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: Jim Hamilton's World of Securities Regulation

By N. Peter Rasmussen

4th Circuit Finds Venue Proper Through EDGAR Server

A fraud defendant who did business in Las Vegas will have to defend criminal charges in the Eastern District of Virginia based on the filing of allegedly false Form 10-Q reports. In a December 14, 2007, decision, a 4th Circuit panel found that venue was proper in the Eastern District, even though, as the court acknowledged, the defendant's "lone contact with the Eastern District for the purposes of this offense" was the fact that "EDGAR?s Management Office of Information and Technology and the system?s computer servers, which store the transmitted files and make them publicly available through the EDGAR website, are located in Alexandria, Virginia, in the Eastern District of Virginia."

The court rejected the defendant's claim that the electronic transmission of a fraudulent document to a computer server in Alexandria did not constitute a "venue-sustaining act," and that the defendant could not have reasonably foreseen that the form filed on EDGAR would be transmitted to the Eastern District of Virginia. According to the court, "this process was part of the SEC?s normal course of business...as all such documents are filed, stored, and disseminated to the public through the EDGAR website in Alexandria, Virginia."

The panel, in a unanimous opinion, found that the "venue-sustaining act need not constitute the core of the alleged violation," but merely one that is material to the charged offense.The appeals panel concluded that "[b]ecause a material act that constituted the violation occurred in the Eastern District of Virginia, namely the transmission of a fraudulent Form 10-Q into the district, the Eastern District is a proper venue."

The court also rejected the defendant's foreseeability argument. According to the court,

If Congress had wanted to limit venue to those districts where the defendant could have reasonably foreseen his criminal conduct taking place, it could have easily done so. Instead, it enacted a broad venue provision, one that lacked any reference to a defendant?s mental state or predictive calculus, and focused solely on whether "any act or transaction constituting the violation" took place in the district.

The panel finally concluded that its holding would not render every public company that filed a document through EDGAR subject to prosecution in the Eastern District, "no matter how tenuous its links to the district otherwise are," as "we in no way impose a rule that all securities fraud prosecutions based on the filing of fraudulent documents through EDGAR must take place where the EDGAR server is located. Rather, we simply hold that such a district is one permissible venue." In addition, the court advised that the venue rules in the Federal Rules of Criminal Procedure provided adequate safeguards against litigating in inconvenient or burdensome venues.

U.S. v. Johnson (4thCir 2007), CCH Federal Securities Law Reporter ¶94,539.

Full post as published by Jim Hamilton's World of Securities Regulation on December 18, 2007 (boomark / email).