Presumption Against Extraterritoriality in Morrison v. National Australia Bank Extended to Criminal Prosecutions

On August 30, 2013, the US Court of Appeals for the Second Circuit ruled in United States v. Vilar that the presumption against extraterritoriality applies to federal criminal prosecutions under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act).1 The Second Circuit's decision addressed some of the questions left unanswered in the US Supreme Court's 2010 decision in Morrison v. National Australia Bank.

Federal statutes are presumed not to have effect outside of the territorial jurisdiction of the United States absent a clearly expressed affirmative intent by Congress.2 In Morrison, the Supreme Court invoked this so-called presumption against extraterritoriality to hold that civil actions for securities fraud under Section 10(b) of the Exchange Act cannot be based on foreign conduct, but rather must concern "transactions in securities listed on domestic exchanges, and domestic transactions in other securities."3 Because Morrison involved a private civil action, however, the Court did not consider whether or how the presumption against extraterritoriality would apply in enforcement actions brought by the Securities and Exchange Commission or in criminal prosecutions brought by the Department of Justice.4

In Vilar, the Second Circuit addressed whether the presumption against extraterritoriality extended to criminal prosecutions under Section 10(b). The Second Circuit concluded that the presumption applied regardless of whether the underlying case was civil or criminal. Nonetheless, it affirmed the defendants' convictions upon finding that the transactions in question were based at least in part on domestic conduct. Thus, while the defendants won the threshold question of whether Section 10(b) applies to foreign conduct, they lost the issue as to whether their conduct could serve to support their convictions.

The underlying prosecution arose out of a dot-com-era securities fraud. The defendants were convicted of defrauding clients by lying about how clients' funds would be invested. In addition, the defendants were convicted for using an unlicensed Small Business Investment Company account to transfer client funds into their personal accounts.5 On appeal, the defendants argued that their convictions could not stand in light of the presumption against extraterritoriality because their criminal conduct took place entirely offshore.

Relying on Morrison and United States v. Bowman, a Supreme Court case from 1922, the Second Circuit...