Understanding the role of CRO


Financier Worldwide Magazine

January 2013 Issue

January 2013 Issue

Does the Securities Investor Protection Act (SIPA) and its incorporation of the US Bankruptcy Code’s provisions governing the recovery of preferential payments and fraudulent transfers enable a trustee appointed under SIPA to reach beyond US borders? With the failures of Bernard L. Madoff Investment Securities LLC (BLMIS) and the Madoff feeder funds, the resulting appointment of the SIPA Trustee in the BLMIS case and the subsequent adversary proceedings commenced by the SIPA Trustee to recover preferences and fraudulent transfers, the issue of the extraterritorial application of SIPA and the Bankruptcy Code is now squarely before the federal courts of the United States.

This article will review recent appellate decisions applying the US Supreme Court’s 2010 decision in Morrison v. Nat. Australia Bank Ltd., 130 S. Ct. 2869 (2010), examine how the federal courts treated SIPA and extraterritoriality prior to Morrison, and discuss the current status of SIPA and extraterritoriality.

Supreme Court jurisprudence

The issue is brought into focus by two Supreme Court decisions – Morrison v. Nat. Australia Bank Ltd., and E.E.O.C. v. Aramco, 499 U.S. 244 (1991). In Morrison, the court expressly applied its earlier holding in Aramco and rejected the contention that the 1934 Securities and Exchange Act (the 1934 Act) reached conduct in the United States affecting overseas exchanges or transactions. The consequence was that the Court effectively barred federal securities fraud actions from being filed within the United States in connection with securities that were traded on a foreign exchange. 

In reaching its determination, the Court placed great emphasis upon the text of the pertinent statute, Section 10(b)(5) of the 1934 Act – which lacked any reference to extraterritoriality – as compared to Section 30 of the 1934 Act which expressly provides for extraterritorial application.

For its part, Aramco held that Title VII did not apply to the overseas employment practices of a multinational company in the absence of express congressional intent. The court determined that the then-operative version of Title VII lacked any such language: “we have repeatedly held that even statutes that contain broad language in their definitions of ‘commerce’ that expressly refer to ‘foreign commerce’ do not apply abroad.” Aramco, 499 U.S. at 251.

Morrison’s appellate progeny

Morrison quickly begat progeny. In Keller Foundation/Case Found. v. Tracy, 696 F.3d 835 (9th Cir. 2012), the Court of Appeals rejected the contention that the Longshore and Harbor Workers’ Compensation Act provided workers’ compensation coverage for maritime employees working in Indonesia and Singapore. Significantly, Keller relied upon Morrison as a touchstone for statutory interpretation. As the Ninth Circuit Court elaborated: “Morrison ... rejected the widespread practice among circuit courts of trying to ‘discern’ whether Congress would have wanted [a federal] statute to apply’ extraterritorially, and it also rejected the courts’ development of complex tests that were difficult to apply.’” Keller Foundation/Case Found., 696 F.3d at 844-845. 

Similarly, in Cedeño v. Castillo, 457 Fed. Appx. 35 (2d Cir. 2012), the Second Circuit held that the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1861, et seq., did not reach conduct allegedly committed abroad by a purported foreign criminal enterprise. In accord, Picard v. Kohn, 2011 U.S. Dist. LEXIS 101261, at *7 (Sept. 6, 2011) (Rakoff, U.S.D.J.) (“RICO cannot be applied extraterritorially”). In contrast, in In re Griffin Trading Co., 683 F.3d 819 (7th Cir. 2012), the Court of Appeals for the Seventh Circuit addressed Morrison and held that the Commodity Exchange Act contained an express statutory grant conferring upon the Commodities Futures Trading Commission the authority to issue special regulations governing overseas customer transfers.

