Archive for the ‘Siemens Argentina Enforcement Action’ Category

Former SEC Enforcement Official Throws The Red Challenge Flag

Monday, February 10th, 2014

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.

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Sometimes you see something in a Foreign Corrupt Practices Act case that’s so inexplicable you wish someone would throw the red challenge flag and have the play reviewed under the hood or up in the booth.  Unfortunately, in the largely-overlooked wind-down phase of the SEC’s FCPA case against several former Siemens executives, the last of the defendants defaulted, so nobody was around to throw the challenge flag – and as a result the SEC seems to have gotten away with a doozy of a blown call.

Recall that this is the same 7-defendant case in which only one – Herbert Steffen – actively contested the SEC’s charges.  Of the other six defendants, the SEC voluntarily dismissed one (Carlos Sergi), three others settled without admitting or denying any wrongdoing (Bernd Regendantz, Andres Truppel, and Uriel Sharef), and the last two defaulted (Ulrich Bock and Stephan Signer).  Steffen, a German citizen and the only defendant who actively contested the charges, was dismissed from the case in February 2013 in a widely-noted decision that found a lack of personal jurisdiction over him.  (See here for my prior guest post).  None of the other defendants in the case were U.S. citizens either, and few if any appear to have had any significant contacts with the United States; the SEC alleged the familiar sporadic touching of U.S. bank accounts, along with a single meeting in Miami during the decade-long alleged bribery scheme, but proffered little else to support personal jurisdiction over any of these foreign nationals.

You might think the court’s dismissal of the only defendant who actively contested personal jurisdiction might have led the SEC to tread carefully when seeking penalties and other sanctions against the defaulting defendants.  Think again.

To the contrary, the SEC took an astonishingly aggressive approach to sanctions against the defaulting defendants, and it got everything it asked for.  The overall case raises legal and policy issues too numerous to address here, but two warrant especially close scrutiny.  First, the SEC convinced the court to impose more than a half-million dollars in civil penalties against each of the two defaulting defendants, despite alleging only four alleged bribes and despite the FCPA’s statutory limit of $10,000 per violation (increased for the relevant period to $11,000 through the SEC’s periodic inflation adjustment as authorized by statute).

How did the SEC get away with a penalty demand more than ten times this apparent $44,000 statutory limit for each defendant?  First, by saying that each of the four alleged bribes should be triple-counted as three separate securities law violations – once as a bribe, again as a books-and-records violation, and yet again as an internal-controls violation – thus artificially multiplying four violations to create twelve.  And as the SEC wonks among us well know, books-and-records and internal-controls violations come with their own separate statutory penalty regime.  But even here the SEC was super aggressive, taking the position that these classically non-fraud violations involved “reckless disregard” of a regulatory requirement, thus allowing the SEC to demand the maximum $60,000  per violation in “second-tier” penalties rather than the $6,000 per violation in the “first-tier” penalties ordinarily associated with non-fraud violations.  (The statutory anomaly that permits dramatically higher civil penalties for books-and-records and internal-controls violations than for bribery violations is another topic beyond the scope of this guest post.)

By triple counting each bribe in this way, the SEC demanded $11,000 + $60,000 + $60,000 ($131,000 total) in penalties against each defaulting defendant, and then multiplied that amount yet again for each of the four alleged bribes in question, arriving at a staggering total penalty of $524,000 per defendant.  This penalty for each of the defaulting defendants was much higher than the total penalties paid by all three of the settling defendants combined (which were only $40,000, $80,000, and $275,000 respectively).

But that’s not even the most bizarre aspect of the SEC’s penalty demand.  Of the four bribes alleged by the SEC against the defaulting defendants, three unquestionably occurred – according to the SEC’s own complaint and penalty motion papers – more than five years before the lawsuit was filed in December 2011, thus raising the obvious question of how the SEC could lawfully request, and how the court could lawfully impose, any penalty at all for those bribes.  By now everyone knows that SEC penalty demands are subject to the 5-year statute of limitations codified at 28 U.S.C. § 2462.  Indeed, just last year the Supreme Court unanimously ruled against the SEC in a case that involved the same statute (Gabelli v. SEC), wherein the SEC conceded the statute’s applicability to penalty demands.  (See my prior guest posts here and here).

