On January 24, 2019, the United States Court of Appeals for the Tenth Circuit affirmed a decision by the United States District Court for the District of Utah holding that the Dodd-Frank Act of 2010 grants the Securities and Exchange Commission (“SEC”) authority to enforce extraterritorially the antifraud provisions of the federal Securities Act of 1933 and the Securities Exchange Act of 1934. SEC v. Scoville, No. 17-CV-4059 (10th Cir. 2019). Months before the Dodd-Frank Act was passed, the Supreme Court in Morrison v. National Australia Bank, 561 U.S. 247, 265 (2010), held that, given the general presumption against extraterritorial application of U.S. laws and the lack of clear indicia of congressional intent to the contrary, the federal securities laws did not apply extraterritorially. But the Tenth Circuit concluded in Scoville that the Dodd-Frank Act “affirmatively and unmistakably” evidenced Congress’s intent to allow the SEC and the U.S. to enforce the federal securities laws whenever the “conducts-and-effects” test is met, effectively rendering Morrison inapplicable to SEC and other government enforcement actions while not disturbing its impact on private securities actions.
Scoville originated from a July 2016 enforcement action against an internet traffic exchange company (the “Company”) and its founder, in which the SEC alleged that the Company was running an unlawful Ponzi scheme. The Company sold buyers “clicks” for their websites to boost its position in search engine results. Allegedly, the Company misled customers in a number of ways, including by promising them a share in the Company’s revenue if they purchased an “Adpack” and clicked on a certain number of ads for the websites of the Company’s other customers. Approximately ninety percent of Adpack purchasers were located outside the United States.
The SEC’s enforcement action against the Company alleged that the Adpacks constituted securities, and that their sale violated Sections 17(a)(1) and (a)(3) of the Securities Act and Section 10(b) of the Securities Exchange Act, as amended by the Dodd-Frank Act. The district court ruled in favor of the SEC, granting a preliminary injunction against defendants, enjoining them from continuing to run their internet traffic exchange, freezing defendants’ assets, and appointing a receiver over the Company’s assets. The Company and its founder filed an interlocutory appeal, arguing that federal securities laws could not apply to sales...
