Harry Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Richard L. Cassin Editor at Large

Elizabeth K. Spahn Editor Emeritus 

Cody Worthington Contributing Editor

Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

Aarti Maharaj Contributing Editor

FCPA Blog Daily News


Russian Graft: The Video

Hermitage Capital Management, once the largest foreign investor in the Russian stock market, has accused police officials, bankers, judges and lawyers of working with gangsters to steal $230 million from the company and using its documents to obtain another $230 million from the Russian treasury through fraudulent tax refunds. Hermitage's latest complaint, according to the Washington Post, accused "several bureaucrats in two Moscow tax agencies of involvement in the crimes and lists more than 30 suspicious tax refunds issued by the agencies between 2006 and 2008, as well as the account numbers of the recipients."

The paper said criminals seized control of Hermitage's Russian assets after its U.S.-born chief executive, William F. Browder, was expelled from the country in 2005. The Interior Ministry said it acted against Hermitage because of financial crimes and wants to charge Browder with tax violations.

Browder, meanwhile, has posted a video on YouTube in English and Russian that accuses authorities of complicity and active involvement in the theft and fraud. In the video, he says officials raided the Russian offices of Hermitage and those of its Moscow lawyers on a pretext and seized all of the company's official documents, seals and accounting records. The items were then used by convicted criminals and others to gain control over the company's assets and later pull off the tax fraud, Browder said.

A story posted by Hermitage (here) described Browder as an activist fund manager who conducted a campaign that "exposed widespread theft and corruption at Gazprom," Russia's biggest company that was formed from the former Ministry of Gas Industry of the Soviet Union. Browder was unable to renew his visa despite help from Jack Straw, the former British Foreign Secretary, and the European Commission. The report also said:

Mr. Browder met Dmitry Medvedev . . . at the World Economic Forum in Davos in January 2007 and requested his assistance in renewing his visa. A month later, Hermitage received a call from Lieutenant Colonel Kuznetsov [from the Russian Interior Ministry], indicating that he was aware of Mr. Browder's visa difficulty. According to Hermitage, the Interior Ministry officer sought a meeting at Hermitage offices. He said: "My answer will depend upon how you behave, what you provide ... the sooner we meet and you provide what is necessary, the sooner your problems will disappear."

According to its website, Hermitage Capital Management was founded in 1996 by William Browder and the late private-banker extraordinaire, Edmond Safra. Hermitage, headquartered in London, says its clients include "international financial institutions, corporations, pension funds, public endowments, investment advisors, family offices and high net-worth individuals."

President Medvedev, 45, has often promised to fight corruption. Russia ranks a lowly 147th on the Corruption Perception Index, tied with Bangladesh, Kenya, and Syria. Like his American counterpart, Medvedev is a former law professor. His Kremlin bio says he graduated from the Faculty of Law at Leningrad State University in 1987 and completed his PhD there. He then taught law as an associate professor at St. Petersburg State University from 1990 until 1999.


Halliburton May Face U.K. Charges

Halliburton disclosed Friday in its latest SEC filing that the U.K.'s Serious Fraud Office (SFO) may bring civil claims or criminal charges against it under various British laws. In February this year, Halliburton and its former subsidiary, Kellogg Brown & Root LLC, admitted paying Nigerian officials at least $182 million in bribes for contracts awarded between 1995 and 2004 to build liquefied natural gas facilities on Bonny Island, Nigeria. The companies agreed with the U.S. Justice Department to pay a $402 million criminal fine, with Halliburton paying $382 million of that amount. Halliburton also agreed with the Securities and Exchange Commission to be jointly liable with KBR to pay $177 million in disgorgement. See our post here.

In Friday's disclosure, Halliburton said the SFO is focused on M.W. Kellogg Limited (MWKL), a U.K. subsidiary of KBR. The DOJ's criminal information had said KBR tried to shield itself from the FCPA by using MWKL to hold ownership in TSKJ, a four-party joint venture that acted as the main contractor on the Bonny Island project. TSKJ's other members were Technip SA of France, Snamprogetti Netherlands B.V. (a subsidiary of Saipem SpA of Italy), and JGC Corporation of Japan. Each partner held about 25% of the venture.

