Securities and Exchange Commission v. Traffic Monsoon et al
MEMORANDUM DECISION AND ORDER GRANTING A PRELIMINARY INJUNCTION AND DENYING THE DEFENDANTS MOTION TO SET ASIDE THE RECEIVERSHIP 33 . Signed by Judge Jill N. Parrish on 3/28/17. (jlw)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
SECURITIES AND EXCHANGE
TRAFFIC MONSOON, LLC and CHARLES
MEMORANDUM DECISION AND
ORDER GRANTING A PRELIMINARY
INJUNCTION AND DENYING THE
DEFENDANTS’ MOTION TO SET ASIDE
Case No. 2:16-cv-00832-JNP
District Judge Jill N. Parrish
Two related motions are before the court. First, the SEC has moved for a preliminary
injunction that continues the receivership and asset freeze put into place by the TRO entered by
the court. Second, defendants Traffic Monsoon, LLC and Charles Scoville (collectively, Traffic
Monsoon) have moved to set aside the receivership. [Docket 33]. The court GRANTS the SEC’s
request for a preliminary injunction and DENIES the defendants’ motion to set aside the
On July 26, 2016, the SEC moved for a TRO freezing the assets of Mr. Scoville and
Traffic Monsoon and appointing a receiver for these assets. The court granted the TRO,
appointed Peggy Hunt as the receiver for Mr. Scoville’s and Traffic Monsoon’s assets, and set a
preliminary injunction hearing. Traffic Monsoon subsequently moved to set aside the
The court held evidentiary hearings on the SEC’s request for a preliminary injunction and
Traffic Monsoon’s motion to set aside the receivership on November 1, 2016 and November 3,
2016. The parties presented legal argument on November 30, 2016.
FINDINGS OF FACT
1. On September 29, 2014, Mr. Scoville registered Traffic Monsoon with the State of
Utah as a limited liability company. Hearing Transcript (“Tr.”) 29–32; Ex. 1, tab 1.
Organizational documents filed with the State of Utah identify Mr. Scoville as Traffic
Monsoon’s sole member, manager and registered agent. The documents list his
Murray, Utah, apartment as Traffic Monsoon’s corporate address. Ex. 1, tab 1.
2. Traffic Monsoon was operated by Mr. Scoville through a website with the address
www.trafficmonsoon.com. Tr. 12; Ex. 1 ¶ 8. The website prominently identified
Traffic Monsoon as a “revenue sharing advertising company.” Docket 64-2, p. 2.
3. Traffic Monsoon operated as a web traffic exchange that sold several different
products designed to deliver “clicks” or “visits” to the websites of its customers. Tr.
12-17. The exclusive method of purchasing these services was through the website.
Tr. 12, 127.
4. These purchased visits are of value to website owners because they make the website
appear more popular than it actually is. Because search engines such as Google
employ algorithms that prioritize more frequently visited websites over less
frequently visited websites, these paid visits tended to result in a higher ranking on a
search engine query.
5. Individuals who wished to purchase services from Traffic Monsoon would create an
account and became “members” of the Traffic Monsoon website.
6. A large majority of the financial transactions the members completed with Traffic
Monsoon—both payments made to Traffic Monsoon and withdrawals from the
member’s account—were conducted through PayPal. Tr. 19, 54.
7. Traffic Monsoon sold 1,000 website visits for $5.95 and 20 clicks on a member’s
banner ad for $5.00. Tr. 17-18, 246-47.
8. Traffic Monsoon’s most popular product by a large margin, however, was the Banner
AdPack (AdPack). AdPacks, which could be purchased for $50, bundled 1,000
website visits and 20 clicks to the member’s banner ad. What set this product apart
(and justified the additional cost for identical services that could be purchase à la
carte for just $10.95) is that the AdPack permitted the purchaser to share in the
revenues of Traffic Monsoon by receiving credits in the member’s account up to a
maximum amount of $55 per AdPack.
9. To qualify for this AdPack revenue sharing, the member had to click on a number of
websites each day. The number of required clicks increased over time, but the
member was ultimately obligated to click on 50 ads and remain on each website for
five seconds. This took the member a little over four minutes per day. The member’s
obligation to click on 50 ads for five seconds each did not scale with the number of
AdPacks purchased. Whether the member owned 1 or 1,000 AdPacks, he or she was
obligated to click on only 50 ads per day and remain on the website to which the
member was directed for five seconds each in order to participate in revenue sharing.
10. 99% of AdPack buyers qualified for some portion of revenue sharing after their
purchase of an AdPack. Tr. 260-61; Ex. 5.
11. Traffic Monsoon members also were entitled to a 10% commission on all products—
including AdPacks—that were purchased by individuals whom the member referred
to Traffic Monsoon. Tr. 301-02. This 10% commission was paid on all future
purchases made by the referred member, including when the referred member rolled
over revenues from existing AdPacks to purchase new AdPacks. Tr. 20–21.
12. Mr. Scoville stated in emails to the SEC that he allocated the $50 purchase price of an
AdPack as follows: 10% was deposited in the referring member’s account, 4.5% was
retained by Traffic Monsoon, 1.5% went to Traffic Monsoon’s programmer in Russia,
and the remaining 84% either was distributed to other AdPack holders who had
qualified in the past 24 hours or was placed in a reserve fund. Ex. 110. The amount
placed in the reserve fund for future sharing was used to even out fluctuations in the
amount of money flowing into the member accounts. Ex. 110. In other words, out of
the $50 purchase price, the referring member received $5, Traffic Monsoon and its
programmer received $6, and the remaining $39 was either shared with other
qualified AdPack holders or placed in a reserve fund for future distribution.
13. Mr. Scoville kept no accounting records for Traffic Monsoon. Ex. 1, tab 6. So there
are no readily available documents that describe precisely how the money was
distributed. After the receiver in this case conducted a preliminary investigation of
how Traffic Monsoon distributed the money it received, she expressed some doubt as
to whether the funds were distributed in the exact manner that Mr. Scoville described.
Tr. 25–26. Rather, it appeared that the money coming into Traffic Monsoon was
simply pooled together and then paid out as needed. Id.
14. At any rate, neither the website nor any other publicly available source of information
informed the members how Traffic Monsoon split revenue between itself and
qualified AdPack holders. So long as Traffic Monsoon shared some undefined portion
of the revenue coming into the company with qualified AdPack holders and paid out a
10% commission, Mr. Scoville was free to distribute the money however he wished.
15. AdPack purchasers typically received about $1 per day in revenue sharing per
AdPack purchased. Tr. 296. These revenue sharing payments would appear as credits
in the member’s Traffic Monsoon account. The member could then use these credits
to purchase additional AdPacks or to purchase Traffic Monsoon’s other services. The
member could also convert these credits into real currency by performing an
electronic transfer to a bank account.
16. If the owner of an AdPack consistently performed his or her daily obligation to click
on 50 ads, the owner would typically recoup the original $50 payment, plus an
additional $5 in profit in about 55 days. If the member continually purchased a new
AdPack after the previous AdPack matured, he or she could reap an impressive 66%
annual return on the $50 investment.1 The member could earn even more money by
convincing others to buy AdPacks.
17. Thus, for all $50 AdPacks that were purchased by a referred member, Traffic
Monsoon typically deposited $60 worth of credits in member accounts: $55 into the
This calculation does not take into account compound interest. If a customer purchased multiple
AdPacks and continually reinvested the resulting revenue stream by purchasing new AdPacks,
higher annual rates of return were possible.
purchasing member’s account over a 55-day period (so long as the member qualified)
and $5 into the referring member’s account.
18. When a customer purchased an AdPack, he or she agreed to be bound by several
terms and conditions. Some of these terms and conditions are as follows:
a. “TrafficMonsoon2 registered as a limited liability company and not a bank nor
a security firm. A purchase of advertising service with us is not considered a
deposit, nor investment.” Docket 64-2, p. 44.
b. “You agree to recognize TrafficMonsoon as a true advertising company which
shares its revenues, and not as any form of investment of any kind.” Docket
64-2, p. 44.
c. “The information, communications and / or any materials TrafficMonsoon
contains are for educational purposes, and is [sic] not to be regarded as
solicitation for investments in any jurisdiction which deems a non-public
offers or solicitations [sic] unlawful, nor to any person whom it will be
unlawful to make such an offer and / or solicitation.” Docket 64-2, p. 45.
d. “You agree that our past performance does not guarantee you the same result
in the future.” Docket 64-2, p. 44.
19. The Traffic Monsoon website also makes a number of representations regarding its
services. Some of those representations are as follows:
a. “Only 1 of the services we offer includes a revenue sharing position. We do
not sell ‘shares.’ We only sell advertising services. It’s from the sales of all our
On its website, Traffic Monsoon often identifies itself as “TrafficMonsoon.” Because the
company is registered as “Traffic Monsoon,” the court uses this version of its name.
services that we share revenues. When our members purchase a service from
TrafficMonsoon, the revenues from that purchase are held by the company.
Then, you can qualify to receive share [sic] of the profits! Naturally there is
cost associated with providing services. Each service provided generates a
profit margin. We share those profits with you! . . . As long as you are
qualified, each sharing position you receive with your AdPack Combo
purchase will continue to share in revenue up to $55.00. Reaching this
maximum is not guaranteed, or affixed to any time frame. It’s completely
reliant upon sales of services, and you being qualified.” Docket 64-2, p. 19.
b. “Is TrafficMonsoon a hyip, Ponzi, pyramid scheme, or illegal? What is a
Ponzi? ponzis [sic] are investment schemes which offer interest payments.
they [sic] pay interest from new investor principle deposits. If you add
together the interest earned total and principle total, there would be a debit
balance created. Sufficient funds would not be available to pay people their
principles and interest. . . . Why is Traffic Monsoon not a Ponzi? Traffic
Monsoon only offers ad services. Nothing else is for sale than ad service.
