Last week’s filing (here) states, in pertinent part, as follows (internal citations omitted).

“To satisfy the statutory prerequisites to certification [... the defendants] must show that there is substantial ground for difference of opinion on the issues presented.

“The defendants respectfully submit that there is substantial ground for difference of opinion regarding the following three questions that lie at the heart of the Order:  (i) whether the Court may exercise personal jurisdiction over the defendants; (ii) whether the SEC’s actions is barred by the applicable statute of limitations; and (iii) whether the SEC has adequately pled the use of an instrumentality of interstate commerce.  As explained more fully below, immediate appellate consideration of these questions is warranted in view of the overwhelming cost in time and money of proceeding to full-blown merits discovery and trial in this case.  As the parties have already informed the Court by letter and proposed scheduling order dated October 3, 2012, merits discovery is expected to last approximately thirty months and will require teams of lawyers to traverse thousands of miles, review millions of documents in foreign languages, depose scores of foreign witnesses in foreign languages and in multiple countries, and negotiate the complexities of foreign law – all with the Court’s frequent oversight and assistance with regard to the Hague Convention process for gathering evidence abroad and related matters.  The extraordinary resources needed to develop a complete factual record and bring this case to trial, which would include many millions of dollars to finance the defense of the case and the SEC’s prosecution of it, will be wasted if the Second Circuit reverses any part of the Order after trial, and would thus render unreasonable requiring these Hungarian defendants to travel thousands of miles from their homes to defend themselves.  The defendants respectfully submit that the questions presented here for certification, coupled with the huge resource outlay contemplated already by both sides if merits discovery should proceed, make this case ripe for early albeit limited appellate review.  This case is simply not a run-of-the-mill piece of litigation.

With regard to the first question presented of personal jurisdiction, prior to the Order no court had ever held that personal jurisdiction may be asserted in an FCPA action over foreign defendants whose sole contact with the United States involved signing allegedly false management certifications and sub-certifications, which the complaint fails to allege even reached or had any impact in the United States.  Absent a clear directive from Second Circuit or Supreme Court precedent, the caution that attends application of the Constitutional ‘minimum contacts’ standard in the international context in evaluating a foreign national defendant’s motion to dismiss on jurisdictional grounds - acknowledged most recently by another judge of this Court in SEC v. Sharef - should militate against an unprecedented broadening of the reach of United States courts.  Furthermore, relying on the defendants’ alleged preparation of either non-alleged or unfiled SEC filings to anchor the assertion of jurisdiction over them specifically as to the bribery counts in the complaint – which the SEC conceded at oral argument have ‘little, if any, connection to the United States,’ strayed from the obligation to evaluate personal jurisdiction on a per-claim basis.  Second, turning to the timeliness question, the Order represents the first modern interpretation and application of 28 USC 2462 to foreign defendants who are not found within the United States during the pertinent five-year period but who are nevertheless readily served.  Despite the Order’s ‘plain language’ analysis, the text and legislative history of the statute are ambiguous and there is a dearth of controlling authority on point, causing reasonable minds to disagree about the statute’s meaning.  It seems doubtful that Congress intended to toll the statute indefinitely for defendants residing outside the United States who can be readily served, as the SEC contends, and comparable authority suggests an outcome different from that reached in the Order.  Third, as the Court itself recognized, whether the use of an instrumentality of interstate commerce includes an intent or even some knowledge element is an issue of first impression in the FCPA context for which the text of the statute offers inadequate guidance.”

*****

A footnote in the above brief indicates that the SEC intends to oppose the motion for interlocutory appeal.

The case cite, SEC v. Sharef, refers to Judge Shira Scheindlin’s February 19th decision in the SEC’s enforcement against Herbert Steffen (a former Siemens executive).  See here for the prior post.

Previous posts here, here and here discussed briefing on the Defendants’ motion to dismiss.  In sum, the foreign national defendants moved to dismiss the SEC’s complaint (alleging the Defendants’ role in a bribery scheme in Macedonia) on three principal grounds:  (1) the court lacked personal jurisdiction over them; (2) the SEC’s claims were time-barred; and (3) the complaint failed to state claims for certain of its causes of action.

Last Friday, U.S. District Court Judge Richard Sullivan (S.D.N.Y.) denied defendants’ motion in its entirety.  (See here for the memorandum and order).  This post summarizes and analyzes Judge Sullivan’s decision.

While obviously important to the case, Judge Sullivan’s personal jurisdiction conclusion is case-specific and the least important conclusion from the standpoint of FCPA case law.  (Whether a court can exercise personal jurisdiction over a specific defendant is a separate and distinct question from whether the jurisdictional element of an FCPA anti-bribery violation has been met – an issue also discussed in Judge Sullivan’s opinion).

Even though Judge Sullivan’s decision is a non-binding trial court decision, the two most important aspects of his decision concern statute of limitations and the jurisdictional element of an FCPA anti-bribery violation.

As to statute of limitations, Judge Sullivan seemed to understand the logic of the Defendants’ positions, yet exhibited judicial restraint in concluding that the plain language of the applicable statute of limitations compelled the conclusion that the limitations period did not begin to run because the foreign national defendants were not physicially present in the U.S.  In the words of Judge Sullivan, “it is not for this Court to second-guess Congress and amend” a statute.

As to the jurisdictional element of an FCPA anti-bribery violation, Judge Sullivan found the jurisdictional element of 78dd-1 (use of the “mails or any means or instrumentality of interstate commerce”) to be ambiguous and he thus consulted legislative history.  In reviewing the legislative history, Judge Sullivan concluded that the corrupt intent element of the FCPA did not apply to the jurisdictional component of the FCPA.  Accordingly, Judge Sullivan concluded that e-mails routed through and/or stored on network servers located within the U.S. are sufficient to plead the jurisdictional element of an FCPA anti-bribery violation even if the defendant did not personally know where his e-mails would be routed and/or stored.

Judge Sullivan’s conclusions on the above two issues are all the more notable given that similar issues are also presented in the current challenge pending – also in the S.D.N.Y. -  by former Siemens executive Herbert Steffen.  (See here for a prior post with links to the briefing).

The remainder of this post summarizes Judge Sullivan’s decision.  [Note, internal citiations from the opinion are omitted].

Personal Jurisdiction

After setting forth the allegations in the SEC’s complaint and the procedural history of the case, Judge Sullivan’s decision begins with personal jurisdiction issues.

Judge Sullivan began by stating the pleading standard on a motion to dismiss for lack of personal jurisdiction – that the SEC bears the burden of establishing that the court has jurisdiction over the defendants which can be met by pleading in good faith legally sufficient allegations of jurisdiction.

Judged against the due process standards of “minimum contacts” and “reasonableness,” Judge Sullivan concluded that the SEC established that defendants have minimum contacts with the United States and that the exercise of personal jurisdiction over the defendants would not be unreasonable.  Accordingly, Judge Sullivan concluded that “the SEC has met its burden at this stage of establishing a prima facie case of personal jurisdiction over defendants.”

As to “minimum contacts” Judge Sullivan stated as follows.

“[T]he Defendants here allegedly engaged in conduct that was designed to violate United States securities regulations and was thus necessarily directed toward the United States, even if not principally directed there.  [...] [D]uring and before the time of the alleged violations, both Magyar’s and Deutsche Telekom’s securities were publicly traded through ADRs listed on the NYSE and were registered with the SEC [...]  Because these companies made regular quarterly and annual consolidated filings during that time, Defendants knew or had reason to know that any false or misleading financial reports would be given to prospective American purchasers of those securities.”

“Indeed, during the period of the alleged violations, Straub allegedly signed false management representation letters to Magyar’s auditors, and Balogh and Morvai signed allegedly false management subrepresentation letters for quarterly and annual reporting periods in 2005.  Therefore, it is not only that Magyar traded securities through ADRs listed on the NYSE that satisfies the minimum contacts standard but also that Defendants allegedly engaged in a cover-up through their statements to Magyar’s auditors knowing that the company traded ADRs on an American exchange, and that prospective purchasers would likely be influenced by any false financial statements and filings.  The court thus has little trouble inferring from the SEC’s detailed allegations that, even if Defendants’ alleged primary intent was not to cause a tangible injury in the United States, it was nonetheless their intent, which is sufficient to confer jurisdiction.”

In discussing ”minimum contacts” Judge Sullivan rejected Defendants’ assertion that their contact must “proximately cause” a  ”substantial injury” in the forum.

As to Defendants’ argument that, should the Court exercise jurisdiction over them, “it would automatically imply that ‘any individual director, officer, or employee of an issuer in any FCPA case’ would also be subject to personal jurisdiction,” Judge Sullivan called Defendants’ concerns “overblown” and stated as follows.

 ”In holding that Defendants have met their burden of demonstrating a prima facie case for jurisdiction at this early stage, the Court does not create a per se rule regarding employees of an issuer but rather bases its decision on a fact-based inquiry – namely, an analysis of the SEC’s specific allegations regarding the Defendants’ bribery scheme, Defendants’ falsification of Magyar’s books and records, and Defendants’ personal involvement in making representations and subrepresentations with respect to and in anticipation of Magyar’s SEC filings. Although Defendants’ alleged bribes may have taken place outside of the United States (as is typically true in cases brought under the FCPA), their concealment of those bribes, in conjunction with Magyar’s SEC filings, was allegedly directed toward the United States.”

[...]

“Accordingly, the Court finds that the SEC has established a prima facie case that Defendants had the requisite minimum contacts with the United States to support personal jurisdiction.”

