United States: Two Recent New York Decisions Provide Guidance On FCPA’s Reach Over Foreign Nationals

Keywords: guidance, FCPA, foreign nationals, Straub

Two recent decisions from the Southern District of New York provide some guidance on limits to the US government's ability to prosecute foreign nationals under the Foreign Corrupt Practices Act. The first decision, SEC v. Straub, et al.,1 supports the government's long-held view that the FCPA applies broadly to foreign nationals involved in foreign bribery schemes - regardless of the defendant's direct contacts with the United States - and significantly limits a foreign defendant's ability to assert a statute-of-limitations defense. The second decision, SEC v. Sharef et al.,2 on the other hand, makes clear that the FCPA's reach does have limits under principles of personal jurisdiction.

The Straub Case

In Straub, the defendants were executives at Magyar Telekom, a telecommunications company. The defendants allegedly bribed public officials in Macedonia to mitigate the effects of a new law, which subjected Magyar to increased competition in the Macedonian telecommunications market. At the time of the alleged bribes, Magyar and its parent, Deutsche Telekom, were publicly traded on the New York Stock Exchange and registered with the SEC. The government alleged that the bribes were recorded in the corporations' books and records "in a manner that did not reflect the true purpose of the contracts." Further, defendants allegedly provided false management representation letters to Magyar's auditors. According to the SEC's complaint, had Magyar auditors known these facts, "they would not have ... provided an unqualified audit opinion to accompany Magyar['s] annual report [to the SEC]."

Defendants first moved to dismiss on personal jurisdiction grounds. During the proceedings, the SEC told the court that the jurisdictional theory the SEC was advocating "may be breaking new ground." But Judge Richard Sullivan disagreed, holding that the court had jurisdiction over the defendants because "their concealment of [the] bribes, in conjunction with Magyar's SEC filings, was allegedly directed toward the United States." The court characterized as "overblown" the defendants' argument that the court's ruling would mean that "any individual director, officer, or employee of an issuer in any FCPA case" would be subject to personal jurisdiction. The court stated that it was not "creat[ing] a per se rule regarding employees of an issuer but rather bas[ing] its decision on a fact-based inquiry." The court's opinion, however, alluded to few, if any, limiting principles on the SEC's broad view of personal jurisdiction.

The defendants also moved to dismiss on statute of limitations grounds. The court acknowledged that "[i]t [wa]s undisputed that more than five years ha[d] elapsed since the SEC's claims first accrued." Nevertheless, the court held that, under the plain language of the catch-all limitations period set forth in 28 U.S.C. § 2462, "an offender must be physically present in the United States for the statute of limitations to run."

The Sharef Case

In Sharef, the defendant was an executive working for an Argentine subsidiary of Siemens, a German corporation. According to the SEC's complaint, between 1996 and 2007, Siemens paid more than $100 million in bribes to government officials in Argentina. The SEC did not allege that the defendant had been directly involved in authorizing or paying the bribes. Instead, the complaint alleged that a Siemens managing board member recruited defendant to facilitate the bribes because of his longstanding ties to government officials in Argentina. The bribes were allegedly authorized by top executives at Siemens and members of its managing board. According to the complaint, approximately $31.3 million of the bribes occurred after March 12, 2001 - when Siemens became subject to US securities laws - and, in the course of paying these bribes, Siemens made false certifications to the SEC.

Defendant moved to dismiss on personal jurisdiction grounds and Judge Shira Scheindlin granted the motion. Citing Straub, the court noted "[i]t is by now well-established that signing or directly manipulating financial statements to cover up illegal foreign action, with knowledge that those statements will be relied upon by United States investors satisfies th[e] [personal jurisdiction minimum contacts] test." The court concluded, however, 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." The court distinguished Straub, noting that the defendant "neither authorized the bribe, nor directed the cover up, much less played any role in the falsified [SEC] filings."

The court also pointed out that the SEC had not "alleged that [defendant's] position as Group President of [the] Siemens [subsidiary] would have made him aware of, let alone involved in falsification of these filings." Finally, the court acknowledged that the complaint alleged that defendant had calls with a Siemens official in New York regarding the bribery scheme and that a portion of the bribery payments were deposited in a New York bank. But these facts did not alter the court's analysis since the defendant "did not place the calls" to New York, nor did the defendant "direct that the funds be routed through a New York bank."

Bolstering its conclusion, the court noted that exercising personal jurisdiction over the defendant would be unreasonable. The court noted defendant'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 ... [since the United States government] ha[d] already obtained comprehensive remedies against Siemens' and Germany ha[d] resolved an action against [defendant] individually."

CONCLUSION

The Second Circuit will likely weigh in on these issues and provide additional guidance in this complex area of law. As Judge Scheindlin wrote in Sharef, "under the SEC's theory [of personal jurisdiction], 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." The Straub decision provides some support for the SEC's expansive view. And both Straub and Sharef make clear that the SEC is aggressively enforcing the FCPA without regard to a foreign defendant's direct contacts with the United States. Further, the Straub decision all but eliminates a statute of limitations defense for a foreign national as long as the individual remains outside the United States. Thus, in light of Straub, companies operating in foreign places should address all allegations that raise potential FCPA concerns, no matter how long ago the alleged misconduct occurred.

To learn more about our FCPA capabilities, please visit the following:
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Securities Litigation & Enforcement
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Footnotes

1. No. 1:11-cv-09645-RJS (S.D.N.Y. Feb. 8, 2013).
2. No. 1:11-cv-09073-SAS (S.D.N.Y. Feb. 19, 2013).

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