There is no investment plan offered. Yes, you can qualify to share in the sales
revenue generated when services are sold by actively viewing other people’s
websites, but this is not interest. . . . New sales of advertising service generate
new earnings. That’s not a ponzi. . . . In conclusion, when looking at pure
definitions, Traffic Monsoon is not a ponzi . . . .” Docket 64-2, p. 31.
c. “[W]e cannot guarantee the amount you’ll receive per day, but as long as you
are qualified to receive share [sic] in site revenues, you’ll continue to receive
of revenues [sic] on each sharing position up to $55. This also means we do
not guarantee reaching $55, because earnings from revenue sharing is
completely dependent upon the sale of ad services, and also dependent upon
you meeting the qualification to receive of revenues [sic] . . . .” Docket 64-2,
20. Despite these disclaimers, the Traffic Monsoon website also promoted the AdPacks as
a way to make money: “There are really 4 opportunities to earn with traffic monsoon
[including revenue sharing through AdPacks]. . . . Each one can be your main focus,
or all of them. Naturally, the more you utilize all 4 of these ways to earn money, the
more you’ll earn.” Docket 64-2, p. 33.
21. By a large margin, AdPacks were Traffic Monsoon’s most popular product. The sale
of AdPacks constituted over 98% of all Traffic Monsoon revenue. Tr. 17, 274. Thus,
over 98% of the revenue sharing distributed to qualified AdPack owners came from
the sale of other AdPacks. The Traffic Monsoon website did not inform members that
almost all of the revenue that was shared with qualified AdPack owners was
generated by the sale of new AdPacks.
22. Approximately 90% of the Traffic Monsoon members who purchased AdPacks reside
outside of the United States and presumably purchased the AdPacks while located in
their home countries. Complaint at ¶ 66.
23. Some individuals initially purchased AdPacks principally as a way to promote their
online businesses. But for many members, the profits that could be reaped from the
AdPacks themselves quickly eclipsed this motive. Tr. 180–86.
24. Traffic Monsoon member correspondence with the receiver evidences that Traffic
Monsoon customers’ primary motivation in purchasing AdPacks was to earn the $5
return on each AdPack, not to receive the advertising services that were available for
only $10.95 if purchased separately from the AdPack. Tr. 74-76, 84-85. Indeed, many
members have not received or used the web visits and banner clicks purchased in the
AdPack. Tr. 181-186. A number of members indicated that they had invested their
“life savings” or “savings” by purchasing AdPacks. Ex. 3, p. 7 & tab 8.
25. By Traffic Monsoon’s own description, it has delivered only 1.6 billion website visits
out of the 17.5 billion that have been purchased by Traffic Monsoon members. Tr.
82-84. In other words, it has delivered only 10% of the web traffic purchased by
members through the sale of AdPacks. It would cost Traffic Monsoon tens of millions
of dollars to acquire and deliver the billions of web visits it owes to its members.
26. Many individuals began to purchase or accumulate hundreds or even thousands of
AdPacks. Tr. 23; Exs. 11, 12.
27. Members typically did not cash out an AdPack when it matured. Instead, they rolled
over the money deposited in their accounts by purchasing another AdPack. Tr. 20. In
order to maximize their returns, members purchased dozens or hundreds of AdPacks.
They would then use the revenue from the existing AdPacks to purchase new
AdPacks as soon as they had enough money in their account to do so. Thus, members
that owned hundreds of AdPacks, which could return thousands of dollars in shared
revenues, typically had relatively little money in their account because the members
would continually reinvest it by purchasing new AdPacks. Ex. 10.
28. If the members rolling over money in their accounts had been referred by another
member for the 10% commission, these rollover transactions also generated
commission payments to the referring members. Tr. 20–21. Therefore, if the referred
member purchased a single AdPack for $50 and then rolled the proceeds over into a
new AdPack every 55 days, the referring member would reap $30 in commissions in
less than one year.
29. Enticed by these commission payments, Traffic Monsoon members promoted the
AdPacks to others. Several members actively promoted the AdPacks online or
through presentations as a money making opportunity with slogans such as “If You
Can Click a Mouse. [sic] You Can Get Paid!!” Tr. 88–89, 210–11. Ex. 3, tab 19.
30. After making an initial investment to purchase multiple AdPacks, a member could
accumulate an ever-growing number of AdPacks by purchasing additional AdPacks
with the 10% profit the member acquired over a 55-day period. For example, if a
member initially invested $5,000 by purchasing 100 AdPacks and only rolled over the
principal amount in new AdPacks, the member could purchase about 166 AdPacks at
the end of one year by reinvesting the principal and profit into new AdPacks. If the
same member continued this pattern of rolling over the principal amount and
investing the profit at the end of the year, the member could purchase around 275
AdPacks at the end of the second year and 456 AdPacks at the end of the third. If the
member then allowed these 456 AdPacks to mature, he or she could accumulate
$25,080—over five times the initial investment.3 If the member were able to convince
family or friends to make similar bulk purchases of AdPacks, the member could
reinvest the resulting 10% commission and acquire even more AdPacks.
31. Between October 2014 and July 2016, Traffic Monsoon members worldwide paid
Traffic Monsoon $173 million in new money to purchase 3.4 million AdPacks. Tr.
270-77; Ex. 6. Traffic Monsoon members purchased approximately 14 million
additional AdPacks for $700 million during that same period by rolling over their
revenue-sharing payments into the purchase of these new AdPacks. Id. During that
same period, Traffic Monsoon members paid approximately $2.9 million for all other
Traffic Monsoon products combined. Id.
32. Out of the $175.9 million total paid into Traffic Monsoon by its members,
approximately $88.4 million has been paid back out to its members, leaving a
difference of $87.4 million between what has been paid in by members and what they
have taken out. Tr. 278-81; Ex. 7.
33. In January, 2016, PayPal became concerned about the enormous growth in the
volume of transactions between Traffic Monsoon and its members, and it froze Traffic
Monsoon’s account. Tr. 26, 137.
34. The PayPal freeze significantly reduced the amount of money that was flowing into
Traffic Monsoon. Tr. 26. Traffic Monsoon then began to transition to other electronic
payment processors such as Payza, Allied Wallet, and SolidTrustPay. Tr. 27. With the
This hypothetical assumes that the member retained all profits in the member account and only
reinvested the profits at the end of the one-year period. If the member reinvested the profits by
purchasing additional AdPacks at the end of each 55-day cycle, as members typically did, the
returns would be even higher.
introduction of these new payment processors, AdPack transactions began to rise
again. Tr. 27.
35. Traffic Monsoon’s resurgence was halted on July 26, 2016, when this court froze its
assets and appointed a receiver.
36. The current combined account balance of Traffic Monsoon members is $34.2 million.
Tr. 284-86; Ex. 7. If the outstanding AdPacks currently owned by Traffic Monsoon
members had matured, the account balance would swell by an additional $243.9
million, for a combined balance of $278.1 million. Id.
37. The receiver currently has between $50-$60 million in frozen Traffic Monsoon assets.
The SEC alleges in its complaint that Traffic Monsoon’s sale of AdPacks constituted an
illegal Ponzi scheme that violated Section 10(b) of the Securities Exchange Act of 1934
(Exchange Act) and Rule 10b-5(a) and (c) promulgated thereunder. The SEC also alleges that
Traffic Monsoon violated Section 17(a)(1) and (3) of the Securities Act of 1933 (Securities Act).4
[Docket 2, ¶¶ 84–92].
Section 10(b) of the Exchange Act makes it unlawful for a person to “use or employ . . .
any manipulative or deceptive device or contrivance in contravention of such rules and
regulations as the Commission may prescribe.” 15 U.S.C. § 78j(b). Pursuant to this statutory
grant of authority, the SEC adopted Rule 10b-5. Subsections (a) and (c) of this rule provide:
The SEC further alleges that Traffic Monsoon violated Sections 5(a) and (c) of the Exchange
Act by selling unregistered securities. See 15 U.S.C. § 77e(a) and (c). But the SEC does not rely
on this allegation to support its request for a preliminary injunction.
It shall be unlawful for any person, directly or indirectly, by the use
of any means or instrumentality of interstate commerce, or of the
mails or of any facility of any national securities exchange, (a) To
employ any device, scheme, or artifice to defraud, . . . or (c) To
engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person, in connection
with the purchase or sale of any security.
17 C.F.R. § 240.10b-5. In order to prevail on its Rule 10b-5 claims, the SEC must prove that Mr.
Scoville committed the acts described in either subsection (a) or (c) with the requisite scienter,
which has been defined by the Supreme Court as “a mental state embracing intent to deceive,
manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). The
scienter requirement may be satisfied with proof of either intent to defraud or recklessness.5 City
of Philadelphia v. Fleming Companies, Inc., 264 F.3d 1245, 1258 (10th Cir. 2001).
Section 17(a)(1) and (3) of the Securities Act similarly states:
It shall be unlawful for any person in the offer or sale of any
securities . . . by the use of any means or instruments of
transportation or communication in interstate commerce or by use
of the mails, directly or indirectly (1) to employ any device,
scheme, or artifice to defraud, or . . . (3) to engage in any
transaction, practice, or course of business which operates or
would operate as a fraud or deceit upon the purchaser.
