Section 10(b) and Rule 10b-5 Do Not Apply to Extraterritorial Conduct, Regardless of Whether Civil or Criminal Liability is Sought

The World in U.S. Courts: Fall 2013 - Securities | August.30.2013

United States v. Vilar, 2013 U.S. App. LEXIS 18143 (2d Cir. Aug. 30, 2013)

Facts

A jury convicted defendants Alberto Vilar and Gary Tanaka for violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, in connection with material misrepresentations made to domestic and international investors through their investment advising firms. Vilar and Tanaka appealed their convictions to the Second Circuit, arguing that the conduct underlying their securities fraud convictions was extraterritorial and thus not criminal under Section 10(b) and Rule 10b-5. In response, the U.S. Department of Justice argued that the extraterritorial limits on Section 10(b) and Rule 10b-5 actions do not apply in the criminal context. In the alternative, they argued that Vilar and Tanaka’s conduct was domestic.

Analysis

Citing recent Supreme Court precedent, the court of appeals noted that a presumption against extraterritoriality applies to a statute unless the statute clearly indicates an extraterritorial application. It further held that this presumption applies to civil and criminal statutes alike. The court found that Section 10(b) and Rule 10b-5 are no exception to this presumption, regardless of whether the provisions are applied in the civil or criminal context. Thus, it found that it would be “clear and obvious error” to apply Section 10(b) and Rule 10b-5 to extraterritorial criminal conduct. Nevertheless, the court found that there was no plain error in Vilar or Tanaka’s securities fraud convictions with respect to the territoriality of their conduct. Although the securities were not traded on a U.S. exchange, the transactions in these securities that were the subject of the prosecution occurred in the U.S.

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