SEC Versus Siemens: A Postscript

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You may remember a previous blog of mine about the curious incident of the SEC serving proceedings on seven former Siemens executives by placing adverts in the Wall Street Journal.

It seems that sanity (at least from these directors’ personal perspectives) has been restored by a recent ruling of Judge Scheindlin in SEC Sharef.

The Judge was asked to rule on the question as to whether the SEC could in fact exercise personal jurisdiction over these defendants. You will remember that this all relates to follow on proceedings issued by the SEC after the settlement reached between Siemens and the SEC relating to bribes paid to foreign officials in Argentina.

Foreign Corrupt Practices Act

The allegations faced by these individuals is that they had breached various provisions of the Foreign Corrupt Practices Act in connection with their alleged involvement in the company’s decade long bribery scheme to retain a $1bn government contract to produce national identity cards for Argentine citizens.

The SEC complaint alleged a number of specific facts against the individual executives in relation to their alleged role in facilitating the payment of bribes to officials. The difficulty which the SEC faced is that the individuals concerned had not conducted their alleged activities in the US.

Indeed, the only alleged connections with the US which the SEC claimed were sufficient to found jurisdiction were the fact that the individuals were officers of a foreign company which had registered its securities under the Securities and Exchange Act and an allegation to the effect that one or more telephone calls were received by one or more executives from the United States.

Judge Ruling

The Judge was careful to acknowledge that there was:

“… ample (and growing) support in case law for the exercise of jurisdiction over individuals who played a role in falsifying or manipulating financial statements relied upon by US investors in order to cover up illegal actions directed entirely at a foreign jurisdiction…”.

That said, the Judge concluded in this case that the allegations against these executives fell far short of what was needed in order to found jurisdiction. Her rejection of the SEC’s minimum contact test for foreign defendants under which she said that “…every participant in illegal action taken by a foreign company subject to US securities law [would be] subject to the jurisdiction of the US courts…” will be a source of some comfort for directors of foreign companies worried about the reach of the Foreign Corrupt Practices Act.

Lest they be lulled into a false sense of security, directors of foreign based companies might do well to consider another case, SEC Straub (also known as the Magyar Telekom case) in which the court upheld the SEC’s jurisdiction arguments despite the fact that the relevant defendants were foreign citizens who claimed that the alleged violations were committed against them overseas.

In that case, the Judge concluded that the defendants were:

“… engaged in conduct that was designed to violate United States Securities regulations and was thus necessarily directed towards the United States if not principally directed there”.

All of this goes to show that the risk of Foreign Corrupt Practices Act jurisdiction being upheld against directors and officers of foreign companies with at least some connection in the United States can never safely be ignored.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
Categories: Directors & Officers

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