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1 FILED United States Court of Appeals Tenth Circuit PUBLISH January 24, 2019 UNITED STATES COURT OF APPEALS Elisabeth A. Shumaker FOR THE TENTH CIRCUIT Clerk of Court _________________ ________________ SECURITIES AND EXCHANGE COMMISSION, Plaintiff - Appellee, v. No. 17-4059 CHARLES D. SCOVILLE, Defendant - Appellant, and TRAFFIC MONSOON, LLC, Defendant. _____________ _______________ PEGGY HUNT, Receiver - Ami cus Curiae. ________________ _________________ Appeal from the United States District Court for the District of Utah (D.C. No. 2:16-CV-00832-JNP) ________________ _________________ Aurbach Coffing, hols and Tom W. Stewart, Marquis D. Loren Washburn (Micah S. Ec Salt Lake City, Utah for Las Vegas, Nevada, with him on the briefs), Smith Correll, LLP, Defendants-Appellants. bbins, General Counsel, Michael A. Conley, Solicitor, William K. Shirey (Robert B. Ste nd Exchange Commission, el to the Solicitor, Securities a with him on the briefs), Couns Washington, D.C., for Plaintiff-Appellee.

2 Peggy Hunt, Michael F. Thomson, a nd John J. Weist, Dorsey & Whi tney LLP, filed a eggy Hunt, in support of Plai brief for Receiver-Amicus Curiae P ntiff-Appellee. ________________ _________________ BRISCOE Before EBEL , and HARTZ , Circuit Judges. , ________________ _________________ EBEL , Circuit Judge. ________________ _________________ This case involves an alleged wo rldwide Ponzi scheme and the an tifraud provisions of the federal Securi ties Act of 1933 and the Securi ties Exchange Act of 1934. Defendant Charles Scovill e operated an internet traffic exchange business through his Utah company, Defe ndant Traffic Monsoon, LLC. The Securities and iated this civil enforcement ac Exchange Commission (“SEC”) init tion, alleging Defendants were instead operati ng an unlawful online Ponzi sche me involving the this interlocutory appeal, S fraudulent sale of securities. In coville challenges several court issued at the outset of t his still ongoing preliminary orders the district enforcement action, including orde s, appointing a rs freezing Defendants’ asset receiver, and preliminarily enj oining Defendants from continuin g to operate their business. In upholding these preliminary the antifraud rulings, we conclude first that provisions of the federal securiti es laws reach Traffic Monsoon ’s sales to customers outside the United States becau se, applying the conduct-and-eff ects test added to the federal securities laws by the 2010 Dodd-Frank Act, Traffic Mon soon undertook significant conduct in the Unite d States to make those sales to persons abroad. We et advertising onsoon’s Adpacks (bundled intern further conclude that Traffic M 2

3 services that allowed a purchaser to share in some of Traffic M onsoon’s revenue) , which are securities regulat ed under the 1933 and qualified as investment contracts 1934 securities acts. We further erted sufficient conclude that the SEC has ass evidence to make it likely that t he SEC will be able to prove t hat Defendants were operating a fraudulent scheme—a P onzi scheme—selling Adpacks an d that scheme violated the antifraud statutes i litigation. Ha ving jurisdiction under 28 nvoked in this U.S.C. § 1292(a)(1) and (2), we , therefore, AFFIRM the district court’s challenged preliminary orders. I. BACKGROUND The parties have very different v ersions of Traffic Monsoon’s b usiness model. onsoon was operating a Ponzi sch According to the SEC, Traffic M eme; that is, a fraudulent scheme in which the bus iness pays returns to its inv estors that are he business, but instead with money acquired from financed, not by the success of t later investors. See S.E.C. v. T .3 (10th Cir. 2013); hompson, 732 F.3d 1151, 1154 n Okla. Dep’t of Sec. ex rel. Fa ught v. Wilcox, 691 F.3d 1171, 11 73 n.2 (10th Cir. 2012). Scoville claims, instead, that Tr internet traffic affic Monsoon is a legitimate exchange offering internet advert ising services. Such a busine ss is based on the fact that internet search engines su ch as Google use algorithms that rank more frequently visited websites higher than les s frequently visited websites. In light of this, website e in order to make that visits to a purchaser’s websit traffic exchange businesses sell 3

4 website look more popular than it really is. Scoville operated several other website ng Traffic Monsoon in September traffic exchanges before starti 2014. ager and registered agent of Tr affic Monsoon, Scoville is the sole member, man a Utah limited liability compa soon’s sole employee, ny. Scoville is also Traffic Mon running the business from his Ut ah apartment. The company cont racts with a Russian computer programmer and several call centers hired to r espond to telephone inquiries from Traffic M onsoon’s customers. Scoville operated Traffic M onsoon through a website, www.trafficmonsoon.com , which was housed on server s physically located in the United States. Someone wanting to do business with Traffic Mon soon first had to become a member by going to the website and creating an account . The member could then purchase through the website several different adver tising services. For example, for $5, a member could purchase twenty clicks on the m ember’s online member could purchase 1,000 visi advertisement, and for $5.95 a ts to his website. ing these services “ala carte, ” a member could Alternatively, instead of purchas purchase an Adpack for $50. A si to receive 1,000 ngle Adpack entitled a member visits to his website and twenty clicks on his internet ad (a $ 10.95 value), plus the opportunity to share in Traffic Monsoon’s revenue up to a maxim um amount of $55. An Adpack purchaser qualified to s enue for each day hare in Traffic Monsoon’s rev 1 that the purchaser click ed on ten (later fifty ) internet ads for other Traffic Monsoon 1 For most of the time Traffic Monsoon was operating, Adpack pur chasers only had o qualify for revenue sharing. I n the last month of its to click on ten ads each day t 4

5 members’ websites and remained on the ad’s landing page for fiv e seconds. In this ers an incentive to provide so way, Scoville gave Adpack purchas me of the Monsoon was sell ing to its mem bers. advertising traffic that Traffic members to complete their dail y qualifying Traffic Monsoon made it easy for advertising clicks. When an A dpack purchaser logged onto his a ccount, Traffic Monsoon would present rotating ads on which the member could cl ick. The [member] is required to vie nds, w each banner ad for only 5 seco and a counter appears that count s down the 5 seconds for [the m ember]. At the end of that time the [me mber] must click on an image tha t appears, to verify that he is human, and then the next banner a d appears automatically. The act of completing the 50 clicks takes the [ member] 4.1 minutes per day. (Aplt. App. at 18-19 ¶ 31 (br acketed material added).) er completed the requisite numb Each day that the Adpack purchas er of clicks, e in Traffic Monsoon’s revenue e arned during the the purchaser qualified to shar preceding twenty-four hours. Nin chasers qualified to ety-nine percent of Adpack pur share in at least some of Traffic Monsoon’s revenue. But “neit her the website nor any other publicly available s ource of information informed the members how Traffic Monsoon split the revenue between olders.” (Id. 2068 itself and qualified Adpack h ¶ 14.) Furthermore, because Tra ffic Monsoon “kept no accountin g records[,] . . . there are no readily available doc uments that describe precisel y how the money was distributed.” (Id. 2067 ¶ 13.) T ypically an Adpack purchaser would earn $1 in operation, however, Traffic Mons oon increased this requirement to fifty clicks per day. 5

