This is the second of a four part series analyzing the path of SEC Enforcement. The first part was published yesterday. The remaining parts of this series will be published later this week.
A Look Back: Where the Enforcement Division Has Been (cont.)
PRC issuers:PRC based issuers, and the reliability of the financial information for these companies, continued to be a key issue for the Commission as well as the PCAOB in 2013. An action brought by the Commission against Subaye, Inc. illustrates the difficulties encountered with some Chinese based issuers while the proceeding against the PRC based affiliates of five international accounting firms highlights a continuing concern regarding these companies.
SEC v. Subaye, Inc., Civil Action No. 13 Civ 3114 (S.D.N.Y. Filed May 13, 2013) is illustrative of the cases brought by the Commission in this area. There a newly appointed executive slated to take over the company traveled to the PRC to investigate the operations which had been reported in Commission filings as generating millions of dollars from dozens of customers. The executive discovered little more than a bit of cash and a few documents, according to the complaint. No company.
Subaye is a Delaware company that supposedly had its primary operations in the PRC. Its shares were registered with the Commission for trading and listed on NASDAQ. Its CEO, defendant James Crane, was a Massachusetts CPA.
Revenue for the company continually increased even as its focus changed, according to the filings. In 2008 its Form 10-K reported that the firm was a provider of video in China. That business yielded $29 million in revenue for 2008. The next year was even more profitable according to the firm’s 2009 Form 10-K. Subay had $48 million in revenue in 2009. Now, however, the Form 10-K reported that the company was developing what it believed to be the first online shopping mall in the world utilizing “3D imaging throughout the online customer interface.”
The next year was even better, according to company reports. Subaye reported revenue of $39.1 million. Again the Form 10-K recorded a shift in business. Now the company was “fully committed to one business model focused entirely on the second generation cloud computing product.”
Things began to unravel at the end of 2010. Mr. Crane replace Canadian audit firm DNTW with PricewaterhouseCoopers Hong Kong. The new auditors began asking questions. Mr. Crane considered replacing the firm. PWC HK resigned in February 2011.
One month earlier the PCAOB had filed a settled action against Mr. Crane and his audit firm. The action was based on the inability of the Board to inspect the firm and its failure to file the required reports and pay its dues. Mr. Crane and his company consented to the entry of an order in which he was barred from being an associated person of a registered public accounting firm.
In late February 2011 NASDAQ commented proceedings to delist the company for failing to comply with listing standards. Mr. Crane resigned as CFO a short time later. No response was filed with the exchange.
Alexander Holternmann, a German business executive who had once facilitated a transaction for the company, was appointed to a management role and later CEO. In June, one month after his appointment, he made his fateful trip to the PRC to examine company operations. What he found is that he was not really in charge of much at all.
The Commission’s complaint alleges violations of Exchange Act Section 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The case is in litigation.
Other Commission actions involving PRC based issuers include: SEC v. SinoTechEnergy Ltd., Civil Action No. 212-cv-00969 (W.D. LA. Filed April 23, 2012)(financial fraud and misrepresentation claims); SEC v. AutoChina Internatinal Ltd., Case No. 1:12-CV-01643 (D. Mass. Filed April 11, 2012)(manipulation); SEC v. Ming Zhou, Case No. 12 CV 1316 (S.D.N.Y. Filed Feb. 22, 2012)(misuse of assets); SEC v. Li, Civil Action No. CV-11-1712 (D. Ariz. Filed Aug. 30, 2011)(financial fraud and misrepresentation claims).
MOU: One of the difficulties in this area is the lack of transparency regarding the audit process for these issuers. The Sarbanes-Oxley Act requires that public company auditors make their work papers available on request by the Commission and the Public Company Accounting Oversight Board. It also requires that those auditors submit to periodic inspections by the PCAOB. Nevertheless, PRC based auditors have declined to produce work papers or permit inspections based on the directive of the Chinese government.
Last year, however, there was some indication that these issues might be resolved. The PCAOB announced an MOU with its Chinese counterparts which promised to make audit work papers available on request. The PCAOB and the China Securities Regulatory Commission or CSRC and the Ministry of Finance in China executed a Memorandum of Understanding on Enforcement Cooperation. Essentially, the agreement provides for the exchange of certain materials on request to assist in the enforcement of the laws of the parties to the agreement. In the MOU the parties pledge the “fullest assistance permissible to secure compliance with the respective Laws and Regulations of the Authorities.”
