A federal district court in New York City issued an order Friday denying a motion to dismiss a civil FCPA enforcement action against three executives of Magyar Telekom Plc.
In December 2011, the SEC sued Elek Straub, Andras Balogh, and Tamas Morvai for FCPA violations. All three are Hungarian citizens and are living there.
They filed a motion to dismiss the complaint, arguing that the U.S. lacked personal jurisdiction over them, that the SEC's claims are barred by the the FCPA's five-year statute of limitations, and that the complaint failed to state a cause of action.
On Friday, Judge Richard J. Sullivan denied the defendants' motion 'in its entirety.' They must now stand trial on the charges.
In December 2011, Magyar and its majority owner Deutsche Telekom AG of Germany agreed to pay a combined $63.9 million criminal penalty to the DOJ to resolve Foreign Corrupt Practices Act charges. Magyar paid an additional $31.2 million in disgorgement and prejudgment interest to settle civil charges with the SEC.
In its suit against the three executives, the SEC said they violated or aided and abetted violations of the antibribery, books and records, and internal controls provisions of the FCPA; knowingly circumvented internal controls and falsified books and records; and made false statements to the company's auditor. The SEC is seeking disgorgement and civil penalties against them.
Judge Sullivan ruled Friday that the defendants had the necessary 'minimum contacts' with the U.S. to confer jurisdiction. He based his finding not on their physical location but their activity on behalf of Magyar, a one-time 'issuer' under the FCPA.
[D]uring and before the time of the alleged violations, both Magyar’s and Deutsche Telekom’s securities were publicly traded through ADRs listed on the NYSE and were registered with the SEC pursuant to Section 12(b) of the Exchange Act. Because these companies made regular quarterly and annual consolidated filings during that time, Defendants knew or had reason to know that any false or misleading financial reports would be given to prospective American purchasers of those securities. Cf. Leasco, 468 F.2d at 1341 n.11; In re Parmalat Sec. Litig., 376 F. Supp. 2d at 456.
(some citations omitted)
The SEC said the executives used 'sham consultancy contracts with entities owned and controlled by a Greek intermediary' to pay €4.9 million which they knew or should have known would be passed on to Macedonian officials. The sham contracts were recorded as legitimate in Magyar's and Deutsche Telekom's financial statements. The SEC said bribes to Macedonian officials in 2005 and 2006 were meant 'to prevent the introduction of a new competitor and gain other regulatory benefits.'
Although more than five years had elapsed since the FCPA offenses occurred, the court Friday said the time limit didn't start to run while the defendants were residing outside the United States.
Judge Sullivan agreed with the SEC's interpretation of 28 U.S.C. § 2462, which says in part that an enforcement action 'shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.' (the court's emphasis)
The operative language, Judge Sullivan said, 'requires, by its plain terms, that an offender must be physically present in the United States for the statute of limitations to run.'
The defendants also argued that the SEC failed to allege facts establishing that 'foreign officials' received the alleged bribes, which were passed through third-party agents. The court rejected the argument.
Quoting from Judge Keith Ellison's ruling in December 2012 in the SEC's case against two Noble executives, Judge Sullivan said:
[I]t would be perverse to read into the [FCPA] a requirement that a defendant know precisely which government official, or which level of government official, would be targeted by his agent; a defendant could simply avoid liability by ensuring that his agent never told him which official was being targeted and what precise action the official took in exchange for the bribe.
Judge Sullivan also found that the SEC complaint stated other facts required to allege a cause of action against the defendants.
He ordered a status conference in the case for April 3.