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Motions To Dismiss Fully Briefed In SEC v. Cohen & Baros

As highlighted in this prior post [1], in January 2017 the SEC filed a civil complaint against former Och-Ziff executives Michael Cohen and Vanja Baros alleging the same core conduct as the DOJ and SEC’s September 2016 enforcement action [2] against Och-Ziff.

The prior post noted that the defendants would be mounting a defense and further noted that the SEC is rarely put to its burden of proof in FCPA enforcement actions (corporate or individual). Indeed, the SEC has never prevailed in FCPA history [3] when put to its ultimate burden of proof.

Late last week, the briefing on the motions to dismiss appeared (all at once) on the court’s docket and this post summarizes the disputed issues which largely center on statute of limitations issues and (as relevant to Baros, a foreign national defendant) general jurisdiction issues as well as FCPA specific jurisdiction issues).

In summary fashion, Cohen’s motion to dismiss brief [4] states:

“The SEC’s case against Mr. Cohen based on decade-old investments in Africa was brought too late, oversteps the territorial limits of the SEC’s authority, and relies on speculation and innuendo for its core premise that Mr. Cohen knew of any violations of law. The SEC recognized that its original complaint was deficient—even after six years of investigation—and chose to amend rather than respond to Defendants’ first motions to dismiss. The amended complaint, however, cannot paper over the legal deficiencies and the SEC’s case must be dismissed.

The case concerns investment transactions that took place between 2007 and early 2011. At that time, Mr. Cohen was head of the European office of a hedge fund, Och-Ziff Capital Management Group (“Och-Ziff”), and he oversaw investments throughout Europe, the Middle East, and Africa. In connection with certain investments in Africa, Och-Ziff engaged in transactions with businessmen whom the SEC now contends paid bribes using money obtained from Och-Ziff. The SEC does not allege that Mr. Cohen or any other Och-Ziff employee paid bribes. Indeed, there is not a single alleged email, text, or other document about any of those deals sent to or from Mr. Cohen that even hints at bribery. Nevertheless, the SEC alleges that by making these investments Mr. Cohen “knowingly or recklessly” violated and/or aided and abetted violations of the Foreign Corrupt Practices Act (“FCPA”) and Investment Advisers Act (“Advisers Act”).

The Complaint fails as a matter of law in three respects: (i) the case was brought far beyond the five-year statute of limitations; (ii) half of the Advisers Act claims are extraterritorialand therefore outside the statute’s reach; and (iii) the Complaint lacks particularized allegations that Mr. Cohen knew of, or recklessly disregarded, bribery.

Time-Barred: All of the conduct alleged in the Complaint occurred well outside the five-year statute of limitations governing claims under the FCPA and the Advisers Act. Indeed, most of the transactions took place nine and ten years ago, in 2007 and 2008. Mr. Cohen agreed to toll only some of the claims, for less than two years, and his last tolling agreement expired nearly three years ago, still leaving the SEC well past the limitations period. The Complaint offers no explanation for the SEC’s delay. Statutes of limitation exist precisely to protect a defendant’s ability to defend himself from unfounded and stale claims, a right Mr. Cohen is denied here.

[…]

Failure to Allege Knowledge: After six years of investigation, the SEC has filed a Complaint that does not come close to alleging the essential element of knowledge, let alone with the particularity required by Rule 9(b). Unlike a private plaintiff, the SEC spent many years and regulatory resources scouring the globe to investigate the transactions at issue before filing suit. It came up empty-handed when it comes to Mr. Cohen. Despite reviewing more than 45 million pages of documents including every single email and text message by Mr. Cohen for a seven-year period—and interviewing dozens, if not hundreds, of witnesses all over the world— the SEC fails to adequately allege the central issue in the case, Mr. Cohen’s knowledge of bribery. Nowhere in its 85 pages does the Complaint cite a single email, text message, memo, note, or other document by Mr. Cohen—or anyone else—discussing, suggesting, or even hinting that Mr. Cohen had knowledge of any improper payments to foreign government officials in connection with the transactions that form the basis of the SEC’s claims. There are none of the cryptic emails or coded language that one might reasonably expect to see if the allegations of Mr. Cohen’s knowledge or involvement in bribery were true.