As to the “reasonableness” prong of the due process analysis, Judge Sullivan cited other authority for the proposition that “the reasonableness inquiry is largely academic in non-diversity cases brought under federal law which provides for nationwide service of process because of the strong federal interests involved.”

Judge Sullivan then stated as follows.

“Like each and every court in this Circuit to have applied the reasonableness standard after determining that a given defendant has the requisite minimum contacts, this Court finds that this is not the rare case where the reasonableness analysis defeats the exercise of personal jurisdiction. Although it might not be convenient for Defendants to defend this action in the United States, Defendants have not made a particular showing that the burden on them would be “severe” or “gravely difficult.” Indeed, as the SEC rightly notes, unlike in a private diversity action, here there is no alternative forum available for the government. Thus, if the SEC could not enforce the FCPA against Defendants in federal courts in the United States, Defendants could potentially evade liability altogether. Additionally, because this case was brought under federal law, the judicial system has a strong federal interest in resolving this issue here. The Court therefore finds that the exercise of personal jurisdiction over Defendants is not unreasonable.”

Statute of Limitations

Judge Sullivan began by setting forth the applicable limitations period found in 28 USC 2462.

“Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service be made thereon.” (emphasis added).

Judge Sullivan began by noting that it was “undisputed that more than five years have elapsed since the SEC’s claims first accrued” but that the parties disagreed as to the plain meaning of section 2642 and, given that Defendants were not physically located within the United States during the limitations period, whether the statute of limitations has run on the SEC’s claims.

Judge Sullivan stated as follows.  “The SEC argues that the statute of limitations has not run because the statute applies only ‘if within the same period, the offender … is found within the United States.  Thus, according to the SEC, because Defendants were not ‘found’ in this country at any point during the limitations period in question, the Court’s inquiry should end.  The Court agrees.”

Judge Sullivan stated as follows.

“Here, the operative language in § 2462 requires, by its plain terms, that an offender must be physically present in the United States for the statute of limitations to run. In arguing otherwise, Defendants essentially seek to amend the statute to run against a defendant if he is either ‘found within the United States’ or subject to service of process elsewhere by some alternative means. Such a reading would be a dramatic restatement of the statutory language and would render the clause “if . . . found within the United States’ mere surplusage.”

“Additionally, reading the statute to require a defendant’s physical presence in the United States is not inconsistent with § 2462’s statement of purpose, as was originally understood.”

Referring to the precursor to § 2642 passed in the 1790′s, and referencing when Congress added the specific language in 1839 and through subsequent re-codifications, Judge Sullivan acknowledged “that it might now be possible, through the Hague Service Convention or otherwise to serve defendants who are not found in the United States.”  However, he stated as follows.

“[This] does not change the fact that Congress has maintained the statutory carve out for defendants not found within the United States.  Indeed, although the purpose underlying the carve-out may no longer be as compelling as it might have once been in light of the possibilities opened by worldwide service of process, it is not for this Court to second-guess Congress and amend the statute on its own.  Accordingly, the Court finds that the statute of limitations within § 2462 has not run on the SEC’s claims.”

In addition to the above jurisdiction and statute of limitations challenges, the Defendants also argued that the SEC’s complaint should be dismissed for failure to state a claim as to:  (i) whether the complaint adequately alleged that Defendants made use of U.S. interstate commerce; (ii) whether the complaint adequately alleged the involvement of “foreign officials”; and (iii) claims pursuant to Exchange Act Rule 13b2-2 concerning misleading statements to auditors.

Jurisdictional Element of an FCPA Anti-Bribery Violation

Judge Sullivan began by noting that the complaint alleges that “Balogh used e-mails in furtherance of the bribe scheme by attaching [various documents] all of which were the alleged means by which Defendants concealed the true nature of the payments offered to the Macedonian government officials” and “that the e-mails were sent from locations outside the United States but were routed through and/or stored on network services located within the United States.”

As stated by Judge Sullivan, “according to the Defendants, because the SEC fails to allege that Defendants personally knew that their e-mails would be routed through and/or stored on servers within the United States, the SEC’s allegations cannot state a claim under the FCPA’s bribery provision.”

Judge Sullivan stated as follows.

“The issue of whether § 78dd-1(a) requires that a defendant intend to use “the mails or any means or instrumentality of interstate commerce” is a matter of first impression in the FCPA context. Section 78dd-1(a) is not a model of precision in legislative drafting: its text does not make immediately clear whether “corruptly” modifies the phrase “make use of the mails or any means or instrumentality of interstate commerce” or the phrase “any offer, payment, promise to pay, or authorization of the payment of any money . . . or . . . anything of value.”  The use of the adverb “corruptly” appears to modify the verb “use,” but the word’s delayed placement in the statutory text appears to reflect a legislative choice to modify the grouping of words that follows: “offer, payment, promise to pay, or authorization of the payment of any money . . . or . . . anything of value.” 15 U.S.C. § 78dd -1(a).  Because the plain language of the provision is ambiguous, even when read in context and after applying traditional canons of statutory construction, the Court turns to the legislative history, which is instructive:  The word “corruptly” is used in order to make clear that the offer, payment, promise, or gift, must be intended  to  induce the recipient to misuse his official position in order to wrongfully direct business to the payor or his client, or to obtain preferential legislation or a favorable regulation. The word “corruptly” connotes an evil motive or purpose, an intent to wrongfully influence the recipient.  S. Rep. No. 95-114, at 10 (1977).”

“Thus, the legislative history reveals that, although Congress intended to make an “intent” or mens rea requirement for the underlying bribery, it expressed no corresponding intent to make such a requirement for the “make use of . . . any means or instrumentality of interstate commerce” element.”

“Such a reading is consistent with the way that courts have interpreted similar provisions in other statutes. For instance, courts have held that the use of interstate commerce in furtherance of violations of the securities laws, the mail and wire fraud statutes, and money laundering statutes is a jurisdictional element of those offenses.  [...] As such, defendants need not have formed the particularized mens rea with respect to the instrumentalities of commerce.”  [...]  Although no court appears to have addressed whether the use of interstate commerce is also a jurisdictional element of an FCPA violation, the similarity of the language in § 78dd-1(a) [...]  weighs in favor of finding that Congress intended a similar application of the requirement in the FCPA context.  [...]  [T]he mere fact that § 78dd-1(a) does not include the phrase ‘directly or indirectly’ does not indicate that the requirement ‘make use’ implies that a defendant must have made direct use.  Therefore, the Court finds that the Complaint sufficiently pleads that Defendants used the means or instrumentality of interstate commerce, pursuant to the FCPA.”

As to the issues in the above paragraph, Judge Sullivan stated in footnotes as follows.

“The Court also rejects two of Defendants’ additional arguments. First, the Court rejects Defendants’ argument that the SEC has failed to allege that there was any ‘use’ whatsoever of the instrumentalities of interstate commerce.  As noted above, the Complaint specifically alleges that Balogh emailed, on behalf of Defendants, drafts of the Protocols, the Letter of Intent, and copies of consulting contracts to third-party intermediaries, and that the e-mails were ‘routed through and/or stored on network servers located within the United States.  The mere  fact that Defendants may not have had personal knowledge that their emails would be routed through or stored in the United States does not mean that they did not, in fact, use an instrument of interstate commerce sufficient for purposes of conferring jurisdiction. Second, the Court rejects Defendants’ argument that it was not foreseeable that emails sent over the Internet in a foreign country would touch servers located elsewhere. The Court does not disagree with Defendants that “the internet is a huge, complex, gossamer web”, but that is all the more reason why it should be foreseeable to a defendant that Internet traffic will not necessarily be entirely local in nature.”

“Defendants also assert that the Complaint fails to sufficiently allege that Defendants used the means or instrumentalities of interstate commerce “in furtherance” of their FCPA violations.  Specifically, they argue that the Complaint alleges only that Defendants executed a “scheme” to bribe Macedonian government officials and not that they made an “‘offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value.”  However, Defendants ignore the fact that the Complaint specifically alleges that Defendants sent the Protocols and Letter of Intent, which were essentially their offers to pay or promises to pay the alleged bribes, to Macedonian government officials.  These e-mails also included reference to the alleged ‘sham’ contracts used to conceal the true nature of Defendants’ bribes.  Accordingly, such allegations are sufficient to satisfy the ‘in furtherance’ language of § 78dd-1.

Identity of “Foreign Officials” 

Judge Sullivan agreed with the recent decision by Judge Ellison in SEC v. Jackson (see here for the prior post) that “the language of the statute does not appear to require that the identity of the foreign official involved be pled with specificity.”

Judge Sullivan stated as follows.

“Such a requirement would be at odds with the statutory scheme, which targets actions (such as making an “offer” or “promise”) without requiring that the “foreign official” accept the offer or reveal his specific identity to the payor.  Indeed, the fact that the FCPA prohibits using “any person” or an intermediary to facilitate the bribe to any “foreign official” or “any foreign political party” suggests that the statute contemplates situations in which the payor knows that a “foreign official” will ultimately receive a bribe but only the intermediary knows the foreign official’s specific identity.”

Judge Sullivan concluded on this issue as follows.