6 shared revenue for each day that he made the requisite number o f qualifying clicks. fifty-five days an Adpack purc That meant that in approximately haser could reach the e $50 the member originally pai d for the Adpack maximum $55 return, recouping th plus earning an additional $5 (a days). When an 10% return over the fifty-five Adpack purchaser reached the m aximum $55 limit in revenue shari ng, that member could either use that money to purchase another $50 Adpack, or he could withdraw some or all of his money. A member could buy as many $50 Adpacks as he wanted; some membe rs owned hundreds or even thousands of Adpacks. Significantly, no matter how many Adpacks a member purch ased, the member coul d qualify to share i n Traffic Monsoon’s revenue on -minute session all of those Adpacks through a single four clicking on other members’ ads. S o, for example, if a member b ought 100 Adpacks nutes a day for fifty-five day s clicking on other for $5,000 and spent just four mi Traffic Monsoon members’ ads, t ack the original he Adpack purchaser would earn b $5,000 he paid for a ll 100 Adpacks plus an additional 10% retur n of $500. If a member consistently rolled over hi s Adpacks every fifty-five da ys, instead of cashing out, he would earn a 66% annual re hase and in a year he turn on his original $50 purc would have 166 Adpacks. In thr ee years, he could earn “$25,080 —over five times the initial [$5,000] investme nt.” (Id. 2073-74 ¶ 30.) A second way a Traffic Monsoon me mber could earn money was to r ecruit other members. The recruiting member would earn a 10% commissi on on every ded Adpacks the d member purchased. This inclu advertising service the recruite 6

7 recruit purchased, both with n ew money and by rolling over earn ings from prior ed that “for all $50 Adpacks th at were purchased by a Adpacks. The district court not referred member, Traffic Monso of credits in on typically deposited $60 worth member accounts: $55 into the pur chasing member’s account over a 55-day period (so long as the member qualified [to share revenue]) and $5 int o the referring member’s account.” (Id. 2068-69 ¶ 17.) ile “[s]ome individuals initia lly purchased The district court found that, wh Adpacks principally as a way to p romote their online businesses [,] . . . for many members, the profits that could be reaped from the Adpacks them selves quickly eclipsed this motive.” (Id. 2071 ¶ 23.) “Indeed, many members have not received or used the web visits and banner c licks purchased in the Adpack” (id. 2072 ¶ 24), because Traffic Monsoon only deliv and website visits it ered about 10% of the clicks sold as part of the Adpacks. Before buying an Adpack, the mem ber had to agree with Traffic M onson that the Adpack was not an “investment ” and that Traffic Monsoon’s “ past performance does not guarantee [the purchaser ] the same result in the futur e.” (Id. 2069 ¶ 18 (internal quotation marks omitte also included a d).) Traffic Monsoon’s website lengthy explanation to its members as to why it was not operati ng a Ponzi scheme. The website further stated that t he revenue Traffic Monsoon sha red with its qualifying members was earned fro m the sale of all of its servi ces, and not just ot explain that Adpacks actually made up more than Adpacks. But the website did n 7

8 98% of Traffic Monsoon’s sales . In fact, Traffic Monsoon misre presented that its e more popular than Adpacks. other advertising services wer ar. Between October 2014 and Ju ly 2016, Adpacks became enormously popul when the SEC initiated this civ aid Traffic Monsoon il enforcement action, members p $173 million in new money to purch ase 3.4 million Adpacks and p urchased approximately 14 million additi onal Adpacks—for $700 million—by rolling over money earned from earlier Adpack d, members paid s. During this same time perio only $2.9 million for all other Traffic Monsoon advertising ser vices. Of the total amount of $175.9 million in cash Traffic Monsoon took in over t his period, it distributed approximately $88 m illion to its members, “leaving a difference of $87.4 d in by members and what they million between what has been pai have taken out.” (Id. 2074 ¶ 32.) Ninety percent of Adpacks were side the purchased by people who live out ecially popular in poorer count United States. Adpacks were esp ries, including Bangladesh, Venezuela, and Morocco. “A large majority of the financia l transactions the members com pleted with Traffic Monsoon—both payments mad e to Traffic Monsoon and withd rawals from the member’s [sic] account—were . 2066 ¶ 6.) In conducted through PayPal.” (Id January 2016, because “PayPal b ecame concerned about the enormo us growth in the volume of transactions between T raffic Monsoon and its members, ” PayPal “froze Traffic Monsoon’s account.” (Id . 2074 ¶ 33.) Traffic Monsoon then began using freeze lasted until July 11, 2016. other electronic payment proces sors. The PayPal 8

9 The SEC brought this enforcement action two weeks later. Durin g those interim two Pal accounts, in weeks, Scoville withdrew $23 milli on from Traffic Monsoon’s Pay the maximum withdrawal PayPal allows at one increments of $100,000, which is al reversed those time. Scoville tried to withdraw another $10 million, but PayP transactions. ly has between $50-$6 0 million in frozen T raffic “The receiver current , and “[t]he current combined ac count balance of Monsoon assets” (id. 2075 ¶ 37) Traffic Monsoon members is $34.2 million” (id. 2075 ¶ 36). But members “typically their account because the member s would continually had relatively little money in dpacks.” (Id. 2072 ¶ 27.) “If the outstanding reinvest it by purchasing new A Adpacks currently owned by Traf fic Monsoon members had matured, the [members’] account balance would” have incr eased from $34 million to $278. 1 million.” (Id. 2075 ¶ 36.) II. THIS SEC ENFORCEMENT ACTION The SEC initiated this civil enfo 6, invoking the rcement action on July 26, 201 district court’s jurisdiction under 15 U.S.C. §§ 77t, 77v, 78u, and 78aa. Relevant to this appeal, the SEC contends tha t Defendants violated § 17(a)( 1) and (a)(3) of the Securities Act of 1933, which p e offer or sale of rohibit fraud or deception in th 2 securities, and § 10(b) of the Securities E xchange Act of 1934 and SEC Rul e 10b- 2 Section 17(a) provide s, in relevant part: r purpose of fraud or deceit (a) Use of interstate commerce fo 9

10 5(a) and (c), which prohibit fraud or deception “in connection with the purchase or 3 join Defendants permanently As relief, the SEC seeks to en sale of any security.” securities It shall be unlawful for any person in the offer or sale of any . . . by the use of any means or i or nstruments of transportation communication in interstate comm erce or by use of the mails, di rectly or indirectly (1) to employ any device, schem e, 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)(1), (3). 3 Section 10 provides, in relevant part: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the m ails, or of any facility of any nati onal securities exchange— . . . . (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, . . . any vice or contrivance in manipulative or deceptive de s and regulations as the contravention of such rule Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 15 U.S.C. § 78j(b). The SEC promu 10b-5 under § 10(b)’s authority. lgated its Rule See Janus Capital Grp., Inc. v. Fi rst Derivative Traders, 564 U .S. 135, 141-42 (2011). Relevant here, Rul e 10b-5 provides: 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 onal securities exchange, of any facility of any nati 10

11 from engaging in this scheme, to impose civil penalties, and to disgorge all gains” (Aplt. App. 32). Defendants’ “ill-gotten is enforcement action, it obtai ned ex parte three At the time the SEC initiated th preliminary orders from the dist ts’ assets; rict court 1) freezing Defendan 2) appointing a receiver over t hose assets and over Defendants’ business; and 3) entering a temporary restrain ing order (“TRO”) prohibiting D efendants from continuing to operate their busin dentiary hearing, the ess. After an adversarial evi district court made the TRO a p reliminary injunction and denied Defendants’ motion to set aside the receivership. It is these two rulings that ar e at issue in this interlocutory appeal. appear on appeal as an amicus We grant the receiver’s motion to . The receiver asserts that, although the noti ce of appeal named both Scoville and Traffic Monsoon not authorized Traffic Monsoon’ as appellants, the receiver has s appeal. (a) To employ any device, sch eme, or artifice to defraud, [or] . . . . (c) To engage in any act, practice, or course of business which operates or would opera te as a fraud or deceit upon any person, in connection with the purchas e or sale of any security. 17 C.F.R. § 240.10b-5. Because “ Rule 10b-5 . . . is coextensiv e with the coverage of § 10(b),” we will refer primaril y to § 10(b). S.E.C. v. Smart, 678 F.3d 850, 856 n.7 quotation marks omitted). (10th Cir. 2012) (internal 11

