In the FCPA’s history, the SEC has never prevailed when put to its ultimate burden of proof in a Foreign Corrupt Practices Act enforcement action.
As highlighted in this previous post, in 2002 the S.D. of Texas dismissed an SEC complaint against Eric Mattson and James Harris. The enforcement action involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment. The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the Court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment. The Court rejected the SEC’s arguments and concluded that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.” See here for the court’s Memorandum and Order.
As highlighted in this previous post, in 2013 the S.D. of New York dismissed an SEC complaint against Herbert Steffen. In dismissing the case against the German national, the judge concluded, as an initial threshold matter, that personal jurisdiction over Steffen exceeded the limits of due process. The judge stated, in pertinent part, as follows.
“If this Court were to hold that Steffen’s support for the bribery scheme satisfied the minimum contacts analysis, even though he neither authorized the bribe, nor directed the cover up, much less played any role in the falsified filings, minimum contacts would be boundless. […] [U]nder the SEC’s theory, every participant in illegal action taken by a foreign company subject to U.S. securities laws would be subject to the jurisdiction of U.S. courts no matter how attenuated their connection with the falsified financial statements. This would be akin to a tort-like foreseeability requirement, which has long been held to be insufficient.”
In SEC v. Jackson, an enforcement action involving Noble executives, the SEC was close to having to prove its case at trial, but the SEC offered to settle the case on the eve of trial on terms very favorable to the defendants after its motion for summary judgment was denied and the judge raised several questions about the SEC’s case. (See here and here for prior posts).
That leaves SEC v. Straub as the only “active” SEC FCPA enforcement action. As highlighted in this previous post, in February 2013 the S.D. of New York denied the motion to dismiss of Elek Straub, Andras Balogh and Tamas Morvai (all foreign nationals formerly associated with Magyar Telekom) in an SEC FCPA case concerning an alleged bribery scheme in Macedonia. (Note – when a trial court denies a motion to dismiss it does not mean that the plaintiff has prevailed, it only means that the case will continue).
Recently, the parties provided the court updates on anticipated summary judgment motions.
This defense letter focuses on statute of limitations, use of interstate commerce, and personal jurisdiction.
As to statute of limitations, the motion will argue that the Supreme Court’s 2013 statute of limitations decision in Gabelli v. SEC (see here for the prior post – an opinion issued after the above mentioned February 2013 motion to dismiss) warrants summary judgment. The motion will further argue that facts reveal that two of the defendants were physically present in the U.S. in 2005 after the time the SEC’s claims “first accrued” and thus the action filed in December 2011 is time-barred.
As to the use of interstate commerce, the letter states:”Discovery has not demonstrated that Straub or Morvai made any use of the instrumentalities of U.S. interstate commerce, nor has it demonstrated that a single innocent e-mail sent by Balogh that independently, unknowingly, and fleetingly passed through a server in the U.S. was sent “in furtherance” of any alleged bribery scheme.” As stated in the letter, “the viability of the SEC’s FCPA claim, against all three Defendants, therefore is dependent on a single e-mail transmission, between one Defendant in Hungary and one of his colleagues in Macedonia, which attaches an unsigned copy of a legitimate – albeit nonbinding – understanding between the two main shareholders of MakTel. Discovery has not supported the SEC’s allegations that this e-mail was sent in furtherance of an alleged bribery scheme, nor has it supported the conclusion that one e-mail sent by Balogh would implicate his co-defendants.”
As to personal jurisdiction, the summary judgment motion will argue that the defendants lack sufficient minimum contacts with the U.S. to justify exercise of personal jurisdiction. [Note, this was the basis on which the SEC’s complaint against Steffen was dismissed]. According to the letter, “limited management and sub-certification representations which occurred in Hungary [should not] support a conclusion of minimum contacts with the U.S. in light of the fact that all of the alleged conduct occurred in Hungary and Macedonia.”
This SEC letter also focuses on statute of limitations, interstate commerce and personal jurisdiction.
As to statute of limitations, the letter ignores the Gabelli decision regarding when claims first accrue and states, “between 2006, when the defendants’ scheme ended, and the filing of the SEC’s complaint in December 2011, not one of the defendants set foot in the U.S.”
As to interstate commerce, the letter states. “There is no genuine issue that defendant Balogh used electronic mail in furthernace of the bribe scheme by attaching drafts of the Protocol, the Letter of Intent, and copying of consulting contracts with third-party intermediaries. The e-mails were sent from locations outside the United States, but were routed through and stored on network servers located within the United States. The email messages sent by Balogh to a co-conspirator’s “hotmail.com” email account have been identified, authenticated, and traced to Balogh’s computer. Balogh has not denied sending them. Further, a witness from Microsoft will testify that during the relevant time all of its Hotmail servers were located within the United States. As a result, all e-mail messages sent to hotmail.com addresses would necessarily have been routed through U.S. interstate commerce.”
As to personal jurisdiction, the letter states: “The factual record fully supports the Court’s exercise of personal jurisdiction over the defendants.There is no genuine issue that the defendants did, in fact, execute the management representation letters and sub-certifications alleged in the complaint. There is no genuine dispute that the defendants, all sophisticated senior corporate executives, were on notice that their representations were made in connection with the company’s filings with the SEC.
As noted in the SEC’s letter, in addition to moving for summary judgment on the above issues, the SEC will also move affirmatively for judgment on its claims that the defendants violated Rule 13b2-1 (falsifying accounting records) and Rule 13b2-2 (making false representations to an auditor).
See here and here for the SEC and defendants’ reply letters.