“In light of the fact that there is no requirement that the “foreign official” be specifically named and that reading such a requirement into the FCPA would be contrary to the statutory scheme, the Court finds that the Complaint satisfies Federal Rule of Civil Procedure 8(a). Specifically, the Complaint alleges, inter alia, that: (1) Magyar’s subsidiaries retained an intermediary to facilitate negotiations with “Macedonian government officials” on Magyar’s behalf; (2) the Protocols were signed by specific senior Macedonian officials from the majority and minority political parties of the governing coalition; (3) the Protocols “required government official to ignore their lawful duties” and recording obligations; (4) the government officials had the power to ensure both that “the government delayed or precluded the issuance of the third mobile telephone license” and that MakTel was exempted “from the obligation to pay an increased frequency fee”; (5) officials from the minority party in the governing coalition “occupied senior positions in the telecommunciations regulatory agencies with jurisdiction over the tender of the third mobile license”; and (6) Balogh communicated directly with the government officials of both parties in furtherance of the bribery scheme.  Such allegations are sufficient to put Defendants on notice of the substance of the SEC’s claims and that the allegedly bribed officials were acting in their official capacities. Accordingly, the Court finds that the SEC has satisfied its pleading obligations under Iqbal and Twombly with regard to the term “foreign official” in the FCPA.

Misleading Auditors

Judge Sullivan first found that the SEC’s complaint, rather than lumping Defendants together through group pleading, did state “with particularity the circumstances constituting the alleged fraud as to each defendant.”  As to whether Rule 13b2-2′s ”materiality” standard referred to the so-called “reasonable investor” standard, Judge Sullivan cited other case law for the proposition that under the Rule “a statement is material if ‘ a reasonable auditor would conclude that it would significantly alter the total mix of information available to him.”  Judge Sullivan stated that such an “interpretation of Rule 13b2-2 is reasonable given that the Rule speaks about the relationship between a corporation’s director or officer and an accountant rather than an investor or recipient of a registration statement.”  Indeed, Judge Sullivan noted, “it would make little sense to import the reasonable investor standard to a Rule that does not even require that the misstatement eve be communicated to an investor in order to establish a violation.”

Judge Sullivan concluded as follows.

“Here, the Complaint alleges that “[h]ad Magyar[’s] auditors known [the facts alleged in the Complaint regarding the alleged bribery scheme], they would not have accepted the management representation letters and other representations provided by Straub[, n]or would the auditors have provided an unqualified auditor opinion to accompany Magyar[’s] annual report on Form 20-F.  In light of the SEC’s allegations noted above and the fact that the materiality of the misstatements made to the auditors is “a mixed question of law and fact that generally should be presented to a jury,”  the Court finds that the Complaint sufficiently alleges the materiality of Defendants’ alleged misstatements to Magyar’s auditors. Accordingly, the Court finds that the SEC’s Rule 13b2-2 claim survives Defendant’ motion.

As to the future of the case, Judge Sullivan set an April 3rd status conference.

Sleepless Nights

According to this recent article by Ashby Jones of the Wall Street Journal, FCPA enforcement is one of “three concerns costing big-company lawyers the most sleep.”

Briefings Complete

One of the bigger FCPA stories of 2012, and one that will reach into 2013 as well, are challenges by foreign defendants in two separate SEC Foreign Corrupt Practices Act enforcement actions.

Prior posts here and here have discussed the briefing in SEC v. Herbert Steffen (a former Siemens executives).

Prior posts here and here have discussed the briefing in SEC v. Elek Straub, Andras Balogh and Tamas Morvai (former Magyar Telecom executives).

Defendants in both actions recently filed reply briefs.

Steffen (here) argues in summary fashion, as follows.

“In its opposition, the SEC asks this Court to assert personal jurisdiction over a defendant: (1) who is a German citizen and resident; (2) who conducted no business in the United States; (3) whose only alleged U.S. “contact” resulted from the unilateral actions of another party; (4) whose allegedly improper conduct occurred entirely outside the United States; and (5) whose conduct was not aimed at and caused no injury in the United States. This request should be rejected. Because the SEC has not met its burden to plead legally sufficient allegations establishing personal jurisdiction over Mr. Steffen, its complaint must be dismissed. In addition, the SEC has failed to explain how its action against Mr. Steffen is not barred by the applicable statute of limitations, 28 U.S.C. § 2462. In addition, although the SEC acknowledges that the purpose of the statutory tolling provision is to ensure that a defendant does not evade U.S. prosecution by “fleeing to another country” where he is “difficult to locate and serve,” it ignores that Mr. Steffen did nothing to evade the SEC, and that the SEC was able to locate him and obtain an order to serve him by publication in Germany, the country of his nationality and residency. Under these circumstances, accepting the SEC’s argument would mean that claims against foreign-national defendants who reside abroad are perpetual, not subject to any time limitations. Finally, even if this Court were to accept a continuing violation theory for securities violations, it does not help the SEC’s case because Mr. Steffen did not take any unlawful acts within the limitations period. For all of these reasons, the motion to dismiss should be granted with prejudice.”

Straub, Balogh and Morvai’s reply brief (here) addresses many of the same jurisdictional and statue of limitations issues at issue in the Steffen challenge.  In addition, the former Magyar Telekom executive’s brief argues that: (1) the pertinent SEC filing the SEC relies upon in making certain allegations was not even filed with the Commission, (2) the SEC has failed to allege corrupt use of an instrumentality of interstate commerce by the defendants; and (3) the SEC has failed to allege the identity of the alleged foreign bribery recipients.

With both the DOJ and SEC bringing more FCPA enforcement actions against foreign actors – for instance in 2011 90% of DOJ individual prosecutions were against foreign nationals and 100% of SEC individual prosecutions were against foreign nationals – the challenges are noteworthy.  Particularly so because Judge Leon, in the Africa Sting case, rejected the DOJ’s jurisdictional theory against U.K. national Pankesh Patel (see here for the prior post) in what was believed to be the first instance of judicial scrutiny concerning FCPA jurisdiction against foreign nationals.

Africa Sting Lawyers Recognized

Two Africa Sting defense lawyers were recently recognized by Law360 as White Collar MVPs.

Michael Madigan (Orrick Herrington & Sutcliffe) represented John Gregory Godsey, who was found not guilty by the jury.  (See here for the prior post).  Commenting on the Africa Sting cases, Madigan stated as follows.  “This case stands out as a significant one. There are certain cases that come along that alter the system of justice and I think this is really one of them.”

In the Law360 article, Madigan was specifically cited for his leadership in leading defense discovery efforts which resulted in the FBI having to turn over its text messages with Richard Bistrong.   According to the article, the Africa Sting case was the ”first major criminal trial to achieve court-ordered production in discovery of thousands of text messages between FBI agents of the government’s key cooperating informant.”  As noted in the article – “The texts showed FBI agents joking with the informant that ‘you could sell snow to an Eskimo’ — a notion that undercut allegations that Godsey and other defendants were willing participants in a bribery scheme. The texts also revealed FBI agents wondering who would play them when Hollywood made a movie about the investigation.”

Eric Dubelier (Reed Smith) was also recognized for his work on the Africa Sting case, specifically his pro bono representation of R. Patrick Caldwell, a former secret service agent and Vietnam veteran, who was also found not guilty by the jury.

In the Law360 article, Dubelier stated as follows regarding his representation of Caldwell.  “Having spent time in the government myself and knowing people like Pat, I thought, You know what? If anyone deserves to represented, this guy does.  Pat really had held only two jobs his entire life: the first as a US soldier in combat, the second as a U.S. Secret Service agent.  His whole career had been in service to the U.S., but it had earned him nothing close to the resources he needed to defend himself against this prosecution. Providing Pat with the defense he deserved was simply the right thing to do.”

As noted by the Law360 article, “After the acquittals — and the mistrials of three additional defendants — and after a concerned jury foreman penned an open letter expressing deep skepticism about the case, the government ultimately dropped the case against the remaining defendants including those awaiting trial and three who already had pled guilty.”

See here for the February 6, 2012 guest post on FCPA Professor by the Africa Sting jury foreman.

Voluntary Disclosure

Willkie Farr & Gallagher FCPA attorneys Martin Weinstein, Robert Meyer and Jeffrey Clark recently published a new book, “The Foreign Corrupt Practices Act:  Compliance, Investigations and Enforcement.”

In this recent Metropolitian Corporate Counsel interview, the authors answer various questions, including the following.

Q: Do you advise your clients to self-report?

Weinstein: We are very cautious about self-reporting to the government. We certainly sometimes advise companies to self-report, but in general we believe that most companies can handle their compliance problems properly without disclosure or government involvement and can appropriately remediate compliance issues and be prepared to respond should the government ever inquire.  Companies across industries fix compliance problems – for instance, in a target company that they are acquiring or have just acquired – every day, without the assistance of the U.S. government.  This is good all around: it allows the acquiring company to proceed with the acquisition, raises the standard of compliance in the acquired company, and permits the government to deploy its enforcement resources where they are needed most. Our book clearly sets forth how to proceed down such a path. That said, the book also discusses the kinds of circumstances in which self-disclosure may be necessary or advisable and helps readers navigate through that fact-specific, critical strategic decision.

Small Bribes In Russia

Relevant to the question I often ask – do FCPA violations occur because companies have bribery as a business strategy or because companies are subject to difficult and opaque business conditions abroad  – is this recent Washington Post article concerning the prevalence of small bribes in Russia.

FCPA Satire

If you like satire, you must check out this post by James McGrath at his Internal Investigations blog.

*****

A good weekend to all.

Prosecutorial Common Law Defeat

One of the best guest posts in FCPA Professor history was this 2011 post from Michael Levy in which he described the concept of prosecutorial common law.  Prosecutorial common law is all around us.  Take a look at the footnotes of the recent FCPA Guidance - most of the “authority” cited for “legal” propositions is DOJ or SEC settlements.

For obvious reasons, prosecutorial common law does not sit well with federal court judges.  For instance, in U.S. v. Bodmer, Judge Shira Scheindlin of the Southern District of New York, in rejecting the DOJ’s position that the FCPA’s criminal penalty provisions applied to a foreign national prior to the 1998 FCPA amendments, noted as follows – “the Government’s charging decision, standing alone, does not establish the applicability of the statute.”  Likewise as noted in this previous post about the Giffen enforcement action, Judge William Pauley of the Southern District of New York stated that prosecutorial common law ”is not the kind or quality of precedent this Court need consider.”

