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Issues To Consider From The Panasonic Enforcement Action

Issues

This prior post went in-depth into the $280 million Foreign Corrupt Practices Act enforcement action against Japan-based Panasonic Corp.  and a U.S. subsidiary Panasonic Avionics Corp. (PAC).

This post continues the analysis by highlighting additional issues to consider.

Timeline

As highlighted in this prior post, Panasonic’s FCPA scrutiny appears to have begun in early 2013. Thus from start to finish, the company’s FCPA scrutiny lasted approximately 5.5 years.

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Once Upon A Time, The DOJ Did Specifically Identify “Foreign Officials” And Rep. Ros-Lehtinen Is Miffed That It Doesn’t Now

Ros

There are several material differences between how the DOJ enforces the Foreign Corrupt Practices Act in the modern era compared to the past.

For instances, as highlighted in this previous post, in the modern era the vast majority of corporate FCPA enforcement actions do not result in related individual charges against company employees. Between 1977 – 2004, the exact opposite was true – most corporate FCPA enforcement actions did result in related individual charges.

For most of the FCPA’s history, the DOJ either charged a business organization suspected of FCPA violations with an offense or did not charge the organization. In the modern era, the DOJ has created a buffet of options (non-prosecution agreements, deferred prosecution agreements) and added “declinations with disgorgements” to the buffet line in September 2016 (see here for the prior post).

As highlighted in this post, for many years the DOJ specifically identified “foreign officials” implicated in an FCPA enforcement action. However, in the modern era of FCPA enforcement the DOJ does not and Rep. Ileana Ros-Lehtinen (R-FL)(pictured) is rightfully miffed.

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Worth Noting From Canada’s First CFPOA Decision

This previous guest post highlighted Canada’s first individual conviction for a bribery offense under the Corruption of Foreign Public Officials Act (“CFPOA”), including the specific facts in the action against Nazir Karigar.

Given the general dearth of Foreign Corrupt Practices Act case law, you ought to have the urge to digest any form of judicial scrutiny of “FCPA-like” cases and the judicial opinion in the Nazir Karigar case makes for an interesting and worthwhile read.

For starters, the judge found that Air India officials were “foreign public officials” under the CFPOA.

This is hardly surprising.

Why?

Because the CFPOA, unlike the FCPA, defines the targeted recipient category, in pertinent part, as follows.

“a person who performs public duties or functions for a foreign state, including a person employed by a board, commission, corporation or other body or authority that is established to perform a duty or function on behalf of the foreign state, or is performing such a duty or function”

As noted in my “foreign official” declaration (which has been cited by the defense in the pending 11th Circuit “foreign official” appeal in the Joel Esquenazi and Carlos Rodriguez action), despite being aware of state-owned enterprises (SOEs) during the FCPA’s legislative process, despite exhibiting a capability for drafting a foreign official definition that expressly included SOEs in other bills, and despite being provided a more precise way to describe SOEs during the legislative process, Congress chose not to include such definitions or concepts in FCPA.

Back to the Karigar decision.

The first take-away point is that the bribery attempt was unsuccessful in that the contract at issue was never awarded.  There have been FCPA enforcement actions consistent with this theory as well.  (See, among other actions, the 2005 FCPA enforcement action against Monsanto – here and here).

A disputed legal issue in Karigar was whether the prosecution needed to prove that the actual bribes were paid and the specific identity of the foreign public officials allegedly bribed.  Summarizing the argument of defense counsel, the opinion states:

“[I]n the submission of counsel for the accused, [counsel argues] that the court cannot know whether any foreign public official was actually offered or received a bribe or other inducement, whether any such official was induced to use his or her position to influence any act or decision and whether any such official had any duties or functions which could be influenced by any such inducement.  In short, in the absence of any evidence that a bribe was actually offered or paid to any official, how can the Crown have proven the requisites of the offense charged beyond a reasonable doubt?”

