District Court Finds Personal Jurisdiction over Executive of Hungarian Telecommunications Company who Participated in SEC Filings that Allegedly Aided in Bribery Scheme

The World in U.S. Courts: Winter 2016 - Personal Jurisdiction | September.30.2016

SEC v. Straub, US District Court for the Southern District of New York, September 30, 2016

The SEC brought claims for violations of the Foreign Corrupt Practices Act and the securities laws against the CEO and two other executives of Magyar Telekom, a Hungarian telecommunications company.  The claims stemmed from Magyar’s alleged bribery of Macedonian government officials to obtain favorable treatment for Magyar’s Macedonian subsidiary, MakTel.  The SEC alleged that defendants were able to conceal the bribery scheme by maintaining inaccurate books and records, by submitting false management representation letters to Magyar’s outside auditor, and by submitting false securities law certifications in connection with Magyar’s SEC filings.      

As relevant here, the defendants sought summary judgment on all claims based on lack of personal jurisdiction.  The SEC brought a cross motion for partial summary judgment on the same issues that the defendants raised in their motion.  The District Court in New York concluded that the relevant question for purposes of jurisdiction was whether the defendants had “purposefully availed” themselves of the privilege of conducting activities within the forum, thus invoking the benefits and protections of its laws, such that the defendant should reasonably anticipate being sued there.  Because the securities laws permit service of process anywhere in the world, the Court noted that the relevant question was whether the defendants had minimum contacts with the US as a whole, not just with New York, where the Court sat.

The Court found that personal jurisdiction existed because the defendants purposefully availed themselves of a US securities exchange to conceal the alleged wrongdoing.  Specifically, in the course of preparing Magyar’s filings with the SEC, Magyar’s CEO had provided signed management misrepresentation letters to the outside auditor in connection with its audit of the company’s financial disclosures, which were then filed with the SEC.  The other defendants had also made representations in support of the management representation letters.  Thus, the undisputed facts showed that defendants “followed a course of conduct directed at the society or economy existing within the jurisdiction of the United States, so that the United States has the power to subject Defendants to judgment concerning that conduct.”  The Court rejected the defendants’ argument that it would be improper to find minimum contacts at this stage because the existence of the bribery scheme was disputed, noting that this argument improperly conflated proof of minimum contacts with proof of the alleged misconduct arising out of those contacts.  The court held that the SEC’s claims—that defendants engaged in a bribery scheme and concealed that schemed from the company’s investors and auditors by falsifying the company’s books and records—“clearly arose out of defendants undisputed contacts with the United States,” and the SEC was not required to prove those claims for jurisdiction to attach.

Weighing the burden on the defendants of litigating in the US against the SEC’s interest in enforcing the federal securities laws, the Court rejected the defendants’ claim that the exercise of personal jurisdiction would be constitutionally unreasonable.  It found the defendants’ contention that they encountered discovery challenges in foreign jurisdictions did not establish a burden so “compelling” that jurisdiction would be unconstitutional, as would be required for due process concerns to be implicated where “purposeful availment” had taken place.  The Court also found one defendant's advanced age and need for regular medical treatment not compelling enough of a burden to find the exercise of jurisdiction unconstitutional because any burden could be “accommodated through means short of finding jurisdiction unconstitutional.”

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