The World in U.S. Courts: Spring 2015 - Securities Law
Georgiou was convicted, among other things, of securities fraud under Section 10(b) of the Securities Exchange Act, in connection with a conspiracy to manipulate the markets for four publicly-traded stocks, causing actual losses of more than $55 million. The violations involved purchases and sales of U.S. securities through U.S. market makers acting as intermediaries for non-U.S. entities. At issue was whether these facts establish non-U.S. transactions outside the reach of the U.S. securities laws.
The stocks were unlisted and traded over-the-counter, with bid-and-ask quotations available on a real-time basis from specialized services. Georgiou and his co-conspirators perpetrated the fraud by opening accounts in Canada, the Bahamas, and Turks and Caicos, from which they then, among other things, engaged in trades that artificially inflated the stock prices and created the false impression that there was an active market in each security. At least some of the trades were facilitated by "market maker" firms in the U.S.; Georgiou and his co-conspirators also engaged in some of their criminal activity while in the U.S.
The Court of Appeals observed that Section 10(b) does not have an extraterritorial reach; it is limited to (1) transactions involving "the purchase or sale of a security listed on an American stock exchange," and (2) transactions involving "the purchase or sale of any other security in the United States." The Court of Appeals first held that the over-the-counter quotation services through which transactions were made do not constitute an "American stock exchange," and so the statute could not be applied on that basis. With respect to the second test, the Court of Appeals focused on where the transactions could be said to have occurred—a test asking where a purchaser or seller incurred "irrevocable liability" to complete the transaction or, alternatively, where title passed. In the case at bar, the Court of Appeals found that at least some of the transactions were physically accomplished through U.S. firms, acting as middlemen between the foreign entities, and thus found the prosecution to have properly been based on a U.S. violation.