A key focus of the New Era of FCPA enforcement is the
prosecution of individuals. Enforcement officials have repeatedly emphasized
the necessity of bringing actions against individuals as well as business
organizations. At the same time some have criticized enforcement officials for
not brining more FCPA actions against individuals.
Two recent rulings in SEC FCPA cases highlight the
difficulty of such actions and the edge of personal jurisdiction. In one the
court ruled in favor of the Commission, rejecting a motion to dismiss based on
personal jurisdiction. SEC v. Straub, No. 11 Civ. 9645 (S.D.N.Y. Opinion
issued Feb. 8, 2013). In the other the court granted the defendant's motion to
dismiss for lack of personal jurisdiction. SEC v. Sharef, No. 11 Civ.
9073 (S.D.N.Y. Opinion issued Feb. 19, 2013).
cases stem from settled corporate FCPA actions. Straub derives from the
action involving Magyar Telekom, Plc. That case centered on a scheme in which
the company bribed officials in two political parties in Macedonia to mitigate
the effects of a new telecommunications law in that country which came into
effect in 2005. The company, whose ADRs are traded in New York, settled with
the DOJ in December 2011, entering into a deferred prosecution agreement and
agreeing to pay a criminal fine. The firm also settled with the SEC, consenting
to the entry of a permanent injunction prohibiting future violations of the
anti-bribery and books and records provisions and agreeing to pay disgorgement
and prejudgment interest. Straub was filed by the Commission at the time
the corporate action was resolved. It named as defendants three company
executives, Elek Straub, Andras Balogh and Tamas Morvai.
Sharef focuses on a portion
of the FCPA actions brought by the DOJ and the SEC against Siemens, A.G., the
giant German manufacturer of industrial and commercial products. The segment
here involved a large contract in Argentina. Subsidiaries of the German parent
paid bribes to secure the contract in 1998. When the agreement was suspended
the next year additional discussions were held with the new President of
Argentina. Eventually more bribes were paid.
When the contract was canceled Siemens brought an
arbitration in 2002 with the World Bank's International Centre for Settlement
of Investment Disputes in Washington, D.C. to recover the lost profits. Since
disclosure of the bribes would constitute a defense, more bribes were paid as
part of a cover-up. Corruption claims arising from these transactions and
others were settled by Siemens with the DOJ, the SEC and the Munich prosecutor
for a record $1.6 billion along with other relief. The SEC subsequently brought
Shraef against seven company executives alleged to have been involved,
Uriel Sharef, Ulrich Bock, Carlos Sergl, Stephan Signer, Herbert Steffen,
Andres Truppel and Bernd Regendantz. Each is a former senior executive at
Basic principles: The
principles governing personal jurisdiction utilized by Judge Shira Scheindlin
in Sharef and Judge Richard Sullivan in Straub are well
established. Section 27 of the Exchange Act governs the exercise of personal
jurisdiction. That Section states in part that the district courts have
jurisdiction where there is a violation of the antifraud provisions if the
"conduct occurring outside the United States has a foreseeable substantial
effect within the United States." It authorizes the exercise of personal
jurisdiction to the limit of the Due Process Clause of the Fifth Amendment.
Under the governing principles the person need not be in the forum. What is
critical is a two part test involving a "minimum contacts" and a reasonableness
The lynchpin to the minimum contacts prong of the test is
the effects caused in the forum by the foreign defendant. This principle
however must be applied with caution. According to Judge Scheindlin
"'[F]oreseeability alone has never been a sufficient benchmark for personal
jurisdiction under the Due Process Clause," quoting World-Wide Volkswagen v.
Woodson, 444 U.S. 286, 295 (1980). 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 that conduct'" quoting J. McIntyre Machinery, Ltd., v. Nicastro, 131
S.Ct. 2780, 2780, 2789 (2011). In this regard it is essential that the
defendant know or have good reason to know that the conduct will have effects
in the forum.
If the contacts are sufficient, the defendant must
present a "compelling case" that an assertion of jurisdiction would be
unreasonable to overcome jurisdiction. Typically this factor does not defeat
jurisdiction if the contacts are sufficient. Matters considered when evaluating
reasonableness include the burden on the defendant, the interest in the forum,
the plaintiff's interest in obtaining relief and the shared interest of several
states in furthering fundamental substantive social policies.