15 U.S.C. § 77q(a). In order to prevail on its “device, scheme, or artifice to defraud” claim under
subsection (1), the SEC must also prove that Mr. Scoville acted knowingly or intentionally.6
“Recklessness is defined as ‘conduct that is an extreme departure from the standards of ordinary
care, and which presents a danger of misleading buyers or sellers that is either known to the
defendant or is so obvious that the actor must have been aware of it.’” Dronsejko v. Thornton,
632 F.3d 658, 665 (10th Cir. 2011) (citation omitted).
Counsel has not provided the court with legal authority on the question of whether the knowing
and intentional requirement for Section 17(a)(1) includes reckless behavior. See Aaron v. SEC,
446 U.S. 680, 686 n.5 (1980) (“We have no occasion here to address the question . . . whether,
under some circumstances, scienter may also include reckless behavior.”). It appears that the
Tenth Circuit has only directly endorsed the recklessness standard in connection with Rule 10b-5
Aaron v. SEC, 446 U.S. 680, 696 (1980). Subsection (3), however, does not incorporate a scienter
requirement. Id. Proof of negligence alone will suffice to establish a violation of this subsection.
See SEC v. Sullivan, 68 F. Supp. 3d 1367, 1377 n.9 (D. Colo. 2014).
The SEC argues that it will likely succeed in proving its claims under Rule 10b-5 and
Section 17(a) and requests a preliminary injunction freezing Traffic Monsoon’s assets until this
case is resolved. In response to the SEC’s request for a preliminary injunction, and in support of
its own motion to set aside the receivership, Traffic Monsoon presents two main arguments.
First, Traffic Monsoon relies upon Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247
(2010), arguing that Section 10(b), upon which Rule 10b-5 depends, and Section 17(a) do not
authorize this court to enjoin activity related to foreign transactions. It asserts that because
approximately 90% of its customers purchased AdPacks over the internet while located outside
the United States, the SEC cannot regulate these transactions. Traffic Monsoon, therefore,
contends that any injunction freezing its assets must be limited to assets sufficient to refund
money paid to it by customers who purchased AdPacks while they were located within the
territorial boundaries of the United States.
Second, Traffic Monsoon argues that this court should not issue an injunction because the
SEC has not adequately shown that it will prevail on the merits.
claims. See Dronsejko, 632 F.3d at 665; City of Philadelphia v. Fleming Companies, Inc., 264
F.3d 1245, 1257–58 (10th Cir. 2001); Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1232–33
(10th Cir. 1996); Hackbart v. Holmes, 675 F.2d 1114, 1117–18 (10th Cir. 1982). Because the
question of whether the scienter requirement of Section 17(a)(1) may be satisfied by a showing
of recklessness is not determinative here, the court need not resolve this uncertainty at this
The court addresses each of Traffic Monsoon’s arguments in turn. The court then
addresses Traffic Monsoon’s objections to some of the terms of the SEC’s proposed injunction.
Finally, the court certifies this order for interlocutory appeal pursuant to 28 U.S.C. § 1292(b).
APPLICABILITY OF SECTION 10(b) AND SECTION 17(a) TO ADPACKS
PURCHASED OUTSIDE OF THE UNITED STATES
A. Morrison and the Presumption Against the Extraterritorial Application of
Prior to the Supreme Court’s Morrison opinion, most of the circuits applied one version
or another of the conduct and effects test to determine whether an extraterritorial securities
transaction fell within the ambit of Section 10(b) and Rule 10b-5. Morrison v. Nat’l Australia
Bank Ltd., 561 U.S. 247, 257–59 (2010). Under this test, Section 10(b) could be applied to an
extraterritorial transaction if significant wrongful conduct related to the transaction occurred in
the United States or if “the wrongful conduct had a substantial effect in the United States or upon
United States citizens.” Id. at 257 (citation omitted).
In Morrison, the Supreme Court reviewed the Second Circuit’s application of the conduct
and effects test in a case in which Australian citizens purchased shares of an Australian bank on
an Australian stock exchange. Id. at 251–52. As a preliminary matter, the Court held that the
Second Circuit erred in its conclusion that “the extraterritorial reach of § 10(b) [raises] a question
of subject-matter jurisdiction.” Id. at 253. The Court clarified that the limits on a district court’s
authority to adjudicate a Section 10(b) claim based upon a foreign transaction are not
jurisdictional in nature because 15 U.S.C. § 78aa(a) conferred jurisdiction over suits to enforce
the provisions of the Exchange Act to the district courts. Id. at 254.
The Court then went on to analyze the language of Section 10(b) to determine whether
Congress intended the statute to be applied outside of the United States. Because the statute is
silent on this issue, the Court employed the canon of construction “that legislation of Congress,
unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the
United States.” Id. at 255 (citation omitted). Under this judicially created presumption, “‘unless
there is the affirmative intention of the Congress clearly expressed’ to give a statute
extraterritorial effect, ‘we must presume it is primarily concerned with domestic conditions.’” Id.
In order to overcome this presumption against the extraterritorial application of a statute,
Congress does not necessarily have to include a clear statement in the statute that says “this law
applies abroad.”7 Id. at 265. Instead, the context provided by related statutory provisions can be
consulted to determine if the presumption should be applied. Id. Indeed, “all available evidence
about the meaning” of a statute—including the history of amendments to the statute, the text of
other provisions found within the larger statutory scheme, the underlying purpose of the statute,
Some commentators had interpreted E.E.O.C. v. Arabian Am. Oil Co., 499 U.S. 244 (1991)
(Aramco) to embrace a “clear statement rule,” which requires a clear statement in the statute
itself to overcome the presumption against extraterritoriality. See id. at 258 (“Congress’
awareness of the need to make a clear statement that a statute applies overseas is amply
demonstrated by the numerous occasions on which it has expressly legislated the extraterritorial
application of a statute.”); Kollias v. D & G Marine Maint., 29 F.3d 67, 73 (2d Cir. 1994) (“The
Aramco dissent and some commentators have interpreted the majority opinion in Aramco as
setting forth a ‘clear statement’ rule, such that the presumption against extraterritoriality cannot
be overcome absent a clear statement in the statute itself.”). But Morrison and other Supreme
Court opinions have since clarified that the presumption is not governed by a “clear statement
rule.” Morrison, 561 U.S. at 265 (“[W]e do not say, as the concurrence seems to think, that the
presumption against extraterritoriality is a ‘clear statement rule,’ if by that is meant a requirement
that a statute say ‘this law applies abroad.’” (citation omitted)); see also Sale, 509 U.S. at 176–77
& n.33; Smith, 507 U.S. at 201–03 & n.4.
and legislative history8—should be consulted to determine whether the presumption has been
overcome. Sale v. Haitian Centers Council, Inc., 509 U.S. 155, 176–77 & n.33 (1993); see also
Smith v. United States, 507 U.S. 197, 201–03 & n.4 (1993) (examining surrounding statutes and
legislative history to determine whether the Federal Tort Claims Act applies to extraterritorial
conduct); United States v. Spelar, 338 U.S. 217, 222 (1949) (looking to “the language of [a]
statute and the legislative purpose underlying it” to determine whether the presumption had been
overcome); Kollias v. D & G Marine Maint., 29 F.3d 67, 73 (2d Cir. 1994) (“[T]he Supreme
Court has made clear . . . that reference to nontextual sources is permissible” to determine
whether the presumption had been overcome); William S. Dodge, Understanding the
Presumption Against Extraterritoriality, 16 BERKELEY J. INT’L L. 85, 110–12 (1998) (stating that
“the lower courts . . . have been unanimous in concluding that the presumption against
extraterritoriality is not a clear statement rule” and that courts should refer to other indicia of
In determining whether the presumption against the extraterritorial application of Section
10(b) had been overcome, the Morrison Court examined several related statutes to determine
whether they evidenced a congressional expression of intent that 10(b) be applied beyond the
borders of the United States. The Court found that the presumption had not been defeated for two
principal reasons. First, the Court examined three related statutes—15 U.S.C. § 78c(a)(17), 15
U.S.C. § 78b(2), and 15 U.S.C. § 78dd(b)—and determined that any inference afforded by these
Although legislative history generally may not be consulted to interpret clear statutory
language, Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 254 (2010) (Scalia,
J., concurring), the Supreme Court has consulted legislative history to determine whether the
presumption against extraterritoriality may be overcome because what is at issue is not the
meaning of unambiguous statutory text, but rather how to interpret legislative silence on the
extraterritorial reach of a statute.
statutes that Congress intended the extraterritorial application of Section 10(b) was too uncertain
to overcome the presumption. Morrison, 561 U.S. at 262–65. Second, the Court expressed its
concern that there was no textual support in the Exchange Act for either the conduct and effects
test that had been created by the circuit courts or an alternate test proposed by the Solicitor
General that would permit the extraterritorial application of Section 10(b) under certain
circumstances. Id. at 261 (“The results of judicial-speculation-made-law [i.e., the conduct and
effects test]—divining what Congress would have wanted if it had thought of the situation before
the court—demonstrate the wisdom of the presumption against extraterritoriality.”); Id. at 270
(“Neither the Solicitor General nor petitioners provide any textual support for this [significant
and material conduct] test.”). It expressed its reticence to engage in “judicial lawmaking” by
creating or endorsing an extraterritorial application test made from whole cloth. See id. at 261
The Morrison Court therefore concluded that the presumption against extraterritorial
application had not been overcome and rejected the conduct and effects test. Id. at 265–66. In its
place, the Court created a transactional test. Analyzing the language of Section 10(b), which
prohibits manipulative or deceptive devices used “in connection with the purchase or sale of any
security,” the Court determined that “the focus of the Exchange Act is not upon the place where
the deception originated, but upon purchases and sales of securities in the United States.” Id. at
266. Thus, Morrison held that Section 10(b) and Rule 10b-5 could only be applied “only in
connection with the purchase or sale of a security listed on an American stock exchange, and the
purchase or sale of any other security in the United States.” Id. at 273.
