In the last two weeks, in two separate SEC enforcement actions, judges in the United States District Court for the Southern District of New York issued rulings addressing when the United States Securities and Exchange Commission (“SEC”) can bring enforcement actions against foreign nationals in cases involving bribes paid in foreign countries. In one case, the Court held that the SEC could proceed; in the other, the Court dismissed the case. These cases are of great interest not only because they explain the limits of the SEC’s jurisdiction, but they also set forth unexpected incidents of that jurisdiction, such as a potentially unlimited statute of limitations period for foreign nationals who never enter the United States.
Securities & Exchange Commission v. Straub1
On February 8, 2013, U.S. District Judge Richard Sullivan denied a motion to dismiss an SEC enforcement action for lack of jurisdiction. Judge Sullivan held that -- although the defendants, who are Hungarian nationals, were never physically present in the United States in connection with the alleged scheme to bribe government officials in Macedonia -- the SEC could proceed with a case against them for violating the FCPA.2
In its complaint -- filed in December 2011 -- the SEC alleged that, in 2005, the defendants, executives of a Hungarian telecommunications company, Magyar Telekom, Plc. (“Magyar”), bribed Macedonian government officials to mitigate the effects of a new law that increased fees, imposed regulatory burdens and allowed for the licensing of a mobile telephone operator which would compete directly with a Magyar subsidiary.3
At the time, Magyar’s securities were publicly traded in the United States through American Depository Receipts (“ADRs”) listed on the New York Stock Exchange (“NYSE”). Defendants made certifications to Magyar’s auditors regarding the accuracy of the company’s financial statements and its internal controls. One of the defendants signed management representation letters to Magyar’s auditors and the other two defendants signed management sub-representation letters or “Sarbanes-Oxley certifications.”4
The defendants argued that, as they are foreign nationals and the alleged bribery took place in Macedonia to further the interests of a Hungarian company, the Court lacked jurisdiction over them. In addressing this argument, the Court recited the standard rule that, in order to establish personal jurisdiction over the defendants, the SEC must show that each defendant “purposefully availed himself of the privilege of doing business in the forum state and that the defendant could foresee being haled into court there.”5 The Court noted that a defendant’s physical absence from the forum is not, in and of itself, sufficient to defeat personal jurisdiction.6 For foreign defendants, their activity in relation to the United States must be “sufficiently extensive and regular to make [the] possibility [of litigation in the United States] a foreseeable risk of the business.”7
The Court held that the SEC’s allegations satisfied the requisite “minimum contacts” standard. The Court reasoned that the defendants “allegedly engaged in a cover-up [of the bribe payments] through their statements to Magyar’s auditors[,] knowing that the company traded ADRs on an American exchange, and that prospective purchasers [of the ADRs] would likely be influenced by any false financial statements and filings.”8 The Court noted “even if [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.”9
This holding shows clearly that foreign nationals are at risk of a U.S. regulatory action, even under circumstances where foreign nationals might well assume that their actions are not directly connected to the United States.
Other Issues Decided by the Straub Court Impact Foreign Nationals
In addition to addressing the personal jurisdiction question, Judge Sullivan also ruled on two other aspects of the FCPA that have important implications for foreign nationals.
The Statute of Limitations Period Does not Begin to Run Until Foreign Nationals Are “Found Within the United States”
In their motion to dismiss, the defendants in Straub argued that the SEC action was barred by the statute of limitations because the alleged unlawful conduct took place in 2005 and the SEC did not file the action until 2011. The Court rejected this argument as well.10
The parties disputed the meaning of the statute of limitations period described in 28 U.S.C. § 246211 which states: “an action . . . shall not be entertained unless commenced 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.”
The Court agreed with the SEC’s interpretation that “the statute applies only if, within the same period, the offender is found within the United States.”12 Thus, the SEC argued that because the defendants were not “found” in the United States from 2005 through the date the suit was filed, the five-year statute of limitations period had not yet started to run. The defendants argued that the statute of limitations begins to run when a defendant is either “found within the United States” or “subject to service of process elsewhere by some alternative means.”13 The defendants’ position was that, since the law provides methods for the SEC to serve defendants with the complaint even if they are not in the United States, the statute of limitations started to run in 2005.