So how did the SEC overcome this seemingly insurmountable statute of limitations obstacle?  Essentially by ignoring the issue entirely.  Of course, it’s possible the SEC got a tolling agreement from these two foreign nationals who later decided to ignore the ensuing lawsuit altogether, but that seems improbable. In any event, neither the SEC’s complaint nor its penalty motion mentioned any tolling agreement.  Of the $524,000 in penalties demanded and imposed against each of the defaulting defendants, nearly $400,000 seems obviously barred by the statute of limitations, yet neither the SEC nor the court appears to have acknowledged this issue at all.

One final oddity in this case warrants a separate challenge flag.  On top of the $524,000 in penalties imposed against defaulting defendant Bock, the SEC was awarded another $316,000 against him in what the agency euphemistically styled as “disgorgement” of ill-gotten profits from the bribery scheme.  But as described by the SEC, this money bore no resemblance to profits derived from any of the alleged bribes.  The SEC described it as hush money allegedly paid to Bock (and his wife) to buy his silence and false testimony in two arbitration proceedings that occurred long after he had retired from the company and that, according to the SEC, helped prevent the bribery scheme from being uncovered.

In my recent article, The Equity Façade of SEC Disgorgement, I wrote at length about how disgorgement in SEC cases, as a general matter, is often stretched beyond its proper limits.  The default judgment against Bock reflects many of the concerns I raised in that article, but it also reflects an even more fundamental disconnect under settled disgorgement law.  Characterizing the kind of hush money allegedly paid to Bock as ill-gotten profits caused by his alleged securities law violations seems a stretch to say the least.  The SEC’s theory was that the money was paid to induce and reward Bock’s false testimony in two arbitration proceedings – not as his share of any alleged bribes, not as extra compensation he was paid for his securities law violations, and not as his share of profits earned by Siemens as a result of the bribes.  Here too, neither the SEC nor the court addressed the obvious causation issue, and the SEC got the full amount it demanded.

One can only hope that neither the SEC nor the courts will view these default judgments as models for similar treatment of individuals in future FCPA cases.  This case illustrates the oft-lamented perils presented by the multitude of SEC cases that are decided each year without any effective advocacy on behalf of the defendant – typically due to the defendant’s default, pro se status, lack of adequate financial resources, or counsel possessing little or no expertise in securities law.  The perils run not only to the hapless defendants who invariably get steamrolled in such cases, but sometimes also to the credibility and ultimate enforceability of the resulting judgments.

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See here for original source documents relevant to the above issues.

Friday Roundup

Friday, February 7th, 2014

Siemens delists, former Siemens execs fail to show up, quotable, to FCPA Inc. and for the reading stack.  It’s all here in the Friday roundup.

Siemens to Delist ADRs

The record-setting 2008 FCPA enforcement action against Siemens A.G. was primarily based on the fact that the company had its shares listed on a U.S. exchange and was thus subject to the FCPA’s books and records and internal controls provisions.  (Note:  Siemens AG itself was not charged with FCPA anti-bribery violations).

I doubt – six years after the fact – that there is a cause and effect relationship here, but it is interesting nevertheless to note that last week Siemens announced that ”it is planning to delist its American Depositary Receipts (ADR) from the New York Stock Exchange (NYSE).”  The company further announced that ”Siemens intends to terminate its reporting obligations (deregistration) to the American Securities and Exchange Commission (SEC).”  As stated in the release:

“The goal of the delisting and deregistration is to address the change in the behavior of its investors. As a consequence processes of financial reporting are simplified and efficiency is improved. The trading of Siemens shares is nowadays conducted predominantly in Germany and via electronic trading platforms (‘over-the-counter’). Trading volume of Siemens shares in the USA is low, amounting to significantly less than 5% of its global trading volume in the year 2013.”

A delisting of course does not remove Siemens from the reach of the FCPA.  There still is the 78dd-3 prong of the FCPA, but the jurisdictional reach of it is the most restrictive found in the FCPA.

For a moment, let’s just pretend that Siemens delisting was related, in some way, to the FCPA.  If so, is this a good thing or a negative impact of the DOJ and SEC’s expansive jurisdictional theories of FCPA liability against foreign actors?

