The Transnational Reach of U.S. Securities Laws – The Extraterritorial Application of 18 U.S.C. § 1348

February 2, 2021 by Digital Editor

By: Maria Aguilar-Rocha and Ivana Djak

The regulatory frameworks that govern U.S. and foreign securities markets are meant to ensure market integrity and a well-functioning global financial system by providing a set of tools that can be used to protect investors and safeguard against corruption.[1]  In the United States, available enforcement mechanisms include statutes that make it a crime to commit fraud in connection with the trade of securities.  The effectiveness of these enforcement mechanisms may be hampered to the extent it is unclear whether particular statutes apply extraterritorially.

In light of the U.S. Department of Justice’s (“DOJ’s”) continued interest in cross-border criminal prosecution of securities violations, this post analyzes the breadth and extraterritorial application of 18 U.S.C. § 1348 and finds that it is unlikely to have extraterritorial reach based on (1) common law treatment of § 1348 and other similar statutes; (2) the Morrison decision (finding that a related statute – Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) – does not have extraterritorial application)[2]; and (3) an examination of the language and legislative history of § 1348.

1. Common Law Treatment of § 1348 and Other Similar Statutes

The U.S. securities markets are regulated by numerous statutes allowing for criminal and civil enforcement by the DOJ and the U.S. Securities and Exchange Commission (“SEC”).[3]  Among the most prevalent and commonly charged of these statutes in both civil and criminal securities fraud cases is Section 10(b) and Rule 10b-5 of the Exchange Act.  Section 10(b) and Rule 10b-5 generally prohibit fraud by any person in connection with the purchase or sale of securities involving interstate commerce.  The newest arrow in the DOJ’s quiver is Section 807 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), 18 U.S.C. § 1348 (2006), which broadly prohibits any kind of securities fraud with respect to public companies.  Section 807 provides that

“Whoever knowingly executes, or attempts to execute, a scheme or artifice (1) to defraud any person in connection with any . . . security of an issuer registered under section 12 of the Securities Exchange Act; [or] (2) to obtain, by means of false or fraudulent pretenses, representations or promises, any money or property in connection with the purchase or sale of any . . . security of an issuer . . . [shall be punished by a fine or imprisonment or both].”

§ 1348.

In order to prove a violation of § 1348, the Government must show: “(1) fraudulent intent; (2) a scheme or artifice to defraud; and (3) a nexus with a security.”[4]  But the contours of the elements required to prove criminal securities fraud under § 1348 have not been defined by the courts, and neither has the statute’s extraterritorial reach.  Notably, no court has decided the meaning and scope of “in connection with” under § 1348.  And courts that have analyzed the intent element have reached different conclusions by analogizing § 1348 to different securities laws and other statutes altogether.  For example, in SEC v. Stein, the Ninth Circuit analogized § 1348 to Section 10(b), and held that for res judicata purposes issues decided in a prior criminal proceeding for securities fraud under § 1348 were identical to the issues raised in the SEC’s civil enforcement action under Section 10(b) and Rule 10b-5.[5]  Yet, the Second Circuit, in United States v. Blaszczak,[6] expressly declined to apply to a criminal securities fraud under § 1348 the elements applicable to a civil securities fraud case under Title 15, noting that § 1348 was intended to overcome the “technical legal requirements” of the Title 15 fraud provisions and apply more generally.[7]  Additionally, the Court also held that § 1348 and the Exchange Act, the wire fraud statute, 18 U.S.C. § 1343, and the other Title 15 securities fraud provisions, do not share the same statutory purpose and accordingly should not be read to have the same elements.[8]  And District Courts have carved out their own interpretations, and have not been overturned.[9]

2. The Morrison Decision

The Supreme Court has already decided, in the civil context, that Section 10(b) of the Exchange Act does not apply extraterritorially.  Specifically, the Exchange Act only reaches securities listed on domestic exchanges and domestic transactions.[10]  The Court declined to extend the reach of the statute to investment transactions made abroad even if they had domestic impact or effect.[11]  Subsequently, the Second Circuit extended the holding in Morrison from the civil to the criminal context.[12]  There is also an added layer of uncertainty about whether the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 changed the extraterritorial reach of Section 10(b) and other securities laws.[13]

