SEC v. Magyar Telekom, Plc. and Deutsche Telekom, AG (S.D.N.Y. 2011)
SEC v. Elek Straub, Andras Balogh, and Tamas Morvai (S.D.N.Y. 2011)
Case Details
- Case Name
- SEC v. Magyar Telekom, Plc. and Deutsche Telekom, AG (S.D.N.Y. 2011)
SEC v. Elek Straub, Andras Balogh, and Tamas Morvai (S.D.N.Y. 2011)
- Countries
- Macedonia, Montenegro
- Foreign Official
- Unnamed Macedonia and Montenegrin government officials.
- Date of Conduct
-
2005 to 2006
- Nature of Business
- Magyar Telekom, Plc. (“Magyar Telekom”) is the largest telecommunications company in Hungary, and during the relevant time its American Depository Receipts were registered with the SEC pursuant to Section 12(b) of the Exchange Act. Deutsche Telekom, AG (“Deutsche Telekom”), a private stock corporation organized under the laws of Germany, owns a controlling interest in Magyar Telekom. Elek Straub was the Chairman and Chief Executive Officer of Magyar Telekom from July 17, 1995, until December 5, 2006. Andras Balogh was the Director of Central Strategic Organization of Magyar Telekom from April 1, 2002 until August 8, 2006, and Tamas Morvai was the Director of Business Development and Acquisitions in the Central Strategic Organization of Magyar Telekom from July 2004 until July 10, 2006. All three individual defendants are Hungarian citizens.
- Influence to be Obtained
- The SEC alleged that Elek Straub, Andras Balogh, and Tamas Morvai (collectively, the “senior executives”) executed a scheme between 2005 and 2006 to bribe Macedonian government officials to obtain certain regulatory and business benefits. In particular, the senior executives allegedly retained a Greek “lobbying consultant” to negotiate a secret agreement with a senior government official, called the “Protocol of Cooperation,” pursuant to which the government would refrain from tendering a license to Magyar Telekom’s mobile phone competitor under a newly‑enacted law and would mitigate other adverse effects under the law for Magyar Telekom’s subsidiaries. In return, the government official was promised up to €10 million in bribes. The Protocol of Cooperation was allegedly approved by Straub and Balogh and, according to the complaint against the senior executives, by executives at Deutsche Telekom.
Balogh and Morvai allegedly entered a second Protocol of Cooperation, identical to the first, with a senior government official of Macedonia’s minority political party. In addition, the senior executives allegedly offered the minority political party the opportunity to designate the beneficiary of a valuable business opportunity in exchange for its support of the benefits sought by Magyar Telekom.
According to the SEC, as a result of these promises, the Macedonian government delayed the introduction of a mobile phone competitor until 2007 and unlawfully reduced the frequency fee tariffs imposed on Magyar Telekom’s subsidiaries. In exchange, the senior executives allegedly authorized Magyar Telekom’s subsidiaries to channel payments of €4.875 million to the officials through entities affiliated with the Greek intermediary. These payments were purportedly made under the guise of six bogus “consulting” and “marketing” contracts that were specifically designed to evade Magyar Telekom’s internal controls and were recorded as consulting expenses in Magyar Telekom’s books and records.
In 2005, Straub, Balogh, and Morvai allegedly executed a second corrupt scheme in which they authorized payments of €7.35 million to government officials in the Republic of Montenegro. The payments were intended to facilitate Magyar Telekom’s acquisition of super‑majority ownership of Telekom Crne Gore A.D. (“TCG”), a former state‑owned public telecommunications services provider in Montenegro. The Government of Montenegro sold its 51% stake to Magyar Telekom though a public tender process, but Magyar Telekom was unsuccessful in acquiring shares from the minority shareholders due to a budget set by Deutsche Telekom. Straub, Balogh, and Morvai offered bribes to Montenegrin officials to induce the government to contribute €0.30 per share to private shareholders, which enabled Magyar Telekom to acquire additional shares.
After the government facilitated the TCG deal, Straub and Balogh allegedly funneled €4.47 million to Montenegrin officials through “consulting” contracts between Magyar Telekom’s subsidiaries and entities in Mauritius and the Seychelles. Straub, Balogh, and Morvai also allegedly funneled €580,000 to the sister of a Montenegrin official through a sham consulting agreement with a purported New York‑based counter‑party and entered a fourth sham consulting agreement with a shell company purportedly based in England, under which it paid €2.3 million.
The SEC further alleged that Straub, Balogh, and Morvai lied to Magyar Telekom’s auditors by failing to disclose the purpose and existence of the contracts used to pay government officials. The false entries in Magyar Telekom’s books and records were consolidated into the books and records of Deutsche Telekom.
- Enforcement
- The SEC charged Magyar Telekom with violations of the anti‑bribery, books-and-records, and internal controls provisions of the FCPA. Magyar Telekom agreed to pay $31.2 million in disgorgement and prejudgment interest to settle the charges. Magyar Telekom also agreed to pay a $59.6 million criminal penalty as part of a deferred prosecution agreement with the DOJ.
Deutsche Telekom was also charged with books and records and internal controls violations. Deutsche Telekom settled the SEC’s charges, and as part of a non‑prosecution agreement with the Department of Justice agreed to pay a penalty of $4.36 million.
Straub, Balogh, and Morvai were charged with violating or aiding and abetting violations of the anti‑bribery, books and records, and internal controls provisions of the FCPA; knowingly circumvented internal controls and falsifying books and records; and making false statements to the company’s auditor. The SEC sought disgorgement and penalties and the imposition of permanent injunctions in its actions against Straub, Balogh, and Morvai.
