Innocent abroad? Morrison, Vilar, and the extraterritorial application of the Exchange Act.

• Author: Herz-Roiphe, Daniel E.

During the fall of 1919, two American sailors bound for Rio de Janeiro hatched a plan to defraud the United States government. (1) When their scheme--which involved an unscrupulous Standard Oil agent, a Rio-based shipbuilder, and a large quantity of fuel--came to the attention of American authorities, the sailors offered a simple defense: since their crimes were committed on the high seas, outside the territorial jurisdiction of the United States, they were presumptively beyond the reach of American law. (2)

Unfortunately for the conspirators, the Supreme Court did not agree. Instead, in United States v. Bowman, the Court held that some criminal statutes "are, as a class, not logically dependent upon their locality for the Government's jurisdiction," and are therefore presumed to apply extraterritorially even if they contain no explicit indication to that effect. (3) The Bowman decision was remarkable: in most contexts, courts assume that ambiguous statutes do not have extraterritorial application. (4) Yet Bowman's exception to the general rule, which many subsequent courts chose to read as a broad carve-out for all criminal statutes, (5) has proven highly influential. It helped give rise to a comparatively liberal approach to the extraterritorial application of criminal law that has endured for decades. (6)

Some eighty-eight years after Bowman, though, the Supreme Court handed down another landmark ruling that seemed to question the presumptive extraterritorial application of criminal statutes. In Morrison v. National Australia Bank, (7) the Court significantly limited the extraterritorial reach of section 10(b) of the Securities Exchange Act of 1934, holding that this provision only barred frauds committed in connection with domestic securities transactions. (8) Since [section] 10(b) covers both civil and criminal violations, the Court's reasoning, which relied heavily on the principle that "[w]hen a statute gives no clear indication of an extraterritorial application, it has none," (9) potentially implied that criminal statutes were not exempt from the presumption against extraterritoriality. Yet Morrison did not make this point explicit. Its holding--which arose from a shareholder lawsuit brought against an Australian bank by Australian investors - only directly addressed "whether [section] 10(b) of the Securities Exchange Act of 1934 provides a cause of action to foreign plaintiffs suing foreign and American defendants." (10) The opinion therefore left a question of tremendous importance unanswered: Did its narrow reading of the Exchange Act's reach apply to criminal violations of section 10(b) as well? Or did Bowman, and the corresponding tradition of construing criminal statutes to permit extraterritorial enforcement, limit Morrison's approach to civil actions?

In August 2013, the Second Circuit offered a definitive answer: "Morrison does apply to criminal cases." (11) In its opinion in United States v. Vilar, the court roundly rebuffed the government's assertion that Bowman confined Morrison's presumption against extraterritoriality to civil contexts. While noting that some opinions interpreting Bowman had been "broadly worded," Vilar returned to a narrow reading of the ninety-year-old decision, restricting its carve-out to crimes committed against the United States itself. (12) Even more significantly, the Second Circuit rebuked the government for providing "little reason, beyond its misplaced reliance on Bowman, for why the presumption against extraterritoriality should not apply to criminal statutes." (13) There was simply "no reason," the court argued, why the justifications for the presumption-which it identified as a belief that Congress "legislates with domestic concerns in mind" and a reluctance to create conflicts with foreign laws--were any "less pertinent in the criminal context." (14)

Vilar has far-reaching implications for a world in which financial markets, and the enforcement actions that police them, have grown increasingly transnational. (15) The Second Circuit's decision strips the government of its ability to prosecute overseas securities frauds--including those committed against American citizens-and therefore poses a major impediment to regulators. This Comment argues that the court should have taken a different approach. While the Second Circuit rightly concluded that nothing about the substance of criminal law renders the presumption against extraterritoriality inapplicable in criminal contexts, it ignored a related-and far more relevant-distinction between the civil shareholder suit evaluated in Morrison and the criminal fraud prosecution in Vilar: the identity of the party bringing the case.

There are good reasons to believe that the justifications underlying the presumption against extraterritoriality are, indeed, "less pertinent" when the party bringing an action is the United States government rather than a private individual--no matter whether that action is criminal or civil. This Comment accordingly argues that it would be wise to limit Morrison to its facts, reading the case to apply to private lawsuits but not government enforcement actions. This approach would ensure an effective regulatory regime that avoided unnecessary conflicts with foreign laws and faithfully effectuated congressional intent.

1. CIVIL AND CRIMINAL OR PUBLIC AND PRIVATE?

   Vilar astutely observed that the substantive interests protected by civil and criminal statutes provide "no reason" to apply the presumption against extraterritoriality to one but not the other. (16) After all, the governments asserted rationale for extraterritorial criminal application--that criminal fraud statutes are concerned with prohibiting individuals ... from defrauding American investors" (17)--holds with equal force in the civil context. Just as applying the presumption against extraterritoriality to criminal statutes creates broad immunity for criminal conduct simply because the fraudulent scheme culminates in a purchase or sale abroad," (18) so too does applying the presumption to civil statutes create broad immunity for civil frauds that take place overseas. (19)

   However, the Vilar court's summary dismissal of restrictions on the presumption against extraterritoriality ignored a more powerful argument for distinguishing between the shareholder lawsuit addressed in Morrison on the one hand, and a criminal fraud prosecution on the other. While the action in Morrison was brought by private plaintiffs (Australian ones, no less), the Vilar case was filed by the executive branch of the United States government.

   Unlike a distinction between criminal and civil statutes-which, as the Second Circuit noted, is supported by little more than courts' historical willingness to apply criminal statutes extraterritorially-a distinction between public and private plaintiffs rests on solid theoretical footing because it cuts to the heart of why courts apply the presumption against extraterritoriality in the first place. While the presumption could be seen as nothing more than a background assumption against which Congress can legislate, this approach is unsatisfying. (20) The choice of statutory interpretation defaults has consequences, and therefore the selection of one possible baseline (e.g., no extraterritorial application) over another (e.g., universal extraterritorial application) requires some justification. (21) Indeed, judges and scholars have long provided a variety of reasons for selecting no extraterritorial application as the starting point for interpretation. (22) EEOC v. Arabian American Oil Co., a quintessential modern statement of the presumption against extraterritoriality, (23) grounds the canon in a belief that Congress "is primarily concerned with domestic conditions," (24) and a desire to avoid the "international discord" that could arise from clashes between American and foreign law. (25) If the presumption against extraterritoriality rests on these grounds, then it should extend only as far they do. (26)

   Yet, as Vilar demonstrates, these justifications founder when the presumption is used to block public enforcement actions rather than private suits. In keeping with the Supreme Court's extraterritoriality jurisprudence, Vilar laid out two reasons for adhering to the presumption against extraterritoriality: "because the presumption 'serves to protect against unintended clashes between our laws and those of other nations which could result in...