Archive for the ‘Materiality’ Category

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.

Friday Roundup

Friday, March 1st, 2013

Hits and misses, does it really need to cost this much, the Wal-Mart effect, survey says, Senate hearing quotable, while they’re at it, checking in on Hollywood and Goldman too, spot on, and some refreshing words.  It’s all here in the Friday roundup.

Hits and Misses

I read pretty much everything churned out by FCPA Inc., including the flood of recent client alerts concerning the Straub and Steffen decisions.  (See here and here for previous posts summarizing the decisions).  Many of these alerts are good and informative (for instance, see here from Debevoise & Plimpton).  However, some of these alerts are just plain wrong.

The headline of one alert was “District Court Decision Limits the Extraterritorial Reach of the FCPA.”  The headline of another alert was “Court Sets Limits on Extraterritorial FCPA Reach; Dismisses Case Against Foreign Siemens Executive.”

Neither the Straub nor Steffen decisions concerned extraterritorial application of the FCPA.  In fact, there is no extraterritorial reach of the FCPA as to foreign actors.  Yes, the FCPA was amended in 1998 to provide for alternative “nationality” jurisdiction (i.e. extraterritorial jurisdiction) over U.S. persons (both legal and natural), however, 78dd-1(g) and 78dd-2(i) are strictly limited to U.S. persons.

Rather, the Straub decision concerned the scope of territorial jurisdiction under 78dd-1(a), specifically the meaning of “use of the mails or any means or instrumentality of interstate commerce …”.

The Steffen decision did not even reach this issue as the judge found the initial threshold issue of personal jurisdiction lacking.

Wal-Mart’s FCPA Scrutiny Expenses Mount

During the media feeding frenzy after the New York Times April 2012 Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV.  At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.

Spitzer of course was right.

Wal-Mart recently stated (here) that it has incurred “$157 million of professional fees and expenses related to the ongoing” FCPA matter during its last fiscal year and that it expect to incur an additional ”$40 to $45 million for the first quarter of fiscal 2014.”  During Wal-Mart’s recent earnings conference call, a company executive stated as follows.  “On FCPA, we continue  to work closely with anticorruption compliance experts to review and to assess  our programs and help us implement concrete steps for each particular market. In  the various markets, these experts have spent tens of thousands of hours on  anti-corruption support and training. We remain committed to follow all laws and  regulations in the markets where we operate.”

The $157 million Wal-Mart spent in the last FY equates to approximately $604,000 in professional fees and expenses per working day.

I observed in this March 2011 articles as follows.

“This new era of enforcement has resulted in wasteful overcompliance, companies viewing every foreign business partner with irrational suspicion, and companies deploying teams of lawyers and specialists around the world spending millions to uncover every potential questionable or unethical $100 corporate payment.  This new era of enforcement has proven lucrative to many segments of the legal, accounting, and compliance industries and the status quo would, from their perspective, seem desirable.”

The question again ought to be asked – does it really need to cost this much or has FCPA scrutiny turned into a boondoggle for many involved?  For more on this issue, see my article “Big, Bold, and Bizarre: The Foreign Corrupt Practices Act Enters a New Era.”

While minor compared to Wal-Mart’s FCPA professional fees and expenses, Beam Inc. recently disclosed here that in 2012 the company spent approximately $4.2 million for “legal, forensic accounting, and other fees related to our internal investigation into Foreign Corrupt Practices Act compliance in our India operations.”

Wal-Mart Effect

Switching gears, but sticking with Wal-Mart related issues, this May 2012 post highlighted a potential “Wal-Mart effect.”  In short, the point was that Wal-Mart is clearly not the only company subject to the FCPA that needs licenses, permits and the like when doing business in Mexico.  I predicted that Wal-Mart’s potential FCPA exposure would cause sleepless nights for many company executives doing business in Mexico and the general region.  The post then discussed statements made during a Kimco Realty Corporation earnings call in May 2012 concerning its properties in Mexico.

Earlier this week, Kimco Realty stated in an SEC filing as follows.

“On January 28, 2013, the Company received a subpoena from the Enforcement Division of the SEC in connection with an investigation, In the Matter of Wal-Mart Stores, Inc. (FW-3678), that the SEC Staff is currently conducting with respect to possible violations of the Foreign Corrupt Practices Act. The Company is responding to the subpoena and intends to cooperate fully with the SEC in this matter. The Company has also been notified that the U.S. Department of Justice (“DOJ”) is conducting a parallel investigation, and the Company expects that it will cooperate with the DOJ investigation. At this point, we are unable to predict the duration, scope or result of the SEC or DOJ investigation.”

Survey Says

The annual Litigation Trends and Survey report by Fulbright & Jaworski is always a good read.  This year’s report (see here to download) surveyed 392 “senior corporate counsel” (275 in the U.S., 100 in the U.K. and 17 in other jurisdictions) on a wide-range of litigation and related matters.  The following were FCPA or related survey results.

“Companies that have retained outside counsel to assist with a corruption or bribery investigation in the past 12 months (including, but not limited to, FCPA in U.S. and equivalent in U.K.”

  • 9% of U.S. respondents answered “yes”; 18% of U.K. respondents answered “yes.”  As noted, “U.S. figures [2010-2012] have remained relatively stable.”

“Companies that have engaged in due diligence for bribery or corruption (including FCPA matters) relating to a merger, acquisition or other business transactions with a foreign country in the past 12 months.”

  • 18% of U.S. respondents answered “yes”; 26% of U.K. respondents answered “yes.”  As noted, “more companies this year have engaged outside counsel in due diligence for corruption or bribery investigations due to business transactions with entities based in a foreign country.”

As to the due diligence figures, in the abstract these figures do not mean much, unless one knows how many responding companies actually engaged in foreign acquisitions or other business combinations.

