Sec. & Exch. Comm'n v. Straub

921 F.Supp.2d 244

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.Elek STRAUB, et al., Defendants.

No. 11 Civ. 9645(RJS).

United States District Court, S.D. New York.

Feb. 8, 2013.

Jeffrey Thomas Infelise, Kara Novaco Brockmeyer, and Robert Irving Dodge, Esqs., Securities and Exchange Commission, Washington, DC, for Securities and Exchange Commission.

Amanda Grier and Saul M. Pilchen, Esqs., Skadden, Arps, Slate, Meagher, & Flom LLP, Carl S. Rauh, Esq., Hogan Lovells LLP, Washington, DC, for Elek Straub.

John A. McMillan and William Michael Sullivan, Jr., Esqs., Pillsbury Winthrop Shaw Pittman LLP, Washington, DC, for Andras Balogh.

Michael Louis Koenig and Victoria Pauline Lane, Esqs., Greenberg Traurig, LLP, Albany, NY, for Tamas Morvai.

MEMORANDUM AND ORDER

RICHARD J. SULLIVAN, District Judge.

Plaintiff Securities and Exchange Commission (the “SEC”) brings this action against Defendants Elek Straub, Andras Balogh, and Tamas Morvai (collectively, “Defendants”)—executives of the Hungarian telecommunications company Magyar Telekom, Plc. (“Magyar”)—arising out of alleged violations of the Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. §§ 78dd–1, et seq. (the “FCPA”). Before the Court is Defendants' joint motion to dismiss the Complaint in this action on the grounds that: (1) the Court lacks personal jurisdiction over Defendants; (2) the SEC's claims are time barred; and (3) the Complaint fails to state claims for certain of its causes of action. For the reasons that follow, the Court denies Defendants' motion in its entirety.

I. Background

The SEC alleges that Defendants engaged in two related schemes involving the bribery of public officials in Macedonia and Montenegro. However, the SEC has advised the Court that the Complaint's anti-bribery claims “are based solely on the allegations involving Macedonia.” (Opp'n 3 n. 2.) Accordingly, for the purpose of resolving the instant motion, the facts below relate almost entirely to Defendants' alleged Macedonian scheme.

A. Facts ¹

In early 2005, the Macedonian Parliament enacted a new Electronic Communications Law, which “liberalized the telecommunications market [in Macedonia] in a manner that would have been unfavorable to Magyar.” (Compl. ¶ 20.) Specifically, the legislation increased frequency fees, imposed regulatory burdens, and authorized the licensing of a third mobile telephone operator in direct competition with Makedonski Telekommunikacii A.D. Skopje(“MakTel”)—the former telecommunications services provider jointly owned by Magyar and the Macedonian government. ( Id.) To mitigate the effects of the new law, Defendants allegedly began executing a scheme in March 2005 to bribe public officials from both political parties in Macedonia's coalition government, memorializing the elements of that scheme in a “secret document” maintained on Magyar's computers. ( Id. ¶ 21.)

In furtherance of the alleged scheme, Magyar's Macedonian subsidiaries retained a Greek intermediary to facilitate negotiations with Macedonian government officials on Magyar's behalf. ( Id. ¶ 22.) The negotiations resulted in a “secret agreement” with those officials entitled the “Protocol of Cooperation” (the “Protocol”), which set a framework whereby the Macedonian officials would mitigate certain adverse effects of the new law in return for the Macedonian government receiving a €95 million dividend payment from MakTel and Macedonian officials receiving undisclosed bribe payments from Magyar. ( Id.) On or about May 25, 2005, Straub approved the Protocol on behalf of Magyar, and approximately two days later, Balogh and a senior Macedonian government official signed and countersigned the document. ( Id. ¶ 23.)

On or about August 31, 2005, Straub allegedly entered into a second, nearly-identical version of the Protocol with a senior Macedonian government official belonging to the minority political party in the governing coalition. ( Id. ¶ 30.) Prior to the execution of this version of the Protocol, Defendants internally confirmed in writing that officials within the minority party would “torpedo [or wreck] the agreement within [two] months if we don't pay bribes to those officials.” ( Id. ¶ 27 (internal quotation marks omitted).) To induce members of the minority political party to sign the Protocol, Defendants allegedly offered “to have [Magyar's] Macedonian subsidiary construct a mobile telecommunications infrastructure in a neighboring country and allow a designee of the minority political party to operate [it] using the company's network backbone.” ( Id. ¶ 29.) On or about August 30, 2005—one day prior to signing the second Protocol with a senior official within the minority political party—Straub executed a Letter of Intent, which identified the prospective business party only as “a company to be named by the [minority political p]arty.” ( Id.)

