¹ 896 F.2d 170, 175.

² Offshore Offers and Sales, Securities Act Release No. 6863, [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶84,524 (Apr. 24, 1990) [hereinafter Regulation S Release]. Regulation S was first published for public comment on June 10, 1988. Securities Act Release No. 6779, [1987–88 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶84,242 (June 10, 1988). It was reproposed in revised form on July 11, 1989. Securities Act Release No. 6838, [1989 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶84,426 (July 11, 1989). Regulation S is an exercise in limited administrative action to resolve a specific concern (and significant practical problem) raised by the possible “extraterritorial” application of the public-offering registration provisions of the Securities Act. Previously, Securities Act Release No. 4708 (July 9, 1964), 29 Fed. Reg. 9828 (codified in 17 C.F.R. §231.4708), and several SEC “no-action” letters had been used to construct a practice on which Regulation S, in turn, is based. See “no-action” letters cited in Regulation S Release, supra, nn. 15–18. This administrative guidance and practice has been built up over the years in light of Congress’s failure to address the extent of extraterritorial application of the U.S. securities laws.

³ Regulation S Release, supra note 2, at 80,665. The release goes on to assert that “[i]t is generally accepted that different considerations apply to the extraterritorial application of the antifraud provisions than to the registration provisions of the Securities Act.” Id. (citing Consolidated Gold Fields PLC v. Minorco, S.A., 871 F.2d 252, 262–63 (2d Cir.), cert. dismissed, 110 S.Ct. 29 (1989); Bersch v. Drexel Firestone Inc., 519 F.2d 974, 986 (2d Cir.), cert. denied, 423 U.S. 1018 (1975) (“It is elementary that the antifraud provisions of the federal securities laws apply to many transactions which are neither within the registration requirements nor on organized American markets”)). This position is supported by the Restatement (Third) of the Foreign Relations Law of the United States [hereinafter Restatement (Third)] §416 comment a: “an interest in punishing fraudulent or manipulative conduct is entitled to greater weight than are routine administrative requirements” in determining the reasonableness of an exercise of jurisdiction. While this distinction may make sense in order to avoid providing a “roadmap to fraud,” the legislative basis for the distinction is not apparent.

⁴ For example, the opinion includes the following quotable language: “Having gone to such lengths to structure a transaction not burdened by the securities laws, plaintiffs cannot expect to wrap themselves in their protective mantle when the deal sours.” 896 F.2d at 175 (footnote omitted).

⁵ The trial court found that the plaintiffs had organized the Hong Kong shell company, despite the fact that Dockery was unable to produce evidence of ownership of that company by MCG. Id. at 173.

⁶ E.g., Zoelsch v. Arthur Andersen & Co., 824 F.2d 27, 33 (D.C. Cir. 1987) (“On review of defendant’s motion to dismiss under Fed.R.Ci v.P. 12(b) and for summary judgment, we assume the truth of the allegations in plaintiff’s complaint and liberally construe the possible theories of liability asserted there”); Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326, 1330 (1972) (citing Steele v. Bulova Watch Co., 344 U.S. 280 (1952)).

⁷ E.g., Menchaca v. Chrysler Credit Corp., 613 F.2d 507 (5th Cir.), cert. denied, 449 U.S. 953 (1980); Moore’s Federal Practice §12.07, at 12–47 (1989).

⁸ The extraterritorial application of the U.S. securities laws was approached as a question of subject matter jurisdiction in earlier cases. This approach involves a determination of whether there exist sufficient U.S. contacts to bring the conduct within the definition of interstate commerce contained in §3(a)(17) (15 U.S.C. §78c(a)(l7)) of the Securities Exchange Act of 1934, as amended. The definition of interstate commerce, in turn, is generally coextensive with Congress’s power under the Commerce Clause of the Constitution. U.S. CONST. Art. 1, §8, cl. 3. The Restatement (Third), supra note 3, §416 Reporters’ Note 1, describes a shift from the subject matter jurisdiction analysis to an analysis that seeks to determine whether there are enough contacts with the United States to lead to a conclusion that Congress intended that U.S. law be applicable. The court of appeals cited Zoelsch v. Arthur Andersen & Co., 824 F.2d 27, 30 (D.C. Cir. 1987), for the proposition that the jurisdictional provisions of the U.S. securities laws furnish no guidance to courts as to their extraterritorial reach.

