1. Morrison prohibits fraudulent transactions involving stocks listed on a national stock exchange. The four Target Stocks were listed on the OTC Bulletin Board and the Pink OTC Markets Inc. Are the OTCBB and the Pink Sheets national exchanges?

2. What is the test that the Georgiou court fashions to determine whether securities transactions are domestic and therefore subject to U.S. securities laws?

A federal jury convicted George Georgiou of conspiracy, securities fraud, and wire fraud for his participation in planned manipulation of the markets of four publicly traded stocks, resulting in more than $55,000,000 in actual losses. The district court sentenced him to 300 months’ imprisonment, ordered him to pay restitution of $55,823,398 and also subjected him to forfeiture of $26,000,000. The four target stocks were quoted on the OTC Bulletin Board (OTCBB) or the Pink OTC Markets Inc. (Pink Sheets). Georgiou and his co-conspirators opened brokerage accounts in Canada, the Bahamas, and Turks and Caicos. They artificially inflated the stock prices, created the false impression that there was an active market in the target stocks, and sold their shares at inflated prices. In June 2006, one of Georgiou’s co-conspirators began cooperating in an FBI sting. Monitoring Georgiou’s transactions, the FBI found that at least some of the manipulated trades were transacted through market makers in the United States.

Georgiou maintained that his convictions were improperly based on the extraterritorial application of United States law. He relied on the Supreme Court’s ruling in Morrison v. National Australia Bank Ltd., in which the Court held that Section 10(b) of the Securities and Exchange Act does not have any extraterritorial reach. 561 U.S. 247 (2010). The Court of Appeals for the Third Circuit had to determine whether the purchases and sales of securities issued by U.S. companies through U.S. market makers acting as intermediaries for foreign entities constitute “domestic transactions.”

JUDICIAL OPINION

GREENAWAY JR., C. J.… The Supreme Court has limited the application of Section 10(b) to actors who employ manipulative or deceptive device[s] in two contexts: (1) transactions involving “the purchase or sale of a security listed on American stock exchange,” and (2) transactions involving “the purchase or sale of any other security in the United States.” Morrison, 561 U.S. at 273. Indeed, Section 10(b) has no extraterritorial reach…. Thus, we consider here whether any of the relevant transactions Georgiou is charged with have the requisite nexus to the United States under Morrison to subject him to liability under Section 10(b).

In this case, foreign entities purchased and sold securities quoted on the OTCBB and the Pink Sheets. Several of these purchases were executed by market makers operating within the United States. In contrast, the Court in Morrison considered a “foreign cubed action … in which (1) foreign plaintiffs [were] suing (2) a foreign issuer in an American court for violations in (3) foreign countries.” Morrison, 561 U.S. at 283 n.11 (Stevens, J., concurring in the judgment). In that case, all aspects of the trades at issue occurred abroad, and thus, it was determined that Section 10(b) did not apply. There are two key distinctions between Morrison and the instant case: (1) the transactions in this case involve stocks of U.S. companies, (2) that were executed through American money makers. To determine whether the transactions at issue were domestic transactions under Morrison, we consider “not … the place where the deception originated, but [the place where] purchases and sales of securities” occurred. It is the “location of the transaction that establishes (or reflects the presumption of) the [Security Exchange] Act’s inapplicability.” Id. at 268. ……………………………….