Tenth Circuit Affirms Extraterritorial Reach Of SEC Enforcement Of The Federal Securities Laws

In the Traffic Monsoon litigation, the U.S. Court of Appeals for the Tenth Circuit held that the enforcement provisions of the Securities Act and the Exchange Act reach Traffic Monsoon's sales to customers outside of the United States. The implications of this decision are significant. This is the first Circuit Court decision to interpret Section 929P(b) of Dodd-Frank, and the first to adopt the position that Dodd-Frank limited Morrison's application to allow for the enforcement provisions of the 1933 and 1934 Acts to apply extraterritorially. As a result, the decision may result in future decisions by the SEC to allow for holders of common shares to be eligible for recovery in connection with fair funds, rather than limiting eligible parties to holders of shares of American Depositary Shares or Receipts (ADR's), a limitation the SEC imposed in the Fair Fund established for investors in BP. Recently, Traffic Monsoon has requested a stay of the Tenth Circuit's mandate while it prepares a writ of certiorari to the Supreme Court.

Traffic Monsoon is an internet traffic exchange business. Businesses like Traffic Monsoon allow companies to purchase "visits" to their websites in order to make their websites appear more popular on search engines such as Google. In order to utilize Traffic Monsoon's services, users had to become a member by creating an account; members could then purchase various services. Members could also purchase an "Adpack" for $50. An Adpack would allow a member to receive 1,000 visits to his website, and 20 clicks on his internet ad. Further, the purchase of an Adpack allowed the member to share in Traffic Monsoon's revenue every day, up to a maximum of $55, by clicking on a certain number of internet ads for other Traffic Monsoon customers. Traffic Monsoon facilitated the process by presenting rotating ads, on which the members could click, through the Traffic Monsoon website. This processes allowed members to complete 50 clicks in just over 4 minutes. Each day that the member completed the requisite number of clicks, he qualified to share in Traffic Monsoon's revenue earned during the preceding 24 hours. Typically, an Adpack purchaser would earn $1 in shared revenue for each day that he made the requisite number of clicks; therefore the purchaser would receive a 10% return on his initial investment in 55 days. Further, a member could purchase an indefinite number of Adpacks, and some purchased in quantities in the...