The Complaint tries to mask this deficiency with speculative and conclusory allegations that the need for bribery was “communicated” to Mr. Cohen in supposed private conversations. The extreme detail in other aspects of the Complaint makes clear that if the SEC had any basis to allege with any specificity what was actually said, or where, or when, the Complaint would have alleged it. If the SEC had a recording or document reflecting these supposed conversations, or even a credible source, the Complaint would have alleged it. The Complaint alleges none of these things—no particulars about where, when, or what was said, and no source for the SEC’s speculation that any such conversations took place at all. That is not enough to raise a “strong inference” of Mr. Cohen’s knowledge, as is required under Rule 9(b). Moreover, after reviewing Defendants’ motions to dismiss, the SEC amended its Complaint in an (unsuccessful) effort to rebut Mr. Cohen’s extraterritoriality argument, but the SEC had nothing to add regarding Mr. Cohen’s knowledge. This Complaint is the best the SEC can do, and it falls far short.

Indeed, the Complaint suffers from the same flaw as the six-year SEC investigation that preceded it: after concluding that Och-Ziff’s counterparties paid foreign government officials, the SEC wrongly assumed that Mr. Cohen must have known of such payments and worked backward to seize on ambiguous circumstantial facts for support. That conclusion is neither justified nor well pled. Rule 9(b) is designed to safeguard defendants’ reputations from unfounded and improvident charges of wrongdoing like these, and it requires dismissal here.”

[5]

In summary fashion, Baros’s motion to dismiss brief [6] states:

“Vanja Baros does not belong in this case. An analyst who formerly worked for the London-based entity Och-Ziff Management Europe Limited (“OZ Europe”), which is separate and distinct from the New York entity Och-Ziff Capital Management Group LLC (“Och-Ziff”), Baros did not engage in any wrongful conduct and was in no position to “execute” an international FCPA scheme. Taking the SEC’s factual allegations as true, the Amended Complaint must be dismissed, and the case against Baros thrown out, for four fundamental reasons.

First, the relief the Amended Complaint seeks includes fines and disgorgement, but the SEC’s claims are time-barred under the applicable statute of limitations. On June 5, 2017, following the filing of the Amended Complaint, the U.S. Supreme Court unanimously held in Kokesh v. SEC that the five-year statute of limitations for civil penalties also applies to disgorgement claims. Here, because all claims against Baros accrued more than five years before the original Complaint was filed – and because the claims are not tolled due to Baros’s presence in the U.S. during the relevant limitations period, the SEC’s claims for fines and disgorgement are time-barred. In addition, under the reasoning of Kokesh, the SEC’s claims for an anti-fraud injunction is time-barred.

Second, the Amended Complaint fails to plead a basis for personal jurisdiction over Baros. Try as it might in its original Complaint and now in the Amended Complaint, the SEC did not and could not make the required allegations that Baros purposefully directed his conduct toward the U.S. and that the underlying violations arose out of or were related to such conduct: the Amended Complaint does not allege a single suit-related action by Baros that occurred within the U.S. or was directed at the U.S. in any cognizable way. Accordingly, the Amended Complaint should be dismissed pursuant to Rule 12(b)(2).

Third, the Amended Complaint fails to state a claim with respect to both the Foreign Corrupt Practices Act (FCPA) and Investment Advisers Act (IAA). To begin with, the SEC has failed to allege facts sufficient to establish that the FCPA’s anti-bribery provisions even apply to Baros. Those provisions cannot be applied to non-resident foreign nationals like Baros unless the defendant either took actions in furtherance of corrupt payments while inside the U.S. or acted as an agent or employee of a U.S. issuer or domestic concern. The SEC does not and cannot allege the former, and its effort to portray Baros as the agent or employee of the ultimate parent company, Och-Ziff, is wholly conclusory and insufficient. The SEC tries to rescue its bribery claims by alleging that Baros aided and abetted Och-Ziff’s violations, but courts in this Circuit have rejected such end-runs around the FCPA’s territorial limitations.