For instance, as noted in this 2010 post, approximately one month after Daimler resolved its FCPA enforcement action it decided – after 17 years on being on the NYSE to delist from the exchange.  (See here for more).

Former Siemens Execs

One way for the SEC to win its FCPA cases is when the defendants do not show up.

As highlighted here, in December 2011 the SEC filed a civil lawsuit against former Siemens executives Uriel Sharef, Herbert Steffen, Andres Truppel, Ulrich Bock, Stephan Signer, Carlos Sergi, and Bernd Regendantz.  The complaint was based on conduct concerning the Argentine prong of the 2008 Siemens enforcement action.

On the same day the enforcement action was announced, Regendatz agreed to resolve the enforcement action.  As noted in the SEC release, Regendatz “paid a €30,000 administrative fine ordered by the Munich prosecutor (equivalent to $40,000 in U.S. dollars).”

As highlighted in this prior post, when put to its burden by Steffen, Judge Shira Scheindlin dismissed the SEC’s complaint in February 2013 for lack of personal jurisdiction (an initial threshold issue not unique to the FCPA).

As noted in this prior post, in April 2013 Uriel Sharef agreed to resolve the enforcement action by paying a $275,000 civil penalty.  (See here).

The SEC voluntarily dismissed its claims against Carlos Sergi in October 2013.

Earlier this week, on February 3rd, Truppel consented to a final judgment in which he agreed to pay a $80,000 civil penalty.

Also earlier this week, on February 4th,  Judge Scheindlin entered a default judgment as to Bock and Signer.  As part of the order, Bock was ordered to pay $937,957 (a $524,000 civil penalty, $316,452 in disgorgement, plus prejudgment interest of $97,505) and Signer was ordered to pay a $524,000 civil penalty.  The Bock and Signer settlement amounts rank first and third in terms of individual SEC FCPA settlements amounts with Ousama Naaman (approximately $877,000) ranking second.

The burning question of course is whether the SEC would have prevailed against Truppel, Bock and Signer if put to its burden of proof.  Like in Steffen, there would no doubt have been an initial threshold issue of personal jurisdiction before turning to FCPA specific jurisdictional issues.

The relevant jurisdictional allegations against Truppel were as follows.

“Truppel participated in meetings in Miami, Florida, and New York, NY, in which bribes to Argentine officials were negotiated and promised. He caused Siemens to pay, and promise to pay, millions of dollars in bribes in an effort to retain the DNI Contract. Some ofthe bribes were paid via bank accounts in the United States.”

The relevant jurisdiction allegations against Bock were as follows.

“Bock participated in a meeting in Miami, Florida, at which bribes to Argentine officials were negotiated and promised. Bock also provided false testimony in two arbitration proceedings, one of which was filed in Washington, D.C., in an effort to conceal Siemens’ corrupt payments and recover its expected profits from the DNI Contract.”

The relevant jurisdictional allegations against Signer were as follows.

“Signer authorized the payment of bribes to government officials in Argentina. Some of the bribes were paid to bank accounts in the United States.”

Quotable

As noted here OECD Secretary General Angel Gurria warned that the bribery of foreign public officials by businesses was contributing to an “erosion of public trust.”  True, but “enforcing” bribery and corruption laws through resolution vehicles not subjected to judicial scrutiny and otherwise inconsistent with rule of law principles (see here for my recent article) also contribute to an “erosion of public trust.”

Gurria also reportedly stated:  “corporations need to stop bribing public officials, and that is going to help recover public trust and legitimacy, that is going to help markets work.”

In all due respect, this is just such a naive way to view the problem of bribery and corruption.

I like what Alexandra Wrage (President of Trace International) said here:

“Whether they’re stating it expressly or acting on it quietly, governments are using corporations as their primary tool to reduce international bribery. They alarm companies with vast fines and terrify individuals with substantial prison sentences with the hope of ending the payment of bribes because they cannot, in most cases, do much of anything about those demanding them. This is not inappropriate. Companies are regulated, subject to laws and answerable to shareholders. The worst offenders demanding bribes, on the other hand, do so with impunity, hiding behind sovereign immunity and, often, their own, complicit local law enforcement. Abacha. Suharto. Marcos. Duvalier. It’s a longstanding tradition, still thriving in many countries today. U.S. and some European law enforcement agencies have been extraordinarily successful, with fines in the United States now counted in the billions of dollars and other jurisdictions promising to catch up soon. While these efforts have done more than anything else to reduce bribery, they have yet to convince us that companies are both the sole source and solution of all international corruption — and that’s insupportable. [...] The simple reality is that there are just some things that companies can’t do about corruption.”