Prosecutorial common law recently suffered a major defeat when the Second Circuit, in a non-FCPA case, rejected (see here for the opinion)  a DOJ theory of prosecution concerning off-label promotion of drugs that it has previously used to secure billions (yes that is a “b”) in recent settlements with pharmaceutical companies.

Commenting on this recent development, Levy stated as follows.  “It is amazing to me how consistently this pattern seems to repeat but, given the incentives on both sides, I don’t really see any structural solutions that would change it.”

For additional reading, see this client alert from Debevoise & Plimpton, this client alert from Arnold & Porter, and this client alert from Gibson Dunn.

SEC Responds to Magyar Telekom Execs Motion to Dismiss

Given the SEC’s positions in its recent response to Herbert Steffen’s motion to dismiss (see here for the prior post), it comes as little surprise that the SEC is taking the same positions in its response to the motion to dismiss filed by former Magyar Telecom executives Elek Straub, Andras Balogh and Tamas Morvai.

In its response brief (here), the SEC states, in summary form, as follows.

“The defendants move to dismiss the complaint, arguing that (1) the Court lacks personal jurisdiction; (2) the SEC’s claims are time-barred; (3) the complaint fails to allege facts supporting the SEC’s anti-bribery claims; and (4) the complaint fails to allege facts supporting the SEC’s lying to auditors claims. The Court should deny the motion on all four grounds.

First, the defendants are subject to personal jurisdiction because their conduct caused foreseeable consequences in the United States. The complaint alleges that the defendants orchestrated a bribery scheme in Macedonia; that they concealed their bribes through the use of sham contracts and falsified books and records; that they lied to Magyar’s auditors by signing false annual and quarterly certifications; and that their actions caused Magyar to file annual and quarterly reports with the SEC in the United States that misrepresented the company’s financial statements and included false Sarbanes-Oxley certifications.

Second, the complaint was timely filed within the statute of limitations set forth at 28 U.S.C. § 2462. That provision expressly states that the limitations period does not begin to run until the defendants are “found within the United States.” The defendants acknowledge in their brief that they have remained outside of the United States since their commission of this scheme. Thus, the statute of limitations period has not begun to run as to them. In any event, claims for equitable relief are not subject to the limitations period of Section 2462, which by its terms applies only to “penalties.”

Third, the complaint pleads all facts necessary to support every element of every claim against the defendants.  The defendants met the “interstate commerce” prong of Exchange Act Section 30A, 15 U.S.C. § 78dd-1, by sending, in furtherance of their bribery scheme, electronic mail messages that were routed through servers located in the United States. Because the use of interstate commerce is a jurisdictional element, the Exchange Act does not require that defendants know, let alone “corruptly” intend, that their messages would reach the United States. The complaint sufficiently identifies the foreign officials whom the defendants bribed; Section 30A does not require that the officials be expressly named. And the complaint sufficiently identifies the specific false statements made by each defendant to Magyar’s auditors and why those statements were material.”

Of particular note as to “foreign official,” the SEC makes the sweeping statement that “there is no requirement under the FCPA or in the case law interpreting it that the SEC’s complaint [needs to] identify bribed foreign officials by name.”  The SEC then states in a footnote as follows.  “Any such requirement would be completely at odds with the FCPA’s statutory scheme. [...]  By its very structure, [the anti-bribery provisions were] drafted to prohibit corrupt transactions in which the precise identity of a government official might not be known even to the payor.”

As noted in this previous post, the SEC is asserting the same “foreign official” position in the Mark Jackson / James Ruehlen challenge.  Oral arguments are to take place today on that motion in Houston.

It should be noted that in the DOJ’s unsuccessful prosecution of John O’Shea, Judge Hughes stated as follows.  “[W]hile the Government does not have to trace a particular dollar to a particular pocket of a particular official, it has to connect the payment to a particular official, that the funds made under his authority to a foreign official, who can be identified in some reasonable way, that is, with no reasonable doubt.” Judge Hughes also stated as follows.  “You can’t convict a man promising to pay unless you have a particular promise to a particular person for a particular benefit. If you call up the [intermediary] and say, look, I’m going to send you 50 grand, bribe somebody, that does not meet the statute.”

Corruption Perception Index

Transparency International (“TI”) recently released its annual Corruption Perceptions Index (“CPI”) (see here).  The CPI ranks countries/territories based on how corrupt their public sector is perceived to be and is a composite index drawing on corruption-related data collected by a variety of reputable institutions and reflecting the views of observers from around the world including experts living and working in the countries/territories evaluated.

The top three (very clean) countries in the CPI were Denmark, Finland and New Zealand. The bottom three (highly corrupt) countries were Afghanistan, North Korea and Somalia.

The United States placed 19th on the list of 176 countries.  While this is better than last year’s 24th place finish, as noted in this prior post it’s a bit ironic that as the U.S. aggressively expands its Foreign Corrupt Practices Act enforcement theories, the U.S. remains far from the top of the CPI.

Assistant Attorney General Lanny Breuer recently spoke of the U.S. FCPA enforcement effort in religious terms (“we in the United States are in a unique position to spread the gospel of anti-corruption, because there is no country that enforces its anti-bribery laws more vigorously than we do”), yet CPI’s rankings should again cause pause as to our claimed moral superiority.

Document Issues

I am not one to usually highlight FCPA Inc. marketing material, but I thought this video clip from e-discovery firm H5 was instructive as to many of the document issues involved in an FCPA investigation.  The enforcement agencies have commented from time to time that FCPA Inc. has a tendency to sometimes over do it in this area, but be that as it may – data collection, data storage, data analysis, etc. are among the reasons why FCPA investigations often soar into the millions.

Recent Scrutiny News

Rolls-Royce

Reuters reports (here) that Rolls-Royce, the world’s second-largest maker of aircraft engines “said the [U.K. Serious Fraud Office] had asked it to conduct an internal inquiry into dealings involving intermediaries in China, Indonesia and other overseas markets.”  According to the report, ”a source close to the investigation said the allegations relate to events in the “distant past” and Rolls-Royce had told the U.S. Department of Justice about the inquiry.”

As noted in this previous post, in June, Data Systems & Solutions, LLC, a wholly-owned subsidiary of Rolls-Royce Holdings, resolved an FCPA enforcement action.

Barclays

Reuters also reports (here) that a previously disclosed DOJ and SEC “investigation into whether Barclays Plc paid bribes to win a banking license in Saudi Arabia has spread to other banks that operate in the region.”

Net 1

Earlier this week, Net 1 UEPS Technologies Inc. disclosed in an SEC filing (here) as follows.

“On November 30, 2012, we received a letter from the U.S. Department of Justice, Criminal Division (the “DOJ”) informing us that the DOJ and the Federal Bureau of Investigation have begun an investigation into whether Net 1 UEPS Technologies, Inc. and its subsidiaries, including their officers, directors, employees, and agents (collectively, “Net 1”) and other persons and entities possibly affiliated with Net 1 violated provisions of the Foreign Corrupt Practices Act and other U.S. federal criminal laws by engaging in a scheme to make corrupt payments to officials of the Government of South Africa in connection with securing a contract with the South African Social Security Agency to provide social welfare and benefits payments and also engaged in violations of the federal securities laws in connection with statements made by Net 1 in its SEC filings regarding this contract. On the same date, we received a letter from the Division of Enforcement of the Securities and Exchange Commission (the “SEC”) advising us that it is also conducting an investigation concerning our company. The SEC letter states that the investigation is a non-public, fact-finding inquiry.”

In this additional release, the company states as follows.

“These investigations appear to be directed at matters which are similar to those that were the subject of articles which appeared in various South African newspapers after AllPay Consolidated Investment Holdings (Pty) Limited (“AllPay”) instituted legal proceeding in the South African courts to set aside the contract awarded to us in January 2012 by SASSA. AllPay was an unsuccessful bidder for the SASSA contract.”

News of the company’s FCPA scrutiny caused the company’s U.S. listed shares to plunge approximately 58%.  This of course caused several plaintiff law firms to announce investigations of their own.  See here, here, and here.  In the meantime, the company’s shares have risen 46%.

It’s an FCPA world.

*****

A good weekend to all.

Motion to Dismiss Filed in SEC Enforcement Action

This previous post highlighted how former Magyar Telekom executives Elek Straub, Andras Balogh and Tamas Morvai planned to challenge the SEC’s charges against them.  Earlier this week, the defendants filed this memorandum in support of their motion to dismiss.

In summary fashion, the memorandum states as follows.

“There are several bases for dismissing the complaint.

 First, this Court lacks personal jurisdiction over the defendants. The complaint alleges conduct by foreign national defendants that occurred wholly outside, and with no nexus to, the United States. Nowhere does the complaint allege that defendants purposefully directed their conduct at the United States. Following constitutional due process principles, the defendants lack the requisite minimum contacts with the forum, and it would be inconsistent with traditional notions of fair play and substantial justice to require them to defend this action in the United States. Indeed, the SEC has acknowledged that its jurisdictional position lacks precedent “on all fours factually” and “may be breaking new ground[.]“

“Second, the SEC’s claims are time-barred [...]  There is no doubt that the complaint was filed outside the five-year period. Specifically, the complaint was filed on December 29, 2011, more than five years after all three defendants had left Magyar Telekom, and more than five years after the alleged conduct occurred. Consequently, the five-year period has expired.”

