Securities & Exchange Commission v. Traffic Monsoon, LLC

Citations: 245 F. Supp. 3d 1275; 2017 U.S. Dist. LEXIS 45908Docket: Case No. 2:16-cv-00832-JNP

Court: District Court, D. Utah; March 28, 2017; Federal District Court

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The court has granted the SEC's motion for a preliminary injunction, which extends the receivership and asset freeze initially established by a temporary restraining order (TRO), while denying the defendants Traffic Monsoon, LLC and Charles Scoville's motion to set aside the receivership. The SEC's TRO was issued on July 26, 2016, leading to the appointment of Peggy Hunt as receiver for the assets of Scoville and Traffic Monsoon. Evidentiary hearings were conducted on November 1 and 3, 2016, with legal arguments presented on November 30, 2016.

Key findings include that Traffic Monsoon, registered as a limited liability company in Utah on September 29, 2014, is solely owned and managed by Scoville, who uses an apartment in Murray, Utah, as its corporate address. The company operates a website, promoting itself as a "revenue sharing advertising company" that facilitates a web traffic exchange. Traffic Monsoon offers services for purchasing website visits, which enhance clients' online visibility and search engine rankings. Transactions predominantly occur through PayPal. 

The company sells 1,000 website visits for $5.95 and offers a popular product called the AdPack for $50, which includes the same visits plus additional revenue sharing credits based on user engagement. Members must perform daily clicks on ads to qualify for revenue sharing, with the requirement set at 50 clicks regardless of the number of AdPacks owned.

99% of AdPack buyers qualified for revenue sharing following their purchase. Traffic Monsoon members earned a 10% commission on all products sold through their referrals, applicable to both initial and future purchases, including when funds from existing AdPacks were used to buy new ones. Mr. Scoville detailed the allocation of the $50 AdPack purchase price: 10% to the referring member, 4.5% retained by Traffic Monsoon, 1.5% to a programmer, and 84% distributed to qualified AdPack holders or reserved for future payouts. No formal accounting records were maintained, leading to doubts about the accuracy of the described distribution method; instead, funds seemed to be pooled and distributed as needed. Traffic Monsoon did not disclose how revenue was split between itself and the AdPack holders, allowing Mr. Scoville discretion in fund distribution. Typically, AdPack purchasers received about $1 daily in revenue sharing, credited to their accounts, which could be used for additional purchases or converted to cash. By consistently clicking on ads, an AdPack owner could recoup their investment and earn a profit within approximately 55 days, potentially achieving a 66% annual return if reinvesting. For each $50 AdPack purchased through referrals, Traffic Monsoon generally credited $60 to member accounts, with $55 going to the buyer and $5 to the referrer.

Customers purchasing an AdPack from Traffic Monsoon agree to specific terms and conditions, acknowledging that Traffic Monsoon is a limited liability company providing advertising services, not a bank or investment firm. Purchases are not deposits or investments, and the company emphasizes that it shares revenues derived solely from advertising services, not from selling shares or investments. Communications from Traffic Monsoon are for educational purposes and do not constitute investment solicitations, and past performance does not guarantee future results.

Traffic Monsoon clarifies that its business model does not align with Ponzi schemes, as it only sells advertising services and does not offer investment plans. Earnings from revenue sharing depend on service sales and customer qualification, with no guarantees on daily earnings or reaching a specific revenue cap of $55 per sharing position. Despite disclaimers, the website promotes AdPacks as a money-making opportunity, suggesting multiple earning avenues.

AdPacks are the company's most popular product, accounting for over 98% of Traffic Monsoon’s revenue, with most shared revenue for qualified AdPack owners coming from the sale of new AdPacks. The website does not disclose that the majority of shared revenue is generated through these sales.