See here and here for further reasons why Gurria’s statement is off-base.

To FCPA Inc.

Weil Gotshal announced that Adam Safwat, most recently the Deputy Chief in the DOJ’s Fraud Section where he worked on – among other things – FCPA enforcement actions – has joined the firm.  According to the release, “with several years of senior level experience in the DOJ, as well as experience as a former federal prosecutor, [Safwat] brings a deep understanding of criminal and regulatory enforcement to the Firm, including with regard to corporate securities fraud and Foreign Corrupt Practices Act investigations.”

Reading Stack

A handy-dandy “Master List of Third Party Corruption Red Flags” courtesy of the FCPAmericas Blog.

For your viewing enjoyment, the recent program at Fordham Law School “China and the Foreign Corrupt Practices Act:  Challenges for the 21st Century.”

For your viewing enjoyment, Senator Elizabeth Warren talking about an issue discussed in last week’s Friday roundup regarding JPMorgan.

I’ve written before about “offensive use” of the FCPA, but I am still trying to figure out the purpose of this press release.

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A good weekend to all.

Friday Roundup

Friday, January 3rd, 2014

Scrutiny alerts and updates, sunshine, year in review roundups, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts and Updates

H-P

The company has been under FCPA scrutiny since at least 2010 and recently disclosed, in pertinent part, as follows.

“The U.S. Department of Justice and the SEC have been conducting an investigation into the Russia GPO deal and potential violations of the Foreign Corrupt Practices Act (“FCPA”). These U.S. enforcement agencies, as well as the Polish Central Anti-Corruption Bureau, are also conducting investigations into potential FCPA violations by an employee of Hewlett-Packard Polska Sp. z o.o., an indirect subsidiary of HP, in connection with certain public-sector transactions in Poland. In addition, the same U.S. enforcement agencies are conducting investigations into certain other public-sector transactions in Russia, Poland, the Commonwealth of Independent States, and Mexico, among other countries.  HP is cooperating with these investigating agencies. In addition, HP is in advanced discussions with the U.S. enforcement agencies to resolve their investigations.”

JPMorgan

The New York Times returned – yet again (see here and here for prior NY Times article) – to JPMorgan’s hiring practices in China.  The article states:

“For Wall Street banks enduring slowdowns in the wake of the financial crisis, China was the last great gold rush. As its economy boomed, China’s state-owned enterprises were using banks to raise billions of dollars in stock and debt offerings — yet JPMorgan was falling further behind in capturing that business.  The solution, the executives decided over email, was to embrace the strategy that seemed to work so well for rivals: hire the children of China’s ruling elite.

[...]

In the months and years that followed, emails and other confidential documents show, JPMorgan escalated what it called its “Sons and Daughters” hiring program, adding scores of well-connected employees and tracking how those hires translated into business deals with the Chinese government. The previously unreported emails and documents — copies of which were reviewed by The New York Times — offer a view into JPMorgan’s motivations for ramping up the hiring program, suggesting that competitive pressures drove many of the bank’s decisions that are now under federal investigation.

The references to other banks in the emails also paint for the first time a broad picture of questionable hiring practices by other Wall Street banks doing business in China — some of them hiring the same employees with family connections. Since opening a bribery investigation into JPMorgan this spring, the authorities have expanded the inquiry to include hiring at other big banks. Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs and Morgan Stanley have previously been identified as coming under scrutiny. A sixth bank, UBS, is also facing scrutiny, according to interviews with current and former Wall Street employees.

[...]

The investigation has also had a chilling effect on JPMorgan’s deal-making in China, interviews show. The bank, seeking to build good will with federal authorities, has considered forgoing certain deals in China and abandoned one assignment altogether.”

Once again, the latest NY Times article sparked much commentary.  See here, here and here.

Former Siemens Executives

The Buenos Aires Herald reports:

“Seventeen people, including former managers of the Siemens company, were … accused of paying off officials in order to help win a contract to produce the national identity cards …”.  The decision was made by Federal Judge Ariel Lijo, who decided to indict them for having allegedly committed bribery.”