The opinion then states:

“I agree that there was no evidence as to what became of the two payments … after the amounts were transferred from the bank account of Cryptometrics Inc. in New York to the accused’s account in India.  It is correct so say that there was no evidence as to what subsequently became of those two sums of money and in particular whether these funds were offered or paid to anyone who qualified as a foreign public official under the Act.”

“The position of the Crown is that no evidence of what actually became of the money is necessary to establish a violation of the CFPOA.  The Crown argues that incoate offenses, in particular a conspiracy to pay bribes, as exists here, constitutes a violation of the Act.  […]

[…]

“There would appear to be no jurisprudence interpreting the CFPOA.  This is the first prosecution under this Act which has proceeded to trial.”

“In any event, I am satisfied that a conspiracy or agreement to bribe foreign public officials is a violation of the Act.  The actus reus of this offense is the agreement to pursue an unlawful object.  […]

[…]

“I also reject the accused’s submission on a policy basis.  In my opinion if the word ‘agrees’ in the Act is restricted to the act of essentially two parties, ‘one to pay the bribe and one to receive the bribe,’ the scope of the Act would be unduly restricted and its objectives defeated.  Moreover, to require proof of the offer of or receipt of a bribe and the identity of a particular recipient would require evidence from a foreign jurisdiction, possibly putting foreign nationals at risk and would the legislation difficult if not impossible to enforce and possibly offend international comity.”

If the above sounds familiar to you, it should.  Similar issues have been contested in recent FCPA enforcement actions.

In U.S. v. O’Shea, the DOJ alleged that the defendant violated the FCPA by making payments to officials at a Mexican utility allegedly owned or controlled by the Mexican government.  The judge granted a motion for acquittal after the DOJ’s evidence.  In doing so, and as relevant to the identity of a “foreign official” issue, the judge stated:

“You can’t convict a man promising to pay unless you have a particular promise to a particular person for a particular benefit. If you call up [somebody] and say, look, I’m going to send you 50 grand, bribe somebody, that does not meet the statute.”

However, the notion that the specific identity of a “foreign official” must be proven by the enforcement agencies has been rejected by two other trial courts in individual FCPA enforcement actions.  In SEC v. Jackson, the court concluded, in ruling on a pre-trial motion to dismiss, that the “government does not have to connect the payment to a particular official.”  The court stated:

“The language of the statute does not appear to require that the identity of the foreign official involved be pled with specificity. […] Nothing in the legislative history of the FCPA suggests that Congress intended to limit the application of [the FCPA] to those cases where the government could show that a defendant knew, either by name or job description, precisely which foreign officials would be receiving the illicit payments he had authorized. […] It would be perverse to read into the statute a requirement that a defendant know precisely which government official, or which level of government official, would be targeted by his agent; a defendant could simply avoid liability by ensuring that his agent never told him which official was being targeted and what precise action the official took in exchange for the bribe.”

Likewise in SEC v. Straub, the court agreed with the above Jackson decision in the context of a pre-trial motion to dismiss and stated that “the language of the [FCPA] does not appear to require that the identity of the foreign official involved be pled with specificity.”  The court stated:

“Such a requirement would be at odds with the statutory scheme, which targets actions (such as making an ‘offer’ or ‘promise’) without requiring that the ‘foreign official’ accept the offer or reveal his specific identity to the payer.  Indeed, the fact that the FCPA prohibits using ‘any person’ or an intermediary to facilitate the bribe to any ‘foreign official’ or ‘any foreign political party’ suggests that the statute contemplates situations in which the payer knows that a ‘foreign official’ will ultimately receive a bribe but only the intermediary knows the foreign official’s specific identity.”

Another interesting aspect of the Karigar is asking the obvious question – will there be a related FCPA enforcement action(s)?