Approximately 90% of Traffic Monsoon members who bought AdPacks are based outside the U.S., likely purchasing them in their home countries. While some members initially aimed to promote their online businesses, many became primarily motivated by the potential profits from the AdPacks. Correspondence with the receiver indicates that members' main interest was earning returns from the AdPacks, rather than utilizing the advertising services, which were available separately for $10.95. Many members reported investing significant personal savings into AdPacks, with only 1.6 billion website visits delivered out of the 17.5 billion purchased, reflecting a mere 10% fulfillment rate. 

Members often accumulated large quantities of AdPacks, typically reinvesting their earnings rather than cashing out. This pattern led to members maintaining low account balances, as they continually purchased new AdPacks with their revenues. If members were referred by others, their rollover transactions generated commissions for those referrers, incentivizing promotion of the AdPacks as a lucrative opportunity. Members could significantly increase their holdings by reinvesting profits, potentially resulting in returns exceeding five times their initial investment. If they successfully encouraged others to make bulk purchases, they could further augment their AdPack acquisitions through earned commissions.

Between October 2014 and July 2016, Traffic Monsoon generated $173 million from new member purchases of 3.4 million AdPacks, and an additional $700 million from approximately 14 million AdPacks purchased via revenue-sharing rollovers. Members also spent around $2.9 million on other products, totaling $175.9 million paid into the company, with only $88.4 million returned to members, creating an $87.4 million deficit. In January 2016, PayPal froze Traffic Monsoon's account due to transaction volume concerns, which significantly reduced cash flow; subsequently, Traffic Monsoon transitioned to other payment processors, leading to a resurgence in transactions. However, this was halted on July 26, 2016, when the court froze its assets and appointed a receiver. Currently, member accounts hold $34.2 million, with potential maturity of outstanding AdPacks estimating a total of $278.1 million. The receiver possesses $50-$60 million in frozen assets.

The SEC alleges that Traffic Monsoon's AdPack sales constituted an illegal Ponzi scheme, violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, as well as Section 17(a)(1) and (3) of the Securities Act. To establish its claims, the SEC must demonstrate Mr. Scoville's actions met the scienter requirement, defined as intent to deceive or recklessness.

To succeed in its 'device, scheme, or artifice to defraud' claim under subsection (1), the SEC must demonstrate that Mr. Scoville acted knowingly or intentionally, as established in Aaron v. SEC. In contrast, subsection (3) does not require proof of scienter; mere negligence is sufficient for a violation, supported by SEC v. Sullivan. The SEC asserts a strong likelihood of success in its claims under Rule 10b-5 and Section 17(a) and seeks a preliminary injunction to freeze Traffic Monsoon's assets pending resolution. 

Traffic Monsoon counters with two main arguments: first, it cites Morrison v. Nat’l Australia Bank Ltd. to argue that Sections 10(b) and 17(a) do not permit the court to enjoin foreign transactions, asserting that 90% of its AdPack sales were to foreign customers, thus limiting any asset freeze to those transactions involving U.S.-based customers. Second, it contends the SEC has not adequately demonstrated that it will prevail on the merits. The court will address these arguments, as well as Traffic Monsoon's objections to the SEC’s proposed injunction terms, and has certified the order for interlocutory appeal under 28 U.S.C. 1292(b).

The applicability of Section 10(b) and Section 17(a) to transactions occurring outside the U.S. is influenced by the Supreme Court’s Morrison decision, which rejected the conduct and effects test previously used by circuits to determine the extraterritorial reach of these provisions. The Court clarified that any limitations on adjudicating Section 10(b) claims related to foreign transactions are not jurisdictional, but rather stem from the statutory provisions of the Exchange Act, as per 15 U.S.C. 78aa(a).

The Court analyzed Section 10(b) to ascertain Congress's intent regarding its extraterritorial application. Noting the statute's silence on this matter, the Court applied the presumption that legislation is intended to operate only within U.S. territory unless Congress clearly expresses a contrary intent. Overcoming this presumption does not require explicit language stating the law applies abroad; instead, the context of related statutes can be examined. The Court emphasized that all available evidence, including legislative history and the purpose of the statute, should be considered to determine if the presumption is rebutted.

