Let There Be Fraud (Abroad): A Proposal for a New U.S. Jurisprudence with Regard to the Extraterritorial Application of the Anti-Fraud Provisions of the 1933 and 1934 Securities Acts

With the growth of foreign participation in the U.S. securities market and the increasing numbers of U.S. investors investing abroad,(1) questions of the extraterritorial application of U.S. securities laws have become quite important. The paucity of guidance in the Securities Act of 1933(2) and the Securities Exchange Act of 1934(3) on this matter has lead to great confusion and frustration, both domestically and internationally. Domestically, courts have construed registration requirements and anti-fraud provisions with a notable degree of inconsistency.(4) Internationally, issuers and sellers have been unwittingly held to U.S. standards in foreign issuances and sales, and nation-states have balked at the arrogance with which U.S. courts have exercised jurisdiction over behavior that they consider to be solely within their sovereign domains.(5) This international friction has prompted these nation-states to introduce retaliatory measures, such as blocking statutes(6) and a reluctance to enforce judgments.(7) Many foreign issuers, fearful of possibly having to face liberal U.S. discovery requests and trial in U.S. courts, have implemented policies of forbidding sales to U.S. nationals.(8) Consequently, U.S. investors have been significantly hampered in their international investment endeavors by the reactions of foreign countries and businesses to the broad reach of the anti-fraud provisions of U.S. law.(9) In response, the U.S. Securities and Exchange Commission (SEC) has implemented certain provisions and published memoranda of understanding that indicate a willingness to address some of these concerns. Examples of new SEC actions include the Multijurisdictional Disclosure Statement,(10) which allows foreign issuers to file the same forms with the SEC as they file in their home states; Regulation S,(11) which clarifies when foreign issuers must register with the SEC; and the International Securities Enforcement Cooperation Act of 1990,(12) which furthers cooperative efforts among the signatory states in the area of enforcement. There remains, however, one area of securities law that has been conspicuously neglected: the extraterritorial application of the anti-fraud provisions of U.S. law. To what extent do the prohibitions against fraud extend beyond the United States' territorial borders? Despite calls from academia and the business community,(13) the SEC and Congress have failed to address this thorny issue. Instead, the courts have been left to grapple with the issue of extraterritoriality. Not surprisingly, given the lack of Congressional guidance in this area, the courts have come to inconsistent conclusions.(14) Rather than look to analogous areas of the securities laws for guidance, the courts have assumed that the anti-fraud provisions are fundamentally different: [i]t is elementary that the anti-fraud provisions of the federal securities laws apply to many transactions which are neither within the registration requirements nor on organized markets.(15) There is currently a split among the circuits with regard to the extent to which the anti-fraud provisions apply extraterritorially. This Note argues that the current state of the law is ambiguous and detrimental to U.S. interests and calls for a new jurisprudence that will present issuers and investors with clearly defined parameters that will ultimately protect U.S. business concerns. Part I of this Note describes the current state of the law and the split among the circuits. Part II focuses on the problems with die current state of the law and its pernicious effects on the U.S. market. Part III proposes abolishing the tests currently employed and in their stead implementing a new domestic-traded test, which ultimately provides greater predictability. I. Current State of the Law The most frequently cited anti-fraud provision of the federal securities laws is section 10(b) of the Securities Exchange Act of 1934, which makes it unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . …