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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.

Judge Grants Jackson And Ruehlen’s Motion To Dismiss SEC’s Monetary Claims – Finds That SEC Was Not Diligent In Bringing Case And That SEC Failed To Negate Facilitation Payments Exception – However Judge Allows SEC To File An Amended Complaint

Previous posts here, here and here discussed the motion to dismiss briefing in the SEC v. Mark Jackson and James Ruehlen Foreign Corrupt Practices Act enforcement action.  The enforcement action is notable in that the defendants, unlike most FCPA defendants, mounted a legal defense.

This previous guest post highlighted last week’s oral argument on the motion.

Yesterday, Judge Keith Ellison (S.D. Tex.) issued a lengthy 61 page decision (see here).

This post goes long and deep as to Judge Ellison’s decision.

Judge Ellison granted Defendants’ motion to dismiss the SEC’s claims that seek monetary damages while denying the motion to dismiss as to claims seeking injunctive relief.  Even though Judge Ellison granted the motion as to SEC monetary damage claims, the dismissal is without prejudice meaning that the SEC will be allowed to file an amended complaint within 30 days.  Presumably after the SEC does this, a new round of briefing will begin again.

In short, Judge Ellison’s decision was based on statute of limitations grounds (specifically that the SEC failed to plead any facts to support an inference that it acted diligently in bringing the complaint) as well as the SEC’s failure to adequately plead discretionary functions relevant to the facilitation payments exception.  As to the first issue, see this post from February 2011 in which I imagined a world in which FCPA defendants mounted legal defenses based on black-letter legal principles such as statute of limitations.  As to the second issue, Judge Ellison concluded, in what is believed to be an issue of first impression, that the SEC must bear the burden of negating the facilitation payments exception.

In addition, Judge Ellison’s decision also touches upon whether the SEC needs to specifically identify the alleged “foreign officials” as well as corrupt intent.  As to the first issue, Judge Ellison concluded that the identity of the foreign official need not be pled with specificity nor does the FCPA mandate a bright-line rule of detailed pleadings about a foreign official’s particular duties.  In so concluding, Judge Ellison acknowledged his disagreement with Judge Lynn Hughes (also in the S.D. of Texas) who stated the opposite in the DOJ’s unsuccessful prosecution of John O’Shea.

All issues are discussed below in the order discussed in Judge Ellison’s decision.

By way of background, the SEC’s complaint (see here for the prior post) alleges that Jackson and Ruehlen violated “the FCPA by participating in a bribery scheme to obtain illicit permits [Temporary Import Permits – “TIPs”] for oil rigs  in Nigeria in order to retain business under lucrative drilling contracts.”  The SEC’s complaint is based on the same core set of facts as the November 2010 DOJ/SEC enforcement action against the Defendants employer, Noble Corporation (see here for the prior post).  As Judge Ellison stated (his recitation of the facts takes up 15 pages) “the SEC charges Jackson and Ruehlen with multiple violations of the Foreign Corrupt Practices Act and other federal securities law in connection with actions they allegedly took to obtain TIPs and TIP extensions in order to avoid paying permanent import duties.”

As Judge Ellison observed in setting forth the legal standard in ruling on a motion to dismiss, “the question for the court to decide is whether the complaint states a valid claim when viewed in the light most favorable to the plaintiff” and the “court should not evaluate the merits of the allegation, but must satisfy itself only that plaintiff has adequately pled a legally cognizable claim.”

Judge Ellison next addressed Defendants claims which contended that the SEC’s complaint failed to adequately plead:  (1) the involvement of a foreign official; (2) that the payments were not facilitating payments, (3) that the Defendants acted corruptly, and (4) whether the facilitating payments exception is unconstitutionally vague.

“Foreign Official”

As to the involvement of a “foreign official,” Judge Ellison summarized the position of the parties as follows.

“Defendants contend that the FCPA requires a plaintiff to allege the identity of the foreign official whose authority a defendant sought to misuse.  They suggest that the SEC must allege by name, or at a minimum by role and job responsibility, the foreign official who was sought to be influenced.  The SEC contends that there is nothing in the FCPA that requires pleading the identity of the foreign official involved with the level of detail Defendants advocate.  Furthermore, it [the SEC] argues that Defendants’ interpretation of the FCPA would run counter to congressional intent.”

Judge Ellison stated, in pertinent part, a follows.

