Sec. & Exch. Comm'n v. Straub

• Decision Date: 30 September 2016
• Docket Number: No. 11 Civ. 9645 (RJS),11 Civ. 9645 (RJS)
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ELEK STRAUB, TAMÁS MORVAI, AND ANDRÁS BALOGH, Defendants.
• Court: U.S. District Court — Southern District of New York

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ELEK STRAUB, TAMÁS MORVAI, AND ANDRÁS BALOGH, Defendants.

No. 11 Civ. 9645 (RJS)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

September 30, 2016

OPINION AND ORDER

RICHARD J. SULLIVAN, District Judge:

The Securities and Exchange Commission (the "SEC") brings this action against three former executives of Magyar Telekom, Plc. ("Magyar"), a Hungarian telecommunications company, alleging that Defendants (1) offered or paid bribes to foreign officials in violation of the anti-bribery provisions of the Foreign Corrupt Practices Act (the "FCPA"), 15 U.S.C. § 78dd-1, (2) aided and abetted violations of the same provisions, (3) aided and abetted Magyar's failure to maintain accurate books and records and sufficient internal controls in violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78m(b)(2)(A)-(B), (4) falsified Magyar's books and records in violation of Section 13(b)(5) of the Exchange Act, 15 U.S.C. § 78m(b)(5), and SEC Rule 13b2-1, 17 C.F.R. § 240.13b2-1, and (5) made false or misleading statements to an accountant or auditor in violation of SEC Rule 13b2-2, 17 C.F.R. § 240.13b2-2. Now before the Court are Defendants' motion for summary judgment on all of the SEC's claims and the SEC's cross motion for partial summary judgment. For the reasons that follow, the Court grants both motions in part and denies both in part.

I. BACKGROUND

This action centers on an alleged scheme in which the Defendants - Elek Straub, Tamás Morvai, and András Balogh - offered or paid bribes to Macedonian government officials in exchange for favorable treatment for Magyar's Macedonian subsidiary. At this stage in the litigation, the parties agree that, for purposes of their cross motions for summary judgment, there remain disputed issues of fact as to the alleged bribery scheme. Accordingly, neither the SEC nor Defendants seek summary judgment on the merits of the alleged violations of the FCPA's anti-bribery provisions. Rather, their motions focus on the issues of personal jurisdiction, use of an instrumentality of interstate commerce, the statute of limitations, and portions of the SEC's non-bribery claims. Nevertheless, to provide background and context for the motions at issue, the Court includes a brief summary of the allegations and claims made by the SEC.

A. The Alleged Bribery Scheme¹

During the period relevant to this action, Straub, Balogh, and Morvai were Hungarian citizens residing in Hungary who served, respectively, as CEO, Director of Central Strategic Organization, and Director of Business Development and Acquisitions at Magyar, a Hungarian telecommunications company then trading publicly on the New York Stock Exchange and a registered issuer with the SEC. (SEC 56.1 ¶¶ 1-4, 10-11.) The SEC claims that, from December 2004 through June 2006, Defendants engaged in a scheme to bribe public officials in Macedonia to mitigate the effects of that country's new telecommunications legislation - legislation that would allow Macedonian regulatory authorities to license a new mobile telephone business that would compete with MakTel, a telecommunications services provider in Macedonia jointly owned by Magyar and the Macedonian government. (Compl. ¶¶ 2, 14, 17, 19; SEC 56.1 ¶¶ 5-7.) In exchange for bribe payments, Macedonian government officials purportedly would adopt regulatory changes favorable to MakTel and prevent a new competitor from entering the market. (Compl. ¶ 2; SEC 56.1 ¶ 62.) In furtherance of this scheme, Magyar allegedly retained a Greek lobbying consultant to facilitate negotiations with the Macedonian officials on Magyar's behalf. (Compl. ¶ 19; SEC 56.1 ¶¶ 83-97.) The negotiations allegedly resulted in two secret agreements executed around the end of May 2005: (1) the "Protocol of Cooperation," signed by Straub and Balogh in late May 2005, which outlined the regulatory actions that would be taken for Magyar's benefit in exchange for its agreement to have MakTel pay a dividend and to have another subsidiary expand into Kosovo (Dodge Decl. Ex. 1; SEC 56.1 ¶¶ 57-58), and (2) the "Non Paper," which promised 19.5 million Euros in bribes to Macedonian officials (Dodge Decl. Ex. 2). The SEC alleges that only Magyar's Greek consultant kept signed copies of the Protocol; Magyar did not, and the Macedonian officials who signed the documents did not record them as official government documents as they wererequired to do under Macedonian law. (Compl. ¶¶ 21-22; SEC 56.1 ¶¶ 65-69.)

