Archive for the ‘Jurisdiction’ Category

Notable RICO Decision And Development

Tuesday, August 6th, 2013

Several FCPA enforcement actions have been brought against foreign companies based on sparse U.S. jurisdiction allegations (a required legal element for an anti-bribery violation against a foreign company).

For instance, the recent Total enforcement action (the third largest in FCPA history in terms of fine and penalty amount) was based on a 1995 wire transfer of $500,000 (representing less than 1% of the alleged bribe payments at issue) from a New York based account.

The JGC Corp. enforcement action was based on the jurisdictional theory that certain alleged bribe payments flowed through U.S. bank accounts and that co-conspirators faxed or e-mailed information into the U.S. in furtherance of the bribery scheme.

The Magyar Telekom enforcement action was based on allegations that a company executive sent two e-mails to a foreign official from his U.S. based e-mail address that passed through, was stored on, and transmitted from servers located in the U.S. and that certain electronic communications made in furtherance of the alleged bribery scheme and the concealment of payments, including drafts of certain agreements and copies of certain contracts with intermediaries, were transmitted by company employees and others through U.S. interstate commerce or stored on computer servers located in the U.S.

The Bridgestone enforcement action was based on allegations that employees sent and received e-mail and fax communications to/from the U.S. in connection with the bribery scheme.

The Tenaris enforcement action was based on allegations that a payment to an agent in connection with the alleged bribery scheme was wired through an intermediary bank located in New York.

The above enforcement actions and the jurisdictional allegations they were based on makes the recent civil RICO decision in PEMEX v. SK Engineering & Construction & Siemens all the more interesting.  As set forth in Judge Louis Stanton’s (S.D.N.Y.) opinion, PEMEX alleged that the defendants violated RICO and common law fraud by bribing PEMEX officials to approve overrun and expenses payments to CONPROCA, a Mexican corporation completing an oil refinery rehabilitation project in Mexico.

According to the complaint, CONPROCA would receive payment from PEMEX’s Project Funding Master Trust (the “Master Trust”), organized under Delaware law, and managed by its then-trustee Bank of New York.  According to the complaint, The Master Trust paid each invoiced amount from its New York account to CONPROCA’s account at Citibank in New York.

The complaint further alleged that CONPROCA financed the project at issue ”through the issuance of bonds registered with the SEC, and through institutional credit, a substantial amount of which were issued by U.S. financial institutions and guaranteed by the Export Import Bank of the United States.”

The DOJ would surely take the position that the above U.S. jurisdictional allegations would be sufficient to bring a criminal FCPA enforcement action against a foreign company for bribing foreign officials.

Not so in a civil RICO action subjected to judicial scrutiny.

In ruling on the defendants’ motion to dismiss based on the argument that the RICO claims were extraterritorial, Judge Stanton first noted that because RICO is silent as to any extraterritorial application, the RICO statutes do not apply extraterritorially.  Judge Stanton then observed that “when foreign actors were the primary operators, victims, and structure of a RICO claim” courts have properly concluded that the claims were extraterritoritial.

Judge Stanton then held that PEMEX’S RICO claims were extraterritorial because “they allege a foreign conspiracy against a foreign victim conducted by foreign defendants participating in foreign enterprises.”

As to those U.S. jurisdictional allegations, Judge Stanton stated:

“They fail to shift the weight of the fraudulent scheme away from Mexico. Seen simply, as a result of the claimed conspiracy PEMEX, the Mexican Plaintiff for whom the work was done in Mexico, paid fraudulent overcharges to CONPROCA, the Mexican corporation which did the work.  PEMEX officials in Mexico granted the challenged approvals to pay CONPROCA. The American trustee merely transferred the payments through two banks in New York.  The defendants’ bribery of PEMEX officials, and CONPROCA’s underbidding and submitting false claims under Mexican public works contracts, all occurred in Mexico. Thus, ‘it is implausible to accept that the thrust of the pattern of racketeering activity was directed at’ the United States.  The RICO claims are accordingly dismissed.”

