Strauss/Steffen, District Court Personal Jurisdiction and U.S.-Nexus Rulings

In Steffen, the moving defendant, who was charged following resolution of the Siemens-Argentina case, obtained a complete dismissal based on the “minimum contacts” and “reasonableness” requirements of International Shoe, obviating the court's need to address other issues. Notwithstanding these different outcomes, both Judges Sullivan and Scheindlin purported to apply similar standards to the due process issues before them, and Judge Scheindlin even drew on certain statements in Judge Sullivan's decision to place limits on broad assertions of jurisdiction over individual defendants. Compare U.S. Dep't of Justice & U.S. Sec. and Exch. Comm'n, A Resource Guide to the U.S. Foreign Corrupt Practices Act at 11-12 (Nov. 14, 2012), http://1.usa.gov/14X1UQS [hereinafter FCPA Guidance] with Steffen, 2013 WL 603135 at *5.

Of course, neither decision constitutes binding precedent, even in the Southern District of New York, and appeals by the losing parties remain possible, if not likely. But at least on the due process issue, the Straub/Steffen decisions, as discussed below, have the potential to affect, in a variety of ways, the government's ability to prosecute foreign individuals whose physical contact with the United States is limited, if not genuinely nonexistent.

For those individual non-U.S. defendants who meet the standards for asserting personal jurisdiction, the Straub decision on the interstate commerce nexus and statute of limitations issues is particularly bad news and likely to stir debate. In denying the defense motion, Judge Sullivan endorsed the SEC's view that e-mails in furtherance of a bribe that both originate and are received outside the United States, but that travel through or are stored on U.S. network servers, satisfy the “interstate commerce” requirement for FCPA claims against foreign-private issuers and their non-U.S. officers and employees under 15 U.S.C. ' 78dd-1.

Together with the court's holding that the statute of limitations in an SEC penalty action does not run while a defendant is outside the United States (Straub, 2013 WL 603135 at *12), Straub's rationale could subject non-U.S. officers of U.S. registrants or their consolidated subsidiaries to potential liability under the FCPA in perpetuity based on a single e-mail sent and received abroad, but unwittingly routed through the United States, so long as they do not become available for service within this country ' provided that their alleged conduct meets the International Shoe test.

The Decision in Straub

The SEC's complaint in Straub alleges that the defendants ' the former Chairman and CEO, former Director of Central and Strategic Organization, and former Director of Business Development and Organization of Magyar Telekom Plc. (Magyar), a subsidiary of Deutsche Telekom AG (DT), whose American Depositary Receipts each traded on U.S. exchanges, rendering Magyar and DT issuers under U.S. securities laws ' arranged through a Greek intermediary for payments to be made by Magyar subsidiaries to Macedonian officials, pursuant to secret written contracts approved or signed by each of the defendants. The payments allegedly were made in exchange for relief from provisions of new telecommunications legislation in Macedonia that negatively affected MakTel, a telecommunications service provider jointly owned by Magyar and the Macedonian government. As a result of the payments, the Macedonian government
allegedly delayed the introduction of a new mobile telephone competitor to, and reduced certain tariffs imposed on, MakTel.

The complaint alleges that, to cover up the bribery scheme, one of the defendants signed a management representation letter to Magyar's auditors stating that he was unaware of any violations of law or improperly recorded transactions in Magyar's financial statements, and the other two defendants signed management sub-representation letters falsely certifying to the full and accurate disclosure of all material information from their areas of responsibility. The complaint also alleges that the defendants concealed the true nature of their allegedly illicit payments by sending e-mails of certain draft contracts and other documents and that these emails, though sent and received outside the United States, “were routed through and/or stored on network servers located within the United States.”

The court rejected the defendants' argument that the court lacked personal jurisdiction over them. Applying the nationwide service-of-process provision in ' 27 of the Securities Exchange Act, the court held it could exercise personal jurisdiction consistent with due process given that each defendant allegedly “knew or had reason to know” by reason of Magyar's status as a foreign-private issuer that any false or misleading financial reports would be given to U.S. Investors. Straub, 2013 WL 466600 at *6-7. The court found significant the SEC's allegation that, in the course of allegedly covering up a bribery scheme aimed at obtaining Macedonian government actions, defendants signed either “false representation letters to Magyar's auditors” or “false management sub-representation letters for quarterly and annual reporting periods,” and thus could be found to have had a sufficient “intent to cause a tangible injury in the United States.” Id. at *7.

