Authored by Maor Berdicevschi, James K. Goldfarb, Daniel T. Brown, Stephen J. Crimmins*
How far is the reach of the United States Securities and Exchange Commission? Unquestionably, the Commission may enforce U.S. securities laws against Israeli companies whose securities trade in the U.S. But what if none of the company's securities trades there? The Commission claims it may enforce U.S. securities law in that situation, too, so long as alleged misconduct related to the securities transaction occurred in the U.S. or has a foreseeable, substantial effect within the U.S. That claim will be tested before a U.S. appeals court this month, and the court's decision has potentially far-reaching consequences, literally. In this article, we discuss the case, S.E.C. v. Traffic Monsoon, LLC, evaluate the Commission's claim, and suggest how Israeli companies can minimize the risk of adverse Commission scrutiny if the appeals court sides with the Commission.
The main antifraud provision of the U.S. securities law is Rule 10b-5, adopted by the Commission pursuant to Section 10(b) of the Securities Exchange Act of 1934.1 Courts have interpreted Section 10(b) and Rule 10b-5 to provide a private cause of action to investors who lose money when they buy or sell securities in reliance on material misrepresentations or omissions, or a scheme, made recklessly or with an intent to deceive. The Exchange Act also
authorizes the Commission to enforce Section 10(b), and the Securities Act of 1933 authorizes the Commission to enforce Section 17(a), which is similar in scope and language to Rule 10b-5, but allows certain claims to be brought for mere negligence.2
Until the late 1960s, U.S. courts did not exercise subject-matter jurisdiction over Section 10(b) and 17(a) cases involving foreign securities transactions. Under a longstanding prudential principle of statutory construction, the "presumption against extraterritoriality," U.S. laws are presumed to apply only to conduct in the U.S. unless Congress indicates otherwise. The securities laws were silent on the issue.
From the late 1960s, however, the courts developed a more expansive view of their authority to hear those cases. Under the so-called "conduct and effects" test, courts exercised jurisdiction when the conduct prohibited by those sections occurred in the U.S. or had a substantial effect in the U.S. or on U.S. citizens. Over time, the conduct and effects test made the U.S. "the Shangri-La of class-action litigation for lawyers representing those allegedly cheated in foreign securities markets."3 The Commission availed itself of the conduct and effects test, too.4
In 2010, however, the U.S. Supreme Court gutted the conduct and effects test. See Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010). Morrison was a putative class action asserting than an Australian bank deceived Australian investors about the value of certain U.S. assets, in violation of Section 10(b). The district court and appeals court dismissed the lawsuit for lack of subject-matter jurisdiction because the plaintiffs failed to satisfy the effects prong of the conduct and effects test. The Supreme Court affirmed the dismissal, but not on the basis of subject-matter jurisdiction.
The issue was not jurisdiction, the Court held. The Exchange Act plainly gave the district court subject-matter jurisdiction to hear whether Section 10(b) applied to the bank's conduct.5 Rather, the issue was the merits of the cause of action...