Securities Regulation Daily Cert petition seeks to resolve questions left open by Morrison
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Friday, April 29, 2016

Cert petition seeks to resolve questions left open by Morrison

By Rodney F. Tonkovic, J.D.

A petition for certiorari has been filed asking the Supreme Court to consider the issue of jurisdiction over cases involving foreign securities businesses. The petitioners argue that the Second Circuit's finding that the foreign transactions at issue were domestic is inconsistent with Morrison and ignores the Congressional directive against the extraterritorial application of the securities laws (Amerindo Investment Advisors, Inc. v. SEC, March 29, 2016).

Questions presented. Exchange Act Section 30(b) specifies that the Exchange Act does not apply to any person transacting business in securities without the jurisdiction of the United States. The petitioners ask whether Section 30(b) should bar an action for securities fraud where defendants issued and sold private securities through their company domiciled and conducted abroad, or Section 30(b) is inapplicable because there are domestic transactions when purchasers who chose to invest offshore committed to purchase while on U.S. soil. A second question concerns whether the physical presence in the United States of a purchaser of a foreign security from a foreign company, fortuitous or purposeful – even one who created offshore entities to purchase and hold such securities – renders the transaction "domestic" and subjects the seller to enforcement of disclosure standards and remedies under United States laws.

Domestic transactions. The petitioners, Gary Tanaka and Alberto Vilar, were convicted of fraud in a criminal action in connection with the sale of Panamanian-issued securities via a London-based business. The sales were made through their Panamanian-incorporated business. On appeal, a Second Circuit panel, finding that Morrison applied to criminal cases, held that there was no plain error in the convictions with respect to the territoriality of their conduct, explaining in a footnote that the domestic nature of a transaction is determined by the physical location of the purchaser or seller when they commit themselves to the investment decision.

Following the Second Circuit’s decision in the criminal action, the SEC moved for reconsideration in the parallel civil action. Reversing its previous decision, the district court determined that the conduct fell within the scope of the federal securities laws, concluding that the fraudulent sales did involve a domestic transaction and granting summary judgment in favor of the Commission. In this case, the court found that the purchaser lived in Puerto Rico at all relevant times, that she received information about the fraudulent securities by mail in Puerto Rico, and that her agreement to purchase the securities was faxed from a Puerto Rican phone number.

The Second Circuit then affirmed by summary order the district court's judgment, agreeing that the transactions at issue fell under the federal securities laws. The court rejected an argument based on Section 30(b), and based on Absolute Activist and Vilar concluded that the transactions were domestic in character because some of the purchasers had committed to buy while on U.S. soil, so irrevocable liability was incurred in the United States.

Section 30(b). The petition argued that the Second Circuit's finding that the foreign transactions at issue were domestic is inconsistent with Morrison and ignores the congressional directive against the extraterritorial application of the securities laws. The petition maintains that the factors “guiding” litigation in subsequent Second Circuit decisions mean one thing in one case, and the opposite in the next. This situation is reminiscent of the "conduct" and "effects" test, the petition says.

Continuing, the petitioners note that other circuits have adopted the Second Circuit's test, opening the door to extensive litigation about the facts that focus on irrevocable liability rather than Morrison's transactional analysis. Further, the Absolute Activist irrevocable liability test is inconsistent with the test applied in the Eleventh Circuit in Quail Cruises Ship Management Ltd. v. Agencia de Viagens CVC Tur Limitada which, the petition says, adopted a standard focusing on the terms of the parties' agreement to determine when and where a securities transaction closes. In other words, liability should be determined by the location of the charged sale, not simply by the location of the buyer, the petitioners argue. According to the petition, the Second Circuit ignores not only where the underlying securities were traded but also, in this case, that the private securities at issue were neither marketed nor traded on the secondary market.

Finally, the petitioners assert that six years after Morrison was decided, there is still no uniform or workable standard to determine which securities transactions are domestic and which are foreign. As a result, participants in the international securities industry cannot reliably ascertain whether their transactions are domestic or foreign. The petitioners believe that this case is the perfect opportunity to resolve the questions left open in Morrison: when is a securities transaction involving a private security created and sold by a foreign entity subject to SEC enforcement, and whether U.S. resources should be spent in the service of offshore investors by way of criminal and civil enforcement proceedings.

The petition is No. 15-1320.

Attorneys: Jane Simkin Smith (Jane Simkin Smith, Attorney at Law) for Amerindo Investment Advisors Inc., Amerindo Advisors UK Ltd. and Amerindo Management Inc. Donald B. Verrilli Jr., U.S. Department of Justice, for the SEC.

Companies: Amerindo Investment Advisors Inc.; Amerindo Advisors UK Ltd.; Amerindo Management Inc.

MainStory: TopStory Enforcement FraudManipulation

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