B. Section 929P(b) of the Dodd-Frank Wall Street Reform and Consumer
At the same time that Morrison was pending in the Supreme Court, Congress was in the
process of amending both the Securities Act and the Exchange Act through the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank). Signed into law less than a month
after the Supreme Court issued Morrison, Section 929P(b) of Dodd-Frank added the following
language to both Section 22 of the Securities Act and Section 27 of the Exchange Act:
The district courts of the United States and the United States courts
of any Territory shall have jurisdiction of an action or proceeding
brought or instituted by the Commission or the United States
alleging a violation of [either Section 10(b) of the Securities
Exchange Act or Section 17(a) of the Securities Act] involving-(1) conduct within the United States that constitutes significant
steps in furtherance of the violation, even if the securities
transaction occurs outside the United States and involves only
foreign investors; or
(2) conduct occurring outside the United States that has a
foreseeable substantial effect within the United States.
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 929P(b),
124 Stat. 1376, 1864–65 (2010); see also 15 U.S.C. §§ 77v(c), 78aa(b). Thus, Dodd-Frank
clarified that United States district courts have jurisdiction over a Section 10(b) action or a
Section 17(a) action brought by the SEC if the conduct and effects test has been satisfied.
The SEC and Traffic Monsoon dispute whether Section 929P(b) of Dodd-Frank
reinstated the conduct and effects test that had just been repudiated in Morrison, or whether
Section 929P(b) left the Morrison transactional test in place. Traffic Monsoon correctly asserts
that the plain language of Section 929P(b) did not explicitly overturn the core holding of
Morrison. As noted above, Morrison overruled precedent in the circuit courts holding that the
extraterritorial reach of Section 10(b) implicates the jurisdiction of the court to hear the case. 561
U.S. at 253–54. Morrison clarified that there was no jurisdictional impediment to the
extraterritorial application of Section 10(b); it was the meaning of the language of the statute
itself—as viewed through the lens of the presumption against extraterritorial application—that
prohibited courts from applying Section 10(b) to transactions occurring outside of the United
States. Id. at 255, 262–65. Thus, Section 929P(b), which addresses only the jurisdiction of the
courts, does not overtly expand the extraterritorial reach of the language of Section 10(b) or
Traffic Monsoon argues that because the plain language of Section 929P(b) does not
directly address the application of the Securities Act or the Exchange Act to foreign transactions,
the Morrison test remains in effect.9 If the Supreme Court had adopted a “clear statement rule,”
see supra n.7, Traffic Monsoon’s argument would likely carry the day. But the Court has rejected
this rule and recognized that the judicial presumption against the extraterritorial application of a
statute may be rebutted by referring to “all available evidence about the meaning” of a statute—
including the context provided by related statutes, history of amendments, underlying purpose,
and legislative history. Sale, 509 U.S. at 176–77 & n.33. The presumption against extraterritorial
application is, in essence, a judicial guess as to what Congress would have wanted when the
statute is silent on this issue. Contrary indications of congressional intent short of a clear
Traffic Monsoon asserts, for example, that in order to overcome the presumption against
extraterritorial application, this court would have to use legislative history to arrive at a tortured
reading of Section 929P(b) that contradicts its plain language. But Traffic Monsoon sets the bar
too high. In order to find that the presumption has been rebutted, this court need not conclude
that the language of Section 929(b) requires the extraterritorial application of Sections 10(b) and
17(a). The presumption may be defeated if Section 929(b) sufficiently evidences congressional
intent that Sections 10(b) and 17(a) be applied outside the borders of the United States.
statement may be sufficient to rebut the presumption. In order to determine whether the
presumption has been overcome in this case, the court must determine whether Section 929P(b),
which was not in place when Morrison was decided and was not considered by the Supreme
Court, provides a sufficient indication of congressional intent to apply Sections 10(b) and 17(a)
to certain extraterritorial transactions.
The legal landscape when Section 929P(b) was initially proposed and considered by
congress is vital to discerning this congressional intent. As noted above, the circuit courts had
applied the conduct and effects test for almost four decades until Morrison rejected it. See
Morrison, 561 U.S. at 256–60 (describing the evolution of the conduct and effects test in the
Second Circuit and noting that other circuits have adopted it as well); Leasco Data Processing
Equip. Corp. v. Maxwell, 468 F.2d 1326, 1334 (2d Cir. 1972) (holding that either conduct or
effects in the United States may justify the application of Section 10(b) to a securities
transaction). These circuit courts held that this conduct and effects test was jurisdictional in
nature. Morrison v. Nat’l Australia Bank Ltd., 547 F.3d 167, 169–71, 176 (2d Cir. 2008); Cont’l
Grain (Australia) Pty. Ltd. v. Pac. Oilseeds, Inc., 592 F.2d 409, 421 (8th Cir. 1979); Gottfried v.
Germain (In re CP Ships Ltd. Sec. Litig.), 578 F.3d 1306, 1313 (11th Cir. 2009). Therefore, the
prevailing view of the law prior to Morrison was that satisfying the conduct and effects test was
essential to the jurisdiction of a court to adjudicate a dispute arising under Section 10(b).
It was in this pre-Morrison legal context that Congress first drafted and considered the
language that would become Section 929P(b) of Dodd-Frank. In the 2008 Morrison opinion
issued by the Second Circuit, the court recognized that Congress had not explicitly defined the
federal courts’ jurisdiction to apply Section 10(b) to transactions occurring outside the United
States and urged Congress to address this omission. Morrison v. Nat’l Australia Bank Ltd., 547
F.3d 167, 170 n.4 (2d Cir. 2008) (“We respectfully urge that this significant omission receive the
appropriate attention of Congress and the Securities and Exchange Commission.”). In response
to this invitation, Congress did just that. On October 15, 2009, the core of the language that
would later become Section 929P(b) of Dodd-Frank was included in a bill introduced in the
House of Representatives that was designed to “provide the Securities and Exchange
Commission with additional authorities to protect investors from violations of the securities
laws.” Investor Protection Act of 2009, H.R. 3817, 111th Cong. § 216 (2009). This language was
later introduced in a separate bill that would become the Dodd-Frank Act, which was passed by
the House on December 11, 2009. Dodd-Frank, H.R. 4173, 111th Cong. § 7216 (as passed by
the House, Dec. 11, 2009). The Senate passed an amended version of the bill on May 20, 2010
that excluded the Section 929P(b) language. Id. (as passed by the Senate, May 20, 2009). The
House and Senate versions of the bill were then referred to a conference committee for
reconciliation. The conference committee first met on June 10, 2010 and held its last meeting on
June 24, 2010. CONGRESS.GOV, Actions Overview H.R. 4173—111th Congress (2009–2010),
https://www.congress.gov/bill/111th-congress/house-bill/4173/actions. On June 29, 2010, the
committee issued a conference report that contains the final version of the bill, including Section
929P(b) in its present form. 156 CONG. REC. H5103 (daily ed. June 29, 2010) (conference report
on Dodd-Frank). The House and the Senate each passed the conference committee version of the
bill and Dodd-Frank was signed into law on July 21, 2010. Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. No. 111-203, § 929P(b), 124 Stat. 1376 (2010).
Meanwhile, the Supreme Court issued Morrison on June 24, 2010. Thus, the Court
altered the legal landscape regarding the jurisdiction of courts to adjudicate claims involving
foreign transactions only on the last day on which the conference committee convened to
hammer out the final version of Dodd-Frank, which was only five days before the committee
published the final version of the bill and less than a month before it was signed into law.
Accordingly, the language that would become Section 929P(b) was drafted and initially
considered by Congress at a time when the prevailing law dictated that the question of whether
an extraterritorial transaction could be scrutinized for violations of Sections 10(b) or 17(a) was
jurisdictional in nature.
In this pre-Morrison context, Section 929P(b) merely codified the prevailing Second
Circuit rule that courts had both jurisdiction and statutory authority to adjudicate a Section 10(b)
claim if the conduct and effects test had been satisfied. Indeed, the committee report for the
language that would later become Section 929P(b) explicitly stated that the language codified the
conduct and effects test as it then existed:
Courts have previously ruled that Federal securities laws are silent
as to their transnational reach, so two court tests—the conduct test
and the effects test—have emerged for making such determinations
and different courts apply different tests. This section would codify
the SEC’s authority to bring proceedings under both the conduct
and the effects tests developed by the courts regardless of the
jurisdiction of the proceedings.
H.R. REP. No. 111-687, pt. 1, at 80 (2009).
The fact that the Supreme Court issued Morrison on the last day that the conference
committee met to negotiate a reconciliation between the House and Senate bills, and five days
before the final version of the bill was published, does not convincingly demonstrate that
Congress had changed its mind about codifying the conduct and effects test. Although courts
generally presume that Congress is familiar with the precedents of the Supreme Court when it
enacts legislation, Cannon v. Univ. of Chicago, 441 U.S. 677, 698–99 (1979), the close proximity
between the date when Morrison was issued and the date when the language of Dodd-Frank was
finalized, greatly undermines this presumption. It strains credulity to assume that legislators read
Morrison on the last day that they met to negotiate the final version of a massive 850-page
omnibus bill designed to overhaul large swaths of the United States financial regulations and
consciously chose to enact Section 292P(b) against the background of the fundamental shift in
securities law brought about by Morrison. Given this timing, the more reasonable assumption is
that Morrison was issued too late in the legislative process to reasonably permit Congress to
react to it. To conform Section 929P(b) to the Morrison opinion at the last minute would be like
requiring a steaming battleship to turn on a dime to retrieve a lifejacket that fell overboard. Thus,
the court does not presume that Congress intended Section 929P(b) to be a nullity.
