The World in U.S. Courts: Spring 2014 - Securities Law
Butler was convicted of criminal violations of Section 10(b) of the Securities Exchange Act of 1934 and other statutes in connection with the private purchase and sale of auction rate securities (ARSs) by sophisticated investors, including many multi-national corporations. After sentencing and appeal, he filed motions to vacate his conviction and sentence, based in part on the assertion that Section 10(b) had impermissibly been applied extraterritorially to conduct occurring outside the U.S.
Observing that courts have "struggled" to define the extraterritorial scope of the U.S. securities laws even after the 2010 U.S. Supreme Court decision addressing the question, the court summarized the current rule: Section 10(b) can apply, in a civil or criminal case, only in connection with the purchase or sale of a security (i) traded on a U.S. national exchange or (ii) if not so traded, where the purchase or sale was in the U.S. Because ARSs are not exchange-traded, the subsection (ii) test would have to be satisfied for jurisdiction to exist. Applying binding precedent from the Second Circuit Court of Appeals, the court stated that Section 10(b) could be applied to a transaction where "irrevocable liability" for it was established, or title to the security passed, in the U.S.
Butler argued that the transactions for which he was convicted were not U.S. transactions because the office addresses of the six clients whose employees testified at trial were outside the U.S. The court disagreed, however, that the office locations of the purchasers conclusively established where transactions actually occurred for purposes of determining whether the statute applied. It noted that Butler had traveled out of the country to meet with clients, and may have made misstatements to them at locations outside the U.S., but the transactions were not consummated in connection with any of these trips. Rather, Butler transacted business from his office in New York, with clients executing documents at their headquarters and exchanging these documents with Butler electronically. Among those documents were ones that made Butler the client’s agent for purposes of placing orders or executing instructions, and those actions by Butler, occurring in the U.S., consummated the transactions and thus were sufficient to support the suit.