|
CAVEAT
Throughout this memorandum, the term Shari’ah is used to denote the authoritative and authoritarian corpus juris of Islamic law as it has been articulated by the recognized Shari’ah authorities over more than a millennium. The specifics of this body of law and jurisprudence are discussed more fully in the text and accompanying footnotes herein. The term Shari’ah as used herein, therefore, does not refer to a personal, subjective, pietistic understanding of the word or concept of Shari’ah. This latter understanding of the word Shari’ah is closer to its literal meaning in Arabic without any of the legalistic connotations it has developed as an authoritative institution in Islamic history, as it is currently practiced in such countries as Iran, Saudi Arabia, and Sudan, and as it is meant when referred to in the various laws and constitutions of most Muslim countries.
Research Memorandum-Article:
Civil Liability and Criminal Exposure
for U.S. Financial Institutions and Businesses
Engaged in Shari’ah-Compliant Finance
Prepared for:
Shari’ah Risk Due Diligence Project
Center for Security Policy, Washington, D.C.
Prepared by:
Law Offices of David Yerushalmi
Washington, D.C., California, Arizona
Lead Author: David Yerushalmi, Esq.
© Copyright 2008. All rights reserved to the Law Offices of David Yerushalmi. No reproduction, publication, or distribution of all or
any part of this memorandum/article is authorized without the expressed written permission of the copyright holder.
1
Purpose:
The purpose of this memorandum is to examine Shari’ah-compliant finance
(“SCF”) in light of existing U.S. law. The result of this examination will be to
highlight and to examine areas of civil liability and criminal exposure unique to
SCF investments and transactions1 in the U.S. as they have been developed and
utilized by various financial institutions and facilitated and promoted by legal,
accounting, and financial professionals.2
This analysis is a first of its kind in the published literature. To date, there has
been no focused effort to identify and analyze the implications for civil liability
and criminal exposure for U.S. financial institutions and other businesses engaged
in any of the various manifestations of SCF from a legal and regulatory
framework. While some of the SCF professional and scholarly writings published
conventionally in professional journals and books and increasingly on the Internet
address broad regulatory concerns3, economic risks4, and transactional5 and
market-related hurdles6, scant attention has been paid to the specific civil and
criminal liability implications of SCF. Necessarily, this is an introductory and
preliminary effort.7 Each specific area identified in this memorandum, and quite
likely many others, require and deserve a detailed treatment by academics and
legal professionals, including government attorneys involved in financial
regulation and compliance, policy specialists, and most importantly practitioners
advising their clients on the advisability and the logistics of SCF.
All too often the legal or accounting professional acting as a facilitator, driven by
complex legal- or accounting-intensive tasks and further motivated by exorbitant
professional fees and the desire to develop a specialized expertise for yet future
marketing of services, loses sight of the fundamental threshold issues for any new
and novel market transaction: Does the transaction or business model comply
with existing civil and criminal statutory and regulatory frameworks? Does the
2
transaction expose the client to unique and elevated civil liability and criminal
exposure or regulatory intervention?8
Unfortunately, the history of the legal and accounting professions in properly
guiding clients involved in finance-intensive industries through the legal hazards
of complex and novel transactions has not been good. In just the past three
decades, problematic transactions were structured and manipulated by financial
institutions and finance-driven businesses and facilitated almost unimaginably by
their attorneys, accountants and financial advisors.9 The lesson professionals
should have learned -- but appear not to have, given what can only be described as
the blind exuberance driving SCF -- is that huge profits and explosive growth,
massive public relations and marketing efforts, and popular appeal in the financial
industry does not establish even a minimal baseline for legal compliance.
Whether a new financial product or an innovative structure for an existing
business is compliant with the civil, criminal, and regulatory frameworks imposed
on a lightning fast and fully reticulated finance-driven economy is no longer a
question for a single professional. Careful analysis and due diligence across
several disciplines conducted in a fully-informed, interactive environment is not a
luxury of the prudent but a necessity for all but the reckless.
The watchword ought to be: Transparency. Any new financing technique or fad
driven by huge profits or enormous liquidity without absolute transparency should
automatically raise red flags for the financial institutions exploiting them and the
professional facilitators structuring them.
Conclusion:
SCF exposes the financial institutions and other businesses which attempt to
exploit this new industry to a whole host of disclosure, due diligence, and
compliance issues, all of which elevate substantially the civil liability and
criminal exposure such companies otherwise factor into their business risk
profiles.10 What is clear from this preliminary legal analysis of what might be
called the SCF industry is that very little of this increased civil and criminal
exposure has been recognized, analyzed, or guarded against in any meaningful
way.11
The salient points of this analysis are:
• The Shari’ah black box syndrome: U.S. financial institutions and
businesses involved in SCF risk grave consequences by willfully ignoring
the endogenous elements of Shari’ah. Ignoring what Shari’ah is -- both in
theory and in practice -- and its intimate connection to Islamic terror and
holy war against the non-Muslim world amounts to corporate recklessness.
• Putting Shari’ah in a black box and treating its prohibitions as if they were
benign secular and objective “screens” ignores the duty of disclosure of
3
the most important elements of Shari’ah: its purposes and its ultimate
methods.
• Undoubtedly, a reasonable post-9/11 investor contemplating an SCF
investment would consider (a) the goal of establishing Shari’ah as the law
of the land and (b) the promulgation of the Law of Jihad to establish this
goal material to the investment decision.
• To the extent that U.S. Shari’ah authorities or foreign Shari’ah authorities
retained by U.S. businesses advocate the implementation of historical and
traditional Shari’ah, they risk being charged with a violation of 18 U.S.C.
§ 2385.
• U.S. financial institutions and businesses have a duty to conduct
reasonable due diligence investigations to be certain that their respective
Shari’ah authorities are neither advocating crimes in the name of Shari’ah
nor promoting the material support of terror, either through legal rulings or
through the funneling of “purification” funds to terrorists. Failure to
conduct such due diligence might very well lead to civil liability, if not
criminal exposure.
• The Shari’ah black box is yet another financial fad like the sub-prime
market where transparency is shrouded in opacity in the mad rush to
market-share and quick profits. U.S. mutual funds are poised to embrace
SCF without a word about the risks associated specifically with Shari’ah.
U.S. banks are cavalierly promoting Shari’ah-compliant loans as “interestfree”
when in fact they are merely repackaged loans at standard interest
rates. This violates any number of consumer protection statutes. Financial
institutions are underwriting Shari’ah-compliant loans and bond issuances
without really understanding the risks associated with default and
bankruptcy treatment.
• Insofar as U.S. financial institutions participate in and cooperate with the
Shari’ah authorities’ efforts to establish the rules and regulations for the
SCF industry, antitrust issues such as rules collusion are likely to present
yet additional issues of exposure for those embracing this new industry.
• The current structure of the SCF industry in which two dozen of the most
influential Shari’ah authorities control the way funds go in and out of the
largest financial enterprises in the world creates the paradigmatic pattern
of predicate racketeering activity any aggressive prosecutor or plaintiff’s
lawyer looks for in a RICO cause of action.
The failure by corporate management and their legal advisors to confront these issues in
any serious fashion is not surprising given the wholesale failure of the participants and
facilitators in this industry to have undertaken a serious analysis of these risks. The extant
legal academic and professional literature reads more like promotional material and not
serious legal analysis conducted by men and women trained to protect clients from their
own blind enthusiasm. The legal industry has gone down this road too many times in the
past. The difference this time is that the risk is not simply financial; it is potentially
existential.
4
I. Overview of Shari’ah-Compliant Finance
A. What is SCF?
According to the disclosures and representations of the financial institutions currently
promoting SCF12, and the Shari’ah authorities they employ, Shari’ah compliance means
that a particular investment or financial transaction has been conducted or structured in a
way considered “legal” or “authorized”13 pursuant to Islamic law.14 Compliance with
Shari’ah is generally achieved by having a Shari’ah authority – either an individual or
group of individuals who has achieved an authoritative status in matters relating to SCF15
– approve of the particular investment or type of transaction. Most financial institutions
employ or retain16 in some fashion what is called a Shari’ah advisory board, which
typically consists of three or more “Shari’ah scholars” who profess to be generally
recognized as an authority in SCF.17
According to most financial institutions, SCF is achieved by the avoidance of interest18,
risk (typically understood as uncertainty or speculation)19, and certain types of prohibited
industries (relating to activities considered haram or forbidden, such as the pork and
alcohol-beverage industries, pornography, gambling, and interest-based financing).20 In
addition, SCF also is said to include a focus on “purification” which has two separate
elements. One, is a form of obligatory charitable contribution called zakat where the act
of supporting the less fortunate is considered a spiritual purification21; and the other is the
purification of a Shari’ah-compliant investment or financial transaction that has been
tainted with forbidden revenue, whether from interest, illicit speculation such as trading
in commodity futures, or a forbidden commercial enterprise such as the pork industry.22
In the latter meaning of purification, the forbidden funds must be disgorged by donating
the money to an acceptable charity but this charitable gift will not count towards a
Muslim investor’s zakat requirement.23
It is quite evident from even a cursory review of these most basic concepts of SCF that at
least a rudimentary understanding of Shari’ah is required to grasp the implications of
SCF relative to U.S. law. Per force, this discussion will be elementary yet true to the
understanding of Shari’ah by contemporary and classical Shari’ah authorities. To begin,
Shari’ah, or the ‘proper way’, is considered the divine will of Allah as articulated in two
canonical sources. The first is the Qur’an, which is considered the perfect expression of
Allah’s will for man. Every word is perfect and unalterable except and unless altered by
some subsequent word of Allah.24 While most of the Qur’an’s 6,236 verses25 are not
considered legal text, there are 80 to 500 verses26 considered instructional or sources for
normative law. But the Qur’an is only one source of Allah’s instruction for Shari’ah. The
Hadith27, or stories of Mohammed’s life and behavior, are also considered legal and
binding authority for how a Muslim in any place at any time must live. The Hadith were
collected by various authors in the early period after Mohammed’s death. Over time,
Islamic legal scholars vetted the authors for trustworthiness and their Hadith for
authenticity and there is general consensus across all Sunni schools that there are six
canonical Hadith.28 The legal or instructional portions of the Hadith together make up the
Sunna.29 While the Shari’ah authorities from the Shi’a Muslim world also accept the
5
Hadith as authoritative, they differ on the selection of the authors accepted as
authoritative based upon mostly theological grounds.30 For all Shari’ah authorities,
however, the Qur’an is considered the direct revelation of Allah’s will and therefore
primary, while the Sunna is the indirect expression of that will and secondary. Both
sources are considered absolutely infallible and authoritative.
In order to divine the detailed laws, norms, and customs for a Muslim in all matters of
life, the Shari’ah authorities over time developed schools of legal jurisprudence adhering
to certain theological and jurisprudential rules to guide their interpretations of the Qur’an
and Sunna. While there is broad agreement among the schools about the rules, there are
important distinctions and these differences do result in different legal interpretations and
rulings, albeit typically differences of degree not of principle.31 The rules of interpretation
and their application to finite factual settings in the form of legal rulings are collectively
termed al fiqh (literally “understanding”). Usul al fiqh, or the ‘sources of the law’, is what
is normally referred to as jurisprudence. Technically, Shari’ah is the overarching divine
law and fiqh is the way Shari’ah authorities have interpreted that divine law in finite
ways.32 It is important to note, however, that the word Shari’ah appears only once in the
Qur’an in this context33 yet it has gained the currency it has institutionally in the Islamic
world only by virtue of the Shari’ah authorities over more than a millennium creating a
corpus juris (i.e., al fiqh) based upon their interpretative understandings of the Qur’an
and Sunna. As such, this memorandum uses the word Shari’ah to mean all of Islamic
jurisprudence, doctrine, and legal rulings, much as it is used in the vernacular by the
typical Shari’ah-adherent Muslim.
Prior to the twentieth century, there was no discipline termed Shari’ah-compliant
financing or even a Shari’ah sub-code relative to commercial transactions per se.34 There
are rulings by Shari’ah authorities authorizing certain contract forms dating back
hundreds of years, but as late as the 1900s, there was still some debate among Shari’ah
authorities whether the prohibition against interest was absolute or just against usurious
interest. When contemporary Islamic political thinkers began to confront the collapse of
the Ottoman Empire after the First World War and the intrusion of Western modes of
social, political, and commercial life into the heart of the Muslim world, Shari’ah
authorities followed their lead and began to issue legal rulings to confront this new
reality.35 Beginning with the early political-theological writings of men such as Maulana
Abul Ala Mawdudi who argued for an Islamic political resurgence and a unique Islamic
political economy, Shari’ah authorities followed suit by issuing authoritative legal
rulings forbidding interest on deposits and calling for the establishment of “Islamic
banks”. Over time, these rulings have incorporated prohibitions against transactions
considered too uncertain or speculative and also rulings to prevent Muslims from
investing in businesses engaged in un-Islamic behavior.36 The development of these rules
and the formalization of SCF have matured over the past three decades so that today there
are entire university departments in the Middle East, Asia, and even in Western
universities dedicated to the study of SCF.37 Most observers connect this recent
development to the emphasis of Shari’ah in the oil-producing Arab states and their
wealth-driven influence throughout the Muslim world and the West.38
6
Effectively, SCF is an attempt to embrace modern interest-based commerce and finance,
but to do so within a framework of Shari’ah-approved structures. For example, while
almost all Shari’ah authorities forbid any transaction or investment which provides for
interest income, SCF rules allow for interest in two ways. One way is to rule that a
Muslim can invest in a permitted business that earns or pays interest but only if the
amount is below a maximum level.39 Any profit earned by the Muslim from that interest
component, however, must be purified by contributing that portion to a Shari’ahapproved
charity.40 A second way to accommodate modern commercial transactions is to
structure the forbidden transaction within Shari’ah-approved contract forms. These
nominate contracts are based upon contract forms found in the classical rulings of the
Shari’ah authorities prior to the advent of contemporary finance. Thus, a loan might be
structured as a “cost-plus sale” where the lender buys the property and immediately sells
it back to the borrower for a “profit”. This profit is the interest component in the typical
loan transaction. The purchase price with the profit component included can be paid over
time to resemble an amortized loan repayment schedule. A host of other forms are
available to deal with interest and also with unduly speculative transactions including
sale-lease back contracts, and partnerships with variations and combinations. For the
more complex transactions, these Shari’ah approved nominate contracts are often pieced
together and used in combination to arrive at a Shari’ah-compliant modern commercial
deal.41
B. Why is SCF important?
As a burgeoning industry, SCF is touted as one of the fastest growing sectors in what has
been termed the global financial markets.42 Estimates for total funds committed to some
kind of SCF investment or transaction is $800 billion worldwide43 with $200 billion of
assets under management in Shari’ah-compliant banks.44 Annual growth in this industry
sector is estimated at between 15-20%45 based upon current trends fueled mainly by
profits and liquidity in the Muslim oil- and gas-producing countries and by a worldwide
Muslim population reported to be the fastest growing among the world’s major
religions.46
Within the SCF market, Shari’ah-compliant bonds, known in Arabic as sukuk47, are the
most explosive segment driven by huge petro-dollar profits creating enormous sovereign
wealth and liquidity. As of the end of the second quarter 2007, outstanding Shari’ahcompliant
bonds totaled $80 billion with another $37.3 billion worth issued in the third
quarter, which is double the amount issued during the same period the previous year.48
All of this growth, underwritten in the main by the mobile, highly liquid capital flowing
out of the GCC states49, has generated an entire industry of financial institutions, law
firms, accounting firms, financial advisors and money managers establishing domestic
and international links with the key investment figures in the GCC states in an effort to
exploit the opportunities for substantial profits.50 This enthusiasm has been translated to
domestic U.S. financial industries in many ways.51 U.S. financial institutions seek to
underwrite Shari’ah-compliant bond issuances domestically and globally;52 Dow Jones
and Company53 and Standard & Poor’s54 have both established Shari’ah-compliant
7
indexes that screen equities based upon software filters meant to eliminate Shari’ah-noncompliant
businesses; Shari’ah-compliant U.S.-based managed equity funds55 and offshore
hedge funds56 managed or advised by entities related to U.S. financial institutions
have been established and can now peg their performances against these indexes; and
U.S. banks have begun to offer Shari’ah-compliant home loans and other credit
facilities57 with federal banking authorities opining about their legality and at least one
state tax authority issuing a ruling on the tax implications of a Shari’ah-compliant
transaction58.
C. Why should SCF come under special scrutiny for civil and criminal
liability exposure?
A preliminary question must be asked: When making financial investments or entering
into financial transactions, why should adherence to the normative principles of Shari’ah
require any special or heightened scrutiny in relation to civil or criminal liability
exposure? The most immediate answer is that, according to the proponents and
practitioners of SCF, Shari’ah is not simply an approach to interest-free, ethical investing
-- although it has been described in promotional literature as such. Instead, SCF is
invariably described by SCF proponents, practitioners, and scholars, as the contemporary
Islamic legal, normative, and communal response to the demands of modern day finance
and commerce.59
As understood on its own terms or by the many constituencies who interpret it, Shari’ah
is not predicated upon a personal or subjective understanding of what it means to be a
Muslim. Neither is it simply an objective formal law or behavioral code regulating
finance and commercial transactions. Shari’ah has been described as “holistic”60, as
“designating good order, much like nomos”61, and definitively by Joseph Schacht, the
founding father of modern scholarship treating Islamic jurisprudence as a distinct
academic discipline, as “[t]he sacred law of Islam [which] is an all-embracing body of
religious duties rather than a legal system proper; it comprises on an equal footing
ordinances regarding cult and ritual, as well as political and (in the narrow sense) legal
rules.” 62
In one of the first and still important academic presentations of this new industry,
Professors Frank Vogel and Samuel Hayes, both distinguished professors at Harvard
University and proponents of SCF, explain that Shari’ah is not some personalized,
subjective, pietistic approach to Islam but an institutionalized legal-political-normative
doctrine and system:
Islamic legal rules encompass both ethics and law, this world and the next,
church and state. The law does not separate rules enforced by individual
conscience from rules enforced by a judge or by the state. Since scholars
alone are capable of knowing the law directly from revelation, laypeople
are expected to seek an opinion (fatwa) from a qualified scholar on any
point in doubt; if they follow that opinion sincerely, they are blameless
even if the opinion is in error.63
8
This classical understanding of Shari’ah has been echoed by almost all of the scholars
who have written on the subject. Two prominent advocates of SCF, one a leading
professor of finance in Australia and the other a senior official in the Bahrain Ministry of
Finance and National Economy, describe the all-encompassing nature of Shari’ah in their
way:
Since Islamic law reflects the will of God rather than the will of a human
lawmaker, it covers all areas of life and not simply those which are of
interest to a secular state or society. It is not limited to questions of belief
and religious practice, but also deals with criminal and constitution
matters, as well as many other fields which in other societies would be
regarded as the concern of the secular authorities. In an Islamic context
there is no such thing as a separate secular authority and secular law, since
religion and state are one. Essentially, the Islamic state as conceived by
orthodox Muslims is a religious entity established under divine law.64
Shari’ah is therefore not strictly speaking a religious legal code where offending or
offensive subdivisions or specific areas of law can be isolated and removed from a
cauterized corpus juris. Instead, Shari’ah is understood by the authorities and scholars
who interpret it as an indivisible “way of life”65 which informs a Shari’ah-adherent
Muslim’s entire being and identity as a Muslim66, including his relationship to his family,
the poor, the stranger, the visitor, national political life, the Muslim Umma (or nation),
religious ritual, business and financial dealings, and the enemy.67 While Shari’ah most
certainly includes more than a millennium of legal decisions developed through Islamic
jurisprudence and informal code-like compilations developed by the different “schools of
jurisprudence”68, Shari’ah proper is the overarching authoritative architecture for all
Islamic jurisprudence and the specific legal decisions which make up the corpus of what
amounts to a juristic body of Islamic dictates and norms.
Understood in its proper context then, anything deemed Shari’ah-compliant by generally
recognized Islamic legal authorities must first and foremost be within the gestalt of
Shari’ah. It is not enough, according to Shari’ah, that a Muslim conducts his own affairs
and business according to some narrow definition of “Islamic ethical business practices.”
For a Shari’ah-adherent Muslim to conduct his business and financial affairs properly, he
must not knowingly promote through his business dealings any forbidden action or
violation of a fundamental precept of Shari’ah or the legal rulings promulgated
thereunder. This is what the scholars mean when they describe Shari’ah as “holistic” or a
fully integrated religious, moral, and legal code.69
Thus, an interest-free and non-speculative commercial transaction which complies with
Shari’ah dictates in these strictly financial and economic areas might nonetheless be
forbidden because the subject matter of the business (i.e., the manufacture or sale of
alcohol) is forbidden. This would be the case even though the Muslim is neither
consuming the alcohol he manufacturers nor selling it to other Muslims. Similarly,
leasing a building to a restaurant or bar which serves forbidden foods such as pork and
9
alcoholic beverages, even though no Muslims frequent the establishment, would
nonetheless be forbidden because pork products and alcohol are forbidden by Shari’ah
independent of its economic or financial implications. Finally, leasing a building to a
church consisting wholly of non-Muslims would also violate the dictates of Shari’ah
because Christian worship and theological doctrine violate several tenets of Shari’ah.70
In other words, SCF is not about just finance, economics, or business ethics. To be
Shari’ah-compliant in financial matters means to be Shari’ah-compliant in theological,
moral, and political matters as well. From a legal or jurisprudential analytical framework,
there is no Shari’ah sub-code or segregated legal doctrine applicable only to financial
matters per se. To be sure, there are specific Shari’ah precepts relating to interest and
uncertainty and the legal decisions promulgated in accordance with those precepts. But
these Shari’ah precepts and the authoritative legal rulings flowing from them are not
divisible or segregable from the rest of Shari’ah and its jurisprudence. Thus, Islamic legal
rulings on apostates, holy war (Jihad), or forbidden sexual relations, are no less relevant
to SCF than rulings on forbidden interest.71
It has been the duty of the Shari’ah legal scholars over the ages to understand these
precepts and to apply them to new and changing circumstances. The degree to which
individual Muslims or the political powers ruling over them have adhered to Shari’ah as
determined by the generally accepted authoritative Islamic jurists has varied
tremendously. It can be said with some historical confidence that Shari’ah has been
honored more in the breach than in its observance.72 But the breaches have not
diminished the absolute authority of Shari’ah and its jurisprudence, as articulated by
Islamic legal scholars and the institutions they have established over the past 1200 years,
to define the legal limits of permitted and proscribed behavior among the hundreds of
millions of Muslims worldwide who consider Shari’ah a way of life, as much religion
and moral guide as civil and criminal legal code.73
This monopolistic institutional control over the legal doctrine of Shari’ah by the
recognized Shari’ah authorities is no better evidenced than in the world of SCF. Whether
one is reading from the Islamic legal treatises themselves, the academic studies of SCF
produced by Muslim and non-Muslim university professors, the lawyers who publish
legal journals on the subject, the media, or the myriad of Internet sites which are
dedicated to the subject, no one seriously contests the exclusive role of the accepted
Shari’ah authorities to divine what is permitted in SCF and what is not.74
This is more than just convention. Islamic jurisprudence codifies the important role
played by Shari’ah authorities to reach consensus (ijma) among themselves on areas not
previously established by the classical Shari’ah jurists as fixed law and immutable.75
Thus, as new financial transactions are fitted to Shari’ah and its immutable “principles
and rules”, the only way for a Muslim concerned with Shari’ah to know that he is not
violating Shari’ah is to rely upon the Shari’ah authorities and the level of consensus they
have reached on the particular matter.
1 0
The quite obvious implication of this fuller understanding of Shari’ah is that one cannot
speak of Shari’ah-compliant finance, business, or economics in the U.S. without
understanding Shari’ah as articulated by the Shari’ah authorities and its ramifications for
the U.S. investor. This is especially true given the legal implications in the areas of the
duty to disclose for financial institutions contemplating a SCF transaction. For example, a
mutual fund promotes itself as Shari’ah-compliant. Having licensed the use of the Dow
Jones Islamic Index (“DJII”)76, which utilizes a software filtering protocol determined to
be Shari’ah-compliant by the Shari’ah advisory board retained by Dow Jones &
Company, the mutual fund selects a subset of the indexed listed equities for its portfolio.
After a careful reading of the marketing material of the DJII and the registration
statement of the mutual funds utilizing the DJII, it should be obvious to any moderately
competent attorney that disclosure issues abound.77
Specifically, in the registration statement filed with the Securities and Exchange
Commission (“SEC”) for one of the first such funds, the Dow Jones Islamic Market
Index Portfolio78 (“Dow Jones Islamic Portfolio Fund”), other than a reference to certain
“Shari’ah screens” or “filters” limiting the universe of acceptable investments, nothing is
said of Shari’ah. For the investing public, all it learns about Shari’ah in the context of
this Shari’ah-compliant mutual fund is that equities of companies involved in interestdriven
profits, companies dealing with commodities such as alcohol or pork, or
companies engaged in the “vice” industries such as entertainment and gambling, are
prohibited. In addition, the standard disclosures also include references to various
financial ratios that work to eliminate companies that might generate too much interest
income on its cash reserves or pay too much interest on its debt. In other words, the DJII
and the mutual funds utilizing such an index appear in many ways like other “socially
responsible investing” or customized “values-based” and “faith-based” indexes.
But this is hardly the case. In a “secular” or even “ideologically” driven values-based
index, a screen that filters out all tobacco and weapons businesses is just that. Even if the
background social or political activism animating the screen is a “smoke-free
environment” and “pacifism,” the screen is marketed only as a screen that filters out
tobacco and weapons industries. It does not purport to be based upon some universal
theological-moral-legal system existing independently of the filters.79
When the mutual fund, however, markets its product as “Islamic” or “Shari’ahcompliant”,
it is making a claim that goes well beyond the disclosed screens or filters,
even if all that is applied to make it “Islamic” or “Shari’ah-compliant” is the use of the
disclosed filters. A cursory reading of the registration statement filed pursuant to the
Investment Act of 194080 for the Dow Jones Islamic Portfolio Fund suggests that the
lawyers tasked with writing the risk section of the document understood this reality, at
least at some rudimentary level81, and sought to eliminate the problem with one broad
brush stroke:
The investment objective of the Dow Jones Islamic Market Index Portfolio
(the "Portfolio") is to seek long-term capital gains by matching the
performance of the Dow Jones Islamic Market Index(SM) (the "Index") – a
1 1
globally diversified compilation of equity securities considered by Dow
Jones' Shari’ah Supervisory Board to be in compliance with Shari’ah
principles. (Emphasis added.)82
Notwithstanding representations throughout the registration statement that various
practices of the fund will comply with “Shari’ah principles”, which are nowhere
articulated in any remotely material way, the language in this section intends to sweep
Shari’ah under the rug by reducing “Shari’ah principles” to whatever the Dow Jones
Shari’ah Supervisory Board says they are. There are, however, a plethora of risk factors
specifically associated with anything pegged to Shari’ah compliance that such a
statement fails to capture. Fundamental disclosure issues for a reasonable investor would
be: What is Shari’ah? Does applying Shari’ah “principles” pose any unique reputational
or financial risks for the investment or might it actually pose a risk for the physical safety
of the U.S. investor? In other words, if Shari’ah is hostile to Western political and
financial institutions, would that not be important for a U.S. investor to know prior to
investing in a business which promotes Shari’ah-compliant investing?
A still more common example of a risk that appears to have been ignored in this
registration statement would apply with special emphasis to a closed-ended fund but
could also affect an open-ended fund’s investors. What would be the effect of a more
authoritative Shari’ah advisory board ruling asserting that the Dow Jones Shari’ah
Supervisory Board was gravely mistaken about Shari’ah principles resulting in a number
of forbidden companies being improperly listed by the DJII as Shari’ah-compliant?83
Precisely because the SCF industry generally represents that only authoritative Shari’ah
scholars can divine legitimate legal rulings of Shari’ah, a contradictory ruling by a more
austere body could pose grave financial risks. Investors who care about “Shari’ah
principles” and who had invested in the fund, and possibly others who had invested in the
underlying equities directly in reliance on the DJII, would likely feel obliged to sell their
interests. The Dow Jones portfolio fund managers would likely also liquidate those
equities so as not to get caught in the cross-fire between competing Shari’ah authorities
and to thereby mitigate claims for damages arising out an allegation that the fund
manager knew or should have known that the Dow Jones Shari’ah advisory board did not
properly adhere to authoritative Shari’ah principles. The end result, given enough sale
orders, would be a material reduction in the share price of the forbidden companies or, in
the case of a close-ended fund, the fund itself. Class action lawsuits brought by investors
caught “holding the bag” and predicated on failure to disclose and misrepresentation
would be inevitable.84
The point of this one, narrowly scripted example is not to analyze the liability exposure
of the registration statement of the now defunct Dow Jones Islamic Portfolio Fund, but
rather to illustrate how marketing an investment product as Shari’ah-compliant
incorporates a whole set of factual predicates, many of which are material to the
investment decision. According to the Shari’ah authorities themselves, Shari’ah -- of
which SCF is only a small, integrated component -- is more than just a half-dozen filters
operating in the background to eliminate interest, speculation, and vice. Rather it is a
motivating force and mark of Muslim identification for hundreds of millions of Muslims
1 2
throughout the world, a corpus juris that incorporates a 1200-year old history of
jurisprudence, of institutionalized legal schools with published legal decisions and other
scholarly writings, together with a millennium of religious and political implications, all
of which has generated in modern times a whole body of literature and scholarship on the
import of Shari’ah in the ancient and contemporary world.
These realities comprise a dangerous minefield for the naïve or willfully ignorant
financial institution seeking to capitalize on the alluringly profitable new universe of
investment vehicles marketed to Shari’ah adherents. This minefield includes questions
which these financial institutions and their professional facilitators have not even begun
to ask, much less answer.85 It is the purpose of this memorandum to begin this analysis
and the necessary discussion of its implications for the U.S. financial industry, the
professionals advising their financial clients on SCF, and the policy-makers in and out of
government. This latter group especially has an obligation to consider the ominous
implications for U.S. national and financial security of a fully integrated Shari’ahcompliant
financial industry.
II. Analysis: Toward an Analytical Taxonomy
A. How to analyze SCF: the lawyer’s role in SCF
As indicated above, Shari’ah-compliant financing is nomenclature describing the
contemporary Islamic legal, normative, and communal response to the demands of
modern day finance and commerce.86 Shari’ah-adherent Muslims desire to maintain their
commitment to the normative demands of Shari’ah. At the same time, they wish to
participate in the benefits and opportunities afforded by investment in international and
Western financial and commercial structures that are neither Shari’ah-centric nor
Shari’ah-compliant, at least according to the overwhelming majority of Shari’ah
authorities called upon in their institutional or personal roles to pass judgment.87
In many instances, both related and unrelated to SCF, transactional lawyers are required
by the parties to a transaction to opine on the transaction’s compliance with existing law
and the enforceability of the underlying agreements in a court of law or, in some cases,
before an arbitrator.88 These legal opinions serve the purpose of assuring the parties to the
transaction that there are no hidden issues that might create obstacles to enforcement. In
addition, although not necessarily part of a formal legal opinion, lawyers are required by
the ethics of professional responsibility to investigate compliance, disclosure, and due
diligence issues in order to understand their client’s legal exposure when a new and
innovative approach to existing financial or commercial transactions is contemplated.89
Lawyers and accountants themselves have direct exposure for documents submitted by a
client to the Securities and Exchange Commission (“SEC”) under several laws, the most
recent and well-known example of which is the Sarbanes-Oxley Act of 2002.
A fundamental predicate of a lawyer’s opinion and indeed the confidence of the parties to
engage in large complex financial deals is the knowledge that the basic transactional
building blocks of the deal are well-known, predictable, and do not pose any significant
1 3
risk that a court will refuse to enforce them as intended by the parties. In simple terms,
this means that the deal is structured in a way that has certainty, consistency,
predictability, and transparency (what shall be referred to hereinafter simply as
“Transparency”)90.
The problems legal counsel face when attempting to analyze a specific SCF transaction
and to opine on compliance and enforceability issues are often directly related to the
Shari’ah “black box” phenomenon. Attorneys, accountants, and financial advisors who
wish to structure a transaction to be Shari’ah-compliant do so by treating Shari’ah
precisely as Shari’ah demands by its own terms. For the Shari’ah faithful, Shari’ah is
first and foremost the divine and perfect will of the ultimate lawgiver and necessarily
there are strictures and obligations imposed on its adherents which are not subject to
reasoned critique or discourse. As to the part of Shari’ah open to human analysis, it is
reserved for Shari’ah authorities who cannot be challenged except by other equally
authoritative Shari’ah authorities.91 Further, because Shari’ah is understood as divine and
the Shari’ah authorities are considered the trustees of its authority, integrity, and
interpretation, the application of Shari’ah’s well-established and ancient doctrines to the
quite modern practice of SCF necessarily lacks Transparency.
The inability of Shari’ah as a jurisprudence and positive law to provide Transparency is
systemic. Any legal or normative system which is not articulated and enforced within a
political structure of codified laws, procedures, courts, binding legal opinions providing
precedence, and effective enforcement mechanisms will, by definition, lack
Transparency. Shari’ah is at its essential core by its own terms a divinely ordained law
which can never be subordinated to a secular political, legal, or regulatory system.92 SCF
is an attempt by the participants – financiers, businessmen, facilitators, and Shari’ah
authorities – to fit the divine law within a modern secular political, legal, and financial
system. But should a secular court or legislature attempt to codify Shari’ah’s precepts as
they apply to SCF in an effort to establish Transparency, aside from the constitutional
issues this would raise in the U.S., it would fail its fundamental purpose because Shari’ah
cannot be rendered subservient to secular law.93
In stark contrast, domestic finance and commerce in the U.S., and indeed international
financial transactions, are based upon Western legal financial structures which provide
Transparency. It is Transparency which renders a complex transaction quite manageable
and viable. When the parties to a transaction and the professionals facilitating it know
that a given transaction format has been used before successfully after being stress tested
and enforced in many forums under various circumstances, the risks of the deal are then
limited to the specific business terms and market conditions rather than the formalities of
the documents and their enforcement. In these transactions, the lawyer can opine safely
and with confidence because he knows the rules of the game and knows they are not
subject to fiat or challenge.94
This is not the case when a lawyer confronts a high-stakes, complex SCF transaction. In
order to render a legal opinion that will satisfy the parties and necessary third-parties such
as a rating agency for a bond securitization, a whole host of issues arise that cannot be
1 4
rationally addressed for at least two reasons: One, certain transaction restrictions
applicable to SCF are considered divine and unalterable. Two, those aspects of a
transaction subject to human reason are not subject to any human reason, but to the
reason of a Shari’ah authority. For example, interest income is understood by most
Shari’ah authorities today to be forbidden. The result has been that SCF utilizes all sorts
of Shari’ah-compliant transactional structures to convert the exact same income stream
(including its variability by pegging it to an index such as the LIBOR) from interest to
something else, such as lease payments. In legal parlance, this is the application of “form
over substance”.95
The use of legal fictions to change the form or the consequence of a transaction without
changing its substance is certainly not new to the secular law. Liability is often
determined by the form rather than the substance of a transaction.96 But the fundamental
difference between a secular use of a legal fiction to convert a problematical “form” to an
acceptable one is that the problem itself and the mechanisms to overcome it can be
understood, challenged openly, debated, and ultimately modified by smart lawyers,
judges, and legislatures to fit changing circumstances. Moreover, if a secular court rules
that a given legal fiction fails its purpose, the participants are free to return to the drafting
table and restructure the deal.
The debate within Shari’ah, however, is in effect closed. Its principles remain divine and
unalterable97 and the application of these principles to changing circumstances are subject
only to what the Shari’ah authorities acting independently of a secular legal and political
system determine to be permitted and forbidden. Thus, Shari’ah informs the Shari’ahadherent
participants in a finance transaction involving interest that interest is divinely
forbidden. The participants are also told it is forbidden because it is evil and causes the
destruction of society.98 Somehow though, interest, wrapped up in a different form where
all of the elements of interest exist but for the name, exits the black box of Shari’ah as
permissible and presumably good for society.99
Thus, a lawyer involved in a complex SCF transaction responsible for shepherding the
participants through the process confronts serious challenges at many different levels. In
this effort the diligent lawyer would likely focus on four distinct phases of a SCF
transaction: (1) determining if the generic investment or type of transaction is prohibited;
(2) developing an alternative (i.e., Shari’ah-compliant) transactional structure necessary
to achieve the financial or commercial goal of the “secular” or Shari’ah non-compliant
investment or transaction; (3) drafting the necessary legal agreements and documents to
implement the alternative transaction; and (4) preparing the filing of any regulatory and
compliance documents with government agencies.
At each stage of this effort, the lawyer is in effect wrapping the Shari’ah component of
SCF in what appears from the casual observer to be a secular black box. This process
begins at the first level when the lawyer turns to the Shari’ah authorities chosen by the
client to determine whether a given investment or transaction is Shari’ah-compliant. In
most cases, the Shari’ah authority issues a fatwa or legal determination in the form of a
terse answer to a fact situation, oftentimes but not always with some rationale. For
1 5
example, a client may wish to invest in a trucking business that hauls alcoholic beverages
along with other commodities. While the consumption of alcohol is generally understood
to be forbidden by Shari’ah, the question arises whether owning a business that transports
alcohol which is not owned or specifically destined for a Muslim is also forbidden. Also,
is there a percentage threshold of profits from the transportation of the alcohol which is
relevant to the determination whether the investment is permitted or proscribed?
At this level, the attorney invariably treats the Shari’ah jurisprudential analysis as a black
box and relies on what his client considers to be a determinative Shari’ah ruling from
someone the client determines to be a Shari’ah authority.100 In the case of a client making
an investment on its own behalf and not representing that the Shari’ah ruling is
authoritative to any third-party, and assuming there are no grounds for third-party
reliance on the authoritativeness of the Shari’ah ruling, the lawyer’s acquiescence to the
black box appears reasonable.101
But the professional’s reliance on the black box of Shari’ah might give rise to serious
problems precisely where there is a duty of care relative to the propriety of the ruling and
the legitimacy or authoritativeness of the Shari’ah authority issuing the ruling. The legal
exposure for a breach of such a duty, as discussed above in the illustration of the
registration statement of the mutual fund, will depend on the kinds of representations
made and the ability to insulate the client with disclosures of the risks and with warranty
and representational disclaimers.
After an investment or transaction is determined to be forbidden by Shari’ah, legal
counsel must address the second phase of the transaction. Here the attorney must be
certain that the client properly explains to the Shari’ah authority what the investment or
transaction involves in its secular or Shari’ah non-compliant structure and ask the
Shari’ah authority to suggest a structure. SCF as it has developed to date includes a range
of legal structures generally acceptable in Shari’ah commercial transactions to bring
otherwise forbidden investments into Shari’ah compliance. Most of these transactional
structures are meant to avoid the prohibition against interest.102
Once the Shari’ah authority solves the Shari’ah compliance problem by suggesting an
alternative structure to “rid” the transaction of the offending elements, be it interest or
uncertainty, the client’s legal counsel must now determine if the new structure changes
the substance of the deal or merely camouflages the problem identified by Shari’ah
through a change in the form of the deal. This analysis is fundamental in many areas,
including disclosure, compliance, taxation, and notably assessing enforceability in the
event of default.103
After having fully assessed the requirements of the Shari’ah-sanctioned deal structure,
legal counsel begins the third phase by drafting the “secular” contracts and various other
agreements to fit the demands of Shari’ah to conventional legal and regulatory
frameworks. This process can require the drafting of certain collateral agreements which
in themselves contradict the principal agreements and transactional documents and
potentially violate Shari’ah precepts. One such example occurs when an SCF transaction
1 6
is structured as a joint-venture leasing arrangement. While the intent of the parties as
reflected in all of the transactional documents is to create a joint-venture leasing
arrangement precisely because they do not wish to run afoul of the prohibition against
interest, the parties still desire to allocate the tax burdens and benefits as if the transaction
were a straightforward financing with interest.104
Lawyers skilled in SCF utilize what are called “tax matters agreements”105 to have the
parties decide for themselves that while the deal might look, feel, and smell like a leasing
duck, it in fact is a loan turkey for purposes of tax characterizations and allocations.106 In
other words, the “form” of the deal is a joint-venture-leasing arrangement (and Shari’ahcompliant),
but the “substance” of the deal for tax purposes is a loan with interest. While
tax matters agreements are not a recent innovation of SCF lawyers, and indeed are often
used for tax purposes in off-balance sheet “synthetic lease” transactions, their
applicability in SCF transactions is not self-evident.107 It is one thing for parties to a
secular transaction to establish dual and even contradictory characterizations depending
on whether the impact of the characterization is on the party’s balance sheet or tax
liability. In such dual-purpose transactions, arguably the standards are different between
tax accountability and balance sheet accounting and the parties’ primary intent is to
achieve off-balance sheet financing without any concern for the specifics of the
structure.108 In other words, the parties are agnostic as to structure and seek only to
achieve both tax and financial accounting benefits.
It is quite another matter, however, when the parties are not agnostic regarding the
structure of the deal and where their true intent is to avoid the payment of interest and to
establish real indices of ownership as required by SCF. In this case, the cognitive
dissonance adds enormous peril to an agreement where all of the documents describe a
joint-venture-lease agreement and the parties presume to tell the Internal Revenue
Service (“IRS”) that what looks to be the case on the surface and what the parties’
actually intended is not in fact the case. While the IRS might continue to apply the
economic reality test109 and wholly ignore the intent as manifested in the Shari’ahcompliant
transaction documents, it is also quite possible that an IRS or tax court ruling
would determine that the tax matters agreement is a ruse or “form” attempting to achieve
tax allocations and benefits inappropriate for the true “substance” of the deal: a Shari’ahcompliant
joint-venture-lease agreement.110
The final step for the transactional lawyer dealing with the intricacies of SCF involves the
various filing requirements of government agencies for reporting and compliance matters.
The registration statement or prospectus of a mutual fund is but one of many such
requirements where the attorney is asked to opine on the adequacy and compliance of
such statements. As described above in the case of the Dow Jones Islamic Portfolio Fund,
the Shari’ah black box exposes both client and counsel to a myriad of issues that do not
otherwise exist.
B. How to analyze the civil and criminal liability exposure in SCF
1. A suggested analytical taxonomy
1 7
The challenges described above for the SCF transactional lawyer and other professionals
advising clients on the intricacies of legal compliance are not inconsequential. In
agreements and in law, words matter but they are given context by the intent of the
parties. The inherent problem of SCF is that the intent of the parties is to comply with
Shari’ah but the intent of Shari’ah generally and in any particular transaction is typically
lost on the secular SCF advisors.111 The latter, especially the lawyers, are very good at
solving problems by re-structuring a transaction through word-smithing, thereby arriving
at the same result in different form. But their approach necessarily is to deal only with the
trees hindering the client’s path to the goal within the landscape of the transaction itself.