Indeed, when the final version of Dodd-Frank was presented to the House and the Senate
for approval, congressmen from both chambers expressed their understanding that Section
929P(b) codified the conduct and effects test. On June 30, 2010, Representative Paul Kanjorski,
who initially drafted the Section 929P(b) language, spoke in favor of the final version of DoddFrank when it was presented in the House. 156 CONG. REC. H5235, H5237 (daily ed. June 30,
2010). Representative Kanjorski confirmed that the purpose of Section 929P(b) was to codify the
conduct and effects test:
[T]he purpose of the language of section 929P(b) of the bill is to
make clear that in actions and proceedings brought by the SEC or
the Justice Department, the specified provisions of the Securities
Act, the Exchange Act and the Investment Advisers Act may have
extraterritorial application, and that extraterritorial application is
appropriate, irrespective of whether the securities are traded on a
domestic exchange or the transactions occur in the United States,
when the conduct within the United States is significant or when
conduct outside the United States has a foreseeable substantial
effect within the United States.
Id. at H5237. He went on to acknowledge that Morrison had been decided just six days earlier
and that the basis for the Supreme Court’s opinion was the presumption against extraterritorial
application. Id. Representative Kanjorski then explained that Section 929P(b)’s “provisions
concerning extraterritoriality, however, are intended to rebut that presumption by clearly
indicating that Congress intends extraterritorial application in cases brought by the SEC or the
Justice Department.” Id. Similarly, Senator Jack Reed noted in the Senate debate on the final
version of Dodd-Frank that the bill contained
extraterritoriality language that clarifies that in actions brought by
the SEC or the Department of Justice, specified provisions in the
securities laws apply if the conduct within the United States is
significant, or the external U.S. conduct has a foreseeable
substantial effect within our country, whether or not the securities
are traded on a domestic exchange or the transactions occur in the
156 CONG. REC. S5915–16 (daily ed. July 15, 2010). Thus, both the legal context in which the
Section 929P(b) language was drafted and the legislative history of this provision indicate a
legislative intent to apply Sections 10(b) and 17(a) to extraterritorial transactions if the conduct
and effects test can be satisfied.
In addition, the text of Dodd-Frank suggests that Congress intended Sections 10(b) and
17(a) to be applied to certain extraterritorial transactions. First, the title of Section 929P of DoddFrank is “STRENGTHENING ENFORCMENT BY THE COMMISION [SEC].” This title
suggests an intent to expand the SEC’s authority to regulate deceptive or fraudulent practices
through Section 929P(b), rather than an intent that the language of this subsection have no effect.
See Almendarez-Torres v. United States, 523 U.S. 224, 234 (1998) (“‘[T]he title of a statute and
the heading of a section’ are ‘tools available for the resolution of a doubt’ about the meaning of a
statute.” (citation omitted)). Second, Section 929Y of Dodd-Frank directs the SEC to conduct a
study to determine whether private rights of action under Section 10(b) should be extended to
cover transactions that satisfy the same conduct and effects test laid out in Section 929P(b).
Commissioning such a study demonstrates Congress’s expectation that it had already extended
the SEC’s authority to bring an enforcement action in Section 929P(b).
Furthermore, the operative language of Section 929P(b) strongly indicates Congress’s
intent that Sections 10(b) and 17(a) be applied to extraterritorial transactions. By clarifying that
the district courts of the United States have jurisdiction over a Section 10(b) or 17(a) claim
brought by the SEC so long as the conduct and effects test has been satisfied, Congress
necessarily expressed its understanding that Sections 10(b) and 17(a) may be applied
extraterritorially—at least to the extent that the conduct and effects test may be met. It would be
pointless to clarify that district courts had jurisdiction to hear Section 10(b) and 17(a) claims
based on certain extraterritorial transactions unless Congress also intended that these statutes be
applied extraterritorially. See Bell v. New Jersey, 461 U.S. 773, 784–86 (1983) (holding that an
amendment to a statutory scheme that necessarily presumes a particular interpretation of an
existing statute is a persuasive indication of the meaning of the existing statute); South Carolina
v. Regan, 465 U.S. 367, 392 (1984) (“[S]ubsequently enacted provisions and the legislative
understanding of them are entitled to ‘great weight’ in construing earlier, related legislation.”
(citation omitted)); Larry M. Eig, Congressional Research Service, 97-589, Statutory
Interpretation: General Principles and Recent Trends 48 (2011), https://fas.org/sgp/crs/misc/97589.pdf (“Other statutes may be expressly premised on a particular interpretation of an earlier
statute; this interpretation may be given effect, especially if a contrary interpretation would
render the amendments pointless or ineffectual.”). Moreover, the fact that Congress chose to
employ a conduct and effects test, which had been employed in the circuit courts for nearly four
decades to determine when a party could enforce Section 10(b), can hardly be a coincidence. The
use of this familiar test indicates an intent to codify the conduct and effects test as it had been
applied in the circuit courts—to determine the reach of Section 10(b) to regulate foreign
Finally, a contrary interpretation of the legislative intent animating Section 929P(b)
would require the court to assume that Congress intended the amendment be a nullity. To assume
that Congress intended this amendment to be mere surplusage, with no discernable effect, flies in
the face of reason. Cf. TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001) (Courts “are ‘reluctant to
treat statutory terms as surplusage in any setting.’” (citation omitted)); Washington Mkt. Co. v.
Hoffman, 101 U.S. 112, 115–16 (1879) (“As early as in Bacon’s Abridgment, sect. 2, it was said
that ‘a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause,
sentence, or word shall be superfluous, void, or insignificant.’”).
In sum, the text of Section 929P(b), the legal context in which this amendment was
drafted, legislative history, and the expressed purpose of the amendment all point to a
congressional intent that, in actions brought by the SEC,10 Sections 10(b) and 17(a) should be
applied to extraterritorial transactions to the extent that the conduct and effects test can be
satisfied.11 The court concludes that these clear indications that Congress intended Sections 10(b)
and 17(a) to be applied to foreign transactions are sufficient to overcome the presumption against
Section 929P(b) is explicitly limited to actions brought by the SEC or the United States. Thus,
Morrison would still control in a private cause of action brought under Section 10(b).
Section 929P(b) also rebuts the Morrison opinion’s criticism that the conduct and effects test
had been created by the circuit courts without any textual justification. See Morrison, 561 U.S. at
261 & n.5, 270. This provision provides the missing statutory basis for the test.
C. Application of the Conduct and Effects Test
The court determines that the test for determining whether the Rule 10b-5 (under Section
10(b)) and Section 17(a) may be applied to any alleged foreign transactions is the conduct and
effects test laid out in Section 929P(b) of Dodd-Frank. Under this test, Rule 10b-5 and Section
17(a) may be applied to violations of these provisions that involve: “(1) conduct within the
United States that constitutes significant steps in furtherance of the violation, even if the
securities transaction occurs outside the United States and involves only foreign investors; or (2)
conduct occurring outside the United States that has a foreseeable substantial effect within the
United States.” Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No.
111-203, § 929P(b), 124 Stat. 1376, 1864–65 (2010); see also 15 U.S.C. §§ 77v(c), 78aa(b).
Even if some of the securities transactions at issue in this case are deemed to be foreign
transactions, the conduct and effects test has been satisfied in this case. Specifically, “conduct
within the United States . . . constitute[d] significant steps in furtherance of the violation” of
Rule 10b-5 and Section 17(a). Mr. Scoville conceived and created Traffic Monsoon in the United
States. Through Traffic Monsoon, he created and promoted the AdPack investments over the
internet while residing in Utah. Indeed, Traffic Monsoon does not dispute in its briefing that
“significant steps” in furtherance of the AdPack sales were carried out in the United States.
Therefore, Rule 10b-5 and Section 17(a) may be applied to all of the transactions at issue in this
D. Application of the Morrison Transactional Test
There is an alternative reason why Rule 10b-5 and Section 17(a) must be applied to all of
the AdPack sales at issue in this case. Even if the court has erred in concluding that Section
929P(b) reinstated the conduct and effects test, all of the AdPack sales challenged by the SEC are
domestic transactions under the Morrison transactional test.
1) Section 10(b) and Rule 10b-5
In Morrison, the Supreme Court analyzed the language of Section 10(b), which prohibits
manipulative or deceptive devices used “in connection with the purchase or sale of any security,”
and determined that “the focus of the Exchange Act is not upon the place where the deception
originated, but upon purchases and sales of securities in the United States.” Id. at 266. Thus,
Morrison held that Section 10(b) and Rule 10b-5 could only be applied “only in connection with
the purchase or sale of a security listed on an American stock exchange, and the purchase or sale
of any other security in the United States.” Id. at 273.