The last survey result in the report perhaps speaks best to the over-hyped nature of the U.K. Bribery Act.

“Has your company changed the way it operates due to the emergence of anti-bribery legislation outside the U.S., such as U.K. Bribery Act 2010?”

  • 78% of U.S. respondents answered “no” and 63% of U.K. respondents answered “no.”

Senate Hearing Quotable

Senator Elizabeth Warren (D-MA) had some quotable moments (here) during a recent Senate Banking hearing.  The hearing concerned financial regulation, not the FCPA.  Nevertheless, some of the issues have some overlap to FCPA enforcement - including how settlement policies in regulatory enforcement actions create conditions in which there is “not much incentive to follow the law” and how “too big to fail” perhaps means “too big for trial.”

Disclosure Issues

This recent Wall Street Journal CFO Journal post notes as follows.

“Securities and Exchange Commissioner Troy Paredes called for a complete review of the information companies disclose to investors, amid concerns that investors suffer from “disclosure overload” that could hamper their ability to gauge the importance of the data.  “What we need is a top-to-bottom review of our disclosure regime,” Mr. Paredes said at the Practising Law Institute’s annual “SEC Speaks” conference in Washington, D.C. on Friday.”

While they’re at it, the SEC should take a look at its absurd position that all payments in violation of the FCPA, no matter how small the payment and no matter how large the company, are “qualitatively material.”  For instance, as noted in this previous post concerning comments made by enforcement officials at a conference I chaired, an SEC official suggested that the concept of materiality itself has two “sub-concepts”: (i) quantitative materiality (something that impacts a company’s financial statements) and (ii) qualitative materiality.  While conceding that very few improper payments are “quantitatively material” and while recognizing that “qualitative materiality” is a “complicated gray area,” the SEC officials nevertheless said that all bribes can be considered qualitatively material because they may “automatically trigger a books and records violation.”  For formal SEC guidance on this issue, see here.

Checking In

Hollywood Industry Sweep

From the New York Times regarding the on-going scrutiny of Hollywood movie studios in China.

“Last March, word reached several studios of a confidential inquiry by the Securities and Exchange Commissionand the Justice Department into possible violations of the Foreign Corrupt Practices Act by people or companies involved in the China film trade. Since then, executives and their advisers have been waiting for some public sign of the scope or focus of the government’s interest.  So far, there has been none. But official silence has not kept the investigation from casting a chill over dealings between Hollywood and China.”

Goldman

From the Wall Street Journal regarding the on-going scrutiny of Goldman’s dealings with Libya’s sovereign wealth fund.

“Libya’s sovereign-wealth fund said it is cooperating with the U.S. Securities and Exchange Commission in its ongoing investigation into Goldman Sachs Group Inc. over the securities firm’s dealings with the fund when Col. Moammar Gadhafi was in power.  [...]  People close to the Libyan investment fund said officials have authorized some former fund executives to give testimony to the SEC. The officials also agreed to provide documents and other data to U.S. regulators about the fund’s ties to Goldman, these people said.”

Spot On

Two recent Q&A’s on Law360 caught my eye.  The question was “what is an important issue or case relevant to your practice area and why.”

Neil Eggleston (Kirkland & Ellis) stated as follows.

“We are beginning to see the development of case law in the FCPA area, which I believe is good for the process. Most of these cases have been settled. When that occurs, defendants have little incentive to refuse to agree to novel Department of Justice theories of prosecution or jurisdiction, so long as the penalty is acceptable. The department then cites its prior settlement as precedent when settling later ones. But no court approved the earlier settlement, and the prior settlement should have no precedential value in favor of the DOJ in later settlements. As the DOJ increases its prosecution of individuals, we will see many more trials, which will give rise to courts, not the DOJ, interpreting the statute.”

For more on these issues, see my article “The Facade of FCPA Enforcement” and this previous guest post on ”prosecutorial common law.”

Richard Marmaro (Skadden) answered the same question as follows.

“An issue of importance in the white collar area is the issue of prosecutorial misconduct, and appropriate remedies for prosecutors who intentionally conceal evidence, intimidate witnesses, or otherwise compromise or impact a defendant’s right to a fair trial. I have seen firsthand in several of my cases shocking misconduct, which has gone undisciplined by the U.S. Department of Justice. I have been fortunate enough to expose this misconduct, and have had cases dismissed as a result. Indeed, over the last decade, there have been several dismissals nationwide at trial or reversals on appeal based on willful misconduct by government lawyers. Despite these judicial findings, however, the Justice Department’s record of disciplining misbehaving prosecutors is shockingly inadequate. I don’t know of any prosecutor that has been terminated based on a judicial finding of intentional misconduct. In addition, I believe that only two prosecutors have received any discipline at all (both in the Stevens case). In my view, the failure to sanction prosecutors who have been found by judges to have committed misconduct sends the wrong signal to defendants, the public and the vast majority of prosecutors who do their jobs honestly every day.”

For more, see this previous post titled ”Should There Be A Difference?”

Refreshing Words

Every now and then it is refreshing to read some common sense words about FCPA compliance and risk assessment.  Such as this recent post from the Trace blog.

“Remember, perfection is neither possible nor necessary.  When devising a compliance plan, it’s important to remind oneself of the big picture.  A company need not break the bank to have a compliance program that follows accepted best practices.  As discussed below, there are various ways that good compliance can be affordable.  And companies are not responsible for developing full-proof compliance programs; they only need to develop programs proportionate to the risk they face, with the understanding that no program will completely eliminate all risk from the equation.  Unlike in other areas of business, when it comes to compliance, being in the middle of the pack is okay.”

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A good weekend to all.

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.