May 30, 2013
In two recent decisions, federal judges in the Southern District of New York addressed the extent to which the Foreign Corrupt Practices Act, 15 U.S.C. §78dd-1, et seq. (FCPA), permits U.S. regulators to pursue enforcement actions against foreign executives of foreign issuers alleged to have participated in bribery of foreign government officials.
On Feb. 8, 2013, in SEC v. Straub, S.D.N.Y., Case No. 11-9645, Judge Richard J. Sullivan issued an opinion and order (Straub Order) holding that the SEC could pursue FCPA claims against three foreign executives of Magyar Telekom, Plc. (Magyar). Sullivan found that personal jurisdiction existed because Magyar's American Depository Receipts traded on a U.S. exchange and the executives caused Magyar to file false reports with the SEC, in part by signing false management representation and subrepresentation letters that were provided to Magyar's auditors.
On Feb. 19, 2013, in SEC v. Sharef, S.D.N.Y. Case No. 11-09073, Judge Shira Scheindlin held that the SEC could not pursue FCPA claims against a foreign executive of a wholly-owned subsidiary of Siemens Aktiengesellschaft (Siemens), where the executive facilitated the payment of bribes through his government connections in Argentina, but did not authorize the bribes, participate in the effort to conceal the bribes, or play a direct role in falsifying the company's SEC filings (Sharef order).
Both decisions involved the application of well-settled principles of personal jurisdiction rooted in the U.S. Supreme Court's seminal decision International Shoe v. Washington, 326 U.S. 310, 316 (1945), where the court held that the Due Process Clause of the Fifth Amendment requires that a defendant who is "not present within the territory of the forum…[must] have certain minimum contacts with it such that the maintenance of the suit does not offend 'traditional notions of fair play and substantial justice.'"1 More specifically, each decision turned on an analysis of whether the defendants' conduct, as alleged, was sufficiently directed towards the United States.
But while the courts engaged in similar analyses, the outcomes reached were markedly different, and those different outcomes provide at least some general guidance regarding the threshold for the exercise of personal jurisdiction in cases involving the FCPA. Specifically, Straub can be interpreted to support the aggressive view of the FCPA's reach taken by regulators in recent years,2 while Sharef can be read to place limitations on it. As discussed in more detail below, however, the cases leave open many questions about when courts will exercise personal jurisdiction over foreign executives of foreign issuers in the FCPA context. Before turning to those questions, a more detailed discussion of the two decisions is warranted.
The 'Straub' Decision
In Straub, the SEC alleges that the defendants, three former members of Magyar management who were all Hungarian citizens, offered €10 million in bribes to Macedonian officials from 2005 to 2006 to induce them to mitigate the effects of a new law that, inter alia, raised fees to be paid by Magyar to the government and authorized the licensing of another mobile telephone operator that would compete directly with Magyar. Straub Order at 2-4. Defendants also allegedly offered to have a Magyar subsidiary construct a mobile telecommunications infrastructure in a neighboring country that would be operated by a company of the choosing of Macedonia's minority party. Id. According to the complaint, defendants allegedly took several steps to conceal the bribes, including: (1) authorizing the payments to be made under sham contracts for "consulting" or "marketing" services; (2) sending payments to the Macedonian government officials below internal control thresholds; and (3) signing management representation and subrepresentation letters to Magyar's auditor that falsely certified the accuracy of the company's books and records. Id. at 3-4; Straub Complaint at 11-12, 19. Allegedly as a result of this conduct, the Macedonian government reduced the fees imposed on Magyar and delayed the introduction of the additional mobile telephone competitor. Straub Order at 3.
The defendants filed a joint motion to dismiss the SEC's Complaint (the motion), arguing, inter alia, that the court lacked personal jurisdiction over them, in part because the complaint "allege[d] conduct by foreign national defendants that occurred wholly outside, and with no nexus to, the United States." Straub Motion at 1.3 In its opposition to the Motion (the Opposition), the SEC maintained that jurisdiction over the executives was proper because they had engaged in violative conduct directed at the United States, specifically, "in falsifying Magyar's books and records, and thereby causing…Magyar's annual and quarterly filings with the SEC to be rendered false." Straub Opposition at 17.
