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Former Magyar Telekom Executives Seek Second Circuit Review Of Recent Ruling

Wednesday, February 27th, 2013

On the heels of Judge Richard Sullivan’s February 8th pre-trial order denying their motion to dismiss (see here for the prior post), former Magyar Telekom executives Elek Straub, Andras Balogh and Tamas Morvai have moved to certify Judge Sullivan’s order for interlocutory appeal to the Second Circuit.

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.

“Far Too Attenuated” – Judge Grants Herbert Steffen’s Motion To Dismiss In SEC FCPA Enforcement Action

Wednesday, February 20th, 2013

Earlier this month Judge Richard Sullivan (S.D.N.Y.Y) denied a motion to dismiss in an SEC FCPA enforcement action against foreign national defendants. (See here for the prior post discussing the decision in SEC v. Straub). Judge Sullivan concluded that “the SEC has met its burden” at the early stages of the case to establish personal jurisdiction over the defendants in that the defendants had sufficient “minimum contacts” with the U.S. such that the exercise of personal jurisdiction over the defendants was “reasonable.” Judge Sullivan only then proceeded to address statute of limitations issues as well as whether the jurisdictional element of an FCPA anti-bribery violation had been properly alleged.

It was noted in the prior post that similar issues were also presented in the SEC’s FCPA enforcement action against former Siemens executive Herbert Steffen, also in the S.D.N.Y.

Yesterday, Judge Shira Scheindlin (a federal court judge well versed in FCPA issues giving her involvement in the Bourke case) granted Steffen’s motion to dismiss the SEC’s complaint. (See here for the opinion and order). Because Judge Schneindlin concluded, as an initial threshold matter, that personal jurisdiction over Steffen exceeded the limits of due process, she did not address Steffen’s other challenges, including as to statute of limitations issues. Unlike the defendants in Straub, Steffen was not alleged to have signed any management representation letters used in connection with financial reporting.

In short, Judge Scheindlin stated as follows.

“If this Court were to hold that Steffen’s support for the bribery scheme satisfied the minimum contacts analysis, even though he neither authorized the bribe, nor directed the cover up, much less played any role in the falsified filings, minimum contacts would be boundless. [...] [U]nder the SEC’s theory, every participant in illegal action taken by a foreign company subject to U.S. securities laws would be subject to the jurisdiction of U.S. courts no matter how attenuated their connection with the falsified financial statements. This would be akin to a tort-like foreseeability requirement, which has long been held to be insufficient.”

The remainder of this post provides context and summarizes Judge Scheindlin’s decision.

As noted in this previous post summarizing the allegations in the SEC’s December 2011 complaint against seven former Siemens executives, the conduct at issue involved a sliver of the overall conduct at issue in Siemens high-profile 2008 FCPA enforcement action. In short, the allegations concerned an alleged bribery scheme in Argentina concerning a national identity card contract and - as to Steffen (the former CEO of Siemens S.A. Argentina who retired in 2003) Judge Scheindlin summarized the allegations as follows.

”The Complaint alleged that [Defendant] Sharef recruited Steffen ‘to facilitate the payment of bribes’ to officials in Argentina because of his longstanding connections in Argentina, which he acquired during his tenure at Siemens Argentina. Following the cancellation of the contract, beginning in December 2000, Steffen and Sharef began renegotiating with the Argentine government, including the newly elected President, which demanded that Siemens paid it bribes in order to reinstate the contract. In order to facilitate payment of bribes to the Argentine officials, Steffen met several times with [Defendant] Regendantz, who become the Chief Financial Officer of [Siemens Business Services - SBS] in February 2002, and ‘pressured’ Regendantz to authorize bribes from SBS to Argentine officials. In April 2002, Steffen told Regendantz that SBS had a ‘moral duty’ to make at least an ‘advance payment’ of ten million dollars to the individuals who had previously handled the bribes because he and other individuals were being threatened as a result of the unpaid bribes. Once Regendantz authorized the bribes, the allegations against Steffen are limited to participation in a phone call initiated by Sharef from the United States in connection with the bribery scheme, and that in the first half of 2003, defendants including Steffen ‘urged Sharef to meet the demands [of Argentine officials] and make the additional payments.”

Judge Scheindlin next addressed whether the SEC’s complaint alleged sufficient facts to establish the two components of the due process – minimum contacts and reasonableness. Judge Scheindlin noted that because the SEC alleged specific jurisdiction over Steffen, this required that he “purposefully directed his activities towards [the U.S.] and the litigation arises out of or is related to [Steffen's ] contact with the forum.

Judge Scheindlin then stated as follows.

