This recent post  highlighted the SEC’s long-standing Foreign Corrupt Practices Act enforcement action against former Magyar Telekom executives Elek Straub, Tamas Morvai, and Andras Balogh and how Judge Richard Sullivan (S.D.N.Y) seemed poised to issue rulings that point towards a trial (which is scheduled for May 8, 2017). The procedural posture of the case was motions for summary judgment whereas Judge Sullivan’s 2013 ruling in the case (see here ) was on motions to dismiss.
Last week, Judge Sullivan issued this opinion and order . The decision represents a rare instance of actual FCPA case law (albeit a trial court decision).
On the FCPA front, the decision goes into the weeds on a rather esoteric issue, that being what does “use” of an instrumentality of interstate commerce mean in connection with the FCPA’s jurisdictional element relevant to foreign issuers and those acting on its behalf.
In short, Judge Sullivan held that Magyar (a foreign issuer) clearly “used an instrumentality of interstate commerce (the Internet) when it made filings through EDGAR” and that “Magyar’s filings with the SEC were a foreseeable consequence of Defendants’ actions.”
As noted in the opinion, this was an issue of first impression and while “merely” a trial court ruling, it sends a word of caution to any foreign executive involved in a bribery scheme who is also involved in the foreign issuer’s SEC filings. That word of caution is that a U.S. court may find jurisdiction under the FCPA’s anti-bribery provisions based on the executive’s participation in the SEC filings if the filings were in furtherance of an underlying bribery scheme that may otherwise lack a U.S. nexus.
Beyond the FCPA specific issue, Judge Sullivan’s decision also addressed some general issues such as “minimum contacts” and the “reasonableness” of a U.S. court asserting jurisdiction over foreign national defendant as well as issues under the general statute of limitations (28 USC 2462) relevant to civil claims. On this score, Judge Sullivan held in part that the five-year limitations period in 28 USC 2462 does not apply disgorgement. (See prior posts here  and here  for recent appellate court decision on this issue).
In addition, Judge Sullivan rejected the SEC’s argument that it may pursue FCPA violations that occurred out of the limitations period on the basis that those violations were similar in character to and part of the same alleged “scheme” as violations that occurred within the limitations.
On the FCPA specific issue, the decision states in full:
“Defendants next argue that summary judgment in their favor on the SEC’s antibribery claims is warranted because the SEC cannot prove that Defendants, “in furtherance of” the alleged bribery scheme, “ma[d]e use of the mails or any means or instrumentality of interstate commerce.” (Def. Mem. at 10 (quoting 15 U.S.C. § 78dd-1(a)).) Defendants made a similar argument in their motion to dismiss the initial complaint, although at the time the parties’ dispute focused on Defendants’ requisite states of mind with respect to their use of an instrumentality of interstate commerce. See Straub I, 921 F. Supp. 2d at 262 (“[T]he parties dispute whether 15 U.S.C. § 78dd-1(a) requires some element of knowledge or intent with respect to the use of ‘the mails or any means or instrumentality of interstate commerce.’”). As set forth in Straub I, the Court ultimately interpreted the instrumentality of interstate commerce requirement as a “jurisdictional element” of the statute – for which the SEC need not establish mens rea – in light of “the way that courts have interpreted similar provisions in other statutes” such as mail and wire fraud and the securities laws. See id. at 263–64 (collecting cases). The Court then held that the SEC had pled the jurisdictional element by alleging that emails attaching drafts of the Protocol of Cooperation and consulting contracts, including “[s]ome” emails “sent or received by [D]efendant Balogh,” were “sent from locations outside the United States, but were routed through and/or stored on network servers located within the United States.” (Doc. No. 1 ¶ 39, cited in Straub I, 921 F. Supp. 2d at 262.)
Discovery has since demonstrated the paucity of evidence in this regard, revealing only five emails that satisfy the SEC’s description, including two emails received by Balogh, one sent by him, and no emails sent or received by Straub or Morvai. (See Def. 56.1 ¶¶ 3–4.) Although the SEC’s cross motion for summary judgment maintains that even Balogh’s single email routed through a United States server satisfies the jurisdictional element for all Defendants (see SEC Opp’n at 13–14), the SEC also advances an alternative theory not raised at the pleading stage – specifically, that Defendants used an instrumentality of interstate commerce by “participating in the preparation of falsified SEC filings that were posted to and accessible from the SEC’s EDGAR internet web site” (SEC Mem. at 31). In response, Defendants argue that the SEC has failed to support the theory with legal authority (though Defendants cite none of their own) and that disputed facts preclude summary judgment on this issue. (Def. Opp’n at 25; Def. Reply at 7–9.) The Court disagrees.
The SEC’s reliance on Magyar’s EDGAR filings to satisfy the jurisdictional element raises two legal issues. The first is whether making such filings constitutes use of an instrumentality of interstate commerce, and it is easily answered. The Internet unquestionably constitutes an “instrumentality of interstate commerce.” Straub I, 921 F. Supp. 2d at 262; see also United States v. Konn, 634 F. App’x 818, 821 (2d Cir. 2015) (“the Internet is a channel and instrumentality of interstate commerce”); Utah Lighthouse Ministry v. Found. for Apologetic Info. & Research, 527 F.3d 1045, 1054 (10th Cir. 2008) (same); United States v. Sutcliffe, 505 F.3d 944, 953 (9th Cir. 2007) (same); United States v. Trotter, 478 F.3d 918, 921 (8th Cir. 2007) (same); United States v. MacEwan, 445 F.3d 237, 245 (3d Cir. 2006) (same); United States v. Hornaday, 392 F.3d 1306, 1311 (11th Cir. 2004) (same). And if that is true of the Internet generally, it is especially true here, where the website in question is one registered to the SEC and accessible to would-be investors and the public at large. Consequently, the Court has little difficulty concluding that a company uses an instrumentality of interstate commerce when it files documents publicly on the EDGAR website. See SEC v. Stanard, No. 06-cv- 7736 (GEL), 2009 WL 196023, at *25 (S.D.N.Y. Jan. 27, 2009) (noting that defendant used “the [I]nternet (including email and electronic SEC filings) to communicate with others regarding the . . . fraud”); SEC v. Ramoil Mgmt., Ltd., No. 01- cv-9057 (SC), 2007 WL 3146943, at *8 (S.D.N.Y. Oct. 25, 2007) (defendant’s use of EDGAR “qualifie[d] as an instrumentality of interstate commerce”); SEC v. Solucorp Indus., Ltd., 274 F. Supp. 2d 379, 419 (S.D.N.Y. 2003) (use of Internet to disseminate false and misleading SEC filings satisfied interstate commerce requirement). Thus, based on the undisputed evidence, there can be no doubt that Magyar itself clearly used an instrumentality of interstate commerce (the Internet) when it made filings through EDGAR.
The second question is to what extent Defendants, who were senior officers of Magyar during the relevant period (SEC 56.1 ¶¶ 2–4), may be said to have “used” an instrumentality of interstate commerce by reason of Magyar’s filings with the SEC. Courts have interpreted this jurisdictional element liberally in other contexts and have held that, in addition to direct use, it is sufficient if the defendant merely “act[s] ‘with knowledge that’” the use of an instrumentality of interstate commerce “‘will follow in the ordinary course of business,’” or that “‘such use can reasonably be foreseen, even though not actually intended.’” United States v. Reifler, 446 F.3d 65, 96 (2d Cir. 2006) (quoting Pereira v. United States, 347 U.S. 1, 8–9 (1954)). Moreover, although the Supreme Court first articulated this foreseeability-based inquiry in Pereira v. United States, a mail fraud case, courts have since applied it in the contexts of wire fraud, see, e.g., Reifler, 446 F.3d at 96, and securities law violations, see, e.g., United States v. Wolfson, 405 F.2d 779, 783–84 (2d Cir. 1968), including civil actions under the securities laws, see SEC v. Boock, No. 09-cv-8261 (DLC), 2011 WL 3792819, at *17 (S.D.N.Y. Aug. 25, 2011) (citing Wolfson); SEC v. Novus Techs., LLC, No. 07-cv-235 (TC), 2010 WL 4180550, at *11 (D. Utah Oct. 20, 2010) (citing Pereira), aff’d sub nom. SEC v. Thompson, 732 F.3d 1151 (10th Cir. 2013); cf. SEC v. Rana Research, Inc., 8 F.3d 29, 1993 WL 445101, at *4 (9th Cir. 1993) (“setting forces in motion which foreseeably result in use of mails will suffice as use of instrumentality of commerce” (citing United States v. MacKay, 491 F.2d 616, 619 (10th Cir. 1973))); Alley v. Miramon, 614 F.2d 1372, 1379–80 (5th Cir. 1980) (citing MacKay and holding that a letter “written on [defendant’s] encouragement” and regulatory filings made by the defendant’s company through the mails both satisfied the jurisdictional element as to defendant); see also 8 Louis Loss et al., Securities Regulation 505 (4th ed. 2012) (“[I]t suffices to show that the defendant . . . might reasonably have foreseen that [use of the mails] would occur.” (collecting cases)).
Whether Pereira’s foreseeability inquiry also applies to the jurisdictional element in the FCPA’s anti-bribery provisions appears to be a matter of first impression, but the outcome is hardly in doubt. To be sure, the Case 1:11-cv-09645-RJS Document 261 Filed 09/30/16 Page 14 of 29 15 wording of the FCPA’s jurisdictional element differs from some other provisions of the securities laws, in which the jurisdictional element is phrased as the required means by which the offense is furthered. See, e.g., 15 U.S.C. § 77l(a)(2) (“Any person who . . . offers or sells a security . . . by the use of any means or instruments of transportation or communication in interstate commerce or of the mails . . . .” (emphasis added)); 15 U.S.C. § 78j(b) (“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails . . . .” (emphasis added)). In contrast, the wording of the FCPA suggests that the “use” of an instrumentality is the actionable conduct, and not merely a jurisdictional hook. See 15 U.S.C. § 78dd-1(a) (“It shall be unlawful for [a person] . . . to make use of the mails or any means or instrumentality of interstate commerce . . . .” (emphasis added)); see also 8 Loss et al., supra, at 497–98 & n.6 (discussing the “differences in the phraseology that is used to connect the jurisdictional elements with the substantive content” of the securities laws and observing that “[a]ll of these variations may result in nuances of construction”). Nevertheless, the Second Circuit has construed another provision under the securities laws that employs the same phrasing as the FCPA’s anti-bribery provisions and found Pereira applicable. Specifically, construing Section 5(a)(1) of the Securities Act of 1933, which makes it unlawful for any person, “directly or indirectly . . . to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell [an unregistered] security,” 15 U.S.C. § 77e(a)(1) (emphasis added), the Second Circuit has held that it too amounts to an adoption of Pereira’s foreseeability rule and reflects Congress’s intent “to exert its power to the full constitutional extent permitted by the commerce clause and the postal clause.” Wolfson, 405 F.2d at 783.
In light of the Second Circuit’s holding in Wolfson, the Court concludes that the Pereira foreseeability rule should also apply to the FCPA’s jurisdictional element, under the canon of statutory construction that, absent evidence of congressional intent to the contrary, courts should interpret identical language in different parts of a statutory scheme consistently. See CSX Corp. v. Children’s Inv. Fund Mgmt. (UK) LLP, 654 F.3d 276, 290 (2d Cir. 2011) (where “the pertinent language of . . . two sections is identical, . . . harmonization of interpretation is normally necessary”); see also Gustafson v. Alloyd Co., 513 U.S. 561, 570 (1995) (“[T]he normal rule of statutory construction [is] that identical words used in different parts of the same act are intended to have the same meaning.” (internal quotation marks omitted)); Ratzlaf v. United States, 510 U.S. 135, 143 (1994) (“A term appearing in several places in a statutory text is generally read the same way each time it appears.”). Thus, for purposes of the FCPA’s anti-bribery provisions, as with the jurisdictional elements of other securities law provisions, a defendant “make[s] use of the mails or any means or instrumentality of interstate commerce,” 15 U.S.C. § 78dd- 1(a), if he “‘act[s] with knowledge that the use of the mails will follow in the ordinary course of business, or where such use can reasonably be foreseen, even though not actually intended,’” Wolfson, 405 F.2d at 783–84 (quoting Pereira, 347 U.S. at 8–9).
Applying that rule to the case at hand, there can be no genuine dispute that Magyar’s filings with the SEC were a foreseeable consequence of Defendants’ actions. Specifically, in the months leading up to the filing of the Annual Report on May 11, 2005 – the period in which Defendants were allegedly negotiating the Protocol of Case 1:11-cv-09645-RJS Document 261 Filed 09/30/16 Page 15 of 29 16 Cooperation and the Non Paper, Magyar’s “give” and “get” in the bribery scheme – Straub made various written representations to PwC asserting that he was not aware of any violations of the law or fraud involving Magyar’s management. (See SEC 56.1 ¶¶ 17, 19, 20, 22, 23.) Balogh similarly reported no unlawful conduct to Magyar’s accounting department in connection with PwC’s audit. (See id. ¶¶ 34–37.) Straub, Balogh, and Morvai continued to make these allegedly false representations and supporting representations through 2005 and into 2006, in connection with the filing of Magyar’s quarterly earnings reports. (See, e.g., id. ¶¶ 27–28, 42–43, 51.) Moreover, on May 11, 2005, Straub signed a certification to be filed with Magyar’s Annual Report, which stated that he had disclosed to PwC “[a]ny fraud, whether or not material, that involves management or other employees who have a significant role in [Magyar’s] internal control over financial reporting.” (Id. ¶ 24.) And it was without question foreseeable to Balogh and Morvai – senior executives who periodically submitted their own representations in support of Magyar’s financial reporting – that Straub, the company’s senior-most executive, would be submitting a certification of this nature in support of the Annual Report. Magyar’s Annual Report, including Straub’s certification and PwC’s clean audit opinion, was ultimately filed on May 11, 2005 on EDGAR, and Magyar’s 3Q 2005 Quarterly Report was ultimately filed on November 9, 2005 on EDGAR, where these documents became (and remain) available via the Internet to United States investors.3 In light 3 At oral argument, Defendants contended that Straub’s Sarbanes-Oxley certification cannot support the jurisdictional element because it was made only with respect to the fiscal year ended December 31, 2004, which predated the scheme, and therefore could not have furthered that scheme. (See Tr. at 62– 64.) But the face of the filing does not support that temporal limitation. Indeed, although some of these facts, there can be no genuine dispute that Defendants “‘act[ed] with knowledge that,’” “‘in the ordinary course of business,’” Magyar would be filing reports with the SEC reflecting both management’s and PwC’s assurance (whether explicit or implicit) that Magyar was not engaged in illegal activity. See Wolfson, 405 F.2d at 783–84 (quoting Pereira, 347 U.S. at 8–9). At the very least, Defendants should have reasonably foreseen such filings. Id. Thus, the SEC is entitled to summary judgment on the issue of whether Defendants used an instrumentality of interstate commerce.
Of course, the parties hotly dispute whether these filings were made in furtherance of a bribery scheme. Defendants deny the existence of any scheme (see Def. Counter 56.1 ¶¶ 57–82 (discussing the Protocol of Cooperation), 83–98 (discussing contracts with the Greek consultant); Def. Reply at 7–9 (arguing that the SEC’s bribery claims rely “entirely and impermissibly on wholly conclusory and unsubstantiated allegations”)), and even the SEC concedes that “there remain disputed issues of fact as to defendants’ bribe scheme” (SEC Mem. at 15). These issues will be resolved at trial, but the use of an instrumentality of interstate commerce cannot be debated.”
On the jurisdictional issues, Judge Sullivan concluded that the defendants had sufficient “minimum contacts” with the U.S. based on the defendants’ signatures of various management representation letters submitted in connection with an audit of the company’s financial disclosures and Sarbanes-Oxley certifications that were ultimately filed with those disclosures on the SEC’s EDGAR website. Regarding the “reasonableness” prong of the jurisdictional analysis, Judge Sullivan stated that “discovery has produced no basis for altering the Court’s prior conclusion that ‘this is not the rare care where the reasonableness analysis defeats the exercise of personal jurisdiction.” Thus, Judge Sullivan held that the Court may exercise personal jurisdiction over the Defendants.
The full portion of Judge Sullivan’s ruling on these issues is set forth below.
As plaintiff, the SEC bears “the ultimate burden of proving the court’s jurisdiction by a preponderance of the evidence.” Beacon Enters., Inc. v. Menzies, 715 F.2d 757, 762 (2d Cir. 1983). To defeat Defendants’ motion for summary judgment for lack of personal jurisdiction, the SEC must put forth “‘an averment of facts that, if credited by the trier, would suffice to establish jurisdiction’” over the Defendants. Dorchester Fin. Sec., Inc. v. Banco BRJ, S.A., 722 F.3d 81, 84–85 (2d Cir. 2013) (quoting Ball v. Metallurgie Hoboken-Overpelt, S.A., 902 F.2d 194, 197 (2d Cir. 1990)). By contrast, to prevail on its own motion on the issue of personal jurisdiction, the SEC’s burden is “even greater; [it] must demonstrate that there is no genuine issue as to any material fact on the jurisdictional question.” Beacon, 715 F.2d at 762.
“A district court must have a statutory basis for exercising personal jurisdiction,” be it the forum state’s personal jurisdiction rules or a federal statute authorizing personal jurisdiction. Marvel Characters, Inc. v. Kirby, 726 F.3d 119, 128 (2d Cir. 2013). Here, the SEC’s claims arise under the Exchange Act, “which provides for worldwide service of process and permits the exercise of personal jurisdiction to the limit of the Fifth Amendment’s [d]ue [p]rocess [c]lause.” Alki Partners, L.P. v. Vatas Holding GmbH, 769 F. Supp. 2d 478, 487–88 (S.D.N.Y. 2011) (citing 15 U.S.C. § 78aa and SEC v. Unifund SAL, 910 F.2d 1028, 1033 (2d Cir. 1990)), aff’d sub nom. Alki Partners, L.P. v. Windhorst, 472 F. App’x 7 (2d Cir. 2012). “The due process test for personal jurisdiction has two related components: the ‘minimum contacts inquiry’ and the ‘reasonableness’ inquiry.” Metro Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560, 567 (2d Cir. 1996). Because the Exchange Act extends personal jurisdiction to the limits of the Fifth Amendment’s due process clause, “it is not the State of New York but the United States which would exercise its jurisdiction over” Defendants here, SEC v. Comm. on Ways & Means of U.S. House of Reps., 161 F. Supp. 3d 199, 222 (S.D.N.Y. 2015) (brackets omitted) (quoting Mariash v. Morrill, 496 F.2d 1138, 1143 (2d Cir. 1974)), and Defendants thus must have minimum contacts “with the entire United States rather than with the forum state,” Straub I, 921 F. Supp. 2d at 253; see also Unifund, 910 F.2d at 1033 (analyzing contacts with the United States).
Accordingly, the Court “must first determine whether [Defendants] ha[ve] sufficient contacts with the [United States] to justify the court’s exercise of personal jurisdiction.” Metro Life, 84 F.3d at 567. If such contacts exist, the Court must then determine “whether the assertion of personal jurisdiction [would] comport with ‘traditional notions of fair play and substantial justice’ – that is, whether it is reasonable under the circumstances of the particular case.” Id. (quoting Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)).
Defendants concede minimum contacts for the purpose of their motion (Def. Mem. at 4–5 & n.3) and instead argue that the Court’s exercising personal jurisdiction over them would nevertheless be constitutionally unreasonable (id. at 4). Nevertheless, because the SEC argues on its motion that the Court’s exercise of jurisdiction would both be reasonable and satisfy minimum contacts, the Court addresses minimum contacts first, since that analysis informs the reasonableness analysis.
- Minimum Contacts
Because the language of the Fifth Amendment’s due process clause is identical to that of the Fourteenth Amendment’s due process clause, the same general principles guide the minimum contacts analysis under both clauses. Thus, even though Defendants’ contacts with the entire United States are determinative here of the “minimum contacts” inquiry, the Court conducts the minimum contacts inquiry in accordance with principles developed in cases analyzing personal jurisdiction under the Fourteenth Amendment. In judging minimum contacts under the standard set forth in International Shoe and its progeny, courts focus on “‘the relationship among the defendant, the forum, and the litigation.’” Keeton v. Hustler Magazine, Inc., 465 U.S 770, 775 (1984) (quoting Shaffer v. Heitner, 433 U.S. 186, 204 (1977)).
The SEC’s case is premised on an assertion of specific, rather than general, jurisdiction. (SEC Mem. at 19, 25.) A court may exercise “[s]pecific jurisdiction” where a suit “aris[es] out of or relate[s] to the defendant’s contacts with the forum.’” Metro. Life, 84 F.3d at 567–68 (quoting Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 415 n.8 (1984)). “The crucial question” under the due process analysis “is whether the defendant has ‘purposefully avail[ed] itself of the privilege of conducting activities within the forum . . . , thus invoking the benefits and protections of its laws, such that [the defendant] should reasonably anticipate being haled into court there.” Best Van Lines, Inc. v. Walker, 490 F.3d 239, 242–43 (2d Cir. 2007) (quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474–475 (1985)); see also World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980) (the due process clause “gives a degree of predictability to the legal system that allows potential defendants to structure their primary conduct with some minimum assurance as to where that conduct will and will not render them liable to suit”). The Second Circuit has found this requirement satisfied for purposes of specific jurisdiction where a defendant has “purposefully directed” merchandise toward the forum and its residents, see Chloe v. Queen Bee of Beverly Hills, LLC, 616 F.3d 158, 171–72 (2d Cir. 2010) (“In actually sending items to [the forum], there can be no doubt that [defendant’s] conduct ‘purposefully directed toward the forum . . . .’”), as well as where a defendant has “purposefully availed” itself of the forum’s banking system, see Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 732 F.3d 161, 171–72 (2d Cir. 2013) (“It should hardly be unforeseeable to a bank that selects and makes use of a particular forum’s banking system that it might be subject to the burden of a lawsuit in that forum for wrongs related to, and arising from, that use.”). See also J. McIntyre Mach., Ltd. v. Nicastro, 564 U.S. 873, 884 (2011) (plurality opinion) (“The question is whether a defendant has followed a course of conduct directed at the society or economy existing within the jurisdiction of a given sovereign, so that the sovereign has the power to subject the defendant to judgment concerning that conduct.”).
These principles support finding minimum contacts here as a matter of law. It is undisputed that, during the period of the alleged violations, in the course of preparing Magyar’s filings with the SEC, Straub signed management representation letters submitted in connection with PwC’s audit of Magyar’s financial disclosures and Sarbanes-Oxley certifications that were ultimately filed with those disclosures on the SEC’s EDGAR website. (SEC 56.1 ¶¶ 17– 29.) It is also undisputed that Balogh and Morvai made representations in support of the management representation letters. (Id. ¶¶ 30–56.) Thus, the undisputed facts show that Defendants “followed a course of conduct directed at the society or economy existing within the jurisdiction of [the United States], so that the [United States] has the power to subject [Defendants] to judgment concerning that conduct.” J. McIntyre Mach., 564 U.S. at 883–84.
Without directly challenging the facts surrounding the EDGAR filings and representation letters, Defendants nevertheless argue that the Court cannot find minimum contacts at this stage because the existence of the bribery scheme is disputed, and therefore the Court cannot find as a matter of law that Defendants directed illegal conduct toward United States investors. (Def. Opp’n at 13–15.) But this argument conflates proof of minimum contacts with proof of the alleged misconduct arising out of those contacts. To establish the Court’s personal jurisdiction, the SEC need only prove Defendants’ contacts with the United States and that the suit arises out of or relates to those contacts. See Walden v. Fiore, 134 S. Ct. 1115, 1121 (2014) (“For a [forum] to exercise jurisdiction consistent with due process, the defendant’s suit-related conduct must create a substantial connection with the forum . . . .”); Brown v. Lockheed Martin Corp., 814 F.3d 619, 624 (2d Cir. 2016) (“specific (also called ‘case-linked’) jurisdiction” is available “when the cause of action sued upon arises out of the defendant’s activities in a [forum]”); Metro. Life, 84 F.3d at 567– 68 (“[s]pecific jurisdiction exists when ‘a [forum] exercises personal jurisdiction over a defendant in a suit arising out of or related to the defendant’s contacts with the forum’” (quoting Helicopteros, 466 U.S. at 415 n.8)). The SEC’s claims here – that Defendants engaged in a bribery scheme and concealed that scheme from Magyar’s investors and auditors by falsifying SEC filings and the company’s books and records (Compl. ¶ 45; SEC Mem. at 3) – clearly “arise out of” Defendants’ undisputed contacts with the United States, as set forth above, and the SEC is not required to prove those claims before the Court can exercise jurisdiction. Consequently, the Court has little difficulty concluding that Defendants here had the requisite minimum contacts with the United States to meet the first prong of the due process test for personal jurisdiction.
“‘Once it has been decided that a defendant purposefully established minimum contacts within the forum . . . , these contacts may be considered in light of other factors to determine whether the assertion of personal jurisdiction would comport with fair play and substantial justice.’” Licci, 732 F.3d at 170 (quoting Burger King, 471 U.S. at 476). “Relevant factors at this second step of the analysis may include: ‘(1) the burden that the exercise of jurisdiction will impose on the defendant; (2) the interests of the forum state in adjudicating the case; [and] (3) the plaintiff’s interest in obtaining convenient and effective relief.’” Id. (quoting Metro. Life, 84 F.3d at 568. The parties’ arguments on this point center on the SEC’s interest in enforcing the federal securities laws versus the burden on Defendants, who reside in Hungary, of having to litigate in the United States.