The Second Circuit has noted that “[w]hile Morrison holds that § 10(b) can be applied to
domestic purchases or sales, it provides little guidance as to what constitutes a domestic purchase
or sale.” Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 67 (2d Cir. 2012). In
analyzing the question of where a transaction occurs, Absolute Activist held that the location of
the two parties to the transaction at the time that they became irrevocably bound determines the
location of the transaction. Id. at 68. Thus, a domestic transaction occurs when “the purchaser
incurred irrevocable liability within the United States to take and pay for a security, or that the
seller incurred irrevocable liability within the United States to deliver a security.” Id.
This test for determining when a domestic transaction has occurred comports with the
language of Section 10(b), which prohibits the use of manipulative or deceptive devices “in
connection with the purchase or sale of any security.” (Emphasis added). Either a domestic
purchaser or a domestic seller of a security may bring a transaction within the purview of Section
In this case, Traffic Monsoon sold all of the AdPacks over the internet to both foreign and
domestic purchasers. In all of these transactions, the seller of these securities, a Utah LLC,
incurred irrevocable liability in the United States to deliver this security. Thus, all of the
transactions satisfy the domestic transaction test under Morrison and Absolute Activist.12
2) Section 17(a)
Morrison only analyzed the language of Section 10(b) to determine its territorial reach. It
had no occasion to consider Section17(a). Because the wording of Section 17(a) is different from
Section 10(b), it requires a separate analysis.
While Section 10(b) prohibits certain deceptive practices “in connection with the
purchase or sale of any security,” Section 17(a) forbids deceptive practices “in the offer or sale
of any securities.” (Emphasis added). Section 10(b) employs two terms that denote a completed
transaction: “purchase” and “sale.” But Section 17(a) regulates not only a completed securities
transaction—a “sale”—it also applies to an “offer,” which is a primary step to a completed
Traffic Monsoon proffered evidence that Mr. Scoville lived in both the United Kingdom and
Utah during the period of time that Traffic Monsoon sold AdPacks over the internet. It argued
that Mr. Scoville’s physical location at the moment when an AdPack was sold determined the
location of the seller for all AdPacks sold. But Mr. Scoville did not sell any AdPacks. His LLC,
Traffic Monsoon, did. Mr. Scoville may not claim the advantages afforded by operating through
an artificial business entity, only to discard this legal fiction when it suits him. Moreover, Mr.
Scoville did not act as an agent of Traffic Monsoon by entering into contracts to sell AdPacks on
foreign soil. The exclusive method of purchasing an AdPack was directly from Traffic Monsoon,
LLC over the internet. Thus, Mr. Scoville’s physical location when a member purchased an
AdPack is irrelevant to the question of where the transaction occurred.
Citing several cases from the Southern District of New York, Traffic Monsoon argues that
“various courts have similarly recognized that Section 17(a) of the Securities Act of 1933 does
not apply to extraterritorial conduct.” [Docket 32, p. 8]. See SEC v. Goldman Sachs & Co., 790 F.
Supp. 2d 147, 164 (S.D.N.Y. 2011) (“[T]he Court agrees that Morrison applies to Section 17(a)
of the Securities Act. At least one post-Morrison court in this district has held the Securities Act
Section 17(a), therefore, applies to AdPacks sold to individuals outside the United States
for two reasons. As noted above, the sale occurs both in the United States and in the foreign
country of the purchaser. In addition, Traffic Monsoon’s offer to sell AdPacks over the internet
occurred in the United States where Traffic Monsoon, LLC is located.
“[U]pon a proper showing,” this court may grant the SEC’s request for a preliminary
injunction restraining acts in violation of either the Securities Act or the Exchange Act. 15 U.S.C.
§§ 77t(b), 78u(d). When the SEC seeks a preliminary injunction pending trial, it must show a
likelihood of prevailing on the merits and a reasonable likelihood that the wrong will be
repeated.14 SEC v. Unifund SAL, 910 F.2d 1028, 1031, 1039 (2d Cir. 1990). The degree to which
the SEC must prove these two elements depends upon the nature of the injunction that it seeks:
Though the “clear showing” qualifier appears to have been
abandoned for injunctions that serve the traditional purpose of
preserving the status quo, plaintiffs have been put to a more
rigorous burden in obtaining preliminary injunctions that order
some form of mandatory relief. We have said that a “clear
showing” is required where the injunction is mandatory. Thus,
even when applying the traditional standard of “likelihood of
success,” a district court, exercising its equitable discretion, should
bear in mind the nature of the preliminary relief the [SEC] is
does not apply to ‘sales that occur outside the United States.’” (citing In re Royal Bank of
Scotland Grp. PLC Sec. Litig., 765 F.Supp.2d 327, 338–39 (S.D.N.Y.2011)). It is true that under
Morrison, Section 17(a) would also be limited to domestic conduct. But the language of Section
17(a) expands the domestic conduct that is regulated to include both completed transactions and
offers to sell securities.
To the extent that the SEC only seeks an asset freeze to guarantee money will be available to
remedy a violation, it need not show a reasonable likelihood that the wrong will be repeated.
SEC v. Cavanagh, 155 F.3d 129, 132 (2d Cir. 1998) (“An asset freeze requires a lesser showing;
the SEC must establish only that it is likely to succeed on the merits.”). Because the SEC seeks
injunctive relief that exceeds a mere asset freeze in this case, it must also show a likelihood of
seeking, and should require a more substantial showing of
likelihood of success, both as to violation and risk of recurrence,
whenever the relief sought is more than preservation of the status
quo. Like any litigant, the [SEC] should be obliged to make a more
persuasive showing of its entitlement to a preliminary injunction
the more onerous are the burdens of the injunction it seeks.
Id. (citations omitted). Under this sliding standard, an injunction that maintains the status quo,
such as an asset freeze, can be issued upon a “showing that the probability of [the SEC]
prevailing is better than fifty percent.” Id. at 1039, 1041 (citation omitted); see also SEC v.
Cavanagh, 155 F.3d 129, 132 (2d Cir. 1998). However, a mandatory injunction that alters the
status quo or a particularly onerous injunction may be issued only upon a “clear showing” that
the SEC will prevail. Unifund, 910 F.2d at 1039, 1040–41.
The SEC has requested an injunction that contains elements of both a traditional
prohibitory injunction and a more restrictive mandatory injunction. It seeks to maintain the status
quo by requesting a freeze on Traffic Monson’s assets. But the requested receivership order,
which is a necessary component of the preliminary injunction that the SEC’s seeks, contains at
least one element of mandatory relief: an order that Mr. Scoville “provide any information to the
Receiver that the Receiver deems necessary.” [Docket 3-5, ¶ 10; Docket 11, ¶ 6].
Moreover, the preliminary injunction that the SEC seeks is particularly burdensome. It
would continue the receiver’s possession of not just Traffic Monsoon’s assets, but also Traffic
Monsoon’s business operations pending the resolution of this litigation. This interruption in
Traffic Monsoon’s business, which relies upon a steady stream of new AdPack purchasers to pay
revenue sharing to existing AdPack holders, would certainly harm the continuing viability of the
enterprise. The keystone to Traffic Monsoon’s success has been the cultivation of its members’
expectation that the purchase of an AdPack will result in a steady stream of revenues into the
members’ accounts. The court is also mindful of the hardship born by the many individuals who
have used their savings to purchase AdPacks. The asset freeze denies these individuals access to
much needed funds.
Given these considerations, the court requires a clear showing of both a likelihood of
success on the merits and that the violations would continue absent an injunction.
A. Likelihood of Success
Traffic Monsoon argues that the SEC cannot show a clear likelihood of success in this
litigation for several reasons. First, it asserts that its sale of AdPacks does not constitute a Ponzi
scheme that would violate Rule 10b-5 or Section 17(a). Second, it argues that the AdPacks are
not securities and are therefore not subject to the restrictions contained in Rule 10b-5 or Section
17(a). And third, it argues that the SEC likely cannot prove the scienter requirements of Rule
10b-5 or Section 17(a).
1) Existence of a Ponzi Scheme
The Tenth Circuit has defined a Ponzi scheme in several different ways. In M & L
Business Machine it was defined as:
an investment scheme in which returns to investors are not
financed through the success of the underlying business venture,
but are taken from principal sums of newly attracted investments.
Typically, investors are promised large returns for their
investments. Initial investors are actually paid the promised
returns, which attract additional investors.
Jobin v. McKay (In re M & L Bus. Mach. Co.), 84 F.3d 1330, 1332 n.1 (10th Cir. 1996) (quoting
Sender v. Heggland Family Trust (In re Hedged-Invs. Assocs., Inc.), 48 F.3d 470, 471 n.2 (10th
Cir. 1995). Alternatively, the circuit court has said that a “Ponzi scheme is a fraudulent
investment scheme in which ‘profits’ to investors are not created by the success of the underlying
business venture but instead are derived from the capital contributions of subsequently attracted
investors.” Sender v. Simon, 84 F.3d 1299, 1301 (10th Cir. 1996). Yet another iteration of the
definition of a Ponzi scheme is that it is a
fraudulent investment scheme in which money contributed by later
investors generates artificially high dividends for the original
investors, whose example attracts even larger investments. Money
from the new investors is used directly to repay or pay interest to
earlier investors, usually without any operation or revenueproducing activity other than the continual raising of new funds.
