June 12, 2013 Articles

FCPA, Due Process, and Jurisdictional Overreach by the DOJ and SEC

The FCPA itself and due-process concerns likely limit the statute's expanded extraterritorial reach.

By Bruce J. Casino and Scott Maberry

The new 120-page Foreign Corrupt Practices Act (FCPA) Guide, “A Resource Guide to the U.S. Foreign Corrupt Practices Act,” published in November 2012 by the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), provides some helpful parsing of the somewhat complex set of rules of personal jurisdiction under the FCPA. It confirms familiar bases for jurisdiction: Issuers and domestic concerns are subject to the FCPA by virtue of nationality, and foreign entities may be subject by way of the territoriality principle for acts committed in the United States in furtherance of a violation. But the guide steps onto shakier ground in asserting FCPA jurisdiction over “a foreign national or company . . . [that] aids and abets, conspires with, or acts as an agent of an issuer or domestic concern, regardless of whether the foreign national or company itself takes any action in the United States.”

The guide elaborates on this in an FCPA jurisdiction hypothetical:

Moreover, even if [a foreign company conspiring with a U.S. corporation to violate FCPA] and Intermediary had never taken actions in the territory of the United States, they can still be subject to jurisdiction under a traditional application of conspiracy law and may be subject to substantive FCPA charges under Pinkerton [v. United States, 328 U.S. 640 (1946)]liability, namely, being liable for the reasonably foreseeable substantive FCPA crimes committed by a co-conspirator in furtherance of the conspiracy.

In Pinkerton, the U.S. Supreme Court held that a conspirator may be found guilty of a substantive offense committed by a co-conspirator in furtherance of the conspiracy if the co-conspirator’s acts were reasonably foreseeable. 328 U.S. at 647–48. The guide here takes the position that Pinkerton liability creates jurisdiction over a foreign co-conspirator whose actions do not touch the territory of the United States.

In SEC v. Sharef,2013 U.S. Dist. LEXIS 22392, Fed. Sec. L. Rep (CCH), P.97,292 (S.D.N.Y. Feb. 19, 2013), as well as in a case with somewhat similar facts, Straub, (see below) the SEC and the DOJ argued for a foreseeable-effects test for jurisdiction, which the court in Sharef held amounted to a “tort-like foreseeability requirement,” and rejected. This standard, derived from tort substantial-liability law, it will be argued below, is different from the standard for in personam jurisdiction.

Problem 1: The Statutory Language
A reason for concern that the guide may be overreaching in taking this position is that the language of the statute does not seem to allow it. The 1998 amendments to the FCPA added a prohibition on foreign nationals and corporations who are not “issuers” or “domestic concerns” violating the FCPA. That amendment, however, restricted the violation to the foreign person (or their officers, directors, employees, or agents) who, “while in the territory of the United States, corruptly[] make[s] use of the mails or instrumentality of interstate commerce or [does] any other act in furtherance” of a bribe of a foreign official or political party. 15 U.S.C. § 78dd-3(a) (emphasis added). Thus the statute itself appears to limit jurisdiction over foreign persons to those who take certain actions while actually in the territory of the United States, whether or not they are in a conspiracy with, or are aiding or abetting U.S. violators, or simply acting on their own.

While the 1998 amendments to the FCPA expanded its jurisdiction, they did not go as far as the guide now goes. The 1998 amendments expanded jurisdiction concerning payments made wholly outside the United States only with respect to U.S. nationals or U.S. entities. 15 U.S.C. § 78dd-1(g)(1) and § 78 dd-2(i)(1). As the Senate report states:

[T]he OECD convention calls on parties to assert nationality jurisdiction when consistent with national legal and constitutional principles. Accordingly, the Act amends the FCPA to provide for jurisdiction over the acts of U.S. businesses and nationals in furtherance of unlawful payments that take place wholly outside the United States. The exercise of jurisdiction over U.S. business and nationals for unlawful conduct abroad is consistent with U.S. legal and constitutional principles and is essential to protect U.S. interests.

S. Rep. No. 105-277 at 2 (emphasis added). Thus the amendment did not expand the jurisdiction over foreign individuals or entities and their agents, which requires an act in furtherance of a bribe done “while in the territory of the United States.” 15 U. S. C. § 78dd -3(a). In this connection, we also note the Senate’s concern that the expansion of jurisdiction should be “consistent with U.S. legal and constitutional principles.” As discussed further below, it is not clear that the extra-statutory expansion of jurisdiction expressed in the guide meets that standard.

Problem 2: Misunderstanding the Jurisdictional Reach of Conspiracy Law
A second concern is that the government appears to be misunderstanding the jurisdictional reach of conspiracy law. Civil conspiracy is a type of tort. The idea that an accomplice or co-conspirator may be held liable for the underlying substantive crime is familiar. That doctrine provides subject matter jurisdiction. But basing jurisdiction over the person (in personam jurisdiction)on the fact that the person was a conspirator or an accomplice is not the same thing and requires a different analysis.

