District Court Holds That "Spread Bets" Made Outside the U.S. Could Trigger Liability Under Section 10(b) of the Exchange Act

The World in U.S. Courts: Spring 2015 - Securities Law

Securities and Exchange Commission v. Sabrdaren, U.S. District Court for the Northern District of California, March 2, 2015

The U.S. Securities and Exchange Commission charged Sabrdaren with insider trading in connection with his allegedly having "tipped" an accomplice about nonpublic developments relating to his employer, a pharmaceutical company, that would likely result in a dramatic rise in the company's stock price. Among other things, Sabrdaren argued that Section 10(b) of the Securities Exchange Act of 1934 did not reach extraterritorially to "spread bets" that he opened with a broker in the UK. (Spread bets are agreements under which the purchaser is paid a portion of the amount that designated securities increase in value during particular time periods.)

A federal magistrate judge in the California trial court rejected the defendant's arguments. In so doing he declined to reach the SEC's contention that the 2010 Dodd-Frank law changed the geographic scope of the Exchange Act, finding that the complaint stated a claim even under the pre-2010 standard laid out in the U.S. Supreme Court's Morrison case. There, the Supreme Court ruled that the Exchange Act did not have extraterritorial reach, but instead applied only where the purchase or sale at issue is made in the U.S., or involves a security listed on a "domestic exchange." In the case at bar, although the defendant's spread bets were placed outside the U.S., corresponding purchases of the U.S. stock at issue and U.S. options relating to the stock were made. The Court found that these purchases of securities traded on a U.S. exchange were "in connection with" the spread bets that were the subject of the "tipping," and so the jurisdictional requirements of Section 10(b) were satisfied.

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