U.S. criminal laws don’t apply to conduct abroad: 2nd Circuit

August 30, 2013

Attention, American fraudsters! If you restrict your criminal activities to conduct outside of the United States, you’re safe from prosecution under U.S. laws.

That’s not exactly how a three-judge panel of the 2nd Circuit Court of Appeals worded its decision Friday in U.S. v. Alberto Vilar and Gary Tanaka, but it’s the effective result of the appellate court’s finding that criminal statutes – in particular, criminal securities fraud laws – don’t extend overseas. The opinion noted that the 2nd Circuit has long recognized a presumption against the extraterritorial application of U.S. criminal laws. But make no mistake, the Vilar ruling is a major interpretation of what the court acknowledged to be an open question after the U.S. Supreme Court’s 2010 admonition against overextending the scope of U.S. laws in Morrison v. National Australia Bank. Namely, does Morrison apply to criminal as well as civil laws? The 2nd Circuit panel – Judges Jon Newman, Jose Cabranes and Chester Straub – could not have answered the question more decisively. “The general rule,” wrote Cabranes, “is that the presumption against extraterritoriality applies to criminal statutes.”

That reasoning could result in the dismissal of some counts of the government’s indictment of onetime SAC Capital trader Mathew Martoma, whose lawyers at Goodwin Procter argued in a brief filed in June that Morrison precludes charges based on trading in the American Depository Receipts of Elan, a company whose stock trades on Irish and British exchanges. The intersection of Morrison and fraud prosecution is also at issue in a 2nd Circuit appeal by former Sky Capital executives Ross Mandell and Andrew Harrington, who were convicted of defrauding mostly British investors in London-traded securities.

Unfortunately for Vilar and Tanaka, who controlled U.S. and international investment advisory firms under the umbrella name Amerindo, the 2nd Circuit upheld their convictions for deceiving investors in two Amerindo vehicles. There was no question that the securities Vilar and Tanaka sold were not listed on any exchange in the United States, and that many foreign investors completed their purchases abroad. The appeals court found, however, that some of Amerindo’s alleged victims transacted in the United States to purchase the securities. Those purchases were domestic transactions under Morrison, the 2nd Circuit said, so they justified the 2010 jury verdicts against Vilar and Tanaka.

But that very limited affirmation has to be considered a blow to prosecutors from the Manhattan U.S. Attorney’s office, who had asked the 2nd Circuit for a much broader holding that would have insulated criminal cases from Morrison defenses. The government argued that the Supreme Court’s 1922 decision in United States v. Bowman holds that U.S. criminal laws apply to conduct outside our borders even if they do not specify extraterritoriality. (In Bowman, the court ruled that criminal charges could be brought against sailors who conspired while at sea to defraud a government-owned company.) Under the government’s reading, the 2010 Morrison decision applied only to civil statutes, not to criminal laws; even though Morrison specifically addressed a securities fraud class action, prosecutors said there’s a distinction between civil fraud suits and criminal prosecutions.

The 2nd Circuit was distinctly unimpressed with the government’s arguments. A more appropriate reading of Bowman, according to Cabranes’s opinion, is that the only exception to the presumption against extraterritoriality in criminal laws is for cases involving alleged crimes against the United States. Cabranes said that before Morrison, the 2nd Circuit “repeatedly observed” that the Bowman decision does not override the presumption in cases involving supposed crimes against private individuals or private property. He conceded that Morrison requires the appeals court to re-evaluate the issue of the extraterritoriality of criminal laws, just as it has forced the 2nd Circuit to make new law on the limits of civil securities and RICO litigation. (Cabranes referred to “yet another issue created by the Supreme Court’s far-reaching holding in Morrison,” noting that “despite the supposed bright-line nature of Morrison’s holding, there has been no shortage of questions raised in its wake.”) But the court said Bowman and Morrison aren’t in tension. They both support the principle that criminal laws don’t extend to overseas conduct. “The distinction the government attempts to draw between civil and criminal laws is no response to the fundamental purposes of the presumption,” the appeals court said.

In particular, the 2nd Circuit said, Morrison limits the government’s reach in securities fraud prosecution. The same law governs both private securities litigation and securities fraud prosecution, and that law has already been determined by the Supreme Court in Morrison to be restricted to cases involving domestic transactions or U.S.-listed securities. “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,” the court said.

The appeals court did vacate the sentences of Vilar and Tanaka because both their prison terms and restitution depended in part on losses by foreign investors. The 2nd Circuit directed U.S. District Judge Richard Sullivan to consider on remand whether those foreign investor losses should factor in the defendants’ sentences but ruled that they cannot serve as the basis of restitution orders.

Vilar counsel Vivian Shevitz said in an email that she’s gratified by the appeals court’s ruling on Morrison and on Vilar’s sentence, as well as a ruling that Vilar can pursue a defense that his trial lawyer didn’t provide effective assistance. Vilar will continue to contest the conviction, she said. Tanaka counsel Nathan Dershowitz of Dershowitz Eiger & Adelson didn’t respond to a request for comment. Mathew Martoma’s lawyer, Richard Strassberg of Goodwin, declined comment. Ross Mandell counsel Matthew Brissenden said in an email that the Vilar ruling “may have ramifications far beyond just the interpretation of (securities fraud laws),” but declined to comment on its potential impact in Mandell’s case.

(This post has been corrected. An earlier version misidentified Judge Jon Newman.)

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