Judge Stanton’s “thrust” reference is similar to the “sufficient force” language in Justice Alito and Justice Thomas’s concurring opinion in the Kiobel case concerning the extraterritorial application of the Alien Tort Statute.  (See here for the prior post on Kiobel including additional information concerning FCPA jurisdictional issues as to foreign companies).

In addition to the above, another interesting RICO development concerns a lawsuit recently brought by Otto Reich (a former U.S. diplomat and Ambassador to Venezuela) against individuals he accuses of bribing senior Venezuelan officials in exchange for contracts worth hundreds of millions of dollars.”  According to the lawsuit, the individuals are U.S. residents and associated with U.S.-based companies Derwick Associates USA LLC and Derwick Associates Corporation.

In pertinent part, Reich alleges as follows.

“Derwick Associates’ ‘business model’ is simple. From the United States Defendants offer multi-million dollar kickbacks to public officials in Venezuela in exchange for the award of energy-sector construction contracts. Once the contracts are secured for Derwick Associates (and the money ultimately transferred into bank accounts in New York) Defendants skim millions off the top, which they deposit in U.S. banks. Defendants then subcontract out the actual work to be performed on site to other U.S.-based companies, including one based in Missouri. Defendants run their illegal scheme from their homes and offices in New York and through their U.S.-based companies. The scheme has been a huge financial boon to Defendants … all of whom enjoy lifestyles of extreme wealth in the United States.”

It is likely that this civil RICO suit, like others before it, will spawn a DOJ FCPA investigation …  if it hasn’t already.

“Total”ly Milking The FCPA Cash Cow?

Monday, June 3rd, 2013

There are many who believe that certain aspects of FCPA enforcement represent a cash cow for the government.

This previous post on the White Collar Crime Prof Blog stated as follows.  “FCPA is a cash cow. Big companies, most of whom are quite vulnerable, will do anything to avoid a civil or criminal trial. FCPA becomes a cost of doing business. The money flows into the government.”

In this article, a former Assistant Director in the SEC Division of Enforcement stated that one reason for the increase in FCPA enforcement is a “very simple reason–it’s lucrative.”

This post from the Chamber of Commerce titled “Justice’s FCPA Cash Cow” stated that “FCPA prosecutions have turned into a cash cow for the Justice Department” and the author noted as follows.  “I’m pretty sure using the justice system as an ATM wasn’t what the authors of the FCPA had in mind.”

This Business Insider article notes that “the profitability enforcement has garnered for the government” is one of the reasons for the increase in FCPA enforcement.  The article states “quite simply, [FCPA enforcement] is lucrative for the government” and it quotes David Krakoff, (BuckleySandler and a former federal prosecutor) as follows.  ” You have to think of the SEC and the DoJ as businesses.  They are looking for growth areas, too.”

As noted in this previous post, Adam Siegel (co-chair of the global white collar group at Freshfields Bruckhaus Deringer and a former federal prosecutor) stated as follows concerning increased enforcement.  “We’re in an economic climate today where I don’t think there’s a single government in the world that isn’t struggling to find resources.  This area has emerged … as a money making center, which is kind of bizarre.”

Matthew  Jacobs, a former DOJ prosecutor who now heads the San Francisco offices of  Vinson & Elkins LLP, stated as follows in a recent Law360 article (“FCPA  Enforcement Will Stay Robust Beyond Obama’s 2nd Term”): “The Department of  Justice has figured out that conducting investigations of corporations is a  lucrative business.  This is the one area of government activity that actually  brings money in rather than shoots money out. We’re talking about literally  billions of dollars that the government is able to collect … as long as there’s  a budget issue it’s not too cynical to say that … generating revenue is a factor  in bringing these cases.”

This Forbes contributor noted as follows. “FCPA enforcement has long been considered a cash cow for the Department of Justice.”

See also this prior post titled ”Is the FCPA a Government Cash Cow” as well as my comments to the New York Times in this article.

And who can forget the comments of William Jacobson, a former DOJ Assistant Chief for FCPA enforcement.  Referencing a different member of the animal kingdom, he stated in a 2010 American Lawyer article that “[t]he government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.”

Those who believe that certain aspects of FCPA enforcement represent a government grab for easy settlement money will find new support in the recent $398 million Total enforcement action (see here for the prior post).

