Reminiscent of the Supreme Court’s decision in Morrisson v. National Australia Bank, we are disappointed by the Southern District of New York’s recent decision narrowly reading the Securities Exchange Commission’s (S.E.C.) reach over foreign individual defendants. The suit alleged the former head of Siemens SA Argentina, Harold Steffen, stood at the center of a $100 million bribery scandal by Siemens AG to secure an Argentinian contract valued at $1 billion. In dismissing the case against Steffen, the Court found that Steffen lacked sufficient contact with the U.S. to prosecute him within the U.S. court system.

The Scandal

According to court documents, 11 years ago senior officials at Siemens AG funneled $100 million in bribes to Argentina. Steffen, who served as the CEO of Siemens SA Argentina, allegedly built relationships that made the scheme possible, and encouraged and persuaded others to offer the bribes.

Initially, the bribes worked. Siemens and its Argentinian affiliate were awarded a $1 billion dollar project to create national identity cards in 1998. The contract was suspended in 1999 because of political unrest within Argentina, and in 2000 Steffen and another Siemens official attempted to salvage the contract when they began renegotiating with Argentina. During the renegotiation process, Siemens allegedly employed a series of shell companies to funnel a hefty $27 million in bribes to the new administration in Argentina. Despite Siemens’ efforts, the contract was cancelled.

Boldly, in 2002, Siemens initiated arbitration proceedings to recover lost profits from the cancelled contract – a contract that was allegedly obtained by illegal bribes and that Siemens was attempting to salvage with additional bribes. The arbitration proceeding resulted in an award of $217 million for Siemens. Not surprisingly, the validity of the arbitration award is questionable because of Siemens’ possible efforts to suppress evidence of the bribery scandal.

Ultimately, the network of bribes and illegal payments was uncovered by regulators in several jurisdictions. Criminal and civil cases have been filed against the company and numerous executives. In 2008, Siemens paid $1.6 billion to settle related cases with U.S. and German authorities.

The Case against Steffen

In March 2001, Siemens became a U.S. issuer subject to U.S. securities law, including the Foreign Corrupt Practices Act (“FCPA”). The Foreign Corrupt Practices Act makes it illegal to bribe foreign government officials in order to obtain or retain business. The FCPA applies not only to American citizens and corporations, but also to foreign businesses listed on the U.S. Stock Exchange and those conducting business from within the United States.

In 2011, the Securities and Exchange Commission (S.E.C.) sued Steffen and six others in U.S. Federal Court at the Southern District of New York. The case was S.E.C. v. Uriel Shared, et al., Case No. 11-cv-9073 (S.D.N.Y.). Steffen recently won dismissal of the case against him on Feb. 19, 2013. The Court held that Steffen did not have sufficient ties to the U.S. and that his poor understanding of English, advanced age and the forum’s “diminished interest in adjudicating the matter” all weighed against finding that the U.S. has personal jurisdiction over Steffen.

In concluding that the U.S. lacked jurisdiction over Steffen, the Court looked at what contact Steffen had with the U.S. Despite allegations that some of the bribes went through intermediary U.S. banks, that a call in furtherance of the conspiracy took place in the U.S., and that certain meetings regarding payment of bribes took place in New York, the court found that Steffen himself was never physically present within the U.S. and that his conduct did not create a connection to the U.S. that was sufficient to haul him into our courts for prosecution under the FCPA.

The Court acknowledged the S.E.C.’s position that the relationships Steffen built while he served as CEO of Siemens Argentina were at the core of the bribery scandal. Nevertheless, the Court discounted Steffen’s role, reasoning that the bribes – which Steffen “urged” and “pressured” others to make – were made after Steffen left his role as CEO and that at the time the bribes were made Steffen was not in a position of authority over the people who made the bribes. The Court also pointed out that Steffen never signed an S.E.C. filing.

Does This Mean Executives Living Outside the U.S.Cannot be Held Liable For FCPA Violations?

No. It does not mean that all executives living outside the U.S. who violate the FCPA will get a pass. It does, however, mean that the Court has chipped away at the category of executives that may be called upon to respond for bribes in U.S. courts. Like the Supreme Court’s decision in Morrison v. National Australia Bank, this court has narrowed the category of wrongdoers who may be forced to appear in U.S. courts to respond to injury they cause to U.S. investors. It is not a big leap from this decision to an argument that those involved in the bribery must actually sign an S.E.C. filing, be present within the borders of the U.S. or have significant physical connections to the U.S. in order to be hauled into U.S. court.

Because the court agreed that Steffen cannot be held accountable for securities law violations within the U.S., U.S. investors who relied upon Siemens’ S.E.C. filings as truthful statements cannot collect from Steffen. It does not matter that Steffen may have urged, encouraged, or pressured others to engage in the illegal conduct.

Conclusion

For U.S. investors of all types, attention to the limits of federal securities laws is exceptionally important as part of any risk assessment. We cannot assume that regulators will be able to offer a remedy. The case against Steffen painfully demonstrates that courts are willing to limit the reach of not just private investors, but regulators as well.