In important language later cited by Judge Scheindlin, Judge Sullivan rejected defendants' contention that exercising jurisdiction over them would yield personal jurisdiction over any officer of any foreign-private issuer in any FCPA case, stating his ruling was based on the SEC's specific allegations regarding the bribery scheme, the falsification of Magyar's books and records, and the defendants' involvement in the representation and sub-representation process. Id. At *9. In short, although defendants' alleged bribe-related activity took place outside the United States, “their concealment of those bribes, in conjunction with Magyar's SEC filings, was allegedly directed toward the United States.” Id.

The Straub court also rejected the defendants' argument that the complaint failed to allege facts sufficient to show that they “ma[de] use of” an “instrumentality of interstate commerce corruptly in furtherance of” any offer or payment to a foreign official.15 U.S.C. ' 77dd-1(a); see Straub, 2013 WL 466600 at *13-15. The defendants argued that, in light of the manner in which Congress placed the word “corruptly” in the FCPA, the SEC was required to show that their use of interstate commerce ' in this case, of U.S. servers in connection with their email communications ' was knowing or intentional. In what it acknowledged was a case of first impression, the court found ambiguous the FCPA's use of the adverb “corruptly.” Although that term appeared to modify the verb “use,” the court held that its delayed placement in the statutory text appeared to reflect Congress's choice to modify the language concerning offers or payments that followed. The court in turn relied on legislative history to interpret the word “corruptly” as modifying offers and payments, not the use of interstate commerce, and thus held the SEC's allegations concerning the routing or storage of foreign emails through U.S. servers satisfied the FCPA's interstate commerce requirement. Straub, 2013 WL 466600 at *13-15.

In addition to rejecting the defendants' personal jurisdiction and interstate nexus arguments, the court also rejected defendants' motion to dismiss the SEC's claims as time barred under 28 U.S.C. ' 2462, even though it was undisputed that more than five years had passed since the SEC's claims had accrued, because “by its plain terms” ' 2462's five-year statute of limitations does not run while a defendant is not physically present in the United States. Id. at *11-13. (The court also adopted the position, recently set forth by Judge Keith Ellison in SEC v. Jackson, 4:12-CV-00563, Memorandum and Order (S.D. Tex. Feb. 24, 2012), that the FCPA does not require a foreign official for whom alleged bribe payments are intended to be specifically identified in order to state a claim. Straub, 2013 WL 603135 at *15- 16.

In so holding, the court did not reference an earlier bench ruling granting a judgment of acquittal, in which Judge Lynn Hughes (who, like Judge Ellison, sits on the United States District Court for the Southern District of Texas) had criticized the government for its inability to trace particular payments to specific foreign officials. See United States v. O'Shea, 09-CR-629 (S.D. Tex. Jan. 16, 2012).)

Bruce E. Yannett and Andrew M. Levine are partners, and Steven S. Michaels is a counsel, in the New York office of Debevoise & Plimpton LLP. Scott N. Auby is a counsel in the firm's Washington, DC office. They are members of the Litigation Department and White Collar Litigation Practice Group.The authors may be reached at [email protected], [email protected], [email protected], and [email protected].

On Feb. 8 and 19, 2013, two judges of the United States District Court for the Southern District of New York ' Judge Richard J. Sullivan in SEC v. Straub, 11-CV-9645 (RJS), 2013 WL 466600 (S.D.N.Y. Feb. 8, 2013); and Judge Shira A. Scheindlin in SEC v. Steffen, 11-CV-9073 (SAS), 2013 WL 603135 (S.D.N.Y. Feb. 19, 2013) ' ruled on a recurring question involving foreign nationals. Specifically, they ruled on whether foreign nationals residing continuously outside the United States may, under the due process “fair play and substantial justice” requirements of International Shoe v. Washington , 326 U.S. 310 (1945), be prosecuted on civil Foreign Corrupt Practices Act (FCPA) charges by the Securities and Exchange Commission (SEC).