Karigar was a paid agent for Cryptometrics Canada and acted on behalf of related entities including Cryptometrics USA.  According to the opinion, $200,000, was transferred from Cryptometrics USA to Karigar’s bank account in furtherance of the bribery scheme.  The opinion further references a relevant letter agreement between Kairgar and the CEO of Cryptometrics USA as well as specific conduct in furtherance of the bribery scheme that took place at Cryptometrics’s office in New York.  In addition, the opinion references an additional $650,000 that was transferred from Crytometrics USA’s bank account in furtherance of the scheme.

Moreover, as noted in the opinion, Karigar corresponded with the DOJ regarding the conduct at issue.  Specifically, the opinion states “that on August 13, 2007, Karigar  – using an alias – “sent an e-mail to the Fraud Section (FCPA) of the U.S. Department of Justice stating that he had information about U.S. citizens paying bribes to foreign officers and inquired about reporting the matter.”  The opinion also references two other e-mails Karigar sent to the DOJ.

Friday Roundup

Simply inexcusable, tell us who, an interesting case study, and for the reading stack.  It’s all here in the Friday roundup.

Simply Inexcusable

The government holds those subject to the FCPA to high standards.  If the proverbial “right hand” in a company doesn’t know what the “left hand” is doing, the government is likely to call that an internal control failure.

Ought not the government be held to the same standard?

What follows is simply inexcusable.

In February 2012, Judge Lynn Hughes (S.D.Tex.) signed this final dismissal of the FCPA enforcement action against John O’Shea.  The motion followed Judge Hughes granting O’Shea’s motion for acquittal after the DOJ’s case in chief in the FCPA trial.  (See here for the prior post).  During the case, Judge Hughes stated, among other things, as follows.  “The problem here is that the principal witness against Mr. O’Shea . . . knows almost nothing. . . .;  The government should have been prepared before they brought the charges to the Grand Jury. . . . You shouldn’t indict people on stuff you can’t prove.’’

Following the acquittal and dismissal, O’Shea has attempted to resume a normal life without the specter of criminal charges and possible jail time occupying his mind.  It is understandable that O’Shea wants his reputation and “old” life back.  But removing the taint of being labeled a criminal law violator by the government has not come easy for O’Shea.

Case in point is the following story.

O’Shea was recently hired by a company and traveled to Canada for a business trip.  The trip was uneventful until O’Shea tried to enter Canada.  It turns out the relevant government databases were not updated to reflect the disposition of his case – something that happened 14 months ago!

O’Shea indicated that he spent the entire afternoon with officials of the Canadian government to persuade them that he should not be put on the next plane back to the U.S. with U.S. marshals.  O’Shea reports that the Canadian official was open-minded enough to visit internet sites suggested by O’Shea (including FCPA Professor) as proof that he was no longer a criminal defendant in the U.S.

After his business trip to Canada, O’Shea also had problems re-entering the U.S. from Canada and could not help but wonder whether someone would be waiting for him upon arrival in Houston.  O’Shea reports that thankfully his fears were not realized, but he can not help but wonder what would have happened if his business trip was to some country other than Canada.

In short, the government’s internal control failure was simply inexcusable.

Tell Us Who

In the aftermath of this week’s Ralph Lauren enforcement action (see here for the prior post) alleging payments to Argentine customs officials, the Argentine government wants to know who the customs officials are.

As noted in a Law360 article, “in a letter to U.S. Ambassador to Argentina Vilma Martinez, the head of Argentina’s tax agency, Ricardo Echegaray, said that it was necessary for the Argentine government to have names and more detailed information about the alleged bribery to aid in a newly launched criminal investigation into the matter.”  The article further stated as follows.  “While seeking the names of Argentine officials implicated in the scheme, Echegaray also put the blame on Ralph Lauren’s customs brokers, who are not government officials, but rather private professionals hired to deal with trade matters. Echegaray likened these brokers’ roles to those of a tax adviser or accountant which companies hire for assistance.”

The question asked by the Argentine official is obviously a legitimate question.

But query whether the DOJ and/or SEC even know who the officials are.

As noted in this previous post concerning the SEC’s briefing in the Jackson and Ruehlen case involving alleged payments to Nigerian customs officials, the SEC argued that the name, titles and exact positions of foreign officials allegedly bribed need not be known in order to state a claim under the FCPAs anti-bribery provisions.

As highlighted in this previous post, in ruling on Jackson and Ruehlen’s motion to dismiss, Judge Keith Ellison (S.D.Tex.) noted in a footnote as follows.

“[T]he Court must disagree with Judge Hughes’s oral statements in a recent criminal FCPA prosecution. [U.S. v. O’Shea] (“You can’t convict a man promising to pay unless you have a particular promise to a particular person for a particular benefit. If you call up the Basurtos and say, look, I’m going to send you 50 grand, bribe somebody, that does not meet the statute.”). This Court holds that asking a third-party to bribe a government official, in order to induce that official to act in one of the proscribed ways detailed in [the FCPA], would meet the statute. The government does not have to “connect the payment to a particular official.”
Case Study

This post earlier this week regarding Wal-Mart noted that savvy investors should have recognized the NY Times induced “FCPA dip” of the company’s stock as a buying opportunity because the market often overreacts to FCPA issues.

In this post earlier this week regarding Ralph Lauren Corp.’s (RLC) FCPA enforcement action, it was noted that the RLC enforcement action was a rare instance of an issuer not previously disclosing its FCPA scrutiny.  Thus, the first instance of public scrutiny appears to have been announcement of the enforcement action on Monday morning.  RLC’s stock dipped approximately 2% on the news and closed at $165.93.  The “FCPA dip” lasted only a day, as Tuesday the stock rebounded and then some and closed yesterday at $175.38.

Reading Stack

Miller & Chevalier’s seasonal FCPA alerts are always information reads.  The firm recently released its FCPA Spring Review 2013.

Is sex as a “thing of value”?   See here from Wendy Wysong (Clifford Chance) – with a particular focus on Asia.

Should you be looking for further citations that more FCPA enforcement is good for FCPA Inc., see this recent article in Lawyers Weekly, an Australian publication.  The article begins as follows.   “A crackdown on foreign bribery has created “a mountain of work” for lawyers, a Jones Day partner has said ahead of a major international anti-corruption conference.”

*****

A good weekend to all.

Motion To Dismiss Denied In Former Magyar Telekom Exec’s Case

This previous post discussed the SEC’s December 2011 Foreign Corrupt Practices Act enforcement action against former Magyar Telekom executives Elek Straub, Andras Balogh and Tamas Morvai (“Defendants”).  Magyar Telekom is a Hungarian telecommunications company that had shares listed on the New York Stock Exchange and previously resolved a joint DOJ/SEC enforcement action in December 2011.  (See here for the previous post).

Previous posts here, here and here discussed briefing on the Defendants’ motion to dismiss.  In sum, the foreign national defendants moved to dismiss the SEC’s complaint (alleging the Defendants’ role in a bribery scheme in Macedonia) on three principal grounds:  (1) the court lacked personal jurisdiction over them; (2) the SEC’s claims were time-barred; and (3) the complaint failed to state claims for certain of its causes of action.

Last Friday, U.S. District Court Judge Richard Sullivan (S.D.N.Y.) denied defendants’ motion in its entirety.  (See here for the memorandum and order).  This post summarizes and analyzes Judge Sullivan’s decision.

While obviously important to the case, Judge Sullivan’s personal jurisdiction conclusion is case-specific and the least important conclusion from the standpoint of FCPA case law.  (Whether a court can exercise personal jurisdiction over a specific defendant is a separate and distinct question from whether the jurisdictional element of an FCPA anti-bribery violation has been met – an issue also discussed in Judge Sullivan’s opinion).

Even though Judge Sullivan’s decision is a non-binding trial court decision, the two most important aspects of his decision concern statute of limitations and the jurisdictional element of an FCPA anti-bribery violation.