Mosier v. Callister, Nebeker & McCullough, 546 F.3d 1271, 1273 n.2 (10th Cir. 2008) (quoting
Ponzi scheme, BLACK’S LAW DICTIONARY (8th ed. 2004)). Although there are minor variations,
these definitions all agree that the central characteristic of a Ponzi scheme is that returns are not
based upon any underlying business activity. Instead, money from new investors is used to pay
Under this definition, Traffic Monsoon operated as a Ponzi scheme. When a member
purchased a $50 AdPack, the member obtained a right to share Traffic Monsoon’s “revenue” up
to $55. The AdPacks typically reached the maximum $55 payout in about 55 days. For many
AdPacks, Traffic Monsoon also paid a $5 commission to the referring member. Unbeknownst to
the Traffic Monsoon members, though, the revenue sharing returns that flowed into the
member’s account to obtain the 10% return and 10% commission were derived almost
exclusively from the sale of AdPacks to later purchasers. Thus, the profits and commissions
generated by the AdPack did not come from underlying business activity. Instead, the profits and
commissions were derived from subsequent investments in AdPacks by later purchasers. An
AdPack investor was almost completely reliant upon new AdPack purchases to recapture the $50
investment and reap the $5 return. The impressive 66% (or more) annual return obtained by early
AdPack investors served as an example that both attracted new investors and convinced existing
investors to roll over their AdPack returns into new AdPacks. 15
But this cycle of returns to early investors fueled by new investments cannot last forever.
A 20% payout every 55 days (10% in revenue sharing and a 10% commission) could not be
sustained by Traffic Monsoon’s relatively anemic revenue generated by selling website visits.
Instead, these impressive returns were paid with either new investor money or members rolling
over credits in their accounts toward new AdPack purchases. But as the number of outstanding
AdPacks expands exponentially, the new investment money must be divided among an evergrowing number of AdPacks, requiring a commensurate exponential expansion of the amount of
new investment money just to maintain the same rate of return. At some point, the daily
payments deposited in AdPack holders’ accounts must begin to decrease until an inevitable
One of the unique aspects of Traffic Monsoon that differentiates it from other Ponzi schemes is
that members had to continually reinvest in the scheme by rolling over the profit from fully
matured AdPacks into the purchase of new AdPacks. This amounted to a shell game in which an
initial investment of a sum of money would continually cycle among the members’ accounts. A
large portion of an initial investment would be distributed to other members as either revenue
sharing or a commission. Then the members that received the revenue sharing payments or
commissions would reinvest it by rolling it over into new AdPAck purchases. Under this system,
the same dollar could be distributed to member accounts as revenue sharing or a commission
many times, until either Traffic Monsoon withdrew it as profit or a member withdrew it from his
or her account. This explains why the members had a relatively small amount in their accounts
when the court entered the TRO—$34.2 million—while the number of outstanding AdPacks, if
allowed to mature, would amount to $243.9 million. So long as the members, encouraged by a
continual flow of money into their accounts, reinvested most of their money rather than
withdrawing it, a relatively small amount of money continually redistributed among the members
through revenue sharing could fuel much greater expectations as to the near-future value of the
AdPacks. But once the money ceased to continually recycle among the member accounts, as
happened when the court entered the TRO, there wasn’t enough money to pay what experience
had led the members to believe their AdPack investment would be worth after a short 55-day
wait. That is why Traffic Monsoon had only about $60 million in assets to cover outstanding
AdPacks that would be worth $243.9 million if they had matured, even though member account
balances amounted to only $34.2 million.
tipping point is reached where fewer members rollover their AdPacks and fewer new investors
are attracted to the scheme. Then, a vicious cycle would begin in which a decrease in new
investment would lower the rate of return, which would in turn decrease the amount of new
investment even more. This cycle would continue until the system collapsed and the unlucky
individuals who had not pulled out their money in time would be left with next to nothing. See
Merrill v. Abbott (In re Indep. Clearing House Co.), 77 B.R. 843, 860 (Bankr. D. Utah 1987) (“A
Ponzi scheme cannot work forever. The investor pool is a limited resource and will eventually
A Ponzi scheme is inherently deceptive because it generates a false appearance of
profitability by using money from new investors to generate returns for earlier investors.
Mukamal v. General Electric Capital Corp. (In re Palm Beach Fin. Partners, L.P.), 517 B.R.
310, 346 (Bankr. S.D. Fla. 2013) (“[T]he hallmark of a Ponzi scheme, which is inherently
fraudulent in nature, is ‘that the entity gives the false appearance of profitability by seeking
investments from new sources rather than earning profits from assets already invested.’” (citation
omitted)). These artificial returns mislead new investors and conceal the fact that the Ponzi will
inevitably collapse and investors will lose money. Therefore the operator of a Ponzi scheme will
likely violate the prohibitions against employing “any device, scheme, or artifice to defraud” or
engaging “in any act, practice, or course of business which operates or would operate as a fraud
or deceit” contained in Rule 10b-5(a), (c) and Section 17(a)(1), (3). See SEC v. Helms, No. A-13CV-01036 ML, 2015 WL 5010298, at *13–*14 (W.D. Tex. Aug. 21, 2015) (concluding that a
Ponzi scheme was a “scheme to defraud” under Rule 10b-5 and Section 17(a)); Merrill, 77 B.R.
at 860 (The perpetrator of a Ponzi scheme “must know all along, from the very nature of his
activities, that investors at the end of the line will lose their money.”).
Traffic Monsoon argues that it cannot be liable under Rule 10b-5 or Section 17(a)
because it did not operate a Ponzi scheme. First, it points to the fact that its website does not
promise any particular rate of return for AdPack purchases and specifically notifies members that
reaching the maximum $55 payout is not guaranteed. Quoting language from M & L Business
Machines, Traffic Monsoon notes that “[t]ypically, investors [in a Ponzi scheme] are promised
large returns for their investments.” 84 F.3d at 1332 n.1. But although promised returns may be a
“typical” indicator of a Ponzi scheme, it is not a necessary element of such a scheme. What is
required is the payment of returns to existing investors with new investor money. As evidenced
by the rapid expansion of Traffic Monsoon’s AdPack sales, the false appearance of profitability
afforded by this practice was more than sufficient to entice new investors.
The deception at the heart of the Traffic Monsoon Ponzi scheme is that it concealed the
fact that almost all of the returns from the AdPacks were derived from subsequent AdPack
purchases. The website did not notify its members that over 98% of the returns came from
subsequent investments in AdPacks. By calling the returns “revenue sharing,” and falsely
claiming that the sale of AdPacks did not constitute a Ponzi scheme, Traffic Monsoon suggested
that the returns were generated by business revenue rather than by other investments in AdPacks.
Indeed, the website asserted that “[n]ew sales of advertising service generate new earnings” and
that “[i]t’s from the sale of all our services that we share revenues,” misleading the members as
to the source of the AdPack returns.
Traffic Monsoon also asserts that it does not operate a Ponzi scheme because it has
sufficient funds to pay out all of the money in its members’ accounts. According to Traffic
Monsoon, if its business model collapses and no more AdPacks are sold, it will have broken no
promises because it will be able to pay out all of the money it is contractually obliged to remit.
But breaching a contract is not the hallmark of a Ponzi scheme. Its defining characteristic is the
inherently deceptive practice of using new investor money, rather than revenue derived from an
underlying business, to pay returns to existing investors.
It is true that Traffic Monsoon’s sale of AdPacks differs somewhat from a run-of-the-mill
Ponzi scheme. In most Ponzi schemes, an investor who deposits $1,000 in the scheme will be
told that there is $1,000 in his or her account, and this total will be augmented with fictitious
returns. This iteration of a Ponzi scheme is inherently bankrupt because there isn’t enough
money to pay out the fictitious sums in all of the victim’s accounts. In the case of Traffic
Monsoon, however, if a member purchased $1,000 in AdPacks, that money would immediately
be distributed to the referring member, to other qualified AdPack holders, and to Traffic
Monsoon. The purchasing member’s account would initially have zero dollars in it. Then money
that other investors used to purchase AdPacks would flow into the member’s account until it
reached $1,100 about two months later. What made Traffic Monsoon a successful Ponzi scheme,
however, was that members would not allow large amounts of money to accumulate in their
accounts. They would continually reinvest this money by purchasing additional AdPacks, leaving
Traffic Monsoon with a relatively modest obligation to pay out money contained in the member
accounts. But the fact that Traffic Monsoon might have enough money to pay out the money
contained in the member accounts if the AdPack model were allowed to collapse under its own
weight does not mean that it does not operate a Ponzi scheme. Members would still have been
deceptively enticed to invest their savings in the scheme by the illusion of profitability Traffic
Monsoon cultivated by using new investor money to pay returns to earlier investors. And those
members that would be left holding hundreds or thousands of worthless AdPacks would still
have lost their savings.
Finally, Traffic Monsoon suggests that it does not operate a Ponzi Scheme because it
operates a legitimate advertising business. However, “[t]he fact that an investment scheme may
have some legitimate business operations is not determinative. If the [defendant’s] legitimate
business operations cannot fund the promised returns to investors, and the payments to investors
are funded by newly attracted investors, then the [defendant] is operating a Ponzi scheme.” In re
Twin Peaks Fin. Serv's Inc., 516 B.R. 651, 655 (Bankr. D. Utah 2014); accord Miller v. Wulf, 84
F. Supp. 3d 1266, 1272 (D. Utah 2015) (“‘[S]eemingly legitimate business activity does not
insulate companies from a finding that they were operated as part of a Ponzi scheme.’ Ponzi
schemes sometimes use legitimate operations to attract investors, but the existence of that
legitimate business does not preclude a finding that the company operated a Ponzi scheme.”
(alteration in original) (footnote and citation omitted)). The less than 2% of revenue Traffic
Monsoon collected from the sale of website visits was clearly insufficient to fund the AdPacks’
2) AdPacks are securities
Both Rule 10b-5 and Section 17(a) regulate transactions that involve securities. The SEC
argues that the AdPacks are securities because they amount to an investment contract, which was
defined by the U.S. Supreme Court in the seminal Howey opinion as comprising three elements.