“The language of the statute does not appear to require that the identity of the foreign official involved be pled with specificity. Indeed, the terms of the FCPA make it unlawful corruptly to authorize payments to any person, knowing that any portion of those payments would be offered to any foreign official.  It is possible that the requirement that the payment be made or authorized with the purpose of “influencing any act or decision of such foreign official . . . in his . . . official capacity . . . , (ii) inducing such foreign official . . . to do or omit to do any act in violation of the lawful duty of such foreign official . . . , or (iii) securing any improper advantage . . . ”, would, at times, require the government to plead details about the foreign official’s identity, duties and responsibilities. For instance, the Court can imagine cases where, in order to show that the payment was intended to influence the official to neglect some particular duty, the government would have to plead that the official had that duty in the first place. However, the Court can similarly imagine situations where the purpose element could be satisfied without pleading details about a foreign official’s particular duties. Where the government alleges that payments made were intended to influence a foreign official to violate the very laws he is charged with implementing, it hardly seems necessary to require the government to identify the day-to-day duties of that foreign official; that foreign official, irrespective of whether he is the most junior staff member or the official who name appears at the top of the organizational chart, surely has a duty, like every government official, not to violate the laws he is charged with implementing. Furthermore, [the FCPA] provides that the purpose element can be satisfied by factual allegations that a payment was made with the purpose that some foreign official would be paid money to secure some improper advantage, which also does not appear to require allegations about that individual’s job responsibilities. The Court cannot see why the purpose requirement in [the FCPA] should mandate a bright-line rule of detailed pleadings about a foreign official’s particular duties.

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. The Fifth Circuit has recognized that, subject to the narrow exception for facilitation payments, Congress intended, with the FCPA, to “cast an otherwise wide net over foreign bribery.”  Kay I, 359 F.3d at 749.  Indeed, in explaining the requirement that a defendant act knowingly, Congress specified that the statute is intended to cover “both prohibited actions that are taken with ‘actual knowledge’ of intended results as well as other actions that, while falling short of what the law terms ‘positive knowledge,’ nevertheless evidence a conscious disregard or deliberate ignorance of known circumstances that should reasonably alert one to the high probability of violations of the Act.” H.R. Conf. Rep. 100-576 (1988).

In light of this legislative history, 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. Yet, Defendants contend that the Complaint must allege this level of detail. […] The Court seriously doubts that Congress intended to hold an individual liable under [the FCPA] only if he took great care to know exactly whom his agent would be bribing and what precise steps that official would be taking. Congress intended to address the problem of domestic entities bribing foreign officials to accomplish certain proscribed ends, see Kay I, 359 F.3d at 747, not domestic entities carefully monitoring the execution of that bribery.  And, if the FCPA does not require a defendant to know precisely which government official was being bribed, a plaintiff bears no burden to allege such facts.

[T]he limitations set out in [the FCPA] do not require the government in every case to plead details about the particular duties of the government official involved; sometimes, the nature of the benefit sought would inherently fall into the class of prohibited acts. Similarly, as discussed infra, pleading the non-applicability of the “facilitating” payments exception will not always require pleading details about the foreign official’s duties. Finally, that the offer or payment must be made in order to assist a defendant in obtaining or retaining business also does not require pleading anything about the foreign officials’ particular responsibilities.  Accordingly, the Court’s conclusion is bolstered by the fact that interpretations of the domestic bribery statutes have not required the level of specificity Defendants seek.

The authorities cited by the Defendants do not convince this Court. It is true that, in Kay I, the Fifth Circuit noted, in a parenthetical, that among the elements of a violation of the FCPA are “the identity of the foreign country and of the officials to whom the suspect payments were made, and the sought-after unlawful actions taken or not taken by the foreign officials in consideration of the bribes.”  Kay I, 359 F.3d at 760.  This, of course, says nothing about the level of detail with which these elements must be alleged. It is telling that, in Kay I itself, the government alleged only that payments were made to “customs officials in the Republic of Haiti” and “officials of other Haitian agencies” to accept documents that understated the true amount of rice being imported by the defendants in that case.  Kay I, 359 F.3d at 762.  The indictment does not specify the job responsibilities of the customs officials and entirely unidentified “other” officials, or what precise actions they took to accept the false documents at issue in Kay I.  If the Fifth Circuit intended for the foreign officials’ identities and specific  misdeeds to be alleged in the great level of detail that Defendants propose, the Court thinks it would have made mention of the woefully inadequate allegations in the case before it. The SEC here has alleged that payments were made to “Nigerian government officials” to “process eleven illegitimate TIPs with false paperwork” and “to obtain discretionary or unlawful extensions of these TIPs.”  The SEC also specifically alleges that among the agencies that received such payments were the NMA and NPA. The Court finds that these allegations are no less detailed than the allegations in Kay I’s indictment.