12 Furthermore, the attorney who f iled the notice of appeal inform ed the district court lle, the attorney did not repre sent Traffic Monsoon that, while he represented Scovi because the company was in recei affic Monsoon is not vership. For these reasons, Tr a proper party to this appeal. N evertheless, the district cour t recently authorized Scoville “to appeal and advance ar guments on behalf of Traffic Monsoon in th[is] 4 appeal.” (Doc. 120.) Consequently, our rulings on this appeal similarly apply to Traffic Monsoon. III. STANDARD OF REVIEW This court reviews the district court’s order appointing a rece iver, and refusing to set aside that order, for an abuse of discretion. See DeTar Distrib. Co. v. Tri-State , 252 (10th Cir. 1967). See gen Motor Transit Co., 379 F.2d 244 erally SEC v. Vescor Capital Corp., 599 F.3d 1189, 1194 , 1198 (10th Ci gnizing, in SEC civil r. 2010) (reco ble power to appoint a receiver action, district court’s equita and the court’s “broad powers and wide discretion to det ermine relief in an equity rec eivership” (internal quotation marks, alteration omitted)). We also review the district cour t’s decision to grant a prelimi nary injunction for an abuse of discretion. See nver, 878 F.3d 1247, McDonnell v. City & Cty. of De 1252 (10th Cir. 2018). “A district court abuses its discretion when it commits an error of law or relies upon a clearly erroneous factual finding .” Id. (internal quotation marks omitted). 4 istrict court’s We GRANT Scoville’s motion to s upplement the record with the d amended order. 12

13 A movant is not entitled to a p reliminary injunction unless he can 2) he will show: (1) he is likely to succeed on the merits of his claim; ( reatened suffer irreparable harm if the injunction is denied; (3) his th injury outweighs the harm the grant of the injunction will caus e the opposing party; and (4) if iss rsely affect ued, the injunction will not adve the public interest. Because the g rant of a preliminary injunct ion is “an extraordinary remedy,” the movant must make a “clear showing” t hat he is entitled to the injunction. Win ter v. Nat. Res. Def. Council , Inc. , 555 U.S. 7, 22 . . . (2008). Further, ened burden the movant must meet a height if he seeks a preliminary injunc tion, like the one [at issue he re], that will alter the status quo. When “see king such an injunction [the mov ant] must make a strong showing both with r egard to the likelihood of suc cess on the merits and with regard to the balance of the harms.” O Cent ro Espirita Beneficiente Uniao Do Vegetal v. Ashcroft , 389 F.3d 973, 976 (10th Cir. 2004) (en banc) [(per curiam)]. 5 On McDonnell, 878 F.3d at 1252 (cita rial added). tions omitted) (bracketed mate appeal, Scoville focuses only on w hether the SEC has made a suf ficient showing of the likelihood of its succes s on its antifraud claims. IV. DISCUSSION Scoville challenges both the prelim inary injunction and the rec eivership , he contends that the antifr aud provisions of the primarily on three grounds. First federal securities acts do not a es of, Adpacks to Traffic pply to offers to sell, and sal Monsoon members located outside the United States. The extrate rritorial reach of a 5 The district court required the SEC in this case to make this heightened showing because the preliminary injuncti on at issue here did more than maintain the status quo, it also required Traffic M onsoon affirmatively to provide the receiver with any for purposes of this information she deem ed necessary. We accept that same analysis appeal. 13

14 federal statute is a matter of congressional intent and Congres s has clearly indicated, ank Act amendments to the securities la ws, that the through the 2010 Dodd-Fr antifraud provisions apply when e ken in the United States ither significant steps are ta to further a violation of those antifraud provisions or conduct outside the United States has a foreseeable substan tial effect within the United S tates. Because Scoville engaged in conduct within the Un likely to have ited States that has been shown violated the securities laws, we conclude the antifraud provisi ons reach Traffic Monsoon’s sale of Adpacks out side the United States. Second, Scoville argues that Adp acks are not “securities” and s o are not aws. We reject that argument be subject to federal securities l cause Adpacks meet the three-part test for investment c rities regulated by ontracts, which qualify as secu federal law. Lastly, Scoville contends that the SEC has failed to show it is likely to succeed ntifraud claims and, in particu lar, cannot show that in proving the elements of its a t securities scheme with the r equisite scienter. We Defendants engaged in a fraudulen reject those arguments because the SEC presented sufficient evi dence that Defendants were likely operati ng a fraudulent scheme—a Ponzi sc heme—and likely doing so with the required scie nter. For these reasons, explai ned in greater detail below, and because we conclude t he remainder of Scoville’s argu ments lack merit, njunction and refusing to we affirm the district court’s ru lings entering a preliminary i set aside the receivership. 14

15 A. The antifraud provisions reac h Traffic Monsoon’s sales of, o r offers to sell, Adpacks to purchasers located outside the United States e antifraud provisions of the fe deral securities acts Scoville first asserts that th do not reach Traffic Monsoon’s sales of, or offers to sell, Adp acks to people living amounts to 90% of Traffic Mons oon’s Adpack sales. outside the United States. That the antifraud provisions apply 1. Congress has provided that extraterritorially when significan ed States to t steps are taken in the Unit ccurring outside the United Sta tes has a further a violation or conduct o within the United States foreseeable substantial effect Whether a federal statute app lies to conduct outside the United States is a question of congressional intent. S ee Morrison v. Nat’l Austra lia Bank Ltd., 561 U.S. 247, 255 (2010). There is a presumption that Congress int ends a statute to apply only within the United States, s ee id., unless Congress has “af firmatively and statute should apply extraterr itorially, RJR Nabisco, unmistakably” indicated that the Inc. v. European Cmty., 136 S. C statute gives no t. 2090, 2100 (2016). “When a clear indication of an extrater ritorial application, it has non e.” Morrison, 561 U.S. at 255. “Th[e] [Supreme] Court has estab lished a two-step framework for deciding questions of extraterritoriality physical Corp., 138 .” WesternGeco LLC. v. ION Geo S. Ct. 2129, 2136 (2018). “The firs t step asks ‘whether the pr esumption against extraterritoriality h as been rebutted.’” Id. (quoting RJR Nabi sco, 136 S. Ct. at 2101). “If the presumption against extr aterritoriality has not been re butted, the second step lication of the he case involves a domestic app of our framework asks ‘whether t 15

16 statute.’” Id. (quoting RJR Na bisco, 136 S. Ct. at 2101). If either step is satisfied, hallenged conduct. See id. the statute applies to the c the question of the extraterri torial reach of the Here, we can resolve at step one clear that Congress “affirma tively and antifraud provisions because it is e provisions apply extraterrito rially in an unmistakably” directed that thos enforcement action. Through the 2010 Dodd-Frank Act, Congress amended both the 1933 and 1934 securities acts to state: The district courts of the Unite courts d States and the United States of any Territory shall have juri sdiction of an action or procee ding brought or instituted by the Commission or the United States alleging a violation of section 77q(a) of this title [Section 17(a) of the 1933 Secu rities Act] involving— (1) conduct within the Unite d 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 t he United States that has a foreseeable substantial effect within the United States. erial added); see also id. § 7 8aa(b) (amended 1934 15 U.S.C. § 77v(c) (bracketed mat Securities Exchange Act providing federal district courts with “jurisdiction of an action or proceeding brought or i nstituted by the [SEC] or the United States alleging a violation of the antifraud prov -- (1) conduct within the isions of this chapter involving United States that constitutes si gnificant steps in furtherance of the violation, even if the securities transaction occurs out side the United States and inv olves only foreign ble investors; or (2) conduct occurring outside the Un ited States that has a foreseea substantial effect within the United States”). 16

