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FCPA Blog Daily News


One-Way Waivers

There was an important post over the weekend on the White Collar Crime Prof Blog. Ellen Podgor flagged a recent case (here) with serious implications for companies with deferred prosecution agreements.

An April 17, 2009 opinion from the DC Court of Appeals in US v. The Williams Companies held that a former Williams employee who's been indicted has a right to discover documents the company produced as part of its cooperation with federal investigators. A copy of the opinion can be downloaded here.

Prof Podgor's wisdom: You may think that your back is against the wall to enter into a deferred prosecution agreement, but before you agree to waive the attorney-client privilege, be aware of the long-term ramifications of this decision.

Here's what happened: Williams' deferred prosecution agreement to resolve trading-related offenses provided that its cooperation with the government would include not asserting the attorney-client privilege or work product protection "as to certain factual documents from the internal investigation." The Justice Department acknowledged that Williams' cooperation was "a factor in the decision to defer criminal prosecution." (Williams also had to pay a $50,000,000 penalty to settle the charges.)

Several employees were eventually indicted, including Scott Thompson, an energy trader. He was charged with conspiracy to commit wire fraud (18 U.S.C. § 371 and § 1343) and to manipulate gas prices in violation of the Commodities Exchange Act (7 U.S.C. § 13(a)(2)). He filed a motion under Brady v. Maryland, 373 U.S. 83 (1963) and Federal Rule of Criminal Procedure 16(a)(1)(E)(i) to compel the United States to produce information material to preparing his defense and provided to the government by Williams. Both the government and Williams opposed the motion.

But the court said Williams “independently and voluntarily chose to participate in a thorough disclosure program, in return for which it received the quid pro quo of lenient punishment for any wrongdoing exposed in the process." Quoting from In re Subpoenas Duces Tecum, 738 F.2d 1367, 1372 (D.C. Cir. 1984) (also known as Tesoro). So allowing Williams "to select according to [its] own self interest to which adversaries [it] will allow access to the materials" would be inconsistent and unfair.

On that basis, the DC Court of Appeals remanded so the trial to court could determine what Thompson is entitled to under Brady. "Because the government’s criminal investigation," the court said, "was far broader than [Williams] and its employees and did not focus on Thompson alone, discovery by Thompson must proceed in a manner that avoids a fishing expedition. . ."

Our thanks to Ellen Podgor for another great post on the White Collar Crime Prof Blog.


In Step With The DOJ

What does it mean to "cooperate with the government" after discovering serious Foreign Corrupt Practices Act compliance problems? There's a description of organizational cooperation in a recent sentencing memo the Justice Department filed in US v. Latin Node Inc.

Latinode was a privately held company. Publicly-listed eLandia bought it and soon discovered a history of corrupt payments in Yemen and Honduras. The strategy eLandia adopted for itself and Latinode was to cooperate with the DOJ. That culminated in Latinode's guilty plea earlier this month to a one-count criminal information charging it with violating the FCPA's antibribery provisions.

In describing the cooperation, the government said eLandia and Latinode made commendable efforts to uncover evidence of corrupt activities. The cooperation was authentic throughout the investigation, the DOJ said, with significant remedial efforts upon discovery of the misconduct.

Here, largely in the government's words, is what the companies did:

  • Latinode and its corporate parent, eLandia, initiated an internal investigation of the corrupt payments immediately upon discovery of the potential problems. This investigation included numerous witness interviews and the review of thousands of documents.
  • Within three months of discovering the improper payments, counsel for Latinode and eLandia visited the government to make a voluntary disclosure of the FCPA violations. Latinode and eLandia provided timely, thorough, and exemplary cooperation in connection with the investigation of Latinode's past corporate conduct.
  • Through counsel, Latinode and eLandia produced thousands of non-privileged documents to the government and responded promptly and productively to all of its requests.
  • The cooperation provided by Latinode and eLandia substantially aided the government in developing its investigation.
  • Almost immediately upon determining the culpability of senior Latinode officers and employees, eLandia terminated those individuals.
  • Although there is no evidence of misconduct by eLandia employees, the company took steps to strengthen its own anti-corruption compliance program, including training its employees in the FCPA and related laws and committing to anti-corruption due diligence in future acquisitions.
  • Perhaps the greatest evidence of eLandia's remedial efforts, the government said, is that it dissolved Latinode from an operational perspective, at a cost to eLandia of millions of dollars, and ceased doing business relating to the tainted contracts.
Did their cooperation help the companies? You bet. eLandia wasn't charged at all in the criminal case (it may still face an SEC civil enforcement action). The government accepted a plea to a single criminal count from Latinode, eLandia's subsidiary that was already largely dormant. The government didn't put either company on organizational probation; nor did it impose a deferred prosecution agreement or require a compliance monitor, saving eLandia enormous out-of-pocket costs. Finally, the criminal penalty of $2,000,000 was far below the fine range in the U.S. sentencing guidelines -- $4,200,000 to $8,400,000 (U.S.S.G. § 8C2.7). eLandia was even given three years to pay.