Halliburton said a finding that it broke British laws could "result in fines, restitution and confiscation of revenues, among other penalties." The amount of final civil or criminal penalties, the company said, will depend on whether MWKL knew about and authorized any of the illegal payments, how much revenue resulted from the bribes, and "the level of cooperation provided to the SFO during the investigations."

The company said its role in the Bonny Island project is also being investigated by France, Nigeria, and Switzerland and could also result in third-party claims.

In February this year, a federal grand jury sitting in Houston indicted Jeffrey Tesler, 60, of London, England, and Wojciech Chodan, 71, of Maidenhead, England, for violating the FCPA. The two U.K. citizens allegedly helped KBR bribe Nigerian officials. The Justice Department unsealed the indictments after Tesler's March 5 arrest by British police acting at the request of U.S. authorities. Chodan hasn't been arrested but faces an outstanding U.S. warrant. The DOJ said it will try to extradite both men to the U.S. to stand trial.

Tesler, a lawyer in London, and Chodan, a former employee and consultant of MWKL, were charged with one count of conspiracy to violate and ten counts of violating the FCPA. They face up to 55 years in prison if convicted on all counts. The indictment also seeks forfeiture from them of more than $132 million -- the amount they allegedly paid to Nigerian officials as bribes. See our post here.

In the U.K., the SFO hasn't indicated whether it plans to take action against Tesler and Chodan or other individuals involved in the case. Tesler was identified in KBR's 2007 annual report. British and French authorities investigated him two years ago but didn't file any charges.

In September 2008, Albert “Jack” Stanley, 65, a former chairman and CEO of KBR, pleaded guilty to a two-count criminal information that charged him him with conspiracy to violate the FCPA and conspiracy to commit mail and wire fraud. He admitted that from 1995 to 2004, he helped TSKJ bribe government officials in Nigeria. Stanley was sentenced to seven years in prison and a restitution payment of $10.8 million. The sentence is subject to review based on his cooperation. See our post here.

Jack Stanley was a senior vice president of Dresser Industries, Inc. when it merged into Halliburton in September 1998. Dresser's wholly-owned construction subsidiary, Kellogg, was combined with Halliburton's construction subsidiary, Brown & Root, Inc., to form KBR. In November 2006, Halliburton spun off KBR, which became a separate publicly-traded company.

Under their agreement for KBR's spin off, Halliburton is obligated to pay most of KBR's fines and other penalties for actual or alleged violations of the FCPA and similar foreign laws committed before November 2006. Halliburton has said it gave the indemnity "[t]o enhance KBR's financial stability and solvency, making possible the separation of KBR . . . ."

KBR, Inc. trades on the NYSE under the symbol KBR.

Halliburton Company trades on the NYSE under the symbol HAL.

Halliburton Company's Form 10-Q filed October 23, 2009 (for the period ending September 30, 2009) can be downloaded here.

Read all our posts about Halliburton here.


Trees Fall To Graft

In Malaysia this week, four forestry department officials, including the director, an officer and two rangers, were arrested for taking a $30,000 bribe. In exchange, they allegedly awarded illegal logging concessions. Malaysia has prized hardwoods growing in protected areas in and around its rain forests. The arrests came after an investigation by the Malaysian Anti-Corruption Commission. According to the Malaysia Star (here), more than $100,000 in cash was seized from the house of the forestry department director, who "is said to be a millionaire." The anti-corruption team is now investigating the sources of his wealth. He and the other suspects are being held "to assist in investigations." So far this year, Malaysian authorities have made 23 arrests in 21 cases of illegal logging.

* * *
The NGO Global Witness has investigated illegal logging in several Southeast Asian countries. For example, in late 2006, its investigators posed as buyers at flooring companies. Thirteen out of 14 lumber suppliers they talked to in China said they could obtain timber from Burma across the land border despite import restrictions. Chinese companies export timber throughout the world, including to Europe and America. Global Witness said some U.S.-based companies still advertise Burmese wood flooring on their websites even though the Lacey Act now bans commerce in illegally obtained timber and wood products.

"This is just part of a wider problem," Global Witness said. "Half of China's timber imports from all countries are probably illegal and China accounts for roughly a quarter of all illegal timber being traded internationally. . . . This has a knock-on effect for other countries. For example, the U.K. imports more illegal timber than any other EU country because it buys so much from China."

