Combating FCPA Charges: Is Resistance Futile?

ESSAY Combating FCPA Charges: Is Resistance Futile? RICHARD C. SMITH * Introduction... 157 I. U.S. Foreign Corrupt Practices Act... 158 II. Pre-2012 Challenges... 160 A. Statutory Definitions... 160 1. Definition of Foreign Official... 160 2. Conscious Avoidance... 161 B. Prosecutorial Conduct... 162 1. Shot Show Trials... 162 2. Lindsey Manufacturing... 162 III. Recent Civil Challenges... 163 A. Noble Corporation Executives... 163 B. Magyar Telecom Executives... 166 C. Siemens Executive... 168 Conclusion... 170 INTRODUCTION As the financial and reputational stakes in connection with U.S. Foreign Corrupt Practices Act (FCPA) 1 actions have increased over the past decade, 2 corporate and individual defendants have largely cooperated, to varying degrees, with the U.S. Securities and Exchange Commission (SEC) * Richard C. Smith is a partner in the Washington, DC office of Norton Rose Fulbright (Fulbright & Jaworski LLP) and the Head of Regulation and Investigations, United States for the firm. He would like to thank Mark T. Emery, Patricia C. Fratto, and Paul E. Sumilas for their assistance with this article. 1. 15 U.S.C. 78m(b), 78dd-1 to -3 (2006 & Supp. V 2011). 2. Eight of the ten largest FCPA settlements have occurred since 2010.

158 VIRGINIA JOURNAL OF INTERNATIONAL LAW [Vol. 54:1 and U.S. Department of Justice (DOJ) (together, the Government) in their investigations, and shortly thereafter sought to settle the charges before any significant litigation ensued, or even commenced. This strategy has many significant benefits, including the avoidance of protracted, highprofile litigation, the ability to prevent documents from becoming publicly available, and a greater control over the public relations impact of the charges and results. For companies, the appeal of a settlement outweighed the risk of being criminally convicted or found civilly liable for a major FCPA violation. These settlements, however, result in a dearth of litigation that creates a vacuum of case law in the FCPA arena, allowing the Government to put forth its interpretations of various provisions of the statute with little or no challenges. As the stakes continue to rise with regard to FCPA enforcement, companies and their counsel should, at the very least, consider varying from the traditional script if the facts and circumstances of a particular case warrant it. In a series of recent cases, individual defendants have opted to fight the charges in court rather than immediately settle with the Government. In various ways, these defendants attacked the Government s broad interpretation of certain provisions of the FCPA, including jurisdictional and statute of limitations grounds. However, in these cases, and as seen in prior challenges, 3 the courts have consistently sided with the Government, allowing for broad readings of the statute that seemingly provide the Government with expansive reach. I. U.S. FOREIGN CORRUPT PRACTICES ACT The FCPA has become the principal anti-corruption law in the United States and one of the most important enforcement priorities for the Government. It is comprised of: (1) anti-bribery provisions and (2) accounting provisions. 4 The anti-bribery provisions prohibit certain companies with connections to the United States, as well as their officers, directors, employees, and agents, from offering, promising, authorizing or making payments (including anything of value ) to non-u.s. government officials, political parties, and certain other individuals, to obtain or retain business 3. See United States v. Kozeny, 667 F.3d 122 (2d Cir. 2011) (upholding the district court s application of the conscious avoidance doctrine to satisfy the knowledge requirement); United States v. Kay, 513 F.3d 432 (5th Cir. 2007) (determining that obtaining beneficial tax and customs treatment met the FCPA s business purpose test); United States v. Aguilar, 783 F. Supp. 2d 1108 (C.D. Cal. 2011) (order granting motion to dismiss) (holding that employees of state-owned entities qualify as foreign officials under the FCPA). 4. See generally 15 U.S.C. 78m(b), 78dd-1 to -3.