“Third, with regard to the remaining claims, the complaint fails to adequately state the claims alleged. More specifically, the complaint: (i) fails to adequately plead that the defendants corruptly made use of interstate commerce, as is required to state a claim for bribery and the claims stemming from the alleged bribery under the FCPA (books and records and internal controls violations, falsifying books and records, and lying to auditors); (ii) fails to adequately plead that the intended payment recipients were “foreign official[s]” under the FCPA; (iii) fails to allege sufficient facts supporting the aiding and abetting claims; and (iv) fails to meet the heightened pleading requirements under Rule 9, including allegations of individualized culpable conduct by each defendant. The complaint also merely parrots the statutory language and fails to allege that the defendants profited personally from any of the alleged conduct. For all these reasons, the complaint should be dismissed with prejudice.”

As to “foreign official” the motion states that the complaint’s reference to “officials” “government officials” and other vague allegations represent “mere legal conclusions that the recipients were “foreign officials” under the FCPA.  The motion states as follows.  “A legal conclusion couched as a ‘factual allegation’ is insufficient to establish the essential element that the intended recipient be a foreign official.  Repeated references to “government officials” without underlying facts presents nothing ‘more than labels and conclusions’ that constitute ‘a formulaic recitation of the elements of a cause of action.”"

Indeed, in my 2010 article “The Facade of FCPA Enforcement” (here) I noted the frequency in which enforcement agency FCPA pleadings “contain little more than uninformative, bare-bones statement of facts replete with legal conclusions.”  I said that the “most common and troubling use of bare-bones, uninformative, legal conclusory statements of facts or allegations is when the enforcement agencies describe the ‘foreign officials’ involved in the alleged conduct giving rising to the FCPA violation.”  In the article, I noted that because there is generally no threat that these bare-boned, uninformative facts or legal conclusions will ever be subject to meaningful judicial scrutiny, that the enforcement agencies get away with such practices.

At least until recently.

Noticeable Lack of FCPA Charges

Numerous FCPA enforcement actions have been based on allegations of payments to foreign customs personnel in connection with customs, license, permit type issues.

Thus, the lack of FCPA charges were noticeable in the DOJ’s recent criminal indictment of APEGO Inc., and various of is employees and agents.  As noted in this recent DOJ Release (N.D. of Georgia), charges were filed alleging conspiracy and twelve counts of importing notebooks and filler paper from China using false  documents.

The indictment (here) includes the following allegations.

“It was further part of the conspiracy that [certain individuals] paid bribes to Taiwanese customs officials on behalf of defendants APEGO and Gung to allow U.S.-bound lined paper products made by the Watanabe Group in China but lacking required country of origin labels, or mislabeled ‘Made in Taiwan,’ to enter Taiwan from China and clear Taiwanese customs.”

Elsewhere, the indictment alleges: (i) that in December 2006 various bribes were paid to Taiwanese customs officials which “allowed defendant APEGO to transship these products from Taiwan to the United States more quickly and less expensively by limiting the need to ‘rework’ the products and cartons (i.e. relable ‘Made in Taiwan’) in Taiwan”; (ii) that in March 2007 when customs officials at a certain Taiwan port no longer accepted bribes, the company arranged for its shipments to be processed through another port in a different part of the country where bribes were paid for the same purpose

Recent Disclosures

Owens-Illinois

Owens-Illinois, Inc. (an Ohio based company that describes itself as the world’s largest glass container manufacturer and preferred partner for many of the world’s leading food and beverage brands) recently disclosed as follows.

“The Company is conducting an internal investigation into conduct in certain of its overseas operations that may have violated the antibribery provisions of the United States Foreign Corrupt Practices Act (FCPA), the FCPA’s books and records and internal controls provisions, the Company’s own internal policies, and various local laws. In October 2012, the Company voluntarily disclosed these matters to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). The Company intends to cooperate with any investigation by the DOJ and the SEC. The Company is presently unable to predict the duration, scope or result of its internal investigation, of any investigations by the DOJ or the SEC or whether either agency will commence any legal action. The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, fines, penalties, and modifications to business practices. The Company also could be subject to investigation and sanctions outside the United States. While the Company is currently unable to quantify the impact of any potential sanctions or remedial measures, it does not expect such actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition.”

Given the recent FCPA scrutiny of the beverage industry (Diageo, Beam Inc., and Central European Distribution Company) one might wonder whether Owens-Illinois’s recent disclosure is connected to those developments.

Barclays

This previous post detailed how Barclays PLC’s relationship with Qatar’s sovereign-wealth fund was under scrutiny by U.K. authorities.

The company recently disclosed (here) as follows.  “Subsequent to reporting the investigations of the Financial Services Authority and Serious Fraud Office in July and August 2012 respectively, Barclays has been informed by the US Department of Justice (DOJ) and US Securities and Exchange Commission (SEC) that they are undertaking an investigation into whether the Group’s relationships with third parties who assist Barclays to win or retain business are compliant with the United States Foreign Corrupt Practices Act. Barclays is investigating and fully co-operating with the DOJ and SEC.”

According to this article in the Wall Street Journal, the focus is “on Barclay’s use of external brokers who facilitated meetings between bank officials and powerful Middle Eastern families.”  The article further notes that “Barclays recently started conducting an internal investigation, with the help of an outside law firm, to figure out whether it or its Middle Eastern introducers might have run afoul” of the FCPA.

Schlumberger

The company recently disclosed as follows.

“In 2007, Schlumberger received an inquiry from the United States Department of Justice (“DOJ”) related to the DOJ’s investigation of whether certain freight forwarding and customs clearance services of Panalpina, Inc., and other companies provided to oil and oilfield service companies, including Schlumberger, violated the Foreign Corrupt Practices Act. In October 2012, Schlumberger was advised by the DOJ that it has closed its inquiry as it relates to Schlumberger.”

For more on the numerous Panalpina-related enforcement actions – what I’ve termed CustomsGate – see here.

The company’s recent disclosure would seem not to address the issues previously the focus of a front-page Wall Street Journal article in October 2010 concerning alleged conduct in Yemen.  (See here for the prior post).

Quotable

In this recent Reuters article, current SEC FCPA Unit Chief Kara Brockmeyer stated as follows.

“I would hate to think the companies view [FCPA] enforcement actions as the cost of doing business.  If we find that out, it will certainly increase the size of the penalty.”

One thing that is becoming increasingly clear in this new era of FCPA enforcement is that investors do appear to view FCPA scrutiny and enforcement actions as a cost of doing business and akin to a regulatory violation.

The Reuters article also stated that there has yet to be a repeat FCPA prosecution.  This is a false statement.  Companies that have resolved more than one FCPA enforcement action over time include: Tyco, ABB, Baker Hughes and General Electric.

Quotable

On his Corruption, Crime & Compliance site (here) Michael Volkov recently observed as follows.

“The FCPA Paparazzi has done a great disservice to the business community.  Call it a complete lack of credibility.  Legal marketing has become confused in this day and age – marketing has now been turned into the “Fear Factor,” meaning that lawyers need to scare potential clients into hiring them.  That is flat out wrong.   Each week, new client alerts, client warnings and other cries of impending disaster are transmitted through the Internet to businesses.  If I were a general counsel, I would have them on “auto delete.”  Talk about a waste of time and effort.”

What’s Up With That Investigation?

One of the many FCPA industry sweeps reportedly underway concerns Hollywood movie industry in China.  (See here for the prior post).  This recent post on the New York Times Media Decoder blog highlights the “powerful gatekeeper of China’s rapidly growing film world, the China Film Group chairman Han Sanping who was recently in the U.S. to receive a China Entertainment Visionary of the Year award, and asks what’s up with the investigation.

I Hear You Travel Alot

My frequent searches for FCPA content often turn up interesting content.  Such as this thread from top-law-schools.com which asks what type of attorneys get to travel the most?  One response was as follows.   ”From what I hear, FCPA is the way to go for travel to other countries because you have lots of interviews of foreign employees.”

The FCPA is certainly the reason for the majority of stamps in my passport.

Counter-Points

Alexandra Wrage (President of Trace International) made some observations recently in her Corporate Counsel column (here) about FCPA enforcement in various Presidential administrations.  While interesting to think about, the actual stats have little substantive value.  Instances of FCPA scrutiny tend to last between 2-4 years (and thus straddle administrations) and various instances of FCPA scrutiny (for instance Pfizer) can last approximately 8 years.  Moreover, rather than “aggressively enforce the FCPA,” as the article notes, what the enforcement agencies more often than not actually do (as evidenced by statistics demonstrating which enforcement actions resulted from voluntary disclosures) is process corporate voluntary disclosures.

There’s An App for That

Law firm O’Melveny & Myers announced (here) the “launch of its FCPA app, the first multi-functional mobile application (app) created by a law firm.”  Richard Grime, partner and head of O’Melveny’s FCPA practice stated as follows.  “We understand the complexities our clients and colleagues face in achieving their business goals in the global marketplace, and thus, have created this mobile application as a fast, yet informative, way for them to remain current with the evolving statutes and provisions imposed by the FCPA and other anti-corruption laws.”

Weekend Reading

Sidley & Austin recently released its Anti-Corruption Quarterly (here).  Among other articles is one focused on the new “sheriff in town.”

The article states as follows.

“Investigating potential violations of the FCPA historically has been the purview of the SEC and the DOJ, but recently, Congress has entered the fray. Two House committees, the House Oversight and House Energy committees, recently instituted an independent FCPA investigation of Wal-Mart, after a New York Times article reported on an alleged massive bribery campaign at Wal-Mart’s Mexican affiliate. These House investigations mean that companies now have to consider the possibility of facing a congressional investigation—in addition to investigations by the SEC and the DOJ—when FCPA violations have occurred.”