[…]

In a footnote, Judge Ellison stated 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.”

“Facilitating” Payments and “Corruptly”

Judge Ellison summarized the position of the parties as follows.

“Defendants argue that the FCPA charges must be dismissed because the SEC bears the burden of pleading the inapplicability of the “facilitating” payments exception, […]   and it has failed to do so. Defendants also argue that the SEC has failed to plead sufficient facts that would support the inference that Defendants acted “corruptly” because the facts pled by the SEC are equally consistent with Defendants’ belief that the payments were permissible facilitating payments, and because, in any event, the SEC has not alleged sufficient facts to indicate that the payments were made with the requisite intent.  Finally, Ruehlen argues that the “facilitating” payments exception is unconstitutionally vague.

The SEC contends that Defendants bear the burden of pleading the inapplicability of the “facilitating” payments exception, but claims that, in any event, it has negated the “facilitating” payments exception.  The SEC further argues that it has adequately pled corrupt intent because it has pled sufficient facts to support the inference that Defendants knew their actions did not fall under the “facilitating” payments exception and were, in fact, taken with the requisite evil motive.  Finally, the SEC argues that the “facilitating” payments exemption is not unconstitutionally vague because a man of common intelligence would have understood what would constitute a permissible payment under the exception and what would not.”

As to the issues, Judge Ellison stated as follows.

“[T]he Court cannot, in every instance, divine, from the sheer fact that Congress chose to exempt “facilitating” payments from liability through an exception instead of an affirmative defense, that it intended for plaintiffs to bear the burden of pleading and proving the exception.  Instead the Court starts from the presumption that  Defendants bear the burden of raising and proving the applicability of an affirmative defense.  The Court then considers whether this statute is on of those rare instances where the true definition of the offense cannot be discerned unless the exception is negated.”

Judge Ellison next turns to the “particular circumstances that led to the addition of the “facilitating” payments exception, which neither party addresses” and stated as follows.

“When the FCPA was first enacted in 1977, there was no such explicit exception, but the legislative history indicated that by using the word “corruptly,” Congress intended to exempt such payments from the purview of the statute. For instance, the House Committee on interstate and foreign commerce provided as follows in its report: The language of the bill is deliberately cast in terms which differentiate between such payments and facilitating payments, sometimes referred to as “grease payments.” In using the word “corruptly,” the committee intends to distinguish between payments which cause an official to exercise other than his free will in acting or deciding or influencing and act or decision and those payments which merely move a particular matter toward an eventual act or decision or which do not involve any discretionary action. H.R. Rep. No. 95-640, at 4 (1977). Similarly, the Senate Committee on Banking, Housing and Urban Affairs wrote: “The statute does not . . . cover so-called ‘grease payments’ such as payments for expediting shipments through customs or placing a transatlantic telephone call, securing required permits, or obtaining adequate police protection, transactions which may involve even the proper performance of duties.” S. Rep. No. 95-114, at 10 (1977). In adding an explicit exception for “facilitating” payments in 1988, both houses explained that the amendment was meant “only to clarify ambiguities ‘without changing the basic intent . . . of the law.’” […]  The legislative history reveals that Congress intended, by using the word “corruptly,” to except facilitating payments from the ambit of the FCPA, and the addition of the “facilitating” payments exception into the language of the statute was intended only to clarify that intent. No one disputes that the SEC must bear the burden of proving that Defendants acted corruptly. Accordingly, the Court finds that the evolution of the statute in this case strongly supports the conclusion that the SEC must bear the burden of negating the “facilitating” payments exception.  The facilitating payments exception is best understood as a threshold requirement to pleading that a defendant acted “corruptly.”

The “facilitating” payments exception was intended to provide a “very limited exception[] to the kinds of bribes to which the FCPA does not apply.”  Kay I, 359 F.3d at 750.  The exception allows for payments to foreign officials the purpose of which is to “expedite or secure the performance of a routine government action,” […], which refers to a “very narrow categor[y] of largely non-discretionary, ministerial activities performed by mid- or low-level foreign functionaries.” Kay I, 359 F.3d at 751.  While the statute specifically includes “obtaining permits” as an example of the type of action that typically qualifies as routine, the Court interprets the example to refer to obtaining permits to which one is properly entitled.  See H.R. Rep. No. 95-640, at 8 (explaining that Congress intended to exclude from the FCPA’s reach “those payments which merely move a particular matter toward an eventual act or decision or which do not involve any discretionary action”).