2013] COMBATING FCPA CHARGES 159 or other improper business advantages. 5 It also prohibits such payments through a third party if the company, or individual, knew or should have known of the high probability that such payments would be made. 6 The accounting provisions require companies that are publicly traded in the United States to keep accurate books and records, and devise and implement sound internal controls. 7 To meet the books and records requirement, all transactions must be accurately recorded in a company s books and records. 8 Entries must include reasonable detail so that the accounting records fairly reflect the transactions. 9 Additionally, the FCPA prohibits the making of any false or misleading statements or omissions of material facts to accountants or auditors in connection with the preparation of required filings. Under the internal controls requirements, companies must implement and maintain internal accounting controls based on sound accounting principles that are designed to prevent and detect violations of corporate policy and law. 10 Among other things, all financial transactions must: (1) occur only with appropriate authorization by the company; (2) be recorded in accordance with generally accepted accounting principles; and (3) be periodically reviewed to identify and correct any accounting discrepancies, errors, and omissions. 11 5. See id. 78dd-2. The FCPA s anti-bribery provisions apply to issuers, or companies that trade securities on U.S. exchanges or file mandatory reports with the SEC, as well as any officer, director, employee, or agent of those issuers, see id. 78dd-1, and to other persons whose misconduct takes place, in part, within the territory of the United States. See id. 78dd-3. 6. See id. 78dd-1(a)(3), (f)(2)(a), (f)(2)(b), 78dd-2(h)(3). The knowing standard was intended to cover both prohibited actions that are taken with actual knowledge of intended results as well as other actions that, while falling short of what the law terms positive knowledge, nevertheless evidence a conscious disregard or deliberate ignorance of known circumstances that should reasonably alert one to the high probability of violations of the Act. H.R. REP. NO. 100-576, at 920 (1988) (Conf. Rep.); see also Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, 5003, 102 Stat. 1107, 1423 24 (1988). 7. See 15 U.S.C. 78m(b)(2). Because the FCPA s accounting provisions apply more generally, they are often used even in cases in which no bribery allegations are raised. See SEC v. Rino Int l Corp., No. 1:13-CV-711 (D.D.C. May 15, 2013). 8. See 15 U.S.C. 78m(b)(2)(A). 9. See id. 78m(b)(7). 10. See id. 78m(b)(2)(B). 11. Id.

160 VIRGINIA JOURNAL OF INTERNATIONAL LAW [Vol. 54:1 II. PRE-2012 CHALLENGES A. Statutory Definitions 1. Definition of Foreign Official The FCPA defines foreign official as any officer or employee of a [non-u.s.] government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any government or department, agency, or instrumentality, or for or on behalf of any such public international organization. 12 The DOJ and SEC liberally construed the statutory definition and applied it to interactions with employees, even low-level employees, of commercial state-owned or controlled enterprises. In 2011, the courts in United States v. Aguilar 13 (informally referred to as Lindsey Manufacturing) and United States v. Carson 14 provided some analysis on how to approach the issue. They did not find that all state-owned commercial entities are instrumentalities. Instead, both courts identified non-exclusive factors to determine whether an entity meets the statutory definition. The court in Lindsey Manufacturing identified the following factors, whether: (1) the entity provides a service to the citizens in many cases to all the inhabitants of the jurisdiction; (2) the key officers and directors of the entity are, or are appointed by, government officials; (3) the entity is financed, at least in large measure, through governmental appropriations or through revenues obtained as a result of governmentmandated taxes, licenses, fees, or royalties, such as entrance fees to a national park; and (4) the entity is vested with and exercises exclusive or controlling power to administer its designated functions, or the entity is widely perceived and understood to be performing official (i.e., governmental) functions. 15 The Carson court stated that it must consider: (1) the foreign state s characterization of the entity and its employees; (2) the foreign state s degree of control over the entity; (3) the purpose of the entity s activities; (4) the entity s obligations and privileges under the foreign state s law, including whether the entity exercises exclusive or controlling power to administer its designated functions; (5) the circumstances surrounding the 12. Id. 78dd-1(f)(1)(A), 78dd-2(h)(2)(A), 78dd-3(f)(2)(A). 13. United States v. Aguilar (Lindsey Mfg.), 783 F. Supp. 2d 1108 (C.D. Cal. 2011). 14. United States v. Carson, No. 8:09-CR-77, 2011 WL 5101701 (C.D. Cal. May 18, 2011). 15. Lindsey Mfg., 783 F. Supp. 2d at 1115.

