Welcome to the United States? New York Federal Court Issues Pair of Important FCPA Rulings Regarding Foreign Business Executives

February 28, 2013

In the past two weeks, Judges Richard J. Sullivan and Shira A. Scheindlin of the United States District Court for the Southern District of New York separately issued important rulings in civil Foreign Corrupt Practices Act ("FCPA") cases against foreign executives of non-U.S.-based companies whose stock is traded on a U.S. stock exchange.  Their rulings reached opposite results on the issue of the court’s exercise of personal jurisdiction over foreign executives who are alleged to have violated the FCPA.  One or both of these rulings could provide the Second Circuit with a rare opportunity to clarify the FCPA’s jurisdictional reach in the context of purely foreign bribery schemes.  

SEC v. Straub, __ F. Supp. 2d __, No. 11 Civ. 9645 (RJS) (Feb. 8, 2013) (Sullivan, J.)

In December 2011, the Securities and Exchange Commission ("SEC") brought a civil enforcement action against three senior executives of a Hungarian telecommunications company, Magyar Telekom, who allegedly bribed government and political party officials in Macedonia and Montenegro in 2005 and 2006 to win business and shut out competition in the telecommunications industry.  The SEC alleges that these executives used sham "consultancy" and "marketing" contracts to pay approximately €4.875 million to Macedonian officials and €7.35 million to Montenegrin officials. The three executives then allegedly caused the bribes to be falsely recorded in Magyar’s books and records, which were consolidated into the books and records of its parent company, Deutsche Telekom AG.  Both Magyar and Deutsche Telekom were publicly traded through American Depository Receipts ("ADRs") on the New York Stock Exchange ("NYSE").  The defendants allegedly made false certifications to Magyar’s auditors, who in turn provided unqualified audit opinions that accompanied the filing of Magyar’s annual reports with the SEC.  There was no allegation that any of the negotiations or meetings regarding this scheme occurred within the United States, that the payment of bribes occurred through banks located in the United States, or that the foreign defendants otherwise ever traveled to the United States in furtherance of the bribery scheme. 

The executive defendants moved to dismiss on three grounds: (1) personal jurisdiction; (2) statute of limitations; and (3) failure to state a claim. 

On February 8, 2013, Judge Sullivan denied the defendants’ motions to dismiss in their entirety.  Despite the fact that none of the foreign defendants set foot in the United States in connection with the alleged bribery scheme, Judge Sullivan ruled that the exercise of personal jurisdiction over the defendants was appropriate and reasonable because the companies were publicly traded on a U.S. stock exchange and the defendants made false certifications to the company’s auditors knowing the effect that fraudulent filings with the SEC would have on U.S. investors.  Thus, the Court held 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." 

Judge Sullivan quickly disposed of the defendants’ statute of limitations defense as well.  The applicable statute of limitations, 28 U.S.C. § 2462, provides that the SEC’s enforcement action must be brought "within five years 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 may be made thereon."  Although more than five years had elapsed since the SEC’s claims first accrued, the Court held that the statute of limitations did not begin to run until the defendants were present in the United States, even though the SEC might have been able to serve the foreign defendants abroad through the Hague Service Convention.

Finally, Judge Sullivan held that the SEC had stated a claim under the FCPA because the complaint adequately alleged that (a) the defendants made use of interstate commerce and (b) the intended recipients of the bribes were foreign officials under the FCPA.  In a matter of first impression under the FCPA, the Court held that the jurisdictional interstate commerce element is satisfied with an allegation that emails in furtherance of the bribery scheme were routed through or stored on network servers located within the U.S., and the SEC need not allege that the defendants had personal knowledge of the use of U.S. servers.  Judge Sullivan further held that the SEC need not allege with specificity the identities of the bribed foreign officials.

SEC v. Sharef, __ F. Supp. 2d __, No. 11 Civ. 9073 (SAS) (Feb. 19, 2013) (Scheindlin, J.)

In December 2011, the SEC brought a civil FCPA enforcement action against seven high-level senior executives at Siemens Aktiengesellschaft and its regional company in Argentina (collectively "Siemens").  Siemens, a German conglomerate that was publicly traded through ADRs on the New York Stock Exchange, had settled FCPA claims with the SEC and Department of Justice for approximately $800 million three years prior.  The SEC’s complaint is based on the defendants’ alleged involvement in a scheme, from 1996 through early 2007, to pay $100 million in bribes to top government officials in Argentina to secure and maintain a $1 billion government contract to produce national identity cards.  The bribes were allegedly paid through sham consulting agreements, among other means.  All defendants are foreign citizens living outside of the United States, including Herbert Steffen, a 74-year-old German citizen who was a senior executive at Siemens when he was recruited to facilitate the payment of bribes to Argentine officials.  Steffen, a former CEO of Siemens Argentina, allegedly pressured co-defendant Bernd Regendantz, the CFO of a Siemens operating group, to continue to pay bribes to Argentine officials; Regendantz subsequently signed fraudulent quarterly and annual Sarbanes-Oxley certifications to cover up the illegal payments.

