In United States v. Georgiou, No. 10-4774 (Jan. 20, 2015), the Third Circuit recently applied the Supreme Court’s extraterritoriality ruling in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), to a criminal securities fraud conviction. Georgiou was convicted of securities fraud, wire fraud, and conspiracy for a stock manipulation scheme orchestrated outside of the United States. The court affirmed the conviction, finding that even though the securities trading did not occur on a U.S. securities exchange, it was actionable under the U.S. securities laws because an aspect of the securities transactions was completed within the United States. A copy of the opinion can be found here: US v Georgiou.
The case involved an alleged classic manipulative scheme to buy thinly-traded stocks, inflate their prices with matched trades, wash sales, and the like, and dump the stocks at the artificially high prices. Georgiou used brokerage accounts in Canada, the Bahamas, and Turks and Caicos for the manipulative trading. The stocks were traded over-the-counter on the OTC Bulletin Board (“OTCBB”) or the Pink OTC Markets (“Pink Sheets”).
In Morrison, the Supreme Court limited the application of section 10(b) to the use of “manipulative or deceptive device[s]” in securities transactions involving either (i) “the purchase or sale of a security listed on an American stock exchange,” or (ii) “the purchase or sale of any other security in the United States.” Morrison , 561 U.S. at 273. The Third Circuit sought to apply that standard to the Georgiou trades.
The court first considered whether securities listed on the OTCBB and the Pink Sheets are “listed on an American stock exchange.” It noted that the SEC identifies 18 nationally registered securities exchanges, but does not include the OTCBB and the Pink Sheets. It also noted that both the OTCBB and the Pink Sheets are self-described as trading mechanisms for securities not listed on any exchange. Finally, it noted that the securities statutes themselves distinguish between “securities exchanges” and “over-the-counter markets.” For those reasons, it found the transactions here were not the purchase or sale of a security on “an American stock exchange,” and therefore were not subject to U.S. securities laws on that basis. See slip op. at 13-15.
The analysis then moved to the second Morrison prong: whether these transactions were the purchase or sale of securities “in the United States.” The court took note of the fact that Morrision involved a so-called “foreign-cubed” transaction – foreign plaintiffs suing a foreign issuer based on securities transactions in foreign countries. In contrast, the securities in the Georgiou case were those of U.S. issuers, and the transactions involved the participation of “market makers” operating in the United States.
Morrison instructed that transactions are “domestic transactions” based not on “the place where the deception originated,” but the place where the purchases and sales occurred. Morrison, 561 U.S. at 266-67. It is the “location of the transaction” that determines the applicability of the U.S. securities laws. See id. at 268. The Georgiou court noted that the 2d, 9th, and 11th Circuits had previously found that a “domestic transaction” was one (i) where the parties became obligated to proceed in the U.S., or (ii) where the actual transfer of title occurred in the U.S. Georgiou, slip op. at 16-17 (referring to Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 69 (2d Cir. 2012); Quail Cruise Ship Mgmt Ltd. v. Agencia de Viagens, 645 F.3d 1307, 1310-11(11th Cir. 2011); SEC v. Levine, 462 Fed. App’x717, 719 (9th Cir. 2011)). The court then “agreed” that “commitment” is “a simple and direct way of designating the point at which . . . the parties obligated themselves to perform . . . even if the formal performance of their agreement is to be after a lapse of time.” Slip op. at 17 (quoting Absolute Activist, 677 F.3d at 68). Accordingly, “the point of irrevocable liability” can be used to determine where a securities purchase or sale occurred; “territoriality under Morrison turns on ‘where, physically, the purchaser or seller committed him or herself’ to pay for or deliver a security.” Slip op. at 17 (citations omitted).
This is all largely consistent with previous decisions. But here the Third Circuit took a detour. The court found the involvement of U.S.-based market makers in “facilitating” at least some of the otherwise foreign transactions made them “domestic transactions” under Morrison: “Here, at least one of the fraudulent transactions in each of the Target Stocks was bought and sold through U.S.-based market makers. . . . [A]ll of the manipulative trades were ‘facilitate[d]’ by U.S.-based market makers, i.e., an American market maker bought the stock from the seller and sold it to the buyer. . . . Therefore, some of the relevant transactions required the involvement of a purchaser or seller working with a market maker and committing to a transaction in the United States, incurring irrevocable liability in the United States, or passing title in the United States.” Id. at 18. The court concluded: “We now hold that irrevocable liability establishes the location of a securities transaction. Here, the evidence is sufficient to demonstrate that Georgiou engaged in ‘domestic transactions’ under the second prong of Morrison, i.e., transactions involving ‘the purchase or sale of any  security in the United States.’ See Morrison, 561 U.S. at 273. Thus, the District Court’s application of Section 10(b) to Georgiou’s transactions was proper.” Slip op. at 19.
The rationale adopted by the court is, at best, designed to satisfy Morrison’s letter rather than its spirit. Although the opinion is somewhat opaque, it seems apparent that the court concluded that the mere involvement of a U.S. person as a market intermediary in a transaction that in all other respects was between foreign persons is sufficient to make the transaction one properly governed by the U.S. securities laws. But to allow the apparently unknown involvement of U.S. market makers “as intermediaries for foreign entities” to serve as the basis for subjecting a transaction to U.S. law seems to violate both the language and spirit of the Morrison opinion. It totally ignores the point made by the Morrison Court that the standard for applicability of U.S. law to a transaction could not be whether some aspect of the transaction touched upon the United States: “For it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States. But the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.” Morrison, 561 U.S. at 266.
The Morrison Court noted that the subject “purchase-and-sale transactions are the objects of the statute’s solicitude.” Id. at 267. It did not look to see if the interstices of those transactions involved some other agreement (i.e., between the seller’s foreign broker and a U.S. market maker) that occurred in the United States, because any such “facilitating” transaction was not “the object of the statute’s solicitude.” Instead, “it is parties or prospective parties” to the purported unlawful transaction that “the statute seeks to ‘protec [t].’” Id. In the Georgiou case, the U.S. market maker is not one of those parties.
If the acknowledged test for the locus of a transaction is, as the Third Circuit says, where the parties “irrevocably” “obligated” themselves to the transaction, then, by all appearances, in this case that was outside of the United States, where the buyer and seller made their purchase and sale commitments. It is not faithful to Morrison to rule that because the market mechanism by which those commitments were implemented included a transaction by other unaffiliated persons within the U.S., the transaction at issue morphed into a “domestic transaction.” In a globalized electronic marketplace, almost any securities transaction that parties commit to on foreign soil can involve an “intermediary” in the United States that “facilitates” its completion. To allow that to trigger the extraterritorial reach of the U.S. securities lawyers would, in fact, make “the presumption against extraterritorial application . . . a craven watchdog . . . retreated to its kennel.” Morrison, 561 U.S. at 266.
January 23, 2015
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