For the typical, secular financial transaction, this is sufficient because there is no dark
forest in which to get lost. An obstacle in the path can be safely circumvented because the
problem is transparent for what it is and thus all of its ramifications for disclosure and
compliance are understood. When the trees, however, grow out of the forest known as
Shari’ah, it is not at all clear to these professionals why they are where they are, what
dangers might lurk there, and where the forest might lead. This is so as the examples have
suggested because Shari’ah is not essentially accessible to the secular professionals. As a
consequence, the forest is packaged as a black box and effectively ignored. It is no
surprise then that there has been very little attention paid by legal professionals in the
published literature dealing with the civil liability and criminal exposure issues unique to
a financial or business transaction fitted to Shari’ah.112
Some of the professional literature does grudgingly recognize that SCF lacks the
certainty, consistency, predictability and transparency necessary to allow the legal and
other professionals to treat it as one would any other secular business transaction. But
because this literature is typically geared toward those fully committed to SCF, there has
been very little in the way of critical analysis of the inherent contradiction or dangers in
the effort to apply Shari’ah precepts, rooted in what one critical observer terms a
“Medieval obscurantism,” to Western financial transactions.113 The potential dangers are
exacerbated by the fact that finance and commerce cannot be separated in practice from
the law and its institutions built on certainty, consistency, predictability, and
transparency. This brings the secular Western legal institutions, understandings, and
duties face-to-face with a sectarian normative legal system rooted in a world bound by
the dictates of a god as determined by Shari’ah scholars fully wedded to the purposes of
Shari’ah.114
What this analysis suggests by implication is that the first order of business for the legal
practitioner advising a client on a SCF transaction is to ask what, if any, legal exposure
might the client have by fitting the desired secular financial transaction to a sectarian,
political, and legal institutional framework predicated upon Shari’ah?
2. Exposure arising out of endogenous elements
SCF is first and foremost a modality to structure modern secular financial activity in a
way to comply with Shari’ah. While legal practitioners, for the reasons discussed above,
1 8
are inclined to leave well enough alone and allow the Shari’ah scholars and authorities
sole access to this black box, professional and fiduciary duties and responsibilities do not
permit such a hands-off approach. The lawyer has an absolute duty to his client to warn
of civil and criminal liability exposure when such exposure exists. This is true even when
the client is not inclined to ask any questions beyond, “How do we get this deal done?”115
Competent legal counsel understands that when the client’s competitors are rushing to
cash-in on the newest fad in the international financial markets with literally trillions of
dollars flowing out of the ground and looking for an investment to land on, prudence
tends to take a back seat to following the herd. As noted earlier, very high-priced lawyers
and accountants with sterling reputations have on more that one occasion in recent
history failed to brake the blind enthusiasm and excesses of their clients as they rushed
head-long into exotic and innovative transactions. The criminal failure in these debacles
has been the fact that without the professional facilitators’ own version of blind
enthusiasm – a willful acceptance of their clients’ blind enthusiasm -- and with just a
modicum of prudent and analytical scrutiny, the U.S. financial and legal systems would
not have suffered as they have.
So it is with SCF. If the Shari’ah in SCF actually means something, the lawyer
representing a U.S. financial institution desiring to enter this new arena needs to find out
what that something is. This inquiry can be termed an analysis of the endogenous
elements or aspects of Shari’ah.116 To understand the risks and exposure for a financial
institution contemplating SCF, the lawyer first must understand what Shari’ah itself says
it is – that is, what the Shari’ah authorities understand it to be, without reference to how
SCF attempts to navigate the demands of modern finance. While this inquiry will only be
relevant to part of the analysis of the client’s potential exposure, it will most certainly be
relevant to many fundamental issues of SCF. Moreover, to the extent that Shari’ah
compliance is determined by Shari’ah authorities, presumably there is something in the
institution of Shari’ah itself that will inform the lawyer about who qualifies for such a
role and how. Finally, to the extent that Shari’ah is in fact what its proponents say it is –
a way of life combining authoritative Islamic legal, moral, theological, and normative
social constructs – the attorney will likely have a responsibility to be certain that his
client has conducted the necessary due diligence to be certain that these structures are not
in and of themselves violations of U.S. law.
Some preliminary questions would be: What is the purpose of Shari’ah? Is there a
Shari’ah with a purpose or are there many? If there are many, how are they distinguished
and how are they similar so that they are all called Shari’ah? Who determines what
Shari’ah is? Who determines what is permitted and what is forbidden in Shari’ah at any
time? Is Shari’ah finance or economics a separate and distinct discipline within Shari’ah?
Does Shari’ah recognize a SCF transaction even if it is utilized to undermine or destroy
Shari’ah? Does Shari’ah include theological purposes? Does it incorporate the purposes
or designs of any one political system over another? The answers to these and many
questions like them must be part of a knowledge base available to the lawyer as he begins
his analysis of specific legal duties in the context of U.S. law.
3. Exposure arising out of exogenous elements
1 9
As discussed above, SCF is a term of art used to describe the contemporary Islamic legal,
normative, and communal response to the demands of modern day finance and
commerce. As such, the rules and norms of Shari’ah are being forced to attend to the
demands of a Muslim demographic which desires to exploit the opportunities available in
Western financial and legal structures yet at the same time to remain faithful to a system
which rejects as unlawful and evil much of the Western financial premises about political
economies and structures. To achieve this seemingly impossible goal, Shari’ah
authorities have developed a whole range of transactional structures and legal-definitional
parameters to guide them in their ultimate determination whether a given transaction or
investment is permitted or prohibited.
In this part of the analysis, the lawyer should begin to address the features of SCF which
might raise liability exposure issues that are not inherent to Shari’ah principles but are
adaptations of Shari’ah principles to fit Western financial structures and institutions. An
example of a transactional structure to deal with this collision between a Shari’ah world
and a Western one built on the time-value of money in the form of interest is the salelease
back agreement.117 While sale-lease back agreements are not unique to SCF and in
fact are a popular vehicle in contemporary finance, in the two contexts they are not
identical in structure and worlds apart in their purposes.118 An example of the legaldefinitional
parameters set out by Shari’ah authorities to deal with the doctrinal conflicts
between the two systems would be the ruling that while interest income is absolutely
forbidden in Shari’ah, it is not forbidden to invest in a company that earns less than
X%119 from interest income which is not a core business of the company (i.e., interest
earned on liquid assets or accounts receivables).
In addition to the exogenous structural and definitional efforts to fit Shari’ah into modern
finance, another example would be the make up and structure of a Shari’ah advisory
board and how it plays some authoritative role in the financial institution with which it is
associated. Thus, while Shari’ah authorities have been an endogenous element within
Shari’ah for over a millennium, private Shari’ah advisory boards sitting together in the
capacity of something akin to an independent audit committee within the structure of a
financial institution is an innovation to respond to a financial landscape understood to be
exogenous to Shari’ah.120 Thus, for example, the lawyer might try to understand what
kind of organization Shari’ah requires for a Shari’ah advisory board and are there
implications for the client or for the Shari’ah advisory board itself relating to the very
real possibility of competing loyalties.
C. The legal analysis: overview
The legal practitioner’s job is typically not theoretical; it is fact-based. The lawyer’s work
by its nature is to take a specific set of facts and to apply the law. At some early point in
the analysis, the practitioner would be confronted by the client’s desire to engage in some
form of SCF. First, the lawyer would attempt to understand all of the factual elements of
the business, transaction, or investment. Part of the early discussions would include the
following questions: what is the client trying to achieve; how does the client wish to
2 0
achieve these goals; what does the client expect if these goals are not met; who are the
players; how are they involved; what decisions need to be made by the various parties;
and how are the decisions implemented?
With the facts of the investment or transaction understood, the transactional lawyer must
then map out not merely the transactional documents, but also the legal and regulatory
issues to be dealt with to achieve the desired end. Thus, in a typical analysis, the lawyer is
focused on a fact-specific transaction and would analyze each and every duty or
obligation imposed by law and determine what must be done to comply and what must be
avoided so as not to breach some duty imposed by statute, regulation, common law, or
the contractual obligations underlying the transaction itself.
For purposes of the analysis, rather than examine any particular fact situation, and to
avoid an overbroad, far-ranging analysis of the plethora of compliance issues relative to
the various SCF investments and transactions, this analysis will begin instead with those
specific duties and obligations that might give rise to civil and criminal liability exposure
implicated in SCF. The analysis will attempt to track the endogenous-exogenous
taxonomy described above. The particular duties examined are certainly not exhaustive
but have been chosen because they appear to give rise to the greatest areas of civil
liability and criminal exposure. Furthermore, this analysis will limit the examination of
the various kinds of businesses and transactions incorporating SCF to those used most
prominently in the U.S. market today.
1. Overview of the SCF markets analyzed
The nubile SCF market migrated from the GCC states via London looking for additional
legitimation in the dynamic U.S. financial markets. As much as London seeks to be the
SCF capital of the Western world121, New York is still the “go-to place” for capital
markets.122 The SCF industry has already taken hold in the imagination of many, but
certainly not all of the leading U.S. financial institutions, yet it is permeating into wider
and deeper audiences in the industry. To date, U.S. financial institutions are engaged in
Shari’ah-compliant stock indexes, publicly traded mutual funds, hedge funds or the socalled
“fund of funds” market for sophisticated fund managers and well-heeled clients,
sovereign wealth and private corporate bond issuances, consumer and commercial bank
loans such as home mortgages -- including participation by Fannie Mae and Freddie Mac,
car loans, residential and commercial real estate financing, and even some construction
financing.123 The analysis which follows will focus on the most common SCF products
utilized in the U.S. today. The specifics of the SCF product will be discussed in greater
detail within the analysis.
2. Overview of the legal analysis
The legal analysis of the SCF products to follow will examine civil and criminal liability
issues relating specifically to the duty to disclose, due diligence, and other compliance
issues raised by specific statutes. The examination will not be exhaustive nor will it focus
on the myriad of regulatory compliance issues where there is no manifest issue of civil or
2 1
criminal liability exposure.124 Specifically, in the disclosure discussion, the analysis
focuses on exposure to claims of securities fraud and various statutory and common law
regimens to protect against consumer fraud. The analysis of the requirements to conduct
due diligence and to meet other compliance mandates will focus primarily on the antiterrorism
statutes, which implicate the anti-money laundering statutes and the antiracketeering
statutes as amended by the USA Patriot Act (“the Patriot Act”).125 Finally,
the other compliance issues will discuss antitrust issues and exposure to tort claims for
aiding and abetting terrorism and the violation of internationally recognized norms of the
law of nations.
D. The legal landscape
1. Common law tort action for deceit or fraud
The regulation of disclosures by businesses, and by the financial industry in particular,
has a long and storied history in U.S. jurisprudence. Most of this regulation began in a
way not normally considered regulatory but its effect was and continues to be most
certainly to regulate. The common law of most states incorporated the tort action of
deceit, commonly referred to as fraud, to allow private rights of action for
misrepresentation in the context of what is now referred to as commercial speech.126 The
essential elements of a common law fraud action are: (1) a false representation (2) of a
material fact (3) which the defendant knew to be false and (4) with the intent to induce
the plaintiff to rely upon it and (5) the plaintiff in fact justifiably relied upon the
representation (6) thereby suffering damages as a result.127
Most states have relaxed or altered many of the elements of common law fraud. For
example, certain relationships under the common law, such as a fiduciary, might also
give rise to a claim for constructive fraud which allows recovery for an omission of
material fact. The scienter elements have also been relaxed. Thus, the intent elements
noted above in (3) and (4), has been “variously defined to mean everything from knowing
falsity with an implication of mens rea, through various gradations of recklessness, down
to such nonaction as is virtually equivalent to negligence or even liability without fault
(and would be better treated as creating a distinct species of liability not based on
intent).”128
2. Federal securities laws
In addition to common law actions for fraud or misrepresentation, there are federal and
state statutory regimes designed to govern disclosures in a myriad of business and
financial contexts, including the sale of goods and the provision of loans; investments
such as the formation of partnerships; and the sale of intangibles such as the offering of
securities. In the world of SCF, the disclosure statutes most obviously implicated in civil
and criminal liability issues are the federal and state securities laws.
In the main, the securities law relating to fraud and misrepresentation were modeled after
common law fraud. Having said this, it is just as true to say that Congress intended the
2 2
securities fraud statutes to have a far broader reach than the common law. As a result,
securities laws sought to include within its enforcement orbit misrepresentations,
omissions, schemes, and artifices that would not otherwise be captured by traditional
common law fraud. In addition, many of the specific elements of common law fraud were
relaxed or in some cases eliminated. While recent federal legislation aimed at curbing
abusive class action litigation and subsequent Supreme Court case law suggest a serious
trimming of the broad reach previously granted federal securities laws, the securities bar
knows full well that this is counterbalanced by a concomitant movement at the state level
to extend the reach of the state securities laws and to interpret them more liberally than
the federal counterparts.129
There are principally seven federal statutes that govern securities transactions: the
Securities Act of 1933; the Securities Act of 1934; the Trust Indenture Act of 1939; the
Investment Company Act of 1940; the Investment Advisors Act of 1940; the Securities
Investor Protection Act of 1970; and the Sarbanes-Oxley Act of 2002.130 Civil and
criminal liability under the federal securities statutes for failure to disclose, what is
broadly referred to as securities fraud, is regulated by the SEC and its principal weapons
are the Securities Act of 1933 ("1933 Act") and the Securities Exchange Act of 1934
("1934 Act").131 The 1933 and 1934 Acts target different markets. The 1933 Act regulates
initial offerings and the 1934 Act regulates all subsequent trading, but the overriding
public policy is the same: “full disclosure of every essentially important element
attending the issue of a new security” and a “demand that persons, whether they be
directors, experts, or underwriters, who sponsor the investment of other people’s money
should be held to the high standards of trusteeship.”132
Although both the 1933 and the 1934 Acts proscribe various types of conduct, including
incomplete or inaccurate disclosure of material information, as an administrative matter
the SEC, through its rule-making authority and its regulatory responsibilities, dictates the
specific kinds of minimal (and in some cases maximal) disclosure required by the
specific provisions. Beyond the routine administration functions granted the SEC, the
main weapons against securities fraud are the civil and criminal remedies. Thus, the SEC,
in addition to administrative sanctions, has access to the civil courts to seek injunctive
relief, disgorgement, and even civil fines, in addition to other ancillary equity-like relief.
In addition, the Department of Justice (“DOJ”), often as a result of an SEC administrative
investigation and criminal referral, is authorized to file criminal charges for violations of
the federal securities laws when it appears the offending party had the requisite intent.133
Finally, private plaintiffs have expressed and implied rights of action under several
provisions. The most used and abused of all such provisions is Rule 10b-5134,
promulgated under the 1934 Act135, which provides for civil litigation136 and criminal
prosecutions.137 When you add the class-action club to the civil claims brought under
Rule 10b-5, although reduced mightily by recent legislation138, the weapons available to
prosecute claims for misstatements and omissions of material fact in SEC filings and
elsewhere in the public domain are considerable.
3. State securities laws
2 3
State securities laws, usually referred to as blue sky laws, essentially track the
development of securities disclosure law and securities fraud liability in federal securities
law. As noted above, as a result of Congress’ efforts to curb private securities fraud
litigation and recent Supreme Court rulings regarding the new pleadings requirements,
the state securities laws will take on ever greater importance in the securities plaintiff’s
arsenal of litigation weapons.139
4. Federal and State consumer protection and anti-fraud laws
Further important weapons in the arsenal for fraud now available in most states are the
consumer protection statutes. While the Federal Trace Commission Act (“FTC Act”)140
does not apply to securities, it might well be implicated where businesses market
consumer products and represent that their business is run according to Shari’ah. Further,
modeled in part after the FTC Act, the “little FTC Acts” enacted by most states are often
more broadly interpreted than the FTC Act and many have an explicit or implied private
right of action allowing the consumers themselves to battle fraud in the marketplace.141
In California, for example, a private plaintiff sued Nike, Inc., an Oregon corporation, on
behalf of all California residents under the California Unfair Competition Law142 for
fraud and failure to disclose. The suit was filed after Nike had made false and misleading
public statements in the wake of media reports suggesting abuse at its foreign factories.
Nike claimed its speech was protected under the First Amendment. The case went to the
U.S. Supreme Court after Nike’s arguments to get the case dismissed on First
Amendment grounds did not persuade the California Supreme Court. But the U.S.
Supreme Court sent it back down to the California courts after it determined that
certiorari had been improvidently granted.143 Nike settled the case.144 The implications of
this type of state action for the SCF industry will be addressed below. Also, at least three
states allow their respective consumer protection statutes to be used for securities fraud,
which would bring the entire SCF industry under consumer fraud scrutiny.145
Additional statutes implicated are the federal Lanham Act, which regulates inter alia
fraud in the description of goods, services, or commercial activities,146 and laws
governing consumer finance. Consumer finance in the U.S. falls within the ambit of the
federal Truth-in-Lending Act (“TILA”)147 and the myriad of regulations promulgated
thereunder referred to collectively as Regulation Z.148 Banks and other lenders
advertising “zero interest loans” or “riba free loans” might in fact run afoul of the TILA
disclosure requirements and the restrictions on deceptive advertising. The Home
Ownership and Equity Protection Act (“HOEPA”)149, which is part of TILA, or the state
versions of HOEPA might also apply to what amounts to predatory lending to Shari’ahadherent
Muslims to the extent that the fees and costs are almost always higher than
conventional loans.
5. Due diligence and compliance statutes
The federal securities laws in several instances incorporate due diligence as defenses to
the anti-fraud provisions and as such are an integral part of any legal analysis for civil or
2 4
criminal exposure.150 In addition, due diligence is incorporated into several compliance
regimes such as the Bank Secrecy Act151 and the anti-money laundering statutes152, many
of which were modified by the Patriot Act. Insofar as SCF incorporates the Shari’ah
obligation to tithe and also requires the “purification” of profits earned in violation of
Shari’ah, the question for the legal practitioner is who decides what happens to the
monies gifted to charities and which charities are selected. Given the historical
connection between some of the largest and well-known Muslim charities and the
funding of terrorist groups153, these questions take on added focus in the context of
material support of terrorism. Finally, the structure of the Shari’ah authority boards and
their professional membership organizations also raise antitrust issues which must be
addressed.
E. The endogenous elements: disclosure of Shari’ah in SCF
1. The preliminary analysis
The first order of business for the attorney providing advice in the context of disclosure
laws to a U.S. financial institution interested in SCF should be the following question:
How intimate is the connection between SCF and Shari’ah itself? In legal terms, how
material is Shari’ah to SCF? If Shari’ah is a material part of SCF, the attorney must
confront the very real likelihood that it is a material fact of SCF in the context of
disclosure laws. While the answer to the question might appear self evident – that is,
Shari’ah has everything to do with SCF – all of the extant literature by legal scholars and
practitioners suggest that even if Shari’ah is a material component of SCF it is not
material to any of the disclosure laws because Shari’ah is treated as a black box that
merely turns out rules requiring objective filters to be coded into a software program and
specific kinds of contractual arrangements to avoid non-Shari’ah-compliant interest and
uncertainty.
But as the preceding pages have already suggested, when secular lawyers treat Shari’ah
as a black box that does not much concern them, except in the specific rulings relative to
a given investment or transaction, this amounts to a willful avoidance of material facts.
Those willfully avoided material facts are the endogenous elements of Shari’ah that
result in the “rules and principles” of SCF.154 Indeed, as indicated above, according to the
proponents and practitioners of SCF -- Shari’ah is not simply an approach to interestfree,
ethical Islamic business practices or investing. Invariably, SCF is described by its
proponents, practitioners, and scholars, as the contemporary Islamic legal, normative, and
communal response to the demands of modern day finance and commerce. What makes
the response “Islamic” or one pursued almost exclusively by Muslims155 is the fact that
this legal, normative, and communal response to modern finance is framed and regulated
by Shari’ah authorities ruling on what Shari’ah permits and what it prohibits. Thus,
whether called Shari’ah-compliant finance, Islamic economics and finance, or even
“ethical” investing, the one unifying characteristic of SCF in all of its ramifications is the
appearance of authoritative Muslim Shari’ah scholars who, individually and collectively
through various manifestations of consensus156, define the “rules and principles” of SCF
2 5
and set out how a Shari’ah-adherent Muslim may “lawfully” engage in commerce,
investing, and finance.
Further, the Shari’ah authorities are clear: SCF is not some discreet or segregable
component of Shari’ah. It is by all accounts a fully integrated discipline within the
corpus juris of Shari’ah which, in turn, is a holistic, all-encompassing way of life that
sets out legal mandates, norms, custom, and preferences to guide the Shari’ah-adherent
Muslim in every single aspect of life -- be it religious ritual, charity, business matters,
family issues and inheritance, war against the infidel, political life, or the afterlife.
Shari’ah is not divisible, moreover, in the sense that one might extract the SCF
“commercial legal code” from Shari’ah and end up with a body of laws articulating a
secular code of business conduct. This is demonstrated quite clearly by the prohibitions
against businesses that trade in pork products (seemingly a strictly dietary code issue) or
the leasing of a building to a church (quite obviously a theological consideration
informing a business law issue).157 Even in the legal rulings relating to whether a Muslim
bank or individual may receive interest from deposit accounts, the decision turns in large
part on whether the deposits reside in a jurisdiction called the “abode of war” where non-
Muslims predominate or the “abode of peace” where Muslims predominate.158
The inclusiveness, universality, and indivisibility of Shari’ah are not just evidenced by
the published work of the classical and contemporary Shari’ah authorities on the one
hand and the secular academic scholars who treat Shari’ah and its jurisprudence as a
discipline for study on the other. Especially important for the lawyer attempting to
determine what if anything the “Shari’ah” of SCF is in the context of disclosure laws,
and what if anything of this “Shari’ah” is material and subject to the duty to disclose, is
what Shari’ah actually is in practice. An attorney in search of the actual presentation of
Shari’ah as an extant and authoritative basis for law in modern times has the opportunity
to examine several Muslim regimes which have implemented Shari’ah as the law of the
land. The best examples of such implementation are Iran, Saudi Arabia, and Sudan.159
The Taliban of Afghanistan had also imposed a fully authoritative Shari’ah and many
other Muslim regimes have utilized aspects of Shari’ah to complement a non-Shari’ah
secular code. Obviously, the more a country’s laws are based upon Shari’ah, the better
the evidence of what Shari’ah is in actual practice devoid of all the academic theorizing
and parsing.160
It is not within the scope of this memorandum to determine what Shari’ah is in fact or
what it means to the contemporary Shari’ah authorities sitting as the final arbiters of
SCF. Examining the literature of Shari’ah over the course of its history, determining
what Shari’ah is in Muslim countries which apply traditional Shari’ah rules and
principles and, importantly, studying the published rulings by contemporary Shari’ah
authorities on what Shari’ah is161, what its purposes are, and what Shari’ah considers the
appropriate means to achieve those ends, are, however, all part of any essential inquiry
into the material endogenous elements of Shari’ah subject to disclosure.
2. The hypothetical: not so hypothetical
2 6
Notwithstanding a reluctance based on practical considerations to engage in a full
analysis of the material endogenous elements of Shari’ah, in order to provide a factual
predicate for the analysis of the disclosure (and other) laws that follow it will be helpful
to assume a fact or two about Shari’ah. Therefore, by way of example and for purposes
of the analysis, this memorandum assumes that after a good faith investigation, the
lawyer advising the financial institution desiring to enter the lucrative SCF industry will
determine that there is a reasonable basis to conclude that a consensus exists among
Shari’ah authorities on the fundamental purpose and methodologies of Shari’ah: The
purpose is submission. Shari’ah seeks to establish that Allah is the divine lawgiver and
that no other law may properly exist but Allah’s law. Shari’ah seeks to achieve this goal
through persuasion and other non-violent means. But when necessary and under certain
prescribed circumstances the use of force and even full-scale war to achieve the
dominance of Shari’ah worldwide is not only permissible, but obligatory.
While this memorandum poses these conclusions as a hypothetical, they are hardly
conjectural. In fact, they reflect the rulings of the classical Shari’ah authorities dating
back almost a millennium and include the most contemporary of Shari’ah authorities
issuing authoritative legal rulings today. Although post-9/11 scholarship on Islamic
terrorism has made the point that the terrorists almost always base their actions on legal
rulings by Shari’ah authorities,162 a wholesale confusion remains because policy-makers
and lawyers have not approached the doctrinal basis for Jihad or Islamic holy war
objectively or analytically. Indeed, other than the reflexive, “Islam is a noble religion of
peace,” no government agency or department, including the Departments of Homeland
Security and Defense, has undertaken a public analysis of the doctrines driving the
Islamic terrorists who seek the destruction of the U.S. and its constitutional
government.163 The result has been that, until recently, no scholar from any discipline
connected to this field of study has systematically examined the strategic doctrines which
provide the theoretical, legal, spiritual, and traditional motivations underpinning the war
on the U.S. and Western interests by the Islamic terrorist combatants.
In what amounts to a strategic and analytical tour de force, Major Stephen Collins
Coughlin, assigned to Military Intelligence in the U.S. Army Reserves, has produced a
study on Shari’ah and its foundational role as controlling doctrine for Shari’ah-adherent
terrorists in their holy war against the infidel.164 The unpublished study has been accepted
by the faculty of the National Defense Intelligence College in partial fulfillment of the
requirement for Coughlin’s Master of Science degree in Strategic Intelligence. The
strength of the study is that it examines meticulously Shari’ah as law as it is defined and
interpreted by Shari’ah authorities themselves. Further, the analysis surveys the binding
rulings of Shari’ah authorities from the classical periods dating back to the early days
after Mohammed’s death, including also the so-called Golden Era of Islamic
enlightenment, through the chaotic period around the fall of the Ottoman Empire and the
establishment of the secular-based military autocracies which continue to dominate most
of the Muslim world today, right through to the present. The contemporary survey also
includes a best-selling 7th grade text book used in Islamic day schools throughout the
U.S. to validate the study’s choice of authorities and to confirm that their legal rulings are
used pedagogically as the foundation for understanding traditional, Shari’ah-centered
2 7
Islam.165 Further, Coughlin carefully authenticates the authorities so that one is not
misled into accepting either a weak authority or an “extremist” view point. Finally, the
work is by far the best of any such scholarship attempted because it treats doctrinal
Shari’ah as Shari’ah expects to be treated and as evidenced by the published rulings of
the Shari’ah authorities: as a sectarian legal-political-military normative social construct
sourced in divine and immutable law.
What the study demonstrates beyond any reasonable doubt is that Shari’ah and the
doctrines of war articulated as the Law of Jihad are valid today as they were one
thousand years ago. Jihad should be implemented as circumstances permit, and the
contemporary authoritative Shari’ah scholars continue to teach, preach and issue legal
rulings to this effect. What Coughlin’s investigation further explicates is that, per
Shari’ah, once the Shari’ah authorities reach a consensus on a legal ruling or doctrine
which is based on the Qur’an and Hadith, that ruling or doctrine is considered immutable
and irrevocable.166 This adds yet further concretization to the rulings on Jihad because
the purpose of Islam and the methodologies to achieve those ends per Shari’ah are
universally accepted by the Shari’ah authorities with but relatively minor exceptions as to
specifics.167
Based upon a consensus of legal authorities, which Coughlin carefully documents by
traversing the full history of Shari’ah’s development across all extant legal schools, this
study places the Law of Jihad in a milieu permeated by the consequences of the
jurisprudential rule of consensus and indisputably establishes three fundamental points
relevant to this memorandum’s analysis:
[1] The goal of Jihad to convert or conquer the entire world and the
methodology to achieve this end by persuasion, by force and subjugation,
or by murder is extant doctrine and valid law by virtue of a universal
consensus among the authoritative Shari’ah scholars throughout Islamic
history.
[2] The doctrine of Jihad is foundational because it is based upon explicit
verses in the Qur’an and the most authentic of canonical Sunna and it is
considered a cornerstone of justice: until the infidels and polytheists are
converted, subjugated, or murdered, their mischief and domination will
continue to harm the Muslim nation. And,
[3] Jihad is conducted primarily through kinetic warfare but it includes
other modalities such as propaganda and psychological warfare.
These three points will serve as the background for the analysis below but will be stresstested
when the factual case studies are examined in Section III. If Coughlin’s thesis is
correct, there should be immediate evidence that contemporary Shari’ah authorities both
embrace the Law of Jihad as an extant doctrine for action by Shari’ah-adherent Muslims
and base their rulings on the classical Shari’ah authorities who fully embraced the
consensus on the Law of Jihad.
2 8
3. The legal analysis: applying the endogenous elements of Shari’ah to
the specific duty to disclose
As noted previously, the SCF industry in the U.S. includes a panoply of businesses which
fall within the regulatory sphere of the securities laws. Mutual funds tracking one of the
Islamic indexes, publicly traded bond issuances and the trading of securitized bond
issuances on a secondary market, and even U.S. public companies announcing their
commitment to conducting their business according to the principles of Shari’ah are
some of the more obvious examples. Do the facts of Shari’ah – representing the
overriding purposes of Shari’ah and the methods authorized to achieve those purposes –
require disclosure under the securities laws?
Failure to disclose a material fact (or the material misrepresentation of an asserted fact) is
the basis for administrative, civil, and criminal actions under all of the securities laws
requiring disclosure. The breach of this duty might arise in a registration, prospectus or
other required filing with the SEC or far more broadly “in connection with” a purchase or
sale of securities. For example, the 1933 Act imposes a number of requirements upon
issuers, underwriters, and dealers to make full and fair disclosures in securities
offerings.168 Section 11 of the 1933 Act (“Section 11”) provides that purchasers of
securities may sue for material misrepresentations or omissions in registration statements
as long as they did not know of the misrepresentation or omission at the time of
purchase.169 The dragnet under Section 11 for potential defendants is fairly wide and
includes: (1) any person who signed the registration statement; (2) any person who was a
director or partner of the issuer at the time of the filing of the registration statement; (3)
any person listed in the registration statement as a soon-to-be director or partner; (4)
every accountant, engineer, appraiser, or other expert named in the statement after having
consented, but only as to any liability arising from the portion of the statement attributed
to the specific expert; or (5) any underwriter of the securities.170 In addition, Section 12
of the 1933 Act (“Section 12”) authorizes a purchaser of securities to sue the offeror or
seller for any material misrepresentation or omission in a prospectus and adds “oral
communications” to the landscape.171 The depth of the exposure for both of these
provisions is the fact that a private plaintiff need not allege or show actual reliance on the
misrepresentation or show that the absence of the material omission was in fact a
contributing element.172
The pre-eminent statutory authority for civil and criminal liability exposure for failure to
disclose in securities transactions is Section 10(b) of the 1934 Act and its regulatory
offspring Rule 10b-5. This is so partly because it has been the source for most of the
litigation due to its breadth and the fact that it includes an implied private right of action
thereby adding private plaintiff and class action claims to the enforcement suits by the
SEC and by DOJ criminal prosecutions.173 The essential elements of a Rule 10b-5 action
are:
2 9
(1) a misstatement or omission; (2) of material fact; (3) with scienter; (4) in connection
with the purchase or the sale of a security; (5) upon which the plaintiff reasonably relied;
and (6) that the plaintiff's reliance was the proximate cause of his or her injury. 174
Once these elements of the Rule 10b-5 cause of action are established, a criminal penalty
can be imposed under section 32(a) if the government satisfactorily proves a willful
violation of the 1934 Act.175
While a thorough analysis of each of the fraud elements relative to the particulars of the
situation176 would be critical for the practitioner to undertake, this memorandum will
examine two of the unique elements to most fraud claims based upon allegations that the
defendant omitted material information about Shari’ah in various public filings and
representations: materiality and scienter. Because the discussion regarding materiality in
a federal securities fraud action are also applicable in the main to fraud claims alleged
under the common law, the state blue sky laws, or other anti-fraud federal and state
statutes, the discussion of materiality will not treat the latter separately. These two
elements of the fraud action are carved out for special attention in this memorandum
because a failure to consider these particular elements properly will likely contribute to
the conclusion that the Shari’ah black box poses no great risk to U.S. companies involved
in SCF. This conclusion, if reached without due consideration of the matters raised
herein, would be faulty and quite likely very costly. There will be a natural tendency by
practitioners to treat materiality and scienter as high hurdles for a government
prosecution, an SEC enforcement action, or a private civil claim because these lawyers
have treated Shari’ah as a black box into which they have refused to peer. They will then
consider the contents of that black box either immaterial in and of itself or irrelevant
since they will insist that there was no requisite intent on the part of their clients to
embrace the endogenous elements of Shari’ah.
a. Materiality
i. The Supreme Court’s standards
Materiality is a fundamental element for an action alleging a failure to disclose under the
securities laws and this is certainly the case for a plaintiff alleging that a defendant
violated such duty by not properly disclosing the real nature, purpose, and scope of
Shari’ah. The essential elements of such a claim might be, in addition to those set forth
above in the hypothetical factual predicate for this discussion, as follows:
(1) Plaintiff bought shares in a closed-end mutual fund which represented
itself to be Shari’ah-compliant.
(2) An important part of these representations was the high-repute of the
Shari’ah advisory board members who were to watch over the fund’s
Shari’ah compliance.
3 0
(3) Various representations by the defendant financial institution and its
agents and representatives spoke of the ethical and socially responsible
nature of Shari’ah.
(4) It was subsequently discovered and made public that the Shari’ah
advisory board members all treated the rulings and pronouncements of Ibn
Taymiyyah, a fourteenth-century Hanbali Shari’ah authority and scholar
“with strikingly modern-sounding views” on commerce and finance177, as
authoritative. It was also discovered and made public that Ibn Taymiyyah
was a key Shari’ah authority for most of the terrorists associated with al
Qaeda. Ibn Taymiyyah, it turns out, was a leading advocate of a Shari’ah
centered political organization for Muslims which would declare holy war
against infidels and Muslims who rejected Shari’ah. In fact, all sorts of
“Islamists” who have declared war on the U.S. and seek the establishment
of a worldwide Caliphate are students and followers of the Shari’ah “rules
and principles” espoused by Ibn Taymiyyah insofar as he advocates
Muslims to war against infidels.178
(5) There is a consensus among Shari’ah authorities from all schools of
Shari’ah jurisprudence that forced subjugation or Jihad against non-
Muslims is obligatory when efforts to peacefully convert the non-Muslims
fail and war is a viable option.
In addition to these allegations which would support an SEC enforcement action or a
private right of action for rescission, a plaintiff might opt to pursue damages. In such a
case, one might anticipate the following: When the information alleged above became
public knowledge, the fund suffered irreparable reputational damage and many of the
U.S. investors sold their shares in the mutual fund causing the value of the traded shares
to plummet. The complaint would also allege that the plaintiff purchased shares in the
mutual fund without knowing anything about Shari’ah other than what the defendants
represented to the public. Since the defendants promoted their Shari’ah authority board
members as highly respected scholars and authorities in their field and since these
authorities ruled that Shari’ah forbade interest and excessive speculation in investments,
and also prohibited investing in various “vice” industries, the plaintiff reasonably relied
on these representations in the belief that Shari’ah was a “socially responsible” business
practice and worth utilizing as an investment “screen”. Had the plaintiff known the facts
about Shari’ah as they have now come to light, plaintiff would never have invested in a
Shari’ah-compliant mutual fund. In addition to damages, the plaintiff would likely apply
to certify the class of similarly situated investors.
The first issue confronting the plaintiffs under Rule 10b-5, the broadest of the federal
securities anti-fraud statutes, will be whether the omissions of fact relating to Shari’ah
doctrine relative to the treatment of apostates (both non-Muslims and Muslims) were
material. Insofar as this question of materiality as phrased would be one of first
impression for an appellate court, legal counsel advising a U.S. financial institution on
the liability exposure for SCF would turn to the courts’ general pronouncements for
3 1
guidance. The leading decision in this area is TSC Industries, Inc. v. Northway, Inc.,179
where the Supreme Court was asked to wade into the question of whether a failure to
disclose in the context of a proxy solicitation was material. The case involved the
acquisition of the target company TSC Industries by National Industries through the
purchase of a controlling interest. After the acquisition, National Industries sought to
acquire all of the assets of TSC Industries and to liquidate the corporate shell. To
accomplish this, TSC Industries issued a proxy statement to its shareholders soliciting
their approval. The vote passed. A shareholder of TSC Industries, Northway, Inc., sued
under section 14(a) of the 1934 Act (“Section 14(a)”) and the SEC rules promulgated
thereunder, Rules 14a-3 and 14a-9. 180 The essential material fact at issue was who was
really in control. While the Court ultimately concluded that there were sufficient
disclosures to inform a reasonable investor, the analysis the Court used to get to that
conclusion provides the basis today for the materiality analysis.
The Court began by clearly rejecting what it considered too low a threshold for
materiality as adopted by the lower court. The Court considered a standard of “all facts
which a reasonable shareholder might consider reasonable”181 “‘too suggestive of mere
possibility, however unlikely.’”182 The Court went on to explain in detail the objective
standard it chose for materiality:
The question of materiality, it is universally agreed, is an objective one,
involving the significance of an omitted or misrepresented fact to a
reasonable investor. Variations in the formulation of a general test of
materiality occur in the articulation of just how significant a fact must be
or, put another way, how certain it must be that the fact would affect a
reasonable investor's judgment.
. . .
The general standard of materiality that we think best comports with the
policies of Rule 14a-9 is as follows: An omitted fact is material if there is
a substantial likelihood that a reasonable shareholder would consider it
important in deciding how to vote. . . . It does not require proof of a
substantial likelihood that disclosure of the omitted fact would have
caused the reasonable investor to change his vote. What the standard does
contemplate is a showing of a substantial likelihood that, under all the
circumstances, the omitted fact would have assumed actual significance in
the deliberations of the reasonable shareholder. Put another way, there
must be a substantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable investor as having significantly
altered the "total mix" of information made available.183
While the Court in TSC Industries set about to explain materiality in the context of proxy
statements, this articulation of materiality has become the operative definition in many
other contexts of securities fraud. In a Rule 10b-5 case alleging failure to disclose premerger
negotiations, the Court utilized the TSC Industries standard in an effort to add
3 2
clarity to the concept of materiality for future or contingent events. In Basic, Inc. v.
Levinson184, the Court confronted the question when pre-merger negotiations are material
and ripe for disclosure. Negotiations over some contingent and future event may, it turns
out, be quite material:
Even before this Court’s decision in TSC Industries, the Second Circuit
had explained the role of the materiality requirement of Rule 10b-5, with
respect to contingent or speculative information or events, in a manner that
gave that term meaning that is independent of the other provisions of the
Rule. Under such circumstances, materiality “will depend at any given
time upon a balancing of both the indicated probability that the event will
occur and the anticipated magnitude of the event in light of the totality of
the company activity.” SEC v. Texas Gulf Sulphur Co., 401 F. 2d, at 849. .
. .
In a subsequent decision, the late Judge Friendly, writing for a Second
Circuit panel, applied the Texas Gulf Sulphur probability/magnitude
approach in the specific context of preliminary merger negotiations. After
acknowledging that materiality is something to be determined on the basis
of the particular facts of each case, he stated:
“Since a merger in which it is bought out is the most important event that
can occur in a small corporation's life, to wit, its death, we think that
inside information, as regards a merger of this sort, can become material at
an earlier stage than would be the case as regards lesser transactions -- and
this even though the mortality rate of mergers in such formative stages is
doubtless high.”
SEC v. Geon Industries, Inc., 531 F. 2d 39, 47-48 (CA2 1976). We agree
with that analysis.185
Arguably, the question whether the Shari’ah in SCF is a material fact that ought to be
disclosed will rest on one of two analytical approaches, or possibly both. The first
approach seeks to determine the materiality of Shari’ah in principle. This approach might
be phrased in question form as follows: Would a post 9-11 reasonable investor consider
the connection between Shari’ah and SCF important to his or her decision to invest? In
other words, would a reasonable investor looking to invest in something promoted (or in
some instances simply represented) as “Shari’ah-compliant” want to know what Shari’ah
and its “rules and principles” say about constitutional government, treatment of infidels,
the Law of Jihad, and the use of suicide-homicide bombers and other acts of terrorism?
Would the reasonable investor want to know about the published statements by
international terrorist leaders citing Shari’ah authorities as justification for their holy war
against the U.S. and other Western nations? These and similarly phrased questions all
attempt to get at the associational link between Shari’ah in principle as an authoritative
set of rules and principles advocating violence and SCF. If in fact such an association
exists, would it be material information to a reasonable investor?186
3 3
The second analysis relevant to materiality goes beyond the association in principle of
SCF with Shari’ah and its call to violence and asks whether there is enough evidence of
an association in fact. In other words, is the connection between Shari’ah and terror and
violence theoretical or is there admissible evidence of a relationship in fact. This analysis
might be framed in the question: is the nexus between Shari’ah and terror and violence so
contingent or speculative that it would render any theoretical association between
Shari’ah and violence or the “call to violence” immaterial? This is another way of
analyzing the argument often made against any association between Shari’ah or Islam
and violence. In the context of Shari’ah, the argument is made that Shari’ah can be
interpreted in peaceful ways or in violent ways and that those Shari’ah authorities who
interpret Shari’ah violently and in ways that would shock the conscience of a reasonable
U.S. investor (or in a lesser way, that might be simply material to the investor) are the
extremists and represent such a small percentage of the recognized Shari’ah authorities
that it would render any such theoretical or conceptual link between Shari’ah and
violence against non-Muslims and non-Shari’ah-compliant Muslims so tenuous and
attenuated as to be immaterial to a reasonable investor. In short, this is an argument that
accepts that violence is associated in principle with Shari’ah,187 but argues that the
association in fact is trivial (or at least less than material) because it is not representative
of Shari’ah as espoused by the vast majority of contemporary Shari’ah authorities.
While Coughlin’s investigation and documentation would demonstrate this argument to
be lacking evidentiary credibility, the analysis in a courtroom would likely turn on an
examination of the facts and the law. As the Court opined in TSC Industries, “[t]he issue
of materiality may be characterized as a mixed question of law and fact, involving as it
does the application of a legal standard to a particular set of facts.”188 In addition to a
simple factual showing that Islamic terrorists base their raison d’être for violence on the
dictates of Shari’ah as expressed by the classical Shari’ah authorities and some
contemporary ones, the fact question as presented might also be addressed by introducing
evidence establishing what the contemporary Shari’ah authorities consider the purposes
and authorized methods of Shari’ah to be. This question might be presented to a jury by
introducing evidence (i) of the rulings of the contemporary Shari’ah authorities, (ii) of
the rulings of classical Shari’ah authorities upon which the contemporary authorities
have relied, and (iii) of Shari’ah in actu, which would include the brief on those Muslimdominated
regimes generally recognized as following Shari’ah, including their Shari’ahbased
criminal codes and punishments and their track record for violations of the basic
norms of the Law of Nations and human decency.189
The legal, in contrast to the purely factual, question presented by this second analysis will
not be different in kind from the first analytical approach, which the reader recalls as the
association in principle between Shari’ah, its call to violence, and SCF. In both, one must
determine if the law requires disclosure of qualitatively material facts as opposed to
strictly quantitatively material facts. Quantitative materiality requires companies only to
disclose hard, empirical facts such as financial data and any criminal convictions of
management personnel. Qualitative materiality requires a fuller disclosure of a whole
range of behaviors that might be considered unethical or even illegal but which have not
yet resulted in an actual conviction.190
3 4
While qualitative materiality is frowned upon by the courts and commentators because it
renders the duty to disclose open to wholesale uncertainty about what must be disclosed
in the first instance, the problem of disclosure for the Shari’ah-compliant financial
institution is not circumscribed by this concern. Disclosure remains a significant legal
issue for the company looking to promote its SCF business (or simply to disclose publicly
the involvement in SCF) because of the difference between whether a duty to disclose
exists in the first instance and what must be disclosed to make a partial disclosure not
misleading to the reasonable investor.191 Thus, to the extent a SCF business actively
promotes its SCF business or includes SCF within the risk factors in its SEC filings, this
disclosure opens the door to a full and accurate disclosure of all facts which a reasonable
investor would find material. It hardly seems in doubt that a post-9/11 investor, in
contemplating an investment in something represented as Shari’ah-compliant, would
consider material any factual link between Shari’ah and the call for violence against non-
Muslims and non-Shari’ah-compliant Muslims, or more specifically against the U.S. or
U.S. interests abroad. Indeed, it would be improbable that a post 9-11 investor would not
want to know what Shari’ah says about the Law of Jihad and the use of Shari’ah by
Islamic terrorists even if the reporting company made no disclosure or representation
about being Shari’ah-compliant. The fact of Shari’ah compliance would likely be
sufficiently material for the duty of disclosure to exist independently of any partial
representation.192
The confusion at a procedural level for the legal advisor attempting to weigh the
materiality issue within the overall analysis of liability exposure might be the existence of
counter factual claims suggesting that Shari’ah has a peaceful face in addition to its
connection to Islamic terror. But these “counter-facts” would simply create a fact
question. This suggests that a well-pled complaint alleging a sufficient nexus between
SCF, Shari’ah, terror, and violence, would survive a motion for summary judgment. This
seems especially true given the effectiveness of Shari’ah-inspired terrorists to convert
calls for violence based upon Shari’ah into actual violence. Moreover, as this
memorandum examines below the specific Shari’ah authorities and their organizational
structures, the factual nexus between SCF, terror, and violence will become much clearer.
ii. Global Security Risk: a material fact?