Steffen moved to dismiss the complaint for lack of personal jurisdiction and expiration of the statute of limitations.

On February 19, 2013, Judge Scheindlin granted Steffen’s motion to dismiss for lack of personal jurisdiction, but declined to address or reach the merits of his statute of limitations defense.  This ruling appears to be the first decision in the country dismissing an FCPA claim on the ground that the court lacked personal jurisdiction over the foreign executive.

Notably, the bribery scheme described in Sharef had more significant ties to the United States than the bribery scheme at issue in Straub.  For example, the bribery scheme in Sharef allegedly included meetings among co-defendants and co-conspirators (but not Steffen) in Miami and New York; the payment of bribes to Argentine officials via bank accounts in New York and Miami; one or more telephone calls from a co-defendant in New York to Steffen in connection with the bribery scheme; and the payment of bribes to Argentine officials to prevent the disclosure of prior bribe payments in an arbitration proceeding between Siemens and the Argentine government in Washington, D.C.

Rather than focus on the bribery scheme’s connection to the United States, Judge Scheindlin focused her analysis on Steffen’s personal conduct and ties to the United States.  The Court noted that even if Steffen’s involvement in the payment of bribes to Argentine officials could be considered the "proximate cause" of Regendantz’s false SEC certifications and filings, "Steffen’s actions are far too attenuated from the resulting harm to establish [the] minimum contacts" necessary for personal jurisdiction.  Judge Scheindlin acknowledged the "ample (and growing) support in case law for the exercise of jurisdiction over individuals who played a role in falsifying or manipulating financial statements . . . to cover up illegal actions directed entirely at a foreign jurisdiction," but concluded 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."  Judge Scheindlin reasoned that although Steffen allegedly caused bribes to be paid in violation of U.S. law, the SEC had not alleged that he had any involvement in the falsification of SEC filings, expressly endorsing Judge Sullivan’s reasoning in Straub.  Furthermore, the Court held that the exercise of jurisdiction over Steffen would not be constitutionally reasonable given his age, lack of ties to the United States, and poor English language skills, as well as the comprehensive remedies that the SEC and DOJ already obtained against Siemens and that Germany had obtained against Steffen individually.

Impact of These Decisions on Foreign Companies and Executives

Judge Sullivan’s February 8 ruling in Straub was feared by many business people and lawyers to signal the death knell for multiple defenses available to foreign corporate executives embroiled in FCPA enforcement actions in the U.S. 

First, Judge Sullivan essentially ruled that an SEC enforcement action can commence many years, if not decades, after the relevant bribery scheme ended so long as the foreign-based defendants cannot be served within the United States.  Notably, just yesterday the Supreme Court concluded in Gabelli v. Securities and Exchange Commission, No. 11-1274, that the five-year limitations period for federal enforcement actions seeking civil penalties under 28 U.S.C. § 2462 begins to run when the alleged fraud occurs, not when it is discovered, as urged by the SEC.  While the Court did not address the provision of that statute that applies to foreign defendants or property, the Supreme Court warned against interpreting the statute so broadly as to permit the Government to file an enforcement action for an "uncertain period into the future" because the lack of time limits on Government penalty actions "would be utterly repugnant to the genius of our laws" and would violate the basic purposes advanced by statutes of limitations, including principles of repose, justice, and the promotion of security and stability to human affairs.  As the Supreme Court emphasized, "even wrongdoers are entitled to assume that their sins may be forgotten."  The Supreme Court’s Gabelli ruling may well present foreign FCPA defendants an opportunity to revisit the statute of limitations interpretation offered by Judge Sullivan in Straub.

Second, Judge Sullivan ruled that a court can exercise personal jurisdiction over foreign-based defendants involved in an entirely foreign bribery scheme based solely on the defendants’ alleged signing of false certification letters to the company’s auditors.  But, Judge Sullivan did not require that the executives send their certifications to the United States, or even that the auditors be U.S.-based auditors.  Rather, it was sufficient that the SEC alleged that the auditors relied on those certifications to provide unqualified audit opinions accompanying SEC filings.  Such a low bar could be easily met in most FCPA cases.

