Dismissal of $44M International Boiler Room Scam Claims Raises Issue of SEC Extraterritorial Enforcement Authority

Pointing to the US Supreme Court’s ruling in Morrison v. National Australia Bank Ltd., the U.S. District Court for the Northern District of Illinois dismissed the SEC’s allegations that a group of entities and persons violated broker-dealer registration requirements in an alleged $44 million international boiler room scam. The broker fraud case is SEC v. Benger.

Claiming the transactions were extraterritorial and not within the scope of the regulator’s reach, defendants sought summary judgment even though a lot of the allegedly fraudulent activity is said to have happened in the US. The district court, however, found that investors became irrevocably bound in their countries upon submission of buying offers even though they turned those offers in to escrow agents in this country. Moreover, the issuer became irrevocably bound in Brazil when accepting the purchase offers, and when the sale went through the titled passed either there or the countries where investors got the stock certificates regardless that the agents that served as middlemen were located here.

In Morrison, the Supreme Court determined that the 1934 Securities Exchange Act’s key federal securities antifraud provision is only applicable to securities transactions that can either be found on U.S. exchanges or that took place domestically. Following that decision, and seeking to give back exterritorial reach to both Justice Department and the SEC, Congress issued the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 929P, which gives federal courts jurisdiction over enforcement actions involving conduct that took place in the US that played a part in significantly furthering a violation/behavior taking place abroad that will have a likely effect domestically.

The Commission believes that, in effect, Dodd-Frank, overturned Morrison.
Speaking at a DC panel-hosted cross-border securities litigation panel, the SEC’s Office of International Affairs Director Jacobs said that Morrison’s transactional test doesn’t succeed in reducing the regulator ability to go after federal securities law cross border violations. She said that the agency is still deciding what to do in the wake of the district court’s ruling in Benger and that the regulator has a full docket of investigations that it is continuing to move forward on.

Meantime, some commenters have suggested that Dodd-Frank’s efforts have been incomplete. Private litigants have had problems with Morrison’s test, with federal district courts turning down plaintiffs’ efforts to file securities actions involving non-US investments. However, in an effort to get around Morrison, big institutional investors have brought their non-US securities cases to state courts instead, as well as to foreign courts. They have also attempted to file related lawsuits involving their American Depositary Receipts.

If you are an institutional investor that has suffered losses because of securities fraud, please contact our stockbroker fraud law firm right away.

Morrison v. National Australia Bank Ltd. (PDF)

SEC v. Benger (PDF)

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New York Fed Bailed Out Bank of America Over Mortgage-Backed Securities Sold to AIG, Institutional Investor Securities Blog, February 20, 2013