According to the Complaint, neither Magyar nor Deutsche Telekom—a company that had a controlling interest in Magyar—kept signed copies of the two Protocols, and the senior Macedonian government officials who signed the documents failed to record them as official government documents, as required under Macedonian law. ( Id. ¶¶ 24–25, 30.) Only the Greek intermediary allegedly kept the original signed Protocols. ( Id. ¶ 30; see Reply Ex. 1 (unsigned copy of the Protocol).)

To obtain the government official's consent to the Protocols, Defendants allegedly offered up to €10 million in bribes, in three installments. (Compl. ¶ 26.) Defendants authorized MakTel and other Magyar subsidiaries to make the first installment (totaling €4.875 million) to government officials via the Greek intermediary under purported “sham ‘success[-]fee[-]based’ contracts for ‘consulting’ or ‘marketing services.’ ” ( Id.) According to the SEC, the contracts “served no legitimate business purpose, and no bona fide services were rendered under them. Instead, the contracts were used to channel corrupt payments indirectly to government officials in a manner that would not be detected.” ( Id. ¶ 32.) Moreover, they were allegedly“supported by false performance certificates or fabricated evidence of performance[,] were in many cases backdated[,] and were in many cases purportedly success-based[ ] but entered into after the relevant contingencies had already been satisfied.” ( Id. ¶ 35.)

Defendants allegedly referred to the routing of payments through such contracts using the code “logistics,” and in an untitled document prepared by Balogh on or about June 1, 2005, Balogh proposed to structure the payments as “success[-]fee [-]based” contracts and volunteered to “be present when signing the contracts or meet[ ] with the representatives of both sides and inform [ ] them about the source of the money.” ( Id. ¶¶ 31–33.) On June 16, 2005, Balogh also asked representatives of the Greek intermediary to provide “feedback, after the transaction, from high[-]level representatives of both sides acknowledging that they received what we promised.” ( Id. ¶ 34.) Additionally, Defendants allegedly discussed various options for structuring bribe payments to the minority political party. ( Id. ¶ 28.) As a result of the allegedly corrupt payments, the Macedonian government purportedly delayed the introduction of a third mobile telephone competitor until 2007—when a new administration came to power—and reduced the frequency-fee tariffs imposed on MakTel. ( Id. ¶ 38.)

During and before the time of the alleged conduct, both Magyar's and Deutsche Telekom's securities were publicly traded through American Depository Receipts (“ADRs”) listed on the New York Stock Exchange (“NYSE”) and were registered with the SEC pursuant to Section 12(b) of the Exchange Act. (Compl. ¶¶ 14–15.) As executives of a publicly filed company, Defendants were required to make certifications to Magyar's auditors regarding the accuracy of the company's financial statements and the adequacy of its internal controls. However, the Complaint alleges that, to cover up the alleged bribery scheme, Defendants falsified their certifications in connection with the company's 2005 financial statements. ( Id. ¶¶ 62–64.) Specifically, between July 2005 and January 2006, Straub signed management representation letters to Magyar's auditors, allegedly misrepresenting that: (1) “we have made available to you all financial records and related data”; (2) “we are not aware of any accounts, transactions or material agreement not fairly described and properly recorded in the financial and accounting records and underlying the financial statements”; and (3) “we are not aware of any violations or possible violations of laws or regulations.” ( Id. ¶ 63.)

For their part, Balogh and Morvai signed management sub-representation letters ² for quarterly and annual reporting periods in 2005, again falsely certifying that “all material information related to my area was disclosed accurately and in full (actual and accruals) and in agreement with the subject matter of the management representation letter.” ( Id. ¶ 64.) To avoid detection, Defendants allegedly “consistently set” the payments to Macedonian government officials “just below internal control thresholds that would have required Board approval,” and, in some cases, “re-executed” the contracts and performance certificates “to name different contracting parties.” ( Id. ¶ 36.) Additionally, the first installment payment to Macedonian government officials under the alleged sham contracts was purportedly booked falsely as legitimate operating expensessuch as “consulting or marketing services.” ( Id. ¶ 6.)

For all of these reasons, the Complaint alleges that the payments made under the sham marketing and consulting contracts were recorded on Magyar's books and records “in a manner that did not reflect the true purpose of the contracts.” ( Id. ¶ 40.) The alleged false records were then subsequently consolidated into Deutsche Telekom's financial statements. ( Id.) According to the...