2013] COMBATING FCPA CHARGES 161 entity s creation; and (6) the foreign state s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans). 16 Thus, any future challenges as to the determination of whether an entity is a government instrumentality under the FCPA will be subject to a factbased test, whereby the court or jury will weigh the factors identified in Lindsey Manufacturing and Carson. 2. Conscious Avoidance In December 2011, the U.S. Court of Appeals for the Second Circuit upheld the 2009 conviction of Frederic Bourke, who had been charged with conspiracy to violate the FCPA, among other counts. 17 The conviction was considered potentially controversial because of Bourke s apparent limited involvement in the actual bribery scheme. Bourke was convicted for allegedly participating in a scheme to bribe senior government officials in Azerbaijan in connection with the privatization of the Azeri state-owned oil company, SOCAR. 18 The DOJ pled that Bourke invested approximately US $8 million in the Azeri privatization program while knowing that his co-defendant, Viktor Kozeny, had bribed senior government officials to secure the deal. 19 The DOJ, however, did not rely on Bourke s actual knowledge of wrongdoing by Kozeny or that Bourke paid any bribes to Azeri officials. Instead, the prosecutors relied on Bourke s constructive knowledge, presenting circumstantial evidence suggesting that Bourke failed to conduct the appropriate due diligence prior to investing, and that he should have known (or he consciously avoided knowing) that there was a high probability of corruption based on the geographic location of the investment, Kozeny s reputation, and other factors. 20 Thus, the DOJ was able to establish knowledge of corruption by presenting evidence that the defendant had consciously avoided knowing the full truth of his investment. Although used in this case in conduct involving an international investor, the court s decision suggests a standard of anti-corruption due diligence that any company or individual must undertake to avoid similar allegations of conscious avoidance. 16. Carson, 2011 WL 5101701, at *3 4. 17. United States v. Kozeny, 667 F.3d 122 (2d Cir. 2011). 18. Id. at 126. 19. Id. at 128, 133. 20. Id. at 132 35.

162 VIRGINIA JOURNAL OF INTERNATIONAL LAW [Vol. 54:1 B. Prosecutorial Conduct 1. Shot Show Trials In January 2010, as a result of an undercover sting operation, FBI agents arrested 22 individuals in connection with an alleged conspiracy to bribe the Gabonese Minister of Defense to secure defense equipment contracts. Three defendants pled guilty in 2011, and the remaining 19 defendants were divided into four trial groups in the U.S. District Court for the District of Columbia. The first trial in May and June 2011 ended with five days of jury deliberation, and a mistrial on July 7, 2011. 21 The Government redoubled its efforts in the trial of the second group beginning in September 2011. However, in the second straight blow to the Government, the court dismissed the conspiracy counts after twelve weeks of trial, ruling that the Government had not presented sufficient evidence to submit the case to the jury. In early 2012, the jury acquitted two of the five defendants in the second trial. When the jury could not reach a verdict on the remaining three defendants, Judge Leon declared a mistrial. After the DOJ s second mistrial due to a hung jury, Judge Leon granted a DOJ request on February 7, 2012, seeking to delay the pending cases against the remaining defendants to allow the DOJ to determine whether to continue to go forward. 22 In a surprising about-face, on February 21, 2012, the DOJ asked Judge Leon to dismiss, with prejudice, all remaining indictments, citing the outcome of the first two trials, the impact of certain evidentiary rulings for future trials, and the substantial government resources that would have to be invested to proceed. 23 2. Lindsey Manufacturing As discussed above, in a case involving executives from Lindsey Manufacturing, the defendants were unable to convince the court that the DOJ had overstepped with respect to its interpretation of certain provisions of the FCPA, specifically, the Government s interpretation of foreign official under the FCPA. Following the verdict, however, the defendants filed a motion to dismiss the indictment based on prosecutorial misconduct, alleging that the Government permitted an FBI agent to make 21. See Richard L. Cassin, Retrial in Africa Sting Case Set for May 2012, THE FCPA BLOG (Jan. 6, 2012, 9:18 AM), http://www.fcpablog.com/blog/2012/1/6/retrial-in-africa-sting-case-set-for-may- 2012.html. 22. Jeremy Pelofsky, U.S. Prosecutors Weigh Dropping Bribery Sting Case, REUTERS (Feb. 7, 2012), http://www.reuters.com/article/2012/02/07/us-usa-crime-bribery-idustre8161yp20120207. 23. Government s Motion to Dismiss Pursuant to Fed. R. Crim. P. 48(a), United States v. Goncalves, No. 1:09-CR-335 (D.D.C. Feb. 21, 2012).

