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Puzzled By Straub And Steffen

Prior posts here and here summarized the recent judicial decisions in SEC v. Straub and SEC v. Steffen.

Today’s post is from Russ Ryan (Partner, King & Spalding).  Prior to joining King & Spalding, Ryan spent ten years in the SEC’s Division of Enforcement, including his last three years as Assistant Director of the Division.  Ryan, along with his colleagues at King & Spalding (Gary Grindler – former DOJ Acting Deputy Attorney General – and Ehren Halse-Stumberg), recently published this client alert on the cases.  Ryan contributes this guest post admitting to some confusion regarding the common thread between Straub and Steffen on the issue of personal jurisdiction.


Am I the only one puzzled that the courts in both Straub and Steffen considered largely dispositive whether or not the respective defendants participated in the deception of U.S. shareholders by signing false accounting certifications or falsifying financial statements?

The irony of the courts’ focus on misleading financial statements is that in neither case – nor in most other Foreign Corrupt Practices Act cases, for that matter – did the SEC even allege that the relevant company’s financial statements were materially misstated.  Likewise, nobody was charged with securities fraud under Securities Exchange Act Section 10(b) and Rule 10b-5, presumably because none of the bribes or falsified records were material to the companies involved, which is typical in an FCPA case.  Indeed, neither Magyar nor Siemens was charged even with violating the periodic reporting requirements of Exchange Act section 13(a) and the rules thereunder for Form 10-K and 10-Q filings, which don’t require proof of scienter, but do require proof of materiality.

In short, in neither case did the SEC ever allege that financial statements were materially misstated, much less that U.S. shareholders were misled by them.  Of course, mere acknowledgment of this point invites the question of to what extent the fight against foreign bribery has to do with the SEC’s core mission of protecting U.S. investors.  Indeed, as Professor Koehler’s article “The Story of the Foreign Corrupt Practices Act” highlights, the SEC did not want any role in enforcing what would become the FCPA’s anti-bribery provisions.

Let’s face it:  Most foreign bribery by employees of U.S. issuers and domestic concerns, although perhaps reprehensible, does not materially mislead or harm the shareholders of these companies, nor is it intended to do so.  To the contrary, even if misguided and short-sighted, most foreign bribery is intended by the bribing employees to enrich their companies, and by extension their shareholders, by boosting real sales and increasing actual revenue.  The primary victims are the company’s competitors and the foreign agency or department whose official was corrupted by the company’s bribe – not shareholders.

It’s true, of course, that if and when a company is caught engaging in bribery, the resulting publicity, investigations, and penalties can hurt the company and its shareholders.  But this harm is no different from that which flows from the exposure of any kind of corporate criminal misconduct, little of which falls within the SEC’s jurisdiction.

It’s also true that most foreign bribery involves some evasion of a company’s internal accounting controls and/or some degree of falsification of a company’s books and records, conduct well within the SEC’s core area of interest whenever an issuer is involved.  But these transgressions typically occur entirely or substantially at a remote subsidiary of the issuer and, even in the aggregate, rarely come close to being material to the issuer itself.

The SEC’s theory is usually that the remote subsidiary’s books and records “roll up” into the issuer’s, and thus are part of the issuer’s own books and records, so they are fair game.  As this prior FCPA Professor post highlighted, the SEC has also argued that payments that violate the FCPA are qualitatively material even if quantitatively immaterial.  For present purposes we can stipulate to the reasonableness of these positions.

But it brings us back to the issue of personal jurisdiction over foreign employees of issuers who lack any meaningful connection with the United States other than working for a company that happens to have SEC-registered securities and SEC filing obligations.  Whether the foreign employee participates in a bribe or a falsification of books and records outside the United States, it is hard to see how that conduct could ever be viewed as a deliberate effort to mislead U.S. shareholders, much less suffice to subject the employee to personal jurisdiction in a law enforcement case being prosecuted in a U.S. court.  And why courts would consider this the lynchpin of their personal jurisdiction analysis is likewise far from clear.

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