Life after Morrison: extraterritoriality and RICO.

AuthorMello, R. Davis

ABSTRACT

For years, the federal courts of appeals have borrowed heavily from securities law jurisprudence in developing a framework for analyzing claims under the Racketeer Influenced and Corrupt Organizations Act (RICO). Last year, in the case of Morrison v. National Australia Bank, the Supreme Court issued a ground-breaking opinion that rejected decades of lower court precedent related to the extraterritorial application of U.S. securities laws and reemphasized the vitality of the presumption against extraterritoriality. Because of the parallel development of securities law and RICO jurisprudence, Morrison will have significant consequences for the application of RICO in cases involving foreign defendants and criminal activity conducted overseas. In the immediate wake of Morrison, two lower courts issued opinions with differing interpretations of how to analyze extraterritoriality in the RICO context. This Note considers the evolution of judicial treatment of extraterritoriality in the securities law context, the fundamental principles of RICO jurisprudence, and the historical RICO jurisprudence regarding extraterritoriality. This Note then discusses the two approaches taken by the lower courts in light of Morrison before ultimately endorsing a third approach, which is both more doctrinally sound and more practically workable.

TABLE OF CONTENTS I. INTRODUCTION II. THE SECURITIES EXCHANGE ACT OF 1934 A. Pre-Morrison: Extraterritoriality and the Exchange Act of 1934 B. The Decision in Morrison III. THE RACKETEERING INFLUENCED AND CORRUPT ORGANIZATIONS ACT A. The RICO Statute B. Extraterritoriality and RICO: Pre-Morrison Jurisprudence C. Extraterritoriality and RICO: Post-Morrison Jurisprudence IV. ANALYZING THE POST-MORRISONRICO JURISPRUDENCE A. The Domestic Enterprises Approach of Cedeno B. The "Contacts" Approach of Norex V. A BETTER ALTERNATIVE A. The Need for a Third Alternative B. A Complete Pattern of Racketeering Activity in the United States VI. CONCLUSION I. INTRODUCTION

In light of the United States Supreme Court's recent decision in Morrison v. National Australia Bank, (1) lower courts have begun to reevaluate how they handle issues of extraterritorial application of the Racketeer Influenced and Corrupt Organizations Act (RICO). (2) Morrison arose under federal securities law, (3) but for decades courts have borrowed from securities law jurisprudence to address extraterritoriality issues under RICO. (4) After Morrison dramatically altered the jurisprudential landscape of extraterritoriality and the securities laws, (5) courts must now reconsider the extraterritorial reach of RICO.

In Morrison, the Supreme Court rejected decades of lower court precedent to hold that courts must look to where the relevant transaction occurred to determine whether a securities fraud claim could be brought in the United States under [section] 10(b) of the Securities Exchange Act of 1934 (Exchange Act). (6) Morrison involved a securities fraud claim brought against an Australian bank in connection with its mortgage servicing operations in the United States. (7) The bank's stock was not traded on U.S. exchanges. (8) The Court held that [section] 10(b) did not provide a cause of action "to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges." (9) The Court emphasized that absent "the affirmative intention of the Congress clearly expressed" to give a statute extraterritorial effect, courts must presume that legislation "is meant to apply only within the territorial jurisdiction of the United States." (10) The Court was careful to clarify that the claim in Morrison was not jurisdictionally barred but simply failed to state a claim under [section] 10(b) because the statute applies only to transactions in securities listed on domestic exchanges and domestic transactions in other securities. (11)

The Morrison decision has important implications beyond the [section] 10(b) context. The Court's revitalization of the presumption against extraterritoriality will reverberate through established jurisprudence applying RICO. Courts have used the same conduct and effects test that was rejected in Morrison to apply RICO to extraterritorial activity. (12) Because lower courts have already held that the text of the RICO statute does not contemplate extraterritorial application, (13) Morrison would seem to dictate that RICO does not create a cause of action arising out of extraterritorial activity. (14) In fact, the Second Circuit recently relied on Morrison in dismissing a RICO claim filed by a Canadian shareholder in a Russian oil company against foreign persons and entities. (15)

