Lay v. United States

• Decision Date: 17 August 2015
• Docket Number: Case No. 13-4021
• Parties: MARK D. LAY, Petitioner-Appellant, v. UNITED STATES OF AMERICA, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

MARK D. LAY, Petitioner-Appellant, v. UNITED STATES OF AMERICA, Respondent-Appellee.

Case No. 13-4021

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

August 17, 2015

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

File Name: 15a0583n.06

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF OHIO

Before: MERRITT and WHITE, Circuit Judges, and HOOD,^* District Judge.

MERRITT, Circuit Judge. This is an appeal from the denial of a motion to vacate a conviction and sentence filed pursuant to 28 U.S.C. § 2255. Defendant Mark Lay was convicted of fraud related to investments he made in a Bermuda hedge fund on behalf of the Ohio Bureau of Workers' Compensation. Defendant contends that the Supreme Court's opinion in Morrison v. National Australia Bank, Ltd., 561 U.S. 247 (2010), decided two years after he was convicted by a jury of fraud under Section 206 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6,¹stripped the district court of jurisdiction and renders his underlying conviction unconstitutional. This appeal requires us to decide whether Morrison's limit on the extra-territorial scope of Section 10(b) of the Securities Exchange Act extends to criminal prosecutions brought in this case pursuant to the Investment Advisers Act. We conclude it does not.

In Morrison, the Supreme Court held that the protections of Section 10(b) of the Securities Exchange Act of 1934² apply primarily to domestic transactions, thereby limiting the scope of Section 10(b). Morrison involved a class action with (1) foreign plaintiffs suing (2) aforeign issuer based on securities transaction in (3) foreign countries. In Morrison, a civil case, three Australian plaintiffs sued the National Australian Bank, an Australian bank, under Section 10(b) of the Securities Exchange Act of 1934, for losses they allegedly suffered on stock purchases traded on Australian exchanges. The Supreme Court held that a private right of action under Section 10(b) and Rule 10b-5 of the Exchange Act could be maintained by foreign plaintiffs only if (1) the security was listed on an American stock exchange or (2) the purchase or sale took place in the United States. 561 U.S. at 273. The Supreme Court framed the issue before it narrowly: "We decide whether § 10(b) of the Securities Exchange Act of 1934 provides a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges." Id. at 250-51. It held it did not. Id. at 265. The Court dismissed the complaint for failure to state a claim because the allegations involved no securities listed on a domestic exchange, and most, but not all, of the purchases occurred outside the United States. The Court reasoned that because the Exchange Act is silent on the extraterritorial reach of Section 10b, it must presume that Congress intended to limit its application to securities transactions occurring within the United States. Id. at 255. Prior to Morrison, if an alleged securities violation, whether occurring within or outside the United States borders, had an impact on investors or markets in the United States it was subject to federal securities law.

Defendant in this case focuses on the "silence" in the Investment Advisers Act regarding its extra-territorial reach to argue that, after Morrison, he could not be prosecuted for his principal role as an adviser in an investment company based in Bermuda. Defendant's argument fails because unlike the Securities Exchange Act, which focuses on the nature of the transaction, the Investment Advisers Act focuses solely on the conduct of the adviser.

I.

The facts supporting defendant's conviction for investor fraud are set out in detail in the Memorandum Opinion and Order issued by the district court after defendant's trial. United States v. Lay, 566 F. Supp. 2d 652 (N.D. Ohio 2008). To recount briefly, defendant was convicted of violations of the Investment Advisers Act, 15 U.S.C. § 80b-6, as well as three counts of wire and mail fraud. Defendant and the company he founded, MDL Capital Management, Inc., provided investment advice to the Ohio Bureau of Workers' Compensation. Defendant was at all relevant times the CEO, principal shareholder and Chief Investment Strategist of MDL Capital. MDL Capital was incorporated under the laws of the State of Pennsylvania and was, at all relevant times, registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940. As an investment adviser, MDL Capital provided investment adviser services for the purchase and selling of securities, to corporate, institutional and individual investors for compensation. The Ohio Bureau of Workers' Compensation is an Ohio agency, organized and existing under the laws of the State of Ohio. The Bureau assists Ohio-based employers and employees to cover expenses related to workplace injuries by providing medical and compensation benefits for work-related injuries, diseases and deaths. At the outset of the relationship, defendant and his company managed and invested the Bureau's workers' compensation monies in a United States-based fund, investing mainly in United States long-term treasury bonds. The fund made money for a number of years.