Regarding the defendants, the article states:

“Twelve people working for Siemens were included in the indictment: Uriel Jonathan Sharef, Ulrich Albert Otto Fritz Bock, Eberhard George Reichert, Luis Rodolfo Schirado, Andrés Ricardo Truppel, Ernst Michael Brechtel, Bernd Regendatz, Ralph Matthias Kleinhempel and José Alberto Ares. Sharef, for instance, was a member of Siemens’ managing board. He also was the first former board member of a Fortune Global 50 company to be indicted under the US Foreign Corrupt Practices Act, as happened in 2011.  Judge Lijo also charged Carlos Francisco Soriano, Miguel Ángel Czysch and José Antonio David as “middlemen” between the company and Menem’s administration to arrange the payment for benefitting the company in the bid. The magistrate also accused Antonio Justo Solsona, Guillermo Andrés Romero, Orlando Salvestrini, Luis Guillermo Cudmani and Federico Rossi Beguy, who allegedly worked for the company competing in the bid against Siemens IT Services and who presumably agreed not to challenge the government’s decision.”

Allegations regarding the Argentine identity card project were included in the 2008 FCPA enforcement action against Siemens (see here) and also served as the basis for 2011 criminal and civil charges against several former Siemens executives, including those recently charged in Argentina (see here for the prior post summarizing the action).

As noted in this previous post, the U.S. charges against the former Siemens executives were brought after the DOJ faced scrutiny (including at the Senate’s 2010 FCPA hearing) for not bringing any individual enforcement action in connection with a bribery scheme “unprecedented in scale and geographic reach” in which there existed at Siemens a “corporate culture in which bribery was tolerated and even rewarded at the highest levels of the company.”

The U.S. criminal charges against former Siemens executives sits on the docket and a recent docket search indicates that there has not been any activity in the case in over two years.

Sunshine

Mark Cuban, who recently prevailed against the SEC in a long-running insider trading enforcement action, says in this Wall Street Journal article that he is “now considering a new venture publicizing SEC transcripts.”  Says Cuban, “I’m going to get as many as I can, and I’ll put it out there.” “Sunshine is the best disinfectant.”

The article further states:

“Mr. Cuban says he isn’t against the SEC as a whole but thinks that the lawyers who work there should be held responsible for their actions. “There’s such a revolving door, and it was run by attorneys with an attorney’s mind-set looking for their next job,” he says. “It’s a résumé builder.” Mr. Cuban says individual lawyers aren’t held accountable because the public is familiar only with the name of the SEC’s chair, Mary Jo White.  “No wonder they say or do whatever they damn well please,” he says. “I’m like, ‘OK, I’m going to start calling them out by name.’  George Canellos, co-director of the SEC’s enforcement division, sent a response to Mr. Cuban’s statements through an SEC spokesperson: “Mr. Cuban’s comments are without merit and uncalled for. Our lawyers acted in the finest traditions of government counsel and entirely appropriately in strongly advocating the position of the government in this matter.”

On a related note, did you know that the FCPA Professor Scribd page contains approximately 250 hard to find FCPA documents, pleadings, briefs, etc.

Year In Review Roundups

From the Wall Street Journal Risk & Compliance Journal page – a “Q&A with Asheesh Goel, Ropes & Gray, on The Year in FCPA

From Trace Blog – “FCPA Corporate Settlements by the Numbers

From Michael Volkov (Corruption, Crime & Compliance) – “The FCPA Person of the Year – The Prosecutor” and “FCPA Predictions for the New Year – 2014

From Thomas Fox (FCPA Compliance and Ethics Blog) – “My Favorite Blog Posts from 2013

Reading Stack

Thomas Fox (FCPA Compliance and Ethics Blog) and Jon Rydberg (Orchid Advisor) are out with a new book here titled “Anti-Bribery Leadership: Practical FCPA and U.K Bribery Act Compliance Concepts for the Corporate Board Member, C-Suite Executive and General Counsel.”

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A good weekend to all.

Friday Roundup

Friday, April 19th, 2013

Docket exploration in this Friday roundup.