In the guide, it appears the government has conflated the two bases of jurisdiction in an attempt to expand its extraterritorial jurisdiction. For instance, the guide in analyzing jurisdiction uses the word “liable” when it apparently, means “subject to jurisdiction.” Under the law of personal jurisdiction, federal courts may not exercise jurisdiction without sufficient contacts by a defendant with the United States. Yet the guide makes a blanket assertion that a foreign co-conspirator could be held liable “regardless of whether the foreign national or company itself takes any action in the United States.” That assertion is in tension with the legal requirement that the unlawful overt act required under federal conspiracy law must produce an injury and damages in the forum state. See Halberstam v. Welch, 705 F.2d 472, 477 (D.C. Cir. 1983). In fact, the guide’s citation to Pinkerton in this regard highlights the tension: Pinkerton held that a conspirator may be found guilty of a substantive offense committed by a co-conspirator in furtherance of the conspiracy if the co-conspirator’s acts were reasonably foreseeable. 328 U.S. at 648. On this basis, the guide asserts that foreign co-conspirators are subject to a U.S. court’s jurisdiction because the U.S. co-conspirator’s actions were foreseeable. But the case law of jurisdiction requires, as discussed below, that for personal jurisdiction to attach, there must be a connection between the act of the foreign person and an intended forum-state consequence. The guide itself seems to use the terms “jurisdiction over” and “liability” interchangeably. This mirrors the guide’s tendency to conflate theories of liability with theories of jurisdiction.

Problem 3: Due Process and the Foreseeable Effects vs. Purposeful Availment Tests
Where, as in the case of the FCPA, a specific federal long-arm statute applies, a court must engage in a two-part inquiry to determine whether it may exercise specific personal jurisdiction over non-resident defendants. Burger King v. Rudzewicz 471 U.S. 472–77 (1985). First, the court must determine whether the exercise of personal jurisdiction would satisfy the requirements of due process. See GTE New Media Servs. Inc. v. BellSouth Corp., 199 F.3d 1343, 1347 (D.C. Cir. 2000). The due-process analysis turns on whether a defendant’s “minimum contacts” arise from “some act by which the defendant purposefully avails [themselves] of the privilege of conducting activities within the forum [], thus invoking the benefits and protections of its laws.” Asahi Metal,480 U.S. at 109. As in the case of the FCPA, “[w]hen the national sovereign is applying national law, the relevant contacts are the contacts between the defendant and the sovereign’s nation.” In re Oil Spill by Amoco Cadiz off Coast of France Mar 16, 1978, 954 F.2d 1279, 1294 (7th Cir. 1992). The defendant must have “purposefully directed his activities at residents of the forum, and the litigation [must] result from alleged injuries that arose out of or relate to those activities.” Burger King Corp. v Rudzewicz, 471 U.S. 462, 472–73 (1985). A person cannot be haled into a forum on the basis of “random, fortuitous or attenuated contacts.” In other words, courts must ensure that “the defendant’s conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there.” World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980). Secondly, due process requires that, even if there are sufficient minimum contacts, jurisdiction must be fair and reasonable. Burger King, 471 U.S. at 477.

The only support for this expansion of extraterritorial jurisdiction that the guide cites is the uncontested criminal-information documents filed in two related prosecutions in the Southern District of Texas. U.S. v. JGC Corp., No. 11-cr-260 (S.D. Tex. 2011) and U.S. v. Snamprogetti Netherlands B.V., No. 10-cr-460 (S.D. Tex 2010). In both cases, conspiracy and aiding and abetting were charged. However, in both cases, the government could have based jurisdiction on territoriality, because Snamprogetti and JGC are each alleged to have caused the transfer of money into a U.S. bank account. But the government’s aiding-and-abetting and conspiracy theory was not tested in court because the companies settled the cases without litigating to challenge the government’s jurisdiction. Of course, unwillingness to test the limits of the government’s jurisdiction may be what the government is counting on in making its claim to expanded extraterritorial jurisdiction. Like Snamprogetti and JGC, many foreign entities may not be willing to challenge jurisdiction, but rather, given the government’s position, will choose to settle.

An important recent FCPA civil case decided in the Southern District of New York is instructive and demonstrates why the government in the guide and in its litigation position is overreaching. In that case, the court dismissed the SEC’s FCPA case against a German defendant, finding that the defendant’s actions in the United States did not meet the International Shoe minimum-contacts standard. SEC v. Sharef,2013 U.S. Dist. 22392. In Sharef, Herbert Steffen, a German senior executive of the Argentine subsidiary of Siemens AG, was accused of helping orchestrate a scheme to bribe Argentine government officials to retain a large government contract. Steffen is alleged to have taken the following acts in furtherance of the bribe payments: (1) negotiated the bribe with Argentine government officials in Argentina; (2) pressured the company’s chief financial officer to authorize a $10 million bribe payment; and (3) urged company officers to authorize additional payments after the initial payments were authorized.