The salient points as to the third largest settlement in FCPA history are as follows.

  • The enforcement action was against a French oil and gas company for making improper payments to an Iranian Official through use of an employee of a Swiss private bank and a British Virgin Islands company.
  • The vast majority of the alleged improper conduct took place between 1995 and 1997 (that is 16 to 18 years ago).
  • The sole U.S. jurisdictional nexus (a required legal element for an anti-bribery violation since Total is a foreign issuer) is a 1995 wire transfer of $500,000 (representing less than 1% of the alleged bribe payments at issue) from a New York based account.
  • The same exact conduct at issue is the focus of a French law enforcement investigation (i.e. Total’s “home” country).

So old is the conduct giving rise to the Total enforcement action, that the DOJ made the unusual statement in the DPA that “evidentiary challenges” were present for both parties given that “most of the underlying conduct occurred in the 1990s and early 2000s.”

A $398 million U.S. enforcement action against a French company for allegedly making improper payments to an Iranian Official with the sole U.S. jurisdictional nexus being an immaterial wire transfer through a U.S. account 18 years ago does not exactly dispel beliefs that certain aspects of FCPA enforcement represent a U.S. government cash cow.

Rather the Total enforcement action supports the legitimacy of this belief.

“Due Process” Limits on Criminal Enforcement of the FCPA Against Non-U.S. Nationals Based on Extraterritorial Conduct

Tuesday, May 14th, 2013

Today’s post is from Debevoise & Plimpton attorneys Sean Hecker, Steven Michaels, and Anna Domyancic.

*****

Earlier this year, two judges of the U.S. District Court for the Southern District of New York ruled on motions to dismiss SEC civil FCPA actions, invoking the International Shoe “minimum contacts” and “reasonableness” tests to determine whether the courts had personal jurisdiction over the foreign individual defendants in those cases.  The decisions in the Straub and Steffen cases — one (Straub, arising out of the Magyar Telekom matter) rejecting the motion and the other (Steffen, arising out of the Siemens-Argentina matter) granting the motion and ordering dismissal — mark important boundaries regarding personal jurisdiction over foreign individual FCPA civil defendants.

But does the reasoning of the recent civil enforcement decisions carry over to the criminal enforcement context?  Specifically, does “due process” mean the same thing in both criminal and civil FCPA actions brought against individual foreign defendants?

The answer is that, generally speaking, the civil and criminal “due process” minimum contacts tests overlap significantly, but not entirely.  The argument that it violates due process to prosecute FCPA criminal charges based on the lack of connection of the underlying facts to the United States has rarely, if ever, been raised, let alone litigated to conclusion.  But as the DOJ pursues more aggressive theories against foreign nationals who are not subject to the nationality principle of jurisdiction, and where the principal injured parties are foreign governments or marketplace competitors who may have no connection to the United States, the issue could gain traction.  It is thus worth considering how precedent in the criminal law “minimum contacts” due process arena compares to International Shoe’s test, including how it might apply in the FCPA context.

I.          Due Process “Nexus” Requirements in the U.S. Criminal Law Context

It is generally understood that, despite the limitations of the due process clause of the Fifth Amendment, U.S. federal criminal statutes may be applied to the extraterritorial conduct of foreign nationals when the law’s application would be neither “arbitrary [n]or fundamentally unfair.”  United States v. Davis, 905 F.2d 245, 249 (9th Cir. 1990).

Most of the courts of appeals to have ruled on the issue have held that due process requires a “nexus” between the United States and the defendant.  For non-U.S. citizens acting outside the United States, a “nexus” may exist when the aim of the defendant’s conduct is “to cause harm inside the United States or to U.S. citizens or interests,” including those outside the United States  See United States v. Al Kassar, 660 F.3d 108, 118 (2d Cir. 2011).  In Al Kassar, the defendants were foreign nationals, charged with conspiring to sell arms to a foreign terrorist organization knowing that the weapons would be used to kill U.S. citizens and destroy U.S. property, among other crimes.  The court determined that the aim of the defendants’ conspiracy established a “nexus” with the United States even though the defendants acted entirely outside the territory of the United States.