The close nexus in the hypothetical factual predicate for this discussion between Shari’ah
and global terrorism is, as explained above, more than just theoretical. Efforts by
corporate legal counsel to dismiss these concerns will invariably run up against the wall
of common understanding linking in material ways the violent and oppressive world of
Shari’ah one hears about in the public media193, terrorism committed in the name of
Shari’ah194, Shari’ah itself195, and something calling itself SCF. This common
understanding has already begun to articulate itself in the debate over materiality in the
context of what is a material or relevant disclosure with respect to shareholder proxy
statements.
3 5
In at least two instances, the New York City Comptroller (“Comptroller”), as the
custodian and trustee of several major New York City employee pension funds which had
acquired substantial stock in Halliburton Company (“Halliburton”) and General Electric
(“GE”), demanded that these two U.S. multi-national corporations doing business in Iran
approve a shareholder proposal at their respective annual meetings to examine the
“potential financial and reputational risks” associated with doing business in terrorsponsoring
countries.196 The first effort was directed against Halliburton and began in late
2002 and culminated in a final negative response to Halliburton’s request for an SEC noaction
letter in March 2003. The company argued that Rule 14a-8(i)(5) of the 1934
Act197, the portion captioned “Relevance”, provides that matters relating to operations
that are financially de minimis198 and are “not otherwise significantly related to the
company’s business” may be omitted by the company.199 Specifically, Halliburton argued
that its business in Iran was not only less than the quantitative minimum but also that the
terror conducted by Iran or somehow intimately related to Iran and its status as one of the
three countries designated by the State Department as “state sponsors of terror” had
nothing to do with Halliburton’s business per se. Also, any adverse consequences would
not affect Halliburton because it was not a retail company and subject to public
opprobrium. In other words, much like the materiality analysis discussed above,
Halliburton would attempt to make relevance/materiality turn on a threshold quantitative
test and then argue that qualitatively its business was not affected by any terror-related
events even if the state and non-state actors with which it did business were engaged in
terror.
The SEC refused to grant a no-action letter. What is instructive is the Comptroller’s
correspondence submitted to the SEC in response to Halliburton’s arguments:
The Funds [controlled by the Comptroller] assert that Halliburton’s
dealings with a reported terrorist state could cause a loss of consumer
confidence by the individuals who purchase Halliburton’s energy services
-- its “consumers.” The Company’s reference elsewhere in its letter to the
“expectations and desires of its customers” only serves to demonstrate
further the significance of consumer confidence. Further, retail
establishments are not the only suitable locations at which to mount a
public protest -- Halliburton has offices throughout the world.
Moreover, as a result of 9/11, the public has a consistent and intense
interest in terrorism. On January 29, 2002, President Bush, in his State of
the Union address, focused on three states, which are egregious sponsors
of terrorism: Iran, Iraq and North Korea. He stated that these states
constitute an “axis of evil.” That focus will inevitably result in careful
attention to Halliburton’s dealings through the Subsidiary in one of those
states.
. . .
3 6
The link between Iran and Halliburton is of special interest to the public,
including institutional, professional and non-professional investors, who
are paying a great deal more attention to the relationship between their
investments and terrorism. Thus, for example, a recent article in Barron’s,
“Under Scrutiny: Pension Funds Are Reconsidering Investments in
Companies that Do Business With Rogue Nations,” discusses the Global
Security Risk database200, which lists companies that it claims are
operating in one or more of the six nations with which U.S. companies are
prohibited from doing business directly. Iran is one of these nations.
Because the public has a legitimate interest in states such as Iran that
sponsor terrorism as well as concern regarding the effect of terrorism on
investors’ assets, the (i)(5) exclusion has no application here. Halliburton
does not dispute that the [Halliburton] Subsidiary conducts operations in
Tehran. As such, Halliburton could be perceived as providing support to
Iran. This perception could compound criticism arising from Halliburton’s
previous dealings, such as its $3.8 million fine and guilty plea in 1995 to
charges it had exported oil-field equipment to Libya in violation of a U.S.
government trade ban. See The Houston Chronicle (July 15, 1995). Such a
perception could hurt the Company’s reputation and in the end, adversely
affect the Company’s financial health. In fact, the Funds’ Proposal is a
model of a proposal that is significantly related to a company’s business,
and therefore, relevant, even if the matter accounts for only a low
percentage of the Company’s business.
Halliburton has not only failed to offer any prior authority in support of its
position, it has also not mentioned its own recent failed effort to persuade
the Division [of Corporate Finance of the SEC] to issue no-action relief on
a similar proposal relating to Burma. In 2001, the Division denied
Halliburton’s request for “no-action” relief under Rule 14a-8(i)(5).
Halliburton Company (February 26, 2001). The shareholder proposal in
2001 sought to have a committee of independent directors prepare a report
regarding projects undertaken by the Company or any subsidiary in
Burma, with an emphasis on describing steps taken to assure that neither
Halliburton nor any of its subsidiaries is involved in or appears to benefit
from use of forced labor or other human rights abusers in Burma.
Halliburton argued that the proposal should be excluded because assets,
earnings and sales did not exceed the Rule’s thresholds and the proposal
was not otherwise significantly related to Halliburton’s business. The
Company further argued that neither the Company nor its subsidiaries
benefited from the use of forced labor or human rights abuses in Burma.
The proponent argued that Burma had been ruled for over a decade by a
military dictatorship condemned for human rights abuses; that several
years prior, the U.S. government banned new investment in Burma; and
that many U.S. companies, including Texaco and Atlantic Richfield had
3 7
voluntarily withdrawn from Burma. The proponent further stated that
Halliburton once had extensive operations in Burma, which could come
back to damage the Company. Of particular relevance to the subject
situation, the proponent stated that Halliburton currently had an office in
Burma.
The Division viewed the proposal as one that was otherwise significantly
related and did not grant the relief sought. We submit that the Division
should follow the same approach here.201
Almost two years later, the SEC took the same hands-off policy when GE came knocking
at the door also seeking a no-action letter to support its contention that it need not include
a proxy proposal by the Comptroller at its annual shareholders’ meeting which mirrored
the earlier proposal submitted to Halliburton.202 In its correspondence in opposition to
GE’s request, the Comptroller quoted at length from the Congressional Conference
Report on the 2004 Budget, which requested that the SEC establish an Office of Global
Security Risk, to evaluate the risks caused by the conduct of business operations in
terrorist states:
The Committee is concerned that American investors may be unwittingly
investing in companies with ties to countries that sponsor terrorism and
countries linked to human rights violations. For example, the Committee is
aware of certain companies listed on U.S. exchanges that are linked to
human rights abuses in Sudan. The Committee believes that a company’s
association with sponsors of terrorism and human rights abuses, no matter
how large or small, can have a material adverse effect on a public
company's operations, financial condition, earnings, and stock prices, all
of which can negatively affect the value of an investment. In order to
protect American investors’ savings and to disclose these business
relationships to investors, the Committee directs the Commission to
establish an Office of Global Security Risk within the Division of
Corporation Finance. The duties of this office shall include, but not be
limited to: (1) establishing a process by which the SEC identifies all
companies on U.S. exchanges operating in State Department-designated
terrorist-sponsoring states; (2) ensuring that all companies sold on U.S.
exchanges operating in State Department-designated terrorist-sponsoring
states are disclosing such activities to investors; (3) implementing
enhanced disclosure requirements based on the asymmetric nature of the
risk to corporate share value and reputation stemming from business
interests in these higher risk countries; (4) coordinating with other
government agencies to ensure the sharing of relevant information across
the Federal government; and (5) initiating a global dialogue to ensure that
foreign corporations whose shares are traded in the United States are
properly disclosing their activities in State Department-designated
terrorist-sponsoring states to American investors. The Commission is
3 8
directed to provide the Committee with quarterly reports on the activities
of the Office of Global Security Risk.203
The Comptroller returned to the theme of a special office within the SEC designed by
Congress to supervise U.S. companies association with terror and their disclosure of the
“global security risk” attendant to such conduct in their public filings:
On March 31, 2004, Chairman Donaldson testified before Congress on the
Commission’s progress in establishing the Office of Global Security Risk:
Additionally, as part of ongoing enhancements to our review
program, we have established two new offices within the Division
of Corporation Finance: The Office of Disclosure Standards, which
will evaluate the review policies and review results of the
Division’s review program as carried out by its eleven review
offices; and The Office of Global Security Risk, created in
response to the 2004 appropriations report language. The Office of
Global Security Risk, which will function within the traditional
disclosure mission of the Commission, will have the following
primary objectives: to identify companies whose activities raise
concern about global security risks that are material to investors; to
obtain appropriate disclosure where merited; and to share
information as necessary and appropriate with, the other, key
government agencies responsible for tracking terrorist financing.
The Office of Global Security Risk will focus on asymmetric risk
by assisting review staff in giving consideration to whether U.S. or
foreign companies that are registered with the SEC have operations
or other exposure with or in areas of the world that may subject it
and its investors to material risks, trends or uncertainties. This
consideration would include whether a company has operations in
a country or area of activity where political, economic or other
risks exist that are material, or whether a company faces public or
government opposition, boycotts, litigation, or similar
circumstances that are reasonably likely to have a material adverse
impact on a company’s financial condition or results of operations.
“Testimony Concerning Fiscal 2005 Appropriations Request for the U.S.
Securities and Exchange Commission”, Statement of William H.
Donaldson, before the Subcommittee on Commerce, Justice, State, and the
Judiciary, Committee on Appropriations, United States House of
Representatives, March 31, 2004.204
Ultimately, the SEC did establish its Office of Global Security Risk whose mission and
operational tack are described on its Internet site as follows:
3 9
The global risk environment has changed dramatically over the past few
years, and continues to change almost daily as we learn of new or possible
threats of terrorist activity around the world. The SEC and its Division of
Corporation Finance have a unique role in seeking to enhance the
investing public’s access to the information it needs about any public
company to make an informed investment decision, including material
information about global security risk.
The federal securities laws are premised on the idea that a company must
disclose information that a reasonable investor would think is material, in
light of the circumstances under which the disclosures are made (including
the mix of information), in assessing an investment in the company. The
Commission’s disclosure-based regulatory approach has served the
investing public and this agency well over the years, and the standard for
disclosure - that of materiality - has long been the foundation of the
Commission's work. We are committed to maintaining the materiality
standard as the basis for our disclosure-based approach.
At the direction of Congress, we have established the Office of Global
Security Risk within the Division of Corporation Finance. This office
works closely with our Division review staff to monitor whether the
documents public companies file with the SEC include disclosure of
material information regarding global security risk-related issues. The
staff of the Office of Global Security Risk is taking steps to apprise our
Division review staff of significant developments in this area of which it
becomes aware, and is thereby assisting the Division in maintaining high
standards of review in considering these issues.205
What is clear from this analysis is that U.S. companies can no longer consider their
associations with countries or entities tainted by terror a private, non-material, or
irrelevant matter. While the courts have not yet entered the fray, the executive and
legislative branches have laid down some markers. This analysis suggests that the closer
a company gets to a “state sponsor of terror”, the more it has to disclose. Prudent counsel
suggests that the closer a company gets to any association with terror, the more it has to
disclose. The obvious question raised by the two proxy examples above would be: if a
shareholder submits a proxy proposal to a publicly reporting financial institution involved
in SCF requiring a full study of the risks associated with Shari’ah, will the company have
legitimate grounds to argue that the risks of Shari’ah and its connection to terror are not
relevant? Outside of the proxy arena, if a company engages in SCF and represents to the
public that Shari’ah is a standard set by Shari’ah authorities relied upon by the company,
has the company disclosed enough about Shari’ah to tell the whole story? Given the
hypothetical this analysis has been working with, the answer would appear to be “no”.
The tide has certainly turned and 9/11 seems to have been a significant catalyst. Congress
and the SEC are focusing on what kinds of disclosure are required when a U.S. public
company operates in locations and deals with parties which implicate terrorism.
4 0
Shareholders like the New York City pension funds have also voiced their view that
disclosing ties to terrorism are no longer subject to theoretical discussion but have
become central to what shareholders expect in disclosure statements. While the SEC’s
Office of Global Security Risk is focusing on links between U.S. businesses and terrorsponsoring
regimes, the broader context of this focus suggests a fortiori that associational
doctrinal relationships with terror and violence raise far more pressing issues of
disclosure than mere geographical relationships.206 Arguably, doing business in Iran is a
lesser connection to terrorism than promoting a financial system initiated originally, and
promulgated still, by politically minded “Islamists”207 who seek the infusion of Shari’ah
as a political-military mandate in the lives of all Muslims – meaning in their personal,
commercial, and political lives -- and which is in fact the doctrine pursued by al Qaeda
and the other regimes, groups, and individuals supporting Jihad against non-Muslims and
apostates in one form or another. The question whether the Shari’ah-terror link is
sufficient to create a legal duty has not been formally decided but no marginally prudent
legal adviser can responsibly ignore it. Further, the fact that the duty to disclose arises in
the SCF context only after some initial representation about the company’s involvement
with Shari’ah appears to lower whatever threshold question might exist in legal counsel’s
calculus.208
b. Scienter
Unlike materiality, which is an element in any type of fraud action, scienter, or intent, is a
critical element of the common law and of most statutory provisions imposing liability on
a wrongdoer, but certainly not all.209 As classically understood by the common law, a
plaintiff’s claim for deceit could only survive a motion to dismiss (or its equivalent) if the
pleadings properly alleged that the defendant knew of the falsity of the representation and
that the false representation was made in an effort to induce reliance by the plaintiff. It is
well known that over time, this standard has been relaxed to include not merely false
representations but also half-truths. This means that having opened the door to a
representation, the putative defendant must be certain to have told the whole truth, or at
least, as set out above, the whole material truth.210
But the question still remains: Having omitted some important part of the story, and
assuming that omission was material, did the defendant withhold the omitted part (a)
knowingly and (b) with intent to deceive? Successful civil and criminal fraud litigation is
as much about properly alleging scienter as it is proving it.211 Judges will decide the
former; jurors are most likely to decide the latter212, although it is fair to say that a
defendant who cannot get a judge to dismiss fraud claims as a matter of law due to faulty
allegations is more than likely to settle or, in the criminal world, to accept a plea bargain,
so as not to face a jury verdict looking to right a wrong.
Today, fraud claims alleging a failure to disclose might be based upon violations of
federal securities laws, state blue sky laws, state consumer protection laws, and other
federal and state anti-fraud statutes. While the common law has generally moved away
from requiring a specific intent to defraud and toward a standard of recklessness -- and in
those jurisdictions which have adopted Section 552 of the Restatement (Second) Of
4 1
Torts213 the move has included even negligent misrepresentation -- specific claims under
federal or state anti-fraud statutes will vary depending upon the statute, the specific
jurisdiction, and whether the action is administrative, civil, or criminal.
For example, under federal securities laws, there are statutes and rules permitting SEC
administrative and civil enforcement actions and private causes of action which do not
impose a requirement to plead or prove scienter. Thus, under the 1933 Act, which has
arguably become far more important for those seeking to pursue class action claims214,
Sections 17(a)(2) and (a)(3) are free of any scienter requirement for SEC civil actions and
to the extent that a private right of action exists, and there is authority for such, the noscienter
rule is likely to extend to private plaintiffs.215 Also, Section 11, which relates to
misrepresentations in a registration statement, imposes an absolute liability on the issuer
without any reference to scienter but does provide for reasonable care defenses as a kind
of substitute for scienter for other defendants.216 Section 12(2) imposes liability without
reference to scienter in public offerings217 but provides an out for the defendant who can
“sustain the burden of proof that he did not know, and in the exercise of reasonable care
could not have known, of such untruth or omission.”218
Another serious avenue for enforcement which avoids the scienter issue arises under the
Investment Advisors Act of 1940 (“Investment Advisors Act”). Fund managers who
embrace SCF while ignoring Shari’ah as a material part of the disclosure will quite likely
face serious scrutiny as the SEC and large city and state institutional investors (i.e.,
government worker pension funds) come to understand the intimacy between the terms
“Shari’ah-compliant”, “Islamic finance”, and even “socially responsible Islamic
investing” and the Shari’ah witnessed in Iran, Saudi Arabia, and Sudan. Indeed, a SCF
investment or business which attempts to disguise the “Shari’ah” and utilize a less
emotionally charged term has just added to its exposure exponentially since that would
certainly be circumstantial evidence that the putative defendants knew of the dangers of
Shari’ah and sought to minimize them by using a more acceptable public relationssensitive
nomenclature. In other words, the choice to avoid the word Shari’ah is likely to
be a central evidentiary proof at trial on the issue of scienter.
Specifically, investment advisers under the Investment Advisors Act, including those
who might otherwise fall within a registration exemption (i.e., the fund manager to an
exempt hedge fund or “pooled investment vehicle”), come within its quite broad antifraud
provisions. Thus, under Rule 206(4)-1:
a. It shall constitute a fraudulent, deceptive, or manipulative act, practice,
or course of business within the meaning of section 206(4) of the Act for
any investment adviser registered or required to be registered under
section 203 of the Act, directly or indirectly, to publish, circulate, or
distribute any advertisement:
. . .
5. Which contains any untrue statement of a material fact, or which
is otherwise false or misleading.219
4 2
Rule 206(4)-8, captures the pooled investment fund advisors:
a. Prohibition. It shall constitute a fraudulent, deceptive, or manipulative
act, practice, or course of business within the meaning of section 206(4) of
the Act for any investment adviser to a pooled investment vehicle to:
1. Make any untrue statement of a material fact or to omit to state a
material fact necessary to make the statements made, in the light of
the circumstances under which they were made, not misleading, to
any investor or prospective investor in the pooled investment
vehicle; or
2. Otherwise engage in any act, practice, or course of business that
is fraudulent, deceptive, or manipulative with respect to any
investor or prospective investor in the pooled investment vehicle.
b. Definition. For purposes of this section “pooled investment vehicle”
means any investment company as defined in section 3(a) of the
Investment Company Act of 1940 or any company that would be an
investment company under section 3(a) of that Act but for the exclusion
provided from that definition by either section 3(c)(1) or section 3(c)(7) of
that Act .220
As the Supreme Court made clear in SEC v. Capital Gains Research Bureau, 375 U.S.
180, 195 (1963), the Investment Advisors Act was meant to safeguard the fiduciary
relationship between the advisor and the investor. The nature of the SEC proceeding, the
heightened duty of such fiduciaries, and the purposes of the act, eliminate the need to
show intent to injure as in common law fraud.221 The exposure of investment advisors to
the claim they have a duty to disclose all of the material facts about Shari’ah prior to any
investment in a SCF fund, securitization, or company, seems quite substantial, which is
further highlighted by the complete lack of attention given the duty and its breach by the
SCF industry.
While scienter’s common law and statutory roles appear greatly diminished in the
contexts discussed above, that is not the case for implied rights of action under Rule 10b-
5. It is well documented in the literature and disparate court opinions across the federal
circuits that Congress and the Supreme Court have gone a long way to gut both the 1934
Act and the blue sky laws of their private class action fear factor -- in part by requiring
strict pleading of all necessary elements including scienter.222 What the attorney
representing the financial institution must keep in mind, however, is that the SEC and
large institutional private plaintiffs with significant investments at stake will continue to
employ Rule 10b-5 and state securities anti-fraud provisions quite effectively. Large
institutional investors with huge investment portfolios are less inclined to turn to class
actions when they can bring far more manageable private civil claims which carry
enough investment clout to make a difference to the defendant.
4 3
Moreover, even after the Supreme Court’s decision in the oft-cited Ernst & Ernst v.
Hochfelder case223, while a Rule 10b-5 allegation will require far more than negligence, it
is likely that a reckless disregard for the truth suffices. Furthermore, this is as much about
artful pleading as it is about trying to nail down the legal standard. This is especially the
case after a financial institution opens the door to a partial but misleading truth.224 Thus, a
financial institution, which recognizes the threshold duty to disclose something about
Shari’ah and the Shari’ah authorities who set the standards for their particular SCF
investment or business, must be extremely careful to capture all of the material facts
about what Shari’ah is, its purposes, and methods. Failure to recognize any extant
connection between Shari’ah and terror and violence after providing some banal
representation about Shari’ah as divine Islamic law based on the Qur’an, the Sunna, and
legal rulings of the competent Shari’ah authorities, will likely suffice to satisfy the
scienter requirement at least at the pleadings stage.
Recklessness, especially in a case where a representation was made but without all the
requisite material facts, is a notoriously fact-based standard which allows a showing of
proof through circumstantial evidence.225 The case law suggests a “totality of the
circumstances” test where a variety of factors come into play to establish recklessness.226
The specific factors typically cited can be characterized in rubric form to include an
analysis which examines: how material the omission was; how available were the omitted
facts to the defendant; was there an extant standard of care in the industry giving rise to a
duty to disclose the omitted facts; how egregious was the breach; and what were the
likely consequences (i.e., benefits to defendant/damages to plaintiff) of not disclosing the
material facts. In the case studies presented in Section III below, these questions will be
addressed within two fact-specific settings to begin to flush out the liability exposure
facing a financial institution which promotes SCF but ignores Shari’ah.227
Rule 10b-5 is important because it operates as a ‘catch-all’ anti-fraud statute with an
implied private right of action. But beyond Rule 10b-5, there are many state securities
laws which require no scienter and are broader in their reach than Rule 10b-5. Arizona’s
blue sky anti-fraud provisions have been given a quite expansive reach to get at all kinds
of securities fraud and without the burden of scienter.228 Arizona blue sky laws also
permit punitive damages.229 In addition, at least three states provide for a securities fraud
claim under their respective consumer anti-fraud statutes230, of which two have a private
right of action allowing for punitive damages.231 Furthermore, even a state like
California, which does not recognize securities fraud as a cause of action under its very
expansive consumer fraud statute, will allow a consumer fraud claim relating to a
“holder” of securities where the allegation is of fraud but not in connection with the
“sale” or “purchase” of a security.232 These state consumer fraud actions are
devastatingly effective weapons in the hands of a sophisticated plaintiffs’ bar against
financial institutions treading blindly down the seemingly golden path of SCF.
4. Sedition: Shari’ah as the advocacy of the violent overthrow of the U.S.
government
Title 18 (the federal criminal code), Section 2385 states:
4 4
§2385. Advocating overthrow of Government
Whoever knowingly or willfully advocates, abets, advises, or teaches the
duty, necessity, desirability, or propriety of overthrowing or destroying the
government of the United States or the government of any State, Territory,
District or Possession thereof, or the government of any political
subdivision therein, by force or violence, or by the assassination of any
officer of any such government; or
Whoever, with intent to cause the overthrow or destruction of any such
government, prints, publishes, edits, issues, circulates, sells, distributes, or
publicly displays any written or printed matter advocating, advising, or
teaching the duty, necessity, desirability, or propriety of overthrowing or
destroying any government in the United States by force or violence, or
attempts to do so; or
Whoever organizes or helps or attempts to organize any society, group, or
assembly of persons who teach, advocate, or encourage the overthrow or
destruction of any such government by force or violence; or becomes or is
a member of, or affiliates with, any such society, group, or assembly of
persons, knowing the purposes thereof—
Shall be fined under this title or imprisoned not more than twenty years, or
both, and shall be ineligible for employment by the United States or any
department or agency thereof, for the five years next following his
conviction.
If two or more persons conspire to commit any offense named in this
section, each shall be fined under this title or imprisoned not more than
twenty years, or both, and shall be ineligible for employment by the
United States or any department or agency thereof, for the five years next
following his conviction.
As used in this section, the terms “organizes” and “organize”, with respect
to any society, group, or assembly of persons, include the recruiting of
new members, the forming of new units, and the regrouping or expansion
of existing clubs, classes, and other units of such society, group, or
assembly of persons.
This is the Smith Act of 1940, as amended. The Supreme Court has taken four occasions
to review cases prosecuted under the Smith Act. In the first case, Dennis v. US, 341
U.S.494 (1951), the Court heard appeals from Communist Party leaders who had been
convicted of violating the Smith Act and whose conviction had been affirmed by the
lower court. The Court examined the First Amendment and other constitutional
4 5
challenges, was unpersuaded, upheld the statute as constitutional, and affirmed the
convictions.
The second time the Court took a look at the Smith Act was six years later in the case of
Yates v. US, 354 U.S. 298 (1957). By this time, however, the Court was now under the
spell of Chief Justice Earl Warren and the other liberal Justices of the time. They had
already tested their mettle in Brown v. Board of Education233 some three years earlier.
The question might have been reasonably asked, would the Court sustain a First
Amendment challenge and effectively overrule Dennis?
The Court delivered its answer by not even addressing the First Amendment issue. What
the Court did do was to limit the Smith Act to cases where the advocacy for the
overthrow of the government was more than merely theoretical and to require a real
nexus between the advocacy and some action that was being urged to achieve the
treasonous goal.
In Scales v. US, 367 U.S. 203 (1961), the Court took another look at the Smith Act. In
this case, the defendant sought to have his conviction for being a member of the
Communist Party set aside on statutory, constitutional, and procedural grounds. While the
procedural aspects are not relevant to this discussion, the statutory and constitutional
parts of the case are. The first argument raised by the defendant-petitioner was based on
the claim that another federal statute had been enacted that provided that mere office
holding or membership in the Communist Party would not constitute a per se violation of
any federal statute.234 From this, the petitioner concocted the argument that the Smith
Act’s membership clause had been repealed pro tanto. The Court rejected this argument
on several grounds but importantly because the Court found that the petitioner’s Smith
Act conviction was for being a member of an organization which called for the violent
overthrow of the U.S. There was nothing unique about the Communist Party except its
doctrine for violent overthrow; the Smith Act applied to any organization, not just to the
Communist Party.
The petitioner also challenged his Smith Act conviction on per se constitutional
grounds.235 The petitioner argued that the membership clause of the Smith Act violated
his Fifth and First Amendment rights. The Fifth Amendment claim essentially boiled
down to this: Although the trial court instructed the jury that the defendant had to be an
“active member” of the criminal group, in accord with the earlier decision in Yates which
required a nexus between advocacy and action, the trial court did not require that the
defendant actually participate in the criminal activity. It was enough that the defendant
knew of the criminal designs of the group at large and that the defendant was an active
member, even if such activity was wholly legal. As such, the petitioner argued that this
violated his Fifth Amendment rights to due process because it convicts a person for mere
association and not some overt criminal act. The First Amendment claim was similarly an
argument that his right to freedom of association was unconstitutionally infringed by
virtue of the threat of criminal prosecution for mere non-criminal membership.
The Court rejected the argument holding as it should have under conspiracy doctrine:
4 6
Any thought that due process puts beyond the reach of the criminal law all
individual associational relationships, unless accompanied by the
commission of specific acts of criminality, is dispelled by familiar concepts
of the law of conspiracy and complicity. While both are commonplace in
the landscape of the criminal law, they are not natural features. Rather they
are particular legal concepts manifesting the more general principle that
society, having the power to punish dangerous behavior, cannot be
powerless against those who work to bring about that behavior. The fact
that Congress has not resorted to either of these familiar concepts means
only that the enquiry here must direct itself to an analysis of the relationship
between the fact of membership and the underlying substantive illegal
conduct, in order to determine whether that relationship is indeed too
tenuous to permit its use as the basis of criminal liability. In this instance it
is an organization which engages in criminal activity, and we can perceive
no reason why one who actively and knowingly works in the ranks of that
organization, intending to contribute to the success of those specifically
illegal activities, should be any more immune from prosecution than he to
whom the organization has assigned the task of carrying out the substantive
criminal act.236
Thus, the Court concluded that a Smith Act membership conviction will stand when (a)
the defendant knows (b) that the group to which the membership attaches intends
criminal purposes and (c) that the defendant’s membership evidences a specific intent to
promote the criminal goals of the organization (d) even if the defendant’s membership
and involvement is not itself criminal activity.
In Noto v. US, 367 U.S. 290 (1961), the fourth of the Smith Act cases to come before the
Court and a companion case to Scales, the Court overturned the conviction because it
found that the nexus between the theory of violence and the actual call to violence too
remote. Quoting from its opinion in Scales, the Court explained that the advocacy must
be:
“not of . . . mere abstract doctrine of forcible overthrow, but of action to
that end, by the use of language reasonably and ordinarily calculated to
incite persons to . . . action” immediately or in the future. Yates v. United
States, supra, at 316. In that case we said:
“. . . The essence of the Dennis holding was that indoctrination of a group
in preparation for future violent action, as well as exhortation to immediate
action, by advocacy found to be directed to ‘action for the accomplishment’
of forcible overthrow, to violence as ‘a rule or principle of action,’ and
employing ‘language of incitement’ . . . is not constitutionally protected . .
.. This is quite a different thing from the view of the District Court here that
mere doctrinal justification of forcible overthrow, if engaged in with intent
to accomplish overthrow, is punishable per se under the Smith Act. That
sort of advocacy, even though uttered with the hope that it may ultimately
4 7
lead to violent revolution, is too remote from concrete action to be regarded
as the kind of indoctrination preparatory to action which was condemned in
Dennis. As one of the concurring opinions in Dennis put it: ‘Throughout
our decisions there has recurred a distinction between the statement of an
idea which may prompt its hearers to take unlawful action, and advocacy
that such action be taken.’” Id., at 321-322.237
Given this judicial backdrop to the language of the Smith Act, the lawyer representing a
U.S. company which retains Shari’ah authorities must be critically aware of several
threatening circumstances. One, if the Shari’ah authorities advocate the Law of Jihad
against the U.S., this advocacy is likely to fall well within the requisites of the Smith Act
as refined by the Supreme Court. The rationale for this rests on two prongs. (A) The
Shari’ah authorities are not mere advocates of theory or theology but authorized religious
leaders who have been retained by the U.S. company precisely because their legal rulings
and pronouncements are authoritative and respected. Moreover, the call to violence at
some point in the future when Shari’ah-adherent Muslims have the logistical opportunity
to conduct Jihad is captured by the Smith Act as the Court explained when it stated that
advocacy is an actual call to violence whether it advocates violence “immediately or in
the future”.238
(B) The Shari’ah authorities are not speaking as advocates to an empty auditorium but as
jurists who issue normative and instructional commands to the members of their group –
i.e., Shari’ah-adherent Muslims. Further, these Shari’ah authorities are chosen because
the Shari’ah faithful listen and act upon their legal rulings. Thus, the call to violence is
very likely to result in violence. Evidence of this direct nexus can be observed in
numerous terrorist and violent events which occur immediately after Shari’ah authorities
issue legal rulings calling for violence. One relatively recent event was the violence over
the publication of cartoons in a Danish paper which satirized Mohammed. The cartoons
had been public for several months and it was not until certain leading Shari’ah
authorities called for a “day of outrage” and “worldwide protest” that protests, violence,
and murder erupted en masse.239
Additionally, to the extent that Shari’ah authorities are employed by a U.S. corporation to
issue legal rulings on Shari’ah and, while serving in that capacity, issue rulings which
include a call to Jihad against the United States, the corporations will not be wise to
ignore the threat of criminal exposure. The important case on this point is the Supreme
Court’s decision in New York Central v. United States, 212 U.S. 481 (1909). Federal
prosecutors indicted a railroad company based on the conduct of an assistant traffic
manager, who paid illegal rebates.240 While corporations could be liable for breach of
civil law duties, prior case law had established there was no criminal liability for
corporations because as artifices of the law, they could not have the requisite mens rea
and be prosecuted. The Court, however, took this opportunity to transport the concept of
respondeat superior from tort law and import it hook, line, and sinker into the criminal
law:
4 8
Applying the principle governing civil liability, we go only a step farther
in holding that the act of the agent, while exercising the authority
delegated to him to make rates for transportation, may be controlled, in the
interest of public policy, by imputing his act to his employer and imposing
penalties upon the corporation for which he is acting in the premises.
. . .
. . . [W]e see no good reason why corporations may not be held
responsible for and charged with the knowledge and purposes of their
agents, acting within the authority conferred upon them. If it were not so,
many offenses might go unpunished and acts be committed in violation of
law where, as in the present case, the statute requires all persons, corporate
or private, to refrain from certain practices, forbidden in the interest of
public policy.241
One legal commenter has aptly described the legal landscape as it developed after New
York Central:
Thus, as the Court announced the dawn of corporate criminal liability in
America with an embrace of tort law, it simultaneously signaled to
generations of prosecutors that arguments of necessity and public policy
would, in the realm of corporate crime at least, carry great sway. Before
too long, the expansion augured by New York Central swelled further. The
influence of public policy arguments is evident in a series of later cases
whose facts compelled prosecutors to argue for ever further expansions of
liability and constrictions of defenses. While, for example, the New York
Central decision suggested that criminal liability was appropriate when
the misconduct “inured to the benefit of the corporations,” later decisions
held that no such actual benefit was necessary to find criminal liability.
Similarly, there became no limit to how low-ranking an employee could
subject the employer to criminal sanction, as courts found that “the
corporation may be criminally bound by the acts of subordinate, even
menial, employees.” In one influential appellate case, the court frankly
articulated the pragmatic nature of the rules relating to corporate criminal
liability, rooting its considerations firmly in the holding of New York
Central:
These results are certainly not startling. They are part of the law of
respondeat superior and accepted as established principles in civil
tort situations. They are a recognition that law as a useful tool must
accommodate pure theoretical logic to the demands of common
sense... It is a logical paradox that this creature of the law -- the
corporate entity -- is created by law with the power to violate law.
4 9
Thus, there has been even some judicial recognition that corporate
criminal law wears the garment of vicarious liability somewhat like an illfitting
hand-me-down, but significantly, courts have accepted the tradeoffs
between legal coherence and crime prevention.242
In the matter under discussion, it will be somewhat misguided for legal counsel to argue
facilely in defense of their U.S. corporate clients that the Shari’ah authorities were
employed strictly to issue legal rulings on financial matters and all other rulings fall
outside the scope of their employment. Typically, criminal respondeat superior applies
where the agent (i) committed a crime; (ii) within the scope of employment; and (iii) with
intent to benefit the company.243 Arguably, a crime was committed by advocating violent
Jihad against the U.S. The problem with legal counsel’s defense on the “scope of
employment” element is the fact that Shari’ah authorities have stated time and again that
there is no separation between a ruling on commercial matters and one on Jihad. As
illustrated by the very software “filters” employed in SCF, the legal rulings on prohibited
vice industries are all part and parcel of the undivided whole of Shari’ah.244 This explains
the SCF legal ruling by many of the Shari’ah authorities that Muslims, including U.S.
Muslims, should not invest in U.S. defense industries yet these same Shari’ah authorities
praise and obligate Muslim investment in weapons for Muslim nations.245 In other words,
the ruling on weapons in the context of SCF is part and parcel of the Law of Jihad.246
Finally, by definition, every legal ruling by a Shari’ah authority is for the achievement of
Allah’s divine law and for the attainment of truth and therefore of benefit to all Muslims
including the company’s in which they invest.
While it is not necessarily the case that an aberrant ruling by an “extremist” Shari’ah
authority will be imputed in every case to his employer, it is not a logical stretch to
conclude that a company employs a Shari’ah authority precisely because his legal rulings
are authoritative and because Shari’ah is a holistic and integrated legal and normative
unit.247 Thus, a ruling on Jihad by a Shari’ah authority is no less a part of his role as an
internationally renown Shari’ah authority and his employment as such than his other
rulings on SCF.
Yet another more threatening avenue of liability arises under the Smith Act. To what
extent might the U.S. company have criminal exposure for “collective knowledge” of the
endogenous elements of Shari’ah? Put differently, if Shari’ah is universally understood
by Shari’ah authorities to advocate the destruction, and in some circumstances the violent
destruction, of the U.S., are U.S. financial institutions and companies which employ
Shari’ah authorities, and the lawyers expert in SCF, liable based upon a “willful
blindness” and “reckless disregard” of the criminal designs and methodologies of
Shari’ah? Legal commentators have discussed the notion of corporate “collective
knowledge” as an evidentiary basis for a finding of scienter:
Other cases further expanded the prosecutor’s ability to charge
corporations, while simultaneously constricting such defendants’ ability to
mount certain arguably legitimate defenses, often explicitly on policy
grounds. One legal consequence of vicarious liability was the development
5 0
of the “collective knowledge” doctrine, largely ushered into existence by a
federal appellate case, United States v. Bank of New England. In that case,
the Bank of New England was tried and convicted of a number of
violations of the Currency Transaction Reporting Act, while the individual
bank employees were acquitted of the charges. In charging the jury, the
trial court instructed them that the bank could be found to have had the
requisite guilty knowledge either through one of its agents, or through the
“aggregate knowledge of its employees.” Because the bank was a
collective institution, its “knowledge [was] the sum of the knowledge of
all of the employees.” Thus, the doctrine “aggregates the states of mind of
several agents within a corporation” to be attributed to the corporation
itself. Consequently, “there is no question that [the collective knowledge
doctrine] subjects corporations to criminal liability where there is literally
no one in the organization that ever intended to commit a crime.”248
F. The exogenous elements of SCF: disclosure, due diligence, and other
compliance issues
Beyond the duty of disclosure of endogenous elements of Shari’ah -- facts which would
be material to a reasonable investor who has been told of an investment or business
transaction represented to be Shari’ah-compliant -- a whole host of other legal issues
arise in the context of how SCF is actually structured. Thus, beyond the question of what
must be disclosed about Shari’ah itself, the “rules and principles” of Shari’ah have been
fitted to modern finance and business to achieve a product that is represented as Shari’ahcompliant.
These contemporary structures are exogenous to Shari’ah but very much a
part of how Shari’ah has been manipulated to accommodate modern finance and
commerce. These exogenous elements reflect on how Shari’ah has been transformed,
modeled, and presented in various SCF contexts. How these contemporary structures
interrelate with various legal duties and obligations is the focus of this section.
In this analysis, it is important to keep in mind a fundamental principle of SCF and a
corollary of that principle. The first is that Shari’ah compliance must be judged by one or
more Shari’ah authorities. It is clear from the literature that a non-Muslim cannot
determine what is Shari’ah-compliant and further that a Muslim who is not recognized by
his peers as a Shari’ah authority cannot assume the role of one. The corollary of this
principle is that the Shari’ah authorities are themselves bound by the community of
Shari’ah authorities within which they operate. The exact nature of this community or
“consensus”, both in terms of its theoretical elasticity and it geographic boundaries, is
only vaguely articulated in the SCF literature, but the implications of its contours both
when adhered to and when breached are quite significant.
1. Disclosure
Thus, the analysis of exogenous structures and factors of SCF begin with disclosure of
what it means to represent to the public that a financial institution or business has
embraced SCF. Is there a duty to represent to the public what a Shari’ah authority is and
5 1
how any given authority has obtained that status? Is it material to the investment? Is the
failure to articulate the risks associated with conflicting SCF rulings from a more
authoritative Shari’ah authority a disregard of minimal standards of disclosure?249
Moreover, is there a duty to disclose to the public whether the Shari’ah authorities
chosen by a U.S. financial institution have ever issued authoritative rulings on matters
that would implicate discrimination or violence against non-Muslims and non-Shari’ahcompliant
Muslims? Is it important that a financial institution’s Shari’ah authority relies
on the Shari’ah rulings of authorities who have called for a worldwide Islamic Caliphate
ruled by Shari’ah? Further, when the Shari’ah authorities rule that investment in a
military or weapons industry are forbidden by Shari’ah, is it important for the U.S.
financial institution to disclose to the reasonable post-9/11 investor whether there is such
a Shari’ah ban on investments by Muslims in Muslim military industries for weapons to
be sold to Muslim regimes?250
In this context, the Nike case discussed above takes on a whole new dimension. Recall
that Nike, an Oregon corporation, was sued in California under its Unfair Competition
Law arguing the Nike’s public statements in defense of its labor practices abroad were
actionable.251 The California Supreme Court was not inclined to restrict the statute’s
reach and rejected Nike’s argument that its First Amendment Free Speech rights were
violated. Nike had argued that the extension of such business fraud statutes to generic
discussions by companies that have more to do with social commentary on issues of
public importance than promoting the sale of specific goods and services is to effectively
deny First Amendment protections to U.S. businesses. In effect, after being attacked
publicly in the media and having chosen to open its corporate mouth in its own defense,
Nike had invited the lawsuit under California’s Draconian consumer fraud statute. The
company could have continued to litigate the case for years, attempting to prove that it
had spoken truthfully about its offshore labor practices, but it understood that every new
twist and turn in the litigation would amount to millions of dollars in bad publicity for a
company that spent millions trying to build and maintain its brand.
Instructive is the language the court used:
The issue here is whether defendant corporation's false statements are
commercial or noncommercial speech for purposes of constitutional free
speech analysis under the state and federal Constitutions. Resolution of
this issue is important because commercial speech receives a lesser degree
of constitutional protection than many other forms of expression, and
because governments may entirely prohibit commercial speech that is
false or misleading.
Because the messages in question were directed by a commercial speaker
to a commercial audience, and because they made representations of fact
about the speaker's own business operations for the purpose of promoting
sales of its products, we conclude that these messages are commercial
speech for purposes of applying state laws barring false and misleading
5 2
commercial messages. Because the Court of Appeal concluded otherwise,
we will reverse its judgment.
Our holding, based on decisions of the United States Supreme Court, in no
way prohibits any business enterprise from speaking out on issues of
public importance or from vigorously defending its own labor practices. It
means only that when a business enterprise, to promote and defend its
sales and profits, makes factual representations about its own products or
its own operations, it must speak truthfully. Unlike our dissenting
colleagues, we do not consider this a remarkable or intolerable burden to
impose on the business community. We emphasize that this lawsuit is still
at a preliminary stage, and that whether any false representations were
made is a disputed issue that has yet to be resolved.252
When U.S. companies tout SCF as “ethical” and “socially responsible investing” or as
simply innocuous “interest-free” and “vice-free” investing, does this amount to consumer
fraud? In California at least, the groundwork for an affirmative finding has been
prepared.
