utahPrior to the U.S. Supreme Court’s June 2010 decision in Morrison v. National Australia Bank, U.S. courts held that the U.S. securities laws could be applied extraterritorially if there was sufficient fraudulent conduct or were sufficient effects from that conduct in the U.S.  In Morrison the Supreme Court rejected this “conduct or effects” test, ruling that the U.S. securities laws apply to allegedly fraudulent transactions, not to alleged fraudulent conduct or its effects, and further that the securities laws apply only to domestic transactions. However, within days after the Morrison decision, the U.S. Congress, as part of its enactment of the Dodd-Frank Act, purported to provide the SEC and the U.S. DOJ “jurisdiction” to pursue enforcement actions based not on transactions in the U.S., but rather based on conduct or its effects in the U.S.


Despite the passage of time, no court reached the question of how to interpret and apply this Dodd-Frank provision in light of the Morrison decision – until now. In a detailed March 28, 2017 decision (here), District of Utah Judge Jill N. Parrish held, notwithstanding Morrison and in reliance on the Dodd-Frank Act provision, that the SEC may bring an enforcement action based on transactions outside the U.S. and involving non-U.S. residents if there was sufficient conduct in the U.S. The ruling potentially has important implications for U.S. regulatory authorities’ reach for securities enforcement actions involving foreign actors or non-U.S. transactions.



Traffic Monson purportedly provided pay–per-click advertising services. Traffic Monson maintained its offices in Utah. Almost of its customers purchased a package called Ad Packs, which allowed purchasers to participate in the products’ future revenue stream. About 90% of Traffic Monsoon customers who purchased AdPacks resided outside the U.S. and purchased their product while located in their home countries.


The SEC alleged that, because funds from subsequent Adpack purchases went to pay prior purchasers, the AdPack product offering was in effect a Ponzi scheme. The SEC alleged that the alleged scheme violated the antifraud provisions of Section 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Exchange Act.


The SEC filed a motion for a preliminary injunction against Traffic Monsoon. Traffic Monsoon opposed the motion on a number of grounds, and in particular argued in reliance on Morrison that Sections 10 and 17 do not authorize the court to enjoin foreign transactions. The company argued that any injunction would have to be limited to assets sufficient to refund money to customers located in the U.S.


As the basis for its authority to seen the injunction even as to the foreign customers, the SEC relied on Section 929P(b) of the Dodd-Frank Act, which amended Section 22 of the Securities Act and Section 27 of the Exchange Act by adding the following language:


The district courts of the United States and the United States court of any territory shall have jurisdiction of an action or proceeding brought or instituted by the Commission or by the United States alleging a violation of [either Section 10(b) of the Securities Exchange Act or Section 17(a) of the Securities Act] 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.


The Tension Between the Dodd Frank Act Provision and Morrison

The interpretive difficulty with the SEC’s reliance on the Dodd-Frank Act’s provision arises from the fact that said that the “transactional” test Morrison enunciated was not a question of subject-matter jurisdiction; it was rather a question of the reach of the securities laws. Simply put, the question of a court’s subject matter jurisdiction is irrelevant with respect to transactions to which the U.S. securities laws do not apply.


The Dodd-Frank Act’s provision speaks only to courts’ jurisdiction; it did not amend or alter the substantive law. The question is whether Section 929P(b) restored the conduct and effects test for SEC enforcement actions, even though it addressed only jurisdictional issues and did not amend the reach of the securities laws.   This question is further complicated by the fact that the Dodd-Frank Act was enacted only a few days after the Supreme Court’s decision in Morrison.


The Presumption Against Extraterritoriality

In order to sort through these issues, Judge Parrish looked first to the interpretive principle enunciated in Morrison that “legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.” The Morrison court stated this principle in the form a presumption that “unless there is affirmative intention of the Congress clearly expressed to give a statute extraterritorial effect, we must presume it is primarily concerned with domestic conditions.” In order to determine whether this presumption applies, the Morrison court elaborated, courts should consider “all available evidence about the meaning of the statute” – not just the statute’s text, but the statute’s legislative history and the underlying purpose of the statute.


After considering the available evidence about Congress’s enactment of Section 929P(b), Judge Parrish concluded that Congress had intended to allow the SEC and the United States to bring securities law claims under the “conduct and effects” test, even though the statute addresses only court jurisdiction and does not otherwise amend the securities laws. She concluded based on the language and legislative history that the provision’s purpose would be served by allowing it to be enforced extraterritorially.


