A New Era of Extraterritorial SEC Enforcement Actions

Joshua D. Roth is partner and Alexander R. Weiner is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum and is based on their article, recently published in the Banking Law Journal.

In a recent decision, U.S. Securities and Exchange Commission v. Scoville, the United States Court of Appeals for the Tenth Circuit became the first Circuit Court to opine on the scope of the SEC’s extraterritorial enforcement authority under the Dodd-Frank Act. Departing from the United States Supreme Court’s 2010 opinion in Morrison v. National Australia Bank Ltd., the Tenth Circuit held that Congress, in enacting the Dodd-Frank Act, “affirmatively and unmistakably” expressed its intent to apply the SEC’s enforcement authority under Section 17(a) of the Securities Act of 1933 (“Section 17(a)”) and the antifraud provisions of the Securities and Exchange Act of 1934, including Section 10(b) (“Section 10(b)”), extraterritorially.

SEC v. Scoville expands the scope of the SEC’s enforcement authority beyond the limitations imposed by Morrison, returning to the so-called “conduct-and-effects” test to determine extraterritoriality. This departure creates uncertainty about the scope of the SEC’s enforcement authority and additional risk for foreign entities and individuals.

Factual Overview

On July 26, 2016, the SEC filed an enforcement action against Charles Scoville and Traffic Monsoon, LLC (the “Defendants”) in the United States District Court for the District of Utah (“Utah District Court”), alleging violations of Section 17(a) and Section 10(b). SEC v. Scoville, 913 F.3d 1204, 1212 (10th Cir. 2010). Scoville was the sole member, manager, and registered agent of Traffic Monsoon, which, according to Scoville, was a “website traffic exchange.” Website traffic exchanges sell visits to websites, clicks on advertisement banners, and similar services to drive internet traffic to websites and make websites appear to be more popular than they actually are. Website owners are the typical customers for website traffic exchanges, as search engines generally rank websites based, in part, on the number of visits that they receive.

According to the SEC, Traffic Monsoon was not a bona fide website traffic exchange. Rather, the SEC alleged that Traffic Monsoon was operating as a Ponzi scheme by selling investment contracts called “Adpacks.” Adpacks were $50 “bundles” that included 1,000 website visits, twenty clicks on advertisement banners, and a right to share in Traffic Monsoon’s profits up to $55 per Adpack.

The Utah District Court found that, while “[s]ome individuals initially purchased Adpacks… to promote their online businesses[,]… for many members, the profits that could be reaped from the Adpacks themselves quickly eclipsed the motive.” Id. at 1211. Ninety-eight percent of Traffic Monsoon’s sales came from Adpacks, and ninety percent of all Adpacks were sold outside the United States. By the time the SEC initiated its enforcement action, Traffic Monsoon’s members had paid $173 million to purchase 3.4 million Adpacks and had purchased approximately 14 million Adpacks (valued at $700 million) by rolling over money earned from earlier Adpacks.

Interestingly, Traffic Monsoon’s website disclaimed being a Ponzi scheme in a list of Frequently Asked Questions:

Is TrafficMonsoon a… Ponzi, pyramid scheme, or illegal? What is a Ponzi? ponzis [sic] are investment schemes which offer interest payments… Traffic Monsoon only offers ad services… Yes, you can qualify to share in the sales revenue generated when services are sold by actively viewing other people’s websites, but this is not interest… That’s not a Ponzi… In conclusion, when looking at pure definitions, Traffic Monsoon is not a ponzi…

SEC v. Traffic Monsoon, LLC, 245 F. Supp. 3d 1275, 1282 (D. Utah 2017).

Utah District Court Decision

In deciding the SEC’s motion for a preliminary injunction, the Utah District Court addressed the scope of the SEC’s extraterritorial enforcement authority. As noted above, the Dodd-Frank Act, signed into law less than a month after Morrison, amended the Securities Act of 1933 and Securities Exchange Act of 1934 to provide federal District Courts with extraterritorial jurisdiction over SEC enforcement actions. In respect to the Securities Exchange Act of 1934’s antifraud provisions, Section 929P(b) of the Dodd-Frank Act provides:

The district courts of the United States and the United States courts of any Territory shall have jurisdiction of an action or proceeding brought or instituted by the Commission or the United States alleging a violation of the antifraud provisions of this title [15 USCS §§ 78a et seq.] involving—(1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.

15 USCS § 78aa(b). Section 929P(b) of the Dodd-Frank Act also provides nearly identical language in connection with Section 17(a).