Another exogenous factor has been addressed by the academic and professional SCF
literature. A significant focus of SCF publications describes the dearth of competent
Shari’ah authorities worldwide. This is due to the fact that while Shari’ah authorities are
apparently available in sufficient numbers to answer the needs of the Shari’ah-adherent
communities worldwide253, there is a major shortage of these authorities who are
sufficiently versed in modern finance and commerce and with a working knowledge of
English to handle the international documentation which invariably are drafted with an
eye towards institutions working out of London or New York. Insofar as there are only
approximately 20-25 sufficiently trained Shari’ah authorities, each of these exclusive
club members sits on dozens of the Shari’ah supervisory boards around the world. The
result is a small clique which advises the lion’s share of competing financial institutions
on how to develop new SCF products and transaction structures.254
The legal advisor must evaluate the disclosure issues given the fact that a Shari’ah
authority’s rulings and artful craftsmanship in finding new transactional structures to
avoid Shari’ah prohibitions might very well differ from one institutional client to another
given the relative financial remuneration. Furthermore, are there issues that ought to be
disclosed to a reasonable investor relating to confidentiality and the systems put in place
to protect confidentiality? What duty of care do the Shari’ah authorities owe the financial
institutions? Are they considered experts for purposes of the 1933 Act? Do they
participate in writing the portions of the registration statement or prospectus that deals
with Shari’ah?
In all of these areas, and more, the materiality and scienter issues discussed above will
play into the calculus for the legal advisor as the examination of these and other
exogenous elements unfold. An additional facet of the disclosure complex, especially as
it relates to the scienter standard of recklessness, is the implication for the financial
5 3
institutions and their professional advisors of a duty to conduct a reasonable due
diligence to make certain that what they have said about SCF is the whole of the material
truth.
2. Due diligence
The articulation of a breach of duty to disclose is closely related to the duty to exercise
reasonable due diligence as either an element of scienter or a defense where scienter is
not at issue. For example, under the 1933 Act, Sections 11 and 12(a)(2) provide for a due
diligence defense for certain defendants who have failed to disclose all relevant material
facts.255 The case law and literature on these defenses is extensive and legal counsel for
any financial institution will have to consider long and hard the implications of ignoring
the exogenous structures set up for a Shari’ah-compliant investment or business. At the
very least, each of the exogenous disclosure issues should be the subject of a carefully
prepared legal opinion. Failure to rely on expert legal opinion will likely expose the
financial institution and its management to far greater liability insofar as failure to do so
might rise to the level of a reckless breach of the duty of care expected in the industry.
The duty to rely on a formal legal opinion intimates the lawyer’s exposure to liability for
failure to conduct a reasonably competent investigation. In the case studies presented in
Section III below, this memorandum begins to pry open these issues for further
discussion among legal scholars and professionals.
3. Other compliance issues
a. Global security risks: revisited
But the due diligence requirements implied in the scienter element of many types of fraud
actions and provided expressly as defenses under securities laws are only one component
of the due diligence analysis pertinent to the question of civil and criminal liability for
SCF. In the main, the effort to combat the global security risks associated with Islamic
terror networks and the regimes which support those networks has incorporated many
strategies, only some of which are appropriately suited to the task at hand. One approach
is through trade sanctions and embargoes. These foreign policy initiatives are authorized
by such laws as the Trading with the Enemy Act (“TWEA”)256 and the International
Emergency Economic Powers Act (“IEEPA”),257 which authorize the Office of Foreign
Assets Control (“OFAC”) of the Treasury Department to establish sanction regimes on
states identified by the president as falling within the jurisdictional reach of either of the
two laws.258
The Halliburton affair described above, which began as a seemingly innocuous inquiry
by the New York City Comptroller on behalf of some shareholders into disclosure
requirements of an annual proxy statement soon spiraled out of control. After Halliburton
was forced to report to its shareholders on the financial and reputational risks of doing
business in a terror-sponsoring state, the Comptroller was still quite unsatisfied and
considered the company’s disclosures inadequate. Soon thereafter, OFAC got involved
and as the investigation progressed, OFAC referred the matter to the DOJ which initiated
5 4
a grand jury investigation.259 Other companies doing business in terror-sponsoring states
have also run into trouble.260 While the implications for financial institutions relying on
Shari’ah authorities associated with or sympathetic to terrorists do not touch upon TWEA
or IEEPA compliance per se, the duty of disclosure of material facts under the
compliance regimes discussed above remains and the ramifications of yet other
compliance issues as discussed below are significant.
i. Reverse money laundering: revisited
Another approach to the global security risk of Islamic terrorism has been through the
strengthening of anti-money laundering laws and regulations. The “heavy lifting” of this
effort of late has been accomplished by the Patriot Act and its amendments to the Bank
Secrecy Act (“BSA”)261 and the anti-money laundering statutes.262 But with all of the
fanfare and political disputation surrounding this legislation by civil libertarians, civil
rights activists, and various Muslim organizations,263 the latter of which have argued the
government’s effort is unduly focused on Islamic terrorism, the legislation still fails to
grapple effectively with the problem of money laundering in support of terrorism. Almost
all of the BSA and the regulations promulgated thereunder and the anti-money laundering
statutes come at the problem of terrorist financing in the traditional way, notwithstanding
a dangerous new modus operandi. The BSA and anti-money laundering statutes are
intensely focused on spotting and reporting suspicious money transfers, especially cash
transfers, which have a criminal source.264
This approach to battling the funding of terrorism fits the traditional approach to antimoney
laundering efforts which looks for money from illegal activities such as drugs and
gambling, typically in the form of cash, and its laundering into clean money invested in
legitimate businesses. As long as the effort is “following the money” in the form of cash
from its entry and first appearance in the regulated and reporting financial system (what
the experts call “placement”)265 as it winds its way to some ultimate destination, the
system works at least moderately well, although most experts will admit it both misses
large sums and suffers from over-reporting of perfectly legitimate cash transactions.266
Much of the modern-day terror financing, however, is conducted through what has been
termed “reverse money laundering”.
This stands the classic model on its head where perfectly legitimate funds are wired or
transferred to U.S. domestic charities and organizations and then to overseas charities and
organizations, or sometimes just directly overseas. These transactions are very difficult to
spot unless government regulators already have the specific charities and organizations in
question under surveillance.267 This kind of pro-active or prophylactic surveillance
necessarily runs into all kinds of privacy and constitutional thickets. Assuming the
federal government does not have sufficient evidence for a probable cause or FISA
warrant268, targeting Muslim charities would at the very least be roundly protested as
racial profiling irrespective of the actual legal or constitutional infirmities of the
practice.269 As a result, while administrative “blocking orders” promulgated under the
authority of the IEEPA have been an effective tool in disrupting and shutting down of the
5 5
largest and most dangerous of Muslim charities funding terrorism,270 prosecutions of
terror-financing operating through charities have met with mixed results.271
This problem raises its ugly head with SCF in two ways. One way, although it does not
yet appear to be the norm in the U.S., is through a charitable contribution made at source
by a SCF financial institution or business. This would occur because faithful Muslims
must gift a certain percentage of their income to charity. It appears that in the Middle
East and Malaysia, SCF companies, banks, and investment funds might actually calculate
the amount the individual Muslim investors owe from profits and distribute those funds
automatically to Islamic Shari’ah-approved charities and only then would the net, after-
Shari’ah-charitable-tax profits be distributed to the individual investor. In the U.S.,
although many of the reporting companies and mutual funds involved in SCF are unclear
about this service, most appear to allow the individual investor to calculate and make his
or her own charitable contribution.272
Several questions arise for those SCF businesses and investments which net the returns to
the investor after this charitable payment: Which charities are Shari’ah-compliant? Who
makes this determination? Do the businesses or financial institutions direct these
contributions or are these decisions made by the Shari’ah authorities? Is there any vetting
of the recipients of these charities to determine what they do with these funds? Why is
this process not transparent?
A second form of this problem arises when some of the gross income of a business is
from Shari’ah prohibited sources. This can occur in several ways but typically in two:
The first is via what one might term the exceptional event when the Shari’ah “filter”
misses some tainted source of income altogether. This might happen when a Shari’ahcompliant
company in a Shari’ah-compliant mutual fund acquires a forbidden company,
the main business of which is in a forbidden industry such as finance or hog farming.
Assuming the acquired company’s forbidden assets are not de minimus, this renders the
parent company in the mutual fund’s portfolio Shari’ah-prohibited and the equity
position in that company must be sold. The proceeds of that sale will include a certain
amount of profits attributed to the forbidden assets. That amount must be calculated and
“purified”.273
The second occasion for purification is more typical. For example, a mutual fund is
permitted to invest routinely in companies which earn up to a fixed percentage of their
income from interest. Notwithstanding this leniency, any profits to the mutual fund
attributed from this forbidden income must be “purified” at some point.274
Because the calculation of this purification can be complex, most Shari’ah authorities
either insist or prefer that the purification take place by the SCF institution so the
Shari’ah authorities will have the opportunity to properly assess the amount needed to be
purified and supervise the logistics.275
As in the charitable contribution discussion, this purification process is typically not fully
disclosed in public filings of U.S. SCF financial institutions. The questions raised above
5 6
about disclosure for the general charitable tax apply here mutatis mutandis. But since
most Shari’ah authorities have ruled that it is more appropriate to have the purification
process carried out by the SCF company rather than at the individual investor level, one
might reasonably assume that this is the general rule.276
In both instances, the legal advisor to the SCF financial institution or business must be
very careful about how these charitable contributions are made and who the beneficiaries
of these funds are. Given the history of Islamic charities funneling contributions to
terrorist organizations directly and indirectly through other charitable organizations in a
laundering process, the anti-money laundering laws must be analyzed carefully by the
attorney to be certain that the financial institution is not facilitating a criminal violation
and that there is strict compliance with all reporting requirements.
The principal anti-money laundering statutes are Title 18, Sections 1956 and 1957. As
indicated above, the focus of these statutes is on criminalizing the movement of funds
from unlawful activity. As such, it has a limited application to the issue of charitable
contributions directed by Shari’ah authorities related to a given SCF financial institution.
The legal advisor, however, must take the following into consideration in proffering his
advice. Section 1956(a)(2) criminalizes the following:
(2) Whoever transports, transmits, or transfers, or attempts to transport,
transmit, or transfer a monetary instrument or funds from a place in the
United States to or through a place outside the United States or to a place
in the United States from or through a place outside the United States—
(A) with the intent to promote the carrying on of specified
unlawful activity; . . ..277
Two issues stand out. One, a purely domestic transfer of legal funds with the requisite
criminal intent is not a per se violation. Arguably, if a domestic transfer took place but
with the understanding that the funds would at least in part find their way overseas as part
of the criminal intent, such a transfer would, it seems, be prohibited. Thus, a U.S.
financial institution might very well run afoul of this provision when it “purifies” its
forbidden assets by transferring funds to a terrorist-supporting charity overseas or
possibly even to a domestic charity as a conduit to problematic overseas groups.
The second issue is intent. The statute requires that the defendant have the intent to move
the funds to promote one of the illegal activities enumerated. Terrorism is one of those
criminal activities set out in Section 1956(c)(7). The lawyer representing a financial
institution contemplating “purification” must consider the possibility that the charitable
gift might be going to a charity with intimate connections to terrorists.278 In this context,
the first question confronting the prudent legal counsel is who directs the funds to the
charitable contribution? Are the charities or universe of acceptable charities chosen by
the Shari’ah authorities? Is this decision binding on the financial institution? The issue
here is quite obvious. If the financial institution places this decision-making authority
into the hands of the Shari’ah authorities it has retained, it is quite possible that any
5 7
criminal “intent” or “purposes” connecting the Shari’ah authorities to these charities will
be considered the financial institution’s. The criminal culpability in this case is not unlike
that which was described above in the discussion of the Smith Act.
While many financial institutions involved in SCF attempt to distance themselves from
the Shari’ah authorities279, the question for the lawyer weighing in on these issues is who
made the decision about which charities would be considered Shari’ah-complaint and
thus recipients for the “purification” of funds. Moreover, if it turns out these charities
have ties to terrorists or are implicated in the material support of terrorism, was this fact
known280 to any agent of the company?
Quite obviously, the criminal exposure arising from the “purification” process might lead
the responsible legal counsel to ask the following questions about any list of potential
charities: Are these well-known non-Muslim charities? If they are Muslim charities, have
they been vetted and by whom? The three largest Muslim charities in the U.S. have all
been implicated in financing terror and subject to administrative blocking orders wherein
their assets were frozen and they were effectively shut down.281
The practice of Muslim charities funneling money to terrorists is so widespread and the
problem so insidious the federal government keeps an updated list and brief on the
dozens of such organization world wide.282 But, it will not suffice for the legal advisor to
simply determine that the charities are “well-known” Muslim charities and not currently
listed as designated supporters of terrorism. At a minimum, the following queries would
need to be undertaken: Who are the ultimate beneficiaries of the contributions? In other
words, who or what is the ultimate recipient of the charities’ “good deeds”? Do these
charities have overseas branches? Is the financial institution wiring the funds
domestically or internationally? Who or what organization founded the organizations and
who controls them today?
Once these questions are asked and answered with sufficient clarity, the legal advisor will
need to be careful that what ever policies are put in place to avoid criminal exposure
under Sections 1956 and 1957, the client continues to monitor these “charitable
contributions” carefully.283
ii. Material support of terrorism and related civil exposure
The material support of terrorism is a federal crime under 18 U.S.C. §§2339 (A) and (B).
The Intelligence Reform and Terrorism Prevention Act of 2004284 amended the definition
of “material support” to include:
(1) the term “material support or resources” means any property, tangible
or intangible, or service, including currency or monetary instruments or
financial securities, financial services, lodging, training, expert advice or
assistance, safehouses, false documentation or identification,
communications equipment, facilities, weapons, lethal substances,
5 8
explosives, personnel (one or more individuals who may be or include
oneself), and transportation, except medicine or religious materials;
(2) the term “training” means instruction or teaching designed to impart a
specific skill, as opposed to general knowledge; and
(3) the term “expert advice or assistance” means advice or assistance
derived from scientific, technical or other specialized knowledge.285
A Shari’ah authority issuing, promoting or advocating a legal ruling for Jihad to anyone
for the purpose of conducting terrorism would quite clearly fall within the definition of
“expert advice” “derived from . . . specialized knowledge”. In addition, a New York
federal district court has concluded that an attorney that passed along a legal ruling
calling for Jihad had provided “material support” in the form of “personnel” as part of a
terror-laden conspiracy. In U.S. v. Satter286, the court upheld attorney Lynne Stewart’s
conviction for violating Section 2339(A) by merely passing along a fatwa or legal ruling
regarding Jihad issued by her client, Sheikh Omar Abdel Rahman, to terrorists in Egypt
who respected his authority in matters of Shari’ah. The court concluded that passing
along a legal ruling was like providing “personnel” to the co-conspirators and amounted
to material support.287
A U.S. company that promotes the legal rulings of a Shari’ah authority who is known for
issuing such rulings on the Law of Jihad could risk extraordinary criminal exposure.
While it is not likely that the company would promote the actual rulings relative to Jihad
or do so with the actual intent to cause violence, this will not be the standard. The
question will be what role does the Shari’ah authority occupy within the company or
what relationship does he have to the company if he is an “outside advisor”. To the extent
that criminal respondeat superior implicates the corporate entity in the Shari’ah
authority’s scienter, a defense built upon lack of knowledge by the board of directors will
not likely be effective. And, the fact that such legal rulings are published in broad
daylight and available from English open sources will render the corporation’s plea of
lack of intent all the more unavailing to the extent it rises to the level of “willful
blindness” or “recklessness”.
Additional areas of criminal and civil liability exposure relate to the anti-money
laundering statutes. To the extent that any “purification” funds move from the financial
institution to a charity and these funds are found to support the terrorist activities, there is
the additional criminal exposure under Sections 2339(A) and (B). Both of these statutes
forbid the provision of material support for terrorism. The distinction between the two
statutes is important. Section 2339(A) requires a showing that the defendant provided
support knowing its intended purposes. Under Section 2339(B), the defendant need only
know of the status of the target organization as a terrorist organization and need not know
or intend that the material support is going to support terrorism.288 The discussion above
regarding corporate criminal exposure for the intent of the company’s agents quite
obviously applies here as well and must be considered by legal counsel.
5 9
In addition to criminal exposure, to the extent that a U.S. financial institution can be
criminally linked to terrorist organizations as a result of the “purification” funds or
indeed via other “material support” relationships between the Shari’ah authorities and the
terrorists, additional statutes provide civil exposure to victims of such violence, even if
the violence occurs outside the jurisdiction of the U.S. The most important of these
statutes is Title 18, Section 2333, which provides for civil remedies and treble damages
for any U.S. national injured by terrorists. In several circuits, federal courts have allowed
private rights of action under this statute against defendants who have “aided and
abetted” the offending terrorists by violating Sections 2339(A) and (B).289
Beyond the civil exposure in Section 2333, there is a strong argument to be made that the
Alien Tort Statute (“ATS”)290 exposes companies linked criminally to terrorism to
enormous civil liabilities. It is one thing to be sued by U.S. nationals for damages caused
by terrorism; but the potential for mass litigation by foreigners for such damages is
enormous. Once the criminal connection is made through the anti-money laundering or
the material support of terrorism statutes, it is a certainty the plaintiffs’ bar would then
artfully allege that terrorism is a violation of some norm of the law of nations that is
“specific, universal, and obligatory” and that there is a proximate cause between the
“material support of terrorism” alleged and the injuries suffered.291
b. Antitrust
Another area of civil liability exposure related to the exogenous structure imposed by the
need for Shari’ah authority boards arises under antitrust law. As noted above, at present
approximately two dozen Shari’ah authorities monopolize the positions available on the
Shari’ah authority boards of the major Shari’ah-compliant financial institutions
worldwide. There has been a concerted effort among these Shari’ah authorities to impose
universal standards to prevent materially divergent opinions. This effort has been
spearheaded by the Accounting and Auditing Organization for Islamic Financial
Institutions (“AAOIFI”) and the Islamic Financial Services Board (“IFSB”), the former
of which seeks to establish accounting standards for the various transactional structures
and the latter to set the standards by which Shari’ah authorities self-regulate and interact
with the financial institutions which employ them.292
The stated goals of the IFSB include:
110. Although inevitably nowadays a small number of Sharī’ah scholars
have been providing their services globally, the current practice is
considered far from professional because of some serious
inadequacies, whereby in most jurisdictions:
(i) the criteria for recognizing a person as a qualified Sharī’ah
scholar is still vague; and
(ii) the means of checking the legality, credibility and validity
of a Sharī`ah ruling are still uncertain.
Considering the juristic nature of Sharī’ah rulings and the legal
implications they would have for the validity of contracts entered
6 0
into by IIFS [SCF financial institution], the ultimate test for their
legitimacy should be the admission of such rulings into a credible
court of law. The IFSB notices that, for some IIFS, the fatāwā have
legal force by virtue of the IIFS’s constitution or statutes. However,
in other cases, they do not; thus, from a legal point of view, the IIFS
are not bound to follow the fatāwā. Accordingly, an IIFS must not
enter into a contract which is not Sharī’ah compliant.
111. Certain countries have a central SSB [Sharī’ah Supervisory Board],
recognized by the regulatory and supervisory bodies, to issue
binding fatāwā. Nevertheless, so far, there is little evidence of the
adoption of Sharī’ah rulings by a credible court of law in resolving
Islamic finance disputes. Even if there are some instances, more
records of these are needed to ensure that the system is running
smoothly and with reliable credibility.
112. We cannot set aside the idea that, in order to propel the Sharī’ah
compliance framework of IIFS to a higher level, it may be preferable
to have a professional organization or an industry association that
will set professional standards for Sharī’ah scholars serving the
Islamic financial services industry. Such a professional association
might look after the interests of membership, and promote
understanding and exchange through publications and regular
forums. It could also establish relationships with relevant academic,
commercial and professional bodies. The Islamic financial services
industry appears to have matured to the point where such an
association, which lay down a transparent and accountable structure
for Sharī’ah advisory services, would be of great value to everyone
involved, whether as industry players or as consumers.293
Thus, according to the IFSB and the independent writings of many of the Shari’ah
authorities, there are designs to establish industry-wide minimal credentials a newcomer
would be required to obtain to enter this apparently lucrative consulting business. The
initial antitrust issue raised by such efforts is the problem of “group boycotts” or the
implications of “self-regulation” for a small, discreet and insular group of authorities who
have almost total market share deciding how one gains entry into the market.294 Applying
the standard “rule of reason”, courts will look to the motivations and anti-competitive
effects of such “industry standards.”295
This is especially problematic in SCF because should a non-recognized Shari’ah
authority attempt to market his services to the financial institutions seeking Shari’ah
guidance, a ruling by the existing Shari’ah authorities that the newcomer has not satisfied
their credentialing requirements would render the market closed to that newcomer as a
practical matter. This is the case because financial institutions who market SCF products
to the Shari’ah-adherent consumer are extraordinarily sensitive to the problem that public
disputes among the Shari’ah authorities over what is permitted or prohibited could
6 1
devastate both the demand for SCF products generally and certainly render any given
SCF product suspect.296
The problem of “self-regulation” would become an issue for the financial institutions if
they play some material part in this effort to control entry into the market by newcomers
in a de jure or de facto collusion with the dominant group.297 Another problem, however,
which does implicate liability for the financial institutions directly, is what has been
described as “rules collusion”298. Here, the effort by the financial institutions and their
agents, the Shari’ah authorities, to agree upon what transaction structures and
investments should be considered “Shari’ah-compliant”, will most assuredly work to
limit the development of new competitive products by the market players. This, in turn,
will make it more difficult for the consumer to distinguish between SCF products, and
raise the cost of searching for newer, innovative SCF products -- thereby shaping and
softening competition among cartel members in order to increase the profits of the parties
to the agreement.299 The fact that such a financial market is predicated upon a consensus
of the market’s private rules advisors suggests that SCF within the financial industry
presents substantial antitrust liability exposure.
c. Banks and consumer loans
Regulated commercial banks and private lenders have recognized the SCF market and
have made significant inroads establishing this new industry. At least one U.S.
commercial bank has attempted to design a Shari’ah-compliant depository account.300
The unique feature of this kind of account for it to comply with contemporary Shari’ah
rulings is that it must be “at risk” as an equity investment and not viewed as a guaranteed
deposit with interest income. Although a U.K. bank has developed a regulatory workaround301,
so far U.S. regulators have not permitted such accounts although one
community bank in Illinois advertises a Shari’ah-compliant “profit-sharing deposit
account” which purportedly does not earn interest but rather a share of the bank’s profits.
It apparently received an exemption from some Shari’ah authority because the bank
guarantees the principal of the deposit as is required by U.S. banking laws but such “no
risk” guarantees are typically considered forbidden according to Shari’ah.302
Another impediment for commercial banks entering this market, however, does appear to
have been overcome. In a typical SCF home mortgage transaction, the lender purchases
the property and either resells it immediately to the borrower at a stepped-up price to be
paid out over time (i.e., a cost-plus sale) or leases it back to the borrower through a salelease
back arrangement. The problem for commercial banks in these transactions is that
U.S. law does not allow banks to own real estate except in limited circumstances, such as
the bank’s own offices or property acquired through foreclosures on bad loans.303 Two
banks have received approval from the Office of the Comptroller of Currency (“OCC”)
for such SCF transactions.304 The rationale for the approvals was a substance-over-form
analysis. Since these mortgage products were in fact disguised loans with interest and the
real estate was only owned for a limited purpose, the Comptroller did not see these
Shari’ah-compliant mortgages as a violation of the prohibition against owning real estate.
6 2
The OCC also granted one of the banks approval to use the cost-plus sale transaction
structure to accommodate construction loans and other consumer loans.305
While the Comptroller was focused on the real estate-banking regulations, one area
missed in the analysis and which the attorney for any lender must pay special care to
address is compliance with all of the various consumer anti-fraud statutes. The statutes
implicated in traditional bank lending are found in TILA, the Lanham Act, and many of
the anti-fraud statutes referenced above.
For example, commercial banks and other lenders must comply with TILA306 and its
complex Regulation Z.307 TILA prohibits specific types of misrepresentations or
misleading omissions in advertising.308 TILA's provisions require lenders to make
standardized disclosures whenever other price terms are advertised. For example, any
advertisement that states an interest rate must state the annual percentage rate (“APR”).309
An oral response to consumer inquires about closed-end loans, however, may only state
the APR.310 Advertisements quoting a down payment by percentage or amount; the
amount of any monthly loan payment or finance charge; the number of payments; or the
period of repayment must also state the APR, the terms of repayment, and the amount or
percentage of any down payment.311
The problem lenders have is that they are marketing the SCF products as interest-free and
therefore Shari’ah-compliant.312 In fact, and as scrutinized by the OCC and likely by the
IRS and state tax authorities313, these various interest-free transactions are merely
disguised loans. In other words, the banks are treating these products and representing
them to the government authorities as conventional loans with interest income while
marketing them to the public as interest-free Shari’ah-compliant non-loan transactions.314
At the very least, full disclosure requires these banks to indicate that the loans are not
interest-free and to fully disclose in all of their advertising the true annual percentage rate
(“APR”). This would require an explanation that while a loan might be considered “ribafree”
for Shari’ah purposes, it is considered a standard loan with interest for all secular
legal purposes because that is what it is. Unfortunately, even this might not be true. For
example, it is not clear at all how a bankruptcy court would treat the transaction. Much
would depend on whether the debtor was in bankruptcy or the lender. How the lender’s
attorney navigates these issues in print advertisements and on the Internet will likely
come to a regulator’s or court’s attention.315
An additional concern for Shari’ah-compliant consumer loans is that they are typically
more costly than conventional loans. This is true because of the machinations inherent in
the transactional documents and because much of the documentation must be duplicated
– one set to track Shari’ah compliance and one set to track government regulations. In
addition, Shari’ah supervision adds a cost in most cases as do some extra taxes attributed
to the transfer of title as required by Shari’ah.316 Because these consumer loans are
marketed to a specific minority community with a unique cultural affinity to Shari’ah,
and because the added costs of these loans have no economic value per se, it is quite
possible that the marketing of these products will fall within the scope of the anti6
3
predatory loan laws, such as the Home Ownership and Equity Protection Act
("HOEPA")317 or the state versions of HOEPA which are typically more aggressive and
have lower thresholds for offending predatory high-cost loans.318
III. Two Brief Case Studies:
Legal analysis is fact-specific. To crystallize just some of the issues raised in this
memorandum, two brief case studies follow. While neither will be considered exhaustive,
they will deal with the major issues raised by the public filings and other open source
information available. As in most cases, the attorney for the business client engaging in
SCF will have access to confidential, privileged, or non-public information which might
change materially the analysis. But what is often the case, the most important material for
assessing a prima facie case of civil or criminal liability is that which has been disclosed
to the public. The relevant information kept from the public tends to be inculpatory rather
than exculpatory.
A. Caribou Coffee
1. Factual background
Caribou Coffee (“Caribou”) began as the dream of John and Kim Puckett, a young couple
on a backpacking trip to Alaska. They wanted to change their life around and decided
upon a new start-up venture: a coffee cafe chain envisioned as a competitor to the
industry giant, Starbucks. In 1992, they opened up their first store in Minneapolis with an
initial investment of $50,000.319 By December 2000, the upstart chain had raised $40
million through several private investment rounds and had opened 149 stores in a halfdozen
markets, a distant second to Starbucks’ more than 3,000 stores. But poor
management systems, board issues and a host of other problems prevented the company
from exploiting the market and raising capital for further expansion. The company
needed money badly; the investors were not going to invest further; and they were even
threatening to exercise their put options to get their money back with interest.320
By the end of the year, the Pucketts had arranged for an exit strategy, agreeing to sell
approximately 84% of Caribou Coffee to an Atlanta, Georgia based company called
Crescent Capital Investments, Inc. (“Crescent”), for a price tag of approximately $84
million.321 Crescent was owned by a Bahrain-based investment bank called First Islamic
Investment Bank, which was funded by mostly wealthy Arab investors from the GCC
states.322
Over the next five years, with the added capital, Caribou grew substantially and by July
2005 was operating 337 coffeehouses. Notwithstanding the company’s continued
operating losses, the time apparently was ripe for a public offering to raise an additional
$90 million from the U.S. investing public. In July 2005, the company’s lawyers and
accountants began the registration process under the 1933 Act for an initial public
offering.323
6 4
One of the issues the lawyers for Caribou confronted was if and how to disclose the fact
that its principal shareholder, Crescent and its parent First Islamic Investment Bank,
which had changed their names to Arcapita Inc. and Arcapita Bank B.S.C.(c)324,
respectively, were Shari’ah observant and required that Caribou also operate its business
according to Shari’ah. Ostensibly, this would have implications at the very least on what
risks arose out of the prohibitions which precluded the company from incurring interestbased
debt; limited the kinds of foods it could serve its customers; and forbade it to
utilize traditional yet speculative hedging strategies to guard against the future price
increases for its principal commodity, coffee.
But the problem with which the attorneys had to wrestle did not end there. Three years
earlier in 2002, a public relations firestorm erupted forcing Caribou Coffee to respond
publicly to accusations that it had aligned itself with a supporter of terrorism. 325 In July
of 2002 an Internet-based campaign began accusing Caribou Coffee and its principal
shareholder of being associating with and employing a Shari’ah authority named Yusuf
Al-Qaradawi, who was well known for his statements in favor of Jihad, including
suicide-homicide attacks against Israeli citizens by Palestinian terrorists and legal rulings
supporting the Jihad carried out by Hamas and Hizballah against Israel.326
At the time, both Hamas and Hizballah were designated as “Foreign Terrorist
Organizations” (“FTO”) in the “2001 Report on Foreign Terrorist Organizations released
by the State Department’s Office of the Coordinator for Counterterrorism.”327 This
designation effectively criminalizes any person or organization which provides material
support to the FTO. A flurry of main stream media stories appeared and Caribou Coffee
was inundated with bad press and angry customers, including talk of a boycott by some
Jewish groups.328 Apparently, Arcapita had retained a Shari’ah advisory board and the
head of the advisory board was Qaradawi. After weathering the storm for several months,
Arcapita severed its relationship with Qaradawi stating that Qaradawi had resigned.329
Another ramification of this affair was an accusation that Arcapita was funneling
charitable contributions, presumably from its Shari’ah charitable tax contributions or its
purification of forbidden profits, to terrorist organizations with connections to Qaradawi.
When the Jewish Community Relations Council of Minnesota and the Dakotas heard
about the possible connection between Caribou and Qaradawi, they initiated an
investigation and the Minneapolis-based company cooperated. According to local media,
Caribou and its Bahrain-based majority shareholder even offered to allow the Jewish
community organization to investigate all of the company’s charitable donations.
According to the story, Arcapita hired the well-known law firm of Gibson, Dunn &
Crutcher to certify that no charitable contributions were transferred to groups banned
under U.S. law. According to news reports, that certification was made.330
In the first draft of the registration statement filed with the SEC pursuant to the 1933 Act
in preparation for its initial public offering seeking to raise $90 million, the company
lawyers settled on the following disclosures331:
6 5
[Under the “Risk Factors” rubric beginning:] Arcapita will continue to
have substantial control over us after this offering, . . ..
. . .
Our compliance with Shari’ahh principles may make it difficult for us
to obtain financing and may limit the products we sell.
Our majority shareholder operates its business and makes its
investments in a manner consistent with the body of Islamic principles
known as Shari’ahh. Consequently, we operate our business in a manner
that is consistent with Shari’ahh principles and will continue to do so for
so long as Arcapita is a significant shareholder. Shari’ahh principles
regarding the lending and borrowing of money are complicated, requiring
application of qualitative and quantitative standards. The negotiation and
documentation of financing that is compliant with these principles are
generally complex and time consuming. As such, if we have immediate
liquidity needs, we may not be able to obtain financing that is compliant
with Shari’ahh principles on a timely basis. A Shari’ahh-compliant
company is prohibited from engaging in derivative hedging transactions
such as interest rate swaps or futures, forward options or other instruments
designed to hedge against changes in interest rates or the price of
commodities we purchase. Also, a Shari’ahh-compliant company is
prohibited from dealing in the areas of alcohol, gambling, pornography,
pork and pork-related products.
We may be subject to adverse publicity resulting from alleged
statements about Arcapita or complaints or questions from our
customers arising from such adverse publicity.
During 2002, we were subject to adverse publicity due to attempts to
connect Arcapita with inflammatory and controversial statements made by
one of its former outside advisors, in his individual capacity, regarding a
variety of subjects, including events in the Middle East. We may be
subject to similar adverse publicity in the future. Even if unfounded, such
adverse publicity could divert our management’s time and attention and
adversely affect the way our customers perceive us, our net sales or results
of operations, in the aggregate or at individual coffeehouses, or the market
price for shares of our common stock.332
No other disclosures were made relating to SCF other than some basic disclosures of the
company’s sale-lease back financing arrangements which were treated as capital leases as
required by generally accepted accounting procedures (“GAAP”).333 The SEC
commented on the recitation of the 2002 affair in the registration statement requesting the
following: “Please tell us, with a view to disclosure, more background about the
6 6
statements, such as describe the statements made and identify who made them. Also
revise the risk factor to clarify the risk.”334
Caribou filed its first amended draft of the registration statement on August 15, 2005.
While there is no change to the description of the 2002 affair, some additional risks are
disclosed relative to financing:
. . . We may, however, enter into a new lease financing arrangement or
other financing arrangement or amend our current lease financing
arrangement to provide us with additional liquidity. We expect that any
such financing arrangement would be structured in a manner that would be
compliant with Shari’ahh principles. Shari’ahh principles regarding the
lending and borrowing of money are complicated, requiring application of
qualitative and quantitative standards. The negotiation and documentation
of financing that is compliant with these principles are generally complex
and time consuming. As such, if we have immediate liquidity needs, we
may not be able to obtain financing that is compliant with Shari’ahh
principles on a timely basis.335
The SEC commented on the first amended registration statement by asking for some
additional clarity on the “disclosure concerning the majority shareholder to briefly
discuss the shareholder and compliance with Shari`ah principles.”336 Notwithstanding the
written comments by the SEC, no material changes regarding Shari’ah or the 2002 affair
were made to any of the subsequent four amendments to the registration statement or to
the final prospectus.337 No changes to these disclosures have been made in any of the
interim filings through the last Form 10-K annual report.338
A cursory examination of the civil liability and criminal exposure issues confronting
Caribou suggests that the company and its legal counsel opted to bury the Shari’ah black
box and to ignore what it knows or most certainly should have known are the facts that
require at the very least some further due diligence on their part and fuller disclosure.
2. Analysis
To begin, to the extent that the examination in this memorandum of the civil liability and
criminal exposure issues surrounding the endogenous and exogenous elements of
Shari’ah and SCF, respectively, are valid, this memorandum would expect to find
implications for both in specific examples. Caribou certainly fits. A U.S. retail chain of
coffeehouses is principally owned and operated by investors from the GCC states. These
investors have organized themselves as an investment bank in Bahrain and incorporated a
subsidiary in the U.S. The financial structure of this company with numerous off-shore
entities is complex and convoluted utilizing literally dozens of Cayman Island offshore
entities to hold the stock of Caribou. The parent company adheres to Shari’ah and to be
certain of this has retained a Shari’ah advisory board. The Shari’ah rulings of this
advisory board control not just the parent company but also the operations of the retail
chain.
6 7
The former chairman of the Shari’ah advisory board was forced to resign following the
public exposure of his open support of Palestinian and Lebanese Islamic terrorist groups.
The accusations of funneling charitable contributions from the principal shareholder’s
profits to terrorist groups were sufficiently alarming that the company requested a major
U.S. law firm to make certain that none of the beneficiaries of the charitable contributions
were specifically designated as terrorist organizations by the U.S. government.
But given all of the above, and the extant literature copiously collected by Coughlin (and
others) on the intimate connection between Shari’ah, the Law of Jihad, and the actual
conduct of Jihad, the question must again be asked whether the lawyers for Caribou have
willfully blinded themselves to this connection even as they disclose and represent to the
investing public that their client abides strictly by Shari’ah. Given the Qaradawi affair
described above, the company and its legal counsel were certainly on notice that one of
the world’s most respected Shari’ah authorities had issued legal rulings based upon
Shari’ah calling for terrorist acts against innocent civilians in Israel.339 Are the partial
disclosures in the company’s prospectus sufficient to provide the unsuspecting post-9/11
investor with the material information that Shari’ah advocates Jihad as a general,
historical, and traditional matter against unbelievers who reject the “invitation to Islam”?
Moreover, after having experienced the 2002 affair over Qaradawi, have the company’s
legal advisors fulfilled their fiduciary duties to conduct sufficient due diligence of the
other Shari’ah authorities to determine if they adhere to traditional, historical, and
authoritative Shari’ah as it relates to the Law of Jihad? After a ten-minute Google search
on the Internet, the only conclusion one could reach would be that neither the company
nor its lawyers conducted even a minimal investigation, or if they did, they willfully
ignored the results.
For example, one of Arcapita’s long-standing Shari’ah authorities and indeed one of the
most respected in the world today is Mufti M. Taqi Usmani. Born in Deoband, India,
Usmani was a judge on the Shari’ah Court in Pakistan and on the Shari’ah Appellate
Bench of the Pakistan Supreme Court, a position he occupied for more than 20 years. He
currently sits on numerous Shari’ah authority boards and chairs the Shari’ah board for
the most authoritative of the standards boards for the SCF industry, the AAOIFI.340
Usmani is hardly an unknown entity. He has published and spoken prolifically on the
evils of the West, America, and the obligation for offensive Jihad. Much of this literature
has been summarized by Alex Alexiev, vice president for research for the Center for
Security Policy341, in his short dossier on Usmani. Drawing on open source research,
Alexiev exposes Usmani as a Shari’ah authority fully committed to the Law of Jihad.342
The most telling of Usmani’s legal rulings on Jihad is found in the last chapter of his
book, Islam and Modernism, published in 2006.343 In that chapter, Usmani responds to a
Syed Badrus Salam of Jedda, Saudi Arabia, who has submitted an inquiry for a legal
ruling to Usmani. In his query, Salam seeks to interpret the various authoritative Shari’ah
scholars who ruled in favor of aggressive Jihad against non-Muslims in a historical
context. He attempts to suggest to Usmani that aggressive Jihad against non-hostile, non6
8
Muslims was no longer required as a practical matter. Arguing that while aggressive
Jihad was effective in the days of Mohammed and the Caliphates as the most effective
way to convert the world to Islam, he opines that today this was no longer the case. When
Muslims are without military power and live in Western societies which allow freedom
of religion and grant Muslims the opportunity to convert non-Muslims peacefully, Salam
maintains that the best approach to spreading the “Message of Allah” is through
“[c]ompromising relations and amicable treatment”.
In his written response, Usmani rejects any such suggestion. His response is provided
below in full for three reasons: (1) it sets out in clear terms the standard, traditional
Shari’ah doctrine on the Law of Jihad; (2) the response is a private response that Usmani
purposefully made public by including in a book which was originally published in Urdu
and which he subsequently had published in English; and (3) providing only a partial
quote and allowing the reader to access the original at some other time would lessen the
stark and startling impact of the legal ruling by one of the world’s most authoritative
Shari’ah scholars and one of the most important Shari’ah authorities in the SCF world.
His response was as follows:344
I am in receipt of your esteemed letter. Whatever you have written about
Jehad can be summarized as this “If a non-Muslim state allows for
preaching Islam in its country, Jehad against it does not remain lawful.” If
this is what you mean, my humble self does not agree with it. Obstruction
in the way of preaching Islam does not mean only a legal obstacle, but
greater power or domination of a non-Muslim state against Muslims is by
itself a great obstacle in the propagation of Islam. There are no legal
restrictions in most of the countries today on preaching Islam, but since
their grandeur and authority is established in the world, it has led to
developing a universal feeling which forms a greater obstacle than the
greatest legal binding in the way of free propagation of Islam.
For this reason the most important purpose of Jehad is to break this
grandeur so that the resulting psychological subordination should come to
an end and the way of accepting the Truth become smooth. As long as this
grandeur and domination persists the hearts of people will remain subdued
and will not be fully inclined to accept the religion of Truth. Hence Jehad
will continue. The Qur'an said in Sura Tauba:
Then, when the sacred months have passed, slay the idolaters
wherever ye find them, and take them (captive), and besiege them,
and prepare for them each ambush. But if they repent and establish
worship and pay the poor-due, then leave their way free. Lo! Allah
is Forgiving, Merciful.345
Here, killing is to continue until the unbelievers pay Jizyah346 after they
are humbled or overpowered. If the purpose of killing was only to acquire
permission and freedom of preaching Islam, it would have been said “until
6 9
they allow for preaching Islam.” But the obligation of Jizyah and along
with it the mention of their subordination is a clear proof that the purpose
is to smash their grandeur, so that the veils of their domination should be
raised and people get a free chance to think over the blessings of Islam.
Imam Razi has written the following commentary on this verse:
The purpose of “Jizyah” is not to let the unbelievers stay in their
contumacy against Islam but sparing their lives to give them a
chance for a time during which they may hopefully get convinced
of the truth of Islam and embrace it. So when an unbeliever is
given time wherein he would be observing the respect and honour
of Islam, and hearing the arguments of its validity, and also
observing the baselesness of disbelief, these things would convince
him to turn towards Islam. This, in fact, is the real purpose of
legalizing Jizyah.
The other question worthy of notice is: Do we find an example that the
Prophet (PBUH)347 and his companions ever sent any missionary groups
in other countries before Jehad and waited for their reaction to allow or
disallow the missionary work? Did they go for Jehad only when they were
refused to carry out the missionary work for Islam? Was any mission sent
to Rome before attacking them? Was any attempt made to avoid Jehad
against Iran and did they contend on seeking a permission for preaching
Islam for that purpose? Obviously it was not so. Thus there can be no
other conclusion that only a permit for missionary activities was not the
aim. If that would have been the only aim many of the bloody combats
could be stopped only on one condition that no obstacle would be placed
in the way of the mission of Islam. But at least in my humble knowledge
there has not been a single incident in the entire history of Islam where
Muslims had shown their willingness to stop Jehad just for one condition
that they will be allowed to preach Islam freely. On the contrary the aim of
Muslims as declared by them in the battle of Qadsia was, “To take out
people from the rule of people and put them under the rule of Allah”.
Similarly, the Our'an said:
And (you O Believers) fight them until persecution is no more and
the Din is all for Allah.
In the exegesis of this verse my reverend father Mufti Muhammad Shafi
has written:
The meaning of religion is “Authority and domination”. Thus the
meaning of this verse would be that Muslims should continue until
the Muslims are safeguarded against their contumacy, and the
religion of Islam becomes a dominating power so that it offers
protection to Muslims from the atrocities and mischiefs of others.
7 0
He further said:
The nutshell of this explanation is that Jehad against the enemies
of Islam is obligatory on Muslims until the danger of their mischief
or evil-doings is over, and the domination of Islam is established
over all other religions. Since this will occur only near the end of
the world, the command of Jehad remains till the last day.