But just eleven days later, Judge Scheindlin’s ruling in Sharef appeared to resurrect the personal jurisdiction defense in FCPA cases.  Indeed, Judge Scheindlin’s ruling was particularly noteworthy given the bribery scheme’s more significant ties to the United States.  Despite similarities in the cases, Judge Sullivan and Judge Scheindlin apparently viewed the constitutional limitations on personal jurisdiction somewhat differently.  It remains to be seen whether the Second Circuit will use these cases as an opportunity to clarify the standard that district courts should apply when evaluating personal jurisdiction in FCPA cases involving foreign corporate executives engaged in entirely (or almost entirely) foreign conduct.

Until the Second Circuit rules though, given that both decisions were from district court judges, neither decision holds precedence in the Southern District of New York or any other court.  Indeed, the opposite results reached by the two judges have the effect of adding uncertainty regarding the constitutional personal jurisdiction defense.  Whichever analysis prevails, the pursuit of these cases by the SEC demonstrates its desire to pursue and hold foreign executives publicly accountable for their alleged bribery of foreign officials, despite the fact that the conduct at issue had long concluded, occurred in remote parts of the world, and had been remedied with comprehensive settlements between the foreign company and U.S. regulators.

Gibson, Dunn & Crutcher LLP  

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues.  We have more than 110 attorneys with FCPA experience, including a number of former federal prosecutors, spread throughout the firm’s domestic and international offices.  Joe Warin, a former Assistant U.S. Attorney, served as FCPA counsel to the first non-U.S. compliance monitor and as compliance monitor for another company that settled FCPA charges during 2010.  In 2009, he completed his compliance consultancy for Statoil A.S.A. pursuant to its DOJ and SEC FCPA settlements.  Please contact the Gibson Dunn attorney with whom you work, or any of the following: 

Washington, D.C.
F. Joseph Warin (202-887-3609, [email protected])
Judith A. Lee (202-887-3591, [email protected])
David P. Burns (202-887-3786, [email protected])
David Debold (202-955-8551, [email protected])
Michael S. Diamant (202-887-3604, [email protected])
Daniel P. Chung (202-887-3729, [email protected]
John W.F. Chesley (202-887-3788, [email protected])
Oleh Vretsona (202-887-3779, [email protected])
Christopher W.H. Sullivan (202-887-3625, [email protected])
Stephanie L. Connor (202-955-8586, [email protected])
Elizabeth H. Goergen (202-887-3623, [email protected])
Jeremy Joseph (202-955-8218, [email protected])

New York
Joel M. Cohen (212-351-2664, [email protected])
Lee G. Dunst (212-351-3824, [email protected])
Mark A. Kirsch (212-351-2662, [email protected])
Alexander H. Southwell (212-351-3981, [email protected])
Jim Walden (212-351-2300, [email protected])
Avi Weitzman (212-351-2465, [email protected])

Lawrence J. Zweifach (212-351-2625, [email protected])
Adam P. Wolf (212-351-3956, [email protected])  

Evan S. Tilton (214-698-3156, [email protected])

Robert C. Blume (303-298-5758, [email protected])
Laura M. Sturges (303-298-5929, [email protected])
John D.W. Partridge (303-298-5931, [email protected])

Los Angeles
Debra Wong Yang (213-229-7472, [email protected])
Michael M. Farhang (213-229-7005, [email protected])
Douglas Fuchs (213-229-7605, [email protected])
Marcellus McRae (213-229-7675, [email protected])

Orange County
Nicola T. Hanna (949-451-4270, [email protected])

San Francisco
Thad A. Davis (415-393-8251, [email protected])
Michael Li-Ming Wong (415-393-8333, [email protected])
Winston Y. Chan (415-393-8362, [email protected])
Brent E. Jones (415-393-8287, [email protected])

Patrick Doris (+44 20 7071 4276, [email protected])
Charlie Falconer (+44 20 7071 4270, [email protected])
Philip Rocher (+44 20 7071 4202, [email protected])
Mark Handley (+44 20 7071 4277, [email protected])

Benoît Fleury (+33 1 56 43 13 00, [email protected])  
Bernard Grinspan (+33 1 56 43 13 00, [email protected])
Jean-Philippe Robé (+33 1 56 43 13 00, [email protected])
Audrey Obadia-Zerbib (+33 1 56 43 13 00, [email protected])

Benno Schwarz (+49 89 189 33-110, [email protected])
Michael Walther (+49 89 189 33-180, [email protected])
Mark Zimmer
(+49 89 189 33-130, [email protected])

Hong Kong
Kelly Austin (+852 2214 3788, [email protected])
Adam S. Goldberg (+852 2214 3717, [email protected])
Oliver D. Welch (+852 2214 3716, [email protected])

São Paulo
Lisa A. Alfaro (+55 (11) 3521-7160, [email protected])  

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