Client Alert. SEC v. Straub. Two recent decisions in the Southern District of New York together shed new

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1 Number 1477 February 28, 2013 Client Alert Latham & Watkins Litigation Department Rare FCPA Case Law Provides Guidance on Statute of Limitations and Personal Jurisdiction in Civil Enforcement Cases Against Foreign Defendants Two recent decisions in the Southern District of together shed new light on when US federal courts will exercise personal jurisdiction over foreign defendants accused of violating the FCPA in civil enforcement cases and make clear that the statute of limitations for civil FCPA claims will be tolled while foreign defendants remain outside of the United States. Two recent decisions in the Southern District of together shed new light on when US federal courts will exercise personal jurisdiction over foreign defendants accused of violating the Foreign Corrupt Practices Act (FCPA) in civil enforcement cases and make clear that the statute of limitations for civil FCPA claims will be tolled while foreign defendants remain outside of the United States. On February 8, 2013, in SEC v. Straub, Judge Richard Sullivan ruled that the Securities and Exchange Commission (SEC) could proceed with FCPA charges against three former executives of a Hungarian telecommunications firm for alleged corruption in Macedonia because the bribery scheme involved the falsification of securities filings published to US investors. 1 Shortly thereafter, in SEC v. Sharef, Judge Shira Scheindlin dismissed FCPA charges against a German executive in Argentina because the executive s alleged corrupt activity lacked a connection to his employer s financial statements. 2 Taken together, these decisions have begun to create identifiable boundaries, if not limits, to the SEC s ability to proceed against foreign employees of foreign issuers, and perhaps foreign employees of US-based issuers as well. On the other hand, Straub endorsed the government s position that the five year statute of limitations for FCPA claims is tolled for any period during which individual defendants are not found within the United States, even if service of process is available under the Hague Convention or other foreign laws. As a result, to the extent that courts adopt Judge Sullivan s logic, it may be the rare case in which the government will face a colorable statute of limitations defense by a foreign defendant. SEC v. Straub The charges in SEC v. Straub stem from an alleged bribery scheme aimed at blunting the effects of regulatory reform in Macedonia. Magyar Telekom, a Hungarian company, jointly owned a Macedonian telecommunications firm that was threatened by Macedonian legislation that imposed higher fees on communications companies and licensed a competitor. Three senior Magyar Telekom executives allegedly entered into secret agreements with Macedonian officials associated with the government in power at that time to delay implementation of the legislation. Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in association with the Law Office of Salman M. Al-Sudairi. In Qatar, Latham & Watkins LLP is licensed by the Qatar Financial Centre Authority. Under s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue,, NY , Phone: Copyright 2013 Latham & Watkins. All Rights Reserved.

2 The Magyar Telekom executives allegedly authorized up to 10 million in bribes and promised business opportunities to certain officials. The 4.8 million in alleged bribes ultimately paid were disguised as payments on success-fee-based contracts for marketing and consulting services. The scheme was purportedly memorialized in several secret written protocols signed by the executives. Drafts of these protocols and other documents relating to the bribery scheme were attached to s sent by one of the executives, which according to the SEC were sent from locations outside the United States, but were routed through and/or stored on network servers located within the United States. 3 Throughout the alleged scheme, the securities of both Magyar Telekom and a company that held a controlling interest in it were publicly traded through American Depositary Receipts (ADRs) listed on the Stock Exchange (NYSE). In connection with US filing requirements, the senior executives made certain representations to Magyar Telekom s auditors relating to the Company s financial records and their knowledge of any possible violations of laws or regulations. On December 29, 2011, the SEC charged the executives and Magyar Telekom with violating the FCPA s anti-bribery provisions, failing to keep accurate books and records, falsifying books and records, and making false statements to auditors. Magyar Telekom settled the SEC claims for US$31.5 million and agreed to pay a US$59.6 million criminal penalty to the Department of Justice as part of a deferred prosecution agreement. 4 The executives moved to dismiss the charges. Personal Jurisdiction and Territorial Reach The executives first challenged the court s ability to exercise personal jurisdiction on the basis that they lacked sufficient minimum contacts with the United States. The court rejected this argument. Judge Sullivan found that because Magyar Telekom s ADRs were registered with the SEC and publicly traded on the NYSE, the executives knew or had reason to know that any false or misleading financial reports would be given to prospective American purchasers of those securities. 5 For this reason, the alleged conduct involving improper payments, inaccurate financial records and misrepresentations to auditors was designed to violate US securities regulations and was thus necessarily directed toward the United States, even if not primarily directed there. 6 The court rejected the executives argument that asserting personal jurisdiction over them would mean that there was personal jurisdiction over all directors, officers and employees of foreign issuers. Judge Sullivan emphasized that he was not creating a per se rule regarding personal jurisdiction. Instead, he explained that he had conducted a fact-based inquiry and noted that, while the bribes may have taken place outside the United States, the concealment of those bribes, particularly in the context of the company s SEC filings, was directed toward the United States. 7 The executives also argued that the SEC was required to show that they were aware that their s would be routed through servers in the United States and thus were intentionally using an instrumentality of interstate commerce in a corrupt manner in order to state an FCPA claim. The court also rejected this argument. Although Judge Sullivan found that the plain language of the FCPA is ambiguous, he concluded that legislative history made clear that defendants need not have formed the particularized mens rea with respect to the instrumentalities of interstate commerce. 8 2 Number 1477 February 28, 2013

