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From Securities Regulation Daily, August 7, 2013

Construing Morrison, federal judge finds that SEC sufficiently alleged domestic fraudulent transaction

By Jim Hamilton, J.D., LL.M.

Referencing the U.S. Supreme Court’s Morrison holding on the extraterritorial reach of the SEC antifraud rule, a federal district judge ruled that an SEC action alleging a large scale fraudulent investment scheme targeting Chinese nationals passed muster under either the pre-Morrison conducts and effects test, which the Dodd-Frank Act may have revived, or the transactional test set forth in Morrison. The court had occasion to extensively examine the SEC’s contention that the transactional test was not the proper inquiry because Dodd-Frank superseded Morrison and revived the conduct and effects test for SEC actions. However, ultimately, the district court did not have to answer what it termed a “complicated question” because the SEC stated a claim under either inquiry. (SEC v. A Chicago Convention Center, LLC, August 6, 2013, St. Eve, A.).

Conduct and effects test. The conduct test is whether the wrongful conduct occurred in the U.S. while the effects test is whether the wrongful conduct had a substantial effect in the U.S. or upon a U.S. citizen. The SEC alleged facts that placed the conduct or the effects of the conduct within the U.S., that investors were solicited to invest in an Illinois company with the lure or prospect of gaining U.S. residency.

Transaction test. In addition, the SEC alleged a claim under the Morrison transaction test as interpreted by the Second Circuit, which requires that a plaintiff allege facts suggesting that irrevocable liability was incurred or title was transferred within the U.S. Here, the SEC alleged that the offering terms instructed potential investors to execute a subscription agreement and to send it to defendants in the United States. The SEC also said that the offering instructed investors to wire funds to the defendants’ U.S.-based escrow agent. Further, the investors were bound only if the subscription agreement was accepted and countersigned by the managing member, an act that would occur domestically. Thus, the defendants’ motion to dismiss was denied.

Impact of Dodd-Frank Act. In Morrison, the Supreme Court held that, when a statute lacks explicit congressional intent to grant extraterritorial scope, a presumption against extraterritoriality applies. The Supreme Court further concluded the Exchange Act lacked such explicit language and, therefore, applied a transactional test to determine if the Exchange Act reached the conduct at issue. A question confronting the court here, which it discussed but did not have to answer in deciding the case, was whether Section 929P(b) of Dodd-Frank evidences a congressional intent to overcome the presumption against extraterritoriality expressed in Morrison, which stemmed from the fact that the Exchange Act lacked a clear statement of extraterritorial effect and to revive the pre-Morrison conducts and effects test. An ancillary question was whether Section 929P(b) is jurisdictional or substantive.

The plain language of Section 929P(b) and its placement in the jurisdictional section of the Exchange Act indicate that it may be jurisdictional, noted the court, however this interpretation could create superfluity or contradict the legislative intent. Because the Supreme Court in Morrison concluded that federal courts already had the power to hear SEC enforcement cases involving foreign transactions, reasoned the court, interpreting Section 929P(b) as jurisdictional would, therefore, mean that Congress gave the SEC no more power or enforcement capability than it had before Morrison. Thus, if Section 929P(b) is purely jurisdictional, it would be redundant and superfluous because other provisions already granted federal courts extraterritorial jurisdiction

The case is Civil Action No. 13 C 982.

Attorneys: Patrick M. Bryan for SEC. Scott T. Mendeloff (Greenberg Traurig, LLP) for Intercontinental Regional Center Trust of Chicago, LLC, A Chicago Convention Center, LLC and Anshoo R. Sethi.

Companies: A Chicago Convention Center, LLC; Intercontinental Regional Center Trust of Chicago, LLC

MainStory: TopStory FraudManipulation IllinoisNews

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