* * *
The United States has banned several Cambodian officials from entering the country because of their complicity in illegal logging. The 2008 Consolidated Appropriations Act included a requirement that the U.S. Secretary of State keep a running list of foreign government officials and their family members who have been involved in corruption relating to the extraction of natural resources in their countries. The law requires the State Department to designate individuals on the list as ineligible for United States visas under Presidential Proclamation 7750 (see our post here). In June 2007, Global Witness published details about corrupt ties among Cambodian timber barons and Prime Minister Hun Sen, his wife, and other senior officials.

* * *
According to Transparency International (here), illegal cutting represents as much as 80 percent of the total lumber production in some countries. "Estimates suggest that almost $2.5 billion worth of stolen timber is traded between East and South Asian countries each year. Around the world, annual losses from illegal logging on public lands have been estimated at over $10 billion by the World Bank."

* * *
Back in Malaysia, the government announced this week that the Malaysian Anti-Corruption Commission Academy will receive training assistance from Interpol. The head of the Malaysian commission said, “Corruption is no longer a local matter to contain. It has become a global issue. With globalization and the world now being borderless where every country is doing business with every other country, unchecked corruption can pose a threat to integrity in all countries, thus giving a new meaning to the term cross-border corruption." Interpol is the world's largest international police organization, with 188 member countries. Malaysia ranks 47th on the Corruption Perception Index, tied with Cape Verde, Costa Rica, Hungary, and Jordan.


How BAE Got Caught

Investigative reporters may be disappearing from newsrooms everywhere, but they still have an important role to play in holding institutions and people accountable for overseas bribery. Rob Evans of the U.K. Guardian contributed an essay to TI's Global Corruption Report 2009 here. It's about how he and David Leigh broke the BAE story. Their investigation wasn't quick or easy, and not many news organizations these days would have let the story play out the way the Guardian did. But the paper supported its reporters and with time and luck (which came in the form of a couple of well-placed whistleblowers) one of Britain's biggest commercial scandals made it into public view.

Here's part of what Rob Evans had to say:

. . . My experience of working with David Leigh on the Guardian investigation that led to the exposure of the BAE Systems scandal in the United Kingdom is illustrative of the challenges that journalists face in investigating corruption. The articles we wrote prompted the Serious Fraud Office (SFO) to launch an investigation into allegations that BAE Systems, the United Kingdom's biggest arms company, had paid bribes to win contracts from Saudi Arabia and other governments. Tony Blair's government eventually stepped in and stopped the SFO from completing its investigation into the allegations in December 2006. . . .

The investigation into BAE System's payments began in late 2002. Over three days in June 2003 the Guardian published articles into alleged bribery in the Czech Republic, India, Qatar and South Africa. A few weeks later whistleblower Edward Cunningham contacted the Guardian with new allegations of a slush fund that BAE Systems was using to bribe and "sweeten" Saudi officials connected to a huge arms contract. Cunningham spoke out because he was appalled by what he had seen. Those articles in September 2003 reported that BAE Systems was allegedly providing prostitutes, sports, cars, yachts, first-class plane tickets and other inducements. . .

During our investigation we faced a number of challenges. One of the most acute was the difficulty in penetrating the banking system to find out how BAE Systems had made its allegedly corrupt payments. The money flowed from the United Kingdom to the tax haven of the British Virgin Islands to Switzerland and onwards - to the Czech Republic, Romania, Qatar, Tanzania, South Africa and Chile. . . . As the number of investigations expanded around the world, so did the leaks, and slowly a picture of the payments began to emerge. We were working with reporters in other counties who were better placed to find out what was going on in the investigations in their countries and share information with us.

. . . Journalists aiming to expose corruption also need to be persistent. They need time to dig around -- to go and see people who may have information, to look through archives, read long reports to retrieve vital pieces of information buried deep within them, and so forth. Often reporters are prevented from doing this, however, as the media owners are far more interested in celebrity stories, or their next set of profits. For many editors, exposing the dry details of how improper payments have been laundered through bank accounts is, quite simply, less exciting than Britney Spears' latest antics. Many people believe that reporters are now being given less time to investigate stories over an extended period. This is a problem that afflicts reporters in developed countries, and it is even more so for journalists in developing countries. . . .

Read all our posts about BAE here.


