The World in U.S. Courts: Summer 2017 - Securities Law/Commodities Exchange Act (CEA) | May.15.2017
The defendants were found liable for insider trading in a civil proceeding brought by the SEC. Certain of the transactions in question themselves generated secondary “hedging” transactions in US securities by entities in the United Kingdom, as to which the SEC also sought disgorgement of profits. The defendants argued that these transactions did not meet the requirements of a US “domestic” transaction so as to be within the scope of the securities fraud laws as defined by the US Supreme Court in the Morrison case, which held that the securities laws do not have extraterritorial application.
A Magistrate Judge in California addressed but did not resolve the question whether 2010 “Dodd-Frank” amendments to the securities laws overruled Morrison so far as cases brought by the United States were concerned, expanding federal jurisdiction to include the so-called “conducts and effects” test that applied pre-Morrison. Under that test, US jurisdiction would attach to wrongful cross-border activities if (1) the conduct that occurred in the US is "more than merely preparatory to the fraud," and (2) the conduct had a substantial effect in the US or upon US citizens. The Court noted that a few decisions supported the idea that Dodd-Frank expanded jurisdiction for securities fraud cases brought by the US Government, but concluded that it did not need to resolve the question itself because the transactions generated purchases of US securities in the US. The Court likewise declined to address the similar question whether the Morrison decision by its own terms was never meant to apply to actions by the US Government agencies.