Sullivan denied the defendants' Motion in its entirety. Straub Order at 1. In doing so, he noted that "[t]he due process test for personal jurisdiction has two related components: the 'minimum contacts inquiry' and the 'reasonableness inquiry.'" Straub Order at 5. In Sullivan's view, the SEC's Complaint had alleged that the defendants had sufficient "minimum contacts" with the United States to satisfy due process standards. Id. at 8. Specifically, Sullivan found that the Complaint sufficiently alleged that the defendants had "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." Id. at 8. According to Sullivan, "it is not only that Magyar traded securities through ADRs…that satisfies the minimum contacts standard…." Id. at 8. The defendants also "engaged in a cover-up through their statements to Magyar's auditors knowing that…prospective purchasers [of the ADRs] would be influenced by any false financial statements and filings." Id. at 9. Finally, Sullivan concluded the defendants had failed to demonstrate that the burden of appearing and defending the matter in the United States would be "severe" or "gravely difficult." Id. at 12. Rather, Sullivan found no alternative forum to be available to hold defendants accountable for the actions alleged in the SEC Complaint and raised the concern that "Defendants could potentially evade liability altogether." Id.4
The 'Sharef' Decision
In Sharef, as described in the court's Memorandum and Order, the SEC filed FCPA claims against seven former Siemens executives relating to their roles in an 11-year bribery scheme involving the payment of an estimated $100 million in bribes to Argentine government officials in order to obtain and retain a contract for production of national identity cards. Sharef Order at 3-4. One of the executives, Herbert Steffen, a German citizen, moved to dismiss for lack of personal jurisdiction, among other grounds. Id. at 2.
Less than two weeks after the Straub decision, Scheindlin granted Steffen's motion, finding that the court lacked personal jurisdiction because (1) the SEC had failed to allege that Steffen had sufficient minimum contacts with the United States to satisfy due process standards, and (2) requiring him to defend the case in the United States would be unreasonable. Sharef Order at 15, 20.
In highlighting the absence of contacts with the United States, Scheindlin noted that the SEC had not alleged that Steffen authorized the bribes, "directed, ordered or even had awareness of the cover ups [of the bribes]," nor had he "any involvement in the falsification of SEC filings in furtherance of those cover ups." Id. at 16. The SEC also did not allege that, simply because of his position as Group President of Siemens Transportation Systems during the relevant time period, Steffen necessarily would have been aware of the company's false SEC filings. Id. Therefore, Scheindlin concluded that even if Steffen, by pressuring codefendant Bernd Regendantz to pay bribes, had proximately caused false filings with the SEC, "Steffen's actions are far too attenuated from the resulting harm" to constitute minimum contacts under International Shoe. Id. at 15.5
Scheindlin also found that exercising jurisdiction over Steffen would be unreasonable due to his "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." Id. at 20-21. According to the judge, at 74 years old, it would be a "heavy burden" for Steffen to appear in the United States. Id. at 21. Finally, in refusing to exercise personal jurisdiction over Steffen, Scheindlin gave weight to the fact that the SEC and the DOJ had already "obtained comprehensive remedies" from Siemens and that Germany had already concluded an individual action against Steffen. Id.6
Scheindlin discussed the Straub decision and noted that "there is ample (and growing) support in case law for the exercise of jurisdiction over individuals who play a role in falsifying or manipulating financial statements relied upon by U.S. investors in order to cover up illegal actions directed entirely at a foreign jurisdiction." Id. at 17. In Scheindlin's view, however, Straub was distinguishable because the defendants in that case "orchestrated a bribery scheme…and as part of the bribery scheme signed off on misleading management representation letters to the company's auditors and signed false SEC filings." Id. (emphasis in original). In contrast, Steffen simply participated in the bribery scheme outside the United States and that scheme ultimately impacted the company's SEC's filings. The complaint did not allege that Steffen played a "role in the cover ups themselves" or a "role in preparing false financial statements." Id. at 19. Absent such allegations, the mere fact that Steffen's actions impacted the company's SEC filings, and therefore, U.S. shareholders, was too attenuated a connection to the United States to allow for the exercise of personal jurisdiction over his actions. Id. at 17-18 ("[T]he exercise of jurisdiction over foreign defendants based on the effect of their conduct on SEC filings is in need of a limiting principle").7
While the SEC and DOJ will likely continue their aggressive pursuit of individuals in FCPA matters, including foreign executives, the Straub and Sharef decisions, read together, offer some guidance as to where courts may draw the line on the exercise of personal jurisdiction and, therefore, the government's reach. Both courts seem to agree that the exercise of personal jurisdiction is appropriate where foreign individuals engage in conduct that is purposefully directed at the United States in some way. Additionally, both courts appear to agree that participating in the creation of false financial statements (by, for example, signing false management representation letters) or signing false SEC filings is conduct that is sufficiently directed at the United States to establish jurisdiction.
Both cases, however, leave open as many questions as they provide answers. The decision in Straub seems to leave open the possibility that conduct short of participating in the creation of false financial statements or signing false SEC filings may be sufficiently directed at the United States to establish jurisdiction. Whether other courts follow Sullivan will be worth monitoring in the coming months and years. Of course, where courts follow Sullivan's lead, the personal jurisdiction inquiry will continue to be extremely fact-intensive.