Mandarin Monkey Business

In Dongguan, a Chinese city on the Pearl River Delta, graft busters are using a powerful weapon against corrupt public officials: their mistresses. During a recent period, 32 out of 38 corruption cases handled by the city's prosecutors were based on complaints or confessions from girlfriends of married office-holders. "At least 80 percent of corrupt officials exposed in Dongguan had mistresses who gave us important information that we did not possess," said Zhou Yuefeng, deputy director of the Dongguan anti-graft bureau.

"We welcome tip-offs and we will protect and reward informers," Zhou said.

According to a local press report, the Chinese public-servants regulation that went into effect in 2007 "stipulates that any official must be dismissed if found to have a mistress." But the law hasn't deterred the amorous bureaucrats.

"Ninety-five percent of the corrupt officials have a mistress or more," said Wang Zhang, head of the discipline commission of Zhengzhou, Henan Province. After analyzing more than 50 cases, he put the women "into seven categories based on what they wanted from the officials -- love, power or money." His investigators are now using the categories to tailor interrogation techniques.

Wang clarified that mistresses don't cause corruption but are a symptom of the abuse of public office. He advised all officials "to stay home with their families, reading books and working on their computers. Of course, a harmonious family can help men stay away from other women," he said.

Apparently the practice has even spread to tax collectors and overworked doctors. Back in Dongguan, a spokesperson for the prosecutor's office said, "Our focus this year will be on the taxation and medical departments. However, that doesn't mean we won't be looking at corruption in other areas."


Goodbye To Waivers? Not So Fast . . .

Companies facing criminal indictment for violating the Foreign Corrupt Practices Act and other federal laws have a sure-fire way to help themselves. They can cooperate. Those found to have “fully cooperated” under the Federal Sentencing Guidelines are entitled to reduced penalties; most of them escape with a deferred or non-prosecution agreement. How does the government measure cooperation? One way has been to look at whether the target agreed to spill the beans on employees by waiving the attorney-client privilege.

The Justice Department claims it has never forcibly stripped an organization of the privilege. That's technically true. As a matter of law only the holder of the privilege can give it up. But it's also true that organizations have routinely waived the privilege because of various inducements. Translation: the DOJ made them offers they couldn't refuse.

Cindy A. Schipani, above, a professor from the University of Michigan's business school (B.A. Michigan State, J.D. University of Chicago) has written an excellent paper (scholarly but readable) on the topic. It's called "The Future of the Attorney-Client Privilege in Corporate Criminal Investigations" (available from SSRN here). Ellen Podgor cited it on the White Collar Crime Prof Blog here.

Prof Schipani traces the history of the waiver as a measure of organizational cooperation. She starts from the Holder Memorandum in 1999 by then-Deputy Attorney General (now AG) Eric Holder, followed by the Thompson Memorandum (2003), the McCallum Memorandum (2005) and the McNulty Memorandum (2006). Each encouraged waiver of the privilege by linking it to some extent to reduced penalties and deferred or non-prosecution agreements. And under the various DOJ guidelines, refusing to waive the privilege became implicitly linked with the threat of indictment, maximum penalties, and corporate ruin.

How serious that threat was became clear, Prof Schipani says, in May 2002. Arthur Andersen LLP was charged with obstruction of justice for shredding documents related to its audit of Enron. The jury convicted Andersen and the Fifth Circuit affirmed. Prof Schipani says,

The indictment and subsequent conviction . . . devastated the firm’s reputation. Moreover, because the SEC does not allow convicted felons to audit public companies, the firm agreed to surrender its Certified Public Accounting licenses and its right to practice before the SEC, which effectively put what was once a “big five” accounting firm out of the business. Numerous Andersen clients deserted the firm, as did many partners and personnel, and Andersen was obliged to sell off profitable components of its business. In the aftermath, nearly 28,000 U.S. Andersen employees lost their jobs.
Although the Supreme Court reversed Andersen’s conviction in 2005 -- holding that the trial court’s jury instruction was faulty -- the firm was already gone.

By 2006, Prof Schipani says, most in-house and outside counsel were convinced that a "culture of waiver" permeated the DOJ and SEC. And they were right. "Nearly 80% of the [deferred or non-prosecution agreements] entered into before June, 2006 reportedly include waiver of privilege," she says. "One would imagine the percentage to be significantly lower if corporations believed waiver to be optional and inconsequential."

