For the last 20 years U.S. courts have generally heard RICO cases arising from illegal conduct occurring abroad if some of the “conduct” occurred in this country or the illegal acts had “effects” here. This was so even though the RICO statute does not provide for application to cases occurring “extraterritorially” (the legal term used in this context for abroad) and the Supreme Court has held there is a presumption against applying U.S. laws extraterritorially. The Supreme Court’s decisions, however, were in non-RICO cases (antitrust and employment discrimination).
The Second Circuit Court of Appeals, based in New York City, the locus of the securities industry, had issued decisions since the 1960’s permitting securities fraud cases to be heard in federal courts there even though the stock purchases were made on foreign exchanges because they had “effects” on U.S. companies. Thus, the Second Circuit turned the presumption against extraterritorial application of U.S laws on its head. It reasoned that as long as Congress did not prohibit extraterritorial application in the law, then it would allow it. It then enunciated the “conduct” and “effects” tests for application of the law to foreign conduct.
The Second Circuit went on to apply these tests in RICO cases, most recently in Norex Petroleum Ltd. v. Access Industries, Inc., where it rejected the district judge’s decision to transfer the case to Russia to be decided in its judicial system. The facts of the case are complicated, but it is enough to understand that the dispute has some connection to the U.S. Norex Petroleum is a Cypriot corporation owned by a California corporation which in turn is owned by a citizen of Canada. Its principal place of business is in Canada. Several of the many RICO defendants are U.S. citizens or U.S. corporations, and some of the alleged racketeering activity occurred here. Most of the illegal activity occurred in Russia, and the case alleged a conspiracy to take over a substantial portion of the Russian oil industry.
In June the Surpeme Court issued its decision in Morrison v. National Australia Bank, LTD,130 S. Ct. 2869 (2010), a securities fraud case brought by purchasers of stock in an Australian bank traded on that county’s stock exchange. According to the plaintiffs, the value of their stock fell after it was revealed that a Florida subsidiary of the Bank was overvalued as a result of fraud. Thus, they alleged that since the fraud had occurred in the U.S. the Securities Exchange Act applied to them and they could bring a suit under the law in a U.S. federal court. The Supreme Court rejected this argument, holding again that “unless a contrary intent appears [in a federal law then it] is meant to apply only within the territorial jurisdiction of the United States.” Id. at 2877. The Court found no such intent by Congress in the Securities Exchange Act, and so it rejected the “conduct” and “effects” tests in favor of a much narrower one. The Act only applies to transactions of securities traded on a U.S. exchange or some other U.S.-issued security. Id. at 2884. The Court called this a “transactional test.” The opinion was written by Justice Scalia, and though three other Justices did not completely agree with his reasoning, they concurred in the judgment, making it unanimous. (Justice Sotomayor recused herself from the case because she was on the Second Circuit panel that had decided it.)
This opinion had no direct effect on RICO. The decision involved interpretation of the Securities Exchange Act (the major federal law regulating the securities industry). As I stated, the Court had reached the same decision about the presumption against extraterritoriality in federal law in antitrust and employment discrimination. But this week the Second Circuit applied that presumption against extraterritoriality in Norex Petroleum and rejected the conduct and effects tests in RICO. Thus, it held that since the dispute “primarily involves foreign actors and foreign acts,” RICO did not apply. Norex Petroleum, _F.3d __, 2010 WL 3749281 at *1 (2d Cir. September 28, 2010).
The Norex Petroleum decision does not apply to any court outside the Second Circuit. But the other federal courts took their lead in enunciating the “conduct” and “effects” tests from the Second Circuit, which had created those standards in securities cases. And now that the Supreme Court has rejected those tests in Securities law, and the Second Circuit has done so in RICO, there is no reason to believe other courts will continue to apply those jurisdiction-expanding tests, which the Supreme Court thinks wrong and created a “Shangri-La of class- action litigation for lawyers representing those allegedly cheated in foreign securities markets.” Morrison at 2886.
RICO plaintiffs take note: your cases cannot be based upon foreign conduct or foreign enterprises. The parties, the enterprise, and most of the racketeering activity must occur in the U.S. As a federal litigator, I happen to agree with the Supreme Court and Second Circuit decisions. Our federal courts are crowded, and judges are generally spread very thin. They are skeptical of civil RICO cases to begin with because of their use by inept plaintiffs’ lawyers who don’t understand the law and because RICO is so complicated. Federal judges should not have to devote time to a complex case that does not belong in U.S. courts. Perhaps this will clear away some far-fetched RICO cases so legitimate ones can be heard.