2013] COMBATING FCPA CHARGES 163 false statements to the grand jury, obtained search warrants supported by affidavits containing false information, and failed to disclose exculpatory Brady material. 24 In a thorough and sometimes cutting opinion, the court granted defendants motion with prejudice, finding multiple instances of prosecutorial misconduct as cited by defendants. 25 III. RECENT CIVIL CHALLENGES With that background, some more recent defendants have started to challenge the Government more aggressively, resulting in more substantive case law that provides companies and counsel with greater clarity as to the contours of the FCPA. A. Noble Corporation Executives The corporate and individual prosecutions involving Noble Corporation (Noble) present an excellent case study in the divergent strategies that may be employed. In 2007, Noble commenced an internal investigation into the legality of certain payments made to customs agents for the purpose of obtaining and renewing permits for the temporary importation of oil drilling units and equipment into Nigeria. Noble voluntarily disclosed the existence and results of the investigation to the Government. Following the typical defense strategy of cooperating and seeking settlement, Noble agreed to pay a US $2.59 million criminal fine and entered into a non-prosecution agreement with the DOJ in late 2010. 26 On the same day, Noble settled with the SEC and consented to a court order enjoining it from violating the FCPA, and agreed to pay over US $5.5 million in disgorgement and pre-judgment interest. 27 The SEC, however, opened a new chapter in the Noble prosecution in 2012, charging three Noble executives with violating the FCPA for allegedly participating in a scheme to bribe Nigerian officials to retain business under large oil contracts. 28 In these new charges, the SEC 24. See Defendants Motion to Dismiss the Indictment with Prejudice Due to Repeated and Intentional Government Misconduct, United States v. Aguilar (Lindsey Mfg.), 831 F. Supp. 2d 1180 (C.D. Cal. 2011) (No. 2:10-CR-1031). 25. See Lindsey Mfg., 831 F. Supp. 2d 1180 (order granting motion to dismiss). 26. Press Release, Dep t of Justice, Oil Services Companies and a Freight Forwarding Company Agree to Resolve Foreign Bribery Investigations and to Pay More than $156 Million in Criminal Penalties (Nov. 4, 2010), available at http://www.justice.gov/opa/pr/2010/november/10-crm- 1251.html. 27. Press Release, SEC, SEC Charges Noble with FCPA Violations (Nov. 4, 2010), available at http://www.sec.gov/litigation/litreleases/2010/lr21728.htm. 28. Press Release, SEC, SEC Charges Three Oil Services Executives with Bribing Customs Officials in Nigeria (Feb. 24, 2012), available at https://www.sec.gov/news/press/2012/2012-32.htm.

164 VIRGINIA JOURNAL OF INTERNATIONAL LAW [Vol. 54:1 specifically alleged that the former Noble CEO, Mark Jackson, and the Director and Division Manager of Noble s Nigerian subsidiary, James Ruehlen, bribed Nigerian customs officials to process false paperwork that purported to evidence the import and export of certain oil rigs, when the oil rigs had not actually been moved. The SEC separately charged Noble s former Controller and Head of Internal Audit, Thomas O Rourke, for allegedly approving the bribes and allowing the bribes to be improperly recorded in Noble s books and records. 29 Following the traditional defense strategy, O Rourke quickly settled with the SEC, agreeing to pay a US $35,000 civil penalty. 30 However, unlike O Rourke and the myriad of defendants in other FCPA actions, Jackson and Ruehlen opted to fight the charges. In March 2012, Jackson and Ruehlen filed motions to dismiss the SEC s complaint, arguing that the SEC failed to state a claim on six grounds: (1) the SEC must specifically identify the government officials for whom the defendants allegedly authorized a bribe; (2) the SEC must specifically allege sufficient facts to support an inference that the allegedly improper payments are not facilitating payments under the FCPA; (3) the facilitating payments exception is unconstitutionally vague; (4) the SEC failed to plead sufficient facts to support the inference that the alleged improper payments were made corruptly ; (5) the SEC failed to sufficiently plead the securities violations, including the failure to specify the books and records that were allegedly falsified; and (6) the statute of limitations had run on the SEC s claims. 31 The SEC filed its responsive brief in June 2012. 32 In December 2012, Judge Ellison issued a lengthy sixty-one-page opinion dismissing some of the SEC s claims for monetary damages without prejudice. 33 Judge Ellison rejected a number of the defendants contentions, and effectively shut the door for future defendants to have any measure of success in reiterating the arguments. For example, after examining the statute s legislative history, the court held that the FCPA does not require the SEC to specifically identify the foreign official who had allegedly been bribed because, in part, the statute does not require that the defendant know the official who had been bribed. 34 Any other reading 29. Id. 30. Id. 31. See Defendant Jackson's Motion to Dismiss the Complaint Under Rule 12(b) for Failure to State a Claim, SEC v. Jackson, 908 F. Supp. 2d 834 (S.D. Tex. 2012) (No. 4:12-CV-563); Defendant Ruehlen's Motion to Dismiss Plaintiff's Complaint for Failure to State a Claim, Jackson, 908 F. Supp. 2d 834 (No. 4:12-CV-563). 32. See Plaintiff's Consolidated Response in Opposition to Defendants Jackson's and Ruehlen's Motions to Dismiss, Jackson, 908 F. Supp. 2d 834 (No. 4:12-CV-563). 33. See Jackson, 908 F. Supp. 2d 834. 34. Id. at 849 50.