In August 2008, under heavy flak, the DOJ issued the so-called 2008 Guidelines. They purported to restore the privilege by removing consideration of a waiver from the evaluation of an organization's cooperation. Did anything change?

Prof Schipani says it's still too early to tell. But, she warns,

The 2008 Guidelines remain ambiguous regarding whether disclosure of internal investigation reports or interview memoranda prepared by attorneys may be required in order for a firm to receive credit for cooperation. If a corporation is deemed to have failed to timely disclose the relevant facts “for whatever reasons,” the guidelines instruct prosecutors not to give cooperation credit.
Her conclusion: Even if the DOJ does not make official demands for waivers, "corporations under governmental investigations may still feel pressure to voluntarily waive the privilege, particularly relating to factual work product."

View the "2008 Guidelines" in the U.S. Attorney’s Manual 9-28.000 / Principles of Federal Prosecution of Business Organizations here and USAM 9-28.710 on attorney-client and work-product protections here.

Download the McNulty Memo here and the Thompson Memo here.

Read prior posts about the attorney-client privilege here.


The Story Of Graft

Transparency International's Global Corruption Report 2009 is here. At 462 pages, it may be the most complete account of global corruption and anti-bribery efforts ever assembled. Reference books like this are both important and fun; you don't need to read from front to back, first page to last. Dive in anywhere -- at the country reports, narrative chapters, footnotes, tables, sidebars, illustrations or research, even the index. It's all worthwhile. Here, from a couple of random dives, is what we mean:

  • The Foreign Corrupt Practices Act "established the first comprehensive prohibition by any country against bribing foreign government officials for business purposes. The FCPA bans the use of bribery to obtain or retain business or to secure any other undue business advantage, and imposes strict record-keeping requirements for public companies. While enforcement in the early years was limited, it has increased markedly since the United States ratified the OECD Convention in 1998. From 2003 to 2007 the average number of new FCPA enforcement actions nearly tripled compared to the preceding five-year period."
  • "In France, Germany, the United Kingdom and the United States, all major foreign investors and exporters and more than 80 per cent of surveyed executives admitted to ‘not being familiar at all’ with one of the most important legal frameworks in global business, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Only a third or so of companies surveyed by other polls in the construction and power sector -- industries with high corruption risks -- had training programs for executives on how to avoid corruption."
  • "Almost 90 per cent of the top 200 businesses worldwide have adopted business codes, but fewer than half report that they monitor compliance. Although more than 3,000 companies have published CSR [corporate social responsibility] reports in 2007, fewer than a third were verified through independent assurance."
  • Enforcement of foreign bribery cases has increased in France, Germany and the United States. "[T]here is still little or no enforcement in . . . Canada, Japan and the United Kingdom." In 2008, France brought 19 enforcement actions and had 16 ongoing investigations; Japan brought one case and had an unknown number of ongoing investigations.
  • Globally, nearly forty percent of polled business executives have been asked to pay a bribe when dealing with public institutions. Half estimated that corruption raised project costs by at least 10 percent. Twenty percent claimed to have lost business because of bribes by a competitor. More than a third felt that corruption is getting worse.
  • "In developing and transition countries alone, corrupt politicians and government officials receive bribes believed to total between US$20 and 40 billion annually – the equivalent of some 20 to 40 per cent of official development assistance."
  • "When corruption allows reckless companies to disregard the law, the consequences range from water shortages in Spain, exploitative work conditions in China or illegal logging in Indonesia to unsafe medicines in Nigeria and poorly constructed buildings in Turkey that collapse with deadly consequences. Even facilitation payments -- the many, often small payments made by companies to ‘get things done’ -- are found to be harmful, as they are funneled up through the system and help nurture and sustain corrupt bureaucracies, political parties and governments."
Transparency International's Global Corruption Report 2009: Corruption and the Private Sector can be downloaded here.

Disclosure: We acted as a peer reviewer for this publication.


Who Owns The War?

We've talked before about corruption in Afghanistan. In debating what to do there, some argue that Iraq was just as corrupt, yet the surge still worked. Was Iraq just as corrupt? It looks like it. Both countries are ranked near the bottom of the Corruption Perception Index: Iraq at 178 and Afghanistan at 176. With the inexact art of calibrating corruption, that's a dead heat. But for American policy makers, there's a world of difference between the two countries.

