. The antifraud provisions of the federal securities laws apply extraterritorially:

  1. When the wrongful conduct occurred in the United States; or

  2. When the conduct outside the United States had a substantial effect in the United States or upon United States citizens.

This is known as the “conduct-and-effects” test. Courts have applied this test for over 40 years notwithstanding the fact that the federal securities acts of 1933 and 1934 did not address the extraterritorial reach of the antifraud provisions of those statutes. On June 24, 2010, the Supreme Court of the United States held in Morrison v. Nat’l Australia Bank Ltd. that the lower courts were wrong to apply the conduct-and-effects test. Then, less than a month after the Morrison decision, Congress enacted the Dodd-Frank Act, which amended the jurisdictional provisions of the federal securities acts to clearly indicate that the anti-fraud provisions apply extraterritorially when the statutory conduct-and-effects test is met.

The Conduct-and-Effects Test

Through the Dodd-Frank Act, Congress amended the federal securities laws to include the conduct-and-effects test:

The district courts of the United States and the United States courts of any Territory shall have jurisdiction of an action or proceeding brought or instituted by the Commission or the United States alleging a violation of section 77q(a) of this title [Section 17(a) of the 1933 Securities 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. See 15 U.S.C. § 77v(c).

SEC Enforcement Action Against International Ponzi Scheme

On January 24, 2019, in SEC v. Scoville, the United States Court of Appeals for the Tenth Circuit held (see opinion below) that Congress, in enacting the Dodd-Frank Act’s amendments to the jurisdictional provisions of the securities laws, “undoubtedly intended that the substantive antifraud provisions should apply extraterritorially when the statutory conduct-and-effects test is satisfied.” The Tenth Circuit proceeded to apply the test to a $207 million international Ponzi scheme, which had 90% of its customers outside the United States. The Ponzi scheme involved the sales of investment contracts by Traffic Monsoon, LLC, whose sole owner and member is Charles Scoville. The Tenth Circuit found that the Defendant’s actions satisfied the conduct-and-effects test because:

  1. The Defendant’s company was located in the United States.

  2. Through his company, the Defendant created and promoted the investments over the internet while residing the United States.

  3. The servers housing the company’s website were physically located in the United States.

The Tenth Circuit is the first Circuit Court to address the scope of the SEC’s extraterritorial enforcement authority under the Dodd-Frank Act. The opinion highlights the SEC’s expansive international reach against fraudsters

For additional analysis of the Tenth Circuit’s opinion, see a recent article in the Harvard Law School Forum on Corporate Governance and Financial Regulation, A New Era of Extraterritorial SEC Enforcement Actions.

© 2020 Zuckerman Law

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About this Author

Jason Zuckerman, Whistleblower Litigation Attorney, Washington DC  Law Firm
Principal

Described by the National Law Journal as a “leading whistleblower attorney,” Jason Zuckerman litigates whistleblowe r retaliation, whistleblower rewards, wrongful discharge, and other employment-related claims. His practice focuses on representing senior executives and senior professionals in high-...

(202) 262-8959
Matthew Stock, CPA, Auditor, Zuckerman Law Firm
Certified Public Accountant

Matthew Stock is the Director of the Whistleblower Rewards Practice at Zuckerman Law. He is an attorney, Certified Public Accountant, Certified Fraud Examiner and former KPMG external auditor. Mr. Stock has audited a broad range of industries, both domestically and internationally, including large public companies and financial institutions. As an auditor, Mr. Stock developed an expertise in financial statement analysis and fraud recognition.

At Zuckerman Law, Mr. Stock leverages his experience as an attorney, CPA, CFE and external auditor to assist whistleblowers investigate and disclose complex financial frauds to the government. His practice focuses on representing whistleblowers in rewards cases at the SECCFTCDOJ and IRS. In addition, Mr. Stock assists whistleblowers in Sarbanes-Oxley whistleblower retaliation cases, analyzing a wide range of accounting issues, including financial statement fraudinadequate internal controls, and issuer disclosure violations.

202-930-5901