17 Scoville argues that, while Dodd- Frank amended these jurisdict ional s, Congress has tated that the antifraud provisions of the securities act not expressly s acts apply extraterritorially. We reject that argument in provisions of those securities which Congress enacted the 201 0 jurisdictional light of the specific context in amendments as part of the Dodd -Frank Act. See Morrison, 561 U. S. at 265 (stating, in determining whether a statute applies extrater ritorially, th at “[a]ssuredly context can be consulted”); see also R iobel v. Royal Dutch JR Nabisco, 136 S. Ct. at 2102; K Petroleum Co., 569 U.S. 108, 119 ( 2013) (looking to “historical background against which the [statute at issue there] was enact ed” to determine wh ether presumption against extraterritorial applic ation had been rebutted). Historically, Congress, in origin ally enacting the federal secu rities acts in 1933 and 1934, did not add ifraud provisions of rial reach of the ant ress the extraterrito those statutes. See M orrison, 561 U.S. at 255 (addressing spec ifically § 10(b)). of appeals for over forty yea rs applied the antifraud Notwithstanding that fact, courts rritorially when “wrongful cond uct occurred in the provisions of those acts extrate side the United States had a “substantial effect in United States” or when conduct out the United States or upon United (internal quotation States citizens.” Id. at 257 marks omitted); see also id. a t 255-60. This became known as t he conduct-and- effects test. Id. at 259; see a lso id. at 257-59. The courts of appeals treated application of the conduct-and-e ffects test to decide when the federal securities acts iction. Id. at 253-54, applied extraterritorially as a matter of subject -matter jurisd 257-60. 17

18 In 2006, in a completely differe nt context (a Title VII employm ent case), the erence between matters that imp licate a federal Supreme Court addressed the diff court’s subject-matter jurisdictio d, to proving an element n and matters that go, instea of a claim. See Arbaugh v. Y&H Corp., 546 U.S. 500, 503 (2006) . Distinguishing between the two issues also tur ns on congressiona l intent. Id. at 514-15. In Arbaugh, the Supreme Court held that the application of Title statutory provision restricting VII only to employers with fifteen or more employees was not a jurisdictional prerequisite but instead went to the merits of a Title VII clai m. 546 U.S. at 503, 515- 16. The Court reached that conc lusion because Congress placed this fifteen- employee requirement, not in the statute’s jurisdictional provi sion, but instead in the definitions section of the statu te, id. at 514-15; “when Congre ss does not rank a statutory limitation on coverage as jurisd ld treat the restriction as ictional, courts shou haracter,” id. at 516. nonjurisdictional in c Returning to the specific questio itorial reach of the n at issue here, the extraterr antifraud provisions of the federa l securities laws, the Second Circuit, in 2008, applied a conduct-and-effects te st to such a securities case in Morrison v. National Australian Bank Ltd. to determin matter jurisdiction. 547 e the district court’s subject- F.3d 167, 170-71 (2d Cir. 2008) . In doing so, however, the Sec ond Circuit noted that Congress, in enacting the securi ties laws, had ne ver addressed the extraterritorial reach of their antifraud provision s and “urge[d] that this sign ificant omission receive 4. The Supreme Court Congress . . . .” Id. at 170 & n. the appropriate attention of 18

19 granted certiorari to review the Second Circuit’s Morrison deci sion. See 558 U.S. 1047 (Nov. 30, 2009). In the meantime, Congress accepte d the Second Circuit’s invitat ion and, in deral securities acts were pr oposed that would October 2009, amendments to the fe eventually become § 929P(b) of the Dodd-Frank Act; those amendm ents added the extraterritorial language now f ound in 15 U.S.C. §§ 77v(c) and 78aa(b), quoted previously in this opini on, see supra p. 16. The Supreme Court, however, deci ded Morrison before Congress fi nalized those amendments. The specific question presented to the Supre me Court in Morrison was whether § 10(b), th e antifraud provision of the 19 34 Act, applied to Australian stock exchange of sh purchases by Australians on the ares in the National Bank of Australia. 561 U.S. at 250-52. The Australian purchas ers brought suit in the ecurities laws, alleging that the Australian Bank’s United States under American s stock lost value after the Bank vicing company bought an American mortgage ser whose owners had misrepresented the value of that company to th e Australian Bank. Id. at 251-53. In Morrison, the Supreme Court cases, first , relying on the Arbaugh line of held, contrary to decades of cir cuit-level authority, that the question of whether federal securities laws applied ex traterritorially was not a ma tter of subject-matter jurisdiction, but instead went to the merits of the claim. Id. at 253-54 (“[T]o ask hibits, which is a to ask what conduct § 10(b) pro what conduct § 10(b) reaches is 19

20 merits question. Subject-matter jurisdiction, by contrast, ref ers to a tribunal’s power to hear a case.” (internal quot ation marks omitted)). Second, Morrison held that, bec cting § 10(b), ause Congress, in originally ena ly, § 10(b) did not apply did not address whether that pr ovision applied extraterritorial oncluded that the courts outside the United States. Id. a t 255. Morrison, therefore, c of appeals were wrong to apply th eir conduct-and-effects tests to determine when d States because § 10(b) simpl y did not apply § 10(b) applied outside the Unite Id. at 255-65. Instea anguage of § 10(b), the d, focusing on the l extraterritorially. Court held that that antifraud provision only applied domestica lly; that is, to fraud chase or sale of a security lis ted on an American only “in connection with the pur 6 or sale of any other security in the United States.” stock exchange, and the purchase Id. at 273. The Supreme Court issued Morri son on June 24, 2010. At that ti me, the proposed Dodd-Frank Act was be fore a joint congressional commit tee tasked with ouse and Senate versions of tha ironing out differences in the H t bill. One such d included what eventually beca me § 929P(b), difference was that the House ha matter the extraterritorial appl ication of the antifraud addressing as a jurisdictional 6 Morrison addressed § 10(b) of the 1934 Act, which makes it unl awful to use fraud “in connection with the purchas rison, 561 U.S. at 262 e or sale of any security.” Mor (quoting 15 U.S.C. § 78j(b)). The 1933 Act, instead, makes it unlawful to use fraud in selling, or offering to sell, a security. See 15 U.S.C. § 7 7q(a)(1), (3). But Morrison noted that “[t]he same focus on domestic transactions is evident in the Securities Act of 1933, enacted by the same Congress as the [19 34] Exchange Act, hensive regulation of securities and forming part of the compre trading.” 561 U.S. at 268 (citation omitted). 20