Iraq always had local leaders who were incorruptible. They were fighting for their tribes -- historically stable and cohesive groups -- and were unwavering. Their objective was to protect their tribal land and people from the insurgents, and they were willing to do whatever it took. They led the awakening movements, first in Anbar Province, then across the country. Official history says the awakening started around 2005; ask soldiers who were there, however, and they'll tell you it started earlier. It just took time before U.S. commanders and politicians gave the tribal leaders any credit.

But in Afghanistan, soldiers say, there's nobody equivalent to the Iraqi sheiks. Strong local leaders with a stake in peace don't exist. So America's choice of partners comes down to the politicians, military and police, and most aren't reliable from one day to the next.

* * *
Based on what Thomas Friedman had to say this week about the way the sleaze works, it's hard to see how a hearts-and-minds campaign can be successful:

Talking to Afghanistan experts in Kabul, Washington and Berlin, a picture is emerging: The Karzai government has a lot in common with a Mafia family. Where a “normal” government raises revenues from the people — in the form of taxes — and then disperses them to its local and regional institutions in the form of budgetary allocations or patronage, this Afghan government operates in the reverse. The money flows upward from the countryside in the form of payments for offices purchased or “gifts” from cronies.
What flows from Kabul, the experts say, is permission for unfettered extraction, protection in case of prosecution and punishment in case the official opposes the system or gets out of line. In “Karzai World,” it appears, slots are either sold (to people who buy them in order to make a profit) or granted to cronies, or are given away to buy off rivals. . . .
. . . Gen. Stanley McChrystal, our top commander there who is asking for thousands more troops, is not wrong when he says a lot of bad things would flow from losing Afghanistan to the Taliban. But I keep asking myself: How do we succeed with such a tainted government as our partner?

* * *
In a preview of the October 18, 2009 New York Times Magazine, Dexter Filkins reports from the battlefield (here). The article brings to mind David Halberstam's spot-on accounts from Vietnam in the 1960s. Filkins' focus is Gen. McChrystal and the soldiers on the ground. But he explores the whole idea of waging a counter-insurgency in a place where we don't have local partners.

Success takes time, but how much time does Stanley McChrystal have? The war in Afghanistan is now in its ninth year. The Taliban, measured by the number of their attacks, are stronger than at any time since the Americans toppled their government at the end of 2001. American soldiers and Marines are dying at a faster rate than ever before. Polls in the United States show that opposition to the war is growing steadily.
Worse yet, for all of America’s time in Afghanistan — for all the money and all the blood — the lack of accomplishment is manifest wherever you go. In Garmsir, there is nothing remotely resembling a modern state that could take over if America and its NATO allies left. Tour the country with a general, and you will see very quickly how vast and forbidding this country is and how paltry the effort has been.

And finally, there is the government in Kabul. President Hamid Karzai, once the darling of the West, rose to the top of nationwide elections in August on what appears to be a tide of fraud. The Americans and their NATO allies are confronting the possibility that the government they are supporting, building and defending is a rotten shell. . . .


Clueless In Quito

Our assigned subject is bribery abroad. So naturally some have wondered why we haven't talked about Chevron's legal tangle in Ecuador and accusations it might have violated the Foreign Corrupt Practices Act there. A couple of readers -- apparently from Ecuador -- even sent us what they said was evidence against the American oil company. It wasn't. We only found news stories from local papers and a copy of our own post about Chevron's $30 million oil-for-food settlement (here).

The reason we haven't talked about the Ecuador case is because we have no idea what it's really about. Like a gargantuan version of Jon & Kate, the back-and-forth charges have left us completely confused -- too addled to have an opinion.

As for facts, here's what we know, or what we think we know:

The case started 16 years ago. A group of Amazon residents alleged that Texaco, which Chevron acquired in 2001, contaminated large areas of rain forest before ending its operations and leaving the country. In a civil suit in the local courts, Chevron is facing damages that could reach $27 billion. The FCPA allegations (coming from sources in Ecuador, including the attorney general) involve an alleged plot by the oil company to bribe the country's leaders and a judge hearing the case.

