Page 4 - Litigation

S4 | MONDAY, FEBRUARY 24, 2014 | Litigation
| NYLJ.COM

Extraterritorial Reach

Of White-Collar Criminal Statutes

‘Vilar’ suggests a signiicant limitation.

corporation in which the United States acts committed outside the United
BY BENJAMIN GRUENSTEIN was a stockholder. Their plan, formu- States. Alberto Vilar and Gary Alan
AND ALAN GUY
lated and put into motion from a ship Tanaka were investment managers
at sea, was to purchase 1,000 tons of and advisers operating through com-
In United States v. Vilar,1 the U.S. fuel on behalf of the victim corpora- panies in the United States and abroad.
Court of Appeals for the Second tion, deliver 600 tons and resell the rest Between 1986 and 2005, Vilar and
Circuit held that the presumption for their own beneit. The trial court Tanaka induced a group of individual
against extraterritoriality, which the dismissed the indictment on jurisdic- clients to transfer signiicant sums into
Supreme Court applied to civil actions tional grounds. It acknowledged that so-called Guaranteed Fixed Rate Depos-

under the federal securities fraud stat- Congress could exercise jurisdiction it Accounts (GFRDAs). The clients were
ute in Morrison v. National Australia over ships at sea, but noted: told their money was being placed in
Bank, 2 applied equally in criminal Congress had always expressly low-risk investments, when in fact Vilar
cases. Rejecting the government’s indicated . when it intended that
and Tanaka were using the funds to
argument that the presumption did not its laws should be operative on take positions in volatile stocks.11 While
apply “in the criminal context,” the Sec- the high seas” and that the statute at least one client signed an investment
ond Circuit ruled that “a defendant may under which the defendants were agreement concerning a GFRDA in the
be convicted of securities fraud under charged made “no reference to the United States, the defendants argued
Section 10(b) and Rule 10b-5 only if high seas as a part of the locus of that the vast majority of the transac-
he has engaged in fraud in connec- the offense.7
tions “were deliberately and carefully
tion with (1) a security listed on a U.S. structured to occur outside the United
exchange, or (2) a security purchased The Supreme Court applied a dif- States . by the investors.”12
or sold in the United States.”3 Neverthe- ferent analysis, recognizing the pre- The value of these investments col-
less, the court upheld the defendants’ sumption against extraterritoriality as lapsed in late-2000, creating signiicant

convictions in light of evidence that valid but holding that its application inancial problems for Vilar and Tanaka.
they had also “engaged in fraud in con- depended on the nature of the offense. In June 2002, the defendants solicited
nection with a domestic purchase or Offenses “against private individuals a $5 million investment from one of
sale of securities.”4
or their property, like assaults, mur- their long-time clients, claiming that
At the same time that it applied der, burglary, larceny, robbery, arson, they had been licensed to form a Small
the presumption against extraterri- embezzlement, and frauds of all kinds, Business Investment Company (SBIC),
toriality in the criminal context, the which affect the peace and good order which would receive signiicant inan-
Second Circuit emphasized that “the of the community must . be commit- cial support from the U.S. government.
same rule of interpretation should not ted within the territorial jurisdiction The client agreed to make the invest-
be applied to criminal statutes which of the government” and “[i]f punish- ment and signed documents to that
are, as a class, not logically dependent ment of them is to be extended to effect while in New York. In reality, Vilar
on their locality for the Government’s include those committed out side of and Tanaka had no such license and
jurisdiction, but are enacted because the strict territorial jurisdiction, it is used the funds to cover personal and
of the right of the Government to natural for Congress to say so in the business expenses—including claims

defend itself against obstruction, or statute.”8 However, “the same rule of arising out of the collapsing GFRDA
fraud wherever perpetrated.”5 This interpretation should not be applied scheme. When Vilar was unable to
principle, articulated by the Supreme to criminal statutes which are, as a promptly return the client’s funds in
Court nearly a century ago in United class, not logically dependent on their early 2005, the client reported Vilar
States v. Bowman,6 has long guided locality, but are enacted because of the and Tanaka to the SEC.13
courts considering the extraterrito- right of the government to defend itself In August 2006, Vilar and Tanaka
rial reach of criminal statutes. While against obstruction, or fraud wherever were indicted on 12 counts, includ-
Morrison and its progeny may gener- perpetrated, especially if committed by ing committing and conspiring to
ally curtail the reach of federal laws, it its own citizens, oficers, or agents.”9 commit securities fraud. A nine-week
remains to be seen whether the Second Where a territorial limitation on such jury trial in the Southern District of
Circuit’s afirmation of Bowman in Vilar a statute would “curtail [its] scope and New York ended in November 2008,
will place a limit on the class of crimi- usefulness” and “leave open a large when Vilar was convicted on all counts
nal laws to which Morrison will apply. immunity for frauds as easily commit- and Tanaka convicted on, among other
The potential impact of Vilar on several ted by citizens on the high seas and in counts, securities fraud. In February

criminal laws familiar to white-collar foreign countries as at home,” extrater- 2010, Vilar was sentenced to a term of
practitioners is considered below.
ritorial application may be “inferred 108 months imprisonment and Tanaka
from the nature of the offense.”10 Find- was sentenced to a term of 60 months
‘United States v. Bowman’
ing that the defendants’ offense fell into imprisonment.14
the latter category, the Supreme Court On appeal, Vilar and Tanaka argued
In Bowman, the defendants were upheld the indictment.
that their convictions for securities
accused of conspiring to defraud a
fraud should be reversed in light of
‘United States v. Vilar’
the Supreme Court’s ruling in Morrison
that liability under §10(b) could only
BENJAMIN GRUENSTEIN is a partner and ALAN In Vilar, the Second Circuit was also arise from “transactions in securities K
is an associate at Cravath, Swaine & faced with the question of whether listed on domestic exchanges[] and OC
GUY Moore.
criminal liability could arise from
domestic transactions in » GST
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BI