⁹ 896 F.2d at 173. One possible extension of this concept, which the SEC would probably have difficulty accepting, is that it may be viewed as providing purchasers with the competence effectively to “waive” the application of the antifraud provisions in offshore transactions, by working with (or even against, as in the present case) the seller to avoid the application of the registration requirements. Section 14 of the Securities Act (15 U.S.C. §77n) would normally operate to render void any explicit waiver by a purchaser of the protections of the Securities Act. Section 29(a) (15 U.S.C. §77cc(a)) of the Securities Exchange Act of 1934, as amended, would operate similarly with respect to that Act. However, the Supreme Court in Scherk v. Alberto-Culver Co., 417 U.S. 506, 517 (1974), held that this policy against waivers of the protections of the Securities Exchange Act might give way in the international context to the goal of fostering international commerce. Scherk could provide a basis for an argument that knowing waivers to facilitate participation in offshore transactions, which are presumably subject to the protections of other legal systems, should be permitted.

¹⁰ 468 F.2d 1326 (2d Cir. 1972). Indeed, plaintiffs had argued that the case at hand was controlled by Leasco.

¹¹ 896 F.2d at 174 (citing Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326 (2d Cir. 1972); Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2d Cir.), cert. denied subnom. Bersch v. Arthur Andersen & Co., 423 U.S. 1018 (1975); 11T v. Vencap, Ltd., 519 F.2d 1001 (2d Cir. 1975); SEC v. Kasser, 548 F.2d 109 (3d Cir.), cert. denied sub nom. Churchill Forest Indus, v. SEC, 431 U.S. 938 (1977); Grunenthal GmbH v. Hotz, 712 F.2d 421 (9th Cir. 1983); Continental Grain v. Pacific Oilseeds, Inc., 592 F.2d 409 (8th Cir. 1979); and Restatement (Third), supra note 3, §416(1)).

¹² Id. (citing Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir.), modified, 405 F.2d 215 (2d Cir. 1968) (en banc), cert. denied sub nom. Manley v. Schoenbaum, 395 U.S. 906 (1969); and Restatement (Third), supra note 3, §416(2)).

¹³ This finding distinguishes this case from Leasco, where the court considered (but did not find dispositive without domestic conduct) the indirect U.S. effects, through a Netherlands Antilles conduit corporation, of the foreign conduct. Leasco, 468 F.2d at 1337–38 (“But even if Leasco N.V. is the beneficial owner, it would be elevating form over substance to hold that this entails a conclusion that the purchases did not have a sufficient effect in the United States …”). In the case at hand, if the court had accepted Dockery’s statements, without supporting records, that MCG was the owner of the Hong Kong shell company, it could have found at least some U.S. effects under Leasco. In Leasco, these indirect domestic effects caused from abroad would not, standing alone, have been a sufficient basis for jurisdiction. However, when combined with significant U.S. conduct, jurisdiction became available. Id. at 1334–35.

¹⁴ The Restatement (Third), supra note 3, §402(2)(a), calls for consideration, in determining the reasonableness of exercise of jurisdiction to prescribe, of “the extent to which the activity takes place within the territory, or has substantial, direct, and foreseeable effect upon or in the territory” (emphasis added).

¹⁵ 896 F.2d at 174. Schoenbaum had emphasized a foreign corporation’s listing on a U.S. securities market as indicating an “effect” on the integrity of the U.S. capital markets. 405 F.2d 200 (2d Cir. 1968).

¹⁶ MCG, Inc. v. Great Western Energy Corp., No. CA 3–87–1852–T (N.D. Tex. 1988) (order granting motion to dismiss).