As the Court noted previously, the United States “has a strong federal interest in resolving this issue here” because “this case was brought under federal law” and “there is no alternative forum available for the government” to enforce the FCPA. Straub I, 921 F. Supp. 2d at 259. Thus, any burden that this action has imposed or will impose on Defendants must be considered not only against the Court’s finding that Defendants directed allegedly illicit activity toward the United States, but also against the SEC’s significant interest in pursuing its claims here. See SEC v. Dunn, 587 F. Supp. 2d 486, 510 (S.D.N.Y. 2008) (“The interest of the United States in adjudicating the case is substantial because there is a need to protect American shareholders and insure the integrity of trading securities [on American stock exchanges]. The SEC has a strong interest in obtaining convenient and effective relief because it is charged with the duty to enforce securities regulations.”); Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 104 F. Supp. 2d 279, 286 (S.D.N.Y. 2000) (“[I]t cannot be gainsaid that nationwide service provisions often are central to major federal regulatory efforts in areas at the core of Congress’[s] power under the [c]ommerce [c]lause, including antitrust and securities regulation. In cases brought under these and comparable statutes, the personal jurisdiction analysis must give appropriate consideration to the strong federal concerns involved.” (footnote omitted)).
Moreover, “where a defendant who purposefully has directed his activities at forum residents seeks to defeat jurisdiction, he must present a compelling case that the presence of some other considerations would render jurisdiction unreasonable.” Burger King, 471 U.S. at 477; see also Asahi Metal Indus. Co. v. Superior Court of Cal., 480 U.S. 102, 116 (1987) (Brennan, J., concurring) (noting that only in “rare cases” will the “minimum requirements inherent in the concept of ‘fair play and substantial justice’ . . . defeat the reasonableness of jurisdiction even [though] the defendant has purposefully engaged in forum activities”); Metro Life, 84 F.3d at 568 (“the exercise of jurisdiction is favored where the plaintiff has made a threshold showing of minimum contacts at the first stage of the inquiry”). Thus, where a plaintiff has met the minimum contacts requirement, “[t]he reasonableness inquiry is largely academic in non-diversity cases brought under a federal law which provides for nationwide service of process . . . because of the strong federal interests involved.” Comm. on Ways & Means, 161 F. Supp. 3d at 223. “To date, while most courts continue to apply the test as a constitutional floor to protect litigants from truly undue burdens, few . . . have ever declined jurisdiction, on fairness grounds, in such cases.” Id.
Discovery has produced no basis for altering the Court’s prior conclusion that “this is not the rare case where the reasonableness analysis defeats the exercise of personal jurisdiction.” Straub I, 921 F. Supp. 2d at 259. Defendants argue that litigating this case has been and will continue to be unreasonably burdensome. Specifically, Defendants contend that they have had difficulty obtaining evidence located in foreign jurisdictions, including both documents and deposition testimony. (Def. Mem. at 6–8.) As a “perfect illustrat[ion] [of] the unduly burdensome challenges [they] have faced . . . defend[ing] this action in a foreign land,” Defendants point to their efforts to depose Slobodan Bogoeski, the former head of Macedonia’s secret service and a “key witness” for the SEC. (Id. at 7.) Defendants take issue with the facts that the SEC “unilaterally interviewed” Bogoeski before alerting Defendants to his existence, and that Defendants have been unable to take a satisfactory deposition of Bogoeski due to logistical difficulties, including Bogoeski’s incarceration in Macedonia on money laundering charges unrelated to this case. (Id. at 7–8.) While the Court does not doubt that discovery in this matter “was a costly and time-consuming exercise” (id. at 7), the difficulties chronicled in Defendants’ briefs do not “present a compelling case” that the Court’s assertion of jurisdiction would be unreasonable. Burger King, 471 U.S. at 477. As Defendants acknowledge, this litigation involves evidence from many countries, including Macedonia, Hungary, Germany, and Greece. (Def. Mem. at 7.) Defendants tellingly do not argue that litigating in Hungary, their home country, would have made the deposition of Bogoeski any easier; rather, the reality is that the enforcement of a statute that prohibits bribery of foreign officials produces discovery complexities not present in wholly domestic litigation or more mundane commercial litigation. The mere fact that such complexities existed here does not establish a burden so compelling as to make this the rare case where asserting jurisdiction would be unconstitutional even though Defendants “purposefully . . . directed [their] activities at forum residents.” Burger King, 471 U.S. at 477.
In addition to discovery burdens, Defendants argue that forcing Defendants to travel to the United States for trial would create an unconstitutional burden. (Def. Mem. 8–9.) As to Balogh and Morvai, Defendants cite nondescript “significant family obligations that prevent them from traveling half way around the world for extended periods of time.” (Id. at 9.) While the Court understands that traveling for trial is burdensome, Balogh and Morvai are no differently positioned than any other foreign defendant with a family. As to Straub, Defendants argue that requiring him to travel for trial would be constitutionally unreasonable because Straub “is nearly 71 years old,” retired, requires “regular treatment” for leukemia, and “has been instructed by his doctors to avoid physical and mental stress.” (Id. at 8–9.) The SEC disputes these facts on the bases that Defendants submitted no declaration from a health professional and that Straub presently serves as a director and managing partner of a venture capital firm and as president of a yachting association (SEC Opp’n at 12) – positions Defendants argue require very little of Straub’s time (Def. Reply at 4–5). Although Straub’s circumstances certainly pose a closer question than Balogh’s and Morvai’s, the Court need not resolve this factual dispute because any burden on Straub may be “accommodated through means short of finding jurisdiction unconstitutional,” Burger King, 471 U.S. at 477, such as Straub’s appearance at trial via videoconference or the submission of his deposition testimony.
