Financial Fraud Law Report

Transcription

1 Financial Fraud Law Report An A.S. Pratt & Sons Publication may 2013 Headnote: A Look Back Steven A. Meyerowitz The Past Year s Top SEC Enforcement Events Andrew N. Vollmer, Douglas J. Davison, and Heather Mowell The FCPA in Review Part II: Release of the Government s Guidance Caps a Year of Disparate Developments Paul R. Berger, Sean Hecker, Andrew M. Levine, Bruce E. Yannett, Samantha J. Rowe, and Amanda M. Bartlett Fourth Circuit Applies the Wartime Suspension of Limitations Act to the Civil False Claims Act Douglas W. Baruch, Jennifer M. Wollenberg, and Kayla Stachniak Kaplan Motion to Dismiss Raising Matter of First Impression in Fcpa Context Denied in S.D.N.Y. Madeleine Moise Cassetta Ruling Dramatically Expands Scope of Whistleblower Protections Under Sarbanes-Oxley Mark D. Pollack and Christian M. Auty Signs of Spring at the U.K. s Serious Fraud Office: Challenges, Changes, and the Impact on Global Anti-Corruption Compliance John Cunningham and Geoff Martin U.S. Federal Reserve Board Proposes Major Changes in How the U.S. Operations of Foreign Banks and Their Subsidiaries Are Supervised David L. Ansell and Gordon L. Miller Dodd-Frank Wall Street Reform and Consumer Protection Act Update David A. Elliott, Rachel Blackmon Cash, and S. Kristen Peters

2 Editor-in-chief Steven A. Meyerowitz President, Meyerowitz Communications Inc. Board of Editors Frank W. Abagnale Author, Lecturer, and Consultant Abagnale and Associates Stephen L. Ascher Jenner & Block LLP Thomas C. Bogle Dechert LLP David J. Cook Cook Collection Attorneys David A. Elliott Burr & Forman LLP William J. Kelleher III Corporate Counsel People s United Bank James M. Keneally Kelley Drye & Warren LLP Richard H. Kravitz Founding Director Center for Socially Responsible Accounting Frank C. Razzano Pepper Hamilton LLP Sareena Malik Sawhney Director Marks Paneth & Shron LLP Mara V.J. Senn Arnold & Porter LLP John R. Snyder Bingham McCutchen LLP Jennifer Taylor McDermott Will & Emery LLP Bruce E. Yannett Debevoise & Plimpton LLP The Financial Fraud Law Report is published 10 times per year by A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC , Copyright 2013 THOMPSON MEDIA GROUP LLC. All rights reserved. No part of this journal may be reproduced in any form by microfilm, xerography, or otherwise or incorporated into any information retrieval system without the written permission of the copyright owner. For permission to photocopy or use material electronically from the Financial Fraud Law Report, please access www. copyright.com or contact the Copyright Clearance Center, Inc. (CCC), 222 Rosewood Drive, Danvers, MA 01923, CCC is a not-for-profit organization that provides licenses and registration for a variety of users. For subscription information and customer service, call Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., PO Box 7080, Miller Place, NY 11764, smeyerow@optonline.net, (phone) / (fax). Material for publication is welcomed articles, decisions, or other items of interest. This publication is designed to be accurate and authoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher. POSTMASTER: Send address changes to the Financial Fraud Law Report, A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC ISSN

3 Motion to Dismiss Raising Matter of First Impression in Fcpa Context Denied in S.D.N.Y. Madeleine Moise Cassetta The author analyzes a recent court decision that provides an instructive insight not only into the extensive reach of the government s Foreign Corrupt Practices Act enforcement efforts, but also into notable issues, such as the jurisdictional element of an FCPA anti-bribery violation and interpretation of the applicable statute of limitations. The three foreign national defendants former executives of Magyar Telekom, Plc. ( Magyar Telekom ), the Hungarian telecommunications subsidiary of Deutsche Telekom AG facing Foreign Corrupt Practices Act bribery and related charges in SEC v. Straub 1 had moved to dismiss the complaint on the basis of (1) failure to state a cause of action, (2) statute of limitations, and (3) lack of personal jurisdiction. On February 8, 2013, U.S. District Court Judge Richard J. Sullivan denied their motion in its entirety. BACKGROUND The three former Magyar Telekom executives were charged in December 2011, when Deutsche Telekom and Magyar Telekom agreed to settle U.S. criminal and civil investigations into the bribery of government officials in Madeleine Moise Cassetta is an associate at LeClairRyan, focusing her practice on business litigation, international law, white collar criminal defense, and healthcare and internal corporate investigations. She may be contacted at madeleine.cassetta@leclairryan.com. Published by A.S. Pratt in the May 2013 issue of the Financial Fraud Law Report. Copyright 2013 THOMPSON MEDIA GROUP LLC

