Among the more controversial questions about the U.S.’s Foreign Corrupt Practices Act has been the extent of its reach in enforcement actions against foreign-domiciled individuals. Two recent decisions from the Southern District of New York reached differing conclusions about the statute’s reach. One case rejected the individual’s motion to dismiss the FCPA enforcement action, while the second granted the individual defendant’s motion to dismiss. Both decisions were based on the court’s personal jurisdiction over the individuals. The difference between the two decisions sheds some light on the question of extent of the FCPA’s reach over foreign individuals.
The first of these two rulings involved three executives of Magyar Telecom. The company was accused of involvement in schemes to bribe government officials in Macedonia and Montenegro. The company and its corporate parent, which were subject to U.S. jurisdiction because their securities (in the form of ADRs) traded on U.S. exchanges, entered into a non-prosecution agreement and also agreed to pay over $95 million in criminal fines and civil penalties.
The SEC also filed 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 U.S lacked personal jurisdiction over them.
In a February 8, 2013 order (here), Southern District of New York Judge Richard J. Sullivan denied the defendants’ motion to dismiss. Judge Sullivan held that the SEC had met its burden of showing that the exercise of personal jurisdiction over the three was consistent with constitutional due process. Judge Sullivan based his ruling not on the individuals’ physical location but their actions on Magyar’s behalf. The complaint, Sullivan observed, alleges that the defendants “engaged in a cover up through their statements to Magyar’s auditors knowing that [the company’s securities} traded on an American exchange and that prospective purchasers” would “likely be influences by any false financial filings.”
With respect to the question of whether or not the defendants had sufficient “minimum contacts” to support the constitutional exercise of jurisdiction, Judge Sullivan noted that “the 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.” He added that “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.”
Judge Sullivan specifically noted that his ruling did not envision any sort of rule that would subject any overseas employee of a company alleged to have violated the FCPA to personal jurisdiction in the U.S. He noted that “although Defendants’ alleged bribes may have taken place outside the Unites States…their concealment of those bribes, in conjunction with Magyar’s SEC filings, was allegedly directed toward the United States.”
In the second of the two decisions, on February 19, 2013, Southern District of New York Judge Shira Scheindlin granted the motion to dismiss of one of the seven individual Siemens executives named in a FCPA enforcement action. Judge Scheindlin’s opinion can be found here. Siemens of course has been embroiled in one of the largest bribery investigations of all time. The SEC filed a separate 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 CEO of Siemens Argentina twice before his retirement in 2003. He never worked in the U.S. The SEC alleged that Steffen helped facilitate a bribe to the Argentinian president to help secure a large government contract by allegedly encouraging another Siemens official to authorize bribes of Argentinian officials
In granting Steffen’s motion, Judge Scheindlin found that Steffen lacked sufficient contacts with the U.S. and dismissed the case against him. Judge Scheindlin found that “Steffen’s actions are far too attenuated from the resulting harm to establish minimum contacts.” She noted that “the SEC does not allege that he directed, ordered or even had awareness of the cover ups … much less that he had any involvement in the falsification of SEC filings in furtherance of the cover ups.”
Judge Scheindlin went on to observe that the exercise of jurisdiction over foreign defendants based on their effects upon SEC filings is “in need of a limiting principle,” adding that “if this Court were to hold that Steffen’s support for the bribery contact 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.”
In further considering whether it would be reasonable for the Court to exercise jurisdiction over Steffen, Judge Scheindlin noted that “Steffen’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 all weigh against personal jurisdiction.” She added that the SEC and the Department of Justice “have already received comprehensive remedies against Siemens” and “Germany has resolved an action against Steffen individually.”
The FCPA Blog’s discussion of Judge Scheindlin’s ruling (as well as a detailed discussion of the larger background regarding the anti-bribery enforcement proceedings involving Siemens) can be found here. Victor Li’s February 20, 2013 Am Law Litigation Daily article about the ruling can be found here.
These two cases reached differing results, although the differing outcomes obviously depended on some very case-specific factual differences. Outcomes of personal jurisdiction motions often are very fact specific. For that reason it could be argued that there is little significance to the fact that in one case the Court found that it had personal jurisdiction over the individual defendants and in another it did not.
Though personal jurisdiction rulings are notoriously fact-specific, there nevertheless are certain conclusions that can be drawn from these two decisions, particularly in consideration of the question when a foreign domiciled individual charged with an FCPA violation can be subject to personal jurisdiction in the U.S. As James Dowden and Nick Berg of the Ropes & Gray law firm noted in their February 27, 2013 Law 360 article entitled “Rare Guidance On FCPA’s Reach Over Foreign Nationals” (here, registration required), the two cases “reaffirm U.S. regulators’ long-standing position that the FCPA has broad applicability to foreign nationals, while also setting the outer limits of the civil scope of the FCPA.”
In that regard, Judge Scheindlin herself not only referred to Judge Sullivan’s ruling in the Magyar executives’ case, but she identified the critical distinctions between the two cases. She noted first that “there is ample (and growing support in the case law for the exercise of jurisdiction over individuals who played a role in falsifying or manipulating financial statements relied upon by U.S. investors in order to cover up illegal actions directed entirely at a foreign jurisdiction.” She cited Judge Sullivan’s ruling the Magyar executives’ case as an example where the court “exercised jurisdiction over individuals who orchestrated a bribery scheme … and as part of the bribery scheme signed off on misleading management representations to the company’s auditors and signed false SEC statements.” However, as noted above, Scheindlin found that the Siemens executive in the case before her was not alleged to have been involved in the cover ups or the falsification of the SEC filings.
At a minimum, the two rulings signify that though U.S. courts may properly exercise personal jurisdiction over foreign individuals in FCPA enforcement action when the facts support jurisdiction, there is a also a point when a foreign-domiciled individual’s involvement in the alleged corrupt activity is too attenuated to support personal jurisdiction. The specific considerations that matter include the extent of the individual’s connection to the actual bribery, the extent of the individual’s role in any cover-up of the bribery, and the extent of the individual’s involvement in or contribution to the falsification of the company’s financial statements.
A February 2013 memorandum from the Arnold & Porter law firm discussing the two cases and entitled “Two Recent Decisions Address Jurisdiction Over Foreign Defendants in FCPA Cases” can be found here.