Notwithstanding that plain language, the Defendants argued that the Dodd-Frank Act did not demonstrate a sufficiently clear intention by Congress to apply Section 17(a) or Section 10(b) extraterritorially because the relevant language from the Dodd-Frank Act focused on jurisdiction. The Supreme Court held in Morrison that extraterritoriality was a question of statutory intent and not jurisdiction. Thus, the Defendants argued that the relevant language in the Dodd-Frank Act had no effect on the extraterritoriality of Section 17(a) or Section 10(b).

The Utah District Court ultimately granted the SEC’s motion for a preliminary injunction, holding that the SEC’s enforcement authority under Section 17(a) and Section 10(b) applied extraterritorially. The Utah District Court reasoned that “[t]he legal landscape when [the Dodd-Frank Act] was initially proposed and considered by congress is vital to discerning this congressional intent… Indeed, when the final version of Dodd-Frank was presented to the House and the Senate for approval, congressmen from both chambers expressed their understanding that [the Dodd-Frank Act] codified the conduct and effects test… Thus, both the legal context… and the legislative history of this provision indicate a legislative intent to apply 17(a) and Sections 10(b) to extraterritorial transactions if the conduct and effects test can be satisfied.” Traffic Monsoon, LLC, 245 F. Supp. 3d at 1292-93.

Circuit Court Decision

Following the Utah District Court’s decision granting the SEC’s motion for a preliminary injunction, Scoville then filed an interlocutory appeal to the Tenth Circuit arguing, inter alia, that Section 17(a) and Section 10(b) did not apply extraterritorially because the Dodd-Frank Act had not abrogated Morrison. The Tenth Circuit’s majority opinion found that Section 17(a) and Section 10(b) applied extraterritorially, holding:

Notwithstanding the placement of the Dodd-Frank amendments in the jurisdictional provisions of the securities acts, given the context and historical background surrounding Congress’s enactment of those amendments, it is clear to us that Congress undoubtedly intended that the substantive antifraud provisions should apply extraterritorially when the statutory conduct-and-effects test is satisfied.

Scoville, 913 F.3d at 1219. The Tenth Circuit proceeded to apply the conduct-and-effects test set forth in the Dodd-Frank Act to the facts at issue. The Tenth Circuit highlighted that the Defendants housed Traffic Monsoon’s servers in the United States and “created and promoted the Adpack[s]” from Utah. Id. The majority opinion viewed the Defendants’ conduct as easily meeting the statutory standard, devoting only one paragraph of a forty-three page opinion to applying the conduct-and-effects test.

The concurrence, however, would not have reached the majority’s holding regarding extraterritoriality because the alleged conduct was sufficiently domestic to satisfy Morrison. As Judge Briscoe explained, “Traffic Monsoon sold AdPacks via the internet, and the record further demonstrates that Traffic Monsoon made its sales through computer servers based solely in the United States. Under any common sense reading of Morrison and § 10(b), Traffic Monsoon made several securities sales in the United States… Accordingly, I would affirm because… the SEC sufficiently established that the Defendants sold securities in the United States…” Id. at 1226-27 (Briscoe, J., concurring).

On February 12, 2019, the Tenth Circuit granted, in part, Scoville’s motion for a stay pending his filing of a petition for a writ of certiorari with the Supreme Court. In Scoville’s motion, he identified two bases for a writ of certiorari: (i) the extraterritorial reach of Section 10(b); and (ii) whether or not a transaction is domestic when foreign parties incur irrevocable liability with respect to the transaction in the United States. Notably, the Tenth Circuit, in granting Scoville’s motion to stay, found that its decision in Scoville “decided an important federal question in a way that conflicts with relevant decisions of the United States Supreme Court,” and constituted “an important question of federal law that has not been, but should be, settled by the United States Supreme Court.” Order Granting Mot. to Stay Pending App. for Cert., SEC v. Scoville, No. 17-4059 (10th Cir.), EFC No. 10626380 (Apr. 18, 2019).

The Conduct-and-Effects Test and Morrison

In the 1960’s, Circuit Courts, starting with the Second Circuit’s 1968 opinion in Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir. 1968), began applying Section 10(b) extraterritorially using a conduct-and-effects test. This pre-Morrison conduct-and-effects test required either a transaction having substantial effects on the United States or significant conduct based in the United States in furtherance of a fraud.

SEC v. Scoville expands the scope of the SEC’s enforcement authority beyond the limitations imposed by Morrison, returning to the so-called “conduct and effects” test to determine extraterritoriality. This departure creates uncertainty about the scope of the SEC’s enforcement authority and additional risk for foreign entities and individuals.