3 Statute of Limitations The executives also argued that the charges were barred because the five year limitation for FCPA claims had expired. The statute of limitations for civil FCPA claims is established by 28 U.S.C. 2462, which sets a five year limitation period if, within the same period, the offender... is found within the United States in order that proper service may be made thereupon. 9 The SEC took the position that, even though its claims were brought more than five years after the alleged corrupt behavior, the limitations period did not expire because the executives were not physically located within the United States for five years during that period. The executives argued that the purpose of 28 U.S.C was to ensure that defendants could be served and that the executives could have been served outside of the US through the Hague Service Convention or by other means before the five-year limitations period had expired. The court rejected this argument, reasoning that both the language and history of 28 U.S.C supported the SEC s interpretation. SEC v. Sharef The facts underpinning SEC v. Sharef involved an alleged scheme by senior executives in a German company to bribe high-level Argentinian government officials, first to win a one billion dollar contract to create national identity cards and later to hide evidence of the initial bribes from arbitrators hearing a dispute over the identity card project. The company is alleged to have paid a total of US$100 million in bribes over a decade. Some of the payments at issue were directed to accounts in the United States and the defendants were alleged to have participated in meetings in related to the bribery scheme. One executive made Sarbanes-Oxley certifications attesting that the financial statements of a subsidiary company implicated in the corruption were not false or misleading. In December 2008, the SEC charged the company with FCPA violations in Argentina and other countries. It paid over US$1.6 billion to the SEC, DOJ and German authorities to resolve those and related charges. In late 2011, the SEC charged seven former executives with violations of the FCPA s anti-bribery, books and records and internal controls provisions. 10 Lack of Personal Jurisdiction The former Chief Executive Officer (CEO) of the company s Argentinian subsidiary moved to dismiss the charges for lack of personal jurisdiction. The SEC alleged that the executive was deeply involved in the bribery scheme. His contacts with the United States, however, were limited. The SEC alleged that another company executive located in telephoned the defendant on one occasion to discuss the bribery scheme and that part of a US$10 million bribe was routed to a United States bank account. The executive argued that the tenuous link between his alleged conduct and the United States was insufficient to confer personal jurisdiction on US courts. The SEC responded that his alleged role in encouraging the Chief Financial Officer (CFO) to authorize bribes foreseeably resulted in the filing of falsified securities filings in the United States. Judge Scheindlin agreed with the defendant. The court stressed that the CFO had sought and received approval from several other superiors (not the defendant) to make the bribes. The court also noted that there were no allegations that the defendant was directly involved in or aware of the implementation of the scheme 3 Number 1477 February 28, 2013