(Ma’arif-ul-Qur’an vol 4, p. 233)
In short, my humble self is of the view that the purpose of Jehad is not just
to get the right of missionary activities in any country, but it aims at
breaking the grandeur of unbelievers and establish that of Muslims. As a
result no one will dare to show any evil designs against Muslims on one
side and on the other side, people subdued from the grandeur of Islam will
have an open mind to think over the blessings of Islam. Factually, this
aims at safeguarding Islam. It is for this reason that the scholars who have
called Jehad “A Protection” must be looked in the above context. But the
basic element of this “protection” is to break the grandeur of unbelievers
and establish the authority of Islam. Hence this basic element cannot be
excluded from it. I think that all Ulema (Religious scholars) have
established the same concept about the purpose of Jehad. Moulana Idrees
Kandhalvi stated:
By commanding Jehad Allah does not mean that all the unbelievers
be killed outright, but the aim is that the religion of Allah should
dominate the world, and Muslims live with honour and dignity,
and obey and worship Allah in peace and tranquillity and there be
no danger from unbelievers to interfere in the religion of Islam.
Islam is not in enmity with the personal existence of its enemies. It
resists such a grandeur and power that may become a threat for
Islam and Muslims. (Seerat-ul-Mustafa vol: 2, p. 388)
At another place he writes:
The implication of this verse is an obligation imposed on Muslims
to fight against the unbelievers till the disorder and mischief cease
to exist and the religion of Allah become supreme. By 'mischief in
this verse is meant the mischief anticipated from the grandeur and
power of disbelief. And “The religion is all for Allah” means the
exhibition and domination of religion, while in another verse it is
stated,
[Arabic verse in the original inserted here.]
7 1
that is, the religion of Islam should gain so much domination and
power that it may not be subdued by the power of infidelity and the
religion of Islam becomes fully secure from the mischief and
danger of disbelief (Ibid vol. 2, p.386)
If the need for Jehad was abandoned just on getting the permission of
Tableegh (Missionary activities), then we see that Muslims already have
this permission in most of the non -Muslim countries of the world (It is a
pity that this permission is not given in some Muslim countries) which
implies that Muslims should never have to lift the sword. As a result
disbelievers may establish and hoist flags of grandeur all over the world
and their awfulness and supremacy on the people would stay dominating.
The policies will be theirs, the commandments will be theirs, ideologies
will be theirs, views will be theirs and the strategies will be theirs, yet the
Muslims would have to be conten[t]ed with the permission for their
missionaries to enter those countries. The question arises how many
people would be prepared to listen to the Muslims or give a serious
thought to their speeches and writings in an atmosphere where disbelief
had established its grandeur and awe throughout. How can the efforts of
Muslim missionaries be effective in an atmosphere where anti-Islamic
doctrines being spread on the strength of political power with full vigour,
and their propagation carried out with means not possessed by Muslims?
If, however, Islam and Muslims attain such a power and grandeur against
which the power and grandeur of disbelievers be subdued or at least it may
be unable to create sedition and mischief mentioned above, then, of
course, mutual compromise through peace treaties with non-Muslim
countries is not against injunctions of Jehad. Likewise as long as the
required capabilities for breaking the grandeur of disbelief are not
possessed by Muslims, peace agreements with other countries, along with
all efforts to accumulate the sources of power, are indeed lawful. In other
words, there can be two types of agreement with non-Muslims.
1) Mutual compromise and peace agreements can be made with
countries that have no power which could threaten the grandeur
and domination of Muslims. This will be enforced as long as they
do not become a threat to the Muslims again.
2) If Muslims do not possess the capability of “Jehad with power”
agreement may be made till the power is attained.
My article published in March, 1971 as referred to by you pertains to these
particular types of agreements. The excerpts of article published in June,
1981 pertain to the state where the grandeur of unbelievers dominates over
the Muslims. Hence your expression that, “Aggressive Jehad is obligatory
against hostile, and non-compromising non-Muslim states subject to
7 2
capability, so that their power breaks and they do not form obstacles in the
way of Muslim Missionary works. Jehad is not advisable against nonhostile
and compromising non-Muslim states who allow freedom of
missionary activities” ..... It is correct if it means what I explained above.
But if it means that just by permitting missionary activities a non-Muslim
state becomes “non-hostile and compromising” and Jehad against them
does not remain lawful or desirable, then in my view this is not correct.
Arguments in favour of my view have already been advanced.
As for your deliberation that “... Particularly these days when territorial
expansion is generally condemned contrary to the times when conquering
the land was common which was regarded as a credit to the attribute of the
kings and rulers. The Aggressive Jehads forming the major parts of
Islamic history all belong to the same era.” ........ With all the respects for
you I strongly condemn it, because, if this is taken to be correct it would
mean that Islam does not have a measure to determine a thing as good or
bad. If a bad thing is counted as an “essential attribute” at the particular
time Islam would begin to march on the footsteps of this practice and
when people begin to condemn it at another time Islam would also follow
the suit. The question is whether Aggressive battle is by itself
commendable or not? If it is, why the Muslims should stop simply because
territorial expansion in these days is regarded as bad? And if it is not
commendable but deplorable why Islam did not stop it in the past. Did it
continue to practice because this was regarded as a creditable attribute of
the kings”?
In my humble opinion this interpretation of the Aggressive Jehad of
Islamic history is extremely incorrect and far away from the facts. Even in
those days when this thing was considered to be a creditable “Attribute of
the kings” Aggressive Jehads were waged not because it was customary
for that period of time but because it was truly commendable for
establishing the grandeur of religion of Allah. There were other
“Attributes of the kings” that in the excitement of victory they never made
any distinction between women, children and old people when persecuting
them. But Islam did not encourage it just because it was customary. On the
contrary Islam not only framed such military rules and regulations but also
practically enforced them as could not even be imagined by the “kings”.
These were a matter of great surprise and rather unbelievable for the
people who had not only become used to the barbarism of those kings but
also became their admirers.
Aggressive Jehad is lawful even today for the purpose it was lawful in
those days. Its justification cannot be veiled only because the peace-loving
inventors of Atom Bombs and Hydrogen Bombs label it as
“Expansionism” and resent those who have put the chains of slavery
7 3
around the necks of the people of Asia and Africa. They are still bleeding
under these heavy chains.
With due apologies, I may point out that it seems to me the result of the
grandeur of the paganism that people have fixed their standard of good
and bad on the basis of the propaganda which produces a lie as truth and
truth as lie and then causes it to work into the minds of people to the
extent that, to say nothing of non-Muslims, the Muslims themselves are
overawed and inclined to adopt an apologetic attitude. If breaking such a
grandeur of falsehood and evil comes under the definition of
“Expansionism” we should venerate the blame of this expansionism with
complete self-confidence, rather than stand humble before them as though
saying, “when you thought that Aggressive Jehad was good we practised
it, but since you have started condemning it in your books..... and only in
books.....we have also forbidden it on ourselves.”
My humble self can never agree with this way of thinking.
Humbly yours.,
Muhammad Taqi Usmani.
Usmani’s condemnation of a peaceful, non-aggressive approach to non-Muslims in the
West is beyond debate or doubt. He advocates violent and aggressive Jihad even against
peaceful non-Muslims if they don’t heed the call to Islam and he bases his legal ruling
explicitly on legal verses in the Qur’an, the actions of Mohammed and the successor
Caliphates, and a consensus among Shari’ah authorities. By doing so, he has rooted his
doctrine of Jihad within traditional and authoritative Shari’ah.
Had the lawyers for Caribou bothered to conduct even a minimal due diligence, they
would have been confronted with three sobering facts:
[1] Usmani, as a Shari’ah legal authority, has issued an absolute grant to
Muslim terrorist combatants and their financial and logistical supporters to
wage aggressive Jihad against the West. Further, because Usmani is a
Shari’ah authority, his publication of this responsive letter is not theory or
theological; it is binding Islamic law and must be taken as such by
Shari’ah-adherent Muslims.
[2] If Usmani’s legal ruling is in fact traditional and authoritative, the
Shari’ah black box of SCF has just become a weapon in the Jihad to
destroy the Western world’s refusal to submit to Shari’ah. Usmani’s
ruling strongly suggests by implication that SCF is hardly an embrace of
the West’s domination, but rather a kind of treaty with the Western world
until the Muslims will have the opportunity to wage violent Jihad. In this
7 4
context, SCF is part of the Jihad to end the “psychological subordination”
Muslims suffer when Islam is not the dominant religion in the world.
[3] To the extent that terrorists will use Usmani’s legal rulings to justify
attacks against Western interests, and in view of Caribou’s indirect
financial support of Usmani as a paid advisor to Arcapita and given
Arcapita’s relationship to Usmani and its absolute control over Caribou,
should Arcapita be charged with the material support of terrorism, Caribou
and its assets could very well be on the blunt end of an executive blocking
order or post-conviction forfeiture proceeding.348
At the very least, the fact must be fully disclosed that Caribou is principally
owned and operated by a company which embraces Shari’ah authorities such as
Qaradawi and Usmani. And, it will hardly be sufficient to characterize Usmani
and his legal rulings through some vague or oblique reference as an “outside
advisor” to its principal shareholder. Usmani is a highly regarded and respected
Shari’ah authority by all of the Shari’ah authorities in the world. He sits on all of
the important Shari’ah boards and is a leader in the industry’s standards
associations. His rulings cannot be marginalized because his role, along with the
other co-members of the Arcapita Shari’ah board, in setting the Shari’ah policies
for Caribou are absolute given Arcapita’s controlling interest.
A final note regarding the third of the sobering facts above. According to
Arcapita’s public representations, it pays both a Shari’ah charitable tax on its
profits and purifies any forbidden “interest” income by contributing those funds to
charity.349 For the 12 months ending June 30, 2007, Arcapita had set aside more
than $2.4 million for such charitable contributions.350 While Arcapita reportably
hired a law firm to confirm that it did not make charitable contributions to
organizations designated as terrorist organizations by the U.S. government, this
listing is hardly exhaustive of Muslim charities involved in funneling aid to
terrorists. While Arcapita’s lawyers might have taken a list of charitable
contributions provided by Arcapita and cross-checked them against the designated
terrorist organizations, this is only a first step. Given the public record regarding
the purpose and methodologies of Shari’ah, the published statements, writings
and legal rulings from two of Arcapita’s esteemed Shari’ah authorities on the
Law of Jihad and the support of violence against Western or Israeli targets, such a
casual due diligence of the beneficiaries of Arcapita’s charitable contributions
would be negligent at best and quite possibly reckless.
B. Dow Jones
1. Dow Jones Islamic Index
As discussed at the beginning of this memorandum, the Dow Jones Islamic Index
(“DJII”) provides a standardized universe of Shari’ah-compliant publicly-traded
companies. Private investors and mutual funds who wish to invest in only Shari’ah7
5
compliant companies can select the DJII or any of the other Islamic indexes established
by Dow Jones for U.S., non-U.S., and specialty markets. One such mutual fund which
has licensed the right to utilize the Dow Jones Islamic U.S. Index (“DJII-US”) and the
Dow Jones name is the Dow Jones Islamic Fund (“the Fund”). Before proceeding to an
examination of the Fund, it would be worthwhile to pause briefly to understand what
Dow Jones & Company (and their lawyers) deem reasonable due diligence and disclosure
for one of the world’s premier financial research companies in the context of an index
marketed to the world of Shari’ah-compliant Muslims as authoritative.
Dow Jones & Company (“Dow Jones”), which was recently acquired by News
Corporation351, was the first company to offer Shari’ah-compliant indexes. Standard &
Poor’s has created its own suite of such indexes. Dow Jones represents itself as “a leading
provider of global business news and information services.”352 It markets “Dow Jones
Indexes [as] a leading full-service index provider that develops, maintains and licenses
indexes for use as benchmarks and as the basis of investment products.”353 DJII describes
its “Key Attributes” as follows:
Shari’ah Law Compliance: The Dow Jones Islamic Market Indexes are
stringently monitored to ensure their continued compliance with Shari’ah
Law. The independent Shari’ah Supervisory Board supports index
integrity by conducting periodic reviews.
Liquidity: The Dow Jones Islamic Market Indexes include only actively
traded stocks that are easily accessible to investors. The selection universe
for the family is the Dow Jones World Index, which covers approximately
95% of underlying market capitalization and expressly excludes the very
smallest and most thinly traded stocks.
Comprehensive Coverage: The DJIM Index provides broad coverage
across countries, regions, market cap ranges and Shari’ah-compliant
industries. Subindexes allow the individual tracking of these various
market segments.
Systematic Methodology: The Dow Jones Islamic Market Indexes are
created and maintained according to a systematic and published
methodology. The selection universe is constructed based on a quantitative
set of rules, and stocks must pass consistently-applied industry and
financial-ratio screens to be included in the index.354
According to the DJII Internet site, the sum and substance of these “screens” are:
The DJIM Index includes all securities in the Dow Jones World Index that
pass the following screens for Islamic compliance:
7 6
Industry Type: Excluded are companies that represent the following lines
of business: alcohol, tobacco, pork-related products, financial services,
defense/weapons and entertainment.
Financial Ratios: Excluded are companies whose:
• Total debt divided by trailing 12-month average market
capitalization is 33% or more.
• Cash plus interest-bearing securities divided by trailing 12-month
average market capitalization is 33% or more.
• Accounts receivables divided by 12-month average market
capitalization is 33% or more.355
In all of its public disclosures and representations, Dow Jones informs the public that the
DJII Shari’ah Supervisory Board “was established to counsel Dow Jones Indexes on
matters relating to the Shari’ahh [sic] compliance of the indexes’ eligible
components.”356 One question that comes to mind is why the DJII needs any Shari’ah
authority on retainer if the “filters” are “quantitative rules” applied presumably by a
software program? Assuming Muslim investors might not trust the DJII to maintain the
“filters” and some supervision is required to keep everyone honest, why does the DJII
keep six world-renowned Shari’ah authorities on retainer? The answer suggested by the
questions themselves is that there is still some component of Shari’ah supervision of the
DJII that is not simply “quantitative”.357 If this is indeed the case, this fact is disclosed
nowhere by the DJII or by any publicly reporting fund that licenses the DJII and is
required to disclose the filters the fund has licensed.
Yet, it is possible that the answer is simpler than that. Perhaps, the DJII, seeking to be the
“gold standard” in the industry, maintains an illustrious board to gild its reputation among
Shari’ah-adherent investors. Indeed, the Shari’ah supervisory board members are listed
prominently on all of the DJII promotional literature, a veritable who’s who in the
Shari’ah authority world:358
Name Country
Shaykh Abdul Sattar Abu Ghuddah Syria
Shaykh Justice Muhammad Taqi Usmani Pakistan
Shaykh Nizam Yaquby Bahrain
Shaykh Dr. Mohamed A. Elgari Saudi Arabia
Shaykh Yusuf Talal DeLorenzo United States
Shaykh Dr. Mohd Daud Baker Malaysia
7 7
On the DJII Internet site, the short resumes of each Shari’ah authority follows. The
disclosures relating to Usmani are limited to his professional and legal associations:
Mr. Usmani has been a member of the Supreme Court of Pakistan since
1982. He is also the vice president of Darul Uloom Karachi and the vice
chair and deputy chairman of the Islamic Fiqh Academy (OIC), Jeddah.
Mr. Usmani edits the monthly magazines Albalagh and Albalagh
International. He is a chairman or member of the Shari’ahh supervisory
boards of a dozen Islamic banks and financial institutions worldwide.
As indicated above, Dow Jones has been a publicly-traded company. News Corporation,
the company which recently acquired Dow Jones, is also a publicly-traded company.
After a careful review of all of the Dow Jones filings with the SEC and the filings by
News Corporation relating to its acquisition of Dow Jones, there is absolutely no mention
of any reputational, financial, or national security risks associated with operating a
Shari’ah-compliant index. No mention is made of the purposes of Shari’ah and its
methodologies beyond describing the “objective filter” or “screen” used to develop the
DJII. No mention is made of the fact that one of its key Shari’ah authorities has called for
violent Jihad against non-Muslims in the U.S. -- even during peaceful times where
Muslims are provided with the First Amendment right to freely exercise their religion and
to convert non-Muslims through lawful means. The question regarding all of the
disclosure and due diligence issues raised in this memorandum now confront not simply
the Dow Jones’ lawyers, who appear to view Shari’ah as a beneficent black box, but the
News Corporation lawyers.
Without going into an intricate analysis of all of the Dow Jones representations and
disclosures relating to Shari’ah and SCF, one area is of interest because it confirms the
earlier analysis of the intimate and integrated relationship between SCF, Shari’ah, and
the Law of Jihad. The DJII describes its “screens” as of two kinds. One screen is for the
forbidden “vice” industries such that companies engaged in any of the forbidden
industries will be excluded from the universe of potential indexed companies. The
second-level screen eliminates companies from within the permissible industries whose
financials indicate they carry too much debt or maintain too much liquidity which would
suggest they are paying or receiving, respectively, too much interest. (As indicated
earlier, a minimum amount of interest is permitted but the Shari’ah-compliant mutual
fund or the individual Shari’ah-compliant investor must “purify” the portion attributed to
forbidden profits such as from interest and donate that portion to a Shari’ah-compliant
charity.)359
In its various public representations, Dow Jones states that the following industries are
forbidden and excluded from the DJII: “alcohol, tobacco, pork-related products, financial
services, defense/weapons and entertainment.”360 Elswhere, Dow Jones explains that
neither tobacco nor defense/weapons are strictly forbidden:
7 8
Although no universal consensus exists among contemporary Shari`ah
scholars on the prohibition of tobacco companies and the defense industry,
most Shari`ah boards have advised against investment in companies
involved in these activities.361
The question for the U.S. publicly-traded company is: Does it have a duty to disclose
why it is that Shari’ah would prohibit the defense industry? Does the Shari’ah
prohibition apply to Muslims investing in a Muslim defense industry? There is of course
no legal issue relative to an index or a mutual fund which chooses not to invest in
military or defense industries, whether out of a conviction that such industries are sources
of evil or out of a moral position against war of any kind. The question, in this instance,
however, does not arise in a vacuum but in a setting flowing from the black box of
Shari’ah. That black box, once pried open, exposes a hostile and even violent doctrine
targeting non-Muslims in the West for conversion, subjugation, or war. There are literal
armies of Shari’ah-driven combatants at war with the West based upon that doctrine. It is
in this context that the question about the motives for the prohibition becomes material to
a post-9/11 U.S. investor in the context of disclosure laws.
Further, the question hardens into an indictment when juxtaposed against the published
legal edicts of the classical and contemporary Shari’ah authorities. Logically, to suggest
that Shari’ah is opposed to the defense industry is on its face absurd given the history of
Shari’ah-based empires waging war against their enemies. The evidence, however, is
more than historical as the contemporary evidence of Shari’ah-based regimes illustrates.
Iran, Saudi Arabia, Sudan, and the Taliban-led Afghanistan all have acquired massive
weapons arsenals and, at least in the case of Iran, have developed an “Islamic defense
industry”.362 The adoption of such a military posture on the part of these Muslim
countries is not simply grounded in a geo-strategic policy. It is also demanded by
Shari’ah, at least according to the leading Shari’ah authorities of our day. In Usmani’s
book, Islam and Modernism, he makes the careful point that Shari’ah has no objections
to science and technology per se. In fact, Shari’ah requires Muslims to invest in and to
utilize all of modern warfare technology for its mandatory Jihad:
The Grand Mufti of Pakistan, Mufti Muhammad Shafi, President, Darul
Ulum, Karachi, has written in his treatise “Jihad” as under,
Indeed, the Patience, the fear of Allah and total belief in and
submission to Allah is the real and unconquerable strength of
Muslims. Along with it, however, it is also essential that equipment
of war and ammunition proper to the time and place should be
acquired and stored. The Prophet (SA) always arranged for war
exercises, and issued instructions to collect and acquire all those
weapons that were in vogue anywhere in those days. . . . [citing the
case where two companions of Muhammad were excused from
fighting because they were studying how to manufacture modern war
weapons].
7 9
This incidence also proves that it is obligatory for the Muslims to
make their countries self-sufficient in war weapons and technology
and should not depend on others. . . . We are bound to think it
seriously how much our country is in need of all the equipment and
weapons of war used in modern warfare so that we may not be
lagging behind. We must put all our energy and resources to fulfill
the aim that we become self-sufficient in the nearest possible future.
. . .
And Moulana Zafar Ahmad Usmani, Sheikh-ul-Hadith, Darul-Ulum-al-
Islamiya, Tando Allah Yar, writes in one of his recent articles,
War weapons and technology against the enemy should be raised
to the extent that the enemy is overawed with them . . . our earlier
Caliphs and Sultans religiously followed this rule. . . . The Muslim
nations should join together to build up factories for ammunition
and other weapons, and a continued process of research and
inventions must be carried out. All these efforts are in conformity
with Qur’anic injunction (Monthly Al-Balagh, p.44 J.A. 1387 (H).
Moulana Muhammad Yusuf Binouri, Sheikh-ul-Hadith Madrasah
Arabiyah, New Town, Karachi, writes:
There is no scarcity in the Islamic world, rather there is an
abundance of natural resources, material reserves and wealth, but
how great a tragedy it is that a major portion of their wealth is
utilized by the enemies through deposits in foreign banks, or spent
in extravagance, debauchery, undue luxuries, and immoralities.
But defense stability, military training and ordnance factories are
practically negligle, while the enemies of Islam are contructing
airports, naval fleets, military cantonments and large ordnance
factories. . . . (Monthly Baiyyenat, Karachi, R.S. 1387 (H), p.4)363
Investors are, of course, entitled to decide whether or not to take a stance against
investing in defense industries. Muslim nations are also free to purchase or manufacture
armaments. But there is a threshold disclosure issue for a U.S. company that is promoting
SCF, which forbids investment in the defense industry. If that prohibition is due to the
fact that Shari’ah considers Islam at war with the West, the promotion of Shari’ah and its
“opposition” to defense industries is hardly full disclosure. The very fact that Dow Jones
hints at this by explaining that there is no consensus that the defense industry is a
forbidden industry in and of itself suggests that someone in the inner circle at Dow Jones
understands that its Shari’ah authorities are using SCF to weaken its enemies (i.e., the
non-Muslim West) while mandating through their legal rulings (applied selectively) that
Shari’ah-adherent subscribers should embrace the weapons industry in the Muslim world
8 0
in the service of Jihad. This rather patent implication suggests more than a reckless
disregard for the duty to disclose material facts to the investing public.
It is unreasonable to argue that this omission of purpose (i.e., Shari’ah hegemony) and
methodology (i.e., Jihad) in the disclosures and representations by Dow Jones as a U.S.
public company is not material to the reasonable U.S. investor. Furthermore, one has to
conclude that there has been a wholesale failure to conduct even a minimally acceptable
due diligence by legal counsel on this issue. Alternatively, it would seem inescapable that
legal counsel knows full well the purposes for such prohibitions and indeed of Shari’ah
and its methodologies and has consciously buried this political-military agenda deep
inside the black box.
2. Dow Jones Islamic Fund
The Fund is an open-ended mutual fund marketed publicly mostly to the Muslim
American community. Most of the Fund, however, is owned by one shareholder, the
North American Islamic Trust (“NAIT”), which owns 69.8% of the Fund. Charles
Schwab & Co., Inc., is the next largest investor with 9.65%.364 The Fund Advisor, Allied
Asset Advisors, Inc. (“AAA”), is a subsidiary of NAIT.365
On its Internet site, NAIT represents itself as follows:
The North American Islamic Trust (NAIT) is a waqf, the historical Islamic
equivalent of an American trust or endowment, serving Muslims in the
United States and their institutions. NAIT facilitates the realization of
American Muslims’ desire for a virtuous and happy life in a Shari’ahhcompliant
way.
NAIT is a not-for-profit entity that qualifies as a tax-exempt organization
under Section 501(c) (3) of the Internal Revenue Code. NAIT was
established in 1973 in Indiana by the Muslim Students Association of U.S.
and Canada (MSA), the predecessor of the Islamic Society of North
America (ISNA). NAIT supports and provides services to ISNA, MSA,
their affiliates, and other Islamic centers and institutions. The President of
ISNA is an ex-officio member of the Board of Trustees of NAIT.366
At the outset, the lawyer for the Fund must confront the fact that NAIT, and its founder
the Muslim Students Association of U.S. and Canada (“MSA”), and the successor to the
MSA, the Islamic Society of North America (“ISNA”), all have close ties to
organizations involved in the material support of terrorism. For example, prior to the start
of the terror-financing trial of the Holy Land Foundation (“HLF”)367, the Government
submitted a trial brief368 with a list of unindicted co-conspirators (“the List of Co-
Conspirators”)369 who had allegedly participated in some way in the conspiracy to fund
Hamas’ terror-related activities against Israel. Hamas was at the time a designated FTO.
In its trial brief, the government characterized Hamas as follows:
8 1
Hamas’ founding charter makes clear that Hamas is, in fact, the
Palestinian branch of the Muslim Brotherhood, and calls for the
annihilation of Israel through “jihad” (holy war), and the creation of an
Islamic state in its place. Hamas defines jihad as including violent
activities, with such violent activities being carried out by Hamas’ military
wing, commonly known as the Izz Al-Din Al-Qassam Brigades (“Al-
Qassam Brigades”). The charter also calls for charity as [a] means of
securing the population’s loyalty. Through charitable support, the charter
explains, “congeniality will deepen, cooperation and compassion will
prevail, unity will firm up, and the ranks will be strengthened in the
confrontation with the enemy.”
. . .
As evidenced by documents seized in 2004 from the Virginia home of
unindicted co-conspirator and fellow Palestinian Committee member
Ismail Elbarrasse, as well as other evidence, the Muslim Brotherhood
directed its Palestinian Committees throughout the world, including the
United States, to carry out the mandate of assisting Sheik Yassin’s newlyformed
Hamas.370
NAIT and ISNA were both on the List of Co-Conspirators as “individuals/entities who
are and/or were members of the US Muslim Brotherhood.” Evidence at the trial linked
these organizations to Hamas.371 Although the trial ended in a mistrial, the Government is
preparing to retry its main case.372
The legal advisor to the Fund has a minefield of issues to navigate relating to due
diligence and disclosure. Beyond the disclosure of the endogenous elements of Shari’ah
the Fund inherits from the DJII, the first and most obvious problem relative to the Fund’s
exogenous aspects is the documented evidence provided by the federal government at the
largest terror-financing trial in U.S. history. Their evidence makes clear that its client,
and the successor to the founder of its client, have been linked to the material support of
terrorism. Moreover, NAIT’s founding organization, the MSA, has a public record of
embracing the goal of a worldwide Shari’ah hegemony. In a devastating dossier by the
Investigative Project on Terrorism, based wholly on open sources, the MSA is exposed as
suspiciously aligned with the goals of the Muslim Brotherhood and Hamas.373
Other disturbing connections to the funding of terrorism arise. The Fund’s portfolio
manager, Dr. Bassam Osman, who has also been the President and Chairman of the Fund
Advisor for the past six years,374 was a director to another suspect Muslim charity. As
Senator Charles Schumer stated during a hearing of the Senate Judiciary Committee on
Saudi-funded Islamic terrorism:
Meanwhile, a number of ISNA board members appear to have checkered
pasts. One member, Siraj Wahhaj, was named as an unindicted coconspirator
in the WTC, in the World Trade Center, ’93 bombings.
8 2
Another member, Bassam Osman, was previously the director of the
Qur’anic Literary Institute, an Oak Lawn, Illinois, organization that had
$1.4 million in assets seized by the Justice Department in June '98 on the
grounds it was used to support Hamas activities.375
Finally, it appears that NAIT’s ownership of so many U.S. mosques contributes further to
its ties to the material support of terrorism. In April 2004, the founder of an Albany
mosque and the imam he had recruited to serve as the spiritual leader of the mosque were
arrested for participating in “a plot to import a shoulder-fired missile and assassinate a
Pakistani diplomat in New York City.”376 It turns out that NAIT owned the Albany
mosque. Several other NAIT-owned mosques have been named as suspected centers of
terrorist activity.377
In light of the adverse publicity and constant tension of a client linked so intimately to the
material support of terrorism, the twin issues of due diligence and disclosure should be
front and center for the Fund’s lawyers. On the due diligence side, the Fund has the
obligation to protect against any of the monies coming in or going out of the Fund being
exploited in the cause of terrorism. In fact, in the Fund’s prospectus, the Fund promoters
make the standard representation of compliance with the Patriot Act’s anti-money
laundering provisions:
Anti-Money Laundering. The Fund has established an Anti-Money
Laundering Compliance Program (the “Program”) as required by the
Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (“USA
PATRIOT ACT”). To ensure compliance with this law, the Fund’s
Program provides for the development of internal practices, procedures
and controls, designation of anti-money laundering compliance officers,
an ongoing training program and an independent audit function to
determine the effectiveness of the Program.
Procedures to implement the Program include, but are not limited to,
determining that the Fund’s Distributor and Transfer Agent have
established proper anti-money laundering procedures, reporting suspicious
and/or fraudulent activity and a complete and thorough review of all new
opening account applications. The Fund will not transact business with
any person or entity whose identity cannot be adequately verified under
the provisions of the USA PATRIOT ACT.378
Given the documented record creating at least associational ties between the Fund’s
principal owner (including the Fund Adviser) and individuals and organizations tied to
the material support of terrorism, a pro forma recitation of compliance with the Patriot
Act will likely fall well short of the due diligence required by the relevant statutes. For
example, what exact monitoring protocols does the Fund have in place to make certain
that neither the Fund Advisor nor the Fund’s principal shareholder have utilized any of
the Fund’s distributions for criminal activity? Further, has the Fund conducted a thorough
8 3
investigation into the tens of millions of dollars raised by NAIT in tax-exempt
contributions for the purchase of the Fund shares? Were these monies from domestic or
overseas sources? Has anyone attempted to source these contributions? While the Fund
might argue that sourcing an investment from NAIT is sufficient, given the history of
NAIT, its associations, and more importantly its role as a “trust” holding as a fiduciary
the funds and property of individual Muslims, associations of Muslims, and Muslim
organizations, regulations promulgated under the Bank Secrecy Act will likely require
that the Fund verify the source of NAIT’s funds.379
C. Case studies: a conclusion and final note
Given the panoply of civil liability and criminal exposure issues analyzed at various
levels in this memorandum, and given the preliminary nature of any such effort of first
impression, legal minds will most certainly approach the specifics of any fact pattern
cautiously and differently. But what should be viewed in a clearer light as a result of this
analysis is that any U.S. company or its legal counsel which cavalierly assumes the black
box of Shari’ah and the many exogenous issues surrounding it are not serious legal
matters will likely discover at some point down the road that willful blindness only
postpones problems; it never eliminates them. And, as most good lawyers know,
postponing problems is a sure way to exacerbate them.
From the brief examination of some of the issues as they relate to the case studies, the
lesson learned is that -- much like the sub-prime meltdown, where financial institutions
had placed credit risks and ballooning values into a black box of securitizations, out of
sight and out of mind, all with the approval of their legal and accounting professionals --
the SCF industry is the latest rage engaging in the same subterfuge. But, instead of bad
credit risks and overvaluations, the industry is flirting with a black box the contents of
which include a legal doctrine bent on the destruction of the very civilization which has
created modern debt-driven finance. While the sub-prime disaster – which followed on
the heels of the accounting and fraud scandals of the Enron era, which in turn followed
the savings and loan debacle of the last century – should have warned bankers and their
facilitators away from black boxes and a lack of transparency, this lesson seems to have
been lost on even the most prudent of these professionals.
In fact, the next level of fraud has already been hatched. If, for example, an investor
would visit the Internet site of Azzad Asset Management (“Assad”), the investor would
find a host of funds marketed around “ethical investing”.380 With but one or two clicks of
the mouse, the investor finds that “ethical investing” includes the application of an
“ethical screen” that looks exactly like the DJII screen: the same vice industries are
excluded and the same financial ratios (with one minor exception) are used to avoid
interest.381 Nowhere in the marketing material or in the SEC filings for the Azzad funds is
the word Islam or Shari’ah even mentioned.
Assuming the Azzad screens did not correlate with the requirements of Shari’ah
coincidentally, the questions are: Why would Azzad fail to disclose its adherence to
Shari’ah? Did they rely on Shari’ah authorities to develop their screens? Are there no
8 4
reputational or financial risks specifically associated with the fact that the Azzad funds
adhere to Shari’ah rules and principles that ought to have been disclosed? Here one sees
the Shari’ah black box repackaged almost entirely into an “ethical” vehicle, presumably
as a way to entice non-Muslims to invest in accord with Shari’ah, or to avoid appropriate
scrutiny. Disclosure laws in the financial industry simply do not countenance such
deception.
A final note for what might be considered the “nuclear exposure” of the SCF industry. As
described above, the leading two dozen Shari’ah authorities who occupy all of the
important positions in the SCF industry effectively establish all its rules and regulations.
If, in fact, these men have as their ultimate and collective goal the implementation of a
Shari’ah-based Caliphate in the U.S. and elsewhere in the non-Muslim world and their
methodologies include the Law of Jihad, meaning violence when necessary or possible
and otherwise fraud and misrepresentations about the true purpose of Shari’ah, the prima
facie case for a massive lawsuit under the Racketeer-Influenced and Corrupt
Organizations Act (“RICO”) is almost unavoidable. This is especially true now that the
Patriot Act has added the federal terror-related crimes to the RICO predicate offenses and
beefed up the predicate offenses relating to money laundering.382 It does not require more
than a cursory examination of the elements of a viable RICO prosecution to recognize the
enormous exposure.
RICO is violated when a defendant, or in this case a cadre of defendants acting as
Shari’ah authorities, engage in a “pattern of racketeering activity” and by having:
(1) Invested income from a pattern of racketeering activity in an “enterprise”;
(2) Acquired or maintained an interest in an “enterprise” through a pattern of
racketeering activity;
(3) Conducted or participated in the affairs of an “enterprise” through a
pattern of racketeering activity; or
(4) Conspire to do any of the above.383
The “pattern of racketeering activity” means two or more of the predicate offenses within
a ten-year period.384 The predicate offenses include mail and wire fraud, material support
of terrorism, and money laundering.385 The “enterprise”, which is an entity, person, or
group of entities or persons associated in some de jure way (e.g., partnership) or as a de
facto association, exists separately from the defendants.386 In this scheme, the enterprise
is the U.S. financial institution involved in SCF. As has been established in the foregoing
pages, to the extent that a U.S. financial institution has criminal culpability for the
predicate offenses387, that particular institution would join the list of defendants and
operate as part of the enterprise. The evidence of the RICO crime then would include the
fraud and ulterior motives of the Shari’ah authorities and how they have manipulated the
enterprise to achieve their criminal ends. If such an indictment were handed down, it
could lead to a pretrial asset freeze388 and a post-conviction massive forfeiture of the
criminal enterprise’s assets.389
8 5
The question for the U.S. financial industry and the legal profession which is charged
with watching over its every move as a fiduciary is whether U.S. financiers will take the
black box to the bank or send it back from whence it came.
IV. Conclusion
SCF exposes the financial institutions and other businesses which attempt to exploit this
new industry to a whole host of disclosure, due diligence, and compliance issues, all of
which elevate substantially the civil liability and criminal exposure such companies
otherwise factor into their business risk profiles.390 What is clear from this preliminary
legal analysis of what might be called the SCF industry is that very little of this increased
civil and criminal exposure has been recognized, analyzed, or guarded against in any
meaningful way.391
The salient points of this analysis are:
• The Shari’ah black box syndrome: U.S. financial institutions and businesses
involved in SCF risk grave consequences by willfully ignoring the
endogenous elements of Shari’ah. Ignoring what Shari’ah is -- both in theory
and in practice -- and its intimate connection to Islamic terror and holy war
against the non-Muslim world amounts to corporate recklessness.
• Putting Shari’ah in a black box and treating its prohibitions as if they were
benign secular and objective “screens” ignores the duty of disclosure of the
most important elements of Shari’ah: its purposes and its ultimate methods.
• Undoubtedly, a reasonable post-9/11 investor contemplating an SCF
investment would consider (a) the goal of establishing Shari’ah as the law of
the land and (b) the promulgation of the Law of Jihad to establish this goal
material to the investment decision.
• To the extent that U.S. Shari’ah authorities or foreign Shari’ah authorities
retained by U.S. businesses advocate the implementation of historical and
traditional Shari’ah, they risk being charged with a violation of 18 U.S.C. §
2385.
• U.S. financial institutions and businesses have a duty to conduct reasonable
due diligence investigations to be certain that their respective Shari’ah
authorities are neither advocating crimes in the name of Shari’ah nor
promoting the material support of terror, either through legal rulings or
through the funneling of “purification” funds to terrorists. Failure to conduct
such due diligence might very well lead to civil liability, if not criminal
exposure.
• The Shari’ah black box is yet another financial fad like the sub-prime market
where transparency is shrouded in opacity in the mad rush to market-share and
8 6
quick profits. U.S. mutual funds are poised to embrace SCF without a word
about the risks associated specifically with Shari’ah. U.S. banks are cavalierly
promoting Shari’ah-compliant loans as “interest-free” when in fact they are
merely repackaged loans at standard interest rates. This violates any number
of consumer protection statutes. Financial institutions are underwriting
Shari’ah-compliant loans and bond issuances without really understanding the
risks associated with default and bankruptcy treatment.
• Insofar as U.S. financial institutions participate in and cooperate with the
Shari’ah authorities’ efforts to establish the rules and regulations for the SCF
industry, antitrust issues such as rules collusion are likely to present yet
additional issues of exposure for those embracing this new industry.
• The current structure of the SCF industry in which two dozen of the most
influential Shari’ah authorities control the way funds go in and out of the
largest financial enterprises in the world creates the paradigmatic pattern of
predicate racketeering activity any aggressive prosecutor or plaintiff’s lawyer
looks for in a RICO cause of action.
The failure by corporate management and their legal advisors to confront these issues in
any serious fashion is not surprising given the wholesale failure of the participants and
facilitators in this industry to have undertaken a serious analysis of these risks. The extant
legal academic and professional literature reads more like promotional material and not
serious legal analysis conducted by men and women trained to protect clients from their
own blind enthusiasm. The legal industry has gone down this road too many times in the
past. The difference this time is that the risk is not simply financial; it is potentially
existential.
8 7
Appendix A: Dollar-Growth of Shari’ah-Compliant Bonds Issuances
Source: Alvi, Ijlal A., Increasing the Secondary Markets for Sukuks, (slide presentation
published by International Islamic Financial Market, Bahrain) available at
http://www.iifm.net/download/Presentations/Increasing%20the%20secondary%20market
%20for%20Sukuk.pdf (last visited Dec. 15, 2007).
8 8
Endnotes:
1 The distinction made throughout between a SCF “investment” and “transaction” is intended and important
in this context. SCF expresses itself in fundamentally two ways: (a) “the investment” refers to the kind of
investment or business Shari’ah is understood to permit (i.e., equity versus debt with interest; asset-based
versus intangibles such as derivatives or hedging transactions based upon future contingencies; and
commerce in permitted versus prohibited industries) and (b) “the transaction” refers to the way in which a
permitted investment or business transaction is structured typically through the use of nominate contracts
(i.e., an “interest-free” loan may be structured as a cost-plus sale or sale/lease back). See infra notes 4-5.
2 This memorandum uses the term “facilitator” (or in some cases “professional facilitator”) to mean the
range of legal, accounting, and financial advisor professionals who are intimately involved in the
promotion and structuring of SCF investments and transactions. An example of this burgeoning cottage
industry can be gleaned by looking at the promotional material for the myriad of professional and business
conferences dedicated to SCF. See, e.g., Upcoming Event, Arab Bankers Ass’n of N. Am., available at
http://www.arabbankers.org/shared/layouts/section.jsp?_event=view&_id=120130_U127360__132301
(last visited Jan. 24, 2008).
3 See, e.g., ISLAMIC FINANCE: THE REGULATORY CHALLENGE (Simon Archer & Rifaat Ahmed Abdel
Karim eds., 2007); Ayman H Abdel-Khaleq, Offering Islamic funds in the US and Europe, INTERNATIONAL
FINANCIAL LAW REVIEW, available at http://www.iflr.com/?Page=17&ISS=16434&SID=515350 (last
visited Jan. 24, 2008).
4 See, e.g., THE POLITICS OF ISLAMIC FINANCE (Clement M. Henry & Rodney Wilson eds., 2004); see also
IBRAHIM WARDE, ISLAMIC FINANCE IN THE GLOBAL ECONOMY (2000).
5 Michael J.T. McMillen, Symposium: Islamic Business and Commercial Law: Contractual Enforceability
Issues: Sukuk and Capital Markets Development, 7 CHI. J. INT’L L. 427 (2007).
6 See, e.g., THE POLITICS OF ISLAMIC FINANCE, supra note 4; Jane Pollard & Michael Samers, Islamic
Banking And Finance: Postcolonial Political Economy And The Decentring Of Economic Geography, 32
TRANSACTIONS OF THE INSTITUTE OF BRITISH GEOGRAPHERS 313 (2007), available at
http://www.blackwell-synergy.com/doi/pdf/10.1111/j.1475-5661.2007.00255.x?cookieSet=1 (last visited
Jan. 24, 2008).
7 This memorandum does not address in any meaningful way SCF insurance. This is due in large part to the
complex nature of the business of insurance and its regulation and the relatively untested models for
Shari’ah compliant insurance schemes from within the SCF industry itself.
8 The post-Enron “Sarbanes-Oxley” world is the recent result of this failure. See, e.g., Harvey J.
Goldschmid, Comm’r, Sec. & Exch. Comm’n, Post-Enron America: An SEC Perspective, Address at the
Third Annual A.A. Sommer, Jr. Corporate Securities & Financial Law Lecture (Dec. 2, 2002), available at
http://www.sec.gov/news/speech/spch120202hjg.htm (last visited Jan. 24, 2008).
9 Beyond the Enron-era, the financial world is in the midst of the “sub-prime mortgage securitization”
industry meltdown, see, e.g., Ben S. Bernanke, Chairman, Fed. Reserve, The Recent Financial Turmoil and
its Economic and Policy Consequences, Address at the Economic Club of New York (Oct. 15, 2007),
available at http://www.federalreserve.gov/newsevents/speech/bernanke20071015a.htm (last visited Jan.
24, 2008), which is already being compared to the debacle of the Savings & Loan crisis, see, e.g., Amy
Waldman, Move Over, Charles Keating - Causes Of The Savings And Loan Scandal, WASHINGTON
MONTHLY, May 1995, available at http://findarticles.com/p/articles/mi_m1316/is_n5_v27/ai_16947718
(last visited Jan. 24, 2008).
10 While it is not the purpose of this memorandum to detail the legal risks for the professional facilitators,
there is substantial legal exposure for the legal, accounting, and financial professionals who provide the
knowledge and expertise to develop the financial and legal instrumentalities of SCF. While “scheme
liability” under a Rule 10b-5 private right of action has been put to rest by Stoneridge Inv. Partners, LLC v.
Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008), to the extent that the lawyers get involved in drafting the
“representations”, liability will still apply. See LOUIS LOSS & JOEL SELIGMAN, FUNDAMENTALS OF
SECURITIES REGULATION 1329-1332 (2004) (for a discussion on “primary liability” for lawyers under Rule
10b-5); id. at 1465-1469 (for a discussion of the “duty to report evidence of a material violation” under Part
205 to Title 17 of the Code of Federal Regulations promulgated by the SEC pursuant to Section 307 of the
Sarbanes-Oxley Act of 2002).
11 This conclusion has been reached by a thorough review of the published proprietary and non-proprietary
information disseminated by many of the financial institutions and the professional facilitators (i.e., the law
8 9
firms, accounting firms, and financial advisors who promote SCF as a business model and marketing niche)
and of the published academic and trade journals which have treated SCF in some detail over the past
decade. Some of this material will be referenced throughout this memorandum as its relevance to
disclosure, due diligence, compliance, industry standards, and best practices are examined.