“It is well-established that a court may exercise personal jurisdiction over a foreign defendant who causes an effect in the forum by an act committed elsewhere. However, ‘this is a principle that must be applied with caution, particularly in an international context.’ ‘Foreseeability’ alone has never been a sufficient benchmark for personal jurisdiction under the Due Process Clause.’ Rather defendants must have ‘followed a course of conduct directed at … the jurisdiction of a given sovereign, so that the sovereign has the power to subject the defendant to judgment concerning the conduct. The effects in the United States must ‘occur as a direct and foreseeable result of the conduct outside the territory’ and defendant ‘must know,or have good reason to know, that his conduct will have effects in the [forum] seeking to assert jurisdiction over him.”

After noting the legal standards for “reasonableness,” Judge Scheindlin concluded that the court lacked personal jurisdiction over Steffen in that the SEC did not establish minimum contacts and that the exercise of jurisdiction over Steffen was not reasonable.

As to minimum contacts, Judge Scheindlin stated as follows.

“The SEC’s allegations are premised on Steffen’s role in encouraging Regendantz to authorize bribes to Argentine officials that ultimately resulted in falsified filings. While Steffen’s actions may have been a proximate cause of the false filings – and that is a matter of some doubt – Steffen’s actions are far too attenuated from the resulting harm to establish minimum contacts. Steffen was brought into the alleged scheme based solely on his connections with Argentine officials. In furtherance of his negotiations with those officials, Steffen ‘urged’ and ‘pressured’ Regendantz to make certain bribes. However, Regendantz did not agree to make the bribes until he communicated with several ‘higher ups’ whose responses he perceived to be instructions to make the bribes. Once Regendantz agreed to make the bribes – following receipt of instructions from Siemens’ management rather than Steffen – Steffen’s alleged role was tangential at best. Steffen did not actually authorize the bribes. The SEC does not allege that he directed, ordered or even had awareness of the cover ups that occurred at SBS much less that he had any involvement in the falsification of SEC filings in furtherance of those cover ups.”

In a footnote, Judge Scheindlin then stated as follows.

“Neither Sharef’s call to Steffen from the United States nor the fact that a portion of the bribery payments were deposited in a New York bank provide sufficient evidence of conduct directed towards the United States to establish minimum contacts. First, Steffen did not place the calls to Sharef. Further, Steffen did not direct that the funds be routed through a New York bank. [...] His conduct was focused solely on ensuring the continuation of the Siemens contract in Argentina.”

Judge Scheindlin then noted that in SEC v. Straub, the defendants not only orchestrated a bribery scheme aimed at the Macedonia government but also as part of the bribery scheme “signed off on misleading management representations to the company’s auditors and signed false SEC filings.”

Judge Scheindlin next stated as follows.

“If this Court were to hold that Steffen’s support for the bribery scheme satisfied the minimum contacts analysis, even though he neither authorized the bribe, nor directed the cover up, much less played any role in the falsified filings, minimum contacts would be boundless. Illegal corporate action almost always requires cover ups, which to be successful must be reflected in financial statements. Thus, under the SEC’s theory, every participant in illegal action taken by a foreign company subject to U.S. securities laws would be subject to the jurisdiction of U.S. courts no matter how attenuated their connection with the falsified financial statements. This would be akin to a tort-like foreseeability requirement, which has long been held to be insufficient. The allegations against Steffen fall far short of the requirement that he ‘follow a course of conduct directed … the jurisdiction of a given sovereign, so that the sovereign has the power to subject the defendant to judgment concerning that conduct. Absent any alleged role in the cover ups themselves, let alone any role in preparing false financial statements the exercise of jurisdiction here exceeds the limts of due process, as articulated by the Supreme Court and the Second Circuit.”

As to reasonableness, Judge Scheindlin stated as follows.

“The decision not to exercise jurisdiction in this case is bolstered by my conclusion that requiring Steffen to defend this case in the United States would be unreasonable. [...] When a defendant is not located in the United States, ‘great care and reserve should be exercised when extending our notions of personal jurisdiction into the international context. Steffen’s lack of geographic ties to the United States, his age, his poor proficiency in English, and the forum’s diminished interest in adjudicating the matter, all weight against personal jurisdiction. [...] [I]t would be a heavy burden on this seventy-four year old defendant to journey to the United States to defend against this suit. Further, the SEC and the Department of Justice have already obtained comprehensive remedies against Siemens and Germany has resolved an action against Steffen individually. The SEC’s interest in ensuring that this type of conduct does not go unpublished will not be furthered by continuing the suit against Steffen, in light of his age, the burden to defend this suit, and the previous adjudications.”

*****

Steffen was represented by Skadden lawyers Erich Schwartz (here – former Assistant Director of the SEC Enforcement Division) and Amanda Grier (here). In an e-mailed statement, Schwartz stated as follows. “We are extremely pleased with this decision, and in particular that the Court recognized the unreasonableness under the circumstances of forcing Mr. Steffen to answer these charges in the U.S.”