The article further states as follows.

“Although congressional committees routinely investigate companies, the current congressional investigation into Wal-Mart is the first investigation in the FCPA context and it may signal the beginning of a trend: high-profile companies or companies that are drawn into political fights (often unwillingly) may find themselves the target of a congressional inquiry if their FCPA problems become public. Whatever effect the congressional investigation may have on Wal-Mart, the possibility of such an investigation is a factor that high-profile companies facing FCPA concerns should weigh.”

For more on Wal-Mart’s FCPA scrutiny, see my recent article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure” (here).

Miller Chevalier also recently released its FCPA Autumn Review – see here.

Morrison Foerster also recently released its End of Summer Round-Up – see here.

This recent Jones Day publication concerning upcoming FCPA Guidance contains the following paragraph that should be read by those who simply label companies that have resolved FCPA enforcement actions or are the subject of FCPA scrutiny as bad or corrupt companies.

“It is the job of a prosecutor to make charging decisions and to decide in the first instance what does and does not violate the law. As prosecutors and enforcement attorneys assess the facts to make charging decisions, they are compelled to view the world, therefore, in binary terms: black and white, right and wrong. As defense counsel, settlement discussions with our counterparts in the DOJ and SEC frequently hinge on which side of the line the conduct sits. Particularly for those of us who served as prosecutors, we acknowledge in these discussions the difficult mission of the enforcement officials to draw and defend lines. The world of business, however, frequently operates in territory that is somewhat grey: a world in which business persons strive to grow the company ethically in situations where the application of the existing rules are not entirely clear. For instance, in the current era of FCPA enforcement, international businesses struggle with their responsibilities to monitor and control the conduct of third parties with whom they do business: distributors and sub-distributors, joint venture partners, dealers, and resellers. Even for companies that are firmly dedicated to compliance with the FCPA, is not always clear when a third party amounts to an agent whose improper conduct might someday be ascribed to the company and its employees. Good and ethical companies struggle, every day, with the concept of defining an agent of the company as opposed to an independent customer who engages in an arm’s-length transaction to purchase the company’s products.”

*****
A good weekend to all.

As indicated in the prior post, the sole jurisdictional allegations in the enforcement action (other than the companies made filings with the SEC) were two e-mails that passed through, were stored on, and transmitted to servers located in the U.S.  The prior post also highlighted that the alleged improper conduct occurred in 2005 and 2006.

The Magyar Telekom enforcement action was a rare instance that also involved charges against individuals.  As noted in the prior post, the SEC, in addition to charging the company, also brought civil charges against former Magyar Telekom executives: Elek Straub (former Chairman and CEO of Magyar Telekom) and Andras Balogh and Tamas Morvai (two former senior executives in Magyar Telekom’s Strategy Department) based on the same alleged Macedonia and Montenegro bribery schemes.

The prior post provided the following summary of the individual charges.  In both schemes, the SEC alleged that the individuals authorized or caused the payments at issue with “knowledge, the firm belief, or under circumstances that made it substantially certain” that all or a portion of the money would be forwarded to foreign officials.  The complaint also alleged that the individuals caused the payments to be falsely recorded in Magyar Telekom’s books and records.  The complaint charged the defendants  with violating or aiding and abetting violations of the anti-bribery, books and records, and internal controls provisions of the FCPA; knowingly circumventing internal controls and falsifying books and records; and making false statements to the company’s auditor.

Litigation of jurisdictional issues (heck litigation of any issue) in corporate FCPA enforcement actions is nearly non-existent.  However, foreign nationals individually charged with FCPA offenses are more likely to contest aggressive jurisdictional theories.  Indeed, a notable development from 2011 was judicial rejection of the DOJ’s asserted jurisdiction in prosecution of a foreign national in the Africa Sting case.  (See here for the prior post regarding Africa Sting defendant Pankesh Patel).

Litigation of statute of limitations issues is also nearly non-existent in FCPA enforcement actions.  Dig into the details of most FCPA enforcement actions and one quickly discovers that the conduct at issue is old – in some cases very old. However, cooperation is the name of the game in corporate FCPA inquiries and asserting statute of limitations issues is not cooperating.  Thus, most companies the subject of FCPA scrutiny enter into tolling agreements with the enforcement agencies or otherwise waive statute of limitations defenses.  However, individuals charged with FCPA offenses tend to fight more including by asserting black letter legal defenses such as statute of limitations.

Which brings us back to the former Magyar Telekom executives.   As reported last week by Law360, lawyers for the defendants argued last week at an initial appearance in the U.S. District Court (S.D. of New York)  that the court lacks jurisdiction over the defendants.  William Sullivan (Pillsbury Winthrop Shaw Pittman -  here, counsel for Balogh) is quoted as follows concerning the jurisdictional issues.  “The allegations that an email may have been caught in a U.S. server without the knowledge of the alleged sender is not enough.”

The Law360 article also suggests that the defendants are likely to raise statute of limitation defenses.

Straub is represented by Saul Pilchen of Skadden Arps Slate Meagher & Flom LLP (see here).

Morvai is represented by Michael Koenig and Victoria Lane of Greenberg Traurig.

In an order issued last week, Judge Richard Sullivan set the following schedule for the defendants’ contemplated omnibus motion to dismiss.

• Oct. 29, 2012 (Defendants to file their motion and accompanying brief)
• Nov. 30, 2012 (SEC to file its opposition brief)
• Dec. 14, 2012 (Defendants to file their reply brief)
• Jan. 17, 2013 (Oral argument)

Given that the enforcement agencies have continued to push the envelope on jurisdictional and statute of limitations issues (coupled with the fact that the DOJ recently lost a jurisdictional challenge in the Africa Sting case), the judicial challenge by the former Magyar Telekom executives is a notable development.  It is also a needed development in that the expected challenge will facilitate judicial scrutiny of these issues

It will be a busy end of the year for the SEC’s FCPA unit.  As noted in this previous post (and links embedded therein), on October 31st oral arguments will take place in the S.D. of Texas on defendants’ motion to dismiss in the Jackson and Ruehlen SEC FCPA enforcement action.

Total fines and penalties were approximately $95 million ($59.6 million against Magyar Telekom via a DOJ deferred prosecution agreement, $4.4 million against Deutsche Telekom via a DOJ non-prosecution agreement,  and $31.2  million against Magyar Telekom via a settled SEC civil complaint).  The SEC action against former Magyar executives remains active.

Because Magyar Telekom and Deutsche Telekom were “foreign issuers,” jurisdiction under the FCPA’s anti-bribery provisions require “use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance” of a bribery scheme.  The sole jurisdictional allegations in the enforcement action (other than the companies made filings with the SEC) are two e-mails that passed through, were stored on, and transmitted to servers located in the U.S. 

It is also noteworthy that the companies faced FCPA exposure based on the conduct of a few Magyar executives who concealed their conduct from others.  Indeed, the DOJ alleged that the existence and true purpose of the sham contracts used in the bribery scheme “were unknown to anyone within Magyar Telekom and Deutsche Telekom other than [two executives]‘ and a relatively small number of additional participants.”  Furthermore, the DOJ alleges that the executives, assisted by Greek intermediaries, circumvented Magyar Telekom’s internal controls by, among other things, backdating contracts and creating other fabricated documents.

The DOJ’s NPA with Deutsche Telekom states that the DOJ ”will not criminally prosecute Deutsche Telekom … for any crimes … related to the offering or making of improper payments by employees of Magyar Telekom to foreign officials, foreign political parties, and officials of foreign political parties in Macedonia and the accounting and record-keeping associated with these improper payments in violation” of the FCPA’s books and records provisions.”  Yet one struggles to find any facts that would justify criminal charges against Deutsche Telekom.  The DOJ has said in the past that it “does not prosecute corporations based on the acts of a single rogue employee.”   Yet all one learns from reading the NPA is that a Deutsche Telekom executive was a board member of Magyar Telekom and one of its subsidiaries and that the  executive had passive knowledge of the scheme and later learned of the Magyar Telekom executives circumvention of Magyar Telekom’s internal controls.  In all other respects, Deutsche Telekom’s criminal and civil exposure appears to be based on a strict liability like theory in that Magyar Telekom’s financial results were incorporated into Deutsche Telekom’s for purposes of financial reporting.

DOJ

The DOJ enforcement action involved a criminal information (here) against Magyar Telekom resolved through a deferred prosecution agreement (here) as well as a non-prosecution agreement (here) with Deutsche Telekom.

Criminal Information

The information focuses on conduct in Macedonia and Montenegro.

Macedonia

As to Macedonia, the information alleges as follows.   ”During 2005 and 2006, certain executives then employed by Magyar engaged in a course of conduct with consultants, intermediaries and other third parties, including contracting through sham contracts to pay an aggregate amount of  €4.875 million to

the Cypriot Shell Company [a shell company controlled by Greek Intermediary #1 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials), Greek Intermediary #2 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials), and Greek Intermediary #3 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials) that executed contracts with, submitted paperwork to, and received payments from, Magyar Telekom and its subsidiaries]

and one of its affiliates, under circumstances in which they knew, or were aware of a high probability that circumstances existed in which, all or a portion of the proceeds of such payments would be offered, given, promised or paid, directly or indirectly to

Macedonian Government Official #1 [a high-ranking government official with responsibility related to telecommunications laws and regulations and a leader of Macedonian Political Party A],

Macedonian Government Official #2 [a high-ranking government official with responsibility for telecommunications laws and regulations and a leader of Macedonian Political Party B],

Macedonian Political Party A, and/or Macedonian Political Party B [collectively political parties in the Macedonian governing coalition each representing a traditional ethnic group in Macedonia] 

with the intention of obtaining business and advantages for Magyar Telekom.  In addition, Macedonian Political Party B was offered the opportunity to designate the beneficiary of a business venture in exchange for the party’s support of Magyar Telekom’s desired benefits.”