Defendant subsequently founded an "offshore" hedge fund, incorporated in Bermuda, and convinced the Bureau to invest in it as well. Defendant's company, MDL Capital, exercised general management and investment authority over the Bermuda fund. The corporate entity,MDL Capital, was the Bermuda fund's investment adviser. Although defendant tried to recruit other investors, the Bureau was the sole investor in the Bermuda fund. Defendant and his company continued to manage investments from the Bureau in the two funds, one domestic and one based in Bermuda. Without the knowledge of the Bureau, defendant began to leverage the assets of the Bermuda fund in excess of the leverage limitation agreed to by the Bureau. Without knowledge of the overleveraging, the Bureau transferred substantial assets from the U.S.-based original fund to the Bermuda fund. The Bermuda fund incurred large losses, but defendant hid the losses from the Bureau. The Bermuda fund's board of directors realized that defendant had overleveraged the Bureau's assets in the Bermuda fund and requested permission from the Bureau to remove the leveraging limitations on the Bermuda fund. Now aware of the overleveraging in the Bermuda fund, the Bureau denied permission to remove the leverage limitation. Although admitting to some overleveraging, defendant continued to hide the extent of the overleveraging of the Bureau's assets in the Bermuda fund.

After an approximately $7 million decline in the value of the Bermuda fund, the Bureau met defendant to discuss the loss. During that meeting, defendant did not admit that he had far exceeded the leverage limitation. The Bureau later learned for the first time that the Bermuda fund had lost millions of dollars, which defendant had concealed up to that point. The Bureau then formally requested a redemption of its investment in the Bermuda fund, but it recovered only $9 million of a $225 million investment.

Defendant was convicted on all counts and sentenced to 60 months on the Investment Advisers Act count and concurrent sentences of 144 months on the three wire and mail fraudcharges.³ Our court affirmed, 612 F.3d 440 (6th Cir. 2010), and the Supreme Court denied certiorari, 562 U.S. 1264 (Feb. 28, 2011), reh'g denied, 131 S. Ct. 2481 (May 16, 2011).⁴

The district court denied defendant's § 2255 motion based on the factual record from trial, which demonstrated defendant had a fiduciary duty to the Bureau relating to the Bermuda fund. The district court found this enough to satisfy the requirement in Morrison that the fraud was sufficiently domestic in nature to be prosecuted in the United States without analyzing the applicability of Morrison to the Investment Advisers Act. Lay v. United States, No. 1:12 CV 1216, 2013 WL 4501045 (N.D. Ohio Aug. 21, 2013). The district court granted a certificate of appealability as to the single issue of whether "the district court lacked jurisdiction with respect to the offenses for which the defendant . . . was convicted and sentenced." Order, dated Aug. 30, 2013. The district court later denied defendant's Expedited Motion for an Amended Certificate of Appealability in which defendant attempted to raise additional issues.⁵ Marginal Entry Order,dated Feb. 28, 2014. We dismissed the appeal from the denial of the expedited motion. Order, No. 14-3218, dated Apr. 10, 2014.⁶

II.

We review the denial of a 28 U.S.C. § 2255 motion de novo as to the legal issues and uphold factual findings of the district court unless they are clearly erroneous. Hamblen v. United States, 591 F.3d 471, 473 (6th Cir. 2009). To warrant relief under § 2255, "a petitioner must demonstrate the existence of an error of constitutional magnitude which had a substantial and injurious effect or influence on the guilty plea or the jury's verdict." Griffin v. United States, 330 F.3d 733, 736 (6th Cir. 2003)(citing Brecht v. Abrahamson, 507 U.S. 619, 637 (1993)).

Morrison held that a private right of action under Section 10(b) and Rule 10b-5 of the Exchange Act could be maintained only if the security was listed on an American stock exchange or the purchase or sale took place in the United States. Defendant seeks to vacate his conviction on the ground that Section 206 of the Investment Advisers Act, by its terms, cannot be applied extraterritorially in light of Morrison because the fund was domiciled in Bermuda, making the Bermuda fund and, by extension, defendant himself, outside the reach of United States courts after Morrison. It is undisputed that the Bermuda-fund shares were not listed on a U.S. exchange. Defendant also argues that the shares in the Bermuda fund were not purchased or sold in the United States so therefore his...