However, that some courts have spoken on the extraterritorial application of Section 10(b) does not tell us how they would view the extraterritorial reach of § 1348, especially given that courts disagree as to whether the two provisions should be analogized, and given that the extraterritorial reach of any statute has to be assessed in light of that particular statute’s language and application.  To determine whether a statute applies extraterritorially, courts must assess whether the presumption against the extraterritorial application of U.S. laws is overcome.  It is a longstanding principle that the legislation of Congress, unless expressly stated otherwise, only applies within the territorial jurisdiction of the United States.  “Thus, ‘unless there is the affirmative intention of the Congress clearly expressed’ to give a statute extraterritorial effect, ‘we must presume it is primarily concerned with domestic conditions.’”[14]  The Supreme Court developed a two-step analysis in RJR Nabisco, Inc. v. European Community for determining whether the presumption is overcome.

“At the first step, we ask whether the presumption against extraterritoriality has been rebutted – that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially . . . If the statute is not extraterritorial, then at the second step we determine whether the case involves a domestic application of the statute, and we do this by looking to the statute’s ‘focus.’  If the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad; but if the conduct relevant to the focus occurred in a foreign country then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.” [15]

As noted, to date, no court has analyzed § 1348 in light of this two-step analysis and the instructions of the Morrison court specifically as to the securities laws.

3. The Language and Legislative History of § 1348

In deciding whether the first step of the RJR Nabisco, Inc. test is met, courts look to the language and legislative history of the relevant statute to determine “whether the statute gives a clear, affirmative indication that it applies extraterritorially.”[16] Only where there is an express instruction by Congress that a statute has extraterritorial reach will the strong presumption against extraterritorial application be overcome.[17]  Silence or ambiguity in the statute is a basis for finding that it only applies within the United States.[18]

The language of § 1348 is silent regarding extraterritorial reach.  And its legislative history offers little insight into whether the statute was meant to be applied extraterritorially.  The congressional record provides that the purpose of § 1348 is to “enhance corporate accountability” by “supplement[ing] the patchwork of existing technical securities law violations with a more general and less technical provision.”[19]  The record further notes that § 1348 increased the penalty for securities fraud from the five year maximum available in the generic mail and wire fraud statutes to a new twenty-five year felony.[20]  These provisions were meant to “provide a flexible tool to allow prosecutors to address the wide array of potential fraud and misconduct which can occur in companies that are publicly traded” in order to “protect shareholders and prospective shareholders against all the types [of] schemes and frauds which inventive criminals may devise in the future.”[21]  Although the legislative history of § 1348 indicates that it is meant to apply broadly to a “wide array of potential fraud and misconduct” perpetrated by “inventive criminals,” it remains unclear whether it encompasses purely domestic violations or also international misconduct.  There are no clues in the language or legislative history of the statute as to whether Congress intended at all (much less whether, when, and how) for § 1348 to ensnare foreign defendants and conduct.

Conclusion: No Extraterritorial Reach

In light of the existing ambiguities in the legislative history of § 1348 regarding extraterritorial application, and the silence regarding extraterritorial reach in its language, it is unlikely that § 1348 would apply extraterritorially under the RJR Nabisco, Inc. test.  Just as the ambiguity in the language and legislative history of Section 10(b) led the Supreme Court to conclude that the provision did not have extraterritorial reach, [22] so too here, the ambiguity in § 1348 should lead courts to conclude the provision does not apply across borders.  For the same reasons, the rule of lenity would also require a narrow application of § 1348.[23]  This outcome may result in underenforcement of cross-border criminal securities violations, but the DOJ cannot force a square peg into a round hole—it cannot seek to apply extraterritorially a statute that Congress did not clearly state has such application.  If lawmakers, or those who would lobby them, are concerned about the DOJ’s ability to prosecute cross-border conduct that threatens the integrity of U.S. and global securities markets, they will need to provide an enforcement tool that clearly does have extraterritorial application, because § 1348, the most recent and supposedly most expansive tool, likely does not fit the bill.

[1] See Janet Austin, What Exactly is Market Integrity? An Analysis of One of the Core Objectives of Securities Regulation, 8 Wm. & Mary Bus. L. Rev. 215 (2017).

[2] See Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 255 (2010).