According to the information, in early 2005, the Macedonian Parliament enacted a law designed to liberalize the telecommunications market in a manner that would have been unfavorable to Magyar Telekom.  Specifically the law authorized the telecommunications regulatory bodies in Macedonia to hold a public tender for a license to operate a third mobile telephone business that would directly compete in Macedonia against Magyar Telekom’s Macedonian subsidiary, MakTel, and imposed increased frequency fees and other regulatory burdens.  According to the information, certain Magyar Telekom executives and the Greek Intermediaries met with Macedonian Official #1 and others to “inform them that a third mobile license was not acceptable.”

According to the information, certain Magyar Telekom executives approved and executed two secret agreements with Macedonian Official #1 to delay or preclude the issuance of a third mobile telephone license and to mitigate the other adverse effects of the new law, including not requiring MakTel to pay the full amount of the increased frequency fee.  The information alleges, among other things, that an e-mail was sent to a Macedonian government official “at his U.S. based e-mail address” that “was passed through, stored on, and transmitted from servers located in the United States” and that a MakTel executive received an e-mail discussing the secret agreements in his “Hotmail email account, which passed through, was stored on, and transmitted to servers located in the United States.”

The information alleges that between 2005 and 2006 Magyar Telekom received the benefits promised in the agreements and that Magyar Telekom executives authorized MakTel and other Magyar Telekom subsidiaries to enter into a series of sham contracts and to pay an aggregate amount of  € 4.875 million under those contracts to the Cypriot Shell Company and one of its affiliates, under circumstances in which the Magyar Telekom Executives knew, or were aware of a high probability that circumstances existed in which, all or a portion of the proceeds of such payments would be offered, given, promised, or paid, directly or indirectly to Macedonian government officials. 

The information alleges that following the sham contracts “the Macedonian government delayed the introduction of a third mobile telephone competitor until 2007 and reduced the frequency fee tariffs imposed on Magyar Telekom’s Macedonian subsidiary, MakTel.”

According to the information, “the existence and true purpose of the agreements were unknown to anyone within Magyar Telekom and Deutsche Telekom other than [the two executives] and a relatively small number of additional participants.”  In fact, the information alleges that the two executives, assisted by Greek Intermediary #1, circumvented Magyar Telekom’s internal controls by, among other things, backdating contracts or creating other fabricated documents.

Nevertheless the information alleges as follows.  “The payments made under these sham contracts were recorded on Magyar Telekom’s books and records in a manner that did not accurately reflect the true purposes of the contracts under which they were made, and the false books and records were consolidated into DT’s financial statements.”

Based on the above allegations as to Macedonia, the information charges FCPA anti-bribery violations and FCPA books and records violations.

Montenegro

The information states as follows.  “In October 2004, the Government of Montenegro issued a tender to privatize its approximately 51% stake in the state-owned telecommunications company TCG [Telekom Crne Gore A.D.].  Magyar Telekom submitted a bid that sought to obtain a super-majority ownership stake, consisting of the government’s 51% share, plus enough additional minority shares from private investors to give Magyar Telekom ownership of at least two-thirds of TCG.”  According to the information, in March 2005 Magyar Telekom succeeded in acquiring an approximately 73% stake in TCG, and after the Government of Montenegro facilitated Magyar Telekom’s acquisition of shares of TCG from minority shareholders, certain Magyar Telekom executives caused Magyar Telekom, TCG, and/or its affiliates to enter into four contracts that purported to relate to the TCG acquisition and/or Magyar Telekom’s operations in Montenegro, but under which no valuable performance was actually rendered.  The information alleges that “payments under those contracts were not recorded accurately on Magyar Telekom’s or Magyar Telekom’s subsidiaries’ books and records.”

According to the information, “the payments under the four contracts … were recorded on Magyar Telekom’s books and records, or those of certain of Magyar Telekom’s subsidiaries, in a manner that did not accurately reflect the true purposes of the contracts under which they were made, and the false books and records were consolidated into Magyar Telekom’s and DT’s financial statements.”

Based on the above conduct as to Montenegro, the information charges FCPA books and records violations.

DPA

The DOJ’s charges against Magyar Telekom were resolved via a deferred prosecution agreement.  Pursuant to the DPA, Magyar Telekom admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees, agents, and those of Magyar Telekom’s subsidiaries as charged in the Information.”

The term of the DPA is two years and it states that the DOJ entered into the agreement based on the following factors.

(a) following reports by the company’s auditors, Magyar Telekom made a timely and voluntary disclosure to the DOJ and SEC about potential misconduct;

(b) over the course of several years, Magyar Telekom’s audit committee led a thorough global internal investigation concerning bribery and related misconduct;

(c) Magyar Telekom’s audit committee reported its findings to the DOJ and SEC;

(d) the pervasiveness of the scheme, the involvement of a number of now-former senior managers at Magyar Telekom and certain of its subsidiaries , and conduct by some of those employees designed to obstruct the audit committee’s investigation;

(e) Magyar Telekom undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures; and

(f) Magyar Telekom agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of Magyar Telekom’s current and former employees, agents, consultants, contractors, subcontractors, and subsidiaries relating to violations of the FCPA.

As detailed in the DPA, the advisory Sentencing Guidelines range for the charges at issue was $72.5 million – $145 million.  Pursuant to the DPA, Magyar agreed to pay $59.6 million (18% below the minimum Guidelines range).  According to the DPA, this amount was “appropriate given the nature and extent of Magyar Telekom’s cooperation in this matter and the remediation undertaken by Magyar Telekom.”

Pursuant to the DPA, Magyar Telekom represented that “it has implemented and will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA” and related laws throughout its operations.  The specific compliance provisions are set forth in an attachment to the DPA.  In addition, Magyar Telekom agreed to “report to the DOJ annually during the term of the Agreement regarding remediation and implementation of the compliance measures” set forth in the attachment.  As is common in FCPA DPA’s Magyar Telekom expressly agreed “that it shall not [directly or indirectly through others] make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by Magyar Telekom” of the above described facts.

The DOJ’s enforcement action also included a non-prosecution agreement  against Deutsche Telekom.  It states that the DOJ “will not criminally prosecute Deutsche Telekom … for any crimes … related to the offering or making of improper payments by employees of Magyar Telekom to foreign officials, foreign political parties, and officials of foreign political parties in Macedonia and the accounting and record-keeping associated with these improper payments in violation” of the FCPA’s books and records provisions.

The DOJ agreed to enter into the NPA based on the following factors: ”(a) DT’s timely, voluntary, and complete disclosure of the facts [described below]; (b) DT’s thorough cooperation with the DOJ and SEC; and (c) DT’s remedial efforts already undertaken and to be undertaken, including enhancements to its compliance program …”.

The NPA relates only to conduct in Macedonia and the NPA contain similar facts as described above.  The NPA also states that a DT Executive was a board member of Magyar Telekom and a MakTel mobile subsidiary.  According to the NPA, the “DT Executive supported” Magyar Telekom entering into an agreement described above and the DT executive was aware an executed agreement “was not kept in Magyar Telekom’s books and records.”  As to the sham contracts with Greek Intermediaries used to circumvent Magyar Telekom’s internal controls and to avoid detection, the NPA states that the DT Executive “later learned of these contracts and the circumstances in which they were executed.”

Under the section heading “Impact on DT’s Books and Records,” the NPA states as follows.  “Magyar Telekom recorded the payments under [the sham contracts] on its books and records in a manner that did not accurately reflect the true purpose of the contracts.  The false entries in Magyar Telekom’s books and records were consolidated into the books and records of DT, which reported the results of Magyar Telekom’s operations in its consolidated financial statements.”

The NPA has a term of two years and, as is standard, DT agreed not to make any public statements contradicting the described facts.  Under the NPA, DT agreed to pay a monetary penalty of $4.36 million.

See here for the DOJ’s release.

SEC

The SEC enforcement action involved a settled complaint against Magyar Telekom and Deutsche Telekom as well as a separate complaint against former Magyar Telekom executives.

The SEC’s settled civil complaint (here) against the companies involves “multiple violations” of the FCPA by Magyar Telekom and “corresponding violations of the books and records and internal controls provisions of the FCPA by Magyar Telekom’s parent company Deutsche Telekom.”  The complaint concerns the same Macedonia and Montenegro schemes identified in the DOJ enforcement action. 

In summary fashion, the SEC complaint alleges as follows.  “During the relevant time period, Magyar Telekom and Deutsche Telekom lacked sufficient internal accounting controls to prevent and detect violations of the FCPA.  As a result, the contracts described above [used in furtherance of the schemes] were not subjected to meaningful review, and substantially all of the amounts were paid without question, prior to the initiation of an internal investigation at the direction of the Audit Committee of Magyar Telekom.  Magyar Telekom recorded the payments to third-parties under these contracts on its books and records in a manner that did not accurately reflect the true purpose of the contracts.  The false entries in Magyar Telekom’s books and records were consolidated into the books and records of Deutsche Telekom, which reports the results of Magyar Telekom’s operations in its consolidated financial statements.”