The assistance available under the MOU is defined to include furnishing “information and documents held in the files of the Requesting Party.” It also includes the exchange of documents which relate to:
Professional services – those “documents sufficient to identify all audit review or other professional services related to . . .” the request;
Work papers – “audit working papers or other documents held by audit firms . . .”
Systems – “documents sufficient to identify firms’ quality control systems including organizational structures, policies adopted and procedures established to provide assurance of compliance with professional standards.”
The request may be denied where it would require the “Requested Party to act in a manner that would violate law . . .” or on grounds of “public interest or essential national interest . . . “ The agreement does not provide for inspections as called for by the Sarbanes-Oxley Act.
At the time of the MOU the SEC had three pending actions involving the question of work paper production. One is a subpoena enforcement action against the PRC affiliate of Deloitte. It seeks the production of audit work papers relating to a Chinese issuer. SEC v. Deloitte Touche Tohmasu CPA, Ltd., Case No. 11-mc-512 (D.D.C.). The second is a proceeding against the same firm relating to a different audit. The proceeding is based on SEC Rule of Practice 102(e). It seeks an order which would preclude the firm from appearing and practicing before the Commission. Such an order it would effectively bar the firm from auditing a U.S. public company. In the Matter of Deloitte Touche Tohmatsu Certified Public Accountants, Ltd., Adm. Proc. File No. 3-14872 (Filed May 9, 2012).
Finally, there is the so-called “industry wide” proceeding against the PRC based affiliates of five international accounting firms. In the Matter of BDO China Dahua CPA Co., Ltd., Adm. Proc. File No. 3-15116 (Filed Dec. 3, 2012). It is also based on Rule 102(e) and seeks the same relief as the proceeding against the Deloitte affiliate. If effective, the agreement provides a framework for the production of audit work papers. The production of the audit work papers would permit firms to comply with their obligations under Sarbanes-Oxley. Accordingly, the MOU has the potential to resolve the pending actions. While the agreement offers this promise, and the prospect of a future arrangement on inspections, implementation is critical.
Ultimately the MOU may also hold the key to the world capital markets for PRC based enterprises — the kind of transparency sought by the agreement is critical to such access. For now, however, the MOU is more promise than fact. While some work papers have been produced under the MOU, the industry wide proceeding has moved forward with post hearing briefing being completed. Whether or not the promise of the MOU will be fulfilled remains to be seen.
Funds: One focus for the Division of Enforcement in recent months has been worked closely with OCIE, assessing the adequacy of procedures and the performance of funds. This has resulted in a number of enforcement actions. For example:
In the Matter of J. Kenneth Alderman, CPA, Adm. Proc. File No. 3-15127 (June 13, 2013). This proceeding , initiated in December 2012, named as Respondents directors at four open ended funds and one closed end fund. Each fund had a board of directors composed of two interested and four independent directors. All of the independent directors were members of the audit committee.
The Order which initiated the proceeding centered on claims that certain assets had been incorrectly valued resulting in false filings as the market crisis unfolded. At the end of the first quarter 2007 large portions of Fund assets were invested in complex structured products such as collateralized debt obligations. Many of the assets were concentrated in below investment grade debt securities. A large percentage of the Funds’ portfolios had to be fair valued by the boards.
Under the Policy and Procedure Manual for the Funds, the directors delegated to investment adviser, Morgan Asset Management, Inc., the responsibility for carrying out certain functions related to valuation of the portfolio securities in connection with calculating the NAV per share. While the Funds’ Valuation Procedures listed a series of factors to be considered, many of which were drawn from the pertinent literature, they provided no meaningful methodology or other specific direction on how to make the fair value determination, according to the Order. The actual task of assigning fair values was performed by Fund Accounting, a function staffed by Morgan Keegan employees. In making their determinations of fair value, the Order alleged that no reasonable analytical method was used.
Throughout the period the directors were unaware of, and did not inquire about, the methodology utilized to fair value the particular securities or types of securities, according to the Order. As a result of the failure by the Directors to cause the Funds to adopt and implement reasonable procedures, the NAVs of the Funds were materially misstated from the end of March 2007 through early August of that year. Thus the prices at which the open ended Fund sold, redeemed and repurchased shares were inaccurate. At least one registration statement, and other filed reports, contained NAVs that were materially misstated.