Defendants also argue in their opening brief that the Court’s assertion of jurisdiction would be unreasonable because the United States and United States jurors have little interest in a case involving the alleged bribery of Macedonian government officials by Hungarian corporate executives, whereas Hungary and Macedonia have a much greater interest in adjudicating the alleged bribery charges. (Def. Mem. at 9.) However, while it is true that Hungary and Macedonia may have an interest in prosecuting the alleged bribery under their own laws, and courts exercising personal jurisdiction over a foreign defendant should “consider the international judicial system’s interest in efficiency and the shared interests of the nations in advancing substantive policies,” Gucci Am., Inc. v. Weixing Li, 135 F. Supp. 3d 87, 99 (S.D.N.Y. 2015) (emphasis removed) (citing Asahi, 480 U.S. at 115), nothing in Defendants’ summary judgment papers suggests that this litigation has interfered or will interfere with any effort by those countries to enforce their own laws. Moreover, as set forth above and argued by the SEC (SEC Opp’n at 8–9), the United States has a considerable countervailing interest in enforcing its own laws to protect United States investors and ensure the integrity of its exchanges – a point Defendants did not contest in their reply brief or at oral argument.
Accordingly, in light of the United States’ significant interest in enforcing its laws, the Court finds that the burdens articulated by Defendants, even if supported by undisputed facts, provide no basis for concluding that the assertion of jurisdiction over Defendants would be unconstitutional. The Court thus grants the SEC’s motion for summary judgment on this issue and holds that the Court may exercise personal jurisdiction over Defendants.”
Judge Sullivan’s 2013 decision concerned statute of limitations, but as stated in last week’s opinion “discovery has since revealed … that two of the defendants – Straub and Morvai – were physically present in the U.S. in 2005.” Specifically Straub traveled to New York and Boston for a week in 2005 and Morvai traveled to the U.S. on two separate trips in 2005. As stated by Judge Sullivan “these undisputed facts require the Court to now consider what effect, if any, these visits have on the running of Section 2462’s statute of limitations.”
In pertinent part, Judge Sullivan stated:
“For the foregoing reasons, the Court finds that actions covered by Section 2462 are subject to a five-year statute of limitations that applies if the defendant is present in the United States at any time during that five-year period, which begins to run on the date the subject claim accrues and does not toll while the defendant is absent from the United States. The Court also finds that the limitations period does not apply at all if the defendant is not present in the United States at any point during the fiveyear period. Accordingly, Balogh, whom the parties agree was never in the United States at any point, cannot avail himself of the limitations period. As to the other two defendants, however, Straub’s trip to the United States in September 2005 (Def. 56.1 ¶ 1) and Morvai’s trips to the United States in June and October 2005 (id. ¶ 2) triggered the five-year statute of limitations for any of the SEC’s claims that accrued before those trips. And because the SEC initiated this action on December 29, 2011 – more than five years after the accrual of any claims that accrued before Straub’s and Morvai’s trips – those claims are time-barred by Section 2462. By contrast, any claims that accrued after Straub’s and Morvai’s trips would not be subject to Section 2462’s limitations period, since neither Straub nor Morvai would have been present in the United States during the five-year periods applicable to those later-accruing claims.
- When the SEC’s Claims “First Accrued”
In light of the conclusions above, the Court addresses whether any of the SEC’s claims accrued after Straub’s and Morvai’s trips. Construing Section 2462, the Supreme Court held in Gabelli that “a right accrues when it comes into existence”; “[t]hus the ‘standard rule’ is that a claim accrues ‘when the plaintiff has a complete and present cause of action.’” 133 S. Ct. at 1220. Applying this rule to the SEC’s books and records and false statements to auditors claims, it is clear that portions of those claims are not time-barred because they accrued after Straub’s and Morvai’s trips to the United States in 2005.6 Specifically, with respect to its books and records claim, the SEC alleges that Defendants improperly recorded “sham” consulting contracts as late as 2006. (Compl. ¶¶ 29, 32–33, 41; see also SEC Opp’n at 30 (“Defendants are charged with books and records violations based on the improper recording in 2006 of sham contracts used to mask the bribe payments.”).) And with respect to its false statements to auditors claim, the SEC identifies representations made by Straub in October 2005, November 2005, and January 2006 (SEC 56.1 ¶¶ 27–29) – all after Straub’s September 2005 trip to the United States – and a supporting representation made by Morvai in January 2006, well after his October 2005 trip (id. ¶¶ 54–56). Thus, some alleged violations of the FCPA’s books and records and false statements to auditors provisions occurred after Straub’s and Morvai’s trips, and so counts three through five of the second amended complaint are not barred by Section 2462’s limitations period.