Based on the above allegations, the SEC complaint charges FCPA anti-bribery, books and records and internal controls violations as to both the Macedonia and Montenegro conduct.  As stated in the SEC’s release (here), without admitting or denying the allegations in the SEC’s complaint, Magyar Telekom agreed to settle the SEC’s charges by paying approximately $31.2 million in disgorgement and pre-judgment interest; Deutsche Telekom settled the SEC’s charges, and as part of a non-prosecution agreement with the Department of Justice agreed to pay a penalty of $4.36 million.

The SEC’s complaint (here) against the former Magyar Telekom executives, Elek Straub (former Chairman and CEO of Magyar Telekom) and Andras Balogh and Tamas Morvai (two former senior executives in Magyar Telekom’s Strategy Department), is also based on the same Macedonia and Montenegro schemes.  In both schemes, the SEC alleged that the individuals authorized or caused the payments at issue with “knowledge, the firm belief, or under circumstances that made it substantially certain” that all or a portion of the money would be forwarded to foreign officials.  The complaint also alleges that the individuals caused the payments to be falsely recorded in Magyar Telekom’s books and records. 

In addition, the complaint alleges that the individuals “made false or misleading statements or omissions to Magyar Telekom’s auditors in connection with the preparation of the company’s financial statements.”  Specifically, the SEC alleged that the individuals signed management representation letters or management sub-representation letters that contained false or misleading information.  The complaint states as follows.  “Had Magyar Telekom’s auditors known [the various facts falsified or concealed] they would not have accepted the management representation letters and other representations provided by Straub.  Nor would the auditors have provided an unqualified audit opinion to accompany Magyar Telekom’s annual report.”

The SEC’s complaint against Straub, Balogh, and Morvai alleges that they violated or aided and abetted violations of the anti-bribery, books and records, and internal controls provisions of the FCPA; knowingly circumvented internal controls and falsified books and records; and made false statements to the company’s auditor. The SEC seeks disgorgement and penalties and the imposition of permanent injunctions.

Magyar Telekom’s release (here) (which per the DPA needed to be cleared by the DOJ) states as follows.  “As previously disclosed, the Audit Committee of Magyar Telekom conducted an internal investigation regarding certain contracts relating to the activities of the Company and/or its affiliates in Montenegro and Macedonia that totaled more than EUR 31 million. In particular, the internal investigation examined whether the Company and/or its Montenegrin and Macedonian affiliates had made payments prohibited by U.S. laws or regulations, including the FCPA. The Company’s Audit Committee informed the DOJ and the SEC of the internal investigation. The DOJ and the SEC commenced investigations into the activities that were the subject of the internal investigation. The Company has previously disclosed the results of the internal investigation. As also previously disclosed, the Company’s Board of Directors approved an agreement in principle with the staff of the SEC to resolve the SEC’s investigation through a settlement.”  The release further states as follows.  “The final settlements recognize the DOJ’s and the SEC’s consideration of the Company’s self-reporting, thorough internal investigation, remediation and cooperation with the DOJ’s and the SEC’s investigations. The Company has undertaken several remedial measures to address the issues identified during the course of these investigations. These measures include steps designed to revise and enhance the Company’s internal controls, as well as the establishment of the Corporate Compliance Program. The Corporate Compliance Program promotes awareness of the Company’s compliance policies and procedures through training, the operation of a whistleblower hotline, and monitoring of, and communications with, employees and subsidiaries of the Company. The Company remains fully committed to responsible corporate behavior.”

Peter Clark (Cadwalader, Wickersham & Taft – here - a former DOJ FCPA Unit chief) represented Magyar Telekom.  Debevoise & Plimpton attorneys Mary Jo White (here – the former U.S. Attorney for the S.D. of N.Y.) and Jonathan Tuttle (here) represented Deutsche Telekom.

Once again, the end of the year sees a telecom company resolving an FCPA enforcement action.  In 2007, it was Lucent Technologies (see here and here);  in 2009 it was UTStarcom (see here for the prior post); in 2010 it was Alcatel-Lucent (see here for the prior post); and in 2011 it is Magyar Telekom and Deutsche Telekom.

Earlier today, the DOJ and SEC announced (see here and here) parallel FCPA enforcement actions against Magyar Telekom (a Hungarian telecommunications company) and Deutsche Telekom (a German telecommunications company that is the majority owner of Magyar).  Fines and penalties in the DOJ and SEC enforcement actions is approximately $95 million.

DOJ

The DOJ release states that the companies agreed to pay a combined $63.9 million criminal penalty to resolve an FCPA investigation into activities by Magyar Telekom and its subsidiaries in Macedonia and Montenegro. 

The DOJ filed a three-count information (see here) against Magyar Telekom charging it with one count of violating the FCPA’s  anti-bribery provision and  two counts of violating the FCPA’s  books and records provisions.  The DOJ release notes that at the time of the charged conduct, Magyar Telekom’s American Depository Receipts (ADRs) traded on the New York Stock Exchange. 

The DOJ’s release states as follows.  “Magyar Telekom’s scheme in Macedonia stemmed from potential legal changes being made to the telecommunications market in that country.    In early 2005, the Macedonian government tried to liberalize the Macedonian telecommunications market in a way that Magyar Telekom deemed detrimental to its Macedonian subsidiary, Makedonski Telekommunikacii AD Skopje (MakTel).   Throughout the late winter and spring of 2005, Magyar Telekom executives, with the help of Greek intermediaries, lobbied Macedonian government officials to prevent the implementation of the new telecommunications laws and regulations.  Magyar Telekom eventually entered into an agreement with certain high-ranking Macedonian government officials to resolve its concerns about the legal changes.   In the secret agreement, a so-called “protocol of cooperation,” Macedonian government officials agreed to delay the entrance of a third mobile license into the Macedonian telecommunications market, as well as other regulatory benefits.   Magyar Telekom executives signed two copies of the protocol of cooperation, each with high-ranking officials of the different ruling parties of Macedonia.   The Magyar Telekom executives then kept the only executed copies outside of Magyar Telekom’s company records.   According to court documents, in order to secure the benefits in the protocol of cooperation, the Magyar Telekom executives engaged in a course of conduct with consultants, intermediaries and other third parties, including through sham consultancy contracts with entities owned and controlled by a Greek intermediary, to pay €4.875 (approximately $6 million) under circumstances in which they knew, or were aware of a high probability that circumstances existed in which, all or part of such payment would be passed on to Macedonian officials.   The sham contracts were recorded as legitimate on MakTel’s books and records, which were consolidated into Magyar Telekom’s financials.   Deustche Telekom, which owned approximately 60 percent of Magyar Telekom, reported the results of Magyar Telekom’s operations in its consolidated financial statements.  Additionally, the criminal information charges Magyar Telekom with falsifying its books and records in regard to its activity in Montenegro.   According to the court filing, Magyar Telekom made improper payments in connection with its acquisition of a state-owned telecommunications company in Montenegro.   These payments were documented on Magyar Telekom’s books and records through the execution of four bogus contracts.   For example, two of the contracts were backdated and concealed the true counterparties, and no legitimate services were provided under the contracts even though the contracts were for €4.47 million.”

The criminal charges against Magyar Telekom were resolved via a deferred prosecution agreement (see here).  Pursuant to the DPA, Magyar Telekom agreed to pay a $59.6 million penalty for its illegal activity, implement an enhanced compliance program and submit annual reports regarding its efforts in implementing the enhanced compliance measures and remediating past problems.

The DOJ also entered into a two-year non-prosecution agreement (see here)  with Deutsche Telekom for its failure to keep books and records that accurately detailed the activities of Magyar Telekom.   At the time of the conduct at issue, Deutsche Telekom’s ADRs traded on the NYSE.  The NPA requires Deutsche Telekom to pay a $4.36 million penalty and to enhance its compliance program.

The DOJ release states as follows.  “Both agreements acknowledge Magyar Telekom and Deutsche Telekom’s voluntary disclosure of the FCPA violations to the department and the leadership of Magyar Telekom’s audit committee in pursuing a ‘thorough global internal investigation concerning bribery and related misconduct.’   In addition, the agreements highlight that the companies have already undertaken remedial measures and have committed to further remedial steps through the implementation of an enhanced compliance program.”

SEC

Based on the same core conduct, the SEC also charged (see here for the complaint) Magyar Telekom and Deutsche Telekom.  Magyar Telekom is charged with FCPA anti-bribery violations as well as books and records and internal controls violations.   Deutsche Telekom is charged with FCPA books and records and internal controls violations.

Without admitting or denying the SEC’s allegations, Magyar Telekom and Deutsche Telekom consented to the entry of final judgments.  Magyar Telekom agreed to settle the SEC’s charges by paying $31.2 million in disgorgement and pre-judgment interest.

The SEC also alleged in a separate complaint (see here) that the three former top executives at Magyar Telekom “orchestrated, approved, and executed”  the Macedonia and Montenegro bribery schemes.  Charged in the complaint are:  Elek Straub (former Chairman and CEO); Andras Balogh (former Director of Central Strategic Organization); and Tamas Morvai (former Director of Business Development and Acquisitions). 

The complaint alleges that the individuals violated or aided and abetted violations of the FCPA’s anti-bribery, books and records, and internal controls provisions; knowingly circumvented internal controls and falsified books and records; and made false statements to the company’s auditor.  Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated as follows.  “Magyar Telekom’s senior executives used sham contracts to funnel millions of dollars in corrupt payments to foreign officials who could help them keep competitors out and win business.  They purposely structured the sham contracts to circumvent internal review, and when questions were eventually raised about their use of ‘consulting’ contracts, they reconfigured them as ‘marketing’ contracts to avoid scrutiny and prolong their scheme.”  The SEC seeks disgorgement and penalties and the imposition of permanent injunctions against the individuals.

Stay tuned for additional analysis of the enforcement actions.