This article was reprinted with permission
from FCPA Professor
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
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
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].
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
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
"[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
"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
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
"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
"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
"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.
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
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
As to the future of the case, Judge Sullivan set an April
3rd status conference.
Read more articles on the FCPA by Mike
Koehler at FCPA
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