As for the SEC’s bribery claims, the analysis is more complicated. The SEC argues that their bribery claims survive because “[D]efendants promised a series of bribe payments that would continue until June 2006,” and “the resulting payments were made via sham contracts as late as May 30, 2006.” (SEC Opp’n at 29–30.) While Defendants dispute that the SEC may proceed under this scheme theory (Def. Opp’n at 16–20), neither party addresses whether the date a defendant pays a bribe is actually the date a bribery claim “accrues” under the FCPA. Based on a plain reading of the statute – which states that it is unlawful for a covered person “to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of” a bribe, 15 U.S.C. § 78dd-1 – the triggering act for the running of the limitations period, i.e., the act that would give the SEC “a complete and present cause of action,” Gabelli, 133 S. Ct. at 1220, would appear to be the “use of the mails,” not the payment or offer of payment of the bribe itself. Certainly the statute would not support a claim brought before a defendant used the mails.
To decide the instant motions, however, the Court need not resolve the issue, as the SEC has identified both a use of the mails (the filing of Magyar’s 3Q 2005 Quarterly Report in November 2005) and a payment of a bribe (in May 2006) that postdate Straub’s and Morvai’s trips to the United States. Thus, one way or another, some alleged violation of the FCPA’s anti-bribery provisions occurred after Straub’s and Morvai’s trips, and so counts one and two of the second amended complaint are not barred by Section 2462’s limitations period.
While any violations that accrued after Straub’s and Morvai’s trips are not timebarred, the Court rejects the SEC’s argument that, because it alleges a bribery “scheme” that “began in 2005 and continued well into 2006,” the so-called “continuing violation” doctrine tolled Section 2462’s limitations period as to all of the alleged violations until the conclusion of the alleged scheme in 2006. (SEC Opp’n at 29.) The continuing violation doctrine is an exception to the general rule of accrual that applies to claims “‘composed of a series of separate acts that collectively constitute one unlawful . . . practice’” – usually involving “claims that by their nature accrue only after the plaintiff has been subjected to some threshold amount of mistreatment” – and does not apply to “discrete unlawful acts, even where those discrete acts are part of a ‘serial violation[ ].’” Gonzalez v. Hasty, 802 F.3d 212, 220 (2d Cir. 2015) (quoting Nat’l R.R. Passenger Corp. v. Morgan, 536 U.S. 101, 114 (2002)). Where the doctrine applies, “the limitations period begins to run when the defendant has ‘engaged in enough activity to make out an actionable . . . claim.’” Id. (citing Morgan, 536 U.S. at 117). Typically, courts apply the doctrine in employment discrimination cases under Title VII where some, but not all, of the conduct amounting to discrimination falls within the limitations period. See, e.g., Morgan, 536 U.S. at 118. The Second Circuit has also extended the doctrine to Eighth Amendment claims brought under 42 U.S.C. § 1983 (see Shomo v. City of New York, 579 F.3d 176, 182 (2d Cir. 2009)), and to unlawful takings claims also under Section 1983 (see Sherman v. Town of Chester, 752 F.3d 554, 566–67 (2d Cir. 2014)). The common thread among these cases is episodic or continuing conduct that, in the aggregate, constitutes a violation, where a single discrete act may not have. The effect of the continuing violation doctrine is to allow recovery based on the entire course of conduct, including those acts that fall outside the limitations period, so long as the plaintiff “allege[s] . . . some non-time-barred acts contributing to the alleged violation.” Gonzalez, 802 F.3d at 220 (internal quotation marks omitted).
Although the terms of Section 2462 do not appear to categorically preclude application of the continuing violation doctrine, see, e.g., Kelly, 663 F. Supp. 2d at 287–288 (applying Section 2462 to securities fraud violations); Cornerstone Realty, Inc. v. Dresser Rand Co., 993 F. Supp. 107, 115 (D. Conn. 1998) (rejecting the argument that the phrase “first accrued” in Section 2462 forecloses the application of the continuing violation doctrine), the doctrine is a poor fit for the alleged violations here – repeated, discrete uses of the mails and offers and payments of bribes. Cf. In re Comverse Tech., Inc. Sec. Litig., 543 F. Supp. 2d 134, 155 (E.D.N.Y. 2008) (noting that the “weight of authority in [the Second Circuit] is skeptical of the application of the continuing violations doctrine in securities fraud cases”); de la Fuente v. DCI Telecommc’ns, Inc., 206 F.R.D. 369, 385–86 (S.D.N.Y. 2002) (“It is not at all clear that the continuing fraud doctrine applies in securities fraud cases.”). Application of the continuing violation doctrine to Section 2462 is further called into question, at least in the SEC enforcement context, by the Supreme Court’s decision in Gabelli, which, as discussed above, rejected the application of the discovery rule (which, like the continuing violation doctrine, is an exception to the general rule of accrual) to Section 2462. See Gabelli, 133 S. Ct. at 1221–24. The Court thus rejects the SEC’s argument that it may pursue FCPA violations that occurred outside of the limitations period simply on the basis that those violations were similar in character to and part of the same alleged “scheme” as violations that occurred within the limitations period.
For the reasons stated above, the Court concludes that claims for civil penalties against Straub and Morvai that accrued before those defendants’ trips to the United States are time-barred by Section 2462, since the SEC would have had to bring those claims by, at the latest, October 2010 (five years after Morvai’s second trip), and the SEC did not file this action until December 29, 2011 (Doc. No. 1). The SEC’s remaining claims, however, are not time-barred. Accordingly, the parties’ summary judgment motions on the statute of limitations issue are both granted in part and denied in part.”