12 A good yet basic recitation of SCF by a U.S. Muslim academic who was the “Scholar-in-Residence: U.S.
Department of Treasury”on SCF is in Mahmoud Amin El-Gamal, A Basic Guide to Contemporary Islamic
Banking and Finance (June 2000), available at http://www.nubank.com/islamic/primer.pdf (last visited
Jan. 24, 2008).
13 In classical and traditional Islamic law, extant and in use to this day by the recognized Shari’ah
authorities, there are essentially five categories of normative assessments: obligatory, recommended,
permitted, discouraged, and forbidden. ENCYCLOPEDIA OF ISLAMIC LAW: A COMPENDIUM OF THE MAJOR
SCHOOLS xxxvii-xxxviii (Laleh Bakhtar ed., 1996).
14 While Shari’ah is often referred to as Islamic law, Shari’ah is according to the Shari’ah authorities the
divine law of Allah which is articulated directly to man through the Qur’an and indirectly through the
canonical stories of Mohammed’s life as told through the Hadith. The jurisprudential rules developed by
the Shari’ah authorities over time to arrive at finite legal rulings are often referred to as usul al fiqh or the
roots of the law and al fiqh or just fiqh is the corpus of jurisprudential rules and principles. Furu’ is the
term used for the positive law rulings of individual jurists. For a discussion of this in more detail, see infra
note 32. For purposes of this memorandum, the word Shari’ah is used as a collective term to include all of
these elements unless otherwise indicated. This is how most Muslims use the word in the vernacular.
15 There is no universally recognized degree or examination to acquire the status of an SCF authority.
Generally, the discipline in Shari’ah related in part to commerce is termed fiqh al muamalat and while
there are jurists who specialize in this area, the qualifications for such positions are quite varied. While the
industry itself is undertaking to create standards and structures for uniformity and transparency, it has not
been successful to date. An examination of these issues can be found in Wafik Grais & Matteo Pelligrini,
Corporate Governance and Shariah Compliance in Institutions Offering Islamic Financial Services (World
Bank Policy Research Working Paper No. 4054, 2006), available at http://wwwwds.
worldbank.org/servlet/WDSContentServer/WDSP/IB/2006/11/08/000016406_20061108095535/Rend
ered/PDF/wps4054.pdf (last visited Jan. 24, 2008).
16 The manner in which a Shari’ah advisor is employed or contracted for by the financial institution bears
on several of the legal complications and risks discussed herein. See infra notes 48-51 and accompanying
text (discussing criminal respondeat superior); see also supra note 14 and accompanying text.
17 The number of Shari’ah scholars sufficiently versed in the disciplines necessary to be gainfully
employed by a “blue chip” financial institution engaged in SCF is quite limited. It is generally represented
that there are only about 20-25 competent Shari’ah scholars who have mastered Shari’ah, finance, and
English well enough to be considered both an SCF scholar and employable. Richard C. Morais, Don’t Call
It Interest, Forbes.com, http://www.forbes.com/business/global/2007/0723/104.html (last visited Jan. 24,
2008). For the general problem of the dearth of qualified Shari’ah scholars, see Grais & Pellgrini, supra
note 15, at [page number here] & n.18.
18 In Arabic, the term used is riba, which literally means “increase.” In the past, there has been debate
among Shari’ah authorities and Islamic academic scholars over the prohibition against riba in financial and
commercial transactions. Some scholars point to the fact that the prohibition against interest in the Qur’an
is not simple interest but usurious interest and specifically a default interest prevalent in pagan pre-Islamic
Arabia. Today, the debate is academic because there is broad consensus that interest of all kinds is
forbidden by Shari’ah. For the consensus view of the prohibition against interest, see FRANK E. VOGEL &
SAMUEL L. HAYES, III, ISLAMIC LAW AND FINANCE: RELIGION, RISK, AND RETURN 71-87 (1998). For a
contrarian position, see TIMUR KURAN, ISLAM & MAMMON: THE ECONOMIC PREDICAMENTS OF ISLAMISM
14 (2004); see also Alex Alexiev, Islamic Finance or Financing Islamism? 6-7 (The Center for Security
Policy, Occasional Papers Series No. 29, 2007). For a general discussion of how contemporary SCF has
perverted the “intent” of an “authentic” Islamic political economy, see Mahmoud Amin El-Gamal,
“Interest” and the Paradox of the Contemporary Islamic Law and Finance, 27 FORDHAM INT'L L.J. 108
(2003); Chibli Mallat, The Debate on Riba and Interest in Twentieth Century Jurisprudence, in ISLAMIC
LAW AND FINANCE (Chibli Mallat ed., 1988).
19 The Qur’an forbids gambling or maysir; the Sunna includes gharar or risk in the prohibition. Since all
business includes an element of risk, the jurisprudential task for the Shari’ah authorities is to take the
9 0
specific examples found in the canonical literature, such as “Do not buy fish in the sea, for it is gharar,”
and to translate that into principles, then rules and finally into finite rulings and contract forms which are
considered halal or permitted. See generally VOGEL & HAYES, supra note 18, at 87-95.
20 While there is general agreement about most of these industries as absolutely forbidden, some such as the
tobacco business and military and defense industries are typically forbidden in SCF in Western countries
but not considered an absolute Shari’ah prohibition. For an exploration into the Shari’ah motives for
forbidding defense industry investments in the West, see infra notes 50, 78-81362 and accompanying text.
21 Zakah (sometimes referred to as zakat), which literally means purification, is a form of religious tax for
assisting the less fortunate and those that “struggle for Allah.” The amount is between 2.5% and 20%,
depending upon the source of the wealth, but it is typically on the lower end (2.5%) of the scale. The
amounts also vary based upon which of the four Sunni schools of jurisprudence one follows. Shi’a Muslims
also follow their own jurisprudence which also accounts for some of the variation. For a fuller discussion of
this religious tax and its use to support those who “struggle for Allah” or fight against non-Muslims in holy
war (i.e., Jihad), see John D.G. Waszak, The Obstacles to Suppressing Radical Islamic Terrorist
Financing, 37 CASE W. RES. J. INT'L L. 673 (2005).
22 See the extended discussion on purification by a well-known American Shari’ah authority, in Yusuf
Talal DeLorenzo, Shari’ah Supervision of Islamic Mutual Funds, available at
http://www.djindexes.com/mdsidx/downloads/delorenzo.pdf (last visited Jan. 24, 2008).
23 Yusuf Talal DeLorenzo, Dow Jones Universtiy Questions and Answers, Question 32, available at
http://www.central-mosque.com/fiqh/dow.htm (last visited Jan. 24, 2008).
24 For a thorough discussion from a “moderate” Shari’ah authority on the full theological and
jurisprudential analysis of Shari’ah, see MOHAMMAD HASHIM KAMALI, PRINCIPLES OF ISLAMIC
JURISPRUDENCE (2003). For the specific discussion of “abrogration”, which is the juridical view of latter
Qur’anic verses which contradict earlier ones, see id. at 202-227. For an analytical and objective analysis
of Islamic jurisprudence and its implications for Muslim-non-Muslim relations, see Stephen Collins
Coughlin, “To Our Great Detriment”: Ignoring What Extremists Say About Jihad (with appendices) 83-133
(July 2007) (unpublished thesis, National Defense Intelligence College).
25 Because the original Arabic Qur’an is not formally numbered and there are no periods in classical Arabic
setting off one verse from another, Islamic canon typically breaks the 114 suras or chapters into 6,236 ayat
or verses, but other counts are also used.
26 There is also a healthy debate over which verses in the Qur’an are actually legal sources (ayat al-ahkam)
such that laws are directly or indirectly derived from them. According to most scholars, the debate centers
on the context of the appearance of a verse which has within it a connection to normative or instructional
language. Some include all such verses while others only count those verses which are clearly “legal” in
that they address authorized or prohibited behavior. See, e.g., KAMALI, supra note 24, at 25-27.
27 Hadith is singular for ‘tradition’. Ahadith is the plural. This memorandum uses Hadith as the collective
body of traditions.
28 The Hadith were not formally collected between 100 to 200 years after the death of Mohammed. See
generally THE ISLAMIC SCHOOL OF LAW: EVOLUTION, DEVOLUTION, AND PROGRESS viii-xii (Peri Bearman,
Rudolph Peters & Frank E. Vogel eds., 2005) ; see also Coughlin, supra note 24, at [page number here]
n.90:
Individuals associated with Muhammad in his lifetime were called “companions.” Among the
numerous companions, the seven most prolific commentators on his life were Abu Hurrairah
‘Abdur Rahman bin Sakhar Dasi (5,374 Hadith), Abdullah bin Umar bin Khattab (2,630), Anas
bin Malik (2,286), Aisha (2,210), Abdullah bin Abbas (1,660), Jabir bin Abdullah Ahsan (1,540),
and Sa'ad bin Malik Abu Saeed Khudhri (1,540). The compiled Hadith of these companions did
not survive in their original creations but were passed down and collected by numerous Hadith
collectors of varying quality and repute. Six scholars stand out among Hadith collectors for the
reputed accuracy and authenticity in the selection of Hadith they chose to include as a part of their
collections. In precedent order, the six “correct” collections of the Sunni, also called the “Six
Canonical Collections” (the Sahih Sittah), are the works of Bukhari, Muslim, Abu Dawud,
Tirmidhi, Ibn Maja and Nasa’i. Hence, if a story concerning Muhammad is related through one of
the six “correct” collections and it reliably cites one of the seven companions, a presumption
emerges, verging on irrebuttable, that the texts cited are accurate for the points being made - as
matters of both Islamic theology and law. Because those accounts are presumed reliable, the
9 1
Sunna arising from them cannot be construed to contradict the Qur’an but rather are to be
understood as doctrinally authoritative explanations of the Quranic verses they support: “Whatever
the Messenger gives you, then take it and whatever he prohibits you, then stay away from it.”
(Qur’an 59:7)
29 The debate over the role the Hadith should play as the secondary basis for Shari’ah is in fact the debate
between the traditionalists who follow the millennium-old doctrine of the Islamic legal schools versus the
progressives, typically in academia. The former account for the “Shari’ah authorities” and the latter for
university professors who wish to distance themselves and Islam from the quite bellicose legal-military
doctrines derived from the Hadith. The subject is fascinating and rich with drama but not one this
memorandum can take up. The interested reader should begin with Coughlin, supra note 24, at 83 et seq.,
and then turn to one of the founders of the academic study of Shari’ah and Islamic jurisprudence, Joseph
Schacht. Must reading would be JOSEPH SCHACHT, AN INTRODUCTION TO ISLAMIC LAW (1982), and
JOSEPH SCHACHT, MUHAMMADAN JURISPRUDENCE (1950). Revisionists abound and two interesting
versions are WAEL B. HALLAQ, A HISTORY OF ISLAMIC LEGAL THEORIES (1997) and WAEL B. HALLAQ,
THE ORIGINS AND EVOLUTION OF ISLAMIC LAW (2005) on the one hand; and M. MUSTAFA AL-AZAMI, ON
SCHACHT’S ORIGINS OF MUHAMMADAN JURISPRUDENCE (1996) on the other hand. Useful also would be
KAMALI, supra note 24.
30 Shi’a Islam differs from Sunni Islam theologically on who they consider to be legitimate successors to
Mohammad’s reign as leader of the Muslim Umma or nation. This has jurisprudential consequences
because Shi’a Muslims, who await the return of the Fourth Imam or Caliph following Mohammed, consider
their Imams who have followed in the Fourth Imam’s footsteps to be his stand-in until his return and as
such they share his infallibility. Thus, the leading contemporary Shi’a Imams are considered by their
followers as inerrant and their legal rulings take on the perfection one would expect from inerrant beings.
See Coughlin, supra note 24, at [page number here] n.52 and accompanying text.
31 As noted, the Shari’ah authorities developed different schools of legal interpretation. These schools are
called maddhahib (or maddhab in the singular form). Early in their development, there were many schisms
and new schools but over time, the main body of legal scholarship and almost all Shari’ah authorities have
long come to recognize only four extant schools among Sunni Muslims and one dominant school (some
cite two) among Shi’a Muslims. While there are important jurisprudential and theological differences
between the Sunni and Shi’a, see supra note 29, and indeed between the schools themselves within the
respective Sunni and Sh’ia traditions, the specific rulings among all schools on the fundamental issues
regarding the purposes of Shari’ah, the point of the individual Muslim’s life, and the integrity and unity of
the Muslim nation as a whole and the methodologies to achieve those ends are remarkably consistent, see
generally Coughlin, supra note 24.
32 Furu’ is the Arabic word most often associated with positive law or the particular rulings in any given
case. See VOGEL & HAYES, supra note 18, at 23-24; see also M. Cherif Bassiouni & Gamal M. Badr, The
Shari’ah: Sources, Interpretation, and Rule-Making, 1 UCLA J. ISLAMIC & NEAR E.L. 135 (2002). For a
discussion of furu’ and usul al-fiqh, see Wael B. Hallaq, Usul Al-Fiqh: Beyond Tradition, 3:2 J. ISLAMIC
STUD. 172-202 (1992), reprinted in [needs to be more specific here] Law and Legal Theory.
33 See Qur’an 45:18. But see Qur’an 5:48, where a variation of the word appears and has the meaning of
the ‘proper way’; while some might argue that the word appears in yet other variations, the first of these
two are the typical verses cited where the word is used in the sense of a legally proper path.
34 The legal verses of the Qur’an are typically broken down into those verses dealing with religious rites
and worship (ibadat) and those dealing with civil relations including commerce, political life, and the Law
of Jihad (mu’amalat). KAMALI, supra note 24, at 26. What is confusing to many is that most academics
writing on the subject of SCF define mu’amalat as civil or commercial relations giving the impression that
there is in fact some sub-code of strictly commercial matters devoid of broader implications. See, e.g.,
Yusuf Talal DeLorenzo & Michael J.T. McMillen, Law and Islamic Finance: An Interactive Analysis, in
ISLAMIC FINANCE, supra note 3, at 142. But cf. VOGEL & HAYES, supra note 18, at 301, where the
“Glossary” defines mu’amalat as “dealings or transactions among human beings; compare ‘ibādāt.” Thus,
while the “glossary” definition is technically correct and properly juxtaposes mu’amalat against ibadat, the
reader who would need such a glossary is not likely to understand that mu’amalat is as much the Law of
Jihad as it is commercial dealings.
9 2
35 See generally supra note 18. For the “socio-economic” impetus for SCF, see Walid S. Hegazy,
Symposium: Islamic Business And Commercial Law: Contemporary Islamic Finance: From Socioeconomic
Idealism To Pure Legalism, 7 CHI. J. INT'L L. 581 (2007).
36 See generally DeLorenzo & McMillen, supra note 34, at 132-197.
37 See Muslim-Investor.com, Resources -- Education/Curricula in Islamic Finance, Education and Banking,
available at http://muslim-investor.com/mi/education.phtml (last visited Jan. 25, 2008) (listing university
departments).
38 See generally WARDE, supra note 4, who theorizes of a “First and Second Aggiornamento” to suggest a
first movement driven by a centralization of power and influence flowing from Arab oil wealth and a
second movement driven by decentralized social, political, and financial constituencies. For a media
rendition of the oil wealth-driven industry, see Wayne Arnold, Islamic Banking Rises on Oil Wealth,
Drawing Non-Muslims, INT’L HERALD TRIB., Nov. 22, 2007, available at
http://www.iht.com/articles/2007/11/22/business/islamic.php (last visited Jan. 25, 2008).
39 The first order of business for determining whether a business is Shari’ah compliant is to make certain
that it is not involved in a “vice” industry such as interest-based financing, the pork industry, various forms
of the entertainment industry, and gambling. The question for Shari’ah authorities is how much
“involvement” in a prohibited business amounts to a violation of Shari’ah such that an investor must not
invest in that company. The same question applies to a permitted business that might earn interest on
deposits or accounts payable and pay interest on debt: How much interest is too much interest? For a
discussion of the Shari’ah authority opinions on this matter by one of the leading Shari’ah authorities, see
Nizam Yaquby, Participation and Trading In Equities of Companies Which Main Business Is Primarily
Lawful but Fraught with Some Prohibited Transactions, Address at the Fourth Harvard Islamic Finance
Forum, Harvard University (Sept. 30-Oct 1, 2000), available at
http://www.djindexes.com/mdsidx/downloads/yaquby.pdf (last visited Jan. 25, 2008).
40 See DeLorenzo, supra note 22.
41 See DeLorenzo & McMillen, supra note 34, at 143-150. Since the development of SCF, the debate
among Islamic, economic, and Shari’ah scholars continues over the propriety of this new field of Shari’ah
scholarship. Some argue that the industry is nothing more than form over substance and an abuse of
Shari’ah. Others contend that SCF is a convoluted way for Shari’ah to effect its purposes in modern
Western financial institutions. For the former, the debate is over the perversion of Shari’ah and its premodern
ethic and economic principles. This group of critics would prefer that Shari’ah be used to modify
the existing political economies to move away from interest-based debt and highly speculative and
leveraged derivative transactions. For the latter group of critics, SCF is more than just an attempt to mollify
the Shari’ah authorities; it is a “Trojan Horse” to legitimatize and to institutionalize Shari’ah, the purpose
of which is the destruction of Western societies as such. For an example of the former group, see Haider
Ala Hamoudi, Muhammad’s Social Justice or Muslim Cant?: Langdellianism and the Failures of Islamic
Finance, 40 CORNELL INT'L L.J. 89; El-Gamal, supra note 18. For the latter group, see KURAN, supra note
18; Alexiev, supra note 18.
42 Drake Bennett, The Zero Percent Solution, BOSTON GLOBE, Nov. 4, 2007, available at
http://www.boston.com/news/education/higher/articles/2007/11/04/the_zero_percent_solution/ (last visited
Jan. 25, 2008).
43 Alexiev, supra note 18, at [page number here] & n.1.
44 Islamic Banking---Status of Islamic Banking, Institute of Islamic Banking and Insurance, available at
http://www.islamic-banking.com/ibanking/statusib.php (last visited Jan. 25, 2008).
45 See Mohammed El Qorchi, Islamic Finance Gears Up, 42 Fin. & Dev., Dec. 2005, available at
http://www.imf.org/external/pubs/ft/fandd/2005/12/qorchi.htm (last visited Jan. 25, 2008). Growth is
reported to have reached 30% annually. See Karina Robinson, Islamic Finance Is Seeing Spectacular
Growth, INT’L HERALD TRIB., Nov. 5, 2007, available at
http://www.iht.com/articles/2007/11/05/business/bankcol06.php (last visited Jan. 25, 2008).
46 Gayle Young, Fast Growing Islam Winning Converts in Western World, CNN Interactive News,
http://www.cnn.com/WORLD/9704/14/egypt.islam/ (last visited Jan. 25, 2008). The Executive Vice
President and General Counsel of the Federal Reserve Board of New York cited a White House report that
Islam is the “fastest growing faith in the United States.” Thomas C. Baxter, Jr., Executive Vice President &
Gen. Counsel, Fed. Reserve Bank of N.Y. Welcome Speech to the Seminar on Legal Issues in the Islamic
9 3
Financial Services Industry (March 1, 2005), available at
http://www.newyorkfed.org/newsevents/speeches/2005/bax050301.html (last visited Jan. 25, 2008).
47 Sukuk in Arabic is plural for bonds; sak is the singular form.
48 Mark Bendeich, Islamic Finance: Safe Haven or Irrational Exuberance? REUTERS, Dec. 10, 2007,
http://www.reuters.com/article/bankingfinancial-SP-A/idUSKLR27708220071210 (last visited Jan. 25,
2007). Growth in this industry is best illustrated graphically. For growth data on Shari’ah compliant bonds,
see Appendix A. To put the Shari’ah compliant bond issuance in context, the total net issuances of all
international bonds and notes for the third quarter of 2007 was $396 billion, which represents a significant
downturn in worldwide demand for such debt instruments. See BANK FOR INTERNATIONAL SETTLEMENTS,
BIS QUARTERLY REVIEW 19-21, Dec. 2007,,available at http://www.bis.org/publ/qtrpdf/r_qt0712.pdf (last
visited Jan. 25, 2008). That Shari’ah compliant bonds were showing spectacular growth in the same quarter
and representing approximately 10% of worldwide demand speaks volumes for the popularity and the
liquidity of this particular market segment.
49 The principal oil-producing Muslim states are located in and around the Persian Gulf: Bahrain, Kuwait,
Quatar, Oman, Saudi Arabia, the United Arab Emirates, Iraq, and Iran. These countries, sans Iraq and Iran,
formed the Gulf Cooperation Council in February 1981. See Council Charter of the Secretariat General of
the Cooperation Council for the Arab States of the Gulf, available at http://www.gccsg.
org/eng/index.php?action=Sec-Show&ID=1 (last visited Jan. 25, 2007).
50 For some of the promotional literature naming several of the “facilitators,” see, e.g., John Butcher,
Shariah Funds Inc Introduces the First Islamic Hedge Fund Aided by Scholars, HEDGE FUNDS REV.,
available at http://www.shariahfunds.com/news/images/Hedge_Funds-Rev.pdf. For specifically offices of
such international law firms as Patton Boggs in Qatar, see the firm’s Internet site,
http://www.pattonboggs.com/Locations/Office.aspx?office=4 (last visited [date]). For Patton Boggs
promotional material indicating the law firm is also a registered agent for lobbying on behalf of the Saudi
Arabian government, see Patton Boggs LLP, Attorneys at Law, http://www.pattonboggs.com/middleeast/
(last visited [date]). The law firm of King and Spaulding also highlights its activities in the area on its
Internet site. See King & Spaulding,
http://www.kslaw.com/portal/server.pt?space=KSPublicRedirect&control=KSPublicRedirect&PracticeAre
aId=141&us_more=0 (last visited [date]); see also Brian O’Connell, Wealth Management: Gulf’s Super
Rich Return Home, Meed, Dec. 21, 2007 (updated Jan. 9, 2008), available at
http://www.meed.com/bankingandfinance/specialreport/2007/12/gulfs_superrich_return_home.html.
51 For GCC sovereign wealth funds purchasing U.S. assets, see David Enrich, Oil-Rich Persian Gulf
Countries Show Growing Financial Clout, DOW JONES NEWSWIRES, Oct. 22, 2007, available at
http://www.zawya.com/story.cfm/sidDN20070920015851 (last visited Feb. 4, 2008). For the push to
establish SCF in the U.S., see generally Wayne Arnold, Adapting Finance to Islam, N.Y. TIMES, Nov. 22,
2007, available at
http://www.nytimes.com/2007/11/22/business/worldbusiness/22islamic.html?ei=5087&em=&en=d6f0821c
05a1d02f&ex=1195880400&pagewanted=all (last visited Jan. 25, 2008).
52 Karen Lane, Islamic-Bond Market Becomes Global By Attracting Non-Muslim Borrowers, WALL ST. J.,
Nov. 16, 2006, available at http://online.wsj.com/article/SB116361223362324035.html (last visited Jan.
25, 2008); see also Press Release, Dow Jones, Dow Jones Indexes and Citigroup To Launch First Islamic
Bond Index (Mar. 6, 2006), available at
http://www.dj.com/Pressroom/PressReleases/Other/US/2006/0306_US_DowJonesIndexes_1095.htm (last
visited Jan. 25, 2008).
53 See Dow Jones Islamic Market Indexes, Dow Jones Indexes, available at
http://www.djindexes.com/mdsidx/?event=showIslamic (last visited Jan. 25, 2008).
54 See STANDARD & POOR’S, S & P SHARIAH INDICES, available at
http://www2.standardandpoors.com/spf/pdf/index/SP_Shariah_Indices_Methodology_Web.pdf (last
visited Jan. 25, 2008).
55 See Index Comparisons, Dow Jones Islamic Fund, http://www.investaaa.com/cgibin/
client_product.cgi?member=55&product_id=527 (last visited Jan. 25, 2008).
56 See Joanna Slater, Growing Interest: When Hedge Funds Meet Islamic Finance, WALL ST. J., Aug. 9,
2007, available at http://online.wsj.com/article/SB118661926443492441.html?mod=todays_us_page_one
(last visited Jan. 25, 2008).
9 4
57 See, e.g., Islamic Finance, Devon Bank, http://www.devonbank.com/Islamic/ (last visited Jan. 25, 2008)
(Chicago-based Devon Bank internet site promoting its Islamic finance products).
58 See, e.g., Shirley Chieu, Islamic Finance in the United States: A Small But Growing Industry, Chicago
Fed Letter No. 214, May 2005, available at
http://www.chicagofed.org/publications/fedletter/cflmay2005_214.pdf (last visited Jan. 25, 2008); Office of
the Comptroller of the Currency, Interpretive Letter No. 806, Oct. 17, 1997, available at
http://www.occ.treas.gov/interp/dec97/int806.pdf; Office of the Comptroller of the Currency, Interpretive
Letter No.867, June 1, 1999, available at http://www.occ.treas.gov/interp/nov99/int867.pdf; see also State
of New York Commissioner of Taxation and Finance Advisory Opinion Petition No. M010821A, Jul. 26,
2002, available at http://www.tax.state.ny.us/pdf/advisory_opinions/real_estate/a02_4r.pdf (last visited Jan.
25, 2008).
59 See generally VOGEL & HAYES, supra note 18. SCF is “legal” in the sense it includes aspects of binding
law, especially in Muslim countries where Shari’ah is considered both constitutional and statutory, such as
Saudi Arabia, Iran, and Sudan; “normative” in the sense that Shari’ah is considered an all-encompassing
way of life; and “communal” in the sense that communities of Muslims have in fact embraced Shari’ah as
authoritative at some level.
60 Bassiouni & Badr, supra note 32, at 135.
61 WARDE, supra at note 4, at 33.
62 JOSEPH SCHACHT, AN INTRODUCTION TO ISLAMIC LAW 1 (1982).
63 VOGEL & HAYES, supra note 18, at 23.
64 MERVYN K. LEWIS & LATIFA M. ALGAOUD, ISLAMIC BANKING 24 (Edward Elgar ed., 2001). While the
authors attempt to “tone down” this absolute statement of Shari’ah by suggesting that as a practical matter
Shari’ah has in fact lived side-by-side with secular law and in some cases even incorporated it into
Shari’ah, they honestly but almost unnoticeably add the following to their effort to soften Shari’ah: “The
continuation of a custom of a particular place or community is allowable under Islamic law, and may in fact
be assimilated into the law, as were many of the customs of the Arabs. To be permissible a custom must
not be contrary to revealed injunctions, and this point remains highly controversial in some areas, for
example the treatment of women.” Id. at 25. What the authors mean by “revealed injunctions” means any
legal ruling of Shari’ah authorities where there is consensus among the authorities that the ruling is based
on an explicit verse in the Qur’an or Sunna. See infra note 75 and accompanying text (discussing
jurisprudential force of “consensus”). What is intriguing is that of all of the fixed unalterable laws of
Shari’ah, the authors are concerned about the treatment of women. While many certainly argue that
Shari’ah demeans and subordinates the Muslim woman, one might have thought that the fixed death
penalty for an apostate – a Muslim who wishes to leave Islam – would have captured their concern
sufficient for articulation. Apparently, it is not, in the authors’ views, “highly controversial” among the
Shari’ah faithful.
65 The literal meaning of Shari’ah is “the way” -- especially to the source of water (i.e., life).
66 See, e.g., DeLorenzo & McMillen, supra note 34, at 136-137.
67 Coughlin, supra note 24.
68 See supra note 31. For a detailed discussion of the schools of jurisprudence, see id.
69 See generally DeLorenzo, supra note 22.
70 A typical ruling reads: “If the lease of real estate is for purely prohibited purposes, like a bar, or a church,
or a nightclub, then the lease contract is prohibited and legally void because the benefit, or subject of the
contract, is prohibited.” A COMPENDIUM OF LEGAL OPINIONS ON THE OPERATIONS OF ISLAMIC BANKS 13-
29 (Yusul Talal DeLorenzo ed. & trans., 2000).
71 In a detailed legal ruling relating to interest earned in a bank in non-Muslim lands, a leading Shari’ah
authority explains that the strictures of Shari’ah on certain business transactions such as deposits in a non-
Muslim bank are relaxed when a Muslim enters the Abode of War (dar al-harb), which is the land of non-
Muslims. The point of this ruling is to give a concrete example of how even the Law of Jihad in the context
of the doctrines relative to the Abode of War versus the Abode of Islam are integral to the law of
commerce. Thus, in the legal ruling, the Shari’ah authority began his analysis as follows:
. . . In the terminology of Islamic Law, “people of the abode of wara” are not only those who are
actually at war with Muslims, but all those who are not formally allied with Muslims by a
covenant of protection, such that war could conceivably be declared between them and
Muslims at any time.
9 5
Id. at 214-245, 224 (emphasis added). For a ruling on whether a Muslim can lease a building in the
Abode of Islam to a foreign school for foreign, non-Muslim students and what must be done to
separate the male students from the female students, see id. at 27-28.
72 There is no shortage of academic literature on the political and religious turmoil that existed in the
Muslim empires from soon after the death of Mohammed and the battles between the “traditionalists” who
sought a Shari’ah-centered political world and those who opposed it for one reason or another. A good,
deep history of Islam may be found in MARSHALL G. S. HODGSON, THE VENTURE OF ISLAM: CONSCIENCE
AND HISTORY IN A WORLD CIVILIZATION, 3 vols. (1974). And, of course, the required reference to
BERNARD LEWIS, THE MIDDLE EAST: A BRIEF HISTORY OF THE LAST 2,000 YEARS (1995). For the narrative
of the failures in Islamic history for the political leaders to abide by Shari’ah from the “traditionalist”
vantage, see SAYYID QUTB, SOCIAL JUSTICE IN ISLAM (2000). For the classic statement on this “theory”
versus “practice” and the dominant role of Shari’ah authorities to determine the theory and even the
practice when Shari’ah is put into practice, see Joseph Schacht, supra note 62. For the lament of a
“moderate” Shari’ah academic scholar who would like to see Shari’ah and usul al-fiqh modernized so that
it might be used to govern modern societies, he suggests that the failure of Shari’ah to keep pace with
modernity was precisely because it often was not fully integrated into Islamic society but rather developed
as a private affair among Shari’ah authorities. KAMALI, supra note 24, at 500-521.
73 This is evident in SCF itself. The sole authorities for determining Shari’ah compliance or even what is
”Islamic” regarding finance and commerce are the traditional Shari’ah scholars. Whatever criticism some
critics might have of the “Islamist” bent of SCF, there is no serious challenge to the absolute authority of
the traditionalists in this discipline. See, e.g., infra note 74.
74 See, e.g., VOGEL & HAYES, supra note 18, at 9-10, 23. Although Professors Vogel and Hayes do not
come right out and say that the traditional Shari’ah authorities are the exclusive authorities on SCF, their
entire book is dedicated to convincing Shari’ah authorities to move toward greater liberality in order to
embrace more of modern day finance. Thus, in the conclusion of their highly acclaimed book on SCF, the
authors ask: “Does Islamic law (fiqh), as elaborated by the scholars and institutions devoted to it, have the
potential to meet all the needs of modern Muslims in the commercial and financial sector, in the traditional
sense of offering normative guidance for various aspects of daily life?” Id. at 294. And, in concluding they
hold out optimism but recognize the future is in the hands of the Shari’ah authorities, not the academics:
No doubt many of the legal challenges now facing Islamic finance are disquieting and difficult –
such as creating derivatives or other risk-hedging devices or encouraging trade in financial
instruments. If fiqh scholars take too cautious and literalist an approach, backing away from the
deeper comparative and functional analysis and bolder legal reasoning or ijtihad which is now
needed, Islamic finance could languish. Given the record to now, we are optimistic about the
future.
Id. at 295.
75 For the classic statement on the role of consensus, see SCHACHT, supra note 62, at 30. For a more
general discussion, see id. at 29-75. For a scholarly work on consensus by the revisionist school of new
academics, see Wael B. Hallaq, On the Authoritativeness of Sunni Consensus, 18 INT’L J. MIDDLE E. STUD.
427-454 (1986), reprinted in WAEL B. HALLAQ, LAW AND LEGAL THEORY IN CLASSICAL AND MEDIEVAL
ISLAM VIII (1994) [hereafter LAW AND LEGAL THEORY]; see also Coughlin, supra note 24, at 91-109.
76 For a discussion of the DJII in greater detail, see infra Part III.B.
77 The fundamental standard regarding disclosure of risks and other pertinent information is whether the
risks are material and whether any other information would be material to a reasonable investor. For a more
thorough discussion of materiality and other disclosure issues, see infra Part II.E.a.
78 This fund was begun in 1999 and liquidated in 2002. For access to its SEC filings, see
http://www.sec.gov/cgi-bin/browseedgar?
action=getcompany&CIK=0001088654&owner=include&count=40 (last visited Feb. 4, 2008).
79 Thus, even if it promoted itself as ethical equity-based investing, if it was based upon Shari’ah, the
disclosure issue would remain. Further, it is different than the so-called Catholic indexes. Even in the case
of the “Catholic Values” funds, there is no representation that there is an underlying legal code requiring
certain investment behavior by adherent Catholics. Instead, the funds follow “Catholic values” as they and
their advisors determine them to be based upon the doctrine of the Catholic Church but they are just as
clear that even if their “Catholic advisors” were to determine a company was not suited to these values,
there is no requirement either by the rules of the fund or by the Catholic Church that such companies not be
9 6
included in the fund. In other words, the Catholic funds are like other truly “values-based” funds where
like-minded individuals agree on certain standards.
80 Investment Company Act of 1940, Pub. L. No. 76-768, 54 Stat. 789.
81 The lawyers’ imputed knowledge is “rudimentary” because very few of the lawyers acting as facilitators
in the SCF industry fully understand or acknowledge what Shari’ah is beyond thinking of it as just another
“value-based screen.”
82 For the Dow Jones Islamic Market Index Portfolio’s Registration Statement filed pursuant to the
Investment Company Act of 1940, Part B, Item 12, see Dow Jones Islamic Market Index Portfolio,
Registration Statement (Form N-1A), available at
http://www.sec.gov/Archives/edgar/data/1088654/0000935489-99-000014.txt (last visited Jan. 25, 2008).
In addition, in Part A of the of the registration statement, there are warranty disclaimers relative to the DJII,
the most important of which is:
Although Dow Jones uses reasonable efforts to comply with its guidelines regarding the selection
of components in the Dow Jones Islamic Market Index, Dow Jones disclaims any warranty of
compliance with Shariah law or other Islamic principles . . . .
While this might insulate Dow Jones from a claim of breach of warranty, it does not address the failure to
disclose material risks relative to the very real problem of competing Shari’ah authorities.
83 This example is not academic. One of the leading Shari’ah authorities on SCF has recently shaken the
Shari’ah-compliant bond industry by stating that he does not believe the current structures approved by
most Shari’ah advisory boards are in fact Shari’ah-compliant. See Sebastian Abbot, Muslims Debate
Bonds, MORNING CALL, (Jan. 12, 2008), available at http://www.mcall.com/business/local/allislamicbonds.
6224369jan12,0,6766410.story (last visited Jan. 25, 2008).
84 The exposure for this now defunct fund in such a lawsuit would arguably be “relatively high” due, in
large part, to the failure of the registration statement to detail the fact that Shari’ah by its own terms rejects
the notion that a given Shari’ah expert or legal authority, or even a single Shari’ah advisory board, can rule
definitively on what is or is not proper compliance with a Shari’ah principle. Even an individual ruling
soundly rooted in consensus among other scholars might be challenged on the grounds that it violates a
particular canonical precept. See, e.g., VOGEL & HAYES, supra note 18, at 32-34. This fact and the
likelihood of such disputes arising among Shari’ah authorities given the current Shari’ah landscape, which
already shows a fair amount of discordance based, in large part, along geographical contours, suggests that
the fund managers had a duty to investigate these rather material facts and to disclose them to their
investors. See generally id. at 28-52. For a series of good articles on SCF as it appears in different
geographical locations and the role of geo-political factors in its development, see THE POLITICS OF
ISLAMIC FINANCE, supra note 4.
85 The following represent just a few of the queries one might expect to be addressed, all of which force the
issue of what does the Shari’ah in Shari’ah compliant finance really mean: Is a company dedicated to
atheism or polytheism Shari’ah compliant even if it passes the “objective” screens discussed in the text
above? What about abortion clinics? Is a company that otherwise passes the publicly-disclosed filters
remain Shari’ah compliant even if it is owned by or domiciled in the territory of the enemies of the Muslim
nation (i.e., an Israeli-owned or domiciled company)? When the Dow Jones Islamic Index publicizes that
weapons manufacturers are forbidden, does Shari’ah in fact forbid weapons manufacturing by Muslims for
Muslim nations? Would it be material to a reasonable U.S. investor to know if the answers to any of these
questions is “no”? What would happen if the U.S. went to war against a major Shari’ah-compliant Muslim
nation and, as a result, the GCC states together with most of the authoritative Shari’ah scholars in the world
declare the war an act of war against the entire Muslim nation? Will this declaration of war affect the Dow
Jones’ Islamic Index filters? Would any company owned by non-Muslim U.S. citizens be Shari’ahcompliant
under those circumstances? For a related discussion, see infra notes 362-366 and accompanying
text.
86 See supra note 59 and accompanying text.
87 See VOGEL & HAYES, supra note 18, at 24-28. Vogel and Hayes note especially the minority view that
interest is not prohibited: “But such Muslims, though numerous, appear to be in the minority. A much
larger number, supported by a near-unanimity of traditional scholars, seem certain that modern bankinterest
falls within the revealed prohibitions and entails a major sin, tolerable only in the throes of
necessity.” Id. at 25 (emphasis added).
9 7
88 In some complicated cases, both judicial and arbitration venues are chosen depending upon the specific
issue litigated or the type of enforcement sought. See, e.g., Michael J.T. McMillen, Symposium: Islamic
Business and Commercial Law: Contractual Enforceability Issues: Sukuk and Capital Markets
Development, 7 CHI. J. INT’L L. 427 (2007).
89 See generally David S. Ruder, Lessons From Enron: Director and Lawyer Monitoring Responsibilities,
(Oct. 10, 2002) (paper presented to the 41st Annual Corporate Counsel Institute, Chicago, Illinois),
available at http://www.law.northwestern.edu/professionaled/documents/Ruder_Lessons_Enron.pdf (last
visited Jan. 28, 2008); see also MODEL RULES OF PROF’L CONDUCT R. 1.2(d) (2002); AM. BAR ASS’N,
ANNOTATED MODEL RULES OF PROFESSIONAL CONDUCT 39-40 (5th ed. 2003).
90 While the terms “certainty, consistency, predictability, and transparency” are oft-used in the law in this
context, this memorandum borrows these precise terms and their meanings from one of SCF’s biggest
advocates and one of the most influential of the legal practitioners making a career of SCF in Michael J.T.
McMillen, Islamic Shari’ah-compliant Project Finance: Collateral Security and Financing Structure Case
Studies, 24 FORDHAM INT’L L.J. 1184 (2001).
91 As discussed supra at notes 60-62 and accompanying text, there is no universal standard of authority or
hierarchy for Shari’ah authorities. This fact alone and the development of authoritativeness is part of the
black box of Shari’ah.
92 See, e.g., McMillen, supra note 88, at 1196, n.14.
93 According to Shari’ah doctrine rooted directly and firmly in the Qur’an, and agreed upon by all legal
schools, no secular law can take precedence over Allah’s divine law: “Whoever does not follow the
revealed law and does not judge according to it is counted an unbeliever.” See, e.g., AL-AZAMI, supra note
29, at 12; see also Coughlin, supra note 24, at 90:
Known among Islamic jurists to take a more “liberal” view toward Islamic law, Mohammad
Hashim Kamali, in his Principles of Islamic Jurisprudence, nonetheless comes down four-square
on the notion of the absolute sovereignty of Allah that necessarily pre-empts all other forms of
sovereignty – including the democratic concept of sovereignty of the people.
The blending of secular law and Shari’ah as it has unfolded in many Muslim countries would appear to be
ipso facto evidence of the failure to tame Shari’ah since there are no Muslim dominated countries that one
might call “mostly free” with real representative government except possibly Turkey and Indonesia. Most
observers recognize Turkey’s success has come at the expense of “religious freedom” since the Kemalists
and their use of the army to suppress the public expression of Islam and Shari’ah is well documented.
Indonesia is changing for the worse due in large part to the growing violence against non-Muslims which in
turn is due in large part to the increasing influence of Shari’ah. See, e.g., Freedom House, Country Reports,
available at http://www.freedomhouse.org/template.cfm?page=21&year=2007 (last visited Jan. 28, 2008)
[hereinafter Freedom Survey 2007]. For a careful analysis of the extent to which Shari’ah is codified as the
law of the land in Muslim countries, see TAD STAHNKE & ROBERT C. BLITT, U.S. COMM. ON INT’L
RELIGIOUS FREEDOM, THE RELIGION-STATE RELATIONSHIP AND THE RIGHT TO FREEDOM OF RELIGION OR
BELIEF: A COMPARATIVE TEXTUAL ANALYSIS OF THE CONSTITUTIONS OF PREDOMINANTLY MUSLIM
COUNTRIES (Mar. 2005) [hereinafter STAHNKE & BLITT, RELIGIOUS FREEDOM SHARI’AH REPORT], available
at http://www.uscirf.gov/countries/global/comparative_constitutions/03082005/Study0305.pdf (last visited
Jan. 28, 2008). For an examination of “religious freedom” in such Muslim countries as Indonesia, Egypt,
Iran, Saudi Arabia, see U.S. COMM. ON INT’L RELIGIOUS FREEDOM, ANNUAL REPORT (May 2005),
available at http://www.uscirf.gov/countries/publications/currentreport/2005annualRpt.pdf#page=71 (last
visited Jan. 28, 2008). For the growing influence of Shari’ah in Indonesia, see Tom A. Peter, At Massive
Rally, Hizb Ut-Tahrir Calls For A Global Muslim State, CHRISTIAN SCIENCE MONITOR, Aug. 14, 2007,
available at http://www.csmonitor.com/2007/0813/p99s01-duts.html (last visited Jan. 28, 2008). For a
good discussion of “modernist legislation” vis-à-vis Shari’ah in Muslim countries, albeit somewhat dated,
see SCHACHT, supra note 62, at 100-111.
94 Certainty, consistency, predictability, and transparency in transactional law are never perfect but operate
within a range of comfort for investors. The market tends to step in and price deals inversely to their
approximation of these goals. As transparency goes down, price goes up until the deal or product just is no
longer in reach of the demand’s willingness to pay.
95 For a SCF-friendly practitioner’s view of these problems, see McMillen, supra note 88.
96 The existence of the “corporate veil” to protect the individual from liability is a good example of this
“form” over “substance.” Even though an individual might “maintain the corporate formalities,” in
9 8
substance he is acting as the sole entrepreneur but the law and the policy behind the law shield him from
personal liability to promote the risk taking inherent in commercial endeavors. For a discussion of this
“legal fiction,” see Sanford A. Schane, The Corporation Is A Person: The Language Of A Legal Fiction, 61
TUL. L. REV. 563 (1987).
97 Even this is not exactly true. According to some scholars, interest was once not divinely prohibited per
se. But the debate about the divinity of this prohibition as it exists today is not open to a societal or political
discussion and conclusion. Rather, it is confined to the Shari’ah black box entrusted to the Shari’ah
authorities. See generally KURAN, supra note 18; El-Gamal, supra note 18.