The plea agreement obligates Latinode (i.e., eLandia) to continue to cooperate with any further investigations by law enforcement agencies. So individuals responsible for the corrupt payments may yet face prosecution.

Download the March 23, 2009 criminal information against Latinode here.

Download Latinode's April 3, 2009 plea agreement here.

Download the DOJ's April 3, 2009 sentencing memo here.


Busting Graft From The Other Side

It perennially runs neck-and-neck with Louisiana as the country's most corrupt state. But last week Illinois took a big step toward coming clean. It launched a website that makes it easy for anyone to report corruption in state and local government -- and get paid to do it. And guess what? The site's a winner -- clean, simple and easy to use.

It starts out saying:

A whistleblower is someone who exposes wrongdoing, fraud, corruption and/or waste.

Taxpayers deserve an honest and efficient government. In 1991, then State Treasurer Pat Quinn, led the movement to enact a state whistleblower protection act.

The Illinois Whistleblower Act protects every citizen -- including state and local government employees -- when they blow the whistle on government corruption.

Our state law rewards citizens who blow the whistle.

In 2008, the Illinois Whistleblower Reward and Protection Act expanded the 1991 law to cover all levels of state government. Since the act was strengthened, a whistleblower can get up to 30% of the amount recovered as a reward upon completion of a successful whistleblower suit.

In just one page, the site walks state employees and others through the steps to file a complaint and how to make it stick.

Whistleblower programs work. We've said before that at least a third of the FCPA enforcement investigations now underway probably started with whistleblower complaints. Just as important is how the programs give stakeholders a voice.

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Another big institution struggling with its own corruption is the World Bank. It has a whistleblower program (here). But an independent evaluation released last week said "staff fear reprisal for reporting infringements and unethical behavior." And unlike Illinois, the Bank doesn't advertise financial rewards for successful complainants. That probably limits its usefulness. We also wonder whether the Bank's borrowers and grantees are required to have whistleblower programs? If any readers know the answer, maybe they can send a comment or an email.

The report by the Bank's Independent Evaluation Group gave the lowest possible rating for fraud-detection to the Bank's International Development Association (IDA). The IDA loans and grants $40 billion to the 78 poorest countries. The Wall Street Journal has a story here.

The independent evaluation criticized the IDA for emphasizing project performance and completion over compliance. Job descriptions and performance evaluations, it said, "do not usually contain specific references to internal control-related duties, responsibilities, and accountability. Concerns about the adequacy of current incentives to promote accountability, compliance and quality were also reflected in several units’ responses." The report can be downloaded here.

The World Bank has debarred 351 entities for violating its fraud and corruption provisions. It kept the names secret until January this year, when pressure from the Wall Street Journal and others forced it to be more transparent. The list of debarred organizations is here.


Paying The Pirates

This month's online edition of Foreign Policy magazine has an article (here) saying Somali pirates are handing over part of their proceeds to the regional Puntland government in exchange for being allowed to operate in areas it controls.

So what? Stay with us a minute.

The State of Puntland is a semi-autonomous region in northeastern Somalia that's been self-governing since 1998. With 2.4 million people, Puntland has a president and cabinet, a house of representatives and a court system. It has a website. It deals directly with other countries and with international institutions such as the World Bank. It levies taxes and spends money on public projects -- it's operating one airport, for example, and developing another. In other words, it's an actual government.

