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(Article from Securities Law Alert, January 2019) 

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On January 24, 2019, the Tenth Circuit held that the conduct and effects tests codified in Section 929P(b) of the Dodd-Frank Act govern the extraterritorial reach of SEC enforcement actions brought under Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act. SEC v. Scoville, 2019 WL 302867 (10th Cir. 2019) (Ebel, J.). Enacted less than a month after the Supreme Court’s decision in Morrison v. National Australia Bank, 561 U.S. 247 (2010), Section 929P(b) amended the Exchange Act and the Securities Act to provide that district courts have jurisdiction over extraterritorial SEC enforcement actions brought under Section 10(b) of the Exchange Act or Section 17(a) of the Securities Act if the conduct and effects tests are met.[1]

Prior to the Morrison decision, courts applied the conduct and effects tests to determine whether they had jurisdiction to hear extraterritorial securities fraud actions. The Morrison Court found that the extraterritorial reach of Section 10(b) is a merits question rather than a jurisdictional question. The Morrison Court determined that Section 10(b) does not apply to extraterritorial securities fraud actions, and repudiated the conduct and effects tests. The Court instead held that Section 10(b) applies only to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.”

On March 28, 2017, the District of Utah found that Morrison does not limit the extraterritorial reach of SEC enforcement actions brought under Sections 10(b) and/or 17(a). SEC v. Traffic Monsoon, 245 F. Supp. 3d 1275 (D. Utah 2017). The court stated that Section 929P(b) reflected “a congressional intent that, in actions brought by the SEC, Sections 10(b) and 17(a) should be applied to extraterritorial transactions to the extent that the conduct and effects test can be satisfied.” The court acknowledged that “the plain language of Section 929P(b) did not explicitly overturn the core holding of Morrison.” However, the court assumed that this omission was due to the fact that “Morrison was issued too late in the legislative process to reasonably permit Congress to react to it.” The court also deemed it immaterial that Section 929P(b) addressed only the jurisdiction of federal courts to hear extraterritorial SEC securities fraud enforcement actions, rather than the substantive reach of Sections 10(b) and 17(a). The court reasoned that “the prevailing view of the law prior to Morrison was that satisfying the conduct and effects test was essential to the jurisdiction of a court to adjudicate a dispute arising under Section 10(b).” The court explained that it did “not presume that Congress intended Section 929P(b) to be a nullity.”

In Scoville,  the Tenth Circuit affirmed the District of Utah’s decision. The Tenth Circuit found it “clear that Congress affirmatively and unmistakably directed that” the antifraud provisions of the securities laws “apply extraterritorially in an enforcement action.” Although Section 929P(b) addressed “the jurisdictional provisions of the securities acts,” the Tenth Circuit determined that “Congress undoubtedly intended that the substantive antifraud provisions should apply extraterritorially when the statutory conduct-and-effects test is satisfied.” The Tenth Circuit based this conclusion on “the context and historical background surrounding Congress’s enactment of those amendments,” including the title of Section 929P, Strengthening Enforcement by the Commission.

Applying Section 929P(b) to the case before it, the Tenth Circuit found that the SEC could bring an enforcement action under Sections 10(b) and 17(a) because the defendant “conceived and created” the relevant entity in the United States, and “created and promoted” the relevant investments while residing in the United States. The court also noted that the servers hosting the website of the entity at issue were located in the United States.