In the course of urging the payments, while remaining outside the United States, Steffen participated in a telephone call placed from the United States by another executive involved in the bribery scheme. The court found that Steffen’s actions, including the call involving the U.S. executive, were not sufficient to assert personal jurisdiction over Steffen. In particular, the court noted that the phone call was placed by the U.S. executive to Steffen, not by Steffen to the United States. The court also noted that a portion of the bribery payments was deposited in a New York bank account, but that act similarly did not meet the minimum-contacts standard, because Steffen did not direct the use of the U.S. bank. The court stated that while a court may exercise personal jurisdiction over a foreign defendant whose foreign act creates effects in the forum, those acts must be “directed” at the United States, and the U.S. effects must be the “direct and foreseeable result” of the foreign conduct. Id. at *14 quoting Leasco, 468 F.2d at 1341.

Interestingly, the SEC had also argued that Steffens should be subject to jurisdiction because his actions foreseeably contributed to the creation of false statements in SEC filings by Siemens. The court rejected that theory as well, saying “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” the contact. Sharef at *15. Instead, the court concluded that foreseeability alone “has never been a sufficient benchmark for personal jurisdiction under the Due Process Clause.” Id. at *20 (quoting World-Wide Volkswagen v. Woodson, 444 U.S. 286, 295 (1980). The court noted, relying on World-Wide Volkswagen, the SEC’s position “would be akin to a tort-like foreseeability requirement, which has long been held to be insufficient” for in personam jurisdiction. Sharef at * 20. This parallels the critique above concerning the conflation of conspiracy law, substantive liability, and the requirements for in personam jurisdiction.

It is important to note that in another recent FCPA case decided by a different judge in the Southern District of New York, the court held that the government had made out a prima facia case of jurisdiction where the defendant allegedly signed false management representations to company auditors “knowing that the company traded [ ] on an American exchange.” SEC v. Straub, 2013 U.S. Dist. Lexis 22447 *24–25 Fed. Sec. L. Rep. (CCH) p 97, 295, (S.D.N.Y. Feb. 8, 2013). The Straub decision comes very close to directly contradicting the Sharef decision. However, as the Sharef court notes, in Straub,as part of the bribery scheme, the defendants“signed off on misleading management representations to the company auditors and signed false SEC filings.” Sharef at *18–19.These acts involved an intent to cause injury in the United States according to Straub. On the other hand, based on the above analysis of due-process requirements, Straub may be incorrectly decided because it ignores the requirement that any effect in the United States be purposeful, not simply foreseeable. Asahi Metal, 480 U.S. at 109 (minimum contacts must arise from “some act by which the defendant purposefully avails [themselves] of the privilege of conducting activities within the forum”). On April 17, 2013, the defendants in Straub filed a motion for interlocutory appeal to the Second Circuit. The Sharef and Straub contradictory approaches leave the case law on alleged government overreaching in the FCPA context somewhat unclear, perhaps for the Second Circuit or the Supreme Court to resolve.

While it may be a basis for liability in a conspiracy or aiding-and-abetting case, “foreseeability alone has never been a sufficient benchmark for personal jurisdiction under the Due Process Clause.World-Wide Volkswagen, 444 U.S. at 295, see also Leasco v. Taussig, 468 F.2d 1321, 1341 (2d Cir. 1972) (holding that “attaining the rather low floor of foreseeability necessary to support a finding of tort liability is not enough to support in personam jurisdiction”). Rather, defendants must have “followed a course of conduct directed at . . . the jurisdiction of a given sovereign, so that the sovereign has the power to subject the defendant to judgment concerning that conduct.” J. McIntyre Machinery, Ltd. V. Nicastro, 131 S. Ct. 2780, 2789 (2011), see also, In re Terrorist Attacks on September 11, 2001, (holding that “plaintiffs have the burden of showing that [defendants] engaged in intentional and allegedly tortious, actions . . . expressly aimed at residents of the United States.”) 538 F.3d 71, 95 (2d Cir. 2008), abrogated on other grounds by Samantar v. Yousuf, ___ U.S. ___, 130 S. Ct. 2278.

Addressing the reasonableness prong of the in personam jurisdiction inquiry, the Sharef court also found that the defendants “lack of geographic ties to the United States, his age, his poor proficiency in English, and the forum’s diminished interest in adjudicating the matter, all weigh against personal jurisdiction.” Sharef, 2013 U.S. Dist. 22392 *23. The reasonableness issue is nowhere mentioned in the guide, but is likely to be a more significant factor when the government is seeking jurisdiction over foreign persons than it typically is with respect to U. S. persons.

Particularly in asserting jurisdiction over foreign persons or entities, self-restraint is warranted on the part of the courts. The Supreme Court has warned: “[g]reat care and reserve should be exercised when extending our notions of personal jurisdiction into the international context.” Ashai, 480 U.S. at 115.

Conclusion
The guide and recent government litigation positions seek to shoehorn expanded extraterritorial jurisdiction into the FCPA by way of substantive tort law, including aiding-and-abetting and conspiracy law, and a narrow foreseeability-effects test, even though the FCPA statute itself and constitutional due-process concerns will likely be found to limit this reach.

Keywords: criminal litigation, FCPA, in personam jurisdiction, foreign persons, conspiracy

Bruce J. Casino and Scott Maberry are partners with Sheppard Mullin Richter & Hampton, LLP in Washington, D.C.


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