4 beyond its initial stages. Significantly, the court refused to characterize the call from to the defendant (which he did not initiate) or the routing of the alleged bribery money to US accounts (which he did not direct) as conducted aimed by the defendant towards the United States. 11 Citing Judge Sullivan s holding in Straub, the court acknowledged that [i]t is now well-established that signing or directly manipulating financial statements to cover up illegal foreign action, with knowledge that those statements will be relied upon by United States investors will confer personal jurisdiction in the United States. 12 However, because the defendant in this case lacked any alleged role in the cover ups themselves, let alone any role in the preparing of false financial statements, Judge Scheindlin declined to exercise jurisdiction. 13 Judge Scheindlin then briefly analyzed the reasonableness prong of the personal jurisdiction test. She cited as support for her decision not to exercise jurisdiction that the defendant was advanced in age (74 years old) and spoke English poorly, and that the federal government s interest in punishing the FCPA violations had already been addressed to some extent by penalties against the company and German penalties against the defendant. Implications for Foreign Issuers and Employees Judge Sullivan s decision in Straub adopted the broad jurisdictional and extraterritorial conception of the FCPA advanced by the government. Judge Scheindlin s decision in Sharef, on the other hand, demonstrates that US courts will require that the government allege conduct that is purposefully directed towards the United States before exercising jurisdiction. Several points deserve particular note: The fact that a foreign executive is involved in allegedly corrupt activity, even if acting on behalf of a foreign issuer of US securities, will not in itself be sufficient to confer personal jurisdiction. When assessing personal jurisdiction, courts will likely focus on (1) the relationship between the defendant s conduct and the preparation of financial reports or other materials incorporated into US securities filings, and (2) the defendant s awareness of this relationship. Making false certifications or falsifying securities filings will almost certainly provide grounds for personal jurisdiction. s that pass through servers in the United States are sufficient to satisfy the FCPA s instrumentality of interstate commerce element, even if they are sent and received outside the United States by persons unaware that the s will pass through the United States. The five-year limitations period for civil FCPA violations will likely be considered tolled for any period that the defendant remains outside the United States Number 1477 February 28, 2013

5 Endnotes 1 No. 11-cv-9645 (RJS) (Feb. 8, 2013) (order denying defendants motion to dismiss). 2 No. 11-cv-9073 (SAS) (Feb. 19, 2013) (order granting defendant s motion to dismiss). 3 Straub, slip. op. at Secs. and Exch. Comm n, Litigation Release No , SEC Charges Magyar Telekom and Former Executives with Bribing Officials in Macedonia and Montenegro (Dec. 29, 2011), available at sec.gov/litigation/litreleases/2011/lr22213.htm. 5 Straub, slip op. at Id. at 8. 7 Id. at Id. at Id. at Secs. and Exch. Comm n, Litigation Release No , SEC Charges Seven Former Siemens Employees with Bribing Leaders in Argentina (Dec. 13, 2011), available at litreleases/2011/ lr22190.htm. The DOJ brought criminal charges against eight former executives at the same time. 11 Sharef, slip. op. at 16 n Id. at Id. at Unlike 28 U.S.C. 2642, the statute of limitations for criminal FCPA violations does not exclude time spent outside the United States. See 18 U.S.C. 3282(a). If you have any questions about this Client Alert, please contact one of the authors listed below or the Latham attorney with whom you normally consult: Noreen A. Kelly-Dynega noreen.kelly-dynega@lw.com Maria A. Barton maria.barton@lw.com Tyler U. Nims tyler.nims@lw.com 5 Number 1477 February 28, 2013

6 Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the attorney with whom you normally consult. A complete list of our Client Alerts can be found on our website at If you wish to update your contact details or customize the information you receive from Latham & Watkins, visit to subscribe to our global client mailings program. Abu Dhabi Barcelona Beijing Boston Brussels Chicago Doha Dubai Frankfurt Hamburg Hong Kong Houston London Los Angeles Madrid Milan Moscow Munich New Jersey Orange County Paris Riyadh* Rome San Diego San Francisco Shanghai Silicon Valley Singapore Tokyo Washington, D.C. * In association with the Law Office of Salman M. Al-Sudairi 6 Number 1477 February 28, 2013