21 provisions, while the Senate had removed that proposed amendmen t. The day that int committee the Supreme Court issued Morris on was the final day that the jo ank Act. See SEC v. Gruss, 859 F. Supp. 2d 653, considered the proposed Dodd-Fr 664 (S.D. N.Y. 2012). The committ ee published the final versio n of the bill several 29P(b). The Dodd-Frank Act was enacted into law on days later, and it included § 9 a month after Morrison. July 21, 2010, less than Morrison, then, contrary to fort eld that the y years of circuit-level law, h reach of § 10(b) did not impli cate a court’s subject- question of the extraterritorial ther provisions of the securitie s acts gave district courts matter jurisdiction; instead, o subject-matter jurisdiction to h ear SEC enforcement actions gen erally. 561 U.S. at 254-55 (citing 15 U.S.C. § 78aa) . But Congress, in the Dodd-Fr ank Act, amended only the jurisdictional sections of the securiti es laws to indi cate that the antifraud provisions applied extraterritori ally when a version of the con duct-and-effects test is make any explicit revisions to the substantive met. The Dodd-Frank Act did not antifraud provisions themselves. cago Convention See generally U.S. SEC v. Chi Ctr., LLC, 961 F. Supp. 2d 905 , 910 (N.D. Ill. 2013) (recognizi ng that “the plain language of the Section 929P(b) seems purely jurisdictional—par ticularly in light of its placement in the jurisdicti —yet the onal section of the Exchange Act Congressional intent behind that provision suppor ts the conclus ion that the provision is substantive”). Notwithstanding the placement of the Dodd-Frank amendments in t he , given the con text and historical jurisdictional provisions of the securities acts 21

22 background surrounding Congress’ s enactment of t , it is clear to us hose amendments d that the substantive antifra that Congress undoubtedly intende ud provisions should apply extraterritorially when th e statutory conduct-and-effects test is satisfied. We ict court, which stated: agree, then, with the distr that Congress is familiar wit h the Although courts generally presume precedents of the Supreme Court when it enacts legislation, the close proximity between the date when M orrison was issued and the dat e when the language of Dodd-Frank was fi is nalized, greatly undermines th presumption. It strains credulity to assume that legislators r ead 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 a nd consciously chose to enact Sec tion 929P(b) against the background of the fundamental shift in secu rities law n this timing, the more reasona brought about by Morrison. Give ble assumption is that Morrison was issued too late in the legislat ive process gress to react to it. to reasonably permit Con (Aplt. App. 2086-87.) by the title Congress gave this s ection of the This conclusion is bolstered FORCEMENT BY THE COMMISSION.” Dodd-Frank Act, “STRENGTHENING EN Dodd-Frank Wall Street Reform a nd Consumer Protection Act, PL 1 11-203 (July 21, 2010), 124 Stat 1376. See generally Almendarez-Torres v. Unite d States, 523 U.S. 224, 234 (1998) (“[T]he title of section are tools a statute and the heading of a available for the resolution of a doubt about the meaning of a statute.”) (internal quotation marks omitted)). In a nother section, § 929Y, the Dod d-Frank Act directed the SEC to “solicit public comme nt and thereafter conduct a stu dy to determine the extent to which private rights of action under the antifraud pr ovisions” of the 1934 . We agree with the district court that this Act “should be extende d” extraterritorially 22

23 suggests Congress believed it “ha d extended the SEC’s authority to bring an in Section 929P(b).” (Aplt. App [antifraud] enforcement action . 2089 (emphasis embers of Congress, including § 929P’s drafter, added).) Furthermore, several m Representative Paul Kanjorski, s provision was to make tated that the purpose of that clear that the antifraud provision s apply extraterritorially in enforcement actions. For all of these reasons, then , we conclude that Congress has “affirmatively and unmistakably” indicated that e federal securities the antifraud provisions of th acts apply extraterritorially whe n the statutory conduct-and-ef fects test is met. 2. Because Dodd-Frank’s conduct-a nd-effects test is met here, t he antifraud provisions apply to Def endants’ sales of, and offers to sell, Adpacks to customers located outside the United States Having determined that the antif raud provisions of the federal securities acts can apply extraterritorially when the statutory conduct-an d-effect test is raffic Monsoon’s sales of, and met, we now apply that test to T offers to sell, Adpacks to customers l ocated outside the United States. The sc ope of that extraterritorial app ressional intent; tha t is, “on the limits lication turns on cong Congress has . . . imposed on the statute[s’] foreign applicati on.” RJR Nabisco, 136 S. Ct. at 2101. Her e, Congress limited the extrat erritorial application of the antifraud pr to ovisions in enforcement actions (1) conduct within the Unite d 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; [and] (2) conduct occurring outside t he United States that has a within the United States. foreseeable substantial effect 23

24 15 U.S.C. § 77v(c); see also id. § 78aa(b). that Defendants’ “‘conduct wit We agree with the district court hin the United States . . . constitute[d] signifi cant steps in furtherance of the violation’ of Rule 10b-5 and Section 17(a). Mr. Scoville Monsoon in the conceived and created Traffic United States. Through Traffic M onsoon, he created and promote d the Adpack investments over the internet wh ile residing in Utah.” (Aplt. App. 2091.) We add that the servers hous oon website were physi cally located in the ing the Traffic Mons United States. For these reasons , the district court correctly held that the antifraud provisions of the federal secur ities acts encompass Defendants’ sales of, and offers to members located outside the Un sell, Adpacks to Traffic Monsoon ited States. B. Adpacks are “securities” Scoville next contends that Adp erefore acks are not “securities” and th ral securities laws. Like th Defendants are not subject to fede e district court, we disagree. As an initial matter, Scoville ar gues that the question of whet her Adpacks are “securities” implicat es federal courts’ s ubject-matter jurisdic tion. We disagree, for the same reasons the Supreme Cour r the statute applied t in Morrison held that whethe extraterritorially was not a jurisdictiona l issue. See 561 U.S . at 251, 253-54 & n.3 (distinguishing, in § 10(b) enfor cement action, between provisi ons in federal securities statutes giving dist rict courts subject-matter juris diction—the power to hear onduct § 10(b) reaches, “which i s a merits a case—from questions of what c 24

25 question”). Instead, the questi on of whether Adpacks are “secu rities” is a merits Mgmt. II, L.P. v. Schaden, 843 F.3d 876, 880-81, inquiry. See, e.g., Avenue Capital 886 (10th Cir. 2016) ( of private claim unde r the 1934 Act for affirming dismissal failure to state a claim on whic h relief can be granted because plaintiffs failed to show that the challenged trans actions were “secu rities”). Answering that merits inquiry, we agree with the district court that Adpacks qualify as securities regulated under the 1933 and 1934 acts. “Congress enacted the Securities Acts in response to ‘serious abuses in a largely unr egulated securities investments, market,’ and for the purpose of regulating ‘ in whatever form they are made and by whatever name they a 4 F.3d 633, 641 re called.” SEC v. Shields, 74 (10th Cir. 2014) (quoting Reves v. Ernst & Young, 494 U.S. 56, 60–61 (1990)). “Congress ‘painted with a broad brush’ in d efining a ‘security’ in recognition of the ‘virtually limitless scope of human ingenuity, especially in th e creation of “countless and variable schemes devised by oney of others on those who seek the use of the m the promise of pro fits. . . .”’” Id. (quoting Reves, 494 U.S a t 60-61). Nevertheless, “‘Congress, in enacting the secu rities laws, did not intend to provide a broad federal ver, 455 U.S. 551, remedy for all fraud.’” Id. at 642 (quoting Marine Bank v. Wea 556 (1982)). 25

