SEC ARGUES ANTI-FRAUD JURISDICTION EXTENDS TO NON-US PLAINTIFFS AND DEFENDANTS
The SEC has filed a brief arguing that it should be able to enforce the anti-fraud rules against non-US defendants where losses are exclusively borne by non-US investors. In the brief, the SEC argues that the antifraud rules should “apply to transnational frauds that result exclusively or principally in overseas losses if the conduct in the United States is material to the fraud’s success and forms a substantial component of the fraudulent scheme.” The SEC compared this standard to one of pure causation i.e. the conduct in the US caused the losses. The SEC argues that the courts should apply this materiality standard to ensure that the US does not become a “base for fraudulent activity.” The case at issue involves non-US investors in a foreign bank whose stock price plummeted as a result of misleading valuations calculated by the defendant’s US subsidiary.
OUR TAKE: Application of this materiality standard could have a significant impact on US-based offshore fund sponsors. Even if a fund is domiciled in a foreign jurisdiction and all investors are domiciled outside the US, the sponsor (even if it is not a registered investment adviser) could be subject to an anti-fraud action or claim if the SEC or a plaintiff could show that the basis of the fraud occurred in the US.