In its analysis, the Morrison Court reviewed related statutes—15 U.S.C. 78c(a)(17), 15 U.S.C. 78b(2), and 15 U.S.C. 78dd(b)—and concluded that any inference of congressional intent for extraterritoriality was too uncertain. Additionally, the Court found a lack of textual support in the Exchange Act for either the conduct and effects test or any alternate test proposed for extraterritorial application of Section 10(b). The Court criticized judicial speculation in creating laws and reiterated its reluctance to engage in judicial lawmaking by endorsing an extraterritorial application test without a firm textual basis.

The Morrison Court established that the presumption against extraterritorial application of U.S. securities laws was not overcome and rejected the previous conduct and effects test, introducing a transactional test instead. This new test emphasized that Section 10(b) of the Exchange Act focuses on purchases and sales of securities within the U.S., indicating that Section 10(b) and Rule 10b-5 apply only to securities transactions involving U.S. exchanges or conducted within the U.S. Following the Morrison decision, Congress enacted Section 929P(b) of the Dodd-Frank Act, which clarified that U.S. district courts have jurisdiction over actions alleging violations of Section 10(b) or Section 17(a) if significant steps toward the violation occurred in the U.S., even if the transactions involved foreign investors or occurred outside the U.S. The SEC and Traffic Monsoon dispute whether Section 929P(b) reinstated the conduct and effects test or maintained the Morrison transactional test. Traffic Monsoon argues that the language of Section 929P(b) does not explicitly overturn the Morrison decision, which clarified that the jurisdictional issue was based on the statute's meaning rather than the court's jurisdiction. Thus, Section 929P(b) does not expand the extraterritorial reach of Sections 10(b) or 17(a), and the Morrison test continues to apply to foreign transactions.

The Supreme Court's rejection of a 'clear statement rule' allows for the rebuttal of the judicial presumption against extraterritorial application of statutes through various forms of evidence, including legislative intent. In this case, the court must determine if Section 929P(b) provides sufficient congressional intent to apply Sections 10(b) and 17(a) to extraterritorial transactions, given it was not in place during the Morrison decision. Historically, circuit courts had utilized the conduct and effects test until it was dismissed in Morrison, which noted Congress's failure to clearly define jurisdiction over foreign transactions, prompting a call for legislative action. Following this, Congress introduced language that became Section 929P(b) in response to the need for clearer jurisdictional authority, culminating in the passage of the Dodd-Frank Act on July 21, 2010. Notably, the Supreme Court issued the Morrison decision on the same day the conference committee concluded discussions on the final version of Dodd-Frank, significantly impacting the statutory landscape surrounding extraterritorial claims.

Section 929P(b) was drafted during a time when the legal framework allowed for the scrutiny of extraterritorial transactions under Sections 10(b) and 17(a) of federal securities laws based on jurisdictional authority. It codified the Second Circuit's rule permitting courts to adjudicate claims if the conduct and effects tests were met, despite variances in application across different courts. The accompanying committee report emphasized that this section would affirm the SEC's authority to pursue cases under both tests, independent of jurisdiction. The timing of the Supreme Court's Morrison decision, issued just before the finalization of the Dodd-Frank Act, is argued to have limited Congress's ability to react and adapt Section 929P(b) to reflect Morrison's implications. It is suggested that Congress did not intend for Section 929P(b) to be ineffective, as evidenced by discussions in both the House and Senate where lawmakers reaffirmed its purpose of ensuring extraterritorial application of certain securities laws when significant conduct occurs within the U.S. or when foreign conduct has substantial U.S. effects. Representative Kanjorski, who helped draft the language, clearly articulated that Section 929P(b) aimed to clarify this extraterritorial reach in light of the Morrison ruling.

