Southern District of New York Limits Application of Morrison in Criminal Case

Originally published July 26, 2011

Keywords: Morrison, mail and wire fraud, private placement shares, securities, fraud

On March 16, 2011, Judge Paul A. Crotty of the District Court of the Southern District of New York rejected US defendants' motion to dismiss an indictment based on Morrison, finding that the securities, mail and wire fraud allegations did not require extraterritorial application of US laws because the crimes were ultimately committed in the United States. U.S. v. Mandell, Case No. 09-0662 (S.D.N.Y. Mar. 16, 2011).

While most lower courts deciding cases under Morrison have focused on the true territorial location of the transactions at issue—as required by Morrison—Judge Crotty focused on the defendants' conduct and the location of the parties involved. In Morrison, the US Supreme Court held that Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") applies only to "the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States."

The crux of the indictment in Mandell involved allegations that Ross Mandell and Adam Harrington fraudulently secured investor money and used it for their own benefits. Specifically, Mandell, used Thornwater Company (Thornwater) to solicit investors to purchase private placement shares in US companies, though none of the Thornwater ventures resulted in a sale of securities in a public offering. Rather, according to the indictment, Mandell misappropriated the funds into his new company, Sky Capital Holdings (Sky Capital), whose stock was traded on the London Stock Exchange's Alternative Investment Market (AIM) from 2002 to 2006. With Harrington's assistance as Mandell's senior broker, the two defendants artificially inflated market prices of Sky Capital stock, misrepresented its potential for legitimate growth to new investors, and promised high returns in Sky Capital stock while pocketing the proceeds.

Judge Crotty found that most of the alleged conduct occurred domestically: the defendants resided in the United States and organized their companies domestically (except for one UK entity); the defendants' scheme was orchestrated in the United States and any money generated overseas was transferred to the United States; all investor accounts were maintained at brokerage offices in the United States; and many of the defrauded investors were located in the United States.

Although several of the trades...