U.S. Justice vs. Foreign Fraud

The following is an excerpt from an article in:


The New York Times
Friday, October 05, 2012

U.S. Justice vs. Foreign Fraud

By FLOYD NORRIS

Ross H. Mandell was accused of running what amounted to a boiler room in Florida, peddling stocks that were overvalued at best, and fraudulent at worst, to customers who were told lies. When some of them tried to sell the securities, he would not let them do so. They lost, and he made, more than $50 million from the scam, the government said.

This spring he was convicted of securities fraud, wire fraud and mail fraud and sentenced to 12 years in prison. Judge Paul A. Crotty of the United States District Court in Lower Manhattan ordered him sent to prison immediately and directed him to forfeit $50 million.

But now he seems likely to have his convictions overturned. The prestigious Association of the Bar of the City of New York has filed a brief with the appeals court in his support, and the United States Court of Appeals for the Second Circuit has ordered him freed on bail pending appeal.

Why? He showed what turned out to be good judgment in both whom he defrauded, and where. Most of the victims were British, and the securities were traded in London, not New York.

In 2010, the Supreme Court ruled that a civil suit contending securities fraud could not proceed because the law did not apply to foreign transactions. In that case, Morrison v. National Australia Bank, foreign shareholders were suing a foreign bank whose share price had plummeted when it was disclosed the bank was taking a big loss caused by its American mortgage business.

That bank’s securities did not trade in the United States.

The case has become known as the “3-F” ruling, at least in securities law circles. Foreign issuer, foreign investors and foreign trading added up to no American jurisdiction. The fact that some of the supposedly deceptive statements were made in United States was not enough for the court, which said Congress had not authorized the application of that statute to crimes committed outside the United States.

“It is a rare case of prohibited extraterritorial application that lacks all conduct with United States territory,” wrote Justice Antonin Scalia. “But the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.”

The Supreme Court opinion was quiet as to whether it also applied to criminal cases; that is the issue in a number of pending appeals.

For more, visit www.nytimes.com.