As to statute of limitations, Judge Sullivan seemed to understand the logic of the Defendants’ positions, yet exhibited judicial restraint in concluding that the plain language of the applicable statute of limitations compelled the conclusion that the limitations period did not begin to run because the foreign national defendants were not physicially present in the U.S.  In the words of Judge Sullivan, “it is not for this Court to second-guess Congress and amend” a statute.

As to the jurisdictional element of an FCPA anti-bribery violation, Judge Sullivan found the jurisdictional element of 78dd-1 (use of the “mails or any means or instrumentality of interstate commerce”) to be ambiguous and he thus consulted legislative history.  In reviewing the legislative history, Judge Sullivan concluded that the corrupt intent element of the FCPA did not apply to the jurisdictional component of the FCPA.  Accordingly, Judge Sullivan concluded that e-mails routed through and/or stored on network servers located within the U.S. are sufficient to plead the jurisdictional element of an FCPA anti-bribery violation even if the defendant did not personally know where his e-mails would be routed and/or stored.

Judge Sullivan’s conclusions on the above two issues are all the more notable given that similar issues are also presented in the current challenge pending – also in the S.D.N.Y. –  by former Siemens executive Herbert Steffen.  (See here for a prior post with links to the briefing).

The remainder of this post summarizes Judge Sullivan’s decision.  [Note, internal citiations from the opinion are omitted].

Personal Jurisdiction

After setting forth the allegations in the SEC’s complaint and the procedural history of the case, Judge Sullivan’s decision begins with personal jurisdiction issues.

Judge Sullivan began by stating the pleading standard on a motion to dismiss for lack of personal jurisdiction – that the SEC bears the burden of establishing that the court has jurisdiction over the defendants which can be met by pleading in good faith legally sufficient allegations of jurisdiction.

Judged against the due process standards of “minimum contacts” and “reasonableness,” Judge Sullivan concluded that the SEC established that defendants have minimum contacts with the United States and that the exercise of personal jurisdiction over the defendants would not be unreasonable.  Accordingly, Judge Sullivan concluded that “the SEC has met its burden at this stage of establishing a prima facie case of personal jurisdiction over defendants.”

As to “minimum contacts” Judge Sullivan stated as follows.

“[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.”

“Indeed, during the period of the alleged violations, Straub allegedly signed false management representation letters to Magyar’s auditors, and Balogh and Morvai signed allegedly false management subrepresentation letters for quarterly and annual reporting periods in 2005.  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.”

In discussing “minimum contacts” Judge Sullivan rejected Defendants’ assertion that their contact must “proximately cause” a  “substantial injury” in the forum.

As to Defendants’ argument that, should the Court exercise jurisdiction over them, “it would automatically imply that ‘any individual director, officer, or employee of an issuer in any FCPA case’ would also be subject to personal jurisdiction,” Judge Sullivan called Defendants’ concerns “overblown” and stated as follows.

 “In holding that Defendants have met their burden of demonstrating a prima facie case for jurisdiction at this early stage, the Court does not create a per se rule regarding employees of an issuer but rather bases its decision on a fact-based inquiry – namely, an analysis of the SEC’s specific allegations regarding the Defendants’ bribery scheme, Defendants’ falsification of Magyar’s books and records, and Defendants’ personal involvement in making representations and subrepresentations with respect to and in anticipation of Magyar’s SEC filings. Although Defendants’ alleged bribes may have taken place outside of the United States (as is typically true in cases brought under the FCPA), their concealment of those bribes, in conjunction with Magyar’s SEC filings, was allegedly directed toward the United States.”

[…]

“Accordingly, the Court finds that the SEC has established a prima facie case that Defendants had the requisite minimum contacts with the United States to support personal jurisdiction.”

As to the “reasonableness” prong of the due process analysis, Judge Sullivan cited other authority for the proposition that “the reasonableness inquiry is largely academic in non-diversity cases brought under federal law which provides for nationwide service of process because of the strong federal interests involved.”