They are: “ an investment of money  in a common enterprise  with profits to come
solely from the efforts of others.” SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946). In applying
this definition of an investment contract, “form should be disregarded for substance and the
emphasis should be on economic reality.” Tcherepnin v. Knight, 389 U.S. 332, 336 (1967).
Traffic Monsoon argues that its sale of AdPacks did not create an investment contract
and, therefore, the AdPacks are not securities. First, Traffic Monsoon argues that its sale of an
AdPack does not constitute “an investment of money in a common enterprise,” but rather the
purchase of services. The fact that members received some services for their AdPack purchases,
however, does not mean that the AdPack was not an investment. The same services available
through the AdPack could be purchased à la carte for just $10.95. The only explanation for why
members would pay an additional $39.05 for the same services was that they wanted to invest
their money to obtain the generous returns obtained by early investors. The evidence clearly
points to the fact that Traffic Monsoon’s explosive growth was driven by members purchasing
and repurchasing AdPacks in order to obtain the incredible returns on their investment, not by
intense demand for Traffic Monsoon’s services. Indeed, many AdPack purchasers had no interest
in the website visits Traffic Monsoon offered, and Traffic Monsoon only ever delivered a fraction
of the clicks it promised to deliver. In short, the economic reality of the AdPack purchases is that
they were investments.
Second, Traffic Monsoon contends that the profits from the AdPacks did not “come
solely from the efforts of others” because its members were required to invest a little over four
minutes every day to visit 50 websites for five seconds each. It asserts that this requirement to
qualify for revenue sharing constituted efforts on the part of the members to reap the profits from
This argument is unavailing. “[T]he word ‘solely’ used in the Howey test ‘should not be
read as a strict or literal limitation on the definition of an investment contract, but rather must be
construed realistically, so as to include within the definition those schemes which involve in
substance, if not form, securities.’” Crowley v. Montgomery Ward & Co., 570 F.2d 877, 879 (10th
Cir. 1978) (citation omitted). “Investments satisfy the third prong of the Howey test ‘when the
efforts made by those other than the investor are the ones which affect significantly the success
or failure of the enterprise.’” SEC v. Shields, 744 F.3d 633, 645 (10th Cir. 2014) (citation
omitted). “[T]he test is ‘whether the efforts made by those other than the investor are the
undeniably significant ones, those essential managerial efforts which affect the failure or success
of the enterprise.’ ” Crowley v. Montgomery Ward & Co., 570 F.2d 875, 877 (10th Cir. 1975)
(citation omitted)). In this case, the efforts of the members in visiting websites for about four
minutes a day was not a significant contribution to the success or failure of the AdPack scheme.
Over 98% of Traffic Monsoon’s revenue sharing came from the sale of AdPacks. The success of
AdPack sales had nothing to do with the members’ efforts and depended solely on Mr. Scoville’s
acumen in promoting them.
Because the three elements of the Howey test are satisfied, the AdPacks were securities
subject to regulation under Rule 10b-5 and Section 17(a).
Traffic Monsoon also argues that the SEC cannot prove the scienter element of Rule
10b-5 or Section 17(a). As evidence for this proposition, it states that in early 2014, the Utah
Division of Securities investigated a scheme similar to Traffic Monsoon run by Mr. Scoville
called AdHitProfits. When Mr. Scoville inquired as to the status of that investigation, he received
an email stating that the matter has been closed because “a security was not involved.” Traffic
Monsoon cites this email as persuasive evidence that Mr. Scoville lacked scienter because he did
not know that the AdPacks were securities.
This argument is unavailing for several reasons. First, Traffic Monsoon provides no
authority for the proposition that the SEC is required to prove that Mr. Scoville knew that the
AdPacks meet the definition of a security. Second, to the extent that Traffic Monsoon argues that
the SEC cannot prove that Mr. Scoville had the requisite knowledge that the AdPacks were a
“device, scheme, or artifice to defraud” or a “course of business which operates or would operate
as a fraud or deceit” under Rule 10b-5 or Section 17(a), the operation of a Ponzi scheme itself is
evidence of scienter. The perpetrator of a Ponzi scheme “must know all along, from the very
nature of his activities, that investors at the end of the line will lose their money.” Merrill, 77
B.R. at 860. And third, Section 17(a)(3) does not have a scienter requirement. Aaron v. SEC, 446
U.S. 680, 696 (1980). At minimum, Traffic Monsoon’s scienter argument is unavailing as to this
In sum, all of Traffic Monsoon’s arguments as to why it will win this case are without
merit. Reviewing the evidence, the court concludes the SEC has made a clear showing that it will
likely prevail on the merits.
B. Reasonable Likelihood that the Wrong Will Be Repeated
In the Tenth Circuit, courts examine several factors to evaluate the likelihood that the
wrong will be repeated:
Determination of the likelihood of future violations requires
analysis of several factors, such as the seriousness of the violation,
the degree of scienter, whether defendant's occupation will present
opportunities for future violations and whether defendant has
recognized his wrongful conduct and gives sincere assurances
against future violations. . . . A knowing violation of §§ 10(b) or
17(a)(1) will justify an injunction more readily than a negligent
violation of § 17(a)(2) or (3). However, if there is a sufficient
showing that the violation is likely to recur, an injunction may be
justified even for a negligent violation of § 17(a)(2) or (3).
SEC v. Pros Int'l, Inc., 994 F.2d 767, 769 (10th Cir. 1993).
Mr. Scoville does not argue that the likelihood of future violations prong of the
preliminary injunction test has not been met. He sold AdPacks through Traffic Monsoon from
October, 2014 up until the day that this court entered a TRO enjoining this practice in July, 2016.
Mr. Scoville has provided no assurances that he will discontinue the sale of AdPacks if the TRO
is permitted to expire. Instead, his entire defense has been that his sale of AdPacks was a
legitimate and legal business practice. Moreover, the very nature of a Ponzi scheme is that it
must be perpetuated through the solicitation of additional investments or it will collapse.
The court concludes that, absent a preliminary injunction, the SEC has made a clear
showing that Mr. Scoville will continue to violate securities laws by perpetuating a Ponzi
scheme. Moreover, to the extent that the SEC seeks an asset freeze, proof of a likelihood of
future violations is not required. Cavanagh, 155 F.3d at 132.
The SEC has made a clear showing that it will prevail and that Mr. Scoville will continue
to violate the law by operating a Ponzi scheme absent an injunction. The court therefore grants
the SEC’s request for a preliminary injunction.
OBJECTIONS TO THE RECEIVERSHIP ORDER
In his motion to set aside the receivership, Mr. Scoville argues that the present
receivership order violates his Fourth and Fifth Amendment rights. The court need not determine
whether the current receivership order violates these rights because the court exercises its
discretion to amend the receivership order to address his concerns.
Without citing authority, Mr. Scoville also argues that the receivership order violates his
right to due process because it deprives him of funds to mount a legal defense to the SEC’s
claims. But “a swindler in securities markets cannot use the victims’ assets to hire counsel who
will help him retain the gleanings of crime.” SEC v. Marino, 29 F. App’x 538, 541–42 (10th Cir.
2002) (unpublished) (quoting SEC v. Quinn, 997 F.2d 287, 289 (7th Cir. 1993)). Indeed, in a
criminal prosecution, “[a] robbery suspect . . . has no Sixth Amendment right to use funds he has
stolen from a bank to retain an attorney to defend him if he is apprehended.” Caplin & Drysdale,
Chartered v. United States, 491 U.S. 617, 626 (1989). If a criminal defendant may not use illgotten gains to fund a defense, a civil defendant certainly may not.
Because the court concludes that the SEC has demonstrated a strong likelihood that it will
prove that Mr. Scoville operated an illegal Ponzi scheme, it denies his due process objection to
the receivership order.
SECTION 1292(b) CERTIFICATION
The court certifies this order for interlocutory appeal pursuant to 28 U.S.C. § 1292(b).
This order contains several “controlling question of law as to which there is substantial ground
for difference of opinion and . . . an immediate appeal from the order may materially advance the
ultimate termination of the litigation.”
There is “substantial ground for difference of opinion” as to whether Section 929P(b) of
Dodd-Frank reinstated the conduct and effects test for litigation brought by the SEC. Although
several district courts have noted the possibility that Section 929P9(b) may have superseded the
Morrison test, none have actually decided the question. See SEC v. Battoo, 158 F. Supp. 3d 676,
692 (N.D. Ill. 2016); SEC v. Brown, No. 14 C 6130, 2015 WL 1010510, at *5 (N.D. Ill. Mar. 4,
2015) (unpublished); SEC v. Chicago Convention Ctr., LLC, 961 F. Supp. 2d 905, 916–17 (N.D.
Ill. 2013). Alternatively, there are grounds for a difference of opinion as to whether Traffic
Monsoon’s sale of AdPacks to foreign customers constituted a domestic transaction if the
Morrison test still applies to litigation brought by the SEC. And finally, the issue of whether
Traffic Monsoon’s particular business model constitutes a Ponzi scheme in light of the
contingent nature of the promised returns appears to be an issue of first impression in this circuit.
Traffic Monsoon’s motion to set aside the receivership [Docket 33] is DENIED. The
SEC’s request for a preliminary injunction is GRANTED. The court shall issue a separate
preliminary injunction order and a revised receivership order.
Signed March 28, 2017.
BY THE COURT
Jill N. Parrish
United States District Court Judge
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