The SEC alleges that Defendants authorized payments to foreign officials in order to obtain TIPs based on false paperwork, in contravention of what Defendants knew was the proper process for obtaining TIPs. As discussed supra,the SEC pled sufficient facts to support the allegation that Defendants knew these payments would be going to Nigerian government officials to obtain TIPs in a manner that violated Nigerian law. The grant of permits by government officials that have no authority to grant permits on the basis sought is in no way a ministerial act nor can it be characterized as “speeding the proper performance of a foreign official’s duties.” H.R. Rep. No. 95-640, at 8. Similarly, if payments were made to induce officials to validate the paperwork while knowing it to be false, that too would not qualify as simply expediting a ministerial act. Accordingly, the SEC’s pleadings easily negate the “facilitating” payments exception with regard to payments made to acquire false paperwork TIPs.

The SEC also alleges that Defendants authorized payments to foreign officials in order to obtain discretionary TIP extensions. Although the Court found that the SEC has alleged sufficient facts to support the inference that Ruehlen, and for the most part Jackson as well, knew that the payments they authorized would be going to bribe foreign officials, the Court cannot conclude that the Complaint pleads sufficient facts to support the allegation that Ruehlen or Jackson knew that these payments would be used to influence a discretionary decision of a foreign official. In fact, the SEC fails to plead sufficient facts to support the allegation that granting of TIP extensions is a discretionary action. The SEC repeatedly alleges that the granting of extensions is a discretionary action.  However, repeated incantations that NCS may grant an extension in its discretion do not satisfy the SEC’s obligations under Iqbal and Twombly to plead facts that render plausible such conclusory allegations.  The SEC alleges sufficient facts to support the conclusion that fourth extensions were illegal, including that grants of third extensions routinely indicated that the extension was the final extension that would be granted for that rig, as well as Noble’s own failed attempt to obtain a fourth extension.  It also alleges that NCS had previously denied a third extension because the rig was operating under a different drilling contract. However, these allegations are insufficient to make plausible the conclusion that granting TIP extensions is discretionary. These allegations are just as consistent with a regime where up to three TIP extensions are granted as a matter of routine for rigs that continue to operate on the same contract as they were operating when the initial TIP was granted. And if NCS does grant up to three TIPs routinely, any bribes offered to speed along or assure that action would fall squarely into the “facilitating” payments exception.

[…]

[T]he SEC has leave to amend the Complaint to allege facts that would support the allegation that granting TIP extensions is a matter of discretion. The SEC can satisfy this burden in a number of ways. The simplest way to do so would be to plead the Nigerian law or policy that so provides. However, the Court does not discount other means. After all, the SEC has plausibly pled that granting TIPs based on false paperwork is a violation of Nigerian law by relying on the fact of a prior Nigerian prosecution and the opinion of a legal expert.  Therefore, the Court does not rule out the possibility that the SEC may be able adequately to plead facts that would support the conclusion that grants of TIP extensions are a matter of discretion without pleading the provisions of Nigerian law. However, should the SEC not rely on Nigerian law, it must do more than just plead facts tat would be equally consistent with a protocol under which where TIP extensions are routinely granted if they satisfy certain threshold requirements.

After reviewing the FCPA’s legislative history, Judge Ellison interpreted the word “corruptly” as an act done with an evil motive or wrongful purpose of influencing a foreign official to misuse his position.”

He further stated as follows.

“In pleading that Defendants acted corruptly, the SEC need not proffer facts that would show that they knew their actions would constitute a violation of the FCPA […] (noting that nothing about the word “corruptly” suggests that the government must prove that a defendant knew he was violating the FCPA);  Kay II, 513 F.3d at 450-451 (holding that even the willfulness requirement in a criminal prosecution does not require the government to prove that a defendant knew he was violating a particular statute).  Indeed, this court seriously doubts that the SEC even needs to prove that Defendants knew that their actions violated any specific law. Because Kay II interpreted the willfulness requirement as requiring only a showing that a defendant knew that his actions were in some way unlawful, […] to interpret the word “corruptly” to require such knowledge would eliminate the distinction between a criminal and civil violation of the FCPA.  […]

Defendants argue that the SEC has not pled that they acted corruptly because it had failed to plead any violations of Nigerian law, and because both defendants had a good faith belief that they were acting lawfully.   Specifically, Jackson argues that he had a good faith belief in the legality of the payments as facilitating payments, and Ruehlen argues that he relied in good faith on the approval of the payments by supervisors, including Jackson.