SIPA, transfers and earlier case law 

Older lower court decisions have grappled with the issue of extraterritoriality, SIPA and bankruptcy preference recovery, but did not reach definitive conclusions. In the aftermath of Morrison, they now appear to be of limited force. For example, in Hill v. Spencer S&L Ass’n (In re Bevill, Bresler & Schulman, Inc.), 83 B.R. 880 (D. N.J. 1988), a case that predated both Aramco and Morrison, the US District Court held that SIPA applied extraterritorially because the “extraterritorial application of SIPA is also consistent with the extraterritorial application of other federal securities laws.” It goes without saying that, given the Supreme Court’s holdings in both Aramco andMorrison, the thrust of Hill appears subject to challenge.

In Maxwell Commun. Corp. v. Barclays Bank (In re Maxwell Commun. Corp.), 170 B.R. 800 (Bankr. S.D.N.Y. 1994), the Bankruptcy Court declined to give extraterritorial reach to the avoidance powers under the Bankruptcy Code and questioned the reach of Hill v. Spencer and the extraterritorial application of SIPA in the aftermath of Aramco. The Court observed that Hill v. Spencer “precedes Aramco, which calls for a clear congressional expression of extraterritoriality.” In re Maxwell Commun. Corp., 170 B.R. at 812, n.16. 

SIPA and extraterritoriality

Irving Picard, the SIPA Trustee of BLMIS, has commenced numerous adversary proceedings in the United States Bankruptcy Court for the Southern District of New York to recover alleged extraterritorial fraudulent and preferential transfers under the provisions of SIPA and the Bankruptcy Code. Faced with these proceedings, transferee defendants moved to withdraw the reference from the Bankruptcy Court. Central to these motions was the issue of SIPA and its extraterritorial application.

The issue of the intersection between Morrison and SIPA appears headed for a point of initial resolution. 

In a 15 May 2012 decision, District Court Judge Jed Rakoff granted the defendants’ respective motions to withdraw the reference to enable the District Court to adjudicate the issue of SIPA and extraterritoriality. Picard v. Primeo Fund, 2012 U.S. Dist. LEXIS 78804 (S.D.N.Y., May 15, 2012). Judge Rakoff wrote: “whether the Trustee can invoke the Bankruptcy Code to avoid transfers that occurred abroad or to recover from subsequent transferees located outside the United States is unclear, particularly after Morrison.” Picard v. Primeo Fund, 2012 U.S. Dist. LEXIS 78804 at *27. The District Court also noted the Bankruptcy Court’s prior holding in In re Maxwell Commun. Corp. In the aftermath of his May 15 decision, Judge Rakoff demanded briefing of this issue, held a hearing and the issues are sub judice as of the writing of this article. 


The extraterritorial application of SIPA weighs heavily upon the Madoff/SIPA litigation. Given the global scope of the transfers alleged by Trustee Picard, Judge Rakoff’s decision will impact the continued debate. Beyond the immediacy of SIPA and its extraterritorial scope, the manner in which the District Court analyses SIPA will be closely watched. Quoting Morrison, the District Court in Primeo wrote: “[w]hen a statute gives no clear indication of an extraterritorial application, it has none.” Picard v. Primeo Fund, 2012 U.S. Dist. LEXIS 78804 at *27. Because of the emphasis placed by Morrison upon statutory construction – as opposed to legislative intent – the District Court’s determination in Picard v. Primeo Fund stands to impact cases outside of SIPA.


Hon. Melanie L. Cyganowski (Ret.) is a former Chief Bankruptcy Judge (EDNY) and currently partner and chair of the Litigation Insolvency, ADR & Fiduciary Appointments practice group, Daniel F. Fiorillo is a partner, and Lloyd M. Green is of counsel at Otterbourg, Steindler, Houston & Rosen, P.C. Ms Cyganowski can be contacted on +1 (212) 905 3677 or by email: mcyganowski@oshr.com. Mr Fiorillo can be contacted on +1 (212) 905 3616 or by email:dfiorillo@oshr.com. Mr Green can be contacted on +1 (212) 905 3620 or by email: lgreen@oshr.com.

© Financier Worldwide


Melanie L. Cyganowski, Daniel F. Fiorillo and Lloyd M. Green

Otterbourg, Steindler, Houston & Rosen, P.C.

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