The Second Circuit’s application of the effects test required a fraudulent transaction with “some effect on American securities markets or investors.” Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247, 258 (2010). The conduct test was driven by the “principle that Congress did not want ‘the United States to be used as a base for manufacturing fraudulent security devices for export, even when these are peddled only to foreigners.’” Terra Sec. ASA Konkursbo v. Citigroup, Inc., 688 F. Supp. 2d 303, 309 (S.D.N.Y. 2010).

As noted above, in Morrison, the Supreme Court repudiated the conduct-and-effect test and held that Section 10(b) did not apply extraterritorially. Morrison involved a “foreign cubed” litigation, that is litigation involving foreign plaintiffs, a foreign defendant, and a foreign securities transaction. In Morrison, the foreign plaintiffs alleged that the National Australian Bank (“NAB”) violated Section 10(b) by improperly incorporating a United States subsidiary’s (Homeside Lending) allegedly falsified valuations into NAB’s public filings. The Supreme Court held that there was no basis for an action under Section 10(b) because the securities at issue were not listed on domestic exchanges or purchased in the United States. As the Supreme Court explained, “[t]he criticisms [of the conduct- and-effects test] seem to us justified…[and] demonstrate the wisdom of the presumption against extraterritoriality… In short, there is no affirmative indication in the Exchange Act that § 10(b) applies extraterritorially, and we therefore conclude that it does not.” Morrison, 561 U.S. at 261-266.


After Scoville, foreign entities and individuals engaging in securities transactions face increased risk of SEC enforcement actions. The Utah District Court acknowledged that the Dodd-Frank Act effectively “codified” the conduct-and-effects test as it had been applied in the Second Circuit prior to Morrison. Traffic Monsoon, 245 F. Supp.3d at 1291. It remains to be seen whether other Circuit Courts will reach similar conclusions. However, for the time being, District Courts (and the SEC) will look to Circuit Courts’ pre-Morrison jurisprudence for guidance regarding the application of the conduct-and-effects test in SEC enforcement actions. Future enforcement actions by the SEC will also provide a helpful interpretative gloss.

One risk created by the effects test is that purely foreign transactions, which arguably influence the price of securities traded on United States exchanges, may be the subject of SEC enforcement actions. For example, in Schoenbaum—an early pre-Morrison case—the plaintiff, an American shareholder of Banff Oil Ltd. (“Banff”), alleged that Banff’s treasury shares were fraudulently sold in Canada in violation of Section 10(b). Banff was a Canadian corporation whose common shares, but not its treasury shares, were publicly traded on stock exchanges in the United States and Canada. The Second Circuit in Schoenbaum held that, although the treasury shares were not traded on United States exchanges and were only sold in Canada, Section 10(b) applied extraterritorially to the transaction because the foreign trading of Banff’s treasury shares “affected the value of the common shares publicly traded in the United States.” Morrison, 561 U.S. at 265. Under Scoville, similar transactions may be subject to SEC enforcement actions.

Likewise, the conduct test can be deployed to reach allegedly fraudulent conduct that takes place in the United States, even where the underlying transaction and any effects are entirely foreign. For example, in SEC v. Kasser (548 F.2d 109 (3d Cir. 1977))—another early pre-Morrison case—the Third Circuit applied the conduct test to an SEC enforcement action where the sole victim was the Manitoba Development Fund, which was owned by the Province of Manitoba. The Third Circuit in Kasser noted that the case had “little, if any, impact” in the United States, Id. at 112; nonetheless, the SEC charged the defendants with engaging in a Ponzi scheme. The Third Circuit found that the SEC’s enforcement action satisfied the conduct test because, inter alia, the SEC alleged that crucial records essential to the fraud were kept in the United States; the New York office of a Swiss Bank was used as a conduit for the transaction; the instrumentalities of interstate commerce were used to further the scheme; negotiations for the fraudulent transaction took place in New York; and one of the investment contracts was executed in New York. Aside from the execution of a contract in New York, none of the relevant facts in Kasser would have been significant under Morrison because the transaction itself was mostly foreign. Scoville increases the risk of SEC enforcement actions for foreign transactions under similar circumstances.

While Scoville affords the SEC with broad latitude to bring extraterritorial enforcement actions under Section 17(a) and Section 10(b), we do not yet know how the SEC will choose to use that power. The SEC (like any organization) has limited resources and may reasonably decide to focus on domestic matters as a matter of prosecutorial discretion. In assessing regulatory risk for foreign entities and individuals, the SEC’s future charging decisions may be as significant as the Tenth Circuit’s decision in Scoville itself.

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