Provisions addressing extraterritoriality in the Dodd-Frank Act illustrate Congress's intention for the SEC and the Justice Department to apply U.S. securities laws extraterritorially. Senator Jack Reed emphasized that if conduct within the U.S. is significant or foreign conduct has substantial foreseeable effects in the U.S., specific securities provisions apply, regardless of where transactions occur. The legislative history and context suggest a clear intent to enforce Sections 10(b) and 17(a) for extraterritorial transactions when the conduct and effects test is met. 

The title of Section 929P, “STRENGTHENING ENFORCEMENT BY THE COMMISSION,” indicates an expansion of the SEC’s regulatory authority over fraudulent practices. Additionally, Section 929Y mandates a study on extending private rights of action under Section 10(b) for transactions meeting the conduct and effects test, reinforcing the expectation that enforcement authority was already extended by Section 929P(b). 

The language in Section 929P(b) affirms Congress's intent for Sections 10(b) and 17(a) to have extraterritorial applicability, as it clarifies U.S. district court jurisdiction over relevant claims when the conduct and effects criteria are satisfied. This clarification implies an understanding that these statutes can indeed apply extraterritorially. The purpose of asserting jurisdiction over these claims suggests Congress intended for the statutes to have extraterritorial reach, as recognized in previous case law. The interpretation of later statutory provisions also holds significant weight in understanding earlier related legislation.

Certain statutes may rely on specific interpretations of earlier laws, which should be upheld to avoid rendering amendments ineffective. Congress's adoption of a conduct and effects test, utilized by circuit courts for nearly four decades regarding Section 10(b), indicates an intention to codify this approach for regulating foreign transactions under Section 10(b). A contrary interpretation would imply that Congress intended the amendment to have no substantial effect, contradicting principles against treating statutory terms as superfluous. 

The text, context, and legislative history of Section 929P(b) demonstrate Congress's intent for Sections 10(b) and 17(a) to apply extraterritorially when the conduct and effects test is met. The court concludes that this intent overcomes the presumption against extraterritorial application. The conduct and effects test specifies that Rule 10b-5 and Section 17(a) can address violations involving either significant conduct within the U.S. related to foreign transactions or conduct outside the U.S. with substantial foreseeable effects within the U.S. 

In this case, despite some transactions being foreign, the test is satisfied as significant conduct occurred in the U.S. Mr. Scoville's creation and promotion of Traffic Monsoon and AdPack investments were conducted from Utah, fulfilling the requirements of the test.

Traffic Monsoon does not contest that significant steps related to AdPack sales were conducted in the United States, allowing for the application of Rule 10b-5 and Section 17(a) to all relevant transactions. Under the Morrison transactional test, even if the court misapplied Section 929P(b), all challenged AdPack sales qualify as domestic transactions. 

The Supreme Court's analysis in Morrison indicates that Section 10(b), which prohibits manipulative practices in securities transactions, applies only to securities transactions occurring within the United States or on American exchanges. The Second Circuit has clarified that the determination of a domestic transaction hinges on where the parties were when they became irrevocably bound, establishing that such a transaction occurs when either the purchaser or seller incurs irrevocable liability for the security within the U.S. In this case, Traffic Monsoon, a Utah LLC, sold AdPacks over the internet, incurring irrevocable liability in the U.S., thus meeting the domestic transaction criteria.

For Section 17(a), which addresses deceptive practices in the "offer or sale" of securities, a separate analysis is warranted due to its distinct wording. Unlike Section 10(b), which pertains only to completed transactions, Section 17(a) encompasses both offers and sales, making it applicable to AdPacks sold to individuals outside the United States.

