Yesterday, defendant Perry Gruss moved to certify for immediate appeal Judge Sweet’s recent ruling in SEC v. Gruss concerning the extraterritorial application of the Investment Advisers Act. In a case of first impression, Judge Sweet held that that the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), did not bar SEC enforcement of Section 206 of the IAA even where the alleged fraud involved a foreign investor subject to a foreign securities regulatory regime. Judge Sweet concluded: “To bar the SEC, the government agency tasked with the job of regulating investment advisers from initiating an action against a domestic adviser because his actions defrauded a foreign investor would defeat the purposes of the IAA.” Judge Sweet’s ruling was the first to consider the implications of Morrison for IAA Section 206 enforcement actions. In Morrison, the Supreme Court held that Section 10(b) of the Securities Exchange Act of 1934 did not apply extraterritorially. In seeking certification, Gruss stated that whether Section 206 has extraterritorial reach is “an issue of first impression of national importance” because Section 206 is “one of the key antifraud provisions in the federal securities laws” and is “routinely relied on by the SEC to protect investment funds.” The Second Circuit’s early resolution of the issue therefore could affect “numerous on-going non-public SEC investigations as well as cases pending in district courts across the country.”
The SEC sued Gruss, a former CFO of a hedge fund manager, for, among other things, allegedly misappropriating cash belonging to an offshore fund for onshore fund investments. Gruss moved to dismiss the complaint, arguing that Morrison barred the SEC’s complaint; the IAA could not be applied abroad. Judge Sweet rejected Gruss’ arguments for a number of reasons, including that Morrison was a private suit brought by a foreign defendant, whereas the suit against Gruss was brought by the SEC, the U.S. government agency charged with protecting the investing public and preventing fraud. Additionally, unlike Morrison’s foreign-cubed scenario, where the plaintiff, defendant, and the securities transactions were all foreign, in Gruss, the SEC had alleged claims against a domestic defendant of a domestic investment adviser based on fraudulent conduct alleged to have occurred in the U.S. Judge Sweet also distinguished the purposes behind the Exchange Act and the IAA. Judge Sweet observed that the Exchange Act focuses on the purchases and sales of securities in the United States, whereas the IAA, which was enacted to prevent fraudulent practices by investment advisers, focuses on the investment adviser and its actions, not the client. Finally, although Section 206 of the IAA, like Section 10(b), is silent as to its extraterritorial application, Judge Sweet refused to infer from this silence that Congress did not intend for the statute to apply abroad. Instead, Judge Sweet observed that shortly after Morrison, Congress passed Section 929P(b) of the Dodd-Frank Act, amending the Securities Act of 1933, the Exchange Act, and the IAA to allow the SEC and DOJ to commence extraterritorial enforcement actions in certain cases.