Number 1477
February 28, 2013
Client Alert
Latham & Watkins Litigation Department
Rare FCPA Case Law Provides Guidance
on Statute of Limitations and Personal
Jurisdiction in Civil Enforcement Cases
Against Foreign Defendants
“Two recent
decisions in the
Southern District
of New York
together shed new
light on when US
federal courts will
exercise personal
jurisdiction over
foreign defendants
accused of violating
the FCPA in civil
enforcement cases
and make clear
that the statute of
limitations for civil
FCPA claims will be
tolled while foreign
defendants remain
outside of the
United States.”
Two recent decisions in the Southern District of New York together shed new
light on when US federal courts will exercise personal jurisdiction over foreign
defendants accused of violating the Foreign Corrupt Practices Act (FCPA) in civil
enforcement cases and make clear that the statute of limitations for civil FCPA
claims will be tolled while foreign defendants remain outside of the United States.
On February 8, 2013, in SEC v. Straub, Judge Richard Sullivan ruled that the
Securities and Exchange Commission (SEC) could proceed with FCPA charges
against three former executives of a Hungarian telecommunications firm for alleged
corruption in Macedonia because the bribery scheme involved the falsification of
securities filings published to US investors.1 Shortly thereafter, in SEC v. Sharef,
Judge Shira Scheindlin dismissed FCPA charges against a German executive in
Argentina because the executive’s alleged corrupt activity lacked a connection to
his employer’s financial statements.2 Taken together, these decisions have begun to
create identifiable boundaries, if not limits, to the SEC’s ability to proceed against
foreign employees of foreign issuers, and perhaps foreign employees of US-based
issuers as well.
On the other hand, Straub endorsed the government’s position that the five
year statute of limitations for FCPA claims is tolled for any period during which
individual defendants are not “found within the United States,” even if service
of process is available under the Hague Convention or other foreign laws. As a
result, to the extent that courts adopt Judge Sullivan’s logic, it may be the rare case
in which the government will face a colorable statute of limitations defense by a
foreign defendant.
SEC v. Straub
The charges in SEC v. Straub stem from an alleged bribery scheme aimed at
blunting the effects of regulatory reform in Macedonia. Magyar Telekom, a
Hungarian company, jointly owned a Macedonian telecommunications firm that was
threatened by Macedonian legislation that imposed higher fees on communications
companies and licensed a competitor. Three senior Magyar Telekom executives
allegedly entered into secret agreements with Macedonian officials associated with
the government in power at that time to delay implementation of the legislation.
Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated
limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships
conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in association with the Law Office of Salman
M. Al-Sudairi. In Qatar, Latham & Watkins LLP is licensed by the Qatar Financial Centre Authority. Under New York’s Code of Professional
Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend
upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York’s Disciplinary Rules
to Latham & Watkins LLP, 885 Third Avenue, New York, NY 10022-4834, Phone: +1.212.906.1200. © Copyright 2013 Latham & Watkins.
All Rights Reserved.
Latham & Watkins | Client Alert
The Magyar Telekom executives allegedly authorized up to €10 million in bribes
and promised business opportunities to certain officials. The €4.8 million in alleged
bribes ultimately paid were disguised as payments on success-fee-based contracts
for marketing and consulting services. The scheme was purportedly memorialized
in several secret written protocols signed by the executives. Drafts of these protocols
and other documents relating to the bribery scheme were attached to emails sent by
one of the executives, which according to the SEC “were sent from locations outside
the United States, but were routed through and/or stored on network servers
located within the United States.”3
Throughout the alleged scheme, the securities of both Magyar Telekom and
a company that held a controlling interest in it were publicly traded through
American Depositary Receipts (ADRs) listed on the New York Stock Exchange
(NYSE). In connection with US filing requirements, the senior executives made
certain representations to Magyar Telekom’s auditors relating to the Company’s
financial records and their knowledge of any possible violations of laws or
regulations.
On December 29, 2011, the SEC charged the executives and Magyar Telekom
with violating the FCPA’s anti-bribery provisions, failing to keep accurate books
and records, falsifying books and records, and making false statements to auditors.
Magyar Telekom settled the SEC claims for US$31.5 million and agreed to pay a
US$59.6 million criminal penalty to the Department of Justice as part of a deferred
prosecution agreement.4 The executives moved to dismiss the charges.
Personal Jurisdiction and Territorial Reach
The executives first challenged the court’s ability to exercise personal jurisdiction
on the basis that they lacked sufficient “minimum contacts” with the United States.
The court rejected this argument.