On October 29, 2012, Straub, Balogh, and Morvai filed a motion to dismiss the civil charges, arguing that the court lacks personal jurisdiction over the defendants because they are foreign national defendants and their alleged conduct occurred wholly outside, and without a nexus to, the United States. Furthermore, the defendants argued that the SEC’s claims are time‑barred. Lastly, the defendants argued that the complaint failed to state the claims alleged because it did not adequately plead that the defendants corruptly made use of interstate commerce and that the intended payment recipients were “foreign officials” under the FCPA; it did not sufficiently allege facts to support the aiding and abetting claims; and the complaint did not meet the heightened pleading requirements under Rule 9 of the Federal Rules of Civil Procedure, which requires allegations of individual culpable conduct by each defendant.
On February 8, 2013, Judge Richard Sullivan of the Southern District of New York denied the defendants’ motion to dismiss the complaint in the action, finding that 1) the court had personal jurisdiction over the defendants, 2) the SEC’s claims were not time‑barred, and 3) the SEC had sufficiently stated its claims. On August 5, 2013, the Court also denied the defendants’ motion for leave to file an interlocutory appeal.
In March 2014, the SEC elected to drop its claims against Straub, Balogh, and Morvai for alleged bribes paid to Montenegrin officials in 2005. Citing the complexity and scope of the investigation, the SEC opted to only pursue a second set of claims involving bribes paid to Macdedonian officials.
In September 2016, the court partially granted the SEC’s and defendants’ motions for summary judgment. In so ruling, the court held that Commission’s case against the three executives could proceed on the grounds that participating in the preparation of false securities filings, which were later posted to the Commission’s U.S.-based EDGAR website, was sufficient to establish the Commission’s jurisdiction over the defendants. A trial in the case was scheduled to begin in May 2017, but Moravai entered into a Consent Agreement in February 2017 in which he agreed to pay a civil penalty of $60,000 to settle the charges against him. On the eve of trial, Straub and Balogh also consented to judgments against them on April 24, 2017, agreeing to pay civil penalties of $250,000 and $150,000, respectively.
- Amount of the Value
- €12,225,000.
- Amount of Business Related to Payment
- Not Stated
- Intermediary
- Shell companies; Third‑party intermediary.
- Citizenship of Parent Entity
- Hungary
- Total Sanction
- $ 40,211,491
- Reporting Requirements
- Yes (2 Years)
- Total Combined Monetary Sanction
- $ 95,171,491
Defendants
Magyar Telekom
- Citation
- SEC v. Magyar Telekom,Plc., et al., No. 11-cv-09646 (S.D.N.Y. 2011).;
- FCPA Statutory Provision
-
- Aiding and Abetting: Anti-Bribery
- Aiding and Abetting: Books-and-Records
- Aiding and Abetting: Internal Controls
- Other Statutory Provision
- None
- Disposition
- Complaint and Consent Order
- Defendant Jurisdictional Basis
- Issuer
- Defendant's Citizenship
- Hungary
- Individual Sanction
- $36,211,491.
Deutsche Telekom
- Citation
- SEC v. Magyar Telekom,Plc., et al., No. 11-cv-09646 (S.D.N.Y. 2011).;
- FCPA Statutory Provision
-
- Aiding and Abetting: Anti-Bribery
- Aiding and Abetting: Books-and-Records
- Aiding and Abetting: Internal Controls
- Other Statutory Provision
- None
- Disposition
- Complaint and Consent Order
- Defendant Jurisdictional Basis
- Agent of Issuer
- Defendant's Citizenship
- Germany
- Individual Sanction
- $4,000,000.
Elek Straub
- Citation
- SEC v. Straub,et al., No. 11-cv-09645 (S.D.N.Y. 2011).
- FCPA Statutory Provision
-
- Aiding and Abetting: Anti-Bribery
- Aiding and Abetting: Books-and-Records
- Aiding and Abetting: Internal Controls
- Other Statutory Provision
- False Statements to Accountant or Auditor (Exchange Act Rule 13b2-2).
- Disposition
- Complaint and Consent Order
- Defendant Jurisdictional Basis
- Agent of Issuer
- Defendant's Citizenship
- Hungary
- Individual Sanction
- $250,000.
Andras Balogh
- Citation
- SEC v. Straub,et al., No. 11-cv-09645 (S.D.N.Y. 2011).
- FCPA Statutory Provision
-
- Aiding and Abetting: Anti-Bribery
- Aiding and Abetting: Books-and-Records
- Aiding and Abetting: Internal Controls
- Other Statutory Provision
- False Statements to Accountant or Auditor (Exchange Act Rule 13b2-2).
- Disposition
- Complaint and Consent Order
- Defendant Jurisdictional Basis
- Agent of Issuer
- Defendant's Citizenship
- Hungary
- Individual Sanction
- $150,000.
Tamas Morvai
- Citation
- SEC v. Straub,et al., No. 11-cv-09645 (S.D.N.Y. 2011).
- FCPA Statutory Provision
-
- Aiding and Abetting: Anti-Bribery
- Aiding and Abetting: Books-and-Records
- Aiding and Abetting: Internal Controls
- Other Statutory Provision
- False Statements to Accountant or Auditor (Exchange Act Rule 13b2-2).
- Disposition
- Complaint and Consent Order
- Defendant Jurisdictional Basis
- Agent of Issuer
- Defendant's Citizenship
- Hungary
- Individual Sanction
- $60,000.
