Two FCPA Cases; One Win for the SEC, One Loss; the Limits of Jurisdiction

Two FCPA Cases; One Win for the SEC, One Loss; the Limits of Jurisdiction

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).

Background: Both 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 Siemens Aktiengesellschaft.

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 inquiry.

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 German authorities.

Conclusion: Straub and 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.

Lexis.com 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 Gorman.

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