Cases like Al-Kassar illustrate how courts look to the protective principle in international law to determine whether a U.S. nexus exists.  The protective principle allows a nation to prosecute conduct occurring outside its territory if the conduct threatens the state’s security or similar interests.  See United States v. Perlaza, 439 F.3d 1149, 1161-62 (9th Cir. 2006).  Crimes like those in Al Kassar, as well as drug-smuggling, may support the exercise of jurisdiction under the protective principle, with some courts going so far as to hold no factual connection to the United States is required in drug cases if the acts at issue occur on “stateless” vessels on the high seas or those of nations that have consented to enforcement of U.S. law in their territories.  See United States v. Cardales, 168 F.3d 548, 553 (1st Cir. 1999); United States v. Martinez-Hidalgo, 993 F.2d 1052, 1056 n.6 (3d Cir. 1993).  Compare United States v. Perlaza, 439 F.3d 1149, 1169 (9th Cir. 2006) (requiring some U.S. connection); United States v. Angulo-Hernandez, 576 F.3d 59, 60 (1st Cir. 2009) (Torruella, J.) (dissenting from denial of en banc review) (noting conflicts among circuits as to the approach to narcotics cases).

In a decision in a non-FCPA foreign bribery context, the U.S. District Court for the District of Columbia in 2011 rejected a motion to dismiss criminal proceedings brought against an Australian national who, while employed as an advisor to the Afghan government, allegedly solicited $190,000 in bribes to be paid from U.S. funds supplied to a U.S. Agency for International Development (“USAID”) contractor.  Charged with anti-kickback violations and federal program bribery under 41 U.S.C. § 53 and 18 U.S.C. § 666(a)(1)(B), the defendant moved to dismiss on due process grounds, based on the lack of any U.S. nexus.  Rejecting the motion, the court invoked the protective principle as enabling the government to charge him for “conduct outside the nation’s territory [that] threatens the nation’s security or could potentially interfere with the operation of its governmental functions.”  United States v. Campbell, 798 F. Supp. 2d 293, 306-08 (D.D.C. 2011) (internal citations omitted).  The court held:  “Not only might Mr. Campbell’s actions hold the United States up to opprobrium in Afghanistan, every instance of such connivance robs USAID money from its intended purpose, hinders the United States’ substantial efforts in Afghanistan, and also robs USAID of support for its efforts from the U.S. taxpayer.”

II.        Comparison of Civil and Criminal Due Process Standards

The nexus requirement in criminal cases is in many respects similar to the “minimum contacts” test for personal jurisdiction in civil ones.  The Straub court found that the SEC’s complaint alleged sufficient minimum contacts with the United States because the defendants’ alleged concealment of bribes, along with the company’s falsified SEC filings, were sufficient to demonstrate that the defendants’ intent was to cause injury to U.S. interests in the transparent operations of SEC-regulated companies.  SEC v. Straub, 2013 WL 466600, at *7 (S.D.N.Y. Feb. 8, 2013).  The Steffen court found that the defendant did not have “minimum contacts” with the United States when he did not authorize the bribes at issue or falsify any SEC filings.  SEC v. Steffen, 2013 WL 603135, at *5 (S.D.N.Y. Feb. 19, 2013).  Considering that the “nexus” element of due process may be met in the criminal context if the defendant intends to cause injury to the United States or its interests, it is possible that acts similar to those the Straub defendants undertook could be found sufficient to confer jurisdiction in a due process sense in criminal matters involving foreign nationals acting abroad.  But the lack of clear precedent identifying which “U.S. interests” count for criminal law due process purposes in an anti-bribery context in which U.S. funds, property, or lives are not at issue raises possibly significant questions whether criminal jurisdiction might be more circumscribed.