SEC v. Jackson & Ruehlen

My first post concerning the SEC’s enforcement action against Mark Jackson and James Ruehlen asked – will the SEC be put to its burden of proof?   I noted that the case would be most interesting to follow as the SEC is rarely put to its burden of proof in Foreign Corrupt Practices Act enforcement actions and I highlighted, at the time, how the last time that happened (in 2002) the SEC lost.

As time would demonstrate, Jackson and Ruehlen indeed did put the SEC to its burden of proof and in December 2012 Judge Keith Ellison (S.D. of Tex.) granted Defendants’ motion to dismiss the SEC’s claims that sought monetary damages while denying the motion to dismiss as to claims seeking injunctive relief.  (See here for the prior post).  Even though Judge Ellison granted the motion as to SEC monetary damage claims, the dismissal was without prejudice meaning that the SEC was allowed to file an amended complaint.  As noted in this prior post, that is indeed what happened next, and as noted here a second round of briefing began anew.

In the Defendant’s renewed motion to dismiss (filed Feb. 22nd) they argued that the SEC could not rely on the fraudulent concealment or continuing violations doctrine to extend the limitations period to cover certain claims that accrued before May 12, 2006.  A week later the Supreme Court issued its unanimous decision in SEC v. Gabelli (see here for the prior post) and soon thereafter on March 11th the Defendants filed a notice of supplemental authority with the court arguing that Gabelli “bolstered” their position.

On March 22nd, the same day the SEC’s opposition brief was due, the parties jointly notified the court “that in lieu of opposing the [motion to dismiss] the SEC intends to file a Second Amended Complaint.”  The filing noted that the then proposed Second Amended Complaint “moots the relief sought in the [the motion to dismiss] because it clarifies that, among the violations alleged, the SEC seeks civil penalties … only to the extent such violations accrued on or before May 12, 2006.

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Speaking of statute of limitations, a recent article highlights how the DOJ is “testing a novel argument” to extend statute of limitations in certain cases.  The theory.  We are at war … in Afghanistan … and regardless of whether the conduct at issue has anything to do with that war in Afghanistan, the 1948 Wartime Suspension of Limitations Act gives prosecutors unlimited time to go after alleged fraud during times of war.

No this article was not in the Onion, it was in the Wall Street Journal (see here).

Former Siemens Executive Sharef Settles 2011 SEC Enforcement Action

The SEC announced earlier this week (here) that Uriel Sharef, ”a former officer and board member of Siemens” agreed to settle – as had long been expected – the SEC’s action against him.  As noted in this previous post, Sharef, along with others was charged (both by the DOJ and SEC) in December 2011 in connection with an Argentine bribery scheme that was also the focus, in part, of the 2008 Siemens corporate enforcement action.

As noted in the SEC’s release, without admitting or denying the SEC’s allegations, Sharef consented to entry of a final judgment prohibiting future FCPA violations and he agreed to pay a $275,000 civil penalty – a penalty the SEC called “the second highest penalty assessed against an individual in an FCPA case.”

[In connection with the Innospec FCPA enforcement action, in August 2010, Ousama Naaman resolved an SEC enforcement action by agreeing to disgorge $810,076, pay prejudgment interest of $67,020 and pay a civil penalty of $438,038.  See here for the prior post].

The burning question of course is whether the SEC would have prevailed against Sharef if he put the SEC to its burden of proof.  As highlighted in this previous post, Sharef’s co-defendant, Herbert Steffen, did just that and in February Judge Shira Scheindlin dismissed the SEC’s complaint against Steffen finding that personal jurisdiction over Steffen exceeded the limits of due process.

The SEC’s allegations against Sharef mention the phone call Sharef placed in the U.S. to Steffen.  As to this call, Judge Scheindlin stated as follows in the Steffen decision.

“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.”

The SEC complaint did however state the following additional as to Sharef.

“Sharef met in New York, NY [in January 2003] with payment intermediaries and agreed to pay $27 million in bribes to Argentine officials in connection with the [contract at issue].

Obstruction Charges Filed Against French Citizen in Connection With FCPA Investigation

The DOJ announced (here) earlier this week that “Frederic Cilins a French citizen, has been arrested and accused of attempting to obstruct an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.”

The Criminal Complaint charges Cilins with one count of tampering with a witness, victim, or informant; one count of obstruction of a criminal investigation; and one count of destruction, alteration, and falsification of records in a federal investigation.