With the connection between the pirates and the Puntland government in mind, the author of the Foreign Policy article, J. Peter Pham, thinks there's an opportunity to choke off the supply of funds to the bad guys. His idea is to use various anti-terrorism and anti-corruption laws already in place to stop all ransom payments. A case to do that, he says, can be made under the Foreign Corrupt Practices Act.

Is that possible? Let's take a look.

First, not everyone has to obey the FCPA. Issuers and domestic concerns and those acting for them are subject to the law. That probably means some but not all of the shipping companies, insurers and security firms that are dealing with the pirates are covered. A fuller discussion about the reach of the law can be found in our post here.

Next, the FCPA outlaws corrupt payments directly or indirectly to a "foreign official." That's a human being, not a government entity. Payments to a government entity do not violate the FCPA. So even if the pirates are known to be paying the government of the State of Puntland for operating rights, that doesn't mean payments to the pirates violate the FCPA. As we've said before -- no foreign official, no FCPA offense. For more on this, see our post here.

But what if some of the ransom money is known to be going directly into the pockets of members of the Puntland government? They're foreign officials under the FCPA. So wouldn't there be a violation? The answer is still no.

Under American law, a payment that's extorted is not a bribe. Judge Shira Scheindlin, in a ruling in U.S. v. Kozeny last year, explained it this way: The legislative history makes clear that while the FCPA would apply to a situation in which a "payment [is] demanded on the part of a government official as a price for gaining entry into a market or to obtain a contract," it would not apply to one in which payment is made to an official "to keep an oil rig from being dynamited." Quoting from S.Rep. No. 95-114, at 10-11 (1977), reprinted in 1977 U.S.C.C.A.N. 4098, 4108.

Judge Scheindlin said the difference is that in the former situation, the bribe payer made the conscious decision to pay the bribe. So he cannot argue that he lacked the intent. "In other words," she said, "in the first example, the payer could have turned his back and walked away -- in the latter example, he could not." See generally United States v. Gonzalez, 407 F.3d 118, 122 (2nd Cir. 2005).

When pirates hold crews hostage and threaten to kill them and destroy their ships and cargo, it's extortion. Where there's duress, there cannot be a voluntary decision "to enter a market or obtain a contract." So the ransom payments -- no matter where they end up -- aren't illegal under the FCPA or any other United States criminal law.


More On The Monitors

Ah, Spring. And the corporate compliance monitors are back in the news. Here's what's happening:

It's an annual event. Democrats in Congress have re-introduced a bill from last year to regulate the way monitors are selected, paid and held accountable. The Project on Government Oversight has a nice report here. The retitled "Accountability in Deferred Prosecution Act of 2009" can be downloaded here.

Two of the bill's sponsors are from New Jersey, where the big flap about monitors first started. In late 2007, New Jersey's U.S. Attorney Chris Christie used deferred prosecution agreements to settle domestic bribery charges against orthopedic device makers. To monitor their compliance, he selected former U.S. Attorney General John Ashcroft, former U.S. Attorney for the Central District of California Debra Yang, former New Jersey Attorney General David Samson, former U.S. Attorney for the Southern District of New York in Manhattan David N. Kelly, and former counsel to the Federal Trade Commission during the Reagan Administration John Carley.

Sticker shock. The monitors were seen as being close to Christie. On top of that, his ex-boss John Ashcroft's monitorship had a price tag of $28 million to $52 million for 18 months of work. Democratic lawmakers (and plenty of Republicans) were unhappy to learn that federal prosecutors, acting alone, could tap party big shots and friends for such lucrative (part-time) posts. In early 2008, Congress launched investigations into all aspects of the monitors -- their appointment, pay, oversight and reporting responsibilities -- and even whether deferred prosecution agreements make sense in the first place. The hearings ended without any action by the Congress.

Where are they now? The orthopedic device makers completed their deferred prosecution agreements a couple of weeks ago. In their September 2007 settlements, they together paid $310 million to resolve charges that they bribed U.S. doctors to buy their products. After that, the Justice Department and the Securities and Exchange Commission began investigating whether the companies also gave kick-backs to overseas doctors employed by government-owned hospitals. Such payments could violate the Foreign Corrupt Practices Act. Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc and Medtronic Inc. disclosed FCPA investigations during 2007 and Wright Medical reported a similar investigation in June 2008.

Christie, meanwhile, resigned as New Jersey's U.S. Attorney in November 2008 and is running for governor as