The Supreme Court's recent rejection of the conduct and effects tests in favor of a "transactional" test in the [section] 10(b) context raises the question of how to define extraterritoriality in RICO cases. (16) The Court reinvigorated the presumption against extraterritoriality in Morrison, but the threshold issue in a RICO case involving extraterritorial conduct is whether the claim seeks extraterritorial, or merely domestic, application in the first place. The transaction in a [section] 10(b) case is a discrete event, and courts can readily determine where the transaction occurred. In RICO cases, however, by definition, the underlying activity giving rise to the plaintiffs claim is a series of events--specifically, a "pattern of racketeering activity." (17) In Norex Petroleum Ltd. v. Access Industries Inc., the first post-Morrison decision by an appellate court to address extraterritoriality and RICO, the Second Circuit was dismissive of the allegation that some of the alleged RICO violations occurred in the United States, stating that "simply alleging that some domestic conduct occurred cannot support a claim of domestic application." (18) It is not clear that Morrison dictates such a result in the RICO context, however; in fact, courts should embrace a more practical approach in considering the reach of RICO's domestic application. While there is language in the Morrison opinion suggesting that certain contacts with the United States will exist in many, if not all, cases of extraterritorial application of the securities laws, (19) extraterritoriality in the RICO context requires some separate consideration due to the very different nature of the activity prohibited by RICO.

This Note explores the development of judicial doctrine in the extraterritorial application of securities laws and of the RICO statute. This Note ultimately considers three alternative views of extraterritoriality and RICO under the new Morrison paradigm. One approach to defining extraterritoriality in the RICO context, evident in a recent decision from the Southern District of New York, would apply RICO to domestic enterprises, but not to foreign enterprises. (20) A second approach, seemingly endorsed by the Second Circuit, would determine the applicability of RICO based on whether a substantial part of the alleged racketeering scheme, viewed as one cohesive unit, took place in the United States. (21) Based on a more plain reading of the statute and a more practical view of what constitutes domestic application, this Note endorses a third approach, which would apply RICO domestically in any case where a plaintiff alleges that at least two acts of racketeering activity (that otherwise satisfy RICO's "pattern" requirement) (22) occurred in the United States within a ten-year time period. (23)

  1. THE SECURITIES EXCHANGE ACT OF 1934

    In 1934, Congress enacted the Securities Exchange Act, which includes the now ubiquitous anti-fraud provision of [section] 10(b), to regulate aftermarket securities trading. (24) Because the federal courts would ultimately model their approach to extraterritoriality and RICO on the analogous securities law jurisprudence, it is necessary to examine briefly the development of that [section] 10(b) extraterritoriality jurisprudence, culminating in the recent Morrison decision.

    A. Pre-Morrison: Extraterritoriality and the Exchange Act of 1934

    For at least the last fifty years, federal courts have wrestled with the application of the Securities Exchange Act to international securities transactions. (25) "It is a longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States." (26) Early international securities cases recognized the legislative silence concerning extraterritorial application of the Exchange Act, and [section] 10(b) claims "were thought to be available only to investors defrauded in transactions conducted within the territorial limits of this country." (27)

    In 1967, the Second Circuit took "an important first step" in expanding the extraterritorial reach of [section] 10(b) in Schoenbaum v. Firstbrook. (28) Schoenbaum involved the sale in Canada of a Canadian corporation's treasury stock to other foreign entities. (29) The corporation's common stock was traded on both the American Stock Exchange and the Toronto Stock Exchange. (30) Despite the fact that the statute was silent as to extraterritorial application, the court discerned that "Congress intended the Exchange Act to have extraterritorial application in order to protect domestic investors who have purchased foreign securities on American exchanges and to protect the domestic securities market from the effects of improper foreign transactions in American securities." (31) The court held that [section] 10(b) applied to foreign securities transactions "at least when the transactions involve stock registered and listed on a national securities exchange, and are detrimental to the interests of American investors." (32)

    Five years later, the Second Circuit further expanded the extraterritorial reach of [section] 10(b) in Leasco Data Processing Equipment Corp. v. Maxwell. (33) Leasco involved...

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