The Order alleged that the Respondents caused the Funds’ to violate: Rules 22c-1 of the Investment Company Act which makes it unlawful to sell, redeem or repurchase redeemable securities except at a price based on the current net asset value; Rule 30a-3(a) which requires that registered management investment companies maintain internal control over financial reporting; and Rule 38a-1 which requires that the registered investment company adopt and implement written policies and procedures reasonably designed to prevent a violation of the federal securities laws by the fund.
Respondents and the Commission agreed to settle the proceeding following litigation but prior to a hearing. Each Respondent consented to the entry of a cease and desist order based only on Rule 38a-1. No monetary relief was ordered. The allegations in the original Order alleging violations of Rules 22c-1 and 30a-3(a) were deleted from the refilled Oder. Also deleted were claims that the NAVs of the Funds were materially misstated from the end of March 2007 through early August of that year; that at least one registration statement and other filed reports were materially misstated; and that the Form N-1A filed by the Select Fund for October 29 2007 contained NAVs as of June 30, 2007 that were materially overstated.
In the Matter of KCAP Financial, Inc., Adm. Proc. File No. 3-15109 (Nov. 28, 2012) is one of a number of actions brought by the Commission centered on the issue of valuation of assets. This proceeding is the Commissions first centered on FAS 157, Fair Value Measurements. The provision requires expanded disclosures about fair value measurements. Essentially, it directs that assets be fair valued based on what is called an “exit price,” that is, a price that is based on what would be obtained if the asset were sold in an orderly transaction between market participants on a specific date.
The case centered on accounting during the market crisis at KCAP Financial, Inc., f/k/a/ Kohlberg Capital Corporation. The firm is a closed end investment company which elected to be regulated as a Business Development Corporation or BDC under the Investment Company Act. The company also has a subsidiary which manages CLO funds. Dayl Pearson is its President and CEO, Michael Wirth its CFO and R. Jonathan Corless the CIO. The firm and each of its three officers were named as Respondents in the proceeding.
From late 2008 through the middle of 2009 KCAP held two primary classes of assets. One was corporate debt while the other was investments in CLOs. During the financial crisis, according to the Order, the firm did not account for certain market based activity in determining the fair value of its debt securities. It also did not account for certain market based activity for its two largest CLO investments by properly fair valuing them. At the time KCAPs filings stated that those CLOs were valued using a discounted cash flow method that incorporated market data. In fact the CLOs were valued at KCAP’s cost.
In May 2010 the firm disclosed that it had to restate the fair values for certain securities and the CLOs. It had overstated NAV by about 27% as of the end of 2008. Its internal controls also were not designed to properly value illiquid securities. As a result, the Order alleges that the firm violated Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and the related rules. The individual defendants are each alleged to have caused the violations.
To resolve the action each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Messrs. Pearson and Wirth each agreed to pay a penalty of $50,000 while Mr. Corless will pay a $25,000 civil penalty.
FCPA: The Foreign Corrupt Practices Act has been a key focus for the Enforcement Division in recent years. Like the Department of Justice, the SEC has a specialized group focused on the area. Nevertheless, questions have been raised regarding the emphasis in this area in view of the fact that a declining number of actions have been brought recently. While it is clearly correct that fewer cases have been brought, the addition of two actions to the top ten largest FCPA settlements measured in terms of dollars paid and the cases being litigated against individuals should end any notion that the Commission is no longer focusing on this area.
Total: French oil and gas giant Total S.A. became the newest member of the FCPA top 10 settlements early last year, paying $398 million to settle corruption charges with the DOJ and the SEC. The firm is currently number four on the list of top ten FCPA settlements. U.S. v. Total, S.A., Criminal No. 1:13 cr 239 (E.D. Va. Filed May 29, 2013); In the Matter of Total, S.A., Adm. Proc. File No. 3-15338 (May 29, 2013).
The charges stem from the efforts of the company to re-enter the Iranian oil market. In 1995 the Total negotiated a development contract with the National Iranian Oil Company or NIOC for the development of the Sirri A and E oil and gas fields. NIOC is a government instrumentality and its employees are foreign officials, according to the charging papers.
Prior to executing the agreement, Total met with an Iranian Official and agreed to enter into a consulting arrangement. That official served as the Chairman of an Iranian state-owned and state-controlled engineering company. He had the ability to influence the decision regarding contract for the Sirri fields.
The consulting contracts had no real substance. Rather, they were used as a conduit for corrupt payments over the next two and one half years. The day the agreements were executed $500,000 was paid from an account held at a U.S. bank in New York City to a Swiss bank. The remaining payments were made from accounts in Switzerland to a Swiss bank at the direction of the Iranian official. Those payments totaled about $16 million.
