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This Freshfields blog discusses a December 2024 S.D.N.Y. decision addressing whether Section 10(b) of the Exchange Act reaches extraterritorial transactions. This decision is the first in the 2nd Circuit since Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010) in which SCOTUS overturned the 2nd Circuit. Here’s background from the blog (citations omitted):

Before the Supreme Court’s ruling in Morrison, courts in the Second Circuit applied “conduct” and “effects” tests, under which Section 10(b) applied to extraterritorial transactions involving conduct that “occurred in the United States” or “had a substantial effect in the United States or upon United States Citizens.”  SEC v. Berger, 322 F.3d 187, 192-93 (2d Cir. 2003).

Morrison rejected the conduct and effects tests, holding that Section 10(b) reached “only transactions in securities listed on domestic exchange, and domestic transactions in other securities.” Within weeks of the Supreme Court’s decision in Morrison, Congress passed the Dodd-Frank Act [. . . a subsection of which] provides that U.S. courts shall have jurisdiction over actions initiated by the SEC or the United States alleging violations of the Exchange Act’s antifraud provisions that involve “conduct occurring within the United States” or “conduct occurring outside the United States that has a foreseeable substantial effect within the United States.”

In short, the Dodd-Frank Act revived the conduct and effects tests for assessing jurisdiction over actions brought by the SEC. Because Dodd-Frank amended the Exchange Act’s jurisdictional provision rather than Section 10(b) itself, which Morrison held was limited to “domestic transactions,” [it was an open question in the Second Circuit whether SEC enforcement of Section 10(b) was limited to domestic transactions.

United States Sec. & Exch. Comm’n v. Passos (S.D.N.Y.; 12/24) involved a public Brazilian company whose stock trades on a Brazilian exchange. After a short seller report was published and the company’s stock price dropped, the company’s EVP of Finance and IR allegedly created a false story with fake supporting documents and shared them with journalists. The SEC brought an action against the executive under Section 10(b) of the Exchange Act alleging that U.S.-based investors bought shares while the company’s stock price was artificially inflated due to the fraudulent story. The executive moved to dismiss, arguing that the claim was barred under Morisson because the company’s stock traded exclusively on a Brazilian exchange and the SEC did not allege any related U.S. transactions.

The district court denied Passos’s motion to dismiss, holding that Section 10(b) reached Passos’s conduct even though the relevant transactions were extraterritorial.  The Court found, first, that the text of the Exchange Act was broad enough to encompass extraterritorial misconduct, and second, that Congress’s amendment of the Exchange Act in Dodd-Frank provided the “affirmative indication” of extraterritorial application that did not exist when the Supreme Court decided Morrison.

What does this mean? The blog continues:

Passos clarifies the SEC’s ability to bring enforcement actions related to extraterritorial transactions, buttressing the Commission’s expansive view of its reach. Whether, as a policy matter, the Trump-era SEC will continue to investigate extraterritorial transactions or will instead take a narrower approach to extraterritoriality remains to be seen.

Nonetheless, non-U.S. public companies, including those listed on non-U.S. exchanges, should be cognizant of the increased risk of SEC enforcement, take steps to ensure their conduct complies with antifraud provisions of the Exchange Act, and include potential enforcement actions in their legal risk management plans.

This is particularly true of companies whose executives conduct business while in the United States or who have a broad base of U.S. shareholders, either of which might, under the right circumstances, permit the SEC to pursue an enforcement action concerning conduct related to a wholly extraterritorial transaction.

– Meredith Ervine