Judge Sullivan then stated as follows.

“Like each and every court in this Circuit to have applied the reasonableness standard after determining that a given defendant has the requisite minimum contacts, this Court finds that this is not the rare case where the reasonableness analysis defeats the exercise of personal jurisdiction. Although 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.” Indeed, as the SEC rightly notes, unlike in a private diversity action, here there is no alternative forum available for the government. Thus, if the SEC could not enforce the FCPA against Defendants in federal courts in the United States, 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 therefore finds that the exercise of personal jurisdiction over Defendants is not unreasonable.”

Statute of Limitations

Judge Sullivan began by setting forth the applicable limitations period found in 28 USC 2462.

“Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced 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 be made thereon.” (emphasis added).

Judge Sullivan began by noting that it was “undisputed that more than five years have elapsed since the SEC’s claims first accrued” but that the parties disagreed as to the plain meaning of section 2642 and, given that Defendants were not physically located within the United States during the limitations period, whether the statute of limitations has run on the SEC’s claims.

Judge Sullivan stated as follows.  “The SEC argues that the statute of limitations has not run because the statute applies only ‘if within the same period, the offender … is found within the United States.  Thus, according to the SEC, because Defendants were not ‘found’ in this country at any point during the limitations period in question, the Court’s inquiry should end.  The Court agrees.”

Judge Sullivan stated as follows.

“Here, the operative language in § 2462 requires, by its plain terms, that an offender must be physically present in the United States for the statute of limitations to run. In arguing otherwise, Defendants essentially seek to amend the statute to run against a defendant if he is either ‘found within the United States’ or subject to service of process elsewhere by some alternative means. Such a reading would be a dramatic restatement of the statutory language and would render the clause “if . . . found within the United States’ mere surplusage.”

“Additionally, reading the statute to require a defendant’s physical presence in the United States is not inconsistent with § 2462’s statement of purpose, as was originally understood.”

Referring to the precursor to § 2642 passed in the 1790’s, and referencing when Congress added the specific language in 1839 and through subsequent re-codifications, Judge Sullivan acknowledged “that it might now be possible, through the Hague Service Convention or otherwise to serve defendants who are not found in the United States.”  However, he stated as follows.

“[This] does not change the fact that Congress has maintained the statutory carve out for defendants not found within the United States.  Indeed, although the purpose underlying the carve-out may no longer be as compelling as it might have once been in light of the possibilities opened by worldwide service of process, it is not for this Court to second-guess Congress and amend the statute on its own.  Accordingly, the Court finds that the statute of limitations within § 2462 has not run on the SEC’s claims.”

In addition to the above jurisdiction and statute of limitations challenges, the Defendants also argued that the SEC’s complaint should be dismissed for failure to state a claim as to:  (i) whether the complaint adequately alleged that Defendants made use of U.S. interstate commerce; (ii) whether the complaint adequately alleged the involvement of “foreign officials”; and (iii) claims pursuant to Exchange Act Rule 13b2-2 concerning misleading statements to auditors.

Jurisdictional Element of an FCPA Anti-Bribery Violation

Judge Sullivan began by noting that the complaint alleges that “Balogh used e-mails in furtherance of the bribe scheme by attaching [various documents] all of which were the alleged means by which Defendants concealed the true nature of the payments offered to the Macedonian government officials” and “that the e-mails were sent from locations outside the United States but were routed through and/or stored on network services located within the United States.”

As stated by Judge Sullivan, “according to the Defendants, because the SEC fails to allege that Defendants personally knew that their e-mails would be routed through and/or stored on servers within the United States, the SEC’s allegations cannot state a claim under the FCPA’s bribery provision.”

Judge Sullivan stated as follows.