4 Financial Fraud Law Report Macedonia and Montenegro. According to the complaint, the defendants had engaged in two separate schemes, one each in Macedonia and Montenegro, to bribe foreign government officials in an effort to obtain regulatory benefits, win business and keep rivals out of the specific markets. 2 Specifically, it is alleged that, in 2005 and 2006, the defendants sought to block the entry of a competitor in Macedonia by authorizing payments of million to an intermediary in Greece using sham consulting and marketing [contracts] knowing or under circumstances that made it substantially certain that all of the payments would be forwarded to government officials. 3 It is also alleged that the defendants made false or misleading statements or omissions to auditors in connection with preparation of the 2005 financial statements, when they signed management representation and sub-representation letters omitting disclosure of the aforementioned bribery schemes. 4 Furthermore, it is alleged that one of the defendants made use of means and instrumentalities of United States interstate commerce by sending electronic mail messages from locations outside the United States, that were routed through and/or stored on network servers located within the United States and forwarding that way, on behalf of all defendants, documents related to the bribery schemes at issue, and by which the defendants concealed the true nature of the corrupt payments. 5 FAILURE TO STATE A CAUSE OF ACTION The Jurisdictional Element of an FCPA Anti-Bribery Violation As part of their failure to state a cause of action argument, the defendants raised a matter of first impression in the FCPA context regarding the jurisdictional element in 15 U.S.C. 78dd-1(a): 6 namely, whether [this section] requires that a defendant intend to use the mails or any means or instrumentalities of interstate commerce in furtherance of corrupt payments. 7 They argued that the complaint did not allege that any defendant had any reason to know that the wholly foreign communications might be routed through and/or stored on servers within the United States. 8 The court, however, found that no corrupt intent is required. 9 After reviewing the legislative history, the court found that the complaint sufficiently pleaded that the defendants had used the means or instrumentalities of inter- 432

5 Motion To Dismiss Raising Matter of first Impression in FCPA Context state commerce in accordance with the FCPA, noting that the legislative history reveals that [the] intent or mens rea requirement [is meant for the] underlying bribery [not] for the make use of any means or instrumentality of interstate commerce element. 10 The court noted that such a reading was consistent with the way that courts have interpreted similar provisions in other statutes, such as the mail and wire fraud statutes and the money laundering statutes. 11 The court thus rejected defendants narrow reading of Section 78dd-1(a), stating that [t]he difference between causes to [in 18 U.S.C. 1341] and uses is not so great as to enable the Court to divine a congressional intent to impart a different meaning to one statutory provision and not to another. 12 Identity of Foreign Officials Next, the court rejected defendants argument that the SEC had failed to allege sufficient facts to establish that the recipients of the intended bribes were foreign officials under the FCPA, noting that the complaint contains various allegations regarding the involvement of foreign government officials in defendants bribery scheme. 13 According to the court, [b]y its plain terms, [t]he language of [15 U.S.C. 78dd-1(a)] does not appear to require that the identity of the foreign official involved be pleaded with specificity. 14 In fact, the court noted, [s]uch 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. 15 STATUTE OF LIMITATIONS The defendants based their statute of limitations argument on a novel reading of 28 U.S.C which establishes a five-year limitations period from the date when the claim first accrued 16 to the effect that the statute would start to run if a defendant was (1) either physically in the United States, or (2) subject to service of process elsewhere by some alternative means during that five-year limitations period. 17 By adopting defendants interpretation, the court explained, the clause if found within the United States [would be] mere surplusage. 18 Therefore, the court, agreeing with the SEC, rejected defendants interpretation, and found that the statute of limitations 433

