997 F.3d 52
1st Cir.2021Background
- Bio Defense, a Delaware corp with principal place in Massachusetts, raised ~$25M from private investors though it sold few products and lost money; Jonathan Morrone and Z. Paul Jurberg were senior officers paid via entities they controlled.
- After U.S. state investigations, Bio Defense stopped U.S. sales and retained foreign call-center firms (e.g., Agile) that charged ~70–75% commissions to solicit overseas investors; call centers used scripts and subscription forms provided from the U.S.
- Foreign investors sent signed subscription agreements to Morrone or Jurberg in Boston; Lu (CEO) countersigned in Boston and stock certificates were mailed from Boston — leaving Bio Defense irrevocably liable in the U.S.
- The SEC sued for violations of the Securities Act (§§5, 17) and the Exchange Act (§§10(b), 15(a), Rule 10b-5), seeking injunctive relief, disgorgement, penalties, and officer/director bars.
- The district court granted partial summary judgment for the SEC: found federal securities laws applied to the foreign solicitations (irrevocable liability in U.S.), ruled for the SEC on §§5 and 15 registration/broker claims and §17(a)(3) fraud-in-business practice; it granted some primary-fraud relief as to Morrone but left a genuine issue as to Jurberg on §10(b)/§17(a)(1).
- On appeal, defendants challenged extraterritorial application under Morrison and asserted genuine factual disputes; the First Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Extraterritoriality under Morrison | Transactions are domestic because irrevocable liability (execution/countersignature and issuance) occurred in Boston and defendants carried out substantial U.S. conduct | Morrison bars applying U.S. securities laws to solicitations of foreign investors; these were foreign transactions solicited overseas | Adopted irrevocable-liability test; transactions were domestic (liability incurred in U.S.); Parkcentral approach rejected; U.S. law applies |
| §15 (unregistered brokers) | Morrone and Jurberg acted as brokers by structuring offerings, identifying purchasers, soliciting investors, processing subscriptions, and receiving transaction-based commissions | They performed only administrative tasks and were not engaged in the business of effecting transactions | Summary judgment for SEC — defendants were engaged in the business of effecting transactions and required registration |
| §17(a)(3) (fraudulent course of business) | The solicitation scheme (hide exorbitant fees, boiler-room call centers, misleading materials) operated as a fraud on purchasers | Defendants disputed some facts but did not seriously contest that solicitation practices were fraudulent | Summary judgment for SEC — no genuine dispute that their practices violated §17(a)(3) |
| §17(a)(1)/§10(b)/Rule 10b-5 (primary fraud; substantial participation and scienter) | Morrone substantially participated and acted with scienter (knew of high fees, counsel warnings, disseminated documents without disclosure) | Defendants argued genuine factual disputes about the extent of participation and scienter (esp. as to Jurberg) | Court affirmed summary judgment as to Morrone on primary-fraud claims; for Jurberg, there remained a genuine issue on §10(b)/§17(a)(1) substantial-participation liability |
Key Cases Cited
- Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010) (transactional test limiting extraterritorial reach of §10(b))
- Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) (domestic transaction where irrevocable liability occurs in U.S.)
- Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE, 763 F.3d 198 (2d Cir. 2014) (held that a domestic transaction alone may not suffice for a domestic claim — rejected here)
- Stoyas v. Toshiba Corp., 896 F.3d 933 (9th Cir. 2018) (adopts irrevocable-liability test for domestic transactions under Morrison)
- United States v. Georgiou, 777 F.3d 125 (3d Cir. 2015) (uses irrevocable-liability analysis for domesticity)
- Riseman v. Orion Rsch., Inc., 749 F.2d 915 (1st Cir. 1984) (uses irrevocable-liability concept to determine timing/location of a securities transaction)
- Lorenzo v. SEC, 139 S. Ct. 1094 (2019) (distinguishes "employing" a scheme from "engaging" in one in Rule 10b-5 context)