Different Outcomes

The two rulings, both of which followed the resolution of FCPA charges against the defendants' employers, led to markedly different outcomes. In Straub, the individual defendants in the Magyar Telekom matter lost not only their motions to dismiss for lack of personal jurisdiction under International Shoe, but also for failure to state a claim because of a lack of sufficient U.S. nexus under the “interstate commerce” requirement of 15 U.S.C. ' 78dd-1, and lack of timely commencement of suit.

In Steffen, the moving defendant, who was charged following resolution of the Siemens-Argentina case, obtained a complete dismissal based on the “minimum contacts” and “reasonableness” requirements of International Shoe, obviating the court's need to address other issues. Notwithstanding these different outcomes, both Judges Sullivan and Scheindlin purported to apply similar standards to the due process issues before them, and Judge Scheindlin even drew on certain statements in Judge Sullivan's decision to place limits on broad assertions of jurisdiction over individual defendants. Compare U.S. Dep't of Justice & U.S. Sec. and Exch. Comm'n, A Resource Guide to the U.S. Foreign Corrupt Practices Act at 11-12 (Nov. 14, 2012), http://1.usa.gov/14X1UQS [hereinafter FCPA Guidance] with Steffen, 2013 WL 603135 at *5.

Of course, neither decision constitutes binding precedent, even in the Southern District of New York, and appeals by the losing parties remain possible, if not likely. But at least on the due process issue, the Straub/Steffen decisions, as discussed below, have the potential to affect, in a variety of ways, the government's ability to prosecute foreign individuals whose physical contact with the United States is limited, if not genuinely nonexistent.

For those individual non-U.S. defendants who meet the standards for asserting personal jurisdiction, the Straub decision on the interstate commerce nexus and statute of limitations issues is particularly bad news and likely to stir debate. In denying the defense motion, Judge Sullivan endorsed the SEC's view that e-mails in furtherance of a bribe that both originate and are received outside the United States, but that travel through or are stored on U.S. network servers, satisfy the “interstate commerce” requirement for FCPA claims against foreign-private issuers and their non-U.S. officers and employees under 15 U.S.C. ' 78dd-1.

Together with the court's holding that the statute of limitations in an SEC penalty action does not run while a defendant is outside the United States (Straub, 2013 WL 603135 at *12), Straub's rationale could subject non-U.S. officers of U.S. registrants or their consolidated subsidiaries to potential liability under the FCPA in perpetuity based on a single e-mail sent and received abroad, but unwittingly routed through the United States, so long as they do not become available for service within this country ' provided that their alleged conduct meets the International Shoe test.

The Decision in Straub

The SEC's complaint in Straub alleges that the defendants ' the former Chairman and CEO, former Director of Central and Strategic Organization, and former Director of Business Development and Organization of Magyar Telekom Plc. (Magyar), a subsidiary of Deutsche Telekom AG (DT), whose American Depositary Receipts each traded on U.S. exchanges, rendering Magyar and DT issuers under U.S. securities laws ' arranged through a Greek intermediary for payments to be made by Magyar subsidiaries to Macedonian officials, pursuant to secret written contracts approved or signed by each of the defendants. The payments allegedly were made in exchange for relief from provisions of new telecommunications legislation in Macedonia that negatively affected MakTel, a telecommunications service provider jointly owned by Magyar and the Macedonian government. As a result of the payments, the Macedonian government
allegedly delayed the introduction of a new mobile telephone competitor to, and reduced certain tariffs imposed on, MakTel.

The complaint alleges that, to cover up the bribery scheme, one of the defendants signed a management representation letter to Magyar's auditors stating that he was unaware of any violations of law or improperly recorded transactions in Magyar's financial statements, and the other two defendants signed management sub-representation letters falsely certifying to the full and accurate disclosure of all material information from their areas of responsibility. The complaint also alleges that the defendants concealed the true nature of their allegedly illicit payments by sending e-mails of certain draft contracts and other documents and that these emails, though sent and received outside the United States, “were routed through and/or stored on network servers located within the United States.”