In ruling in favor of the SEC, the Court stressed that the plain meaning of the statute requires the defendant’s physical presence in the United States in order for the statute to start running.14 Under this ruling, foreign nationals can be sued in the United States many years -- or even decades -- after the allegedly unlawful conduct, so long as they remain outside the United States.
Emails Routed Through Servers Located in the United States Can Support a Substantive FCPA Violation
The SEC premised its substantive FCPA claim on, among other things, 15 U.S.C. § 78dd-1(a), which makes it illegal to “use . . . the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money” to “any foreign official.” The complaint alleged defendants sent documents related to the alleged bribery scheme via email. Although the defendants were outside the United States when they sent the emails (which were addressed to recipients also outside the United States), the emails were routed or stored on network servers located in the United States.15
In an issue of first impression, the Court considered whether the SEC had to allege that the defendants intended to use servers based in the United States (i.e. instrumentalities of interstate commerce).16 The Court held that the SEC did not have to do so. It is sufficient, Judge Sullivan held, for the SEC to allege that the servers in the United States were, in fact, used in transmission of the emails, whether or not the defendants knew or intended that those servers would be used.17 This ruling, too, broadly expands the SEC’s ability to sue foreign nationals for FCPA violations.
Securities & Exchange Commission v. Sharef18
On February 19, 2013, less than two weeks after the denial of the defendants’ motion to dismiss in SEC v. Straub, another judge on the U.S. District Court for the Southern District of New York, Judge Shira Scheindlin, granted Herbert Steffen’s motion to dismiss an action brought by the SEC against him and six other former senior executives at Siemens Aktiengesellschaft (“Siemens”) a multinational engineering and electronics company headquartered in Germany. Steffen, a 74-year old German citizen, was the former CEO of Siemens S.A. Argentina, a Siemens subsidiary from 1983 to 1989, and again in 1991. He served in other management roles with Siemens until he retired in 2003.19
The SEC’s complaint, filed in December 2011, alleged defendants paid millions of dollars in bribes to government officials in Argentina in exchange for a billion dollar contract to create national identity cards. The contract was awarded to Siemens in 1998 and later suspended. Siemens allegedly then paid additional bribes to Argentine officials in order to get the contract reauthorized.20 The complaint alleged, among other things, that the defendants “urged Siemens management to funnel more money to Argentine officials to ensure that earlier bribes were not disclosed.”21
The complaint alleged that one of the defendants, the Chief Financial Officer of Siemens Business Services (“SBS”), “an operating group”22 of Siemens, had “signed quarterly and annual certifications under the Sarbanes-Oxley Act [(“SOX”)] in which he represented that SBS’ financial statements [which obviously did not report any bribe payments] were not false or misleading.”23 Defendant Steffen -- who was not alleged to have signed the SOX statements himself -- filed a motion to dismiss asserting that the Court lacked personal jurisdiction over him and that the complaint was untimely.24
As Judge Sullivan did in Straub, Judge Scheindlin analyzed the issue of personal jurisdiction. The Court cited a similar standard for the requisite “minimum contacts” as Judge Sullivan did in Straub.25 However, Judge Scheindlin found that “Steffan’s actions [were] far too attenuated from the resulting harm to establish minimum contacts.”26 The Court scrutinized Steffan’s role in the scheme and noted that while he may have “pressured” others to make certain bribes, he ultimately did not authorize the bribes, nor did he sign and falsify any of the SEC filings to conceal the bribes.27
Judge Scheindlin expressed concern that “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.”28 Judge Scheindlin noted that when a defendant is not in the United States “great care” should be taken in exercising jurisdiction.29 “Steffen’s lack of geographic ties to the United States, his age, his poor proficiency in English” and the fact that Germany already resolved an action against him, all weighed heavily against establishing personal jurisdiction.30 Judge Scheindlin dismissed the action on jurisdictional grounds and therefore found it unnecessary to address the statute of limitations issue.31
These two recent District Court decisions make clear that -- although there are limitations -- foreign nationals face a real risk that conduct that occurs outside the United States could give rise to an SEC enforcement action for violation of the FCPA. While these decisions reached different results, the analysis of whether a foreign national has the requisite “minimum contacts” is a fact-specific inquiry. Certainly, signing financial statements or certifications that ultimately will be filed in the United States, or form the basis of such filings, can be a sufficient basis for jurisdiction, but it is not a requirement for an assertion of personal jurisdiction and even actions less directly connected to the United States may be enough.