In 1997 the company entered into a second arrangement with NIOC. This agreement was to develop phases 2 and 3 of the South Pars gas field which was a joint venture with a number of other multinational oil and gas companies. Total secured a 40% interest in the project.
As with the initial project, Total entered into a consulting arrangement with the Iranian official. Over the next several years the company made a series of payments under this agreement which totaled about $44 million. The payments, according to the charging papers, were to influence the decision on the award of the contract.
None of the payments were properly recorded in the books and records of the company. The consulting contracts were designed to circumvent the internal controls of the company. Total also “had inadequate systems for reviewing these [the consulting] documents and lacked controls sufficient to provide reasonable assurances . . .” that they complied with U.S. law, according to the SEC.
Total resolved the criminal charges by entering into a deferred prosecution agreement. The underlying indictment contains three counts: One for conspiracy to violate the anti-bribery provisions of the FCPA; one for violating the internal controls provisions of the FCPA; and one for violating the books and records provisions of the FCPA. The firm also agreed to pay a criminal fine of $245.2 million, retain a monitor for three years, continue to enhance its compliance systems and cooperate with enforcement officials.
To resolve the SEC administrative proceeding the company consented to the entry of a cease and desist order based on Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B), and pay disgorgement of $153 million and retain a consultant.
Weatherford: Later in the year Swiss based Weatherford International Ltd, with shares were traded on the NYSE, joined the FCPA top 10 list, paying about $152 million to resolve corruption charges with the Department of Justice and the Securities and Exchange Commission. Overall the company paid $252 million to resolve charges which included export control violations.
The FCPA charges stem from what DOJ termed a failure to implement internal controls despite having a global footprint with over 500 legal entities, many of which operate in high risk parts of the world. Specifically, the bribery charges were based on three schemes. The first involved a joint venture established by Weatherford subsidiary Weatherford Services Ltd. in Angola with two local entities in 2005. The previous year officials in Sonangol told the company that 100% of the Angolan well screens market could be obtained if a joint venture with certain designated companies was set up. One company selected had among its principals the wife of one of the Sonangol officials and relatives of another. A second included among its principals the relative of an Angolan Minister, the relative’s spouse, and another Angolan official.
The joint venture existed solely as a conduit for millions of dollars of payments by the Weatherford subsidiary to the foreign officials controlling them, according to the court papers. In exchange for the payments Weatherford Services obtained, through the joint venture, lucrative contracts and information about the pricing of competitors. In one instance a contract was taken away from a competitor and given to Weatherford Services. Although the local entities did not make any contribution to the venture, neither Weatherford nor its subsidiary conducted any due diligence.
The second scheme involved the bribery in Africa of a foreign official by employees of Weatherford Services. The purpose of the payments was to secure the renewal of an oil services contract. The payments were made through a freight forwarding agent, according to the court papers. That agent used initially rejected a proposed contract which contained an FCPA clause. The company legal department in Huston, Texas then approved the insertion of a clause which stipulated that all applicable laws would be followed. Prior to the retention of the agent a local official demanded a bribe from a company manager which was rejected and reported in an ethics questionnaire. There was no follow-up on the report. The payment made was concealed by the creation of sham purchase orders and similar records crafted by the forwarding agent. The contract was renewed in 2006.
The third scheme involved payments in the Middle East from 2005 through 2011 by employees of Weatherford Oil Tools Middle East Limited or WOTME. In this scheme what were claimed to be volume discounts to a distributor who supplied company products to a government owned national oil company were actually used to create a slush fund. That fund was used to make payments to the national oil company. During the period WOTME paid about $15 million to the distributor.
In 2002 WOTME also paid about $1.4 million in kickbacks to the government of Iraq on nine contracts with the Ministry of Oil and others. The payments were to provide oil drilling and refining equipment. They were incorrectly booked as legitimate fees and costs and were concealed by inflating the price of the contracts.
Finally, in a separate mater, from 1998 through 2007, the company and certain subsidiaries violated various U.S. export control and sanctions laws. During the period they exported or re-exported oil and gas drilling equipment to sanctioned countries without the required U.S. Government authorizations. Business operations were also conducted. The countries involved were Cuba, Iran, Sudan and Syria. About $110 million in revenue was generated by the illegal conduct. The company took steps to conceal this conduct, according to the SEC’s complaint.