The court rejected the defendants' argument that the court lacked personal jurisdiction over them. Applying the nationwide service-of-process provision in ' 27 of the Securities Exchange Act, the court held it could exercise personal jurisdiction consistent with due process given that each defendant allegedly “knew or had reason to know” by reason of Magyar's status as a foreign-private issuer that any false or misleading financial reports would be given to U.S. Investors. Straub, 2013 WL 466600 at *6-7. The court found significant the SEC's allegation that, in the course of allegedly covering up a bribery scheme aimed at obtaining Macedonian government actions, defendants signed either “false representation letters to Magyar's auditors” or “false management sub-representation letters for quarterly and annual reporting periods,” and thus could be found to have had a sufficient “intent to cause a tangible injury in the United States.” Id. at *7.

In important language later cited by Judge Scheindlin, Judge Sullivan rejected defendants' contention that exercising jurisdiction over them would yield personal jurisdiction over any officer of any foreign-private issuer in any FCPA case, stating his ruling was based on the SEC's specific allegations regarding the bribery scheme, the falsification of Magyar's books and records, and the defendants' involvement in the representation and sub-representation process. Id. At *9. In short, although defendants' alleged bribe-related activity took place outside the United States, “their concealment of those bribes, in conjunction with Magyar's SEC filings, was allegedly directed toward the United States.” Id.

The Straub court also rejected the defendants' argument that the complaint failed to allege facts sufficient to show that they “ma[de] use of” an “instrumentality of interstate commerce corruptly in furtherance of” any offer or payment to a foreign official.15 U.S.C. ' 77dd-1(a); see Straub, 2013 WL 466600 at *13-15. The defendants argued that, in light of the manner in which Congress placed the word “corruptly” in the FCPA, the SEC was required to show that their use of interstate commerce ' in this case, of U.S. servers in connection with their email communications ' was knowing or intentional. In what it acknowledged was a case of first impression, the court found ambiguous the FCPA's use of the adverb “corruptly.” Although that term appeared to modify the verb “use,” the court held that its delayed placement in the statutory text appeared to reflect Congress's choice to modify the language concerning offers or payments that followed. The court in turn relied on legislative history to interpret the word “corruptly” as modifying offers and payments, not the use of interstate commerce, and thus held the SEC's allegations concerning the routing or storage of foreign emails through U.S. servers satisfied the FCPA's interstate commerce requirement. Straub, 2013 WL 466600 at *13-15.

In addition to rejecting the defendants' personal jurisdiction and interstate nexus arguments, the court also rejected defendants' motion to dismiss the SEC's claims as time barred under 28 U.S.C. ' 2462, even though it was undisputed that more than five years had passed since the SEC's claims had accrued, because “by its plain terms” ' 2462's five-year statute of limitations does not run while a defendant is not physically present in the United States. Id. at *11-13. (The court also adopted the position, recently set forth by Judge Keith Ellison in SEC v. Jackson, 4:12-CV-00563, Memorandum and Order (S.D. Tex. Feb. 24, 2012), that the FCPA does not require a foreign official for whom alleged bribe payments are intended to be specifically identified in order to state a claim. Straub, 2013 WL 603135 at *15- 16.

In so holding, the court did not reference an earlier bench ruling granting a judgment of acquittal, in which Judge Lynn Hughes (who, like Judge Ellison, sits on the United States District Court for the Southern District of Texas) had criticized the government for its inability to trace particular payments to specific foreign officials. See United States v. O'Shea, 09-CR-629 (S.D. Tex. Jan. 16, 2012).)

Bruce E. Yannett and Andrew M. Levine are partners, and Steven S. Michaels is a counsel, in the New York office of Debevoise & Plimpton LLP. Scott N. Auby is a counsel in the firm's Washington, DC office. They are members of the Litigation Department and White Collar Litigation Practice Group.The authors may be reached at [email protected], [email protected], [email protected], and [email protected].