Chevron says it's the Ecuador government and courts that haven't been honest. As evidence, it released tapes in August that appeared to implicate politicians and the judge in a plot to take $3 million in kickbacks from clean-up contractors if Chevron is found liable. Just how and why the tapes were made and given to Chevron is a mystery. The New York Times quoted Steven Donziger, a lawyer representing the Ecuadorans suing Chevron, as saying: “I suspect this is a Chevron sting operation; there needs to be an investigation into Chevron’s role in this as much as the judge’s. I find it awfully odd that these individuals would secretly film meetings using James Bond devices like a spy watch and a spy pen."

One of the men who made the tapes -- yes, using "watches and pens implanted with bugging devices" -- Diego Borja, was a Chevron contractor providing logistics services. The company said it didn't pay him for the tapes but gave him money to leave Ecuador with his family because of safety concerns. “Chevron had no involvement in the videotaping,” Kent Robertson, a company spokesman, told the New York Times. “Chevron referred this matter to the U.S. Department of Justice and Ecuador’s prosecutor general after making every reasonable effort to verify the evidence that was presented.”

Professor Ralph Steinhardt at George Washington University Law School -- a heavyweight expert in international civil litigation -- told the Times: “For someone who is trying to figure out what you can learn from this, it’s not as though it yields a rational narrative. In trying to appreciate the complexities of this case, you need to have the skills of a poker player rather than the skills of a lawyer.”

OK then. We've often displayed to ourself and others a lack of poker-playing skills. So for now at least, we fold.


Bourke Denied New Trial

Frederic Bourke's attempt to overturn his conviction and obtain a new trial has failed. He was found guilty in July of conspiring to violate the Foreign Corrupt Practices Act under 18 U.S.C. § 371 and making false statements in violation of 18 U.S.C. § 1001. He faces up to five years in prison for each count. Sentencing is now scheduled for November 10 (see our post here).

In his motion for acquittal or a new trial, Bourke argued, among other things, that the jury instructions were wrong in a number of ways, including the mens rea element, the local law defense, a good-faith defense, and his possible conviction based on negligent acts.

During his trial, prosecutors said Bourke had "stuck his head in the sand." The jury thought so too. As the foreman said after the verdict: "It was Kozeny, it was Azerbaijan, it was a foreign country. We thought [Bourke] knew [about the bribery] and definitely could have known. He’s an investor. It’s his job to know.”

In his post-trial motion, Bourke argued that Judge Shira Scheindlin made a mistake by allowing the jury to convict him of conspiracy if all he did was stick his head in the sand. She issued an instruction on the theory of conscious avoidance even though the government's evidence of his actual knowledge was thin, Bourke said. That created a strong possibility the jury was mislead into believing it could convict him simply because he had "not tried hard enough to learn the truth."

But Judge Scheindlin said her instruction was correct. In fact the jury could convict him if he stuck his head in the sand to avoid knowing facts he should have known. The test was not Bourke's actual knowledge of Kozeny's bribes, but his efforts to avoid acquiring that actual knowledge. "The conscious avoidance doctrine provides that a defendant's knowledge of a fact required to prove the defendant's guilt may be found when the jury is persuaded that the defendant consciously avoided learning that fact while aware of high probability of its existence," she said, quoting United States v. Svoboda, 347 F.3d 471, 477 (2d Cir. 2003).

She explained further why there's no head-in-the-sand defense under the FCPA's antibribery provisions, or a conspiracy charge based on that part of the FCPA:

"In addition, the FCPA explicitly permits a finding of knowledge on a conscious avoidance theory. It provides that '[w]hen knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.' 15 U.S.C. § 78dd-2(h)(3)(B). Because the defendant must be found to possess the same intent as that required for the substantive offense, the conscious avoidance instruction was particularly appropriate in this case."

Bourke's lawyers plan to appeal his conviction.

Download a copy of Judge Shira A. Scheindlin's October 13, 2009 opinion and order in U.S. v. Victor Kozeny and Frederic Bourke, Jr. (United States District Court for the Southern District of New York, Case No.: 05-Cr 518) here.

Download the complete jury charge in U.S. v. Victor Kozeny and Frederic Bourke, Jr. here.

Read all our posts about the prosecution of Frederic Bourke here.