Further, the Amended Complaint fails to allege essential elements of a claim under the FCPA in connection with at least two of the transactions at issue, which provides an independent basis for dismissal as to these two transactions.

[…]

The fatal defects in the Amended Complaint cannot be ascribed to imprecise drafting, and cannot be cured by further amendment or discovery. The SEC, unlike a private plaintiff, was able to conduct extensive pre-filing investigation in this case, including compelling the production of millions of documents and obtaining testimony both in this country and abroad. The Amended Complaint presumably reflects the SEC’s best attempts to fix the defects in its original pleading and, for the reasons set forth below, that attempt has failed.”

In summary fashion, the SEC’s opposition brief to the motions to dismiss [7] states:

“The Commission has brought timely, well-pled claims against Defendants Cohen and Baros for violations of the Foreign Corrupt Practices Act (FCPA) and the Investment Advisors Act (IAA). Defendants’ action – and the resulting allegations – are within the jurisdiction of this Court and the territorial reach of the statutes that Defendants have violated. Defendants seek to avoid liability for their actions by minimizing their roles at Och-Ziff, by ignoring or distorting the facts of their intentions with their main offices and bosses in the United States, and by misapplying or misapprehending the cases, rules, and statutes on which they base their arguments.

The arguments Cohen and Baros put forward are (for the most part) heavily factually-based, the sort usually raised on summary judgment. But Defendants have re-styled these fact-based arguments as arguments for dismissal. And they have tried to give the Court a bare handful of documents from which to make ‘fact’ arguments. As a result, the Commission filed its Amended Complaint to clarify further what Cohen and Baros seek to muddy: their roles at Och-Ziff and in the bribery scheme. In most of these instances, these arguments – while ultimately wrong – are currently premature.

The Commission responds to the Defendants’ Motions to Dismiss as follows:

Timely Claims: The Commission claims against Cohen and Baros are timely. Following a finding of liability on each claim, Defendants may be enjoined and barred from association with securities-related entities. The applicable statute of limitations does not preclude the Court from doing so. Moreover, as Cohen has entered into tolling agreements with Commission, penalties and disgorgement may be imposed by the Court. Finally, it is too early in the life of this case to determine whether the statute of limitations would preclude disgorgement and injunctions on some of the violations, as these questions will turn on facts learned in discovery and proven at trial. Whether the Court should enjoin a defendant is fact-specific (concerning both underlying past conduct and current factors) and should be determined following finding of liability. And, as a claim for disgorgement may accrue later than the substantive violation (when the ill-gotten gains are actually received), determining whether the statute of limitations will apply to the Commission’s disgorgement claims is also premature.

[…]

Violations Pled Sufficiently: Each of the violations by Cohen and Baros alleged in the Amended Complaint are pled sufficiently, both as to Defendants actions and their knowledge of bribes. Defendants attempt to apply the wrong pleading standard to Foreign Corrupt Practices Act claims and try to alter the state of mind required for a violation. The Amended Complaint alleges the facts necessary to plead each of the Defendants’ violations.

Baros Was an Agent of Och-Ziff: The Amended Complaint alleges that Baros was both an agent and an employee of Och-Ziff. The FCPA reaches Baros and his conduct in arranging for Och-Ziff and OZ Management to pay bribes to foreign officials. In addition, Baros’s dispute with these allegations is a fact-intensive matter, not suitable for resolution on a motion to dismiss.