2013] COMBATING FCPA CHARGES 165 would potentially allow a corporate defendant to avoid FCPA liability by taking measures to ensure that it does not become aware of the foreign official s identity. 35 While another court could rule differently, given the relative paucity of case law interpreting the FCPA, such a result is unlikely. Although the defendants did not succeed with respect to the first argument, the court ruled in their favor on other key contentions. Most notably, Judge Ellison agreed with the defendants on the burden of proof with respect to the facilitating payments exception. 36 Judge Ellison again examined the legislative history of the FCPA, and ruled that the facilitating payments exception is best understood as a threshold requirement to pleading that a defendant acted corruptly. 37 Although Judge Ellison cautioned that blanket assertions that a defendant s actions are corrupt are insufficient to overcome this burden, he concluded that the SEC pled sufficient facts to support an inference that certain payments had been made corruptly. 38 The SEC failed to plead sufficient facts with respect to other alleged payments. 39 In making this analysis, the court also ruled that the facilitating payments exception is not unconstitutionally vague. 40 This opinion makes clear that defendants can hold the SEC s feet to the fire, and require the SEC to plead, with some degree of specificity, that the facilitating payments exception does not apply. Although the SEC s burden is not significantly high, future litigants may be able to expose the SEC s lack of specific knowledge regarding allegations. Lastly, Judge Ellison granted the defendants motions to dismiss the complaint without prejudice because the statute of limitations period had run. 41 The court noted that the SEC failed to plead that it had entered into a tolling agreement with the defendants, which would have brought the claims within the statute of limitations. 42 More significantly for future litigants, the court considered the SEC s claim that the statute of limitations had been tolled due to the doctrine of fraudulent concealment. Judge Ellison held that the SEC had sufficiently pled facts to support an inference that the conduct had been concealed, including the fact that the improper payments were allegedly falsified on the company s books and records, and that Jackson had falsely certified in public filings that he had disclosed all significant deficiencies and material weaknesses in the 35. Id. 36. Id. at 857. 37. Id. 38. Id. at 858 59. 39. SEC v. Jackson, 908 F. Supp. 2d 834, 858 59 (S.D. Tex. 2012) (No. 4:12-CV-563). 40. Id. at 862 63. 41. Id. at 867 74. 42. Id. at 868.