Under the heading “Overview of the Defendant’s Crimes” the complaint states, in pertinent part, as follows.

“Cilins … has made repeated efforts to obstruct an ongoing federal grand jury investigation … concerning potential money laundering violations and potential violations of the Foreign Corrupt Practices Act, including such violations by a domestic concern as defined by the FCPA, relating to bribes to officials of a former government of the country of Guinea for the purpose of obtaining valuable mining concessions in Guinea.  During monitored and recorded phone calls and face-to-face meetings with a cooperating witness “CW” [identified as the former wife of a now deceased high-ranking official in the Government of Guinea who is cooperating with the government "in the hopes of obtaining immunity for her own potential criminal conduct"] assisting in this investigation, Cilins, among other things, agreed to pay large sums of money to the cooperating witness to induce the cooperating witness to: (1) provide to Cilins, for destruction, documents Cilins knew had been requested from the cooperating witness by special agents of the FBI and which were to be produced before a federal grand jury; and (2) sign an affidavit containing numerous false statements regarding matters within the scope of the grand jury investigation.  Cilins repeatedly told the cooperating witness that the documents needed to be destroyed ‘urgently’ and that Cilins needed to be present to personally witness the documents being burned.”

Various reports (see here for instance) have linked Cilins to Guernsey-based BSG Resources Ltd and the Criminal Complaint would seem to reference this company as a “particular business entity not based in the United States engaged in the mining industry” (the “Entity”).  The Criminal Complaint sketches a bribery scheme and states, in pertinent part, as follows.

“CW was visited by several individuals including Cilins who identified themselves as representatives of the Entity.  According to the CW, these individuals told the CW, on behalf of the Entity, that they wished to invest in mines in Guinea and asked the CW for help with the Guinean Official, who was then CW’s spouse.  Cilins offered the CW $12 million, to be distributed to the CW and ministers or officials within the Government of Guinea who might be needed to secure the mining rights if all went well after their introduction to the Guinean Official.”

The Criminal Complaint further states that “some of the money paid to the CW by the Entity and its affiliates or agents was wired to a bank account in Florida controlled by the CW.”

It would appear from the Criminal Complaint that BSG Resources is not the sole focus of the U.S. investigation.   Indeed, BSG Resources does not fit the description of a “domestic concern” as referenced in the Criminal Complaint which further states that “subjects of the grand jury investigation include one or more “domestic concerns” within the meaning of the FCPA …”.

Contrary to this assertion, obstruction charges were not first used in the FCPA enforcement against Hong Carson.  Prior to Carson (in which the charge was ultimately dropped) obstruction charges have been used in several FCPA enforcement actions since the FCPA’s first-mega case in 1982 (see here for the prior post).  Although not always successful prosecuted, the following FCPA defendants were nevertheless also charged with various obstruction charges:  Gerald Green, David Kay and Douglas Murphy, Leo Winston Smith and John O’Shea

TJGEM, LLC Complaint

In another example of the noticeable trend of increasing “offensive” use of the FCPA, in late March, Missouri-based TJGEM, LLC filed this civil complaint in U.S. District Court for the District of Columbia alleging a variety of claims, including RICO, against various Ghana officials and New Jersey-based Conti Construction Co. Inc. in connection with a sewer project.  AllAfrica reports here as follows.

 ”TJGEM is claiming that [a Ghanian official] inflated the contract sum for the construction of the sewer system, which has now been awarded to Conti Construction, also an American company, by $10 million …  According to [the complaint] because TJGEM’s representatives, who were negotiating with [the official] for the contract, were totally non-receptive and unresponsive to the [official's] corrupt practices and solicitations, and refused to neither entertain  nor accede to same, but instead, rejected said corrupt practices, the contract  was taken away from them. [TJGEM] argues that the selection of a company whose price for the reconstruction of the sewer  project was some $10,000,000 in excess of the price fixed by TJGEM, leads to a reasonable inference that the [official] inflated the price of the sewer project, in order to receive said $10,000,000 as a bribe and kickback in the award of the  sewer project contract to his own use and benefit, and to the use and benefit of other Ghanaian public officials with whom he is acting in concert in the said criminal enterprise.”

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A good weekend to all.

“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.”