Securities Regulation Daily Wrap Up, CORPORATE GOVERNANCE—SDNY Has Personal Jurisdiction in FCPA Action Over Macedonian Scheme, (Feb 22, 2013)

By Rodney F. Tonkovic, J.D.

The District Court for the Southern District of New York found that it had personal jurisdiction over executives of a Hungarian company and denied their motion to dismiss the SEC's complaint against them. The court also found that the SEC's claims were not time-barred and that the complaint stated a claim. (SEC v. Straub, February 8, 2013, Sullivan, R.).

The Commission brought this action against three executives of Magyar Telekom, Plc. (Magyar), a Hungarian telecommunications company alleging violations of the Foreign Corrupt Practices Act. The Commission claimed that the defendants engaged in related schemes involving the bribing of public officials in Macedonia and Montenegro, but this complaint addressed the Macedonian scheme.

According to the Commission, in 2005 the Macedonian government passed legislation that impacted the telecommunications market in a manner unfavorable to Magyar. Among other matters, the laws increased fees and regulatory burdens and provided for a competitor to Magyar's Macedonian subsidiary. The defendants then schemed to bribe Macedonian government officials to mitigate certain of the laws' effects such as certain tariffs and the introduction of a competitor.

At the time, Magyar's securities were publicly traded through American Depository Receipts (ADRs) listed on the NYSE. The complaint alleged that Magyar filed false certifications in connection with its financial statements. Further, the payments to government officials, which were made under sham contracts, were falsely booked as legitimate operating expenses, which were then consolidated into financial statements that accompanied Magyar's SEC filings.

Personal jurisdiction. The defendants first argued that the court lacked personal jurisdiction over them. The court found that the SEC established a prima facie case for the requisite minimum contacts with the U.S. to support personal jurisdiction. According to the court, because the ADRs were registered with the SEC and listed on the NYSE, the defendants knew, or had reason to know, that their false or misleading financial reports would be seen by prospective investors in the U.S. While the alleged bribes occurred outside of the U.S., the court explained, their concealment was directed there.

The court then determined that the exercise of personal jurisdiction over the defendants was reasonable. The court remarked that it is rare for the reasonableness analysis to defeat the exercise of personal jurisdiction, and while it may be inconvenient, the defendants did not show that the burden of defending this action in the U.S. would be "severe" or "gravely difficult." Moreover, the court continued, there is no alternative forum for the SEC to enforce an FCPA action against the defendants.

Statute of limitations. Next, the statute of limitations under 28 U.S.C. Section 2462's catch-all limitations period has not run on the SEC's claims. There was no dispute that more than five years had elapsed since the SEC's claims accrued. Section 2462's operative language, however, requires that an offender must be physically present in the U.S. for the statute of limitations to run, and the defendants were not in the U.S. The court accordingly found that the statute of limitations had not run.

Complaint stated a claim. Finally, the court concluded that the complaint stated a claim and denied dismissal on those grounds. The court found that the complaint adequately alleged the use of U.S. interstate commerce. As a matter of first impression in the FCPA context, the court determined that Congress intended that the use of interstate commerce is a jurisdictional element of an FCPA violation, and that the defendants used emails that were routed through or stored on servers in the U.S. in furtherance of the scheme.

The complaint also adequately alleged the involvement of "foreign officials" under the FCPA. Allegations concerning "Macedonian government officials," among other parties, were sufficient to put the defendants on notice of the SEC's claims, the court said. Next, the complaint also adequately alleged that false statements were made to accountants in violation of Exchange Act rule 13b2-2. According to the court, the SEC alleged with sufficient particularity the circumstances constituting the alleged fraud as to each defendant as well as the materiality of the alleged misstatements to Magyar's auditors.

This is case no. 11 Civ. 9645 (RJS).

Attorneys: Jeffrey Thomas Infelise, Robert Irving Dodge and Kara Novaco Brockmeyer for SEC. Amanda Grier and Saul M. Pilchen (Skadden , Arps, Slate, Meagher & Flom, LLP); Carl S. Rauh (Hogan Lovells, LLP) for Elek Straub. John A. McMillan and William Michael Sullivan, Jr. (Pillsbury Winthrop Shaw Pittman, LLP) for Andras Balogh, Michael Louis Koenig (Greenberg Traurig, LLP) for Tamas Morvai.

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