The Court’s Holding

Judge Parish concluded that the SEC’s allegations against Traffic Monsoon satisfied the statutory provision’s “conduct” test, in that Traffic Monsoon had operated in the U.S. while defrauding investors outside the U.S.  She emphasized that her holding is limited to actions brought by the SEC and the United States and that otherwise Morrison still applied to lawsuits brought by private individuals. In addition, because she concluded that her ruling is one of first impression, she certified the order for interlocutory appeal to the Tenth Circuit.


Judge Parrish also held in the alternative that the SEC’s allegations in any event satisfied Morrison’s transactional test. She ruled that because Traffic Monsoon had sold the AdPacks over the internet and had incurred irrevocable liability in the United States to deliver its products to buyers. She held that these actions satisfied the Second Circuit’s holding in the Absolute Activist Value Master Fund decision a domestic transaction sufficient to meet Morrison’s transactional requirement where “the seller incurred irrevocable liability within the United States to deliver a security.”



There are a couple of preliminary points worth emphasizing here. First, as Judge Parrish underscored in her opinion, her ruling, even if it stands, does not affect the question of the reach of the federal securities laws in lawsuits brought by private parties (which continue to be governed by Morrison). Her decision, at most, addresses only the question of authorities’ reach to bring enforcement actions against foreign actors or involving foreign transactions.


Second, while she upheld the SEC’s authorities’ extraterritorial reach where the conduct and effects test has been met, she also certified the question to the Tenth Circuit. The Tenth Circuit potentially could take a different approach. On the other hand, given her alternative ruling that Morrison’s transaction test was satisfied, the Tenth Circuit might decide to decline to take up the interlocutory appeal.


Judge Parrish’s opinion nevertheless has important potential implications. Among other things, it appears that the SEC and the DOJ could seek to assert its enforcement authority even where no transaction took place in the United States if sufficient conduct took place here. The authorities could also seek to assert their enforcement authority even where there was no transaction or conduct in the United States but where there were sufficient effects – for example, where U.S. investors allegedly were defrauded by misconduct outside the U.S. and involving transactions outside the U.S.


As the Sherman & Sterling law firm said in a April 11, 2017 post on its Government Regulatory Enforcement blog  about the Traffic Monsoon decision (here), “if adopted more broadly by other courts, the reasoning of this decision could expand significantly the SEC’s and the DOJ’s ability to prosecute securities fraud claims involving foreign transactions, so long as there is significant U.S. conduct or a foreseeable substantial effect in the United States. “ The Morrison Foerster law firm, in an April 10, 2017 post on its Jumpstarter blog (here) added that the decision “functions as a warning to issuers that their foreign activities may nevertheless be subject to liability under the U.S. securities laws.”


The noteworthy aspect of Judge Parrish’s opinion is not really so much what she said as that she appears to be the first one to have said it. As Jonathan Richman of the Proskauer Rose law firm noted in his April 13, 2017 Law 360 article about the decision (here, subscription required), Judge Parrish’s ruling “appears to be the first decision squarely resolving whether the Dodd-Frank Act succeeded in allowing the government to pursue such claims based on the location of the allegedly illegal conduct, rather than the location of the securities transaction at issue.”  More to the point, Judge Parrish “appears to be the first to squarely resolve the alleged drafting problem in the Dodd-Frank Act.”


While I understand the fundamental issues that make Judge Parrish’s decision noteworthy, the decision is from my perspective not surprising. As Judge Parrish herself noted, it seems pretty clear that what Congress was trying to do was to codify the conduct and effects test for purposes of the SEC’s and the DOJ’s authority to pursue enforcement actions. The statute may have been couched in terms of the court’s subject matter jurisdiction but that was simply because up until that time courts had treated the issue as one of subject matter jurisdiction. As Judge Parrish noted, Morrison simply came too late in the legislative process to permit Congress to react and adapt to it.


As Richman commented in his Law 360 article, Judge Parrish’s ruling “is probably not unexpected”; even though Congress failed to conform Section 929P(b) to Morrison and left thestatutory provision couched in terms of “jurisdiction,” Congress’s intent “seems to have been relatively clear.”


While further proceedings in this case remain, and while other courts’ willingness to follow Judge Parrish’s lead on these issues remains to be seen, her ruling nevertheless does have important implications about the potential reach of the government agencies’ enforcement authority. The ruling underscores the potential extraterritorial reach that Dodd-Frank Act provision affords the regulatory agencies to enforce the U.S. securities laws.