The decision in Sharef, on the other hand, does not appear to leave much room for finding personal jurisdiction where defendants have not participated in the creation of false financial statements or signing false SEC filings. Indeed, Scheindlin expressly asserts that "the exercise of jurisdiction over foreign defendants based on the effect of their conduct on SEC filings is in need of a limiting principle," Sharef Order at 18, and she appears to draw the line at the purposeful manipulation of financial statements and SEC filings. It will likewise be important in the coming months and years to monitor whether other courts follow Scheindlin's analysis and embrace a similar limiting principle. Of course, if courts adopt such a bright-line, it could have a significant impact on the ability of the government to reach the conduct of foreign actors engaged in alleged bribery schemes.
Steven A. Tyrrell, and Christopher L. Garcia are partners at Weil, Gotshal & Manges. Associate Brianna N. Benfield assisted in the preparation of this article.
1. Federal securities laws, including the FCPA, provide for the exercise of jurisdiction over "conduct occurring outside the United States that has a foreseeable substantial effect within the United States." 15 U.S.C. §78aa(b)(2) (2013). This has been interpreted to allow for the exercise of personal jurisdiction "to the limit of the Due Process Clause," as applied in International Shoe and its progeny. SEC v. Unifund SAL, 910 F.2d 1028, 1033 (2d Cir. 1990).
2. For example, the DOJ successfully prosecuted a foreign executive employed by Alcatel-Lucent, see U.S. Dept. of Justice, "Two Former Alcatel Executives Indicted for Allegedly Bribing Costa Rican Officials to Obtain a Telecommunications Contract," (March 20, 2007), http://www.justice.gov/opa/pr/2007/March/07_crm_169.html, and a U.K. solicitor working on behalf of a consortium of companies in Nigeria, see U.S. Dept. of Justice, "Two UK Citizens Charged by United States With Bribing Nigerian Government Officials to Obtain Lucrative Contracts as Part of KBR Joint Venture Scheme," (March 5, 2009), http://www.justice.gov/opa/pr/2009/March/09-crm-192.html.
3. The defendants also argued that the SEC's claims were barred by the statute of limitations and that the Complaint failed to state a claim under Federal Rule of Civil Procedure 12(b)(6). The court rejected these arguments in an interesting discussion that can be found at pages 12-21 of the Order. Because this article principally concerns the court's ruling concerning personal jurisdiction, these other rulings are not discussed further herein.
4. Both Magyar Telekom and Deutsche Telekom had previously settled the matter with the SEC and the DOJ in December 2011 and paid the agencies a combined total of more than $95 million in disgorgement, prejudgment interest, and criminal penalties arising from the same underlying schemes. See U.S. Sec. and Exch. Comm'n, "SEC Charges Magyar Telekom and Former Executives with Bribing Officials in Macedonia and Montenegro," (Dec. 29, 2011), http://www.sec.gov/news/press/2011/2011-279.htm.
5. In a footnote, Scheindlin questioned whether Regendantz, who was Siemens Business Services CFO, could be a proximate cause, given that Regendantz needed the approval of "higher ups" before authorizing the bribes for which Steffen had allegedly lobbied. Sharef Ord. at 15-17.
6. Siemens settled its FCPA matter with the DOJ and the SEC in December 2008, paying $450 million in penalties to the DOJ and $350 million in disgorgement of wrongful profits to the SEC. See U.S. Sec. and Exch. Comm'n, "SEC Charges Siemens AG for Engaging in Worldwide Bribery" (Dec. 15, 2008), http://www.sec.gov/news/press/2008/2008-294.htm. In Germany, Siemens paid criminal fines of €395 million and €201 million to the Munich Public Prosecutor. David Crawford and Mike Esterl, "Siemens Pays Record Fine in Probe: $800 Million Settlement Will End U.S. Bribery Case for German Conglomerate," Wall St. J. (Dec. 16, 2008), http://online.wsj.com/article/SB122936135680907233.html.
7. It should be noted that Regendantz, whose case was more analogous to that of the Straub defendants because he signed representation letters, settled with the SEC at the time the charges were brought against the individual defendants in 2011. See U.S. Sec. and Exch. Comm'n, "SEC Charges Seven Former Siemens Executives with Bribing Leaders in Argentina," (Dec. 13, 2011), http://www.sec.gov/litigation/litreleases/2011/lr22190.htm.
Reprinted with permission from the May 30, 2013 edition of the New York Law Journal © 2013 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.