At the same time, because the “reasonableness” due process test in civil matters focuses on several factors not strictly captured by the criminal law test, it is also possible that some defendants facing civil FCPA charges might have valid due process defenses where they might not if they were charged criminally for the same conduct.  In Steffen, the court found that the reasonableness test was not met due to “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” after certain corporate settlements occurred, including in other jurisdictions.  How and whether any of these points would matter if they were raised as part of a due process challenge in the pending criminal case where Mr. Steffen has been charged remains to be seen.  Given that Mr. Steffen has not voluntarily appeared in the United States, is currently not subject to extradition proceedings, and cannot be tried under Federal Rule of Criminal Procedure 43 until he does appear, the issue may never be litigated in his case and may be rarely ripe in the FCPA context.

III.       Conclusion

The recent due process rulings in the civil FCPA matters in Straub and Steffen rightly raise the question of the jurisdictional limits that apply as a matter of due process in the criminal FCPA arena.  These constitutional issues, apart from the threshold matter of how and whether the FCPA was intended by Congress to apply in an extraterritorial context, an issue on which the Supreme Court’s recent decision in Kiobel v. Royal Dutch Petroleum Co., No. 10-1491 (U.S. Apr. 13, 2013) puts a spotlight, may become of increasing importance as the DOJ pursues aggressive jurisdictional theories against individual foreign nationals.  A lack of clear precedent will undoubtedly put pressure on litigants to settle and on the courts to resolve cases on non-constitutional grounds, but may ultimately lead to judicial pronouncements on the constitutional limits of the FCPA.

The Impact Of Kiobel On FCPA Enforcement

Thursday, April 18th, 2013

Yesterday, the Supreme Court released its long-awaited opinion in Kiobel v. Royal Dutch Shell Petroleum.

The precise issue before the court was “whether and under what circumstances courts may recognize a cause of action under the Alien Tort Statute (“ATS”), for violations of the law of nations occurring within the territory of a sovereign other than the United States.”

The opinion, authored by Chief Justice Roberts, holds that “the presumption against exterritoriality applies to claims under the ATS, and that nothing in the statute rebuts that presumption.”

Accordingly, the court in a unanimous opinion (several justices authored concurring opinions) affirmed the Second Circuit’s dismissal of a lawsuit brought by a group of Nigerian nationals residing in the United State who filed suit in federal court against certain Dutch, British, and Nigerian corporations, alleging that the corporations aided and abetted the Nigerian government in committing violations of the law of nations in Nigeria.

This post analyzes the impact of Kiobel on FCPA enforcement.

While the ATS and Foreign Corrupt Practices Act are separated by 188 years in terms of enactment, the statutes have often being viewed by some as siblings, or at least distant cousins within the same family.

However, it is important to grasp that the ATS and FCPA are very different statutes in very material ways.

The jurisdictional issue the Supreme Court addressed in Kiobel - whether the canon of statutory interpretation known as the presumption against extraterritorial application - was necessitated because the ATS was silent on the jurisdiction issue.  Indeed, Chief Justice Roberts stated that the canon “provides that when a statute gives no clear indication of an extraterritorial application it has none”  (emphasis added).

In contrast, the FCPA is explicit as to its jurisdictional scope and provides as follows depending on the category of person (legal or natural) subject to the law’s anti-bribery provisions.

As to U.S. persons (legal or natural) the FCPA provides for two types of jurisdictional.  The original statutory standard was (and is still part of the law) “use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance” of a bribery scheme.  However, in 1998 Congress amended the FCPA to also provide for so-called nationality jurisdiction as to U.S. persons.  15 USC 78dd-1(g) and 78dd-2(i) specifically state, in pertinent part, as follows:  “It shall also be unlawful for [any issuer organized under the laws of the United States or for any United States person] to corruptly do any act outside the United States in furtherance [of a bribery scheme] irrespective of whether such [U.S. person] makes uses of the mails or any means or instrumentality of interstate commerce in furtherance [of the bribery scheme].  In short, as to U.S. persons, in 1998 Congress explicitly amended the FCPA to provide for extraterritorial jurisdiction thus negating the need for reference to the canon of statutory interpretation at issue in Kiobel.

As to foreign issuers subject to 78dd-1 of the FCPA (i.e. foreign companies with shares registered on U.S. exchanges or otherwise required to file periodic reports with the SEC), the 1998 amendment found in 78dd-1(g) did not apply to such companies.  It can thus be inferred that Congress did not intend for the extraterritorial provisions of the 1998 amendments to apply to such entities.  Here again, the need for the canon of statutory interpretation at issue in Kiobel is negated.  For such foreign issuers, the FCPA explicitly provides only territorial jurisdiction as stated above.