6 Financial Fraud Law Report had not run in this case as the defendants had not been physically present in the United States during the limitations period. 19 LACK OF PERSONAL JURISDICTION In support of their lack of personal jurisdiction argument, the defendants had argued that a finding of jurisdiction in this case, involving foreign individuals engaged in wholly foreign conduct purportedly for the benefit of the foreign corporation rather than personal enrichment, in effect, it would provide personal jurisdiction over any individual director, officer, or employee of an issuer in any FCPA case even if there is no nexus to the United States for that individual, contrary to the text of the FCPA [and] the standards for establishing personal jurisdiction consistent with constitutional due process. 20 Specifically, the defendants argued that the complaint was devoid of any allegations that they purposefully directed their conduct at the United States much less that they knew or reasonably could have expected that their actions, all of which occurred overseas, would have harmed American investors. 21 Moreover, the defendants argued, the SEC did not allege that any investor whether in the United States or abroad suffered such harm. 22 Applying well-established principles of minimum contacts and reasonableness, the court found that the SEC has met its burden of proving a prima facie case of jurisdiction sufficient to withstand a jurisdictional challenge at this early stage of the litigation. 23 The court rejected the argument that, by finding personal jurisdiction in this case, it was creat[ing] a per se rule regarding employees of an issuer. 24 Instead, the basis for the court s findings was a case-specific fact-based inquiry. 25 The court thus noted that during and before the alleged violations, both Magyar s and Deutsche Telekom s securities were publicly traded through [American Depository Receipts ( ADRs )] listed on the NYSE and were registered with the SEC pursuant to Section 12(b) of the Securities Exchange Act, that these companies made regular quarterly and annual consolidated filings during that time, and that the [d]efendants allegedly engaged in a cover-up [signing false management and sub-representation letters for quarterly and annual reporting periods in 2005] 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 434

7 Motion To Dismiss Raising Matter of first Impression in FCPA Context statements and filings. 26 Consequently, the court concluded, the [d]efendants knew or had reason to know that any false or misleading financial reports would be given to prospective American purchasers of those securities and that it ha[d] little trouble inferring that, even if the 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. 27 CONCLUSION This decision provides an instructive insight not only into the extensive reach of the government s FCPA enforcement efforts, but also into notable issues, such as the jurisdictional element of an FCPA anti-bribery violation and interpretation of the applicable statute of limitations. Therefore, it is most likely that it will have a significant impact in any future similar challenges by individual defendants even though it is a non-binding trial court decision. Notes 1 F. Supp. 2d, 2013 WL (S.D.N.Y. Feb. 8, 2013). 2 Complaint 2-3, SEC v. Straub, No. 11 Civ (S.D.N.Y. Dec. 29, 2011). 3 Id. at 18-19, Id. at Id. at U.S.C. 78dd-1(a) states, in pertinent parts: It shall be unlawful for any issuer which has a class of securities registered pursuant to section 781 of this title or which is required to file reports under section 780(d) of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of 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 to (1) any foreign official for purposes of (A) (i) influencing any act or decision of such foreign official in his official capacity, 435

8 Financial Fraud Law Report (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or (B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person. 7 Straub, 2013 WL , at *14. 8 Memorandum of Law in Support of Defendants Joint Motion to Dismiss the Complaint ( Mem. ) at 22, SEC v. Straub, No. 11 Civ (S.D.N.Y. Nov. 5, 2012). 9 Straub, at * Id.; see also id. at * Id. at * Id. at * Id. at *15-* Id. at * Id U.S.C states: 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 within five years 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 may be made thereon. 17 Straub, 2013 WL , at * Id. at * Id. at *12-* Mem., supra note 8, at Id. at Id. at Straub, 2013 WL , at *7. 24 Id. at *9. 25 Id. 26 Id. at *7. 27 Id. at *7-*8. 436