As the Court has already discussed, the SEC has alleged sufficient facts that support the inference that obtaining TIPs through the use of false paperwork violated Nigerian law. However, as explained, the SEC has no obligation to plead that Defendants knew that they were violating a law, or even that they were seeking an illegal result to state a civil FCPA violation. Instead, it must plead only that Defendants acted with the wrongful purpose of influencing a foreign official to misuse his official position. As explained the SEC has adequately alleged that Defendants authorized payments to foreign officials to obtain TIPs based on false paperwork, in contravention of what Defendants knew to be the proper protocol. Seeking to obtain governmentally-issued benefits through payments intended to ensure Nigerian officials ignore the proper protocols plainly satisfies the requirement of having the wrongful purpose of influencing a foreign official to misuse his position. Defendants’ representations of their good-faith belief that the payments were “facilitating” payments, and therefore legal, are unavailing. First, as explained, the SEC’s allegations support the inference that Defendants knew they were seeking to obtain TIPs in an illegal manner, thereby pleading facts that, if true, would negative any claim of good faith belief that the payments were made to ensure routine government actions. At the motion to dismiss stage, representations to the contrary are irrelevant. Second, the Court is not certain that the SEC is obliged to plead that Defendants did not have a good-faith belief that their payments fell under the “facilitating” payments exception. As a practical matter, the Court has difficulty imagining how the SEC could plead that Defendants acted “corruptly” without, at the same time, pleading facts that, if true, would render implausible any claim that Defendants had a good-faith belief that the payments fell into the “facilitating” payments exception. After all, it is hard to see how one could have the evil motive or wrongful purpose of influencing an official to misuse his official position while, at the same time, believing, in good faith, that he was simply ensuring or expediting a routine government action. The Court need not resolve the question, however, because, in any event, the facts alleged by the SEC support the inference that Defendants knew use of false paperwork to obtain TIPs was illegal.

Finally, Ruehlen argues that the SEC has not pled adequate facts that he acted corruptly because he authorized payments with the knowledge and consent of Noble’s senior management.  […]  The factfinder may certainly consider whether Jackson’s approval of the payments negates corrupt intent. However, for the purpose of Rule 12(b)(6) motion, the Court finds that the facts pled regarding Ruehlen’s intimate involvement with the West Africa Audit make plausible the allegation that he did act “corruptly.”

Because the Court finds that the SEC has failed adequately to plead that the payments to obtain TIP extensions were not facilitating payments, it does not address whether the SEC has adequately pled that Defendants acted corruptly in making those payments. However, the Court notes, that should the SEC amend its complaint to plead sufficient facts to support the inference that the grant of TIP extensions is a discretionary act, it will need also to plead facts that support the inference that, in making these payments, Jackson and Ruehlen had the evil motive or wrongful purpose of influencing an official to misuse his position.”

In a footnote Judge Ellison then stated as follows.

[W]hile the Court finds no explicit statutory obligation to plead facts that would tend to show that Defendants did not have a good faith belief that their payments fell within the “facilitating” payments exception, the Court has difficulty imagining that the SEC will be able to plead that Defendants had the bad purpose of influencing an official to misuse his position if it does not first plead that Defendants knew they were not entitled to extensions as a matter of right upon satisfying certain basic threshold requirements.

As to the unconstitutional vagueness issue, Judge Ellison stated as follows.

“Here, a person of common intelligence should have no difficulty understanding that routine government actions do not include the granting of permits based on fraudulent documents. He would not fail to understand that the statutory example of “obtaining permits” as a routine governmental action presupposes that those permits are obtained based on some valid entitlement. Furthermore, even if a man of common intelligence might be somewhat uncertain about whether payments to secure TIPs through a known illegal method would be covered by the “facilitating” payments exception, the exception is but one of numerous elements of a civil FCPA violation; some ambiguity in the scope of this one part of the statute does not draw an impermissibly vague line.  […]

Similarly, should the SEC amend its Complaint adequately to plead that the granting of TIP extensions is a discretionary action, any argument that enforcement actions could not be initiated on the basis of payments to obtain favorable exercises of discretion in obtaining permits would also fail. In analyzing the FCPA, the Fifth Circuit made it unambiguously clear that the FCPA was enacted in substantial part to “prohibit the type of bribery that . . . prompts officials to misuse their discretionary authority.”  […} Even if the language of the “facilitating” payments exception failed adequately to put persons of common intelligence on alert that bribery to influence discretionary decisions was prohibited under the FCPA, Kay I, a  decision from February 2004, established the point as a matter of law. It is, of course, a “common maxim, familiar to all minds, that ignorance of the law will not excuse any person, either civilly or criminally.” […]”

Statute of Limitations

Judge Ellison summarized the positions of the parties as follows.

