913 F.3d 1204
10th Cir.2019Background
- Charles Scoville operated Traffic Monsoon, a Utah LLC that sold internet advertising and $50 "Adpacks" via a website hosted on U.S. servers; Scoville ran the business from Utah.
- An Adpack included advertising credits plus the opportunity to share in Traffic Monsoon revenue (up to $55), typically yielding ~10% over ~55 days; purchasers could qualify by spending minutes clicking rotating ads.
- From Oct. 2014–July 2016 Traffic Monsoon took in ~$176M in cash (mostly Adpacks), paid out ~$88M, and retained a shortfall of ~$87.4M; ~90% of Adpacks were purchased by persons abroad.
- PayPal froze Traffic Monsoon’s account in Jan. 2016; Scoville withdrew ~$23M in the two weeks before the SEC sued in July 2016.
- The SEC obtained ex parte orders freezing assets, appointing a receiver, and enjoining operations; after a hearing the district court made the TRO a preliminary injunction and maintained the receivership.
Issues
| Issue | Plaintiff's Argument (SEC) | Defendant's Argument (Scoville/Traffic Monsoon) | Held |
|---|---|---|---|
| Extraterritorial reach of antifraud provisions | Dodd‑Frank §929P(b) permits SEC to reach foreign Adpack sales where significant conduct occurs in U.S. or foreign conduct has foreseeable U.S. effects | Antifraud provisions do not apply extraterritorially to sales to foreign purchasers | Court: Dodd‑Frank rebutted presumption against extraterritoriality; U.S. conduct (creation/operation, servers, promotion from Utah) were significant steps, so statutes apply to foreign sales |
| Whether Adpacks are "securities" | Adpacks are investment contracts under Howey: investment, common enterprise, expectation of profit from others' efforts | Adpacks are merely advertising services; purchaser efforts (clicking) negate Howey's "solely from others' efforts" prong | Court: Adpacks satisfy Howey: economic reality shows investment in a common enterprise with reasonable profit expectations primarily from Traffic Monsoon's enterprise |
| Likelihood of SEC success on antifraud claims (fraud/Ponzi scheme) | Evidence shows returns paid from new investors, misrepresentations about revenue sources, failure to deliver promised advertising — likely a Ponzi scheme and thus likely fraud | Traffic Monsoon sold legitimate advertising services; not a Ponzi scheme; purchasers had disclosures and performed clicks to qualify; no proof of scienter | Court: Sufficient evidence of Ponzi‑style operations and deceptive representations to find SEC likely to prevail; scienter supported by scheme’s inherently deceptive nature |
| Receivership and asset freeze (scope) | Receiver and asset freeze necessary to preserve assets for equitable relief/disgorgement | Release funds earned from non‑Adpack services (~$3M) outside SEC claims | Court: Freeze and receivership appropriate; given pooled revenues and lack of accounting, SEC showed need to freeze all Traffic Monsoon funds |
Key Cases Cited
- SEC v. Thompson, 732 F.3d 1151 (10th Cir. 2013) (discusses Ponzi schemes in securities context)
- Okla. Dep't of Sec. ex rel. Faught v. Wilcox, 691 F.3d 1171 (10th Cir. 2012) (Ponzi scheme characterization)
- SEC v. Shields, 744 F.3d 633 (10th Cir. 2014) (Howey/Howey‑prong analysis and economic‑realities approach)
- Howey Co. v. SEC, 328 U.S. 293 (1946) (establishes test for investment contract)
- Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247 (2010) (extraterritoriality framework for §10(b))
- RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090 (2016) (extraterritoriality two‑step framework)
- WesternGeco LLC v. ION Geophysical Corp., 138 S. Ct. 2129 (2018) (two‑step extraterritoriality analysis reaffirmed)
- Arbaugh v. Y & H Corp., 546 U.S. 500 (2006) (distinguishing jurisdictional limits from merits elements)
- Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) (scope of Rule 10b‑5/§10(b) liability)
- Aaron v. SEC, 446 U.S. 680 (1980) (scienter requirement under §10(b) and §17(a))