26 The 1933 Act defines “security” to include an “investment contr act,” 15 7 at the district court determi U.S.C. § 77b(a)(1), and that is wh ned an Adpack is. Although the Act did not further the Supreme Court did define “investment contract,” in SEC v. W.J. Howey C o., 328 U.S. 293 (1946). In Howey, the o wner of a large Florida citrus grove sold sma ll pieces of the grove to the publ ic to help finance the grove’s further development. Id these small parts of . at 294-95. The purchasers of the grove were “for the most pa rt . . . non-residents of Florid a. They [we]re predominantly business and prof essional people who lack the kno wledge, skill and equipment necessary for the car e and cultivation of citrus tree s. They [we]re attracted by the expectation of substantial profits.” Id. at 2 96. Purchasers received the deed to the sma ll pieces of land they bought and the option to hire the seller or some other company to cultivate a nd market the fruit grown on t hat particular piece be paid to the land purchaser . Id. at 295-96. of land, with the net proceeds to Owners of 85% of the pieces of la to cultivate and nd sold hired the grove owner market their sections of the gr ove. Id. at 295. Howey held th at a purchaser’s “land sales contract, the warranty deed [he received] and the service contract together constitute[d] an ‘investment cont material added), defined ract,’” id. at 297 (bracketed as “a contract, transaction or s cheme whereby a person invests his money in a 7 Although the 1933 and 1934 Acts use “slightly different formul ations” for defining a “security,” the Supreme Court ha s, nevertheless treated those formulations “as ng.” SEC v. Edwards, 540 U.S. 38 9, 393 (2004). essentially identical in meani 26

27 common enterprise and is led to expect profits s olely from the efforts of the promoter 298-99; see also id. at 297-301. or a third party.” Id. at “[T]o distinguish an investment contract from other commercial dealings, the Howey test has subsequently bee n broken down into three require ments: (1) an rise, (3) with a reasonable e xpectation of profits investment, (2) in a common enterp urial or managerial efforts of to be derived from the entreprene others.” Shields, 744 on marks omitted). In address ing the legal question F.3d at 643 n.7 (internal quotati of whether some transaction qua t,” see Thompson, lifies as an “investment contrac 732 F.3d at 1161, we disregard fo rm over substance and focus on the “‘economic realities underlying a transac tion, and not on the name appende d thereto.’” Shields, 744 F.3d at 643 (quoting United H ousing Found’n, Inc. v. Forman , 421 U.S. 837, 849 (1975)). Here, Scoville contends —unsuccessfully—that the SEC f ailed to make an he three Howey requirements and, therefore, the adequate showing as to any of t Adpacks as “investment contrac ts” subject to federal district court erred in treating securities regulation. 1. An Adpack qualifies as an investment An Adpack is an “investment.” J ust as the citrus grove owner i n Howey was “offering something more than f ething different from ee simple interests in land, som a farm or orchard coupled with m anagement services,” 328 U.S. a t 299, so, too, Traffic Monsoon was offering its Adpack purchasers something mo re than just advertising services. Adpacks also offered the purchaser an op portunity to share in y “had no desire to as the land purchasers in Howe Traffic Monsoon’s revenue. Just 27

28 occupy the[ir] land or to devel op it themselves” but were inste ad “attracted solely by too the vast majority of the prospects of a return on thei r investment,” id. At 300, so s, not to receive the same a dvertising services $50 Adpack purchasers bought Adpack nstead to hav they could have bought ala cart e for $10.95, but i e the opportunity to nue and earn significant returns . We agree with the share in Traffic Monsoon’s reve district court that early points to the fac t that Traffic Monsoon’ s explosive [t]he evidence cl chasing and repurchasing Adpack s in growth was driven by members pur order to obtain the incredible r eturns on their investment, not by intense ernet advertising] services. Indeed, demand for Traffic Monsoon’s [int erest in the website visits Tr many Adpack purchasers had no int affic Monsoon offered, and Tr affic Monsoon only ever delivered a frac tion of the clicks it promised to deliv er. In short, the economic real ity of the they were investments. Adpack purchases is that (Aplt. App. 2103 (bracketed material added).) purchasers testified that th ey bought Neither the fact that a few Adpack Adpacks for the advertising serv ices, nor the fact that not eve ry Adpack purchaser qualified to share revenue (alt hough almost all of them did), p revents us from characterizing Adpacks as invest 300-01 (holding, in ments. See Howey, 328 U.S. at the context of § 10(b), that Cour t’s conclusion that land sales and service contracts amounted to an “investment contr act” was “unaffected by the fac t that some purchasers choose not to accept th e full offer of an investment contract by declining to enter into a service contract with the” citrus grove owner). 28

29 2. An Adpack involves a common enterprise “a common enterprise.” Just as An Adpack is an investment in the land purchasers in Howey bou ght the opportunity “to share in the pro fits of a large citrus fruit enterprise managed and par owners, 328 U.S. at tly owned by” the citrus grove 299, so Adpack purchasers bought the opportunity to share in re venue derived from the sale of all of Traffic Monsoo n’s advertising services. The revenue in which Adpack purchasers could share, t n enterprise, hen, was generated from a commo Traffic Monsoon’s sale of inte rnet advertising services. 3. An Adpack provides members wit h a reasonable expectation of profit derived from the entrepreneurial or management efforts of other s n investment contract is that t Howey’s third requirement for a he investor “is led to expect profits solely from the efforts of the promoter o r a third party.” 328 , 744 F.3d at 643 n.7 (applying U.S. at 298-99; see also Shields this part of Howey’s er have “a reasonable expecta tion of profits to be inquiry to require that the consum or managerial e fforts of other s” (internal quotation derived from the entrepreneurial marks omitted)). Scoville points out that, althou gh the revenue Adpack purchase rs share is derived from Defendants’ efforts rtising services, the to sell Traffic Monsoon’s adve returns Adpack purchas ers earn are also the result of purchaser s’ own efforts in clicking on other members’ webs ites in order to qualify to shar e revenue. Although the Supreme Court, in Howey, sta ted that the profits expected f rom an “investment at 301, the Tenth from others’ efforts, 328 U.S. contract” should result “solely” 29

30 Circuit has held that “[i]nvestme nts satisfy the third prong of the Howey test when than the investor are the ones which affect the efforts made by those other significantly the success or failu ds, 744 F.3d at 645 re of the enterprise.” Shiel (internal quotation marks omitte d); see also Crowley v. Montgom ery Ward & Co., 570 F.2d 875, 877 (10th Cir. 1975). That is the case here . Adpack purchasers expected Traffic Mons oon’s success to turn “significantly” on the co to sell its ad vertising services. See mpany’s efforts generally Miller v. Cent. Chinc hilla Grp., Inc., 494 F.2d 414, 417 (8th Cir. 1974) (“In determining whether the plainti ffs’ contributions were nominal or significant, the issue is not what efforts, in fa ct, were required of them. Rat her, it is what efforts the plaintiffs were reasonably led t at the time they o believe were required of them entered into the contracts.”). A ssuming Adpack cted to contribute to purchasers expe those services by clicking on ot her members’ some degree in the delivery of not expect their own efforts to be significant. No websites, Adpack purchasers did matter how many Adpacks a member owned, the member expected to qualify to share revenue on all of his or her Ad packs by spending only four minu tes a day clicking on up to fifty ads. Moreover, there icks on one’s website or is evidence that receiving cl internet ad was not the motivati on for the vast majority of Adp ack purchasers; earning a 10% return on th eir investment was. Scoville further argues that Adp acks cannot be “investment cont racts” because there was never a “guarantee” t hat qualified Adpack purchasers would receive a share on to share its se Traffic Monsoon’s obligati of Traffic Monsoon’s revenue becau 30

