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The U.S. Supreme Court, contrary to forty years of circuit-level law, held that the question of the extraterritorial reach of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), did not implicate a court's subject-matter jurisdiction; instead, other provisions of the securities acts gave district courts subject-matter jurisdiction to hear SEC enforcement actions generally. But Congress, in the Dodd-Frank Act, amended only the jurisdictional sections of the securities laws to indicate that the antifraud provisions applied extraterritorially when a version of the conduct-and-effects test is met. The Dodd-Frank Act did not make any explicit revisions to the substantive antifraud provisions themselves.
This case involved an alleged worldwide Ponzi scheme and the antifraud provisions of the federal Securities Act of 1933 and the Securities Exchange Act of 1934. Defendant Charles Scoville operated an internet traffic exchange business through his Utah company, Defendant Traffic Monsoon, LLC. The Securities and Exchange Commission ("SEC") initiated this civil enforcement action, alleging Defendants were instead operating an unlawful online Ponzi scheme involving the fraudulent sale of securities. In this interlocutory appeal, Scoville challenges several preliminary orders the district court issued at the outset of this still ongoing enforcement action, including orders freezing Defendants' assets, appointing a receiver, and preliminarily enjoining Defendants from continuing to operate their business.
Did the antifraud provisions of the federal securities acts apply to offers to sell, and sales of, Adpacks to Traffic Monsoon members located outside the United States?
The court upheld the preliminary rulings. The court concluded first that the antifraud provisions of the federal securities laws reach Traffic Monsoon's sales to customers outside the United States because, applying the conduct-and-effects test added to the federal securities laws by the 2010 Dodd-Frank Act, Traffic Monsoon undertook significant conduct in the United States to make those sales to persons abroad. The court further concluded that Traffic Monsoon's Adpacks (bundled internet advertising services that allowed a purchaser to share in some of Traffic Monsoon's revenue) qualified as investment contracts, which are securities regulated under the 1933 and 1934 securities acts. The court further concluded that the SEC has asserted sufficient evidence to make it likely that the SEC will be able to prove that Defendants were operating a fraudulent scheme—a Ponzi scheme—selling Adpacks and that scheme violated the antifraud statutes invoked in this litigation. Having jurisdiction under 28 U.S.C. § 1292(a)(1) and (2), the court affirmed the district court's challenged preliminary orders.