US Jurisdiction Extends Overseas
By Michael A. Collora
Send Email to: mcollora@dwyercollora.com
Portions of this Article were published in the FT Fraud Report, March,2000 (London)
In recent years, through both legislation and court rulings, the United States has sought to extend its jurisdiction well beyond its borders. Few will object if this is used to capture and convict international terrorists, or search and seize the vessels of drug dealers 200 miles out at sea. But these efforts are also being duplicated in more white collar areas, creating the possibility that the ordinary businessman may become ensnared.
The US has been expanding the research of its laws to cover international acts, challenging traditional ideas of sovereignty as well as the concept of territoriality, which is the underpinning of international law. The judiciary are increasingly interpreting statutes to cover such acts, reflecting a growing concern about the integrity of US markets in a shrinking financial world. Additionally, US enforcement of such laws has become more feasible due to co-operation with foreign counterparts of agencies such as the Securities Exchange Commission (SEC) and the Federal Trade Commission (FTC).
Here we examine developing case law in several areas where the foreign businessman will have an interest.
Securities Fraud
The United States has enacted several statutes to punish fraud in the sale of securities within the US. Insider trading is normally prosecuted civilly or criminally under two rules, 10(b)5 and 14(e) of the 1934 Securities Act.
The SEC, which may sue civilly for insider trading and recover the profits, has claimed jurisdiction over foreigners when a US security is involved, or when the trading occurred in the US. Consequently, it has sought to restrain or seize profits from insider trading conducted through a foreign account, in effect forcing the true owner to come forward or lose the proceeds. See, for example, SEC v. Euro SEC Fund, 1999 US DST. LEXIS 4046.
It has used Memoranda of Understanding with foreign countries to obtain bond and trading information from a foreign brokerage house. See SEC and Indian S.E.B.I. Sign Memorandum of Understanding, Release No. IS-1124, 66 SEC Docket 1893.
In a recent case, five Swedish citizens were alleged to have purchased stock in a US corporation based on non-public information (SEC v. Heden, 51 F.Supp.2d 296 (SDNY, 1999)). It was suspected that these individuals acted in violation of 10(b). The SEC then moved successfully to freeze the five defendants' US assets to satisfy a potential judgment. In practice, it is easy for the SEC to take such action. The SEC must only show that it has a "likelihood of no success" on the merits. A freeze order can even apply to nonparties, such as those allegedly holding defendants' funds.
Of course, jurisdiction can work both ways. Foreign businessmen defrauded by US citizens or companies may use the US courts to seek damages. See, for example, Psimenos v EF Hutton & Co., Inc., 722 F.2d 1041 (2nd Cir. 1983). In this case, a Greek businessman sued a brokerage house in New York for alleged fraud. While most acts occurred in Athens, US jurisdiction upheld since trading occurred in New York.
Money Laundering
The recent prosecution of Lucy Edwards, a Bank of New York official, and her husband for laundering money transferred out of Russia demonstrates the research of US criminal laws in a fast developing area.
The money laundering statutes make it illegal to take illegally obtained proceeds and change their form through the use of monetary instruments or bank accounts. See Title 18 of the United States Code, ß1956, ß1957. According to the statute, a non-US citizen may be charged if some of the activity occurred within the United States.
Sometimes this type of prosecution requires foreign bank records. The US has successfully forced foreign banks to provide records, even in countries where there are laws prohibiting disclosure. In one instance, a US citizen turned over a Cayman bank computer disk to the government as part of a plea bargain; the bank failed to retrieve the disk. See Johnson v US, 971 F.Supp. 862(D.N.J. 1997).
In another example, the Bank of Nova Scotia, a Canadian bank, was ordered to produce documents regarding a money laundering indictment (US v. The Bank of Nova Scotia, 740 F.2d 817 (11th Cir. 1984).
More recently, US authorities succeeded in piercing the privacy laws of the Cayman Islands, known as the "Switzerland of the Caribbean". Cayman policy traditionally allows banks to withhold bank records in civil cases. However, pursuant to a FTC action for money laundering against an American, US authorities convinced Cayman authorities to release all requested bank records. Calling this a "pragmatic business decision", those releasing the records presumably acted to protect the bank from liability. The Cayman authorities also agreed to freeze the accounts of the defendant at Cayman branches of Euro Bank, Cayman National Bank, and the Bank of Nova Scotia.
It is uncertain whether this change of attitude by the Cayman government will be followed in other nations with similar reputations. Nonetheless, US authorities will pursue aggressive discovery methods, including those outside US borders.