Motion To Dismiss Denied In Former Magyar Telekom Exec’s Case

Monday, February 11th, 2013

This previous post discussed the SEC’s December 2011 Foreign Corrupt Practices Act enforcement action against former Magyar Telekom executives Elek Straub, Andras Balogh and Tamas Morvai (“Defendants”). Magyar Telekom is a Hungarian telecommunications company that had shares listed on the New York Stock Exchange and previously resolved a joint DOJ/SEC enforcement action in December 2011. (See here for the previous 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.

Friday Roundup

Friday, January 18th, 2013

An on-point editorial, the former DOJ Fraud Chief on voluntary disclosures, and for the reading stack.

On-Point Editorial

“Government enforcers always need to be watched, especially when their business targets are politically unpopular. Then the feds think they can get away with anything.” So begins a recent Wall Street Journal editorial (here) on the Supreme Court’s recent oral arguments in Gabelli v. SEC – a case in which the five year limitations period under 28 U.S.C. § 2462 is squarely before the court (see here for SCOTUS Blog coverage). Gabelli is a case to watch given that the limitations period in most SEC FCPA enforcement actions would seemed to be stretched.

Former DOJ Fraud Chief on Voluntary Disclosures

Recently the online news site Main Justice interviewed former DOJ Fraud Section chief Steven Tyrrell (see here for the video). Much of the interview was about voluntary disclosures. Tyrrell stated that he is “certain” there have been so-called declinations that are “simply not public” where companies did not voluntary disclose, but had extensive remediation and cooperation. In the interview Tyrrell also agreed that the declination examples in the recent FCPA Guidance – all of which had voluntary disclosure as an apparent factor - was likely an enforcement agency attempt to encourage more voluntary disclosures. Tyrrell stated that voluntary disclosure “should not be the be all and end all” in any case.

Once again, selective government information as to FCPA enforcement designed to achieve policy objectives of the enforcement agencies.

For The Reading Stack

Some recommended reading on FCPA jurisdictional issues, Chinese SOEs, and an additional year in review.

Jurisdictional Issues

The current edition of the ABA International Law News has a great article by Debevoise & Plimpton attorneys Sean Hecker and Margot Laporte titled “Should FCPA ’Territorial’ Jurisdiction Reach Extraterritorial Proportions?”

As to FCPA enforcement actions against foreign entities and individuals for conduct that occurred overseas with only minimal U.S. contacts, the authors ask “whether the United States is the appropriate authority to prosecute such cases, where the evidence, witnesses, and conduct are located overseas and where alternative jurisdictions often have an even greater interest in enforcement.”

As to Judge Leon’s rejection of the DOJ’s expansive jurisdictional theory in the Africa Sting prosecution of Pankesh Patel (see here for the prior post), the authors state as follows. “This decision, which suggests a requirement of physical presence in the United States in connection with an allegedly corrupt act, call into question much of the DOJ and SEC’s expansive construction of territorial jurisdiction over foreign entities and individuals under the FCPA. Until additional courts speak to the issue, however, the DOJ and SEC are unlikely to back off their more expansive views of jurisdiction.”

As alluded to in the article, additional courts are poised to speak on jurisdictional issues as to foreign actors. (See here for general discussion of motions to dismiss pending in SEC enforcement actions against former Maygar Telekom executives Elek Straub, Andras Balogh and Tamas Morvai and former Siemens executive Herbert Steffen).

Chinese SOEs

Interested in Chinese SOEs? How can you not be if your interested in FCPA issues. If so, see here for a recent Wall Street Journal article titled “China’s Investments Prompt Call for New Rules.” The article details investments by Chinese companies, including SOEs, in the U.S. over the past several years and states as follows – “according to a U.S. congressional commission, state-owned companies accounted for 90% of the value of Chinese investments in the U.S. industrial-machinery, aerospace, automobile and logistics industries between 2007 and the third quarter of 2011.” The article also notes as follows. “Even figuring out which Chinese operations qualify as state-controlled can be tough.”

Year in Review

Miller & Chevalier recently published (here) its FCPA Winter Review 2013. The review highlights developments from Q4 of 2012, reviews 2012 enforcement trends, and looks forward to 2013. [Note, Miller & Chevalier keeps its FCPA statistics differently from the "core" approach described here].

*****

A good weekend to all.

Friday Roundup

Friday, December 28th, 2012

Sleepless nights, briefings complete, Africa Sting lawyers recognized, a leader of the FCPA bar on voluntary disclosure, small bribes in Russia, and satire. It’s all here in the Friday roundup.

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.