Update: 'Tourre' Extends SEC’s Reach For Foreign Transactions Involving Domestic Offerings

A recent decision by Judge Katherine Forrest of the U.S. District Court for the Southern District of New York clarified the scope of the Securities and Exchange Commission's (the "SEC") ability to pursue fraud charges in foreign securities transactions involving domestic offerings.1 The SEC alleges that former Goldman Sachs & Co. Vice President Fabrice Tourre failed to disclose that hedge fund manager John Paulson helped to select, and then shorted, the portfolio of securities underlying the ABACUS 2007-AC1 synthetic collateralized debt obligation at issue in that matter.2 Tourre moved for summary judgment, arguing that he could not be held liable for offerings in connection with foreign transactions under the Supreme Court's landmark 2010 decision, Morrison v. National Australia Bank Ltd.3

MORRISON v. NATIONAL AUSTRALIA BANK LTD.

The Court's decision in Morrison upset four decades of circuit court precedent by overruling the U.S. Court of Appeals for the Second Circuit's long-standing "conduct and effects" test for determining whether fraud suits may be brought under the federal securities laws with respect to securities transactions with a foreign component. Beginning its analysis with the canon that legislation is presumed not to have extraterritorial effect unless "contrary intent appears" in the statute,4 the Court set forth a new bright-line "transactional" test which limits the reach of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder to transactions involving (1) "the purchase or sale of a security listed on an American stock exchange" or (2) "the purchase or sale of any other security in the United States."5 Moreover, the Court clarified that the circuit court's analysis of the question as one of subject-matter jurisdiction was misplaced; rather, "to ask what conduct § 10(b) reaches is to ask what conduct § 10(b) prohibits, which is a merits question."6

Subsequent district court cases have held that Morrison applies to cases brought under Section 17(a) of the Securities Act of 1933 (the "Securities Act") as well.7 More recently—in the first circuit court case to consider the question—the Second Circuit held that a securities transaction is domestic for the purposes of the second-prong of Morrison when irrevocable liability was incurred or title was transferred within the United States.8

SEC v. TOURRE

Recently, in SEC v. Tourre, Judge Forrest—in a question of first impression—considered the effect of the Supreme Court's holding in Morrison on Section 17(a) cases brought by the SEC in connection with the fraudulent offering, as opposed to sale, of securities. Section 17(a) provides, in pertinent part:

It shall be unlawful for any person in the offer or sale of any securities . . . directly or indirectly —

to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.9 Tourre moved for summary judgment on the SEC's Section 17(a) claims related to offers made to two foreign investors, IKB Deutsche Industriebank AG ("IKB") and ABN AMRO Bank N.V. ("ABN"), arguing that the offers were not "domestic" under Morrison.10

As the court framed the analysis, the primary question of law that the parties disputed was "what it means for fraud made 'in the offer' of securities to be domestic for purposes of Section 17(a) and Morrison."11 Under Tourre's reading, "if an offer leads to a consummated sale, only the sale is actionable. [Thus,] if the sale is not domestic, neither the sale nor the offer is actionable under Morrison."12 Similarly, an offer is actionable under Tourre's reading "if and only if it is both domestic and ultimately unconsummated."13 Because the sales to IKB and ABN were consummated outside the United States, Tourre urged, the offers made to IKB and ABN were not actionable under Morrison.

In rejecting Tourre's motion, Judge Forrest distinguished Exchange Act Section 10(b), which prohibits fraud in connection with the "purchase or sale of any security," from Securities Act Section 17(a), which concerns the "offer or sale of any securities."14 The court then turned to the definition of "offer" in Section 2(a)(3) of the Securities Act, which "include[s] every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value."15 Viewing Sections 17(a) and 2(a)(3) in conjunction, the court held:

[L]ike Section 10(b), Section 17(a) prohibits only a narrow subset of fraudulent activity. Unlike Section 10(b), however, the prohibited conduct is circumscribed by its connection with "the offer or sale of any securities," rather than with the "purchase or sale of any security."

That distinction is key. Section 17(a)'s proscription extends beyond consummated transactions. Because...