Bourke Injured, Sentencing Delayed

Frederic Bourke's sentencing has been rescheduled to November 10, 2009 at 2:30 pm. Judge Shira Scheindlin in the federal district court in Manhattan ordered the four week delay last week. Bourke underwent surgery almost two weeks ago to repair a "ruptured distal biceps tendon in his left arm." The cause of the injury, which happened on September 22, isn't specified in the court record.

Bourke, 63, was convicted in July of conspiring to violate the Foreign Corrupt Practices Act and the Travel Act, and lying to FBI agents. The jury said he invested in Viktor Kozeny's 1998 scheme to take over Azerbaijan's state oil company despite knowing Kozeny planned to bribe Azeri leaders. Then he lied to federal agents during their investigation. Bourke faces up to ten years in prison. Kozeny, meanwhile, is a fugitive living in the Bahamas.

Without the surgery, according to his doctor, Bourke, who's left-handed, risked permanent loss of mobility in his left arm, including turning a doorknob or looking at his wristwatch. After the surgery, his arm will be in a splint for six weeks at a ninety degree angle. He'll then need physical therapy twice a week for about three months. His doctor is David S. Ruch, MD, a professor at Duke University and director of its hand, upper extremity and microvascular surgery fellowship program.

According to, "The people most likely to get a biceps tendon rupture are strength athletes, bodybuilders and heavy manual workers. Generally, males over the age of 35 years. . . . After the injury there is usually localized pain at the front of the elbow, with bruising and swelling. The biceps muscle may retract up the upper arm crating a prominent bump, known as the 'Popeye' sign. This is often visibly different to the other biceps when contracting the muscle."

The government agreed to postpone Bourke's sentencing until his splint is removed. Judge Scheindlin signed the rescheduling order last Wednesday, two days after receiving a request from Bourke's lead trial lawyer, Harold Haddon, accompanied by a letter to the judge from Bourke's doctor.

Bourke's attorneys have asked for a new trial and are also appealing his conviction. He's now free on bail.

Download a copy of Judge Scheindlin's handwritten order here.


A Record Of Reform

In September 1977, the U.S. House of Representatives finished debating a bill designated as H.R. 3815. Its working title was the Unlawful Corporate Payments Act of 1977, or UCPA. The bill was a response to a huge scandal. As the record of the House debate explained:

"More than 400 corporations have admitted making questionable or illegal payments. The companies, most of them voluntarily, have reported paying out well in excess of $300 million in corporate funds to foreign government officials, politicians, and political parties. These corporations have included some of the largest and most widely held public companies in the United States; over 117 of them rank in the top Fortune 500 industries. The abuses disclosed run the gamut from bribery of high foreign officials in order to secure some type of favorable action by a foreign government to so-called facilitating payments that allegedly were made to ensure that government functionaries discharge certain ministrial [sic] or clerical duties. Sectors of industry typically involved are: drugs and health care; oil and gas production and services; food products; aerospace, airlines and air services; and chemicals."

But did the scandal really matter? Should Americans have cared about bribery abroad? The House of Representatives thought so. It listed about a dozen reasons in this little statement of purpose that's also part of the legislative record:

The payment of bribes to influence the acts or decisions of foreign officials, foreign political parties or candidates for foreign political office is unethical. It is counter to the moral expectations and values of the American public. But not only is it unethical, it is bad business as well. It erodes public confidence in the integrity of the free market system. It short-circuits the marketplace by directing business to those companies too inefficient to compete in terms of price, quality or service, or too lazy to engage in honest salesmanship, or too intent upon unloading marginal products. In short, it rewards corruption instead of efficiency and puts pressure on ethical enterprises to lower their standards or risk losing business. Bribery of foreign officials by some American companies casts a shadow on all U.S. companies. The exposure of such activity can damage a company's image, lead to costly lawsuits, cause the cancellation of contracts, and result in the appropriation of valuable assets overseas.
After 32 years, there's nothing there that's out of date. Bribery is still -- and always has been -- the wrong way around. It spreads weakness everywhere. Like cheating in sports, it produces no winners and lots of losers -- the players involved, their teams, the team owners, the league, the sponsors and fans. It's all bad. That's why the bill to enact the UCPA was important in September 1977. And why the law it became -- the Foreign Corrupt Practices Act -- is important today.

Download a copy of House Report No. 95-640 (September 28, 1977) here.