The sale of AdPacks by Traffic Monsoon occurs in both the United States and the purchaser's foreign country, with the offer being made online from the U.S. where Traffic Monsoon, LLC is based. The SEC seeks a preliminary injunction to prevent violations of the Securities Act and the Exchange Act, requiring a demonstration of the likelihood of success on the merits and the risk of recurrence of the violations. The standard of proof varies depending on the nature of the injunction; for traditional prohibitory injunctions, a showing of greater than 50% likelihood of success suffices, while mandatory injunctions necessitate a “clear showing” of success. The SEC's request includes both a freeze on Traffic Monsoon's assets (preserving the status quo) and a receivership order that imposes mandatory relief by requiring Mr. Scoville to provide information to the Receiver. This injunction is particularly burdensome, as it not only freezes assets but also disrupts Traffic Monsoon's business operations, which depend on a consistent influx of new AdPack purchasers to sustain revenue sharing with existing holders. This disruption could jeopardize the enterprise’s viability, which is built on members' expectations of revenue generation from AdPack purchases.

The court acknowledges the financial hardship faced by individuals who invested their savings in AdPacks, as the asset freeze restricts their access to essential funds. It emphasizes the need for the SEC to demonstrate both a strong likelihood of success in the case and the potential continuation of violations without an injunction. Traffic Monsoon contends that the SEC cannot establish a clear likelihood of success for several reasons: it claims that the AdPacks do not constitute a Ponzi scheme in violation of Rule 10b-5 or Section 17(a), that AdPacks are not securities under these rules, and that the SEC is unlikely to meet the scienter requirements of these regulations.

The Tenth Circuit has defined a Ponzi scheme in various ways, emphasizing that such schemes involve returns to investors financed by new investments rather than the success of a legitimate business. In this context, Traffic Monsoon's operations are characterized as a Ponzi scheme since returns to investors from AdPacks are derived primarily from the capital of new investors, rather than from actual business activities. When a member buys a $50 AdPack, they are entitled to share in Traffic Monsoon's revenue up to $55, typically reaching this cap in about 55 days, with an additional $5 commission for referrals. However, the returns and commissions are predominantly funded by subsequent AdPack sales, meaning investors rely heavily on new purchases to recover their initial investment and gain returns.

Early AdPack investors in Traffic Monsoon experienced impressive returns of 66% or more annually, which attracted new investors and encouraged existing ones to reinvest their returns into new AdPacks. However, this unsustainable cycle relied on continuous new investments or rollovers from existing members, raising concerns about the viability of such payouts, which included a 20% return every 55 days (10% from revenue sharing and 10% as commission). As the number of AdPacks grew, the required influx of new investment money would need to increase exponentially to maintain existing return rates. Eventually, the system would face a tipping point where reduced new investments would lead to lower returns, prompting a downward spiral that could result in system collapse and significant losses for late investors.

The text identifies Traffic Monsoon’s operations as resembling a Ponzi scheme, which is inherently fraudulent and deceptive, as it generates the false appearance of profitability through funds from new investors rather than genuine profit from investments. This leads to misleading returns for new investors, obscuring the scheme's inevitable failure. The operator's actions likely violate securities regulations prohibiting fraud, such as Rule 10b-5 and Section 17(a), especially since the nature of Ponzi schemes is to ultimately defraud later investors. Traffic Monsoon contends that it is not liable under these regulations because its website does not guarantee specific returns, but the absence of promised returns does not preclude the operation of a Ponzi scheme, which fundamentally relies on paying returns to existing investors with new investor funds.

Traffic Monsoon's rapid growth in AdPack sales created a misleading perception of profitability, effectively attracting new investors. The core deception involved concealing that over 98% of returns from AdPacks originated from subsequent purchases rather than actual business revenue. The platform misrepresented these returns as "revenue sharing," falsely asserting that selling AdPacks did not constitute a Ponzi scheme, implying that earnings came from legitimate business activities. Traffic Monsoon claimed that it would not be a Ponzi scheme because it could fulfill all contractual payout obligations if it ceased selling AdPacks, arguing that breaching a contract does not define a Ponzi scheme. However, the essence of a Ponzi scheme lies in the deceptive use of new investors' money to pay returns, not in contract fulfillment.