As to persons other than U.S. persons (legal or natural) or foreign issuers, the FCPA was also amended in 1998 to create an entire new category of “person” subject to the FCPA’s anti-bribery provisions.  See 78dd-3.  This category applies to non-U.S. actors and non-foreign issuers such as foreign private companies and foreign nationals.   This FCPA prong has explicit jurisdictional provisions.  78dd-3(a) states, in pertinent part, that it shall be unlawful for “any person” other than an issuer or domestic concern (that is a U.S. “person”) ”while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance [of a bribery scheme."  Here again, because the FCPA is explicit, the need for the canon of statutory interpretation at issue in Kiobel is negated.

Just because the canon of statutory interpretation at issue in Kiobel is not directly applicable to the FCPA, it does not follow that Kiobel will not have an impact on FCPA enforcement.  To the contrary, the logic and rationale of many justices in Kiobel has direct bearing on certain aspects of FCPA enforcement, and indeed can be viewed as Supreme Court disapproval of certain aspects of FCPA enforcement.

Despite the above jurisdictional provisions clearly set forth in the FCPA, in recent years the DOJ has advanced broad jurisdictional theories in enforcement actions against foreign entities and foreign nationals.

For instance in 2006, the DOJ brought its first criminal FCPA enforcement action a foreign company, Norway-based Statoil (see here for the information), for engaging in a bribery scheme in Iran.  The sole jurisdictional allegation the DOJ hung its hat on was the notion that Statoil received an invoice from a U.K. consulting company instructing that money "be routed through a U.S. bank account in New York to a bank account in Switzerland" which the company paid.

In announcing this action, which resulted in $21 million flowing into the U.S. Treasury, the DOJ stated (here) as follows.

"Although Statoil is a foreign issuer, the FCPA applies to foreign and domestic public companies alike, where the companies stock trades on American exchanges.  This prosecution demonstrates the [DOJ's] commitment vigorously to enforce the FCPA against all international businesses whose conduct falls within its scope.”

Many similar DOJ enforcement actions against foreign companies have been brought since.  In fact, the majority of cases in the FCPA’s “Top Ten” in terms of fine and penalty amounts are against foreign companies including the Bonny Island, Nigeria enforcement actions in which the DOJ (and SEC) alleged that Dutch, French, and Japanese companies bribed Nigerian foreign officials.  The jurisdictional allegations in these cases, which resulted in approximately $1.1 billion flowing into the U.S. Treasury, all hinged on wire transfers through New York based accounts and faxes and e-mails to the U.S.  FCPA enforcement against foreign companies has been so prominent as to gain the attention of main-stream media such as the New York Times in this story.

In short, while the above FCPA enforcement actions against foreign actors (and several other examples could also be cited) did not rely on extraterritorial jurisdiction – because indeed there is none under the FCPA as to foreign actors – they did rely on what I’ve called de facto extraterritorial jurisdiction given the scant connection the bribery schemes had to the U.S.

It is here where the logic and rationale of many justices in Kiobel has direct bearing on this aspect of FCPA enforcement, and indeed can be viewed as Supreme Court disapproval of this aspect of FCPA enforcement.

For starters, Chief Justice Roberts recognized the delicate foreign policy consequences of the issue before the court – an issue that is present when the U.S. government alleges that foreign companies are bribing foreign officials on foreign lands.

It was also refreshing to see Chief Justice Roberts reference the “historical background against which the ATS was enacted” in giving meaning to the statute and how these historical events provided no support to the petitioner’s position.  I have long argued (see here for “The Facade of FCPA Enforcement“) that certain aspects of FCPA enforcement are inconsistent with Congressional intent – a notion that becomes all the more apparent when reading “The Story of the FCPA” – the most extensive piece ever written on the FCPA’s history that I published this past December upon the FCPA’s 35th anniversary.

