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.”