98 See, e.g., Text of the Historic Judgment on Interest Given by the Supreme Court of Pakistan, ALBALAGH,
http://www.albalagh.net/Islamic_economics/riba_judgement.shtml (last visited Jan. 28, 2008).
99 Islamic scholars in academia have given this issue much attention. See, e.g., Mahmoud A. El-Gamal, An
Economic Explication of the Prohibitions of Riba in Classical Islamic Jurisprudence, in THE PROCEEDINGS
OF THE THIRD HARVARD UNIVERSITY FORUM ON ISLAMIC FINANCE: LOCAL CHALLENGES, GLOBAL
OPPORTUNITIES 29-40 available at http://www.ruf.rice.edu/~elgamal/files/riba.pdf (last visited Jan. 28,
2008); see also KURAN, supra note 18; McMillen, supra note 87, at [page number] n.2; Timur Kuran, The
Genesis Of Islamic Economics; A Chapter In The Politics Of Muslim Identity, Social Research (Summer
1997), available at http://findarticles.com/p/articles/mi_m2267/is_n2_v64/ai_19652892/pg_1 (last visited
Feb. 1, 2008).
100 This would be the case as a matter of theory, prudence, and actual practice. Theory: the lawyer is not an
expert; prudence: the lawyer’s involvement would expose him to accusations of tampering with divine law,
extending beyond his area of expertise, and for disturbing the lines of authority and discipline in a team
effort; actual practice: lawyers are not Shari’ah authorities and use good judgment in not pretending to be
such. See supra note 71; DeLorenzo & McMillen, supra note 34.
101 This might not be the case if the company is a publicly-owned company or even a company with other
shareholders where the law articulates a duty to minority shareholders. See Mary Siegel, Fiduciary Duty
Myths In Close Corporate Law, 29 DEL. J. CORP. L. 377 (2004) (discussing fiduciary duties in context of
close corporation).
102 Such nominate contracts include cost-plus agreements where a purchase money lender purchases and
immediately resells the collateral to the borrower at an agreed upon stepped-up price with a deferred
payment schedule, or sale-lease back agreements where the lease payments cover the interest for the loan.
VOGEL & HAYES, supra note 18, at 181-200. Recently, certain Shari’ah authorities have even developed
what are represented as Shari’ah compliant structures to allow investment in highly speculative derivates,
something most Shari’ah authorities have forbidden altogether. For a theoretical discussion of “legal”
derivatives, see id. at 219-232. For an example in practice, see Slater, supra note 56.
103 See supra note 93.
104 See McMillen, supra note 88, at 1259-1260.
105 Tax matter agreements are most properly and conservatively used in inter-company tax allocations for
related entities. See, e.g., Interagency Policy Statement on Income Tax Allocation in a Holding Company
Structure, 63 Fed. Reg. 64,757 (Nov. 23, 1998).
106 Id.
107 For a discussion of defining and classifying “financial intangibles” and the complexities in the post-
Enron world, see Olufunmilayo B. Arewa, Measuring and Representing the Knowledge Economy:
Accounting for Economic Reality under the Intangibles Paradigm, 54 BUFFALO L. REV. 1 (2006); Anthony
J. Luppino, Stopping The Enron End-Runs And Other Trick Plays: The Book-Tax Accounting Conformity
Defense, 2003 COLUM. BUS. L. REV. 35.
108 See, e.g., Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure, 63
Fed. Reg. 225 (Nov. 23, 1998) available at http://www.fdic.gov/regulations/laws/federal/98soptx.pdf (last
visited Feb. 14, 2008). See also Arewa, supra note 107, and Luppina, supra note 107 (discussing the
complexities of structuring transactions with conflicting purposes).
109 See, e.g., Pahl v. Commissioner, 150 F.3d 1124, 1128 (9th Cir. 1998).
110 Throughout the legal literature on SCF, there is a recognition that defaults and bankruptcies will pose
real challenges because it is not clear how the transactions will be characterized. See, e.g., McMillen, supra
note 90 (much of the deal structures were addressing the uncertainty of default under Shari’a legal systems)
and McMillen, supra note 88 (enforceability and rating issues for securitization of bond issuances).
9 9
111 It is not enough to refute this proposition by stating that the intent of Shari’ah is known: the avoidance
of interest, speculation, and vice. If the refutation were both true and meaningful, it would suggest that the
speaker knows what Shari’ah means by interest, speculation, and vice. And, if that were true, the speaker
could devise his own legal structures without reference to or assistance from Shari’ah scholars and
authorities. But this is not the case.
112 A good example is to look at the published works of the legal practitioners making a living providing
expert legal services to the SCF industry. The articles by McMillen cited herein generally are examples but
notably see McMillen, supra note 88, at [page number] n.18 and accompanying text where the author
waxes on about the utilization of Shari’ah in Saudi Arabia and various other Muslim countries and does not
raise even a word of caution regarding the abuses well documented under the Shari’ah legal system.
113 Id.; see also William L. Rutledge, Executive Vice President, [institution], Regulation and Supervision of
Islamic Banking in the United States, Address Before the 2005 Arab Bankers Ass’n of N. Am. Conference
on Islamic Fin.: Players, Products & Innovations in New York City (Apr. 19, 2005), available at
http://www.nubank.com/islamic/regulation.pdf (last visited Jan. 28, 2008). For a discussion of Shari’ah as
“Medieval obscurantism,” see Alexiev, supra note 18.
114 Even the scholarly literature produced by academic “Islamicists” and economists produces only rarely
an objective critique that begins by asking whether Shari’ah is at all compatible with Western life. See,
e.g., KURAN, supra note 18.
115 See McMillen, supra note 88.
116 Borrowed term from ENCYCLOPEDIA OF SOCIAL SCIENCE RESEARCH 308-309 (Michael Lewis-Beck,
Alan Bryman & Tim Futing Liao eds., 2003), available at http://wwwpersonal.
umd.umich.edu/~delittle/Encyclopedia%20entries/endogeneous%20variable.pdf (last visited Jan.
28, 2008). The endogenous/exogenous taxonomy for analyzing disclosure has an ancient pedigree. In
standard common law fraud, commentators such as Judge Story distinguished between the heightened duty
to disclose for intrinsic elements of a deal versus the extrinsic:
Intrinsic circumstances are properly those which belong to the nature, character, condition, title,
safety, use, or enjoyment, &c., of the subject-matter of the contract, such as natural or artificial
defects in the subject-matter. Extrinsic circumstances are properly those which are accidentally
connected with it, or rather bear upon it at the time of the contract, and may enhance or diminish
its value or price, or operate as a motive to make or decline the contract; such as facts respecting
the occurrence of peace or war, the rise or fall of markets, the character of the neighborhood, the
increase or diminution of duties, or the like circumstances.
1 JOSEPH STORY, COMMENTARIES ON EQUITY JURISPRUDENCE 300, at 301-02 (W. H. Lyon, Jr. ed., Little,
Brown & Co. 14th ed. 1918) (1834).
117 One such Shari’ah-based nominate lease contract is called Ijara. VOGEL & HAYES, supra note 18, at
143-145.
118 Typically, a sale-lease back financing transaction is a way for a company to gain liquidity and to move a
capital asset off the balance sheet to avoid the burdens to the company’s debt ratios if standard capital asset
financing is used. For a short discussion of the accounting aspects, see Richard J. Strotman, Sale/leaseback:
Financing Tool for the ‘90s, CPA J. ONLINE (Apr. 1991), available at
http://www.nysscpa.org/cpajournal/old/10691657.htm (last visited Jan. 28, 2008). The motivation for a
Shari’ah sale-lease back, however, is to avoid interest and to accommodate Shari’ah fixed rules relative to
the actual transfer of ownership of the property, who is responsible for repairs (lessor), who can cancel the
contract under changed circumstances (lessee), and how the parties will treat future sale and option terms.
In other words, the purposes of a secular sale-lease back are purely for accounting purposes or “form”; for
the Shari’ah contract, however, the purpose is to effect the actual form required by Shari’ah as
“substance”.
119 See Yaquby, supra note 38 (various Shari’ah authorities prohibit investment in companies that earn
more than 5-15% of total earnings from interest income). The DJII achieves this prohibitory goal by
screening out companies with a debt to market capitalization equal to or greater than 33%. For this and
other ratios intended to screen for interest income, see M. H. Khatkhatay & Shariq Nisar, Investment in
Stocks: A Critical Review of Dow Jones Shari’ah Screening Norms, Paper Presented at the Int’l
Conference on Islamic Capital Markets (Aug. 27-29, 2007), available at
http://www.djindexes.com/mdsidx/downloads/Islamic/articles/DowJonesShariahScreeningNorms.pdf (last
visited Jan. 28, 2008).
10 0
120 This is not to say that financial institutions will not in time become endogenous elements of Shari’ah if
SCF were to be wholly institutionalized within the Western financial system. The point being that Shari’ah
is not viewed as stagnant or inert vis-à-vis what is today understood as endogenous and all else being
exogenous. In fact, the literature suggests Shari’ah is an organic system which, over time, has developed
new endogenies and expelled others. See SCHACHT, supra note 51, at 199-211. What might be said is that
the most static of the endogenous elements of Shari’ah are what are called the Five Pillars and Jihad, which
is sometimes referred to as the Sixth Pillar. See Coughlin, supra note 24, at 83 et seq.
121 See, e.g., Munshtak Parker, UK Government Serious About Sukuk, ARAB NEWS (2007).
122 J. Quinn Martin, City Tries to Increase Share of Sharia Finances, N.Y.SUN (Oct. 9, 2007) available at
http://www.nysun.com/article/64175?page_no=1 (last visited Jan. 28, 2008).
123 See Elliot Blair Smith, Dream Fulfilled Helps Muslims Realize Theirs, USA TODAY (Feb. 24, 2005),
available at http://www.usatoday.com/money/perfi/general/2005-02-24-islamic-finance-usat_x.htm (last
visited Jan. 28, 2008); see also Rutledge, supra note 110; Press Release, Freddie Mac, Devon Bank,
Freddie Mac Announce Expanded Financing Opportunities for Muslim Homebuyers (Jan. 10, 2005),
available at http://www.freddiemac.com/news/archives/afford_housing/2005/20050110_devonbank.html
(last visited Jan. 28, 2008).
124 For example, in the regulation of securities, SEC has enormous oversight responsibility for and authority
over public disclosures of information relative to the particular offering, investment, or business
represented by a particular security. Much of this authority is administered through stop order proceedings.
The SEC also has the authority to go to court and seek injunctive relief and other forms of equity-like
ancillary relief. Criminal prosecutions under the federal securities laws, however, are brought by the
Department of Justice. See generally LOSS & SELIGMAN, supra note 10, at 143-144, 598-603, 653-655,
1411-1532.
125 Formally the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001, Pub. L. No. 107-56, 115 Stat. 272.
126 See Nike, Inc. v. Kasky, 539 U.S. 654 (2003) (per curiam) (Stevens, J., concurring) (discussing
commercial versus non-commercial speech and suggesting that case was disposed of summarily on
procedural grounds).
127 LOSS & SELIGMAN, supra note 10, at 910.
128 Id. at 911.
129 Id. at 1187-1192.
130 Securities Act of 1933 (Truth in Securities Act), 15 U.S.C. §§ 77a to 77aa (2006) (focuses on initial
distribution of securities); Securities Exchange Act of 1934, 15 U.S.C. §§ 78a to 78mm (focuses on
ongoing post-distribution trading of trading); Trust Indenture Act of 1939, 15 U.S.C. §§ 77aaa to 77bbbb
(supplements the 1933 Act and focuses on distribution of debt securities); Investment Company Act of
1940, 15 U.S.C. §§ 80a-1 to 80a-64 (governs activity of publicly owned companies that invest in and trade
securities); Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-1 to 80b-21 (requires regulation and
registration of those in business of advising others on securities investments); Securities Investor Protection
Act of 1970, 15 U.S.C. §§ 78aaa to 78111 (creates nonprofit membership corporation designed to cover
customer losses when broker-dealer firms cannot cover their customer accounts); Sarbanes-Oxley Act of
2002, Pub. L. No. 107-204, 116 Stat. 745 (codified as amended in scattered sections of 11, 15, 18, 28, and
29 U.S.C.) (adds several additional lawyers of corporate reporting and ethics oversight). The Public Utility
Holding Company Act of 1935, 15 U.S.C. §§ 79 to 79z-6, which governed public utilities, was repealed by
the Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594.
131 No analysis of the current SCF industry in the U.S. would be complete without an examination of the
Investment Company Act of 1940 and the Investment Advisors Act of 1940. This is because much of the
SCF investments are being propelled by mutual funds tracking the DJII and the S&P’s version of the same
thing. In addition, with the huge sovereign wealth in the GCC looking for sophisticated investment
strategies, Shari’ah compliant hedge funds are right around the corner. The analysis which follows will
examine these two acts to the extent they implicate these types of SCF investments and require a different
analysis of the liability exposure for securities fraud.
132 H.R. REP. NO. 73-85, at 3 (1933); see 1934 Act, 15 U.S.C. § 78b (stating that one purpose of securities
law is “to insure the maintenance of fair and honest markets”).
133 See generally LOSS & SELIGMAN, supra note 10 at Chapter 9-B-6.
10 1
134 17 C.F.R. § 240.10b-5 (1997); see Herman & Maclean v. Huddleston, 459 U.S. 375, 380 (1983) (“The
existence of this implied remedy is simply beyond peradventure.”).
135 15 U.S.C. § 78j.
136 See generally LOSS & SELIGMAN, supra note 10, at 910, 1273-1301 (implied right of action under Rule
10(b)-5).
137 15. U.S.C. § 78ff(a) (criminal penalties); see LOSS & SELIGMAN, supra note 10, at 1418-1425. For a
general survey of criminal liability under the securities acts, see Nic Heuer, Les Reese & Winston Sale,
Securities Fraud, 44 AM. CRIM. L. REV. 956 (2007).
138 See Jeffrey T. Cook, Recrafting The Jurisdictional Framework For Private Rights Of Action Under The
Federal Securities Laws, 55 AM. U.L. REV. 621 (2006).
139 Supra note 126.
140 15 U.S.C. §§ 41-58.
141 For a discussion of the broad sweep of state consumer fraud statutes, see Victor E. Schwartz & Cary
Silverman, Common-Sense Construction of Consumer Protection Acts, 54 KAN. L. REV. 1 (2005).
142 The law, known as the Unfair Competition Law (“UCL”), is codified at CAL. BUS. & PROF. CODE §§
17200-17210 (Deering 2007).
143 Supra note 126. The UCL recently was amended by Proposition 64 to eliminate the right of private
plaintiffs to sue as “private attorneys general” without a showing of injury. See Schwartz & Silverman,
supra note 141, at 34-37.
144 David Monsma & John Buckley, Eighteenth Annual Corporate Law Symposium: Corporate Social
Responsibility In The International Context: Is There An Emerging Fiduciary Duty To Consider Human
Rights?, 74 U. CIN. L. REV. 75 (2005).
145 For Pennsylvania, see Denison v. Kelly, 759 F. Supp. 199, 202 (D. Pa. 1991) (referencing 73 PA. CONS.
STAT. §§ 201-1-202-9.3 (2007)). For Illinois, see Onesti v. Thomson McKinnon Secur., Inc., 619 F. Supp.
1262, 1267 (D. Ill. 1985) (referencing ILL. REV. STAT. ch. 121 1/2, § 262, et seq. (1985), now 815 ILL.
COMP. STAT. 505/2 (2007)). For Arizona, see State ex rel. Corbin v. Pickrell, 136 Ariz. 589, 592 (Ariz.
1983) (referencing ARIZ. REV. STAT. ANN. §§ 44-1522 – 1531 (2007)).
146 15 U.S.C § 1125 (2006).
147 15 U.S.C. §§ 1601-1693r.
148 15 U.S.C. app. 12 CFR § 226.
149 Pub. L. No. 103-325, 108 Stat. 2190 (codified as amended in scattered sections of 15 U.S.C.).
150 LOSS & SELIGMAN, supra note 10, at 1205 (defense of reasonable care under Section 12(a)(2) of the
1933 Act); id. at 1227-1239 (reasonable care and “expertizing” defenses under Section 11 of the 1933 Act).
151 31 U.S.C. §§ 5311-5332 (2006).
152 See infra Part II.F.3.i.
153 See infra Part II.F.3.ii.
154 “Shari’ah rules and principles” is a term of art among Shari’ah authorities. Various standards
publications are available to the public through the Islamic Financial Services Board (“IFSB”), one of the
premier standards institutes of SCF. See IFSB Published Standards, Islamic Financial Services Board,,
http://www.ifsb.org/index.php?ch=4&pg=140 (last visited Jan. 28, 2008) [hereinafter IFSB Standards].
155 Excepting of course the non-Muslim facilitators and financial institutions who desire to exploit it for
purely pecuniary gain.
156 As the literature makes clear, consensus among Shari’ah authorities is an important part of the tradition
and integrity of Shari’ah. In some Muslim countries, however, there is actual government oversight and
regulation. See, e.g., THE POLITICS OF ISLAMIC FINANCE, supra note 4; see also Islamic Financial Services
Board, Guidance on Key Elements of the Supervisory Review Process of Institutions Offering Islamic
Financial Services (Excluding Islamic Insurance (Takaful) Institutions and Islamic Mutual Funds), at ¶¶
110-118 at 24-25 (Dec. 2007), available at
http://www.ifsb.org/view.php?ch=4&pg=257&ac=36&fname=file&dbIndex=0&ex=1201533270&md=%C
1h%D5%BB%AA%B9zc%C3%9E%7CV%29%0A%BA%3C (last visited Jan. 28, 2008) [hereinafter
IFSB Standard].
157 Supra note 58 and accompanying text.
158 Supra note 59 and accompanying text.
159 See, e.g., STAHNKE & BLITT, RELIGIOUS FREEDOM SHARI’AH REPORT, supra note 93. Recently, northern
Nigeria has been added to this list. See Nigeria Turns From Harsher Side of Islamic Law, N.Y. TIMES, Dec.
10 2
1, 2007, available at http://www.nytimes.com/2007/12/01/world/africa/01shariah.html?_r=1&oref=login
(last visited Jan. 28, 2008).
160 Supra note 156; see Freedom Survey 2007, supra note 93.
161 An integral part of this inquiry is a study of the extant rulings of the classical Shari’ah authorities
considered to be authoritative by contemporary Shari’ah authorities.
162 See, e.g., MARY HABECK, KNOWING THE ENEMY: JIHADIST IDEOLOGY AND THE WAR ON TERROR (2006).
For a critique of this work essentially making the case that the author properly documents the connection
between doctrines underpinning the holy war by contemporary Islamic terrorists and the classical Law of
Jihad but overlays this factual connection with wishful policies based upon her argument that most
Muslims are not Shari’ah-adherent, see David Yerushalmi, Book Review, Townhall.com, Knowing the
Enemy: Jihadist Ideology and the War on Terror,
http://www.townhall.com/columnists/DavidYerushalmi/2006/09/06/knowing_the_enemy_jihadist_ideolog
y_and_the_war_on_terror (last visited Jan. 28, 2008).
163 Two examples of the government’s unwillingness to examine the doctrines of Islamic terrorists
seriously. Example One. In the 9-11 Commission Report, the most substantial public government effort to
date to understand what Islamic terrorism is and what drives it, the authors mention “Islamic law” only four
times. While the report concedes that al Qaeda’s doctrine of worldwide Jihad is based on Islamic law,
immediately thereafter the report attempts to distance anything but “radical” or “extremist” Islamic law
from the narrative. But the report makes no effort at analysis or comparison to see if the “al Qaeda” version
of Shari’ah is somehow different in kind or degree from historical, traditional, and authoritative Shari’ah.
NAT’L COMM’N ON TERRORIST ATTACKS UPON THE U.S., THE 9/11 COMMISSION REPORT 48-53 (2004),
available at http://www.9-11commission.gov/report/911Report.pdf (last visited Jan. 28, 2008) [hereinafter
THE 9/11 COMMISSION REPORT]. At one point the report notes that “fundamentalists” blame the decline of
the Islamic Empire on the failure of its religious leaders to abide by the tenets of Islamic law and the need
to return to the literal understandings of the Qur’an and Hadith. The report then suggests bin Laden bases
much of his doctrine on artificially selecting from the legal works of Ibn Taymiyyah. This is an effort to
buttress the Report’s narrative that there is no legitimate connection between traditional Shari’ah and the
terrorists’ doctrine of Jihad. Id. at 50-51.The problem with this “analysis” is that ibn Taymiyyah is a very
important Shari’ah authority today among Hanbali jurists and even many non-Hanbali jurists (especially in
matters relating to SCF) and his doctrine on Jihad is no less extreme than bin Laden’s. For ibn
Taymiyyah’s complete work on Jihad translated, see RUDOPH PETERS, JIHAD IN CLASSICAL AND MODERN
ISLAM 43-54 (2005). But see Coughlin, supra note 24, at 46 (describing criticism of ibn Taymiyyah by
Shari’ah authorities from the other schools.)
Example Two. The New York Police Department produced a 90-page report on the logistics and
processes on the domestic recruitment of Muslims living in Western countries by Islamic terrorist groups.
Islamic law or Shari’ah is mentioned only six times and while the report concedes that the goal of the
terrorists is the establishment of a worldwide Caliphate subject to Shari’ah, all factual indices of Shari’ah
adherence by budding terrorists is characterized as an act identified as “Salafist” or “Wahhabi.” Again, this
is an effort to marginalize the connection to Shari’ah proper and to label it as a Saudi Arabian-based cult.
The New York City Police Department report made no effort to understand the relationship between
Salafism and Shari’ah or to see what traditional and authoritative Shari’ah mandated in the Law of Jihad.
Had the researchers done so, they would have found that Salafism is nothing more than what the classical
Shari’ah authorities have held for a millennium. MITCHELL D. SILVER & ARVIN BHATT, SENIOR
INTELLIGENCE ANALYSTS, N.Y. CITY POLICE DEP’T RADICALIZATION IN THE WEST: THE HOMEGROWN
THREAT (2007), available at http://sethgodin.typepad.com/seths_blog/files/NYPD_Report-
Radicalization_in_the_West.pdf (last visited Jan. 28, 2008).
164 Coughlin, supra note 24.
165 YAHIYA EMERICK, WHAT ISLAM IS ALL ABOUT: A STUDENT TEXTBOOK (GRADES 7 TO 12) (5th
rev. ed. 2004).
166 Coughlin, supra note 24, at 97-108, 134 et seq.
167 One poignant example is Coughlin’s use of Averroes (aka Abu al-Walid Muhammad Ibn Muhammad
Ibn Rusd), one of the leading Shari’ah authorities of the so-called Golden Era in Islamic history often
touted as an age of Muslim enlightenment, pluralism, and peace. What Coughlin points out, based upon
available English translations of Averroes’ major work on Jihad, is that even in their best light, Shari’ah
10 3
authorities consistently maintain that infidels and polytheists “must be fought.” See, e.g., Coughlin, supra
note 24, at 184. For the entire work on Jihad translated, see Peters, supra note 163, at 27-42.
168 See, e.g., 15 U.S.C. 77g (2006) (disclosures required in registration statements); § 77j (disclosures
required in prospectuses); § 77aa (schedules of information required in registration statements).
169 Id. § 77k.
170 Respectively (1) § 77f; (2) § 77k(a)(2); (3) § 77k(a)(3); (4) § 77k(a)(4); and (5) § 77k(a)(5).
171 Id. § 77l.
172 See generally LOSS & SELIGMAN, supra note 10, at 1217-1239.
173 Supra notes 134-137 and accompanying text.
174 LOSS & SELIGMAN, supra note 10, at 1273-1301; see also Heuer,, Reese & Sale, supra note 137.
175 15 U.S.C. § 78ff(a); see also Heuer, Reese & Sale, supra note 137, at [page number] & nn.53-54.
176 A thoroughgoing analysis would require a determination of the following: whether the matter was a
criminal indictment, SEC enforcement proceeding, or a private civil lawsuit and who was the defendant
such as an issuer, investment advisor, or expert signatory to a registration statement and under which
particular anti-fraud provision the matter was pursued. See generally LOSS & SELIGMAN, supra note 10.
177 VOGEL & HAYES, supra note 18, at 38.
178 See Coughlin, supra note 24, at 147-150; supra note 162.
179 426 U.S. 438 (1976).
180 The materiality issues under the proxy rules are transferable to many other provisions, including Rule
10(b)-5. See, e.g., Basic Inc. v. Levinson, 485 U.S. 224, 232 (1988); LOSS & SELIGMAN, supra note 10, at
580 & n.148.
The relevant language of the proxy rules states:
No solicitation subject to this regulation shall be made by means of any proxy statement,
form of proxy, notice of meeting or other communication, written or oral, containing any
statement which, at the time and in the light of the circumstances under which it is made,
is false or misleading with respect to any material fact, or which omits to state any
material fact necessary in order to make the statements therein not false or misleading or
necessary to correct any statement in any earlier communication with respect to the
solicitation of a proxy for the same meeting or subject matter which has become false or
misleading.
181 485 U.S. 224, 445 (1988) (emphasis in the original).
182 Id. at 449 (quoting from 478 F. 2d at 1302).
183 Id. at 445-449 (footnotes and citations omitted).
184 Id.
185 Id. at 238-239.
186 A related question would be who decides and how does one decide what Shari’ah is? This is not specific
to the query of materiality. As noted supra, if a financial institution relies upon specific Shari’ah
authorities, the question might be as simple as determining what these specific Shari’ah authorities
consider to be authentic and authoritative Shari’ah rulings on Jihad, terrorism, and violence against non-
Muslims and non-Shari’ah-compliant Muslims. Aside from a careful examination of the rulings on these
subjects issued by the relevant Shari’ah authorities, a problem in any event if they have not published
rulings in these areas, one would be well-advised to look to the classical Shari’ah authorities upon which
these contemporary Shari’ah authorities rely as authoritative in their SCF rulings. While such a reliance
might not be dispositive (i.e., a Shari’ah authority might rely on Ibn Taymiyyah for purposes of
determining what kind of nominate contract Shari’ah allows for any given transaction, but in fact reject Ibn
Taymiyyah’s rulings on Jihad and war against the infidels). But at the very least, it raises an important fact
question for the reasonable investor that might very well rise to the level of materiality: Do the Shari’ah
authorities of the particular financial institution consider Ibn Taymiyyah’s Shari’ah-based rulings on war
against non-Muslims and non-Shari’ah compliant Muslims authoritative? If not Ibn Taymiyyah’s, whose?
187 This is procedurally akin to a defendant’s position on a motion to dismiss or for summary judgment.
Assuming all the allegations are true, as a matter of law, there is no actual evidence that Shari’ah is the
cause of violence rather than its excuse.
188 426 U.S. 438, 450 (1976).
189 See supra note 93; supra notes 290-291 and accompanying text..
10 4
190 See generally LOSS & SELIGMAN, supra note 10, at 171-174. For a thorough discussion of the
quantitative-qualitative distinction in disclosure, see John M. Fedders, Qualitative Materiality: The Birth,
Struggles, And Demise Of An Unworkable Standard, 48 CATH. U.L. REV. 41 (1998).
191 Common law fraud did not originally impose a duty to disclose; rather, once a statement represented
something as fact, it had to be truthful. Materiality gets at “truthfulness” in that “half-truths” can be as
misleading as false statements. The development of the law on the disclosure of omitted facts has always
lagged behind the duty to disclose the whole of a truth partially told. For a discussion in this development
relative to securities fraud cases, see LOSS & SELIGMAN, supra note 10, at 910-918.
192 This would be the case whether a company made no disclosure at all or represented itself as focused on
“socially responsible” or “ethical” investing without any mention of Shari’ah. If the business model was in
fact based upon Shari’ah, this would remain a material fact. See infra notes 380-381 and accompanying
text (discussing Azzad Asset Management).
193 Recent media stories about the Shari’ah criminal law include only recently a Muslim convert to
Christianity sentenced to death, a rape victim sentenced to lashes, and thieves having their hands
amputated. See, e.g., Josh Gersten, Widespread Outrage At Afghan Facing Death For Abandoning Islam,
N.Y. SUN, Mar. 21, 2006. For a scholarly look at the Shari’ah criminal law from the time of the Ottoman
Empire until today, see RUDOLPH PETERS, CRIME AND PUNISHMENT IN ISLAMIC LAW: THEORY AND
PRACTICE FROM THE SIXTEENTH TO THE TWENTY-FIRST CENTURY (2005).
194 See supra note 162.
195 For Shari’ah as expressed by Shari’ah authorities over the past millennium, see DAVID COOK,
UNDERSTANDING JIHAD; PETERS, supra note 163; Coughlin, supra note 24, at 83-223. See generally, THE
LEGACY OF JIHAD 141-367 (2005).
196 The SEC documents from which this narration is drawn can be found through a Lexis search: for the
Halliburton “No Action Letter” file, see 2003 SEC No-Act. LEXIS 433 [hereinafter Halliburton No-Action
File]. For General Electric, see 2005 SEC No-Act. LEXIS 137 [hereinafter GE No-Action File]. For a
broader article discussing these cases in some detail in the context of compliance by foreign subsidiaries of
U.S. corporations, see Terence J. Lau, Triggering Parent Company Liability Under United States Sanctions
Regimes: The Troubling Implications Of Prohibiting Approval And Facilitation, 41 AM. BUS. L.J. 413
(2004).
197 17 CFR 240.14a-8.
198 The rule sets the floor at less than 5% of assets at the end of the current fiscal year; and less than 5% of
gross earnings and net income. Id.
199 See Halliburton No-Action File, supra note 196. Halliburton raised other objections such as the
requested proxy statement included factual errors.
200 The Global Security Risk Database was a first of its kind approach to ferreting out companies doing
business in “terror sponsoring states.” The work was carried out and published by the Center For Security
Policy, a Washington, D.C.-based policy think tank headed by former Reagan administration official Frank
Gaffney. For the Global Security Risk Database, see THE CTR. FOR SEC. POLICY, THE TERRORISM
INVESTMENTS OF THE 50 STATES (Aug. 12, 2004), available at
http://www.centerforsecuritypolicy.org/modules/newsmanager/center%20publication%20pdfs/divestterror_
report.pdf (last visited Jan. 30, 2008). For an overall review of the “Divest Terror” program spearheaded by
the Center for Security Policy, see Center for Security Policy, Divest Terror Initiative,
http://www.centerforsecuritypolicy.org/home.aspx?sid=56&categoryid=56&subcategoryid=57&newsid=11
567 (last visited Jan. 30, 2008).
201 Letter from Janice Silberstein, Assoc. Gen. Counsel, City of N.Y., Office of the Comptroller, to Sec. and
Exch. Comm’n, Div. of Corporate Fin., Office of the Chief Counsel (Feb. 7, 2003), in Halliburton No-
Action File, supra note 196.
202 See GE No-Action File, supra note 196.
203 Letter from Richard S. Simon, Deputy Gen. Counsel, The City of N.Y., Office of the Comptroller, to
Sec. and Exch. Comm’n, Div. of Corporate Fin., Office of the Chief Counsel (Dec. 10, 2004), in GE No-
Action File, supra note 196.
204 Id.
205 U.S. Securities and Exchange Commission, Office of Global Security Risk,
http://www.sec.gov/divisions/corpfin/globalsecrisk.htm (last visited Jan. 30, 2008). In this context, the SEC
proposed the following:
10 5
II. Disclosure of Business Activities in or With Countries Designated as State Sponsors of
Terrorism
The federal securities laws do not impose a specific disclosure requirement that addresses
business activities in or with a country based upon its designation as a State Sponsor of Terrorism.
However, the federal securities laws do require disclosure of business activities in or with a State
Sponsor of Terrorism if this constitutes material information that is necessary to make a
company's statements, in the light of the circumstances under which they are made, not
misleading. [Note 6 citation appears here in the text. See below.] The term “material” is not
defined in the federal securities laws. Rather, the Supreme Court has determined information to be
material if there is a substantial likelihood that a reasonable investor would consider the
information important in making an investment decision or if the information would significantly
alter the total mix of available information. [Note 7 citation appears here in the text. See below.]
The materiality standard applicable to a company’s activities in or with State Sponsors of
Terrorism is the same materiality standard applicable to all other corporate activities. Any such
material information not covered by a specific rule or regulation must be disclosed if necessary to
make the required statements, in the light of the circumstances under which they are made, not
misleading. The materiality standard’s extensive regulatory and judicial history helps companies
and their counsel to interpret and apply it consistently, and we remain committed to employing
this standard to company disclosure regarding business activities in or with State Sponsors of
Terrorism.
Although the Commission is well positioned to review disclosure relating to business
activities regardless of the country in which they are conducted, we do not have the expertise or
information necessary to identify the particular countries whose governments have funded,
sponsored, provided a safe haven for, or otherwise supported terrorism. Nor is it the Commission’s
role to determine the degree to which a public company’s business activities may support
terrorism or may be inconsistent with U.S. foreign policy or U.S. national interests.
Note 6: Rule 408 of Regulation C, [17 CFR 230.408] and Rule 12b-20 under the Securities
Exchange Act of 1934 [17 CFR 240.12b-20].
Note 7: TSC Industries v. Northway, Inc., 426 U.S. 438 (1976). It has also held that materiality of
contingent or speculative events or information depends on balancing the probability that the event
will occur and the expected magnitude of the event. Basic v. Levinson, 485 U.S. 224, 238 (1988).
Concept Release on Mechanisms to Access Disclosures Relating to Business Activities in or With
Countries Designated as State Sponsors of Terrorism, 72 Fed. Reg. 65862, 65863 (proposed Nov. 23, 2007)
(to be codified at 17 C.F.R. pts. 228, 229, 230, 239, 240 & 249) (footnotes omitted).
206 See generally Coughlin, supra note 24.
207 This is a term of art used by many commentators, both of the punditry variety and of the scholarly. It
should be distinguished from ‘Islamicist’, which tends to describe an academic whose discipline is the
study of things Islamic.
208 Supra note 191.
209 See generally LOSS & SELIGMAN, supra note 10, at 910-11, 1018-31.
210 Supra note 191.
211 This is especially true after the passage of the Private Securities Litigation Reform Act of 1995
(PSLRA), which ratcheted up the scienter pleadings requirements and froze discovery during a defendant’s
motion to dismiss to eliminate frivolous suits and to eliminate the “leverage” plaintiffs use by propounding
reams of discovery requests early on to tie-up company management and extort a settlement. For a good
discussion of the pleadings requirements post-PSLRA, see Ray J. Grzebielski & Brian O. O'Mara, Whether
Alleging "Motive and Opportunity" Can Satisfy the Heightened Pleading Standards of the Private
Securities Litigation Reform Act of 1995:Much Ado About Nothing, 1 DEPAUL BUS. & COM. L.J. 313
(2003).
212 Certainly this is true in the Second Circuit Court of Appeals, given the ruling in Press v. Chemical
Investment Services Corp., 166 F.3d 529, 538 (2d Cir. 1999) (“‘Whether or not a given intent existed is, of
course, a question of fact.’” (quoting SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1467 (2d Cir. 1996)));
see also id. (“‘Whether a given intent existed is generally a question of fact.’” (quoting In re Time Warner,
9 F.3d 259, 270-71 (2d Cir. 1993))). For an argument in favor of the Second Circuit’s approach to scienter,
see Daniela Nanau, Analyzing Post-Market Boom Jurisprudence in the Second and Ninth Circuits: Has the
10 6
Pendulum Really Swung Too Far in Favor of Plaintiffs?, 3 CARDOZO PUB. L. POL'Y & ETHICS J. 943
(2006).
213 RESTATEMENT (SECOND) OF TORTS §552(1) (1977).
214 See supra notes 211-212; see also Cook, supra note 138 (providing an overall examination of the
jurisdictional issues raised by the recent federal legislation affecting class actions alleging securities fraud).
215 See generally LOSS & SELIGMAN, supra note 10, at 1019 & n.345.
216 See generally id. at 1227-39 (except the discussion on “expertizing” at 1232-33).
217 Per its terms, Section 12(2) creates civil liability for misrepresentations when someone “offers or sells a
security” and does so “by means of a prospectus or oral communication.” 15 U.S.C.S. § 77l(a)(2); see also
Gustafson v. Alloyd Co., 513 U.S. 561, 569 (1995) (stating that a “prospectus” is a specific kind of
document under the 1933 act and misrepresentations of the written kind must be in the prospectus to be the
basis for an action under Section 12(2)).
218 15 U.S.C. § 77l(a)(2) (2006).
219 17 C.F.R. § 275.206(4)-1 (2008).
220 For the SEC Final Rule, see 72 Fed. Reg. 44,756, 44,761 (Sep. 10, 2007) (codified at 17 C.F.R. pt. 275).
221 375 U.S. 180, 195 (1963). For a discussion of whether there is a private right of action to void contracts
under Section 215 of the Investment Advisors Act, see Transamerica Mortg. Advisors (tama) v. Lewis, 444
U.S. 11, 18-19 (1979); see also LOSS & SELIGMAN, supra note 10, at 1241-47.
222 See supra note 211; see also Jeffrey W. Stempel, Class Actions and Limited Vision: Opportunities for
Improvement Through a More Functional Approach to Class Treatment of Disputes, 83 WASH. U. L. REV.
1127 (2005) (discussing the Class Action Fairness Act of 2005 (CAFA)).
223 425 U.S. 185 (1976); see also Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033 (7th Cir. 1977)
(stating the classic “recklessness” standard as follows: “[H]ighly unreasonable [conduct], involving not
merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary
care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is
so obvious that the actor must have been aware of it”).
224 See supra note 191; see also City of Monroe Employees Ret. Sys. v. Bridgestone, 399 F.3d 651, 687 (6th
Cir. 2005). In the Bridgstone case, the court quoted Rubin v. Schottenstein, 143 F.3d 263, 267 (6th Cir.
1998) (en banc), as follows:
The question thus is not whether a [defendant’s] silence can give rise to liability, but whether
liability may flow from his decision to speak . . . concerning material details . . ., without revealing
certain additional known facts necessary to make his statements not misleading. This question is
answered by the text of [SEC] Rule 10b-5(b) itself: it is unlawful for any person to “omit to state a
material fact necessary in order to make the statements made, in the light of the circumstances
under which they were made, not misleading . . . .”
Bridgestone, 399 F.3d at 687.
225 See Bridgestone, 399 F.3d at 669 (quoting Helwig v. Vencor, Inc., 251 F.3d 540, 555 (6th Cir. 2001)),
wherein the court explained that “[a]s for materiality, whether or not a statement is material turns on ‘a
fact-intensive test.’” The court also stated that “‘[m]ateriality depends on the significance the reasonable
investor would place on the withheld or misrepresented information.’” Id. (quoting Basic Inc. v. Levinson,
485 U.S. 224, 240 (1988)). That is, would the information, had it been presented accurately, have
“‘significantly altered the ‘total mix’ of information made available?’” 251 F.3d at 563 (quoting Basic, 485
U.S. at 231-32).
226 See Bridgestone, 399 F.3d at 669 (citing PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 680 (6th Cir.
2004)).
227 These “rubrics” are derived from the nine illustrative factors in Helwig, which are often cited by other
courts.
228 Ariz ARIZ. REV. STAT. ANN. § 44-1991 (1999); see also Richard G. Himelrick, Arizona Securities Fraud
Liability: Charting a Non-Federal Path, 32 ARIZ. ST. L.J. 203 (2000).
229 See id. at 230 & n. 186.
230 See supra note 145.
231 For case law regarding Illinois’ private right of action, see In re CLDC Management Corp., 18 B.R. 797,
799-800 (Bankr. D. Ill. 1982) (implied private right of action allowed); Martin v. Heinold Commodities,
163 Ill. 2d 33, 67 (1994) (punitive damages allowed). For case law regarding Arizona’s private right of
10 7
action, see Holeman v. Neils, 803 F. Supp. 237 (D. Ariz. 1992) (implied private right of action allowed);
Dunlap v. Jimmy GMC of Tucson, Inc., 666 P.2d 83 (Ariz. Ct. App. 1983) (punitive damages allowed).
232 Strigliabotti v. Franklin Res., Inc., No. C 04-00883 SI, 2005 U.S. Dist. LEXIS 9625 (N.D. Cal. March 7,
2005).
233 Brown v. Bd. of Educ., 345 U.S. 972 (1953).
234 367 U.S. at 207-210. The intervening statute purportedly overruling the Smith Act membership clause,
the Internal Security Act of 1950, 64 Stat. 987 (codified at 50 U.S.C. § 781), was repealed by Act of Dec.
17, 1993, Pub. L. No. 103-199, Title VIII, § 803(1), 107 Stat. 2329.
235 The petitioner also raised “as applied” claims but these boiled down to an evidentiary analysis.
236 367 U.S. at 225.
237 367 U.S. at 297.
238 Id. In Brandenburg v. Ohio, 395 U.S. 444 (1969), in a per curiam decision, the Court held in striking
down a state law criminalizing speech advocating violence that such speech is constitutionally protected
unless it is intended and likely to cause imminent illegal conduct. The Brandenburg Court understood its
decision as concordant with the Smith Act cases cited. The question of “imminence” will no doubt plague
future cases and remain a fact-based inquiry. Imminence will likely involve not simply the timing of the
threat of violence, but also its seriousness and its likelihood.
239 Olivier Guitta, The Cartoon Jihad: The Muslim Brotherhood's project for dominating the West, WEEKLY
STANDARD 22, Feb. 20, 2006, available at
http://www.weeklystandard.com/Content/Public/Articles/000/000/006/704xewyj.asp (last visited Jan. 31,
2008).
240 212 U.S. at 498. The Elkins Act made it an offense to “give or receive a rebate whereby goods are
transported in interstate commerce at less than the published rate.” Preet Bharara, Corporations Cry Uncle
and Their Employees Cry Foul: Rethinking Prosecutorial Pressure on Corporate Defendants, 44 AM.
CRIM. L. REV. 53, 61 n.42 (2007) (quoting New York Central, 212 U.S. at 498).
241 212 U.S. at 494.
242 Bharara, supra note 240, at 62-63.
243 W. PAGE KEETON, PROSSER AND KEETON ON TORTS 499-508 (5th ed. 1984). For a general discussion on
corporate liability, see Note, Corporate Crime: Regulating Corporate Behavior through Criminal
Sanctions, 92 HARV. L. REV. 1227, 1247-51 (1979).
244 See infra notes 359-361 and accompanying text.
245 See infra notes 362-364 and accompanying text.
246 In his essay on the proper role of a Shari’ah authority for a mutual fund, DeLorenzo argues that beyond
the “quantitative” rules, there are “socially responsible” screens that must be applied over the purely
objective ones. DeLorenzo, supra note 22, at 6. For a discussion of the purpose of the DJII Shari’ah
advisory board, see infra Part III.B.1.
247 See infra notes 286-291 and accompanying text.
248 See Patricia S. Abril & Ann Morales Olazabal, The Locus of Corporate Scienter, 2006 COLUM. BUS. L.
REV. 81 (2006) (discussing “collective knowledge”).
249 It seems Shari’ah authorities themselves understand the reputational and even financial risks of not
imposing some broad standards for entry into the elite group of Shari’ah authorities and for not
standardizing what is Shari’ah-compliant and what is not. See, e.g., IFSB Standards, supra note 154.
