Debevoise & Plimpton

Second Circuit curtails the territorial reach of criminal liability under Section 10(b)

On 30 August 2013, the United States Court of Appeals for the Second Circuit unanimously held that Section 10(b) of the Securities Exchange Act of 1934 (Section 10(b)) does not apply to extraterritorial conduct, ‘regardless of whether liability is sought criminally or civilly.’ Interpreting the scope of the Supreme Court’s landmark ruling in Morrison v National Australian Bank Ltd, the Second Circuit’s significant decision in United States v Vilar, et al. means that a criminal defendant may be convicted of fraud under Section 10(b) only if the defendant engaged in fraud ‘in connection with’ a security listed on a United States exchange or a security ‘purchased or sold’ in the United States.

In reaching its conclusion, the court rejected the government’s attempts to distinguish criminal liability under Section 10(b) from the civil liability at issue in Morrison, holding that ‘[a] statute either applies extraterritorially or it does not, and once it is determined that a statute does not apply extraterritorially, the only question we must answer in the individual case is whether the relevant conduct occurred in the territory of a foreign sovereign.’

Beginning in the mid-1980s, investment managers and advisors Alberto Vilar and Gary Tanaka offered select clients the opportunity to invest in ‘guaranteed fixed-return deposit accounts’ (GFRDA), promising high, fixed-rate interest, and representing that an overwhelming majority of funds would be invested in high-quality, short-term deposits…

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