166 VIRGINIA JOURNAL OF INTERNATIONAL LAW [Vol. 54:1 company s internal controls to the Audit Committee. 43 However, Judge Ellison stated that the SEC would have to demonstrate that its reliance upon these facts was reasonable, and noted that the SEC failed to sufficiently plead that it had been diligent in bringing the action. 44 Judge Ellison s ruling ultimately will have little impact upon the case against both Jackson and Ruehlen. As noted, the dismissals were made without prejudice, and the SEC has since filed two amended complaints that in all likelihood will cure the deficiencies. 45 Nevertheless, this result may encourage future litigants to take the opportunity to challenge the Government aggressively in certain circumstances. B. Magyar Telecom Executives In 2011, the SEC brought an action against former executives (the Defendants) of a Hungarian telecommunications company, Magyar Telekom, Plc (Magyar) for violations of the FCPA. 46 In 2005, legislation was enacted which would negatively impact Magyar s business by imposing additional fees, increasing regulatory requirements, and opening the market to an additional telecom company that would be a competitor to Makedovski Telekommunikacii A.D. Skopje (MakTel), a venture jointly owned by Magyar and the Macedonian government. 47 The complaint alleged that the Defendants began executing a scheme in 2005 to bribe Macedonian government officials to ameliorate the effects of the new legislation. 48 This included a secret document setting forth the scheme, and secret agreements between Magyar s Macedonian subsidiary and government officials, brokered by an intermediary hired by the subsidiary. 49 Over US $10 million in bribes were allegedly offered through sham success fee based marketing and consulting contracts, and payments totaling approximately US $6 million were issued. 50 As a result of the illicit offers and payments, it was alleged that the additional telecom company s entry into the market was delayed, and tariffs were reduced until a new administration came into power. 51 On February 8, 2013, Judge Sullivan in the Southern District of New York denied a motion to dismiss filed by the Defendants. The joint motion 43. Id. at 868 71. 44. Id. at 871. 45. See Amended Complaint, SEC v. Jackson, No. 4:12-CV-563 (S.D. Tex. Jan. 25, 2013); Second Amended Complaint, Jackson, No. 4:12-CV-563 (S.D. Tex. Mar. 25, 2013). 46. Complaint, SEC v. Straub, 921 F. Supp. 2d 244 (S.D.N.Y. Dec. 29, 2011) (No. 1:11-CV-9645). 47. See Straub, 921 F. Supp. 2d at 248 49 (S.D.N.Y. Feb. 8, 2013) (No. 1:11-CV-9645). 48. Id. at 249. 49. Id. 50. Id. 51. Id. at 249 50.

2013] COMBATING FCPA CHARGES 167 was predicated on Defendants contentions that: (1) the court lacks personal jurisdiction over the Defendants; (2) claims against the Defendants are time barred; and (3) the SEC s complaint fails to state a claim for several causes of action. 52 Defendants alleged that the court lacked personal jurisdiction over them. 53 Judge Sullivan undertook a traditional analysis and concluded that a prima facie showing of personal jurisdiction over the Defendants had been made because they allegedly engaged in conduct that was designed to violate United States securities regulations and was thus necessarily directed toward the United States, even if not principally directed there. 54 In so holding, Judge Sullivan noted that, during the period of the alleged violations, Magyar publicly traded its securities through American Depositary Receipts on the New York Stock Exchange. 55 The company was also registered with the SEC as required by Exchange Act Section 12(b) and made periodic filings with the SEC. 56 Judge Sullivan also noted that the ruling did not create a presumption that employees of an issuer are automatically within reach but, instead, made this determination by a fact-based analysis that considered, inter alia, the Defendants personal involvement. 57 Defendants contention that the statutory limitations period had run was also rejected. Noting the applicable five-year statute of limitations for FCPA violations, Judge Sullivan held that the limitations period did not begin to run during the period when the Defendants were not found within the United States, stating that the language of the statute requires, by its plain terms, that an offender must be physically present in the United States for the statute of limitations to run. 58 Defendants also asserted that the SEC failed to allege facts sufficient to show that they made use of interstate commerce with corrupt intent. Judge Sullivan held, as a matter of first impression, that the statute does not require a particularized mens rea with respect to the instrumentalities of commerce, and it is sufficient that they used email which was routed through the United States in furtherance of the bribery scheme, including forwarding documents relating to the scheme. 59 That the Defendants 52. Id. at 251. 53. SEC v. Straub, 921 F. Supp. 2d 244, 251 (S.D.N.Y. Feb. 8, 2013) (No. 1:11-CV-9645). 54. Id. at 255. 55. Id. at 255. 56. Id. As a result, the company was an issuer as defined by the statute and therefore subject to the FCPA. 57. Id. at 257. 58. Id. at 260. 59. SEC v. Straub, 921 F. Supp. 2d at 263 (S.D.N.Y. Feb. 8, 2013) (No. 1:11-CV-9645).

