Does the Securities Exchange Act Apply to Short-Swing Profits Abroad?

Section 16(b) of the Securities Exchange Act requires statutory “insiders” of companies that are registered with the Securities Exchange Commission (SEC)—such as officers, directors, and certain beneficial owners—to disgorge profits from “short-swing” trading within a six-month period. It is a strict liability provision that does not depend on the insiders’ intent.

On May 23, 2025, in Rubenstein v. Ishizuka, Judge Margaret M. Garnett (Southern District of New York) held that Section 16(b) did not cover profits from purchases and sales of stock outside the United States, applying the familiar “transactional test” that the U.S. Supreme Court adopted for Section 10(b) of the Exchange Act in Morrison v. National Australia Bank (2010). This is not surprising, since lower courts have extended Morrison’s test to other provisions of U.S. securities law, but it is not necessarily correct.

Different provisions of the same statute may apply extraterritorially to different extents. Section 16(b)’s purpose is quite different from Section 10(b)’s, and so its geographic scope might differ too.

The Short-Swing Trades

Next Meats Holdings, Inc. is a Nevada corporation with its principal place of business in Japan. The company is registered with the SEC and its securities trade over the counter (OTC) in the United States. Next Meats makes vegetarian “meat” products, which it sells in stores and restaurants in the United States.

The plaintiff brought a shareholder derivative action against Next Meats’ CEO, Koichi Ishizuka, and White Knight Co., a Japanese entity owned and controlled by Ishizuka, seeking disgorgement of approximately $391,995 in short-swing profits. The complaint alleged that White Knight sold 461,714 shares of Next Meats to an unrelated Japanese company and then, within six months, purchased more than 120 million shares from Next Meats’ former CEO and from its current Chief Operating Officer. After these transactions, White Knight became Next Meats’ controlling shareholder. There was no allegation that any of these transactions occurred in the United States.

Morrison’s Transactional Test

In Morrison, the Supreme Court held that Section 10(b) of the Exchange Act (the Exchange Act’s principal antifraud provision) applies only to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” In the absence of controlling precedent, Judge Garnett applied the same transactional test to claims under Section 16(b), as a couple of other district courts have done.

Judge Garnett found that the first prong of this transactional test was not met because Next Meats’ shares trade over the counter rather than on a domestic exchange. Turning to the transactional test’s second prong, she noted that, under Second Circuit precedent, a transaction is domestic either if irrevocable liability is incurred in the United States or if title passes in the United States. In this case, the complaint alleged no facts showing than any of the trades involved in the short-swing profits occurred in the United States. Judge Garnett therefore dismissed the complaint under Rule 12(b)(6) for failure to state a claim upon which relief can be granted.

Personal Jurisdiction

Because she dismissed the claim on the merits, Judge Garnett felt obligated to address personal jurisdiction at least briefly. The Exchange Act permits the exercise of personal jurisdiction to the limits of the Due Process Clause of the Fifth Amendment, and under Rule 4(k)(1)(C), the relevant forum for analyzing minimum contacts is the United States as a whole.

The district court relied on effects within the forum as the basis for personal jurisdiction. Noting that Next Meats is a U.S. company that is registered with the SEC and sells its securities to U.S. shareholders, the court concluded “that the transactions can reasonably be expected to impact U.S. shareholders and that Defendants have sufficient minimum contacts with the United States to fall within the limits of due process.”

Should Morrison’s Transactional Test Apply to Section 16(b)?

The problem with the district court’s analysis lies in its assumption that the same test for geographic scope should apply to Section 16(b) as applies to Section 10(b). In fairness to Judge Garnett, other district judgeshave reached the same conclusion, and the Second Circuit has extended Morrison’s transactional test to other provisions of federal securities law.

But RJR Nabisco v. European Community (2016) makes clear that the geographic scope of federal statutes must be determined provision by provision. The Supreme Court currently employs a “two-step framework” for the presumption against extraterritoriality, under which it looks first for a clear indication of extraterritoriality and second, for statutes that lack such an indication, at whether conduct relevant to the focus of the statute occurs in the United States. Different provisions may have different texts and different focuses, even within the same statute—and may, therefore, apply extraterritorially to different extents. Court should not assume that Morrison’s transactional test applies to all provisions of U.S. securities law.

Like Section 10(b), Section 16(b) lacks a clear indication of extraterritoriality. So, courts must proceed to the second step and determine the “focus” of the provision. In Morrison, the Supreme Court found that the focus of Section 10(b) was on the affected transaction based largely on the language of that provision. “Section 10(b) does not punish deceptive conduct,” Justice Scalia wrote, “but only deceptive conduct ‘in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered’” (quoting Section 10(b)). “Those purchase-and-sale transactions are the objects of the statute’s solicitude,” he continued. “It is those transactions that the statute seeks to ‘regulate’; it is parties or prospective parties to those transactions that the statute seeks to ‘protec[t]’” (citations omitted).

The language of Section 16(b) is different:

For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale … within any period of less than six months … shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction ….

It allows a suit for disgorgement to be filed “by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request.”

Although Section 16(b) also uses the words “purchase” and “sale,” they refer here to the insiders’ prohibited conduct rather than to the protected transactions. “Purchase” and “sale” under Section 16(b) are equivalent to the deceptive conduct under Section 10(b), which Morrison found not to be the focus of that provision. That Section 16(b)’s focus is different is apparent from its opening line: “For the purpose of preventing the unfair use of information ….” Unfair to whom? Almost certainly, unfair to the issuer and to holders of securities in the issuer, who are permitted to bring claims for disgorgement. To paraphrase Morrison, it is these parties that the provision seeks to protect.

This analysis suggests that when the issuer is a U.S. company and shareholders reside in the United States, Section 16(b) should apply to all short-swing trading by beneficial owners, directors, and officers of U.S. companies, including trades that occur abroad. Recall that Judge Garnett found in her personal jurisdiction analysis that those foreign transactions “can reasonably be expected to impact U.S. shareholders.” If one insists additionally that there be conduct relevant to the provision’s focus, as the Supreme Court seems to be doing these days, the issuers’ registration with the SEC and efforts to sell shares to the U.S. public should meet that requirement.

Conclusion

As I have noted before, how to apply Morrison’s transactional test to Section 10(b) continues to bedevil the lower courts. But it should be clear that Morrison never intended to establish a test applicable to every provision of U.S. securities law. Each provision must be analyzed on its own terms, using the two-step presumption against extraterritoriality.