“The issue of whether § 78dd-1(a) requires that a defendant intend to use “the mails or any means or instrumentality of interstate commerce” is a matter of first impression in the FCPA context. Section 78dd-1(a) is not a model of precision in legislative drafting: its text does not make immediately clear whether “corruptly” modifies the phrase “make use of the mails or any means or instrumentality of interstate commerce” or the phrase “any offer, payment, promise to pay, or authorization of the payment of any money . . . or . . . anything of value.”  The use of the adverb “corruptly” appears to modify the verb “use,” but the word’s delayed placement in the statutory text appears to reflect a legislative choice to modify the grouping of words that follows: “offer, payment, promise to pay, or authorization of the payment of any money . . . or . . . anything of value.” 15 U.S.C. § 78dd -1(a).  Because the plain language of the provision is ambiguous, even when read in context and after applying traditional canons of statutory construction, the Court turns to the legislative history, which is instructive:  The word “corruptly” is used in order to make clear that the offer, payment, promise, or gift, must be intended  to  induce the recipient to misuse his official position in order to wrongfully direct business to the payor or his client, or to obtain preferential legislation or a favorable regulation. The word “corruptly” connotes an evil motive or purpose, an intent to wrongfully influence the recipient.  S. Rep. No. 95-114, at 10 (1977).”

“Thus, the legislative history reveals that, although Congress intended to make an “intent” or mens rea requirement for the underlying bribery, it expressed no corresponding intent to make such a requirement for the “make use of . . . any means or instrumentality of interstate commerce” element.”

“Such a reading is consistent with the way that courts have interpreted similar provisions in other statutes. For instance, courts have held that the use of interstate commerce in furtherance of violations of the securities laws, the mail and wire fraud statutes, and money laundering statutes is a jurisdictional element of those offenses.  […] As such, defendants need not have formed the particularized mens rea with respect to the instrumentalities of commerce.”  […]  Although no court appears to have addressed whether the use of interstate commerce is also a jurisdictional element of an FCPA violation, the similarity of the language in § 78dd-1(a) […]  weighs in favor of finding that Congress intended a similar application of the requirement in the FCPA context.  […]  [T]he mere fact that § 78dd-1(a) does not include the phrase ‘directly or indirectly’ does not indicate that the requirement ‘make use’ implies that a defendant must have made direct use.  Therefore, the Court finds that the Complaint sufficiently pleads that Defendants used the means or instrumentality of interstate commerce, pursuant to the FCPA.”

As to the issues in the above paragraph, Judge Sullivan stated in footnotes as follows.

“The Court also rejects two of Defendants’ additional arguments. First, the Court rejects Defendants’ argument that the SEC has failed to allege that there was any ‘use’ whatsoever of the instrumentalities of interstate commerce.  As noted above, the Complaint specifically alleges that Balogh emailed, on behalf of Defendants, drafts of the Protocols, the Letter of Intent, and copies of consulting contracts to third-party intermediaries, and that the e-mails were ‘routed through and/or stored on network servers located within the United States.  The mere  fact that Defendants may not have had personal knowledge that their emails would be routed through or stored in the United States does not mean that they did not, in fact, use an instrument of interstate commerce sufficient for purposes of conferring jurisdiction. Second, the Court rejects Defendants’ argument that it was not foreseeable that emails sent over the Internet in a foreign country would touch servers located elsewhere. The Court does not disagree with Defendants that “the internet is a huge, complex, gossamer web”, but that is all the more reason why it should be foreseeable to a defendant that Internet traffic will not necessarily be entirely local in nature.”

“Defendants also assert that the Complaint fails to sufficiently allege that Defendants used the means or instrumentalities of interstate commerce “in furtherance” of their FCPA violations.  Specifically, they argue that the Complaint alleges only that Defendants executed a “scheme” to bribe Macedonian government officials and not that they made an “‘offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value.”  However, Defendants ignore the fact that the Complaint specifically alleges that Defendants sent the Protocols and Letter of Intent, which were essentially their offers to pay or promises to pay the alleged bribes, to Macedonian government officials.  These e-mails also included reference to the alleged ‘sham’ contracts used to conceal the true nature of Defendants’ bribes.  Accordingly, such allegations are sufficient to satisfy the ‘in furtherance’ language of § 78dd-1.