168 VIRGINIA JOURNAL OF INTERNATIONAL LAW [Vol. 54:1 claimed they were not aware that their emails would be routed through the United States had no effect on his analysis. 60 Defendants also argued that the SEC failed to allege facts sufficient to establish that the intended recipients of the bribes were foreign officials under the FCPA. 61 Like Judge Ellison s determination in the recent Noble executives decision, 62 Judge Sullivan rejected this claim, explaining that a party need not know specifically which foreign official would receive the bribe and that there is no requirement that such official be specifically named. 63 It was sufficient that the allegations contended that the Defendants were aware that the intended recipients were government officials acting in their official capacity. 64 Defendants also claimed that the SEC failed to allege a violation of Exchange Act Rule 13b2-2 in connection with letters prepared for a 2005 financial statement audit. 65 Judge Sullivan noted that the complaint contained sufficiently particularized allegations and that the Defendants statements were material pursuant to Rule 13b2-2, indicating that although the Second Circuit had not addressed this question, he agreed that the appropriate standard for materiality is whether a reasonable auditor would conclude that it would significantly alter the total mix of information available to him. 66 As the complaint alleged that the auditors would not have accepted management s representation letters and would not have provided an unqualified auditor report, the allegation was sufficient to send this question to the jury. 67 C. Siemens Executive In a contrasting case, a former Siemens executive challenged the SEC s case on both jurisdictional and statute of limitations grounds, resulting in a dismissal. 68 In 2008, the DOJ and SEC settled the largest FCPA case, agreeing to fines over US $800 million against the company and subsidiaries. 69 In 2011, the SEC finally brought charges against a number of individual Siemens executives in relation to the alleged FCPA conduct. 70 60. Id. at 264 n.13. 61. Id. at 265. 62. See supra text accompanying notes 34 35. 63. Straub, 921 F. Supp. 2d at 265 66. 64. Id. at 266. 65. Id. 66. Id. at 268 (quoting SEC v. Patel, No. 1:07-CV-39, 2009 WL 3151143, at *30 (D.N.H. Sept. 30, 2009)). 67. Id. 68. SEC v. Sharef, 924 F. Supp. 2d 539 (S.D.N.Y. Feb. 19, 2013) (No. 1:11-CV-9073). 69. Press Release, Dep t of Justice, Siemens AG and Three Subsidiaries Plead Guilty to Foreign Corrupt Practices Act Violations and Agree to Pay $450 Million in Combined Criminal Fines, available

2013] COMBATING FCPA CHARGES 169 Herbert Steffen, a German citizen who formerly managed Siemens Argentinian subsidiary, challenged the SEC s charges. 71 Steffen challenged the complaint on both personal jurisdiction and statute of limitations grounds. 72 Steffen argued that the SEC failed to demonstrate the minimal contacts necessary to confer jurisdiction over him. 73 According to Steffen, he was an executive in Germany when he received a limited number of calls from another Siemens defendant located in the United States. 74 Additionally, during the time of the alleged conduct, he was an officer of a foreign company that registered securities traded on the New York Stock Exchange (NYSE). 75 In his motion to dismiss, Steffen argued that Siemens decision to trade certain securities with the NYSE did not automatically confer jurisdiction over him. 76 He also argued that the conduct alleged in the complaint was time barred claiming that all the conduct at issue occurred in 2003, the same year that he retired from Siemens. 77 The SEC claimed that Steffen was more involved in the conduct at issue and that his specific acts caused foreseeable consequences in the United States, including the inclusion of false statements in the company s SEC filings. 78 The SEC also argued that since Steffen s conduct did not result in a payment for a contract connected to the alleged bribes until 2007, the claims were not time barred. 79 On February 19, Judge Scheindlin issued an order dismissing the complaint as it related to Steffen, holding that the court did not have personal jurisdiction over him. 80 In contrast to the Magyar defendants, Judge Scheindlin held that Steffen s contacts with the United States were too attenuated to confer jurisdiction over him. 81 Steffen never signed any certifications related to the company s SEC filings, and he had only at http://www.justice.gov/opa/pr/2008/december/08-crm-1105.html. 70. Complaint, Sharef, 924 F. Supp. 2d 539 (S.D.N.Y. Dec. 13, 2011) (No. 1:11-CV-9073). 71. Memorandum of Law in Support of Defendant Steffen's Motion to Dismiss the Complaint for Lack of Personal Jurisdiction and Failure to File Within the Statute of Limitations, Sharef, 924 F. Supp. 2d 539 (S.D.N.Y. Oct. 12, 2012) (No. 1:11-CV-9073). 72. Id. 73. Id. at 3 6. 74. Id. at 2, 3 4. 75. Id. at 3 4. 76. Id. at 4. 77. Memorandum of Law in Support of Defendant Steffen's Motion to Dismiss the Complaint for Lack of Personal Jurisdiction and Failure to File Within the Statute of Limitations at 8 12, Sharef, 924 F. Supp. 2d 539 (S.D.N.Y. Oct. 12, 2012) (No. 1:11-CV-9073). 78. Plaintiff SEC s Memorandum in Opposition to Defendant Steffen's Motion to Dismiss the Complaint at 12, Sharef, 924 F. Supp. 2d 539 (S.D.N.Y. Nov. 13, 2012) (No. 1:11-CV-9073). 79. Id. at 19 22. 80. Sharef, 924 F. Supp. 2d 539, 549 50 (S.D.N.Y. Feb. 19, 2013) (No. 1:11-CV-9073). 81. Id. at 546.