During the investigation the company took steps which “compromised the investigation,” according to the Commission. This resulted from failing to provide the staff with complete and accurate information resulting in significant delay, failing to secure important computers and documents and allowing potentially complicit employees to collect subpoenaed documents. Later cooperation improved.
To resolve the FCPA charges with the DOJ, the company entered into a deferred prosecution agreement. It required the payment of an $87.2 million criminal penalty and the retention of a monitor for 18 months. The underlying criminal information contains one count of violating the internal controls provisions of the FCPA. In addition, Weatherford Services agreed to plead guilty to violating the anti-bribery provisions.
The SEC’s complaint alleged violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). SEC v. Weatherford International, Ltd., Civil Action No. 4:13-CV-03500 (S.D. Tex. Filed Nov. 26, 2013). To resolve the charges the company agreed to pay $90,984,844 in disgorgement, prejudgment interest and a $1.875 million civil penalty assessed in part for a lack of cooperation during the investigation. $31,646,907 of the payment will be satisfied by the agreement of the company to pay an equal amount to the USAO. See Lit. Rel. No. 22880 (Nov. 26, 2013).
The export control charges were resolved with the payment of $100 million composed of the following: A $48 million monetary penalty paid pursuant to a deferred prosecution agreement; $2 million in criminal fines under two guilty pleas; and a $50 million civil penalty paid to the Department of Commerce related to 174 violations charged by Commerce’s Bureau of Industry and Security. See also U.S. v. Diebold, Inc., Case No. 5:13CR464 (N.D. Ohio Filed Oct. 22, 2013); SEC v. Diebold, Inc., Civil Action No. 1:13-cv-01609 (D.D.C. Filed Oct. 22, 2013)(prior history, lack of remediation yield monitor in FCPA settlement).
Individuals: Finally, while there is an increased emphasis on prosecutions against individuals, two rulings last year highlight the difficulties of such actions for enforcement officials. One is SEC v. Straub, No. 11 Civ. 9645 (S.D.N.Y. Opinion issued Feb. 8, 2013) while the other is SEC v. Sharef, No. 11 Civ. 9073 (S.D.N.Y. Opinion issued Feb. 19, 2013).
Both cases stem from settled corporate FCPA actions. Straub derives from the action involving Magyar Telekom, Plc. That case centered on a scheme in which the company bribed officials in two political parties in Macedonia to mitigate the effects of a new telecommunications law in that country which came into effect in 2005. The company, with ADRs are traded in New York, settled with the DOJ in December 2011, entering into a deferred prosecution agreement and agreeing to pay a criminal fine. The firm also settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of the anti-bribery and books and records provisions and agreeing to pay disgorgement and prejudgment interest. Straub was filed by the Commission at the time the corporate action was resolved. It named as defendants three company executives, Elek Straub, Andras Balogh and Tamas Morvai.
Sharef focuses on a portion of the FCPA actions brought by the DOJ and the SEC against Siemens, A.G., the giant German manufacturer of industrial and commercial products. The segment here involved a large contract in Argentina. Subsidiaries of the German parent paid bribes to secure the contract in 1998. When the agreement was suspended the next year additional discussions were held with the new President of Argentina. Eventually more bribes were paid.
When the contract was canceled Siemens brought an arbitration in 2002 with the World Bank’s International Centre for Settlement of Investment Disputes in Washington, D.C. to recover the lost profits. Since disclosure of the bribes would constitute a defense, more bribes were paid as part of a cover-up. Corruption claims arising from these transactions and others were settled by Siemens with the DOJ, the SEC and the Munich prosecutor for a record $1.6 billion along with other relief. The SEC subsequently brought Shraef against seven company executives alleged to have been involved, Uriel Sharef, Ulrich Bock, Carlos Sergl, Stephan Signer, Herbert Steffen, Andres Truppel and Bernd Regendantz. Each is a former senior executive at Siemens Aktiengesellschaft.
The principles governing personal jurisdiction utilized by Judge Shira Scheindlin in Sharef and Judge Richard Sullivan in Straub are well established. Section 27 of the Exchange Act governs the exercise of personal jurisdiction. That Section states in part that the district courts have jurisdiction where there is a violation of the antifraud provisions if the “conduct occurring outside the United States has a foreseeable substantial effect within the United States.” It authorizes the exercise of personal jurisdiction to the limit of the Due Process Clause of the Fifth Amendment. Under the governing principles the person need not be in the forum. The critical analysis involves a two part test centered on “minimum contacts” and a reasonableness inquiry.
