(Reuters) - In June, a long-simmering – but mostly theoretical – debate over the implications of a securities-law provision of the Dodd-Frank financial reform act came to the U.S. Supreme Court. On Monday, five prominent securities law professors urged the justices to take up the case.
Charles Scoville, who managed an internet advertising firm that sold investors a share of its purported revenue along with advertising services, was sued by the Securities and Exchange Commission for running an alleged Ponzi scheme. Scoville argued (among other things), that almost all of his investors were based overseas, so under the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank (130 S.Ct. 2869), which limited the extraterritorial reach of U.S. securities laws, the SEC couldn’t hold him liable.
The government countered that Congress fixed the extraterritoriality problem in Dodd-Frank, which was signed into law about a month after the Supreme Court’s Morrison decision. Dodd-Frank included a provision extending the subject-matter jurisdiction of U.S. courts to hear SEC or Justice Department cases involving foreign-traded securities as long as the defendant’s alleged misconduct took place or had a substantial effect in the U.S.
Scoville responded that Congress didn’t actually fix anything. The Supreme Court’s Morrison ruling, he argued, wasn’t about jurisdiction but about the substantive scope of U.S. securities laws. Whatever Congress intended in Dodd-Frank, he said, the law’s provision extending subject-matter jurisdiction in SEC and DOJ securities suits did not reverse the Supreme Court’s bar on claims involving overseas transactions.
In precedent-setting decisions, both the trial court and the 10th U.S. Circuit Court of Appeals (913 F.3d 1204) rejected Scoville’s argument. The appeals court acknowledged that Congress didn’t change the substance of the securities fraud laws. But it said that the context of the Dodd-Frank provision, as well as comments by the provision’s drafters, made lawmakers’ intentions clear. “Congress undoubtedly intended that the substantive antifraud provisions should apply extraterritorially when the statutory conduct-and-effects test is satisfied,” the court wrote.
Scoville’s Supreme Court lawyers at Williams & Connolly said in their June 21 petition for Supreme Court review (2019 WL 2577758) that the 10th Circuit should not have attempted to divine congressional intent but should have looked at what Dodd-Frank actually says. (George Conway of Wachtell Lipton Rosen & Katz, who won the Morrison case at the Supreme Court and has been monitoring its intersection with Dodd-Frank since July 2010, connected the Scoville team with Williams & Connolly, which did not represent Scoville at the 10th Circuit.)
“Dodd-Frank did not amend the relevant antifraud provisions - provisions that, under Morrison, are the obstacle to any claim based on extraterritorial conduct,” the petition said. The 10th Circuit ruling, it argued, “flouts foundational principles of statutory interpretation providing that a statute should be interpreted according to its plain terms.”
The petition didn’t argue that the circuits have split on Dodd-Frank’s override of Morrison – because they haven’t. Several trial courts have looked at the question, but the 10th Circuit is the only appeals court to reach a conclusion. Given that it’s been nearly 10 years since Dodd-Frank became law, Scoville’s lawyers can’t exactly argue that its intersection with the Morrison decision is a recurring issue.
Instead, the Scoville petition focuses on the Supreme Court’s interest in proper statutory interpretation, and on enforcing the distinction between jurisdictional and merits rulings. Scoville and his lawyers received a big boost Monday from an amicus brief by law professors Joseph Grundfest of Stanford, Todd Henderson of Chicago, Jonathan Macey of Yale, Richard Painter of Minnesota and Adam Pritchard of Michigan. The professors elaborated on Scoville’s argument that the 10th Circuit committed a fundamental mistake by essentially rewriting the text of Dodd-Frank’s jurisdictional provision to address what the appeals court discerned to be Congress’ true goal of reversing Morrison.
“Because the 10th Circuit panel exceeded its constitutional bounds,” the amicus brief said, “this court’s review is necessary to restore the proper balance of power between the branches of government.”
The professors’ counsel, Matthew Schwartz of Sullivan & Cromwell, argued in the brief’s most intriguing discussion that even if the 10th Circuit had properly looked at the legislative intent behind Dodd-Frank’s provision extending subject-matter jurisdiction for SEC and DOJ securities cases, it should not have relied just on comments from a single senator and House representative. Both congressmen added comments to the legislative record at the last minute, in the scant weeks between the Supreme Court’s Morrison ruling and the enactment of Dodd-Frank.
In fact, according to the professors, Dodd-Frank’s drafters had plenty of warning about the Morrison case. Morrison was a private securities class action, but the government submitted an amicus brief outlining the implications of the case for the SEC and DOJ. The government’s Morrison brief argued that the reach of U.S. securities laws is not a matter of jurisdiction but of substance. And, according to the law professors, the SEC and DOJ lawyers who wrote the government’s Morrison brief “were also ‘substantially involved’ in advising members of Congress regarding the effect of the extraterritoriality provisions at issue.”
In other words, according to the professors, Congress was on notice before the Morrison decision came down that if lawmakers wanted to assure the government’s right to pursue extraterritorial securities claims, Dodd-Frank’s proposed expansion of jurisdiction would not get the job done. It’s even possible to infer, the professors argued, that some members of Congress who voted for Dodd-Frank were fully aware that the bill did not reverse Morrison. “This inference is no less likely than the opposite inference,” they posited.
I checked the profs’ theory with David Becker of Cleary Gottlieb Steen & Hamilton, who was the SEC’s general counsel when the Morrison decision came down and Dodd-Frank was finalized. Becker said in an email that in advance of the Supreme Court’s ruling, he and his colleagues suggested legislative language “that would overturn any result limiting the SEC’s enforcement powers.”
After the decision, Becker said, his team believed the language already shared with Congress – which was the jurisdictional language ultimately included in Dodd-Frank – was sufficient to reverse Morrison’s limits on SEC and DOJ enforcement. But in anticipation of arguments that the law addressed only jurisdiction, the SEC supported the addition of statements in the legislative record to clarify Dodd-Frank’s intent.
“Of course the statute authorizes extraterritorial cases under the antifraud provisions of the federal securities laws,” Becker said. To suggest otherwise, Becker said, would imply that Congress passed a law granting U.S. courts jurisdiction over cases that could never be brought.
“There is nothing in the legislative history to suggest that Congress intended this bizarre result,” Becker said.
I suspect the SEC will have something similar to say in its response to Scoville’s petition. That response is due on Aug. 21.
The views expressed in this article are not those of Reuters News.