170 VIRGINIA JOURNAL OF INTERNATIONAL LAW [Vol. 54:1 limited phone calls regarding the bribery scheme with the other defendants located in the United States. 82 Steffen s contacts with the United States stand in stark contrast to that of the Magyar defendants. Judge Scheindlin was hesitant to allow such limited contacts to confer jurisdiction over a foreign defendant, stating: 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. Illegal corporate action almost always requires cover ups, which to be successful must be reflected in financial statements. Thus, under 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. 83 CONCLUSION While these cases are not the first instances when an individual has challenged FCPA and FCPA-related charges, they do appear to indicate a greater willingness by defendants to challenge the Government s aggressive pursuit of individuals in FCPA cases. To date, while courts have generally ruled in favor of the Government, these cases will likely be appealed, and provide defendants with another opportunity to set forth their defenses. Although defendants and potential defendants may believe that resistance is truly futile and that the better, and perhaps more economical, option is simply to settle with the authorities rather than engaging in a protracted legal battle, this defeats the purpose of the adversarial system and seemingly creates a guilty until proven innocent mindset in the FCPA field. One avenue that still may be open to future defendants is how a court should read the intent provision of the statute. The anti-bribery provisions of the statute state that the covered individual or entity shall not 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. 84 To date, and most 82. Id. at 542 43. Judge Schiendlin noted that those phone calls may not have even caused the other defendants to eventually make the bribes discussed, as they sought approval from more senior executives prior to the payments. Id. at 546. 83. Id. at 547. 84. 15 U.S.C. 78dd-1 (2006) (emphasis added).

2013] COMBATING FCPA CHARGES 171 recently in the Magyar matter, the Government has interpreted the corrupt intent provision to apply to the offer, payment, promise to pay, or authorization of the payment phrase only. 85 The Magyar defendants had argued unsuccessfully that the use of mails or interstate commerce had to be done corruptly. 86 As a result, and as reinforced in the Magyar case, even innocuous communications that are not made with the requisite corrupt intent satisfy this element, as long as the offer, payment, promise or authorization was done corruptly and as long as the communication is somehow related to the conduct. Depending on the set of facts, however, a defendant might be able to argue that the term corruptly should apply to both phrases thus requiring that the Government prove that both the offer, payment, promise or authorization and the use of the mails or interstate commerce were corrupt. In Flores-Figueroa v. United States, 87 the Supreme Court resolved a circuit split regarding the interpretation of a false identification statute. 88 In Flores-Figueroa, the Supreme Court held that a mens rea requirement (in that case knowingly ) could modify the subsequent verbs and the other elements in the statute. 89 While the Magyar court stated that the mens rea requirement ( corruptly ) could not modify a jurisdictional element (the use of mails or interstate commerce), no circuit courts have opined on this question with respect to the FCPA statute, and a defendant in the right circumstances might be able to raise such an argument. 85. SEC v. Straub, 921 F. Supp. 2d 244, 262 (S.D.N.Y. Feb. 8, 2013) (No. 1:11-CV-9645). 86. Id. 87. Flores-Figueroa v. United States, 556 U.S. 646 (2009). 88. 18 U.S.C. 1028A(a)(1) (2006). 89. Flores-Figueroa, 556 U.S. at 651 52.