District Court Reinforces Broad Territorial Reach of the FCPA

by Morgan Lewis
Contact

Decision in Magyar Telekom case maintains that engaging in unlawful conduct abroad that is "directed toward the United States, even if not principally directed there," may trigger personal jurisdiction.

On February 8, Judge Richard J. Sullivan of the U.S. District Court for the Southern District of New York denied a motion by three former Magyar Telekom executives challenging the extraterritorial reach of the U.S. Foreign Corrupt Practices Act (FCPA).[1] The decision validated regulators' position that non-U.S. employees of foreign-owned corporations who engage in conduct that is directed toward the United States (e.g., efforts designed to violate U.S. securities regulations) can be held accountable for FCPA violations.

Background

On December 29, 2011, the U.S. Securities and Exchange Commission (SEC) brought suit against defendants Elek Straub, Andras Balogh, and Tamas Morvai. The SEC alleged that the former Magyar executives orchestrated, approved, and executed a plan to bribe Macedonian officials in 2005 and 2006 to block the entry of a competitor to Magyar's Macedonian telecommunications subsidiaries and to gain other regulatory benefits.[2] Among other bribes, the Magyar executives allegedly paid a third-party intermediary approximately $6 million under the guise of fraudulent consulting and marketing contracts to encourage officials to favor Magyar at the expense of its competitors. The SEC has further alleged that the former Magyar executives authorized a payment of approximately $9 million to Montenegrin government officials through a series of sham contracts. Magyar previously resolved a joint SEC and U.S. Department of Justice enforcement action in December 2011.[3]

In their motion to dismiss, the defendants alleged that the court lacked personal jurisdiction over them because the alleged crimes were committed overseas. The defendants claimed that their only direct contact with the United States, as alleged by the SEC, was a series of emails that were routed through and stored on U.S. computer servers. The SEC opposed the motion, arguing that the former executives had sufficient ties to the United States because their company listed its stock on U.S. exchanges and filed reports with the U.S. government.

District Court Order

In his order, Judge Sullivan found that the SEC "met its burden at this stage of establishing a prima facie case of personal jurisdiction over [the d]efendants" by demonstrating that the defendants had "minimum contacts with the United States and that the exercise of personal jurisdiction over [them] would not be unreasonable[.]"[4] Judge Sullivan based his "minimal contacts" finding on the fact that the defendants were "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."[5] The judge further observed that, both prior to and during the time of the alleged violations, Magyar's "securities were publicly traded through [American Depository Receipts (ADRs)] listed on the NYSE and were registered with the SEC."[6] He also found that the 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."[7] As a result, the judge had "little trouble" concluding that, "even if [the d]efendants' 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."[8]

With respect to the "reasonableness" test for personal jurisdiction, Judge Sullivan explained that "'[t]he reasonableness inquiry is largely academic in non-diversity cases brought under a federal law which provides for nationwide service of process because of the strong federal interests involved.'"[9] Judge Sullivan supported his finding for reasonableness by stating, "Like each and every court in this [c]ircuit to have applied the reasonableness standard after determining that a given defendant has the requisite minimum contacts, this [c]ourt finds that this is not the rare case where the reasonableness analysis defeats the exercise of personal jurisdiction."[10] Judge Sullivan further explained that "[a]lthough it might not be convenient for [the d]efendants to defend this action in the United States," the reality of FCPA enforcement actions counsels in favor of finding jurisdiction because "unlike in a private diversity action . . . there is no alternative forum available for the government. Thus, if the SEC could not enforce the FCPA against [the d]efendants in federal courts in the United States, [the d]efendants could potentially evade liability altogether."[11]

Implications

The decision in Magyar Telekom has shown that non-U.S. employees of foreign companies may not evade FCPA enforcement on jurisdictional grounds where such employees engage in unlawful conduct that is ultimately directed toward the United States. One example of such conduct, as learned from Magyar Telekom, is the falsification of corporate books and records, which led the company to file fraudulent financial statements with the SEC.


[1]. Sec. & Exch. Comm'n v. Straub (Magyar Telekom), No. 11 Civ. 9645 (S.D.N.Y. Feb. 8, 2011) (order denying defendants' motion to dismiss), available here.

[2]. Press Release, Sec. & Exch. Comm'n, SEC Charges Magyar Telekom and Former Executives with Bribing Officials in Macedonia and Montenegro (Dec. 29, 2011), available here.

[3]. Press Release, Dep't of Justice, Magyar Telekom and Deutsche Telekom Resolve Foreign Corrupt Practices Act Investigation and Agree to Pay Nearly $64 Million in Combined Criminal Penalties (Dec. 29, 2011), available here.

[4]. Magyar Telekom, slip op. at 12.

[5]. Id. at 8.

[6]. Id.

[7]. Id. at 9.

[8]. Id.

[9]. Id. at 12 (quoting Sec. & Exch. Comm'n v. Syndicated Food Servs. Int'l, Inc., No. 04-CV-1303 (NGG)(ALC), 2010 WL 3528406, at *3 (E.D.N.Y. Sept. 3, 2010)).

[10]. Id.

[11]. Id.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morgan Lewis | Attorney Advertising

Written by:

Morgan Lewis
Contact
more
less

Morgan Lewis on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!