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Second Circuit Concludes That Presumption Against Extraterritoriality Applies To Criminal Liability Under The Securities Law

Previous posts (here [1] and here [2]) have discussed extraterritorial jurisdiction issues in non-FCPA cases.

One post discussed the Supreme Court’s opinion in Kiobel v. Royal Dutch Shell Petroleum [3] concerning the Alien Tort Statute (“ATS”) and its impact on FCPA enforcement.  The decision held that the “the presumption against exterritoriality applies to claims under the ATS, and that nothing in the statute rebuts that presumption.”

The presumption issue of course is not directly relevant to FCPA enforcement actions because the FCPA is explicit as to its jurisdictional scope  and provides as follows depending on the category of person (legal or natural) subject to the law’s anti-bribery provisions.

As to U.S. persons (legal or natural) the FCPA provides for two types of jurisdictional.  The original statutory standard was (and is still part of the law) “use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance” of a bribery scheme.  However, in 1998 Congress amended the FCPA to also provide for so-called nationality jurisdiction as to U.S. persons.  15 USC 78dd-1(g) and 78dd-2(i) specifically states, in pertinent part, as follows:  “It shall also be unlawful for [any issuer organized under the laws of the United States or for any United States person] to corruptly do any act outside the United States in furtherance [of a bribery scheme] irrespective of whether such [U.S. person] makes uses of the mails or any means or instrumentality of interstate commerce in furtherance [of the bribery scheme].  In short, as to U.S. persons, in 1998 Congress explicitly amended the FCPA to provide for extraterritorial jurisdiction.

As to foreign issuers subject to 78dd-1 of the FCPA (i.e. foreign companies with shares registered on U.S. exchanges or otherwise required to file periodic reports with the SEC), the 1998 amendment found in 78dd-1(g) does not apply to such companies.    For such foreign issuers, the FCPA explicitly provides only territorial jurisdiction.

As to persons other than U.S. persons (legal or natural) or foreign issuers, the FCPA was also amended in 1998 to create an entire new category of “person” subject to the FCPA’s anti-bribery provisions.  See 78dd-3.  This category applies to non-U.S. actors and non-foreign issuers such as foreign private companies and foreign nationals.   This FCPA prong has explicit jurisdictional provisions.  78dd-3(a) states, in pertinent part, that it shall be unlawful for “any person” other than an issuer or domestic concern (that is a U.S. “person”) ”while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance [of a bribery scheme.”  Here again, the FCPA explicitly provides only territorial jurisdiction.

As noted in the prior post, just because the presumption against extraterritoriality is not directly applicable to the FCPA, it does not follow that the presumption will not have an impact on FCPA enforcement.  To the contrary, the logic and rationale of many justices in Kiobel has direct bearing on certain aspects of FCPA enforcement, and indeed can be viewed as Supreme Court disapproval of certain aspects of FCPA enforcement.  (For further specifics, including what I call the DOJ’s frequent assertion of de facto extraterritorial jurisdiction over foreign actors, see the prior post).

The above is all relevant to setting the background for an important recent decision from the influential Second Circuit Court of Appeals in U.S. v. Alberto Vilar and Gary Tanaka. [4]  In this case, concerning criminal liability under Section 10(b) of the Securities Exchange Act, the court extended the Supreme Court’s holding in Morrison v. National Australia Bank (130 S.Ct. 2869) (a civil case concerning Section 10(b)) and concluded that Section 10(b) does not apply to extraterritorial conduct, “regardless of whether liability is sought criminally or civilly.”

The finding had little actual effect in the specific case, given that the court found that the defendants engaged in territorial acts.  However, Vilar’s impact is broad, including in the FCPA context should a foreign actor in an FCPA enforcement choose to put the DOJ to its burden of proof.  [As noted in this [5] prior post, the only time this has happened in the criminal FCPA context is when Africa Sting defendant Pankesh Patel prevailed].

In reaching its conclusion, the Second Circuit gutted the DOJ’s arguments.  The court noted as follows.

“[T]he government is incorrect when it asserts that ‘the presumption against extraterritoriality for civil statutes … simply does not apply in the criminal context.'”

“The government contends, relying on [a 1922 Supreme Court case – U.S. v. Bowman], that the presumption against extraterritoriality has no place in our reading of criminal statutes.  To the contrary, no plausible interpretation of Bowman supports this broad proposition; fairly read, Bowman stands for quite the opposite.”

“[T]he government provides little reason, beyond its misplaced reliance on Bowman, for why the presumption against extraterritoriality should not apply to criminal statutes.”

“The presumption against extraterritoriality is a method of interpreting a statute, which has the same meaning in every case.  The presumption against extraterritoriality is not a rule to be applied to the specific facts of a case.  A statute either applies extraterritorially or it does not, and once it is determined that a statute does not apply extraterritorially, the only question we must answer in the individual case is whether the relevant conduct occurred in the territory of a foreign sovereign.”

[For more on the Second Circuit’s decision, see here [6] from Alison Frankel at Reuters]

To repeat, the presumption against extraterritoriality is not needed in the FCPA context, because the statute is explicit as to its jurisdiction depending on the actor.

As to foreign actors, the FCPA does not apply extraterritorially, and in the words of the Second Circuit, “the only question” becomes “whether the relevant conduct occurred in the territory of a foreign sovereign.”

As to this question, the concurring opinion of Justice Alito, joined by Justice Thomas, in Kiobel is instructive in that it stated  that when the ATS “claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritoriality.”

Applying this to the FCPA context, can it truly be said that most FCPA enforcement actions against foreign actors touch and concern the territory of the U.S. with “sufficient force”?