Domestic Status

Under the Morrison test for extraterritoriality, a Section 10(b) claim for securities fraud may only be brought if the transaction involved “the purchase or sale of a security listed on an American stock exchange” or “the purchase or sale of any other security in the United States.”  Although nominally a bright-line test, it can be difficult to apply.  In United States v. Georgiou, 2015 WL 241438 (3rd Cir. Jan. 20, 2015), the court considered whether either prong was applicable to the purchase, by a foreign entity, of securities listed on the OTCBB or Pink Sheets.

First, the court examined whether the OTCBB or Pink Sheets were “stock exchanges.”  The court found that the Securities Exchange Act of 1934 draws a clear distinction between “securities exchanges” and “over-the-counter markets” and, moreover, the OTCBB and Pink Sheets are not on the SEC’s list of registered national securities exchanges.  Accordingly, it was “persuaded that those exchanges are not national securities exchanges within the scope of Morrison.”

Second, the court examined whether the purchases were nevertheless “domestic” securities transactions.  In doing so, the court adopted the Second Circuit’s approach and held that “a securities transaction is domestic when the parties incur irrevocable liability to carry out the transactions within the United States or when title is passed within the United States.”  Because there was evidence that the trades were facilitated by U.S. market makers and that in specific instances the securities were bought or sold from entities located in the United States, the court held that they met the “irrevocable liability” standard and could be the subject of a Section 10(b) claim.

Holding: Judgment of conviction affirmed.



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