“Jackson and Ruehlen argue that the SEC’s Complaint should be dismissed because all of the events giving rise to the claims occurred outside of the limitations period and the SEC’s Complaint has failed to raise any basis for tolling.  The SEC does not dispute that the Complaint, on its face, raises no basis for tolling, but it argues that the statute of limitations should be tolled because of tolling agreements between the parties, because the fraudulent concealment doctrine applies, and because the continuing violations doctrine applies. Additionally, the SEC contends that the statute of limitations does not apply to equitable relief such as injunctions.  Finally, the SEC requests leave to amend its Complaint to plead any additional facts necessary for statute of limitations purposes.”

After discussing the applicable five year statute of limitations, he stated as follows.

The Complaint in this case was filed on February 24, 2012. Accordingly, absent some reason the statute of limitations should not apply, claims that accrued before February 24, 2007 should be barred. Here, the vast majority of the misconduct alleged occurred before February 24, 2007.  Although the Complaint does not plead any basis for tolling, the Court examines the  arguments as to why the statute of limitations should be tolled or is inapplicable, to determine whether any of the claims predicated on conduct prior to February 24, 2007 survive, and also to determine whether leave to amend would be futile.

[…]

Defendants do not dispute that they each signed tolling agreements with the SEC that would suspend the running of the statute of limitations for a total of 290 days.  These tolling agreements would make timely any claims based on conduct occurring after May 10, 2006.  […] Thus, although the SEC should have pled the existence of these tolling agreements, the Court finds it appropriate to grant the SEC leave to amend.”

As to fraudulent concealment as a basis for tolling the statute of limitations, Judge Ellison stated as follows.

Defendants also argue that the Complaint has failed to raise any basis for tolling. They argue that the SEC has failed to plead facts that would give rise to tolling based on the doctrine of fraudulent concealment. The SEC contends that it has pled the elements of fraudulent concealment that it is required to plead, and that Defendants actually bear some of the burden because the statute of limitations is an affirmative defense.

[…]

The Court rejects the SEC’s contention that it is Defendants who must bear the burden of proving that the Commission should have discovered the fraud earlier.

[…]

Under the applicable Fifth Circuit standard, the SEC has pled enough facts to suggest that Defendants concealed their wrongdoing. Specifically, the SEC has pled that each time a payment for false paperwork TIPs was approved, it was logged as a legitimate operating expense, as Defendants knew and intended. Furthermore, the SEC has alleged that Jackson signed personal certifications as CFO and CEO that were attached to Noble’s public quarterly and annual filings, dated from August 8, 2005 to May 9, 2007, stating that he had disclosed to Noble’s auditors and Audit Committee all significant deficiencies and material weaknesses in the design or operation of internal controls and any fraud. These acts are pled with adequate specificity and can, theoretically, be enough to support a claim of concealment. However, the Court notes that, if these assertions by Defendants that their actions are legal are to be the sole basis of the fraudulent concealment allegations, the SEC will eventually have to show that its reliance on these representations was reasonable. This is because “generally speaking, denial of wrongdoing is no more an act of concealment than is silence” and such a denial may constitute concealment only “where the parties are in a fiduciary relationship, or where the circumstances indicate that it was reasonable for the plaintiff to rely on defendant’s denial.”

However, the SEC has not pled any facts that support the inference that it acted diligently in bringing this Complaint. The SEC argues that, because it did not learn of the misconduct until June 2007, and because it brought its complaint within five years of that date, it has pled all it needs to plead.  However, as explained above, the SEC must plead facts that show that it acted diligently in gathering the facts that form the basis of its claims. It concedes that, by June 2007, when Noble disclosed its internal investigation to the SEC, it had inquiry notice of potential misconduct. The SEC has leave to amend its Complaint to plead facts that would support the inference that it acted diligently in gathering the facts that form the basis of this Complaint.

As to the SEC seeking the equitable remedy of injunction, the court noted that the “parties have cited no cases that suggest that dismissal of claims for injunctive relief is appropriate at the Rule 12(b)(6) stage.  […] The SEC, of course, ultimately will bear the burden of showing that an injunction is warranted.

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