The Death of Pennoyer v. Neff and the Requirements for Minimum Contacts under the FCPA

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The bane of every first year law student, at least in Civil Procedure, is Pennoyer v. Neff. This is because (1) it is usually studied very early in the semester; (2) is viewed as the first true introduction to how strikingly convoluted legal issues can be; and (3) has the most turgid legal writing from the 19th century imaginable to attempt to read and understand. Fortunately for all of us, in a case called International Shoe v. Washington, the US Supreme Court overturned Pennoyer and held that if a person is not present with in the forum, then he (or she) must have such minimum contacts with the forum that the maintenance of the action must not offend traditional notions of fair play and substantial justice. Courts have named these two tests (1) the minimum contact analysis and (2) the reasonableness inquiry. Last month there were two cases involving the Foreign Corrupt Practices Act (FCPA), which discussed just how far enforcement of the FCPA can go, using the minimum contacts and reasonableness tests.

The first case was SEC v. Schraub, where the Securities and Exchange Commission (SEC) brought an enforcement action against three executives of Magyar Telekom, Plc. As set out in an article in the D&O Diary, entitled “Foreign-Domiciled Individuals and the FCPA’s Reach”, this case followed on after the Magyar Telekom FCPA enforcement action. It involved an enforcement proceeding against three Magyar executives. The SEC alleged that the three authorized payments to an intermediary, knowing the payments would be forwarded to government officials. The SEC also alleged that the individuals made false statements to the company’s auditors by signing representations that the company’s books and records were accurate. All three executives are Hungarian citizens and residents. The three moved to dismiss the SEC’s complaint, arguing that the US lacked personal jurisdiction over them. This case was before Judge Richard Sullivan.

The second case was SEC v. Sharef, a case following out the Siemens FCPA matter. In this case the SEC filed an enforcement action against several Siemens executives in connection with alleged bribery activities in Argentina. One of the defendants, Herbert Steffen, moved to dismiss contending that the court lacked personal jurisdiction over him. Steffen, a German citizen, had been Chief Executive Officer (CEO) of Siemens Argentina twice before his retirement in 2003. This case was before Judge Shira Scheindlin, the same judge who presided over the Frederick Bourke case.

The cases came to different results based upon different underlying facts. But the key to remember is the International Shoe test, minimum contacts and reasonableness.

I.                   Straub

  1. Minimum Contacts

As cited by the FCPA Professor in his post, entitled “Motion To Dismiss Denied In Former Magyar Telekom Exec’s Case”, Judge Sullivan said:

“[T]he Defendants here allegedly 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.  [...] [D]uring and before the time of the alleged violations, both Magyar’s and Deutsche Telekom’s securities were publicly traded through ADRs listed on the NYSE and were registered with the SEC [...] Because these companies made regular quarterly and annual consolidated filings during that time, Defendants knew or had reason to know that any false or misleading financial reports would be given to prospective American purchasers of those securities.”

Therefore, it is not only that Magyar traded securities through ADRs listed on the NYSE that satisfies the minimum contacts standard but also that 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. The court thus has little trouble inferring from the SEC’s detailed allegations 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.

2.        Reasonableness

Judge Sullivan stated that while 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.” The SEC noted that there was no alternative forum available for the US government and this required that the US bring a FCPA action against Defendants in federal courts in the US or the  Defendants could potentially evade liability altogether. Additionally, because this case was brought under federal law, the judicial system has a strong federal interest in resolving this issue here. The Court found that the exercise of personal jurisdiction over Defendants was “not unreasonable.”

II.                Sharef

  1. Minimum Contacts

In a post, entitled ““Far Too Attenuated” – Judge Grants Herbert Steffen’s Motion To Dismiss In SEC FCPA Enforcement Action”, the FCPA Professor cited to Judge Scheindlin regarding this prong of the jurisdictional test. Judge Scheindlin said that the 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 the conduct.  The effects in the United States must ‘occur as a direct and foreseeable result of the conduct outside the territory’ and defendant ‘must know, or have good reason to know, that his conduct will have effects in the [forum] seeking to assert jurisdiction over him.

The SEC allegations against Steffen were premised on Steffen’s role in encouraging another defendant to authorize bribes to Argentine officials that ultimately resulted in falsified filings. Thereafter his only actions were “limited to participation in a phone call initiated by Sharef from the United States in connection with the bribery scheme, and that in the first half of 2003, defendants including Steffen ‘urged Sharef to meet the demands [of Argentine officials] and make the additional payments.’”

She found that Steffen’s actions were “far too attenuated from the resulting harm to establish minimum contacts. Steffen was brought into the alleged scheme based solely on his connections with Argentine officials.” There was no allegation Steffen authorized the bribes nor was there any allegation that he directed, ordered or even had awareness of the cover ups that occurred at SBS much less that he had any involvement in the falsification of SEC filings in furtherance of those cover ups.

The FCPA Professor quoted Judge Scheindlin for the following “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. Illegal corporate action almost always requires cover ups, which to be successful must be reflected in financial statements. Thus, 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. The allegations against Steffen fall far short of the requirement that he ‘follow a course of conduct directed … the jurisdiction of a given sovereign, so that the sovereign has the power to subject the defendant to judgment concerning that conduct. Absent any alleged role in the cover ups themselves, let alone any role in preparing false financial statements the exercise of jurisdiction here exceeds the limits of due process, as articulated by the Supreme Court and the Second Circuit.’

  1. Reasonableness

Judge Scheindlin took a different tact on the reasonableness prong. She found that Steffen’s lack of geographic ties to the US, his age, his poor proficiency in English, and the forum’s diminished interest in adjudicating the matter, all weigh against personal jurisdiction. This would place a heavy burden on this seventy-four year old defendant to journey to the US to defend against this suit. As the SEC and the Department of Justice (DOJ) have already obtained comprehensive remedies against Siemens and Germany has resolved an action against Steffen individually, she believed that the “SEC’s interest in ensuring that this type of conduct does not go unpublished will not be furthered by continuing the suit against Steffen, in light of his age, the burden to defend this suit, and the previous adjudications.

III.             Jurisdictional Box Score

Case

SEC v. Straub, et al

SEC v. Sharef, et al

Defendants Elek Straub, Andras Balogh and Tamas Morvai Herbert Steffens
Judge Richard Sullivan Shira Schendlin
Underlying FCPA Case Magyar Telekom, Plc Siemens AG
Analysis – Minimum Contacts
  1. Made false statements to company auditors.
  2. Knowing that company securities traded on American exchange
  3. Prospective purchasers would likely be influenced by false financial filings.
  1. No evidence proffered defendant had directed, ordered or had awareness of bribes.
  2. No evidence that he was involved in falsification of financial records
Analysis – Reasonableness
  1. SEC could not seek redress outside US
  2. US government has strong interest in hearing matter
  1. Defendant had lack of geographic ties to US
  2. Age of Steffens – 76
  3. Country of his domicile has resolved action against him individually

These two cases are very fact specific. However, they also set some clear parameters as to whether and how a FCPA enforcement action can be brought against individual foreign defendants. The difference between the two cases would appear to be affirmative actions by the three Magyar Telekom employees in providing false information in the reporting of financial information which is made public to companies listed in the US. This may well set a bar to future actions against foreign nationals under the FCPA.