Court of Appeals Refuses To Apply Geographic Limitations of General Securities Fraud Statute to Investment Advisors Act White Collar Criminal Law

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

Lay v. United States, U.S. Court of Appeals for the Sixth Circuit, August 17, 2015

Mark Lay was convicted in 2008 of securities fraud for violating the Investment Advisors Act of 1940, among other laws, in connection with investments in a Bermuda hedge fund on behalf of an agency of the State of Ohio. Two years, later, in the Morrison case, the U.S. Supreme Court set out a new and more limited rule for determining whether U.S. federal statutes should be given extraterritorial effect, imposing a presumption against extraterritorial application where a statute does not clearly provide for such a scope of operation. Morrison dealt with Section 10(b) of the Securities Exchange Act of 1934—the general antifraud provision for transactions in securities. In that context, the Supreme Court held that Section 10(b) could only support claims by non-U.S. plaintiffs where the security was listed on an American stock exchange or the purchase or sale took place in the United States. Here, Lay sought to have that rule applied to the Investment Advisors Act, with the result that his service to a Bermudan investment fund would be outside the reach of the law.

The Court of Appeals disagreed. It first concluded that Morrison's focus on U.S. transactions should not be applied to the Investment Advisors Act because the focus of the latter statute is the advisor's conduct, not on subsequent transactions. Focusing on that relationship, it then found sufficient U.S. connections so as to avoid any problems of extraterritorial application of the law. Specifically, the Court of Appeals noted that Lay owed a fiduciary duty to the plaintiff agency of the state of Ohio, that Lay's adviser agreement related to a U.S.-based fund, and that all of the activities that were the subject of the prosecution were undertaken pursuant to a single investment relationship between Law and the agency both the domestic fund and the Bermuda fund.

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