Judge Sullivan found that because Magyar Telekom’s ADRs were registered with
the SEC and publicly traded on the NYSE, the executives “knew or had reason to
know that any false or misleading financial reports would be given to prospective
American purchasers of those securities.”5 For this reason, the alleged conduct
involving improper payments, inaccurate financial records and misrepresentations to
auditors “was designed to violate US securities regulations and was thus necessarily
directed toward the United States, even if not primarily directed there.”6
The court rejected the executives’ argument that asserting personal jurisdiction over
them would mean that there was personal jurisdiction over all directors, officers and
employees of foreign issuers. Judge Sullivan emphasized that he was not creating
a per se rule regarding personal jurisdiction. Instead, he explained that he had
conducted a fact-based inquiry and noted that, while the bribes may have taken
place outside the United States, the concealment of those bribes, particularly in the
context of the company’s SEC filings, was directed toward the United States.7
The executives also argued that the SEC was required to show that they were
aware that their emails would be routed through servers in the United States — and
thus were intentionally using an instrumentality of interstate commerce in a corrupt
manner — in order to state an FCPA claim. The court also rejected this argument.
Although Judge Sullivan found that the plain language of the FCPA is ambiguous,
he concluded that legislative history made clear that “defendants need not have
formed the particularized mens rea with respect to the instrumentalities of interstate
commerce.”8
2
Number 1477 | February 28, 2013
Latham & Watkins | Client Alert
Statute of Limitations
The executives also argued that the charges were barred because the five year
limitation for FCPA claims had expired. The statute of limitations for civil FCPA
claims is established by 28 U.S.C. § 2462, which sets a five year limitation period
“if, within the same period, the offender . . . is found within the United States in
order that proper service may be made thereupon.”9 The SEC took the position
that, even though its claims were brought more than five years after the alleged
corrupt behavior, the limitations period did not expire because the executives were
not physically located within the United States for five years during that period.
The executives argued that the purpose of 28 U.S.C. § 2462 was to ensure that
defendants could be served and that the executives could have been served outside
of the US — through the Hague Service Convention or by other means — before
the five-year limitations period had expired. The court rejected this argument,
reasoning that both the language and history of 28 U.S.C. § 2462 supported the
SEC’s interpretation.
SEC v. Sharef
The facts underpinning SEC v. Sharef involved an alleged scheme by senior
executives in a German company to bribe high-level Argentinian government
officials, first to win a one billion dollar contract to create national identity cards and
later to hide evidence of the initial bribes from arbitrators hearing a dispute over the
identity card project. The company is alleged to have paid a total of US$100 million
in bribes over a decade. Some of the payments at issue were directed to accounts in
the United States and the defendants were alleged to have participated in meetings
in New York related to the bribery scheme. One executive made Sarbanes-Oxley
certifications attesting that the financial statements of a subsidiary company
implicated in the corruption were not false or misleading.
In December 2008, the SEC charged the company with FCPA violations in
Argentina and other countries. It paid over US$1.6 billion to the SEC, DOJ and
German authorities to resolve those and related charges. In late 2011, the SEC
charged seven former executives with violations of the FCPA’s anti-bribery, books
and records and internal controls provisions.10
Lack of Personal Jurisdiction
The former Chief Executive Officer (CEO) of the company’s Argentinian subsidiary
moved to dismiss the charges for lack of personal jurisdiction. The SEC alleged
that the executive was deeply involved in the bribery scheme. His contacts with
the United States, however, were limited. The SEC alleged that another company
executive located in New York telephoned the defendant on one occasion to discuss
the bribery scheme and that part of a US$10 million bribe was routed to a United
States bank account.
The executive argued that the tenuous link between his alleged conduct and the
United States was insufficient to confer personal jurisdiction on US courts. The SEC
responded that his alleged role in encouraging the Chief Financial Officer (CFO) to
authorize bribes foreseeably resulted in the filing of falsified securities filings in the
United States.
Judge Scheindlin agreed with the defendant. The court stressed that the CFO had
sought and received approval from several other superiors (not the defendant)
to make the bribes. The court also noted that there were no allegations that the
defendant was directly involved in or aware of the implementation of the scheme
3
Number 1477 | February 28, 2013
Latham & Watkins | Client Alert
beyond its initial stages. Significantly, the court refused to characterize the call from
New York to the defendant (which he did not initiate) or the routing of the alleged
bribery money to US accounts (which he did not direct) as conducted aimed by the
defendant towards the United States.11
Citing Judge Sullivan’s holding in Straub, the court acknowledged that “[i]t is now
well-established that signing or directly manipulating financial statements to cover
up illegal foreign action, with knowledge that those statements will be relied upon
by United States investors” will confer personal jurisdiction in the United States.12
However, because the defendant in this case lacked “any alleged role in the cover
ups themselves, let alone any role in the preparing of false financial statements,”
Judge Scheindlin declined to exercise jurisdiction.13
Judge Scheindlin then briefly analyzed the “reasonableness” prong of the personal
jurisdiction test. She cited as support for her decision not to exercise jurisdiction that
the defendant was advanced in age (74 years old) and spoke English poorly, and
that the federal government’s interest in punishing the FCPA violations had already
been addressed to some extent by penalties against the company and German
penalties against the defendant.