The Court Has Personal Jurisdiction Over Baros: As pled in the Amended Complaint, Baros had pervasive and deliberate contacts with the United States, and this Court has jurisdiction over him for his FCPA, Advisor Act, and accounting and internal controls violations. This Court’s exercise of personal jurisdiction over him is reasonable.

For all of these reasons, the Commission respectfully requests that the Court deny Defendants’ Motions to Dismiss.”

In summary fashion, Cohen’s reply brief [8] states:

“The Securities and Exchange Commission (“SEC”) cannot circumvent the statutory and judicial limits on its authority that require dismissal of the Amended Complaint.

First, the SEC concedes that half of this case falls outside the limitations period set forth in 28 U.S.C. § 2462. The whole case falls outside the limitations period unless the Court applies tolling agreements that reference only one formal investigation to claims that arose in another. But Mr. Cohen did not agree to a blank-check waiver of his limitations defense and the Court cannot rewrite the tolling agreements now to make them broader when the SEC failed to do so previously. The SEC asks the Court to dodge the limitations issue so that it can pursue penalties, disgorgement, and injunctive relief through trial, then seek punitive sanctions in a follow-on proceeding. That is a blatant end-run around Section 2462 and two unanimous Supreme Court decisions that preclude courts from entertaining SEC actions designed to label defendants wrongdoers and penalize them for conduct outside the limitations period.

[…]

Finally, the Opposition wrongly argues that Rule 9(b) should not apply because the claims asserted do not require fraud as an element. Rule 9(b) applies based on the nature of the facts alleged, not the elements of the claims, and the SEC cannot meet the heightened pleading burden for its theory that Mr. Cohen supposedly knew of but concealed bribes.”

In summary fashion, Baros’s reply brief [9] states:

“In his motion to dismiss, Vanja Baros (“Baros”) set forth multiple independent grounds for dismissal, including that the SEC’s claims are time-barred, that this Court lacks personal jurisdiction over Baros, and that the FCPA claims against him fail to satisfy minimum pleading standards. In its opposition to Baros’s motion, the SEC does not nothing to resolve the fatal deficiencies in the Amended Complaint.

With respect to statute of limitations, the SEC concedes that all of its claims seeking a fine against Baros are time-barred. Under the U.S. Supreme Court’s ruling in Kokesh, claims seeking disgorgement are subject to the same statute of limitations as other penalties, and the SEC’s claims for disgorgement against Baros are therefore time-barred as well. The SEC’s arguments to the contrary – that (i) the Court should delay ruling on the statute of limitations issue; and that (ii) the SEC’s “disgorgement claims” accrue at a different time than the substantive violation – are contradicted by every relevant authority (including those cited by the SEC itself) and defy common sense. Kokesh controls, and this Court can and should rule now that the SEC’s claims seeking disgorgement are time-barred.

With respect to personal jurisdiction, the SEC simply repeats – and often embellishes – the allegations in the Amended Complaint. But all of the SEC’s jurisdictional allegations are impermissibly conclusory, relate to the U.S. contacts of parties other than Baros, and/or draw only indirect and attenuated links between Baros’s own actions and any impact inside the forum. None of them adequately alleges any suit-related action by Baros that took place inside the U.S., was purposefully directed at the U.S., or was expressly intended to cause harm within the U.S. Under well-settled law, this Court therefore lacks personal jurisdiction over Baros – a foreign national who was an employee of a non-U.S. subsidiary and was far removed temporally, geographically, and factually from the alleged FCPA scheme involving Och-Ziff.

With respect to its substantive FCPA claims, the SEC asks the Court to defer ruling on key issues regarding agency. But these issues are fully ripe and, if reached, would end the FCPA anti-bribery claims against Baros, because the Amended Complaint’s conclusory allegations and formulaic recitals of elements of the FCPA do not meet basic pleading standards with respect to Baros and cannot be cured through discovery.

Simply put, Baros does not belong in this case, and the SEC should not be permitted to keep him in by arguing for delay or obscuring the factual deficiencies in the Amended Complaint.”

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