[3] See, e.g., Section 24 of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77x (2006); Section 32(a) of the Exchange Act, 15 U.S.C. § 78ff(a) (2006); Section 49 of the Investment Company Act of 1940 (“Investment Company Act”), 15 U.S.C. § 80a-48 (2006); Section 217 of the Investment Advisers Act of 1940 (“Advisers Act”), 15 U.S.C. § 80b-17 (2006).

[4] United States v. Motz, 652 F.Supp.2d 284, 592 (E.D.N.Y. 2009) (internal citations and quotation marks omitted).

[5] 906 F.3d 823, 829–30 (9th Cir. 2018); but see United States v. Tarallo, 380 F.3d 1174, 1188–89 & 1196 n.5 (9th Cir. 2004) (holding that a criminal securities fraud case brought under § 78ff required a showing of “willfulness”); see also United States v. Chiarella, 588 F.2d 1358, 1370–71 (2d Cir. 1978), rev’d on other grounds, 445 U.S. 222 (1980) (distinguishing scienter in civil securities fraud from willfulness in a criminal case).

[6] 947 F.3d 19 (2d Cir. 2019)

[7] See id. at 36–37 (citing S. Rep. No. 107-146, at 14).

[8] Id.

[9] See, e.g., United States v. Motz, 652 F.Supp.2d at 294 (finding that § 1348 is analogous to the mail and wire fraud statutes based on its text and legislative history); United States v. Mahaffy, 693 F.3d 113 (2d Cir. 2012) (citing approvingly to Motz); Blaszczak, 947 F.3d 19 (failing to overturn the decision in Mahaffy, but finding that § 1348 should not be analogized to the mail and wire fraud statutes)

[10] Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 255 (2010).

[11] Id.

[12] See United States v. Vilar, 729 F.3d 62 (2d Cir. 2013) (“Section 10(b) and . . . Rule 10b-5, do not apply to extraterritorial conduct, regardless of whether liability is sought criminally or civilly.).

[13] See, e.g., S.E.C. v. Tourre, No. 10-cv-3229, 2012 WL 5838794 (S.D.N.Y. Nov. 19, 2012) (“The SEC [takes] the position that the [] Dodd–Frank Act has repealed Morrison’s applicability to the SEC, but only for conduct occurring after Dodd–Frank’s enactment.”); S.E.C. v. Scoville, 913 F.3d 1204, 1215 (10th Cir. 2019) (holding, contrary to Morrison, that the antifraud provisions of the securities laws apply extraterritorially “when either significant steps are taken in the United States to further a violation of those anti-fraud provisions or conduct outside the United States has a foreseeable substantial effect within the United Sates,” because the Dodd-Frank Act amended the reach of the 1933 and 1934 securities acts).

[14] Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 255 (2010) (quoting EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991)); see also Foley Bros., Inc. v. Filardo, 336 U.S. 281 (1949).

[15] RJR Nabisco, Inc. v. European Community, 136 S. Ct. 2090, 2101 (2016).

[16] 136 S. Ct. at 2101.

[17] See Morrison, 561 U.S. at 255 (finding that congressional intent regarding a statute’s extraterritorial application must be “clearly expressed”); see also RJR Nabisco, Inc., 136 S. Ct. at 2100 (finding that Congress must “affirmatively and unmistakably instruct[] that the statute” will apply extraterritorially).

[18] See id.

[19] 148 Cong. Rec. S7418 (daily ed. July 26, 2002).

[20] Id. at S7421.

[21] Id. at S7418-19, 21.

[22] Morrison, 561 U.S. at 255.

[23] See Johnson v. United States, 576 U.S. 591, 595 (2015); see also United States v. Thompson/Ctr. Arms Co., 504 U.S. 505, 517-18 (1992) (stating that where multiple readings of a statute are possible, lenity requires “selection of the narrowest reading”).

Maria Aguilar-Rocha is a Georgetown Law graduate and is currently pursuing a Securities and Financial Regulation LL.M. at the university. She is an LL.M. Articles Advisor for the Georgetown Journal of International Law. She has previously worked in the Criminal Division of the U.S. Department of Justice, where she handled a variety of cases involving securities and financial fraud, and is currently a litigation attorney at a global law firm.

Ivana Djak is a litigator in the New York office of Clifford Chance LLP focusing on transnational white collar criminal matters and government investigations. She graduated from Georgetown Law and clerked for the U.S. District Court for the Southern District of New York and the U.S. Court of Appeals for the Third Circuit before rejoining Clifford Chance.