Implications for Foreign Issuers and Employees
Judge Sullivan’s decision in Straub adopted the broad jurisdictional and
extraterritorial conception of the FCPA advanced by the government. Judge
Scheindlin’s decision in Sharef, on the other hand, demonstrates that US courts will
require that the government allege conduct that is purposefully directed towards the
United States before exercising jurisdiction.
Several points deserve particular note: • The fact that a foreign executive is involved in allegedly corrupt activity, even if
acting on behalf of a foreign issuer of US securities, will not in itself be sufficient
to confer personal jurisdiction.
• When assessing personal jurisdiction, courts will likely focus on (1) the
relationship between the defendant’s conduct and the preparation of financial
reports or other materials incorporated into US securities filings, and (2) the
defendant’s awareness of this relationship.
• Making false certifications or falsifying securities filings will almost certainly
provide grounds for personal jurisdiction.
• Emails that pass through servers in the United States are sufficient to satisfy the
FCPA’s “instrumentality of interstate commerce” element, even if they are sent
and received outside the United States by persons unaware that the emails will
pass through the United States.
• The five-year limitations period for civil FCPA violations will likely be considered
tolled for any period that the defendant remains outside the United States.14
4
Number 1477 | February 28, 2013
Latham & Watkins | Client Alert
Endnotes
1
No. 11-cv-9645 (RJS) (Feb. 8, 2013) (order denying defendants’ motion to dismiss).
2
No. 11-cv-9073 (SAS) (Feb. 19, 2013) (order granting defendant’s motion to dismiss).
3
Straub, slip. op. at 15.
4
Secs. and Exch. Comm’n, Litigation Release No. 22213, SEC Charges Magyar Telekom and Former
Executives with Bribing Officials in Macedonia and Montenegro (Dec. 29, 2011), available at http://www.
sec.gov/litigation/litreleases/2011/lr22213.htm.
5
Straub, slip op. at 8-9.
6
Id. at 8.
7
Id. at 11.
8
Id. at 16.
9
Id. at 12-13.
10
11
Secs. and Exch. Comm’n, Litigation Release No. 22190, SEC Charges Seven Former Siemens
Employees with Bribing Leaders in Argentina (Dec. 13, 2011), available at http://www.sec.gov/litigation/
litreleases/2011/ lr22190.htm. The DOJ brought criminal charges against eight former executives at the
same time.
Sharef, slip. op. at 16 n.63.
12
Id. at 18.
13
Id. at 19.
14
Unlike 28 U.S.C. § 2642, the statute of limitations for criminal FCPA violations does not exclude time
spent outside the United States. See 18 U.S.C. § 3282(a).
If you have any questions about this Client Alert, please contact one of the authors
listed below or the Latham attorney with whom you normally consult:
Noreen A. Kelly-Dynega
+1.212.906.1736
[email protected]
New York
Maria A. Barton
+1.212.906.4552
[email protected]
New York
Tyler U. Nims
+1.212.906.4702
[email protected]
New York
5
Number 1477 | February 28, 2013
Latham & Watkins | Client Alert
Client Alert is published by Latham & Watkins as a news reporting service to clients
and other friends. The information contained in this publication should not be
construed as legal advice. Should further analysis or explanation of the subject
matter be required, please contact the attorney with whom you normally consult. A
complete list of our Client Alerts can be found on our website at www.lw.com.
If you wish to update your contact details or customize the information you receive
from Latham & Watkins, visit http://events.lw.com/reaction/subscriptionpage.html to
subscribe to our global client mailings program.
Abu Dhabi
Houston
Paris
Barcelona
London
Riyadh*
Beijing
Los Angeles
Rome
Boston
Madrid
San Diego
Brussels
Milan
San Francisco
Chicago
Moscow
Shanghai
Doha
Munich
Silicon Valley
Dubai
New Jersey
Singapore
Frankfurt
New York
Tokyo
Hamburg
Orange County
Washington, D.C.
Hong Kong
* In association with the Law Office of Salman M. Al-Sudairi
6
Number 1477 | February 28, 2013