Unlike typical Ponzi schemes where investors see inflated account balances, Traffic Monsoon's structure allowed immediate distribution of funds from new AdPack purchases to others, resulting in members reinvesting rather than holding large balances. This mechanism kept Traffic Monsoon's payout obligations low, but did not negate its Ponzi scheme status. Even if the firm could meet contractual payout obligations, the deceptive allure of profitability from new investor funds remained. Lastly, Traffic Monsoon's claim of operating a legitimate advertising business does not exempt it from being classified as a Ponzi scheme, as the presence of legitimate operations does not outweigh the deceptive nature of the investment scheme.

A defendant may be operating a Ponzi scheme if their legitimate business operations cannot generate sufficient funds to pay promised investor returns, relying instead on funds from new investors. Even if a business appears legitimate, this does not exempt it from being classified as a Ponzi scheme if it attracts investors using that facade. In the case of Traffic Monsoon, less than 2% of its revenue from selling website visits was inadequate to support the aggressive returns of its AdPacks, which are argued to be securities under both Rule 10b-5 and Section 17(a). The SEC contends that AdPacks meet the definition of an investment contract as established in the Howey case, requiring an investment of money in a common enterprise with profits derived solely from others' efforts. 

Traffic Monsoon disputes this, claiming AdPack purchases are for services rather than investments. However, the evidence suggests that the primary motivation for purchasing AdPacks was the potential for high returns, rather than the services offered, as those services could be bought separately for a lower price. Additionally, Traffic Monsoon's claims that the requirement for members to engage in minimal daily tasks negates the "solely from the efforts of others" criterion is flawed. Courts interpret "solely" in a broader context, meaning that if the success of the enterprise significantly relies on the efforts of others, it still qualifies as an investment under the Howey test.

The court in SEC v. Shields determined that the key factor in assessing whether certain efforts contributed significantly to an enterprise's success or failure is the nature of those efforts. In this case, the minimal engagement of members (visiting websites for about four minutes daily) was deemed insufficient to influence the success of the AdPack scheme, which primarily relied on Mr. Scoville's promotional skills. Consequently, the court concluded that the AdPacks qualified as securities under Rule 10b-5 and Section 17(a) due to the fulfillment of the Howey test elements.

Regarding the scienter element, Traffic Monsoon argued that the SEC could not prove Mr. Scoville's knowledge of the AdPacks being securities, citing a prior investigation by the Utah Division of Securities that found no security involved. However, the court rejected this argument on several grounds: the SEC is not obligated to show that Mr. Scoville recognized the AdPacks as securities; the nature of operating a Ponzi scheme inherently indicates knowledge of fraudulent activities; and Section 17(a)(3) does not require a scienter element.

The conclusion affirmed that Traffic Monsoon's defenses lacked merit, with the SEC demonstrating a strong likelihood of success. The court also evaluated the potential for future violations based on several criteria, including the seriousness of past violations, the defendant’s knowledge, and whether the defendant acknowledged wrongdoing. A knowing violation warrants an injunction more readily than a negligent one, but sufficient evidence of likely recurrence can justify an injunction even for negligence.

Mr. Scoville did not contest the likelihood of future violations necessary for a preliminary injunction. He sold AdPacks via Traffic Monsoon from October 2014 until a temporary restraining order (TRO) was issued in July 2016, with no guarantees that he would stop selling AdPacks if the TRO expired. His defense relies solely on the assertion that his business practices were legitimate. The court characterized his actions as consistent with a Ponzi scheme, which necessitates ongoing solicitation of investments to survive. It concluded that the SEC demonstrated a strong likelihood that Mr. Scoville would continue violating securities laws without an injunction, hence granting the SEC’s request for a preliminary injunction. 

Regarding the receivership order, Mr. Scoville claimed violations of his Fourth and Fifth Amendment rights and due process in not being able to access funds for legal defense. However, the court opted to amend the receivership order without ruling on these constitutional claims, referencing precedent that prohibits individuals engaged in securities fraud from using victim funds to finance their defense. The court affirmed that since the SEC likely would prove Mr. Scoville's illegal Ponzi scheme operations, it rejected his due process challenge.

