Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

February 19, 2013

Stock Sales Were Not Domestic Transactions Under Morrison

By Rodney F. Tonkovic, J.D.

Stock transactions were not domestic sales, a magistrate judge concluded in granting a motion for partial summary judgment. "In the end," the court stated, "this was a sale of shares in a foreign company to foreign investors" (SEC v. Benger, February 15, 2013, Cole, J.).

The SEC claimed that the defendants engaged in an international boiler room scheme that took in approximately $44 million from penny stock sales to foreign purchasers. The defendants (the distribution agents) are all Illinois citizens operating out of Chicago who entered into distribution agreements with certain issuers of stock to sell shares to foreign investors. The sales were made by foreign sales agents in the countries where the prospective purchasers lived. At issue were sales of shares in an issuer formed under the laws of the sovereign country of St. Vincent and Grenadines; the shares were never registered, traded, or quoted in the U.S.

The Commission asserted that the defendants skimmed 60 percent as commissions for themselves and the foreign boiler room operators. The stock purchase agreements seen by the investors represented that there were no commissions and that there was only a nominal transaction fee. The defendants allegedly concealed the extent of their involvement and claimed ignorance of the high-pressure sales tactics and misrepresentations used by the boiler room operators.

The defendants argued that the "issuers of the stock were foreign, the investors were foreign, and the stock sales transactions were foreign." Therefore, the Exchange Act fraud counts against them would not survive Morrison v. National Australia Bank Ltd.'s holding that Section 10(b) does not apply extraterritorially, the defendants contended. The SEC argued that, unlike in Morrison, all the defendant movants were in the U.S. and all of their conduct, which aided and abetted the fraud, and without which the fraud could not have succeeded, occurred in the U.S.

The court disagreed, however, stating that "the question under Morrison is where the stock purchase transaction occurred, not the locus of the bulk of the fraudulent activity." Elaborating, the court wrote that, while there was a lot of activity in the U.S., the only domestic activity pertaining to the transaction was the movement of documents between escrow agents, and there was no suggestion that the escrow agents had any authority to bind the issuer or transfer or accept title. In sum, the court remarked that only a "fairly tortured and ultimately faulty analysis" could lead one to the conclusion that the sales at issue were domestic.

Attorneys: Jonathan Stephen Polish for SEC. Howard J. Stein for Stefan H. Benger and SHB Capital, Inc.

Companies: SHB Capital, Inc.

The case is No. 09 C 676.

LitigationEnforcement: FraudManipulation IllinoisNews

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.


A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.