SEC to Answer 'Morrison' Challenge by 5-31

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By Phyllis Diamond

May 4 — The Securities and Exchange Commission has until May 31 to respond to a U.S. Supreme Court bid by two convicted fraudsters who claim a federal appeals court erroneously defined what constitutes a “domestic transaction” for securities fraud liability purposes.

The U.S. Court of Appeals for the Second Circuit misapplied the standard set out in Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247 (2010), when it granted the SEC summary judgment in a civil enforcement action, petitioners Alberto Vilar and Gary Tanaka argued in a March 29 certiorari petition.

The Morrison court concluded that 1934 Securities Exchange Act Section 10(b) applies only to transactions in securities listed on U.S. exchanges or to transactions that take place in the U.S. Despite several petitions raising Morrison-related questions—including a previous bid by Vilar and Tanaka—the justices have yet to revisit the decision.

Domestic Transactions

In 2008, Vilar and Tanaka, who purported to operate several affiliated financial businesses in the U.S. and abroad, were convicted on charges they fraudulently represented to investors that the firms managed a fund that invested in high quality, short-term instruments paying a fixed rate of return.

After the defendants were sentenced, the district court granted the SEC summary judgment in a related civil action and the Second Circuit affirmed. In a summary order, the appeals court rejected Vilar and Tanaka's contention that the SEC suit was barred by Morrison, saying their transactions were “domestic in character.”

Suitable Vehicle

“Six years after Morrison, no uniform or workable standard has developed to determine which securities transactions are domestic and which are foreign,” Vilar and Tanaka wrote in their petition. “This case is a suitable vehicle to resolve the issue of the meaning of `domestic transaction.'”

In Vilar and Tanaka's criminal case, the Second Circuit concluded that Morrison applies to criminal cases (171 SLD, 9/4/13). Nonetheless, it affirmed the defendants' convictions, saying their investment fraud scheme involved at least some domestic misconduct.

In an April 2014 petition, Vilar and Tanaka asked the justices to address what makes a securities transaction domestic for Morrison purposes, among other issues (87 Securities Law Daily, 5/6/14), but the court declined (103 Securities Law Daily, 5/29/14).

The petitioners are represented by Vivian Shevitz, South Salem, N.Y.

To contact the reporter on this story: Phyllis Diamond in Washington at

To contact the editor responsible for this story: Susan Jenkins at

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