Finally, the court certified the order for interlocutory appeal under 28 U.S.C. § 1292(b), noting significant legal questions regarding the interpretation of Section 929P(b) of Dodd-Frank and its potential impact on the SEC's litigation standards, particularly in relation to whether the Morrison test is still applicable.

Traffic Monsoon's business model is under scrutiny to determine if it constitutes a Ponzi scheme, marking a novel legal issue in this circuit. The court denied Traffic Monsoon’s motion to set aside the receivership and granted the SEC's request for a preliminary injunction, with plans to issue a separate preliminary injunction order and a revised receivership order. The court noted that calculations of returns do not include compound interest; members who reinvested their profits by purchasing additional AdPacks could see even greater returns. The SEC alleges that Traffic Monsoon violated Sections 5(a) and (c) of the Exchange Act by selling unregistered securities, but this allegation is not central to the request for a preliminary injunction. Recklessness is defined as a significant deviation from ordinary care that risks misleading buyers or sellers, a standard endorsed in the Tenth Circuit, particularly for Rule 10b-5 claims. The court refrains from addressing whether reckless behavior can satisfy the scienter requirement under Section 17(a)(1). Additionally, interpretations of E.E.O.C. v. Arabian Am. Oil Co. regarding a "clear statement rule" for extraterritoriality are discussed, with the conclusion that the presumption against extraterritoriality is not strictly governed by such a rule.

The excerpt addresses the legal principles surrounding the presumption against extraterritoriality in U.S. securities law, particularly in the context of Sections 10(b) and 17(a) of the Securities Act. It clarifies that the presumption is not a strict "clear statement rule" requiring explicit statutory language for extraterritorial application. Instead, it can be rebutted if legislative history indicates congressional intent for such application. Section 929P(b) is discussed as potentially evidencing this intent, especially in actions brought by the SEC or the U.S. government, but it does not extend to private actions under Section 10(b). The excerpt notes that Morrison v. National Australia Bank, which established the conduct and effects test, remains controlling for private causes of action.

Traffic Monsoon's argument that the physical location of its representative, Mr. Scoville, during transactions should determine the extraterritorial applicability is rejected. The court asserts that Mr. Scoville, operating through his LLC, cannot disregard the corporate entity's legal status to claim extraterritorial benefits. The sales were conducted online directly through Traffic Monsoon, making the location of Mr. Scoville irrelevant. Moreover, the court agrees with prior rulings that affirm Morrison's applicability to Section 17(a), indicating that it similarly does not extend to sales occurring outside U.S. borders.

Section 17(a) broadens the scope of regulated domestic conduct to include completed transactions and offers to sell securities. The SEC, when seeking an asset freeze to ensure funds are available to address violations, does not need to demonstrate a high likelihood of future wrongdoing, as established in SEC v. Cavanagh. For an asset freeze, the SEC only needs to show probable success on the merits. However, since the SEC is pursuing injunctive relief beyond just an asset freeze, it must demonstrate a likelihood of future violations.

Traffic Monsoon's operation notably required members to continuously reinvest by rolling over profits from matured AdPacks into new purchases. This system created a cycle where an initial investment repeatedly circulated among member accounts. A significant portion of these investments was paid out as revenue sharing or commissions, which were then reinvested into new AdPacks. This recycling allowed a limited amount of actual cash to support inflated expectations regarding the future value of AdPacks. At the time the court issued the TRO, members had only $34.2 million in their accounts, while the total potential value of outstanding AdPacks was $243.9 million. The scheme's reliance on constant reinvestment meant that once the flow of money stopped due to the TRO, there were insufficient funds to meet the inflated expectations of members, who experienced a stark disparity between their anticipated returns and the actual available assets, which amounted to about $60 million.