Second Circuit Applies Morrison To Criminal Prosecution Under Section 10(B) And Rule 10b-5

In United States v. Vilar, Case Nos. 10-521(L), 10-580(CON), 10-4639(CON), 2013 WL 4608948 (2d Cir. Aug. 30, 2013), the United States Court of Appeals for the Second Circuit held that Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities & Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, do not apply to extraterritorial conduct in both the civil and criminal context. In so holding, the Second Circuit made clear that the United States Supreme Court's ruling in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) [blog article here], that civil liability under Section 10(b) does not apply extraterritorially, extends to criminal conduct as well. In light of that ruling, a criminal conviction for securities fraud can only be found if the defendant "engaged in fraud in connection with (1) a security listed on a U.S. exchange, or (2) a security purchased or sold in the United States." While this holding did not disturb the defendants' convictions in this case, the ruling provides guidance for future prosecutions under Section 10(b), which now require proof of a domestic sale or listing as a necessary element for conviction.

From the mid-1980s through their arrest in 2005, defendants Alberto Vilar and Gary Alan Tanaka worked as investment managers and advisors using a number of domestic and off-shore companies as vehicles for the investments...