Identity of “Foreign Officials” 

Judge Sullivan agreed with the recent decision by Judge Ellison in SEC v. Jackson (see here for the prior post) that “the language of the statute does not appear to require that the identity of the foreign official involved be pled with specificity.”

Judge Sullivan stated as follows.

“Such a requirement would be at odds with the statutory scheme, which targets actions (such as making an “offer” or “promise”) without requiring that the “foreign official” accept the offer or reveal his specific identity to the payor.  Indeed, the fact that the FCPA prohibits using “any person” or an intermediary to facilitate the bribe to any “foreign official” or “any foreign political party” suggests that the statute contemplates situations in which the payor knows that a “foreign official” will ultimately receive a bribe but only the intermediary knows the foreign official’s specific identity.”

Judge Sullivan concluded on this issue as follows.

“In light of the fact that there is no requirement that the “foreign official” be specifically named and that reading such a requirement into the FCPA would be contrary to the statutory scheme, the Court finds that the Complaint satisfies Federal Rule of Civil Procedure 8(a). Specifically, the Complaint alleges, inter alia, that: (1) Magyar’s subsidiaries retained an intermediary to facilitate negotiations with “Macedonian government officials” on Magyar’s behalf; (2) the Protocols were signed by specific senior Macedonian officials from the majority and minority political parties of the governing coalition; (3) the Protocols “required government official to ignore their lawful duties” and recording obligations; (4) the government officials had the power to ensure both that “the government delayed or precluded the issuance of the third mobile telephone license” and that MakTel was exempted “from the obligation to pay an increased frequency fee”; (5) officials from the minority party in the governing coalition “occupied senior positions in the telecommunciations regulatory agencies with jurisdiction over the tender of the third mobile license”; and (6) Balogh communicated directly with the government officials of both parties in furtherance of the bribery scheme.  Such allegations are sufficient to put Defendants on notice of the substance of the SEC’s claims and that the allegedly bribed officials were acting in their official capacities. Accordingly, the Court finds that the SEC has satisfied its pleading obligations under Iqbal and Twombly with regard to the term “foreign official” in the FCPA.

Misleading Auditors

Judge Sullivan first found that the SEC’s complaint, rather than lumping Defendants together through group pleading, did state “with particularity the circumstances constituting the alleged fraud as to each defendant.”  As to whether Rule 13b2-2’s “materiality” standard referred to the so-called “reasonable investor” standard, Judge Sullivan cited other case law for the proposition that under the Rule “a statement is material if ‘ a reasonable auditor would conclude that it would significantly alter the total mix of information available to him.”  Judge Sullivan stated that such an “interpretation of Rule 13b2-2 is reasonable given that the Rule speaks about the relationship between a corporation’s director or officer and an accountant rather than an investor or recipient of a registration statement.”  Indeed, Judge Sullivan noted, “it would make little sense to import the reasonable investor standard to a Rule that does not even require that the misstatement eve be communicated to an investor in order to establish a violation.”

Judge Sullivan concluded as follows.

“Here, the Complaint alleges that “[h]ad Magyar[’s] auditors known [the facts alleged in the Complaint regarding the alleged bribery scheme], they would not have accepted the management representation letters and other representations provided by Straub[, n]or would the auditors have provided an unqualified auditor opinion to accompany Magyar[’s] annual report on Form 20-F.  In light of the SEC’s allegations noted above and the fact that the materiality of the misstatements made to the auditors is “a mixed question of law and fact that generally should be presented to a jury,”  the Court finds that the Complaint sufficiently alleges the materiality of Defendants’ alleged misstatements to Magyar’s auditors. Accordingly, the Court finds that the SEC’s Rule 13b2-2 claim survives Defendant’ motion.

As to the future of the case, Judge Sullivan set an April 3rd status conference.

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