31 revenue was contingent on there being revenue to share. But ne ither were the citrus nt in the citrus crop. grove purchasers in Howey guara nteed a return on their investme ansaction satisfies Howey’s te st for an “investment 328 U.S. at 296. So long as a tr contract,” “it is immaterial whet her the enterprise is speculat ive or non-speculative.” stment contract,” the purcha ser just has to have a Id. at 301. To qualify as an “inve fits.” Shields, 744 F.3d at 642 n.7, 643; see, e.g., “reasonable expectation of pro o SEC v. Int’l Loan Network, I nc. 968 F.2d 1304, Edwards, 540 U.S. at 395; see als 1308 (D.C. Cir. 1992) (rejecting argument that investment progr am could not be an “investment contract” because no return was guaranteed; stating that “[v]ery few Howey requires is a ‘reasonable investments ‘guarantee’ a return—all that expectation of profits’” (quotin g Forman, 421 U.S. at 852)). T he evidence here onable expectation—based on th e representations supported Adpack purchasers’ reas made to them—of sharing Traffi affic Monsoon’s c Monsoon’s revenue. Although Tr website stated there was no guara ntee that there would always b e revenue for qualifying members to share, it does not appear that there was ever a time, before the PayPal freeze, when a qualifying ed shared revenue. member did not receive purport 4. Conclusion: Adpacks qualif y as investment contracts For these reasons, then, the dis trict court did not err in conc luding that Adpacks meet Howey’s three-part test and, therefore, qualify as “investment gulation under contracts” and, thus, as securiti es subject to re the federal securities laws. 31

32 C. It is likely that the SEC can violated the prove that Defendants’ conduct antifraud provisions of f ederal securities laws Scoville asserts that the distri ct court abused its discretion in determining that Defendants violated the antif raud statutes. Scoville the SEC can likely establish that ments of Defendants’ liability. takes aim at two requisite ele 1. Defendants were opera ting a Ponzi scheme 8 fraudulent schemes involving se curities. The antifraud statutes apply to The SEC will likely succeed in proving that Defendants were district court held that the involved in such a fraudulent sche me because Defendants were op erating a Ponzi scheme, which is “inherently decep tive because it generates a f alse appearance of profitability by using money from new investors to generate ret urns for earlier investors.” (Aplt. App. 2099 (c iting Mukamal v. Gen. Elec. Cap ital Corp. (In re , 517 B.R. 310, 346 (Bankr. S.D. Palm Beach Fin. Partners, L.P.) Fla. 2013)).) Scoville counters that the SEC e operating a cannot prove that Defendants wer Ponzi scheme. But there is str ong evidence that that is exactl y what Defendants were doing. 8 bits “any device, scheme, or a rtifice to defraud” in More precisely, § 17(a)(1) prohi ities.” 15 U.S.C. § 77q(a)(1). Section 17(a)(3) also “the offer or sale of any secur applies to “the offe r or sale of any secu rities,” and prohibits “engag[ing] in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.” 10(b) addresses the use Id. § 77q(a)(3). Section of “any manipulative or deceptiv e device or contrivance” “in co nnection with the purchase or sale of any security .” Id. § 78j(b). SEC Rule 10b -5(a) and (c) apply “in connection with the purchase or sale of any security,” and proh ibit using “any device, scheme, or artifice to defraud,” and “engag[ing] in any act, pr actice, or course of pon any person.” 17 business which operates or woul d operate as a fraud or deceit u C.F.R. § 240.10b-5(a), (c). 32

33 The Tenth Circuit has offered se veral different definitions of a Ponzi scheme, the gist of those definitions i but the district court captured n noting that “the central s that returns are not based upon any underlying characteristic of a Ponzi scheme i business activity. Instead, money o pay earlier from new investors is used t investors.” (Aplt. App. 2097.) See Thompson, 732 F.3d at 1154 n.3; Wilcox, 691 F.3d at 1173 n.2. In addition, i n a Ponzi scheme often the “mo ney contributed by later investors generates artifi riginal investors, whose cially high dividends for the o example attracts even larger i nvestments.” Wilcox, 691 F.3d at 1173 n.2. The district court did not abuse its discretion in determining that the SEC is likely to prove Defendants were operating a Ponzi scheme. For every $50 Adpack it sold, Traffic Monsoon often had to pay out $55 to qualifying pu rchasers, and even $60 if the purchaser had been r ecruited by another Traffic Mons oon member. Traffic sales of new Adpacks; there was essentially no Monsoon paid these amounts from other business activity generati was sharing with ng the revenue Traffic Monsoon qualifying Adpack purchasers. Fu rthermore, Traffic Monsoon mis represented to its Adpack purchasers that the reve nue it was sharing came from sal es of all of Traffic Monsoon’s other advertising serv sely indicated were ices, which Traffic Monsoon fal more popular than its Adpacks. T hus, the record evidence would support finding that Defendants were offering the po ssibility of high rates of retur n on qualifying Adpacks and paying those returns using money from later Adpack sales. In light of he SEC will be able to show that Defendants were this evidence, it was likely t 33

34 operating a Ponzi scheme and thus , be able to prove that Defend ants used fraud or r to sell, Adpacks. deception to sell, or offe Scoville’s arguments to the cont le, although he rary are unavailing. For examp reasserts his argument that Tra ffic Monsoon was only selling ad vertising services, as previously discussed, the vast ma jority of Adpack purchasers we re not seeking to buy internet advertising services but were, instead, seeking a sign ificant return on their $50-per-Adpack investment. More over, Defendants may still be o perating a Ponzi scheme even if they have “some legitimate business operations.” Gillman v. Geis (In ), 516 B.R. 651, 655 (Bankr. D. re Twin Peaks Fin. Servs., Inc. Utah 2014); see also Miller v. Wulf, 84 F. Supp. 3d 1266, 1272 & n.45 (D. Utah 2015) . on—that before an Adpack purchas er could Neither does Scoville’s asserti share in Traffic Monsoon’s reve ng on other members’ nue, he had to qualify by clicki websites for four minutes on a gi ven day and then there had to be revenue Traffic Monsoon generated in the prece ding twenty-four hours—prevent th e district court’s determination that Defendants were running a Ponzi scheme. Eve n though Defendants disclosed these requi site conditions for an Adpack p urchaser to share in Traffic Monsoon’s revenue, there is evidence that Defendants de ceived purchasers by ffic Monsoon’s other be shared was generated by Tra telling them that the revenue to 34

35 advertising services that were m ore popular than Adpacks. Inst ead, essentially all of 9 nerated by the sale of additiona the revenue to be shared was ge l Adpacks. endants did not expressly limit returns on Lastly, Scoville argues that Def chasers. And he contends that none of its members Adpacks only to the original pur had ever suffered a loss. But t he fact that this Ponzi scheme had not yet imploded does not mean Defendants were not running a Ponzi scheme. 2. Scienter next asserts that the SEC will not be able to In a related argument, Scoville establish that Defendants acted with the requisite scienter. W e disagree. Sections 10(b) and 17(a)(1) requi re proof that Defendants acted with the “intent to deceive, manipulate, or defraud.” Aaron v. SEC, 446 U.S. 680, 686 & n.5, 695-97 (1980) (quoting Ernst & Ernst v. Hochfelder, 425 U.S 185 , 194 & n.12 (1976)). (No scienter is require , 446 U.S. at 695-96.) d under § 17(a)(3). See Aaron The district court correctly hel d that this scienter is likely established in this case by operating a Ponzi scheme, which a the fact that Defendants were gain is “inherently nerates a false appearance of profitabil ity by using money deceptive because it ge from new investors to generate (Aplt. App. 2099 returns for earlier investors.” 10 (citing In re Palm Beach Fin . Partners, 517 B.R. at 346).). 9 In light of this crucial decepti on, we reject, at this point i n the case, Scoville’s assertion that Defendants were not operating a Ponzi scheme bec ause “Traffic Monsoon has fully disclosed ever ything to its members.” (Aplt. Br. 52.) 10 ressed Defendants’ Scoville incorrectly asserts tha t the district court never add scienter. 35