The lynchpin to the minimum contacts prong of the test is the effects caused in the forum by the foreign defendant. This principle, however, must be applied with caution. According to Judge Scheindlin “’[F]oreseeability alone has never been a sufficient benchmark for personal jurisdiction under the Due Process Clause,” quoting World-Wide Volkswagen v. Woodson, 444 U.S. 286, 295 (1980). 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’” quoting J. McIntyre Machinery, Ltd., v. Nicastro, 131 S.Ct. 2780, 2780, 2789 (2011). In this regard it is essential that the defendant know or have good reason to know that the conduct will have effects in the forum.
If the contacts are sufficient, the defendant must present a “compelling case” that an assertion of jurisdiction would be unreasonable to overcome jurisdiction. Typically this factor does not defeat jurisdiction if the contacts are sufficient. Matters considered when evaluating reasonableness include the burden on the defendant, the interest in the forum, the plaintiff’s interest in obtaining relief and the shared interest of several states in furthering fundamental substantive social policies.
In StraubJudge Sullivan rejected Defendants’ motion to dismiss under Federal Civil Rule 12(b)(2). Here the Court concluded that “the SEC has met its burden of proving a prima facie case of jurisdiction sufficient to withstand a jurisdictional challenge . . .” The securities of Magyard are traded through ADRs on the New York Stock Exchange. It is registered with the SEC and filed periodic reports. In view of this, it is apparent that the defendants would know that misleading financial reports would go to prospective purchasers of the securities.
In connection with the fraudulent scheme in this case Mr. Straub was alleged to have signed false management representations letters to the auditors of Magyard. Messrs. Balough and Morval signed what are claimed to be false management sub-representation letters for quarterly and annual reporting periods in 2005. Those actions were taken as part of an effort to cover up the bribery scheme. After examining these claims Judge Sullivan had “little trouble” concluding that the Commission’s allegations were sufficient.
In reaching its conclusion the Court rejected defendants’ claim that the SEC must prove that the conduct caused a substantial injury in the forum: “At oral argument, defendants repeatedly misrepresented this standard [foreseeability], indicating that a defendant’s contact must ‘proximately cause’ a ‘substantial injury’ in the forum . . . Indeed, in the aftermath of Burger King [Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)] the Second Circuit expressly declined to adopt such a standard,” citing Chew v. Dietrich, 143 F. 3d 23 (2nd Cir. 1998).
The Court also rejected the Defendants’ reasonableness argument, finding that this is not the “rare case” where such an argument can overcome the minimum contacts. To the contrary, the Court held that “[a]lthough it might not be convenient for Defendants to defend this action in the United States, Defendants have not made a particular showing that the burden on them would be ‘severe’ or ‘gravely difficult.” Indeed, there is no alternative forum for this action. Accordingly the motion was denied.
In contrast Judge Scheindlin, in Sharef, sustained the defendant’s motion to dismiss in Sharef, concluding that the showing made by the SEC was wholly inadequate. As in Straub the SEC claimed that an assertion of jurisdiction over Mr. Steffen was appropriate because his conduct contributed to false financial statements and filings in the U.S.
At the same time however, Mr. Steffen’s role in the scheme was limited and there is not specific allegation that he contributed to false filings. According to the SEC Mr. Steffen was brought into the scheme based on his connections with Argentine officials. He did participate in the negotiations regarding the bribes although he repeatedly urged and “pressured” his superior to make certain bribes in furtherance of the scheme. Those bribes were not made, however, until superiors agreed. At that point Mr. Steffen’s role largely ended. And, the Commission did not allege that he ordered or even knew of the cover-up that went on at the company or that he had any involvement in the falsification of SEC filings as part of that arrangement.
While signing or manipulating financial statements that will be filed with the SEC represents sufficient contacts, the Court noted, that was not the case here. To the contrary, 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 . . . 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. This would be akin to a tort-like foreseeability requirement, which has long been held to be insufficient.” (emphasis original).
The Court also found that reasonableness supports dismissal. Here the fact that Mr. Steffen lacks any ties to the U.S., is 74 years old and has poor proficiency in English all weigh against personal jurisdiction. Furthermore, the SEC and the DOJ have already obtained comprehensive remedies and Mr. Steffen has resolved a case against him with the German authorities. Read together the two decisions highlight the difficulties of prosecuting individuals while defining the contours of personal jurisdiction in these cases.
Next: A look forward to the path being charted for the Enforcement Division under a new Commission.