Straub: Sufficient contacts. Judge
Sullivan rejected Defendants' motion to dismiss under Federal Civil Rule
12(b)(2). Here the Court concluded that "the SEC has met its burden of proving
a prima facie case of jurisdiction sufficient to withstand a jurisdictional
challenge . . . " The securities of Magyard are traded through ADRs on the New
York Stock Exchange. It is registered with the SEC and filed periodic reports.
In view of this, it is apparent that the defendants would know that misleading
financial reports would go to prospective purchasers of the securities.
In connection with the fraudulent scheme in this case Mr.
Straub is alleged to have signed false management representations letters to
the auditors of Magyard. Messrs. Balough and Morval signed what are claimed to
be false management sub-representation letters for quarterly and annual
reporting periods in 2005. These actions were taken as part of an effort to
cover up the bribery scheme. After examining these claims Judge Sullivan had
"little trouble" concluding that the Commission's allegations were sufficient.
In reaching its conclusion the Court rejected defendants'
claim that the SEC must prove that the conduct caused a substantial injury in
the forum: "At oral argument, defendants repeatedly misrepresented this
standard [forseeability], indicating that a defendant's contact must
'proximately cause' a 'substantial injury' in the forum . . . Indeed, in the
aftermath of Burger King [Burger King Corp. v. Rudzewicz, 471 U.S. 462
(1985)] the Second Circuit expressly declined to adopt such a standard," citing
Chew v. Dietrich, 143 F. 3d 23 (2nd Cir. 1998).
The Court also rejected the Defendants' reasonableness
argument, finding that this is not the "rare case" where such an argument can
overcome the minimum contacts. To the contrary, the Court held that "[a]lthough
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, there is no alternative forum
for this action. Accordingly the motion was denied.
Sharef: Insufficient contacts. In
contrast Judge Scheindlin sustained the defendant's motion to dismiss in Sharef,
concluding that the showing made by the SEC was wholly inadequate. As in Straub
the SEC claimed that an assertion of jurisdiction over Mr. Steffen is
appropriate because his conduct contributed to false financial statements and
filings in the U.S.
Seismen's securities were in fact traded in the U.S. At
the same time however, Mr. Steffen's role in the scheme was limited and there
is not specific allegation that he contributed to false filings. According to
the SEC Mr. Steffen was brought into the scheme based on his connections with
Argentine officials. He did participate in the negotiations regarding the
bribes. He repeatedly urged and "pressured" his superior to make certain bribes
in furtherance of the scheme. Those bribes were not made, however, until
superiors agreed. At that point Mr. Steffen's role largely ended. And, the
Commission did not allege that he ordered or even knew of the cover up that
went on at the company or that he had any involvement in the falsification of
SEC filings as part of that arrangement.
While signing or manipulating financial statements that
will be filed with the SEC represents sufficient contacts, the Court noted,
that is not the case here. To the contrary, 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 . . . 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." (emphasis original).
The Court also found that reasonableness supports
dismissal. Here the fact that Mr. Steffen lacks any ties to the U.S., is 74
years old and has poor proficiency in English all weigh against personal
jurisdiction. Furthermore, the SEC and the DOJ have already obtained
comprehensive remedies and Mr. Steffen has resolved a case against him with the
Sharef are actions against foreign nationals alleged to have
participated in the violations of the Foreign Corrupt Practices Act by their
companies through actions taken abroad. The Court in each instance applied the
same principles, at times citing the same cases, to evaluate the jurisdictional
challenge presented to the SEC's complaint.
Both Courts concluded that when the effects of the
conduct by a foreign national taken outside the U.S. falsify or manipulate the
financial statements relied on by U.S. investors there are sufficient contacts
to support jurisdiction. In Straub those actions were the falsification
of the certificates given to the auditors as part of the cover up. In Sharef
however, those or similar allegations were absent, leaving only generalized
allegations that Mr. Steffen participated in the wrongful conduct. Indeed, a
review of the SEC's detailed complaint fails to reveal anything approximating
the allegations relied on by Judge Sullivan in Straub. Read together the
two decisions define the contours of personal jurisdiction in these cases.
subscribers can access enhanced versions of the opinions cited in this article:
World-Wide Volkswagen v. Woodson, 444
U.S. 286 (1980)
J. McIntyre Machinery, Ltd., v. Nicastro, 131
S.Ct. 2780 (2011)
Burger King v. Rudzewicz, 471
U.S. 462 (1985)
For more commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
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