Defendants allegedly paid Macedonian officials 4.875 million Euros in bribes before the scheme came to an end in 2006. (Compl. ¶ 2.) According to the SEC, at Balogh's suggestion (id. ¶ 28), Defendants made these payments through "sham" consulting contracts that each of the Defendants authorized Magyar to enter into with its Greek consultant, under which Magyar was to pay the consultant "success fees" for work that was never performed, or for which the "success" criteria had been met before the contract was executed. (Id. ¶¶ 29, 32; SEC 56.1 ¶¶ 83-97.) The Greek consultant would then forward the payments on to Macedonian officials. (Compl. ¶ 29.)

As further explained below, the SEC alleges that Defendants were able to conceal the bribe scheme until 2006 by maintaining inaccurate books and records that did not reflect the true nature of the consultancy contracts (id. ¶ 4) or the existence of the Protocol of Cooperation (SEC 56.1 ¶¶ 68-71) by submitting false management representation letters to Magyar's external auditor, PricewaterhouseCoopers, ("PwC") (Compl. ¶¶ 38-45), and by submitting false Sarbanes-Oxley Act certifications in connection with Magyar's SEC filings (SEC 56.1 ¶¶ 24-25). The SEC contends that, "[h]ad Magyar Telekom's auditors known these facts, they would not have accepted the management representation letters and other representations provided by Straub" and would not have "provided an unqualified audit opinion to accompany Magyar Telekom's annual report on Form 20-F" filed on May 11, 2005. (Compl. ¶ 45; SEC 56.1 ¶¶ 72-82, 98.)

B. Representations to PwC and SEC Filings

Between 2004 and 2006, Magyar was an issuer of American depository receipts (securities traded on United States exchanges that represent a specified number of shares of a foreign company's stock) and made regular public filings with the SEC on its EDGAR website. (SEC 56.1 ¶¶ 11-13.) Among these was Magyar's annual report on Form 20-F for the fiscal year ended December 31, 2004, which Magyar filed on May 11, 2005 - well after the commencement of the alleged bribery scheme and only weeks before Defendants finalized the Protocol of Cooperation. Annual Report (Form 20-F) (May 11, 2005) (the "Annual Report"). Attached to the Annual Report was a certification by Straub pursuant to Section 302 of the Sarbanes-Oxley Act, dated May 11, 2005, which stated:

1. I have reviewed this annual report on Form 20-F of Magyar Telekom;

. . .

5. The [c]ompany's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the [c]ompany's auditors and the audit committee of [c]ompany's board of directors (or persons performing the equivalent function):

a.) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the [c]ompany's ability to record, process, summarize and report financial information; andb.) Any fraud, whether or not material, that involves management or other employees who have a significant role in the [c]ompany's internal control over financial reporting.

Id. Ex. 12.1, cited in SEC 56.1 ¶ 24.

The Annual Report also attached an audit report from PwC, dated February 21, 2005, in which PwC opined that the Annual Report presented Magyar's financial position and results "fairly, in all material respects." Annual Report at F-2. In addition, the Annual Report attached a consent form from PwC, dated May 11, 2005, in which PwC consented to Magyar's filing of PwC's audit report with its Annual Report. Id. Ex. 14.1. In the months between the conclusion of the reporting period (December 31, 2004) and the filing of the Annual Report and these attachments (May 11, 2005), Magyar's management submitted letters to PwC, in which Straub and Magyar's chief financial officer made representations to PwC in connection with PwC's audit. (See SEC 56.1 ¶¶ 16-23.) In the first of these letters, dated January 17, 2005, Straub represented that, as of January 14, 2005, "[w]e are not aware of any violations or possible violations of laws or regulations the effects of which should be considered for disclosure in financial statements," "[w]e have no knowledge of any fraud or suspected fraud affecting the company" involving "management" or "employees who have significant roles in internal control over financial reporting," and "[w]e have disclosed to you all significant facts relating to any frauds or suspected frauds known to us that may have affected [Magyar]." (Id. ¶ 17.) On February 11, February 28, April 27, and May 11, 2005, Straub and Magyar's CFO submitted additional letters to PwC that reaffirmed these representations as of each of those dates. (Id. ¶¶ 19, 20, 22, 23.)

Moreover, other Magyar officers made representations to Magyar's accounting department in support of the representation letter sent to PwC. Pertinent here, on April 27, 2005, in response to a request from Magyar's accounting department for a certification as part of a representation letter to PwC, Balogh sent an email containing his representation that, "[a]s of April 27, 2005, there are no reportable post balance sheet events related to my area of responsibility, i.e.[,] no material events occurring after December 31, 2014, having a material impact on my company's financial position." (Id. ¶¶ 34-35.) Similarly, on May 9, 2005,...