250 See infra notes 358-363 and accompanying text.
251 Nike, Inc. v. Kasky, 539 U.S. 654 (2003); see also supra notes 140-142 and accompanying text.
252 Kasky v. Nike, Inc., 27 Cal. 4th 939, 946 (2002).
253 This is assisted by the burgeoning use of Internet sites which provide legal rulings (fatawa) to the
Shari’ah faithful anywhere in the world. See, e.g., IslamOnLine.net,
http://www.islamonline.net/english/index.shtml (last visited Jan. 31, 2008).
254 Alexiev, supra note 18, at n.43. The number 20-25 was derived by developing a list of names of
Shari’ah authorities which appear in SEC filings and the major SCF Internet sites. If one includes Shari’ah
authorities who deal almost exclusively in Pakistan, Malaysia, or the GCC states, the number is probably
closer to 60. See generally Islamic Banking and Finance Issue #3 Summary,
http://islamicbankingandfinance.com/summary3.html (last visited Jan. 31, 2008) (summarizing an issue of
the London-based journal Islamic Banking and Finance, which discusses this “bottleneck”).
255 See supra notes 216-218 and accompanying text.
10 8
256 50 U.S.C. app. § 1 (2007).
257 50 U.S.C.S. §§ 1701-1706 (2007).
258 See, e.g., Notice of March 8, 2007--Continuation of the National Emergency With Respect to Iran, 72
Fed. Reg. 47 (March 12, 2007).
259 See HALLIBURTON COMPANY, FORM 10K FOR THE FISCAL YEAR ENDED DEC. 31, 2006, at 58, available
at http://www.sec.gov/Archives/edgar/data/45012/000004501207000072/ed10k2006_final.htm (last visited
Jan. 31, 2008):
Operations in Iran
We received and responded to an inquiry in mid-2001 from the Office of Foreign Assets
Control (OFAC) of the United States Treasury Department with respect to operations in Iran by a
Halliburton subsidiary incorporated in the Cayman Islands. The OFAC inquiry requested
information with respect to compliance with the Iranian Transaction Regulations. These
regulations prohibit United States citizens, including United States corporations and other United
States business organizations, from engaging in commercial, financial, or trade transactions with
Iran, unless authorized by OFAC or exempted by statute. Our 2001 written response to OFAC
stated that we believed that we were in compliance with applicable sanction regulations. In the
first quarter of 2004, we responded to a follow-up letter from OFAC requesting additional
information. We understand this matter has now been referred by OFAC to the DOJ. In July 2004,
we received a grand jury subpoena from an Assistant United States District Attorney requesting
the production of documents. We are cooperating with the government’s investigation and
responded to the subpoena by producing documents in September 2004.
Separate from the OFAC inquiry, we completed a study in 2003 of our activities in Iran
during 2002 and 2003 and concluded that these activities were in compliance with applicable
sanction regulations. These sanction regulations require isolation of entities that conduct activities
in Iran from contact with United States citizens or managers of United States companies.
Notwithstanding our conclusions that our activities in Iran were not in violation of United States
laws and regulations, we announced that, after fulfilling our current contractual obligations within
Iran, we intend to cease operations within that country and withdraw from further activities there.
260 See Lau, supra note 196, at 418-19.
261 31 U.S.C. §§ 5318 et seq. (2006).
262 See generally Eric J. Gouvin, Bringing Out the Big Guns: The USA Patriot Act, Money Laundering, and
the War on Terrorism, 55 BAYLOR L. REV. 955 (2003).
263 See, e.g., CairChicago.org, Action Alert (Dec. 1, 2005), available at
http://www.cairchicago.org/actionalerts.php?file=aa_blog12012005 (last visited Jan. 31, 2008) (announcing
a special Internet web log site opposing the Patriot Act on “civil rights” grounds, published by the Council
on American-Islamic Relations (CAIR)).
264 See Gouvin, supra note 262, at 976-77.
265 FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNSEL, BANK SECRECY ACT/ ANTI-MONEY
LAUNDERING EXAMINATION MANUAL 8 (2006), available at
http://www.ffiec.gov/pdf/bsa_aml_examination_manual2006.pdf (last visited Jan. 31, 2008).
266 See Gouvin, supra note 262, at 967-69.
267 Id. at 976-77.
268 “FISA” is the Foreign Intelligence Surveillance Act of 1978, Pub. L. No. 95- 511, 92 Stat. 1783
(codified as amended at 50 U.S.C. §§ 1801-1862), which was amended materially by the Patriot Act. See
USA Patriot Act, § 218, 115 Stat. 291 (amending 50 U.S.C. §§ 1804(a)(7)(B) & 1823(a)(7)(B)). A Fifth
Amendment “criminal” warrant typically requires a showing of probable cause before a judge. The FISA
requirements for a warrant, which are directed at foreign threats, even if on domestic soil, has relaxed
standards. For a thorough explanation of these standards, see Richard Henry Seamon & William Dylan
Gardner, The Patriot Act and the Wall Between Foreign Intelligence and Law Enforcement, 28 HARV. J.L.
& PUB. POL’Y 319 (2005).
269 See David Hardin, The Fuss Over Two Small Words: The Unconstitutionality of the USA PATRIOT Act
Amendments to FISA Under the Fourth Amendment, 71 GEO. WASH. L. REV. 291, 291 & n.395 (2003).
270 See generally Montgomery E. Engel, Donating “Blood Money”: Fundraising For International
Terrorism By United States Charities and the Government's Efforts to Constrict the Flow, 12 CARDOZO J.
INT'L & COMP. L. 251 (2004). Specifically, Engel writes that:
10 9
The authority of the President to issue both Executive Orders 12,947 and 13,224 originates in the
International Emergency Economic Powers Act (“IEEPA”). Upon declaration of a national
emergency in response to an “unusual and extraordinary threat,” IEEPA grants the President broad
authority to govern the disposition and block the assets of “any person, or with respect to any
property, subject to the jurisdiction of the United States.” The Supreme Court has upheld IEEPA's
broad grant of authority to the President in its form as amended in 1977. The Court refused to limit
the President’s authority to continued blocking or freezing but ensured that it extended to the
permanent disposition of assets suggested by IEEPA’s congressional grant of the power to
“transfer,” “compel,” and even “nullify” assets. Underlying this deferential grant, the Court
recognized a legitimate and discretionary exercise of the President’s power to govern foreign
policy by using frozen assets as a "bargaining chip" in dealing with a hostile country.
Id. at 258-59 (footnotes omitted). The role of Muslim charities in financing terror has been discussed in
Congressional testimony as well. See Role of Charities and NGOs in the Financing of Terrorist Activities:
Hearing Before the Subcomm. on International Trade and Finance of the S. Comm. on Banking, Housing,
and Urban Affairs, 107th Cong. (2002) (statement of Matthew Levitt, Senior Fellow, Washington Institute
for Near East Policy), available at http://banking.senate.gov/02_08hrg/080102/levitt.htm (last visited Feb.
1, 2008). Military strategists have also looked at this modality for furthering the terrorist war aims. See
Major Wesley J. L. Anderson, Disrupting Threat Finances: Utilization of Financial Information to Disrupt
Terrorist Organizations in the Twenty-First Century (November 4, 2007) (unpublished thesis, School of
Advanced Military Studies, U.S. Army Command and General Staff College), available at
http://stinet.dtic.mil/cgi-bin/GetTRDoc?AD=A470454&Location=U2&doc=GetTRDoc.pdf (last visited
Feb. 1, 2008).
271 Prosecutions for the “material support of terrorism” are notoriously difficult cases to try before a jury
because they often require reams of financial data evidence, circumstantial evidence of associational links,
and the defense often raised by defendants that they had no specific knowledge that the money they
contributed was going to support illegal activities. A recent case with these dynamics, the largest federal
terror-financing case to date, ended in mistrial on the bulk of the charges. See the court filings (organized
and with commentary) in the criminal prosecution U.S. v. Holy Land Foundation for Relief and
Development, Criminal Action No. 3:04-CR-240-G, 2007 U.S. Dist. LEXIS 50239 (N.D. Tex. July 11,
2007), available at http://www.nefafoundation.org/hlfdocs.html (last visited Jan. 31, 2008).
272 One of the leading Shari’ah authorities recommends that Shari’ah-compliant mutual funds calculate the
Shari’ah-based religious tax called zakat for the investors and withhold it at source as a value added. See
generally supra note 22 and accompanying text. The assumption for this memorandum has been that if a
reporting mutual fund does not disclose that it has the authority to gift zakat contributions on behalf of the
individual investors, then the mutual fund has left that for the individual investors.
273 Id.; see also Yaquby, supra note 39; ISLAMIC FINANCIAL SERVICES BOARD, EXPOSURE DRAFT: GUIDING
PRINCIPLES ON GOVERNANCE FOR ISLAMIC COLLECTIVE INVESTMENT SCHEMES 14-17 (Dec. 2007),
available at
http://www.ifsb.org/view.php?ch=4&pg=140&ac=31&fname=file&dbIndex=0&ex=1201805784&md=%E
B%FA%AF%F7%DD%E3%80%1F%9C%DC%ED%9F%07%EE%E7%23 (last visited Jan. 31, 2008).
274 See supra note 270.
275 Id.
276 While it does not appear that the DJII calculates the “purification” requirement for its index of funds
with a concomitant reduction in the stated values and returns for its universe of stocks, one index actually
promotes this feature:
Incorporates Dividend Purification: In addition, the application of a dividend adjustment factor
in the creation of the MSCI Islamic Index Series results in more relevant benchmarks, as they
reflect the total return to an Islamic portfolio net of dividend purification.
MSCI Global Islamic Indices, http://www.mscibarra.com/products/indices/islamic/ (last visited Jan. 31,
2008).
277 18 U.S.C. §1956(a)(2)(A) (2006).
278 As one commentator began an analysis into the problem of Muslim charities being used to funnel funds
to Islamic terrorists:
On December 4, 2001, nearly three months after the terrorist attacks of September 11th and
barely three days after a pair of terrorist suicide bombings killed 25 and injured 200 in Israel,
11 0
President Bush declared the Holy Land Foundation for Relief and Development (“HLF”) of
Richardson, Texas, a terrorist organization, its assets frozen, and announced that its offices had
been raided by the FBI. Purportedly the largest Muslim charity in the United States, HLF had been
under investigation by the FBI for its alleged financing of the Islamic Resistance movement, or
Hamas, for nine years. Ten days later, the Bush Administration acted again, freezing the assets and
raiding the offices of two more Muslim charities, the Benevolence International Foundation
(“BIF”) and the Global Relief Foundation (“GRF”), both located in the Chicago, Illinois area.
Engel, supra note 270, at 251 (footnotes omitted).
279 For a case study of Caribou Coffee, see infra notes 323-338 and accompanying text.
280 Or, as set out supra note 223 and accompanying text, was this fact willfully or recklessly avoided?
281 See supra note 278.
282 See U.S. Department of the Treasury, Key Issues: Protecting Charitable Organizations,
http://www.ustreas.gov/offices/enforcement/key-issues/protecting/charities_execorder_13224-a.shtml#a
(last visited Jan. 31, 2008).
283 Typically, good legal counsel, when developing a due diligence plan, will construct it such that it
accounts for the threshold prima facie requirements of an indictment or other criminal charging process
rather than an acquittal at trial.
284 108 Pub. L. No. 458, 118 Stat. 3638 (2004).
285 18 U.S.C. § 2339(A)(b) (2006).
286 395 F. Supp. 2d 79 (S.D.N.Y. 2005).
287 Id. at 99.
288 For the discussion of this point in an earlier appeal arising out of the same trial, see U.S. v. Sattar, 314 F.
Supp. 2d 279, 301-02 (S.D.N.Y. 2004).
289 See, e.g., Boim v. Quranic Literacy Inst., 291 F.3d 1000 (7th Cir. 2002).
290 28 U.S.C. § 1350 (2006).
291 The ATS is a jurisdictional statute. See Sosa v. Alvarez-Machain, 542 U.S. 692 (2004). It gives an alien
plaintiff access to federal courts if there is an allegation that the alien suffered some harm that is in
“violation of the law of nations or a treaty of the United States.” Id. In the Court’s opinion, it held that the
norm of law violated must be “specific, universal, and obligatory.” Id. at 732. The U.S. laws against
terrorism and the “material support of terrorism” are in accord with the Law of Nations and at the very least
are “specific, universal, and obligatory.” See, e.g., Filartiga v. Pena-Irala, 630 F.2d 876, 885 (2d Cir.
1980) (stating that torture is a violation of the Law of Nations); see also Torture Victim Protection Act of
1991, § 2(b), Pub. L. No. 102-256, 106 Stat 73 (codified at 28 U.S.C. § 1350).
292 See supra note 15 and accompanying text; see also Islamic Financial Services Board,
http://www.ifsb.org/index.php (last visited Jan. 31, 2008); Accounting and Auditing Organization for
Islamic Financial Institutions, http://www.aaoifi.com/index.shtml (last visited Jan. 31, 2008).
293 IFSB Standards, supra note 154 (footnotes omitted).
294 See generally Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284
(1985); see also Robert Pitofsky, Chairman, Fed. Trade Comm’n, Self Regulation and Antitrust (Feb. 18,
1998), available at http://www.ftc.gov/speeches/pitofsky/self4.shtm (last visited Jan. 31, 2008); Debra A.
Valentine, Gen. Counsel, Fed. Trade Comm’n, Industry Self-Regulation and Antitrust Enforcement: An
Evolving Relationship (May 24, 1998), available at http://www.ftc.gov/speeches/other/dvisraelspeech.shtm
(last visited Jan. 31, 2008).
295 Id.
296 See generally McMillen, supra note 5, at 458-67 (attempting to cure the lack of transparency, certainty,
consistency, and predictability of SCF by arguing for the IFSB to propose Model Acts like the Model Acts
propounded by the National Conference of Commissioners on Uniform State Laws).
297 See Am. Soc'y of Mech. Eng'rs v. Hydrolevel Corp., 456 U.S. 556 (1982). In fact, the SCF financial
institutions participate at various levels in setting the standards for the industry. See, e.g., AAOIFI
Members, http://www.aaoifi.com/members.html (last visited Jan. 31, 2008). The private banks do not
appear to play as significant a role in setting standards for the IFSB. See, e.g., IFSB Members,
http://www.ifsb.org/index.php?ch=3&pg=7&ac=10 (last visited Jan. 31, 2008).
298 For an interesting discussion of “rules collusion” as “Type III,” see Robert H. Lande & Howard P.
Marvel, The Three Types of Collusion: Fixing Prices, Rivals, And Rules, 2000 WIS. L. REV. 941, 949-84
(2000).
11 1
299 Id. The anti-competitive effects of the rule-making monopoly currently enjoyed by the Shari’ah
authorities go in some measure to the endogenous aspects of what Shari’ah itself says about who is
qualified to be part of the Ulema or scholarly elite with any real authority. Historically and institutionally,
because the Shari’ah authorities have used “consensus” and the limitation of new interpretations via the
doctrine of the “closing of the gate of itjima” as a self-regulator, they have been extraordinarily successful
in keeping the group over time true to the early doctrines developed after the formal schools had articulated
them. See, e.g., Coughlin, supra note 24, passim.
300 See Rutledge, supra note 113.
301 Id.; see also Callum McCarthy, Chairman, FSA Muslim Council of Britain Islamic Fin. and Trade
Conference, Regulation and Islamic Finance (June 13, 2006), available at
http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2006/0613_cm.shtml (last visited Jan. 31,
2008).
302 See Rutledge, supra note 113.
303 12 U.S.C. § 29 (2006). For a senior officer at the Federal Reserve Bank of New York remarking
favorably on Islamic banking in the United States, see Michael Silva, Islamic Banking Remarks, 12 AM.
LAW & BUS. REV. 201, 201 & n.4 (2006).
304 See supra note 58.
305 Id.
306 Supra note 147.
307 Supra note 148.
308 For a thorough discussion of the strengths and weaknesses of TILA in regulating misleading advertising,
see Patricia A. McCoy, The Middle-Class Crunch: Rethinking Disclosure in a World of Risk-Based
Pricing, 44 HARV. J. ON LEGIS. 123 (2007).
309 15 U.S.C. § 1664(c) (2006), 12 C.F.R. § 226.24(b) (2005).
310 15 U.S.C. § 1665(a).
311 Id. § 1664(d); Supp. I to Part 226 – Official Staff Interpretations, 12 C.F.R. pt. 226 (construing §
226.24(c)), available at http://ecfr.gpoaccess.gov/cgi/t/text/textidx?
c=ecfr&sid=52c796f4a8897e30772fa9be6632dfd5&rgn=div9&view=text&node=12:3.0.1.1.7.5.8.6.27
&idno=12.
312 See, e.g., University Bank, Opening Doors to Islamic Financing, http://www.universitybank.
com/IslamicBanking/homefinance.html (last visited Feb. 1, 2008) (declaring Islamic Financial
Corporation’s loans “free of interest”). While deep in University Bank’s “Frequently Asked Questions,”
http://www.university-bank.com/IslamicBanking/faq.html (last visited Feb. 1, 2008), the bank attempts to
explain that “[a]n accountant may argue that rent in the latter two and profit in the former is interest, but in
none of these cases is it riba. Some accountants argue that anything that may be perceived as generating a
benefit from the passage of time has interest in it. The Sharia’a scholars have not defined riba in this way,
rather riba necessarily relates to loans of money or exchanges of money like commodities when they are
used as money.”
Interestingly, in contrast to what one might expect of, an argument aimed at the IRS or OCC -- which
would downplay the “form” and argue that the “substance” of the transaction is a loan -- University Bank
represents to its customers that its Shari’ah-compliant transactions are in fact substantively not loans and
that their form is their substance. For example, again buried in its Frequently Asked Questions:
Query: Isn’t the Islamic system of purchasing houses the same thing, the same mechanics, as
the traditional mortgage system only with different labeling?
SHAPE™: This too is inaccurate. The process of qualifying a consumer and disclosing costs and
risks to a consumer is the same as the mortgage system. This process is regulated by federal and
state statutes in the United States. Hence, the paperwork is the same or very similar prior to and
after making the acquisition, but not the acquisition itself.
The acquisition mechanics are fundamentally different without creating all of the same rights and
obligations as in a traditional mortgage. Hence, it is not a question of labeling, but of actual
structure.
Id. (emphasis added).
313 See supra note 58.
11 2
314 See supra note 312.
315 Bankruptcy and loan defaults open up an entire Pandora’s box of issues that this memorandum will not
and cannot address. Legal commentators have discussed this in passing; however, only in the most cursory
of terms. See, e.g., McMillen, supra note 88.
316 See, e.g., Devon Bank, Frequently Asked Questions, http://www.devonbank.com/Islamic/faq.html (last
visited Feb. 1, 2008):
Why are your costs higher than conventional loans?
To be Shariah-compliant, our costs must be related to our actual expenses. Our products have a
higher documentation fee due to the extra work in product design and assembling documents for a
closing—it is not an automated process as it is for a conventional loan. Our profit rate is otherwise
the same as an equivalent traditional mortgage. There are a few transaction costs that are higher
because of the dictates of the specific deal structure needed to satisfy the requirements of an
Islamic financing transaction, such as two deeds to record instead of one. Otherwise, all our costs
are the same as a traditional mortgage. We do not charge a premium for religious accommodation.
317 Pub. L. No. 103-325, 108 Stat. 2190 (1994) (codified as amended in scattered sections of TILA, 15
U.S.C. §§ 1601-1667).
318 See generally C. Lincoln Combs, Banking Law and Regulation: Predatory Lending in Arizona, 38 ARIZ.
ST. L.J. 617 (2006).
319 See Elina Chamis, A New Cup O' Joe: Minneapolis Coffee Retailer Plans Expansion into D.C. Market,
WASH. BUS. J., Mar. 31, 2000, available at
http://www.bizjournals.com/washington/stories/2000/04/03/story7.html?page=1 (last visited Feb. 1, 2008).
320 See Neal St. Anthony, Venture Firm Buys Caribou; Its Investors Tapped Out, Caribou Coffee's
Founders Will Sell the Chain and Step Aside from Management Roles, STAR TRIBUNE (Minneapolis, MN),
Dec. 9, 2000, at 1D.
321 See Milestone Year for First Islamic Investment Ban, MIDDLE EAST NEWSFILE, Jan. 24, 2001.
322 Crescent Capital Soon to be Arcapita, ATLANTA BUS. CHRON., Feb. 28, 2005, available at
http://atlanta.bizjournals.com/atlanta/stories/2005/02/28/daily1.html (last visited Feb. 1, 2008); see also
Arcapita.com, http://www.arcapita.com/about/invest/team-strategy.html (last visited Feb. 1, 2008).
323 CARIBOU COFFEE COMPANY, INC., FORM S-1 REGISTRATION STATEMENT (2005) [hereinafter CARIBOU
COFFEE S-1], available at
http://www.sec.gov/Archives/edgar/data/1332602/000095014405007474/g96252sv1.htm.
324 Arcapita Inc. and Arcapita Bank B.S.C.(c) in fact own Caribou through a very complex off-shore
ownership structure. As reported in Caribou Coffee Prospectus for its initial public offering:
(1) As of August 15, 2005, Caribou Holding Company Limited (“CHCL”) has 150,600
shares of voting stock and 6,815,038 shares of non-voting stock outstanding. 5,971,218
of the shares of non-voting stock are held by five companies (the “Five Non-Voting
Holding Companies”), which are Cayman Island entities owned by approximately 160
international investors. Arcapita Bank B.S.C.(c) (“Arcapita Bank”) holds a minority
interest in three of the Five Non-Voting Holding Companies, which each own 1,587,180
shares of the non-voting stock of CHCL. 572,820 of the remaining shares of non-voting
stock are held by Premium Coffee Holdings Limited, an indirect subsidiary of Arcapita
Bank. The remaining 271,000 shares of non-voting stock are held by Arcapita Incentive
Plan Limited (“AIPL”), a Cayman Islands entity owned by management of Arcapita
Bank (including Messrs. Ogburn and Griffith). 10,040 shares of voting stock are held by
each of 15 separate Cayman Islands entities formed by Arcapita Bank (the “Voting
Cayman Entities”). The Voting Cayman Entities are owned by approximately 50
international investors (the “International Investors”).
Each of the Voting Cayman Entities owns 62/3% percent of the voting stock of CHCL.
Each International Investor has granted Arcapita Investment Management Limited
(“AIML”), a direct subsidiary of Arcapita Bank, a revocable proxy to vote its shares of
voting stock in the Voting Cayman Entities on all matters. In addition, each Voting
Cayman Entity has entered into an administration agreement with AIML pursuant to
which AIML is authorized to vote the voting stock of CHCL held by such Voting
11 3
Cayman Entity. Each administration agreement is terminable by a Voting Cayman Entity
upon 60 days’ prior written notice to AIML by a vote of two-thirds of its shareholders.
(2) Arcapita Bank does not directly own any stock of CHCL, Caribou Coffee Company,
Inc., AIPL or the Voting Cayman Entities. The number of shares of stock shown as
owned by Arcapita Bank includes all of the shares of CHCL subject to the revocable
proxies granted to AIML as described in note (1)above. Arcapita Bank is a Bahrain joint
stock company.
CARIBOU COFFEE COMPANY, INC., PROSPECTUS 71 nn.1-2 (2005) [hereinafter CARIBOU COFFEE
PROSPECTUS], available at
http://www.sec.gov/Archives/edgar/data/1332602/000095014405009927/g96252b4e424b4.htm#112 (last
visited Feb. 1, 2008).
325 While most of this “firestorm” was local and contained to the media in Minnesota, Ohio, and Illinois,
there was at least one international mainstream media outlet that picked it up. See Jon Tevlin, Caribou
Severs Ties with Islamic Advisor, STAR TRIBUNE (Minneapolis, MN), July 4, 2002, at 1B; see also
Christopher Dickey, Tempest in a Coffee Cup, NEWSWEEK, June 26, 2002.
326 For the profile on Qaradawi, see Investigative Project on Terrorism, Apologists or Extremists: Yusuf al-
Qaradawi, http://www.investigativeproject.org/profile/167 (last visited Feb. 1, 2008); see also Anti-
Defamation League, Sheik Yusuf al-Qaradawi: Theologian of Terror (Nov. 9, 2007) [hereinafter ADL
Report],
http://www.adl.org/main_Arab_World/al_Qaradawi_report_20041110.htm?Multi_page_sections=sHeading
_1 (last visited Feb. 1, 2008).
327 OFFICE OF THE COORDINATOR FOR COUNTERTERRORISM, U.S. DEPT. OF STATE, 2001 REPORT ON
FOREIGN TERRORIST ORGANIZATIONS (2001), available at
http://www.state.gov/s/ct/rls/rpt/fto/2001/5258.htm (last visited Feb. 1, 2008). Both organizations had been
so designated in the previous report issued two years earlier. See OFFICE OF THE COORDINATOR FOR
COUNTERTERRORISM, U.S. DEPT. OF STATE, 1999 REPORT ON FOREIGN TERRORIST ORGANIZATIONS (1999),
available at http://www.state.gov/s/ct/rls/rpt/fto/2682.htm (last visited Feb. 1, 2008). The FTO designation
is made pursuant to the Immigration and Nationality Act, as amended by the Antiterrorism and Effective
Death Penalty Act of 1996, 18 U.S.C. §1189, based upon the terrorist activities described in 18 U.S.C.
§1182(a)(3)(B), which in turn bring the designated terrorist organization within the scope of 18 U.S.C.
§§2339 (B), the material support of terrorism statute.
328 Coffeehouse Chain Steamed by Terror Allegations, CLEVELAND JEWISH NEWS, June 21, 2002, at 22.
329 See supra note 324.
330 Tevlin, supra note 325.
331 Of special note is the fact that the lawyers for the offering were King and Spaulding, LLP, one of the
major law firm facilitators for SCF. See supra note 50.
332 CARIBOU COFFEE S-1, supra note 323, at 16-17.
333 Id. at 35-36 & F-21.
334 Letter from Thomas Jones, Senior Attorney, Securities and Exchange Commission, to George E.
Mileusnic, Chief Financial Officer, Caribou Coffee Company, Inc. (Aug. 15, 2005) (commenting on
Caribou Coffee Company, Inc.’s Form S-1 Registration Statement), available at SEC
http://www.sec.gov/Archives/edgar/data/1332602/000000000005042186/filename1.txt (last visited Feb. 1,
2008).
335 CARIBOU COFFEE COMPANY INC., AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT 37
(2005) [hereinafter CARIBOU COFFEE FIRST AMENDED REGISTRATION STATEMENT]. Additional repetitive
remarks were made on the inability to hedge. Id. at 41.
336 Letter from Thomas Jones, Senior Attorney, Securities and Exchange Commission, to George E.
Mileusnic, Chief Financial Officer, Caribou Coffee Company, Inc. (Sep. 2, 2005) (commenting on Caribou
Coffee Company, Inc.’s First Amended Registration Statement), available at
http://www.sec.gov/Archives/edgar/data/1332602/000000000005046177/filename1.txt. The SEC also
asked for an additional clarification on the difficulty to obtain financing due to the adherence to Shari’ah.
337 See CARIBOU COFFEE PROSPECTUS, supra note 324. The failure to make the suggested changes and
revisions requested by the SEC might have been due to any number of reasons: (1) the matter was resolved
by telephone or letter after counsel for Caribou argued that there were sufficient disclosures of the matters
11 4
raised by the SEC; or (2) the Caribou lawyers resubmitted the amended registration statement and the SEC
examiners failed to notice the changes had not been made. The former is more likely.
338 CARIBOU COFFEE COMPANY, INC., FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DEC. 31,
2006 (2007), available at
http://www.sec.gov/Archives/edgar/data/1332602/000095013707004971/c13623e10vk.htm.
339 The citation to legal rulings by Qaradawi opposing terrorist actions outside of Israel is only reassuring if
one takes the view that murdering innocent Israelis is not an act of terror criminalized by U.S. law. See
Dickey, supra note 325 (suggesting the Qaradawi affair was overblown insofar as he signed a fatwa against
“innocent civilians”). Qaradawi considers no Jew in Israel an “innocent civilian.” ADL Report, supra note
326.
340 See AAOIFI Sharia Board, http://www.aaoifi.com/sharia-board.html (last visited Feb. 1, 2008)
(providing short biography of Usmani); see also Alex Alexiev, Usmani Dossier (on file with the author)
[hereinafter Usmani Dossier] (providing information on Usmani based upon open sources).
341 The Center for Security Policy is a Washington, D.C.-based non-profit policy think tank. See Center for
Security Policy, http://www.centerforsecuritypolicy.org/.
342 Usmani Dossier, supra note 340.
343 MUFTI M. TAQI USMANI, ISLAM AND MODERNISM 123-39 (2006).
344 This work is an English translation and contains some grammatical, spelling, diction, and punctuation
errors. Most of these errors have been left as they appear in the original. Only some quotation marks used
in indented quotes have been removed.
345 In the original, this verse was in Arabic. It is the infamous “Sword Verse” found at Qur’an, 9:5
346 Jizyah is a special tax imposed on non-Muslims to establish their subjugation to their Muslim rulers. See
generally BAT YE’OR, THE DHIMMI: JEWS AND CHRISTIANS UNDER ISLAM (1985).
347 PBUH is an acronym for “peace be unto him” typically said following Mohammed’s name by Shari’ah
adherent Muslims.
348 The threat to Arcapita and therefore also to Caribou is that even commingled funds are subject to
forfeiture under the anti-money laundering statutes which include the material support of terrorism as a
predicate offense. See United States v. Tencer, 107 F.3d 1120, 1134-35 (5th Cir. 1997) (stating that all
commingled funds in account were subject to forfeiture under § 982(a)(1), as “property involved” includes
any property used to facilitate the money laundering offense).
349 ARCAPITA, ARCAPITA ANNUAL REPORT 2007, at 95, available at
http://www.arcapita.com/about/financial/pdfs/Arcapita_ar2007_English_Final.pdf (last visited Feb. 1,
2008).
350 Id. at 100.
351 Press Release, News Corp., News Corp. Completes Dow Jones & Co. Acquisition (Dec. 13, 2007),
available at http://www.newscorp.com/news/news_359.html (last visited Feb. 1, 2008).
352 Dow Jones Indexes About Us Overview,
http://www.djindexes.com/mdsidx/?event=showAboutUsOverview (last visited Feb. 1, 2008).
353 Id.
354 Dow Jones Islamic Market Indexes Key Attributes,
http://www.djindexes.com/mdsidx/index.cfm?event=showIslamicBenefit (last visited Feb. 1, 2008).
355 Dow Jones Islamic Market Indexes Methodology Overview,
http://www.djindexes.com/mdsidx/index.cfm?event=showIslamicMethod (last visited Feb. 1, 2008).
356 Dow Jones Islamic Market Indexes Shari’ah Supervisory Board,
http://www.djindexes.com/mdsidx/index.cfm?event=showIslamicOverView#board (last visited Feb. 1,
2008).
357 In an article posted at the DJII Internet site, an important American Shari’ah authority and one of the
DJII Shari’ah authorities, discusses the need for a Shari’ah advisory board for a fund that licenses the DJII
index. The point of the entire article is to discuss all of the non-quantitative duties of a Shari’ah advisor in
the selection and control of equities for investment. While one might accept his rationale for such
supervision over the actual funds, if the DJII in fact utilizes a strictly quantitative protocol for selecting its
“universe” of acceptable stocks, the question remains what useful purpose the DJII Shari’ah advisory board
plays -- other than window dressing for reputation. See DeLorenzo, supra note 22.
358 See supra note 356.
359 Id.
11 5
360 Id.
361 DOW JONES INDEXES, GUIDE TO THE DOW JONES ISLAMIC MARKET INDEXES (2007), available at
http://www.djindexes.com/mdsidx/downloads/imi_rulebook.pdf. This guide is described at the Dow Jones
Internet site as a “Rule Book.” See Dow Jones Islamic Market Indexes Links and Downloads,
http://www.djindexes.com/mdsidx/index.cfm?event=showIslamicLinks.
362 Wikipedia Entry for Iranian Military Industry,
http://en.wikipedia.org/wiki/Iranian_defense_industry#External_links (last visited Feb. 1, 2008) (linking to
a variety of sources implicating Iran’s military industry).
363 USMANI, supra note 343, at 36-38.
364 ALLIED ASSET ADVISORS, INC., STATEMENT OF ADDITIONAL INFORMATION 10 (2007), available at
http://www.investaaa.com/pdfs/SAI10.06.pdf (last visited Feb. 1, 2008) [hereinafter STATEMENT OF
ADDITIONAL INFORMATION] (providing information on Allied Asset Advisors, Inc., the Dow Jones Islamic
Fund’s Investment Advisor).
365 Id; see also ALLIED ASSET ADVISORS, INC., DOW JONES ISLAMIC FUND PROSPECTUS 11 (2007),
available at http://www.investaaa.com/pdfs/Prospectus10.06.pdf (last visited Feb. 1, 2008) [hereinafter
DJIF PROSPECTUS].
366 North American Islamic Trust, http://www.nait.net/NAIT_about_%20us.htm (last visited Feb. 2, 2008).
NAIT’s principle role as a waqf or religious trust is to acquire title to Islamic mosques and to preserve their
Shari’ah compliance so that Muslim communities who become less Shari’ah-adherent will not later
convert these mosques into something less than Shari’ah-compliant. As NAIT itself explains:
The fundamental motivation for entrusting the title of a center to NAIT is that the founders who
establish Islamic centers, and the committed successors who perpetuate them, want to keep these
centers true to the Islamic purpose for which they were established. Many Islamic centers founded
in the U.S., Europe, and Australia in the 19th and early 20th century became social clubs, or were
lost through demographic changes, disrepair and property taxes. Placing a center in trust with
NAIT ensures that a third party of national scope and stature is responsible for the preservation of
the center for the Islamic aims for which it was founded. The trust document between the Islamic
center and NAIT leaves the administration of the center to the local community, but requires
NAIT to preserve it to serve the Muslim community in the cause of Islam.
NAIT Islamic Centers Waqf, http://www.nait.net/icw.htm (last visited Feb. 2, 2008). NAIT apparently
takes its Shari’ah obligations seriously even to the extent that it is prepared to deceive Muslim
communities into acquiring their properties and then refusing to deed them back. See, e.g., North Am.
Islamic Trust, Inc. v. Muslim Ctr. of Miami, Inc., 771 So. 2d 1227, 1227 n.2 (Fla. Dist. Ct. App. 2000)
(determining that trial court’s finding that NAIT took title to the Miami mosque property in trust for the
community would not be overturned, and stating that “NAIT presented evidence that it holds property in
trust for many Muslim organizations as ‘protector’ of the property. It contends that it is in a better position
than MCM to ensure that the land will be used for the benefit of the Muslim community. We decline to
engage in any such inquiry”).
367 See supra note 271.
368 The trial ended in a mistrial, but the govenment is preparing a retrial. For the government’s trial brief,
see http://nefafoundation.org/miscellaneous/HLF/U.S._v_HLF_TrialBrief.pdf (last visited Feb. 15, 2008).
369 See List of Unindicted Co-conspirators, U.S. v. Holy Land Found. for Relief and Dev., CR NO. 3:04-
CR-240-G (N.D. Tex. 2007), available at
http://www.nefafoundation.org/miscellaneous/HLF/US_v_HLF_Unindicted_Coconspirators.pdf (last
visited Feb. 15, 2008).
370 Supra note 368, at 8.
371 One piece of evidence was a strategy memorandum which sets out the goal of the Shari’ah faithful in
the U.S.:
4- Understanding the role of the Muslim Brother in North America:
The process of settlement is a "Civilization-Jihadist Process" with all the word means. The Ikhwan
must understand that their work in America is a kind of grand Jihad in eliminating and destroying
the Western civilization from within and "sabotaging" its miserable house by their hands and the
hands of the believers so that it is eliminated and God's religion is made victorious over all other
religions. Without this level of understanding, we are not up to this challenge and have not
prepared ourselves for Jihad yet. It is a Muslim's destiny to perform Jihad and work wherever he is
11 6
and wherever he lands until the final hour comes, and there is no escape from that destiny except
for those who chose to slack. But, would the slackers and the Mujahedeen be equal.
Government Exhibit 003-0085, U.S. v. Holy Land Found. for Relief and Dev., CR NO. 3:04-CR-240-G
(N.D. Tex. 2007) (Arabic), available at
http://www.nefafoundation.org/miscellaneous/HLF/Akram_GeneralStrategicGoal.pdf (last visited Feb. 2,
2008).
372 Editorial, Motion for Retrial, INVESTOR’S BUSINESS DAILY, Oct. 23, 2007, available at
http://www.ibdeditorials.com/IBDArticles.aspx?id=278031924272951 (last visited Feb. 2, 2008).
373 INVESTIGATIVE PROJECT ON TERRORISM, MUSLIM STUDENTS ASSOCIATION DOSSIER, available at
http://www.investigativeproject.org/documents/misc/84.pdf (last visited Feb. 2, 2008).
374 DJIF PROSPECTUS, supra note 365, at 12.
375 Terrorism: Growing Wahhabi Influence in the United States: Hearing Before the Subcomm. on
Terrorism, Technology and Homeland Security of the S. Comm. on the Judiciary, 108th Cong. (2003). The
Qur’anic Literary Institute affair appeared in a Wall Street Journal story and was recounted in an article in
The Tax Lawyer, the American Bar Association’s tax journal:
[I]n 1991, a Mr. Qadi, an investor in BMI [a company connected to Hamas and tied to
funding of terror], transferred $820,000 through one of his companies from a Swiss bank
account to the Qur’anic Literacy Institute, a Chicago-based organization. The U.S.
government has alleged that the Qur’anic Institute “lent substantial assistance, through
means of repeated and possibly illegal subterfuge and misrepresentation, to a man who is
an admitted operative of Hamas.” Mohammad Salah, an employee of the Qur’anic
Literary Institute, was arrested in Israel in 1993 “with a large sum of cash and a cache of
notes describing meetings with various Hamas cells,” and later pled guilty in an Israeli
court “to being a top Hamas operative involved in raising money for the terror group.”
n58 A 1995 confession by Mr. Salah stated that while in Chicago “in the early 1990s, he
trained recruits to work with ‘basic chemical materials for the preparation of bombs and
explosives,’ as well as various toxins.”
Mindy Herzfeld, Restricting the Flow of Funds from U.S. Charities to International Terrorist
Organizations--A Proposal, 56 TAX LAW. 875, 875 n.57 (2003). The story, as told by the media at
the time, was that the Qur’anic Literacy Institute was operated out of a residential apartment
building in Chicago and was funneling hundreds of thousands of dollars to Hamas. See, e.g.,
Darlene Gavron Stevens & Matt O'Connor, Friends Defend Bridgeview Man Linked to Terror,
CHI. TRIB., June 11, 1998.
376 Eric Lichtblau & James C. Mckinley, 2 Albany Men Are Arrested in Plot to Import a Missile and Kill a
Diplomat, N.Y. TIMES, Aug. 6, 2004, at B-1.
377 Brian Nearing, Trust Owns Mosque Location; Group Spent $40,000 For Central Avenue Site; Others
Linked To Terror Activities, Reports Reveal, TIMES UNION (Albany, NY), Aug. 6, 2004.
378 STATEMENT OF ADDITIONAL INFORMATION, supra note 364, at 13.
379 See, e.g., 31 C.F.R. § 103.131 (2003) (emphasis added):
(b) Customer identification program: minimum requirements.
(1) In general. A mutual fund must implement a written Customer Identification
Program (“CIP”) appropriate for its size and type of business that, at a minimum,
includes each of the requirements of paragraphs (b)(1) through (5) of this section. The
CIP must be a part of the mutual fund's anti-money laundering program required under
the regulations implementing 31 U.S.C. 5318(h).
(2) Identity verification procedures. The CIP must include risk-based procedures for
verifying the identity of each customer to the extent reasonable and practicable. The
procedures must enable the mutual fund to form a reasonable belief that it knows
the true identity of each customer. The procedures must be based on the mutual
fund's assessment of the relevant risks, including those presented by the manner in
which accounts are opened, fund shares are distributed, and purchases, sales and
exchanges are effected, the various types of accounts maintained by the mutual fund, the
various types of identifying information available, and the mutual fund's customer base.
At a minimum, these procedures must contain the elements described in this paragraph
(b)(2)
11 7
. . .
(C) Additional verification for certain customers. The CIP must address situations
where, based on the mutual fund’s risk assessment of a new account opened by a
customer that is not an individual, the mutual fund will obtain information about
individuals with authority or control over such account, including persons authorized
to effect transactions in the shareholder of record's account, in order to verify the
customer's identity. This verification method applies only when the mutual fund cannot
verify the customer's true identity using the verification methods described in paragraphs
(b)(2)(ii)(A) and (B) of this section. (Emphasis added.)
380 Azzad Asset Management, http://azzad.net/new/default.aspx (last visited Feb. 2, 2008)
381 Azzad Asset Management, Social and Financial Screens, http://azzad.net/new/ethical_screens.aspx (last
visited Feb. 2, 2008).
382 CHARLES DOYLE, CRS REPORT FOR CONGRESS, CRIMINAL MONEY LAUNDERING LEGISLATION IN THE
109TH CONGRESS (2006), available at http://www.house.gov/gallegly/issues/crime/crimedocs/RS22400.pdf
(last visited Feb. 2, 2008).
383 18 U.S.C. § 1962(a)-(d) (2006); see also NIELS B. SCHAUMANN, GILBERT LAW SUMMARIES: SECURITIES
REGULATION 394 (6th ed. 2002).
384 § 1961(5); see also H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229 (1989) (stating that must show the
predicate acts are related to one another and that they amount to, or constitute a threat of, continuing
racketeering activity).
385 See, e.g., § 1961(1)B & G; see also supra note 382.
386 § 1961(4).
387 See Schofield v. First Commodity Corp., 793 F.2d 28 (1st Cir. 1986) (discussing criminal respondeat
superior under RICO).
388 § 1963(d); see also § 1956(b)(3)-(4).
389 § 1963(a)-(c).
390 While it has not been the purpose of this memorandum to detail the legal risks for the professional
facilitators, there is substantial legal exposure for the legal, accounting, and financial professionals who
provide the knowledge and expertise to develop the financial and legal instrumentalities of SCF. While
“scheme liability” under a Rule 10b-5 private right of action has been put to rest by Stoneridge Inv.
Partners, LLC v. Scientific-Atlanta, Inc., 2008 U.S. LEXIS 1091 (U.S. 2008), to the extent that the lawyers
get involved in drafting the “representations”, liability will still apply. See LOSS & SELIGMAN, supra note
10, at 1329-1332 (discussing “primary liability” for lawyers under Rule 10b-5); id. at 1465-1469
(discussing the “duty to report evidence of a material violation” under Part 205 to Title 17 of the Code of
Federal Regulations promulgated by the SEC pursuant to Section 307 of the Sarbanes-Oxley Act of 2002).
391 This conclusion has been reached by a thorough review of the published proprietary and non-proprietary
information disseminated by many of the financial institutions and the professional facilitators (i.e., the law
firms, accounting firms, and financial advisors who promote SCF as a business model and marketing niche)
and of the published academic and trade journals which have treated SCF in some detail over the past
decade. Some of this material will be referenced throughout this memorandum as its relevance to
disclosure, due diligence, compliance, industry standards, and best practices are examined.
Add this page to your favorite Social Bookmarking websites  |