36 D. Traffic Monsoon’s revenue gen erated from the sale of its oth er advertising the district court’s preliminar y orders services is properly subject to [a]t a minimum, the Court shou ld order the Lastly, Scoville asserts that, “ District Court to release the [ currently frozen] Traffic Monsoo n funds that are admittedly outside the scope of any of the SEC’s claims.” (Apl t. Br. 53 (bracketed material added).) Scoville refer ion that Traffic s to the approximately $3 mill Monsoon earned from September 201 4 through July 2016 from the s ale of its internet advertising services other than Adpacks. But it is not clear, as Scoville asserts, that these other sales are “outside t he scope of any of the SEC’s cl aims.” Id. The revenue to be shared with qualif ying Adpack purchasers was gene rated from the sale of all of Traffic Monsoon’s a dvertising services. Further, Tra ffic Monsoon had no accounting records; its revenue a pparently was pooled together and Adpack ool. In light of this evidence purchasers were paid from that p , Scoville has not bused its discretion in prelimin arily freezing all of shown that the district court a 11 ng them in the receivership. Traffic Monsoon’s funds and placi V. CONCLUSION For the foregoing reasons, we AFFI RM in all respects the distri ct court’s challenged preliminary decisions i on. Although early in n this civil enforcement acti 11 The issue of whether Scoville should personally be liable unde r the antifraud provisions has not been adequately raised before us, nor adequa tely preserved below. to address that issue. Accordingly, we decline 36

37 lihood that it will this civil enforcemen t action, the SEC has established the like 12 ms against Defendants. succeed on its antifraud clai 12 e Court will direct the parties Once our mandate has issued, th to address the status of the related appeal, No. 18-4038. 37

38 17-4059 , SEC v. Traffic Monsoon LLC , J., concurring. BRISCOE s are “securities” I concur in the judgment. I agree with the majority that AdPack and 1934 securities acts, Maj. O within the meaning of the 1933 p. 24–31, that Scoville did not adequately preserve th e personal liability issue, id. a t 35 n.11, and that the SEC is nts’ conduct violated the antif raud provisions of the likely to prove that the Defenda anying regulations, id. at 31–3 securities acts and their accomp 5. I am not persuaded, to assume, that the AdPack sal es at issue were foreign however, as the majority appears sales outside of the United Stat e would be no need to es. Absent that assumption ther address in this case whether the antifraud provisions of the se curities acts apply extraterritorially. I write separ ately to endorse the ruling of the district court, Aplt. App. at 2091–94, and as also advanced by the SEC on appeal, Resp. Br . 52–57, that under nk Ltd., 561 U.S. 247 (2010), Tr affic Monsoon sold Morrison v. Nat’l Australian Ba AdPacks in the United States. T d their accompanying herefore, the securities acts an regulations cover the Defendants’ domestic activity even if a l arge percentage of the AdPack buyers purchased the securities while abroad. As explained by the majority, the Supreme Court has developed a two-step test to determine questions of extraterri ION Geophysical Corp., toriality. WesternGeco LLC v. 138 S. Ct. 2129, 2136 (2018). We have discretion to begin the a nalysis at step one or two, id. at 2136–37, and if either ste p is satisfied then the statut e applies to the challenged conduct, see id. at 2136. I would r esolve this case at step two .

39 “Under the second step of [the] fra mework, we must identify the statute’s focus,” (citing RJR Nabisco, Inc. v. Eu WesternGeco, 138 S. Ct. at 2137 ropean Cmty., 136 S. Ct. otation marks omitted), and the Supreme Court has 2090, 2101 (2016)) (internal qu clarified that “the focus of t he Exchange Act is . . . upon pur chases and sales of securities . Morrison prov ides the test for liability in the United States,” Morrison , 561 U.S. at 266 1 b), under § 10(b). As Morrison explai we ask “whether the ns, based on the text of § 10( purchase or sale [of the security ] [wa]s made in the United Sta tes, or involve[d] a security listed on a domestic exchange.” 561 U.S. at 269–70 (emphasis ad ded). Since AdPacks were not listed on a domestic exc hange, we must decide if eithe r the “purchase[s]” or the “sale[s]” were “made in the United States.” The Second, Third, and Ninth Circuits have adopted the “irrevoc able liability” test to determine where a security “ sale” or “purchase” occurs under Morrison and § 10(b). er Fund Ltd. v. Ficeto, 677 F.3 See Absolute Activist Value Mast d 60, 67 (2d Cir. 2012) (“[W]e hold that transactions i nvolving securities that are not traded on a domestic exchange are domestic itle passes within the United if irrevocable liability is incurred or t States.”); see also Stoyas v. T oshiba Corp., 896 F.3d 933, 949 (9th Cir. 2018), petition for 1 Section 10(b) makes it unlawful [t]o use or employ, in connection with the purchase or sale of any security registered on a national secur ities exchange or any security no t so registered . . . any manipulative or deceptive device or contrivance in co ntravention of such rules and regulations as the Commission may prescribe as n ecessary or appropriate in the p ublic interest or for t he protection of inv estors. 15 U.S.C. § 78j(b) (emphasis added). 2

40 cert. filed, (U.S. Oct. 17, 2018 ) (No. 18-486); United States v . Georgiou, 777 F.3d. 125, the Second Circuit ha s explained, a dome stic transaction occurs 137 (3d Cir. 2015). As rrevocable liability within the U nited States to take and pay when “the purchaser incur[s] i for a security, or [when] the sel ler incur[s] irrevocable liabi lity within the United States to deliver a security.” Absolute Ac tivist, 677 F.3d at 68. While “ irrevocable liability” may appear to turn on contract princ securities transactions at iples and “the location of the issue,” see id. at 70 (emphasis added), the Second Circuit late r clarified that “territoriality under Morrison concerns where, p hysically, the purchaser or sel ler committed him or herself, not where, as a matter o f law, a contract is said to h ave been executed.” United States v. Vilar, 729 F.3d 62, 77 n.11 (2d Cir. 2013) (citing Mo rrison, 561 U.S. at 268). It cable liability test is a fact in appears, then, that the irrevo tensive inquiry to determine whether a “sale” or “purchase” of “any security not so register ed” occurred in the United States. In this case, Traffic Monsoon was based in the United States an d operated out of its securities. As found by the district court, Scoville the United States when selling registered Traffic Monsoon with the State of Utah as a limited liability company. Scoville filed organizational documents w ith the State of Utah which ide ntified Scoville as Traffic Monsoon’s sole member, manager, a listed his apartment’s nd registered agent. Scoville address in Murray, Utah, as Tra ffic Monsoon’s corporate address . Traffic Monsoon sold AdPacks via the internet, and th e record further demonstrates t hat Traffic Monsoon made its sales through computer servers based solely in the United S tates. Under any common § 10(b), Traffic Monsoon made sev eral securities sales in sense reading of Morrison and 3

41 the United States. That many AdPack buyers were abroad when the y purchased the securities over the internet does not alter this conclusion. Ne ither does Scoville’s argument that he was in the Un ited Kingdom for a period while T raffic Monsoon sold AdPacks since Traffic Monsoon ex ecuted all the AdPack sales in an automated manner in the United States. The analysis under § 17(a) is similar. Section 17(a) makes it “ unlawful for any person in the offer or sale of a ny securities . . . to employ a ny device, scheme, or artifice y transaction, practice, or to defraud, or . . . to engage in an course of business which operates or would operate as a er.” 15 U.S.C. § 77q(a)(1), fraud or deceit upon the purchas (3) (emphasis added). Under the s ame reasoning illustrated abov e, Traffic Monsoon made “sale[s]” or “offer[s]” of “secur ities” in the United States wi thin the meaning of § 17(a). Accordingly, I would a ffirm because, as explained by the distri ct court, the SEC sufficiently established that the Defendants sold securities in the United States in ions. s and their accompanying regulat violation of the securities act 4

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