The concurring opinion of Justice Alito, joined by Justice Thomas, is also instructive in that it states when the ATS “claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritoriality.”   Applying this to the FCPA context, can it truly be said that the above FCPA enforcement actions against foreign actors  touched and concerned the territory of the U.S. with “sufficient force”?

Even the concurring opinion of Justice Breyer, joined by Justices Ginsburg, Sotomayor and Kagan, is instructive.  This opinion did not invoke the presumption against exterritoriality in concluding that the claims should be dismissed, but rather found that jurisdiction was lacking for another reason.  Namely that the foreign corporations, while having shares traded on U.S. exchanges, had an insufficient presence in the U.S. such that it would be “farfetched to believe, based solely upon the defendants’ minimal and indirect American presence, that this legal action helps to vindicate a distinct American interest.”  The parallels to FCPA enforcement actions against foreign actors for alleging bribing foreign officials in foreign lands are obvious.

If FCPA enforcement actions against foreign actors are based on aggressive and dubious territorial jurisdictional theories – why don’t the companies aggressively litigate?

This highlights the second key difference between the ATS and the FCPA.  The only reason the Kiobel case made it to the Supreme Court is because the plaintiffs in ATS cases have little leverage against the corporate defendants.  ATS actions are civil actions brought by private plaintiffs and are thus actually litigated.  I know, it seems a bit old-fashioned doesn’t it.

In contrast, certain courts have held (although by no means is the argument that the FCPA ought to have a private right of action a fait accompli) that the FCPA does not have a private right.  The FCPA is thus only enforced by the DOJ (or the SEC as to issuers).  These government enforcement agencies, unlike ATS plaintiffs, have big and sharp sticks that corporate defendants (and individuals as well) are mindful of in deciding how to proceed when subject to FCPA scrutiny.

Indeed, as explained in this prior post, when the above referenced Japanese company charged for making bribe payments to Nigerian officials raised jurisdictional issues, the DOJ stated that the company was not cooperating.  Specifically the resolution document states as follows.  “After initially declining to cooperate with the Department based on jurisdictional arguments, [the company] began to cooperate.”  A company doesn’t cooperate with the DOJ in an FCPA enforcement, the chances are higher that the company will be indicted as opposed to being offered one of the resolution vehicles discussed below.

In short, to challenge a “plaintiff” in an FCPA enforcement action first requires a company to be criminally indicted by the DOJ or in the SEC context to be charged by the company’s primary government regulator.  The impact on the company’s market capitalization upon indictment or civil charging is likely to be much greater than the FCPA fines or penalties the DOJ and/or SEC are seeking.

Indeed, in the FCPA’s 35 year history only two companies have put the DOJ to its burden of proof at trial and both companies ultimately prevailed.  The first instance, involving an issuer occurred in 1991, and the second instance, involving a private company, occurred in 2011.

To make matters worse, per DOJ policy, all FCPA enforcement shall originate from Main Justice in Washington, D.C.  This means from a discretion and supervision standpoint that a very small group of individuals are in the charge of an entire area of law.  Contrast this with DOJ insider trading cases, financial fraud cases, etc. that can originate from any U.S. Attorneys office in the country

To make matters even worse, in 2004 the DOJ introduced non-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs) to the FCPA context.  These agreements have the practical effect of insulating DOJ FCPA enforcement theories in corporate enforcement actions from any judicial scrutiny.

These dynamics of FCPA enforcement are simply not present in ATS cases and for this very simple reason the ATS, unlike the FCPA, has been the subject of much litigation over the past decade.  Imagine if the ATS was only enforced by the government, consolidated entirely in one office in Washington D.C., and that the government used NPAs and DPAs to resolve the cases.

The Supreme Court would have never heard the Kiobel case, nor would the Supreme Court have heard the Sosa ATS case in 2004, nor would various appellate courts have heard ATS cases over the past decade or so.

Returning to the original question – will Kiobel have an impact on FCPA enforcement?  The logic and rationale of many justices in Kiobel would sure seem to have direct bearing on certain aspects of FCPA enforcement, and indeed can be viewed as Supreme Court disapproval of certain aspects of FCPA enforcement.

However, in order for judicial logic and rationale to be triggered, the judiciary needs to play a role, and in the FCPA context the judiciary rarely gets to play a role because of government enforcement policies.

Puzzled By Straub And Steffen

Wednesday, March 13th, 2013

Prior posts here and here summarized the recent judicial decisions in SEC v. Straub and SEC v. Steffen.

Today’s post is from Russ Ryan (Partner, King & Spalding).  Prior to joining King & Spalding, Ryan spent ten years in the SEC’s Division of Enforcement, including his last three years as Assistant Director of the Division.  Ryan, along with his colleagues at King & Spalding (Gary Grindler – former DOJ Acting Deputy Attorney General - and Ehren Halse-Stumberg), recently published this client alert on the cases.  Ryan contributes this guest post admitting to some confusion regarding the common thread between Straub and Steffen on the issue of personal jurisdiction.

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Am I the only one puzzled that the courts in both Straub and Steffen considered largely dispositive whether or not the respective defendants participated in the deception of U.S. shareholders by signing false accounting certifications or falsifying financial statements?

The irony of the courts’ focus on misleading financial statements is that in neither case – nor in most other Foreign Corrupt Practices Act cases, for that matter – did the SEC even allege that the relevant company’s financial statements were materially misstated.  Likewise, nobody was charged with securities fraud under Securities Exchange Act Section 10(b) and Rule 10b-5, presumably because none of the bribes or falsified records were material to the companies involved, which is typical in an FCPA case.  Indeed, neither Magyar nor Siemens was charged even with violating the periodic reporting requirements of Exchange Act section 13(a) and the rules thereunder for Form 10-K and 10-Q filings, which don’t require proof of scienter, but do require proof of materiality.

In short, in neither case did the SEC ever allege that financial statements were materially misstated, much less that U.S. shareholders were misled by them.  Of course, mere acknowledgment of this point invites the question of to what extent the fight against foreign bribery has to do with the SEC’s core mission of protecting U.S. investors.  Indeed, as Professor Koehler’s article “The Story of the Foreign Corrupt Practices Act” highlights, the SEC did not want any role in enforcing what would become the FCPA’s anti-bribery provisions.

Let’s face it:  Most foreign bribery by employees of U.S. issuers and domestic concerns, although perhaps reprehensible, does not materially mislead or harm the shareholders of these companies, nor is it intended to do so.  To the contrary, even if misguided and short-sighted, most foreign bribery is intended by the bribing employees to enrich their companies, and by extension their shareholders, by boosting real sales and increasing actual revenue.  The primary victims are the company’s competitors and the foreign agency or department whose official was corrupted by the company’s bribe – not shareholders.

It’s true, of course, that if and when a company is caught engaging in bribery, the resulting publicity, investigations, and penalties can hurt the company and its shareholders.  But this harm is no different from that which flows from the exposure of any kind of corporate criminal misconduct, little of which falls within the SEC’s jurisdiction.

It’s also true that most foreign bribery involves some evasion of a company’s internal accounting controls and/or some degree of falsification of a company’s books and records, conduct well within the SEC’s core area of interest whenever an issuer is involved.  But these transgressions typically occur entirely or substantially at a remote subsidiary of the issuer and, even in the aggregate, rarely come close to being material to the issuer itself.

The SEC’s theory is usually that the remote subsidiary’s books and records “roll up” into the issuer’s, and thus are part of the issuer’s own books and records, so they are fair game.  As this prior FCPA Professor post highlighted, the SEC has also argued that payments that violate the FCPA are qualitatively material even if quantitatively immaterial.  For present purposes we can stipulate to the reasonableness of these positions.

But it brings us back to the issue of personal jurisdiction over foreign employees of issuers who lack any meaningful connection with the United States other than working for a company that happens to have SEC-registered securities and SEC filing obligations.  Whether the foreign employee participates in a bribe or a falsification of books and records outside the United States, it is hard to see how that conduct could ever be viewed as a deliberate effort to mislead U.S. shareholders, much less suffice to subject the employee to personal jurisdiction in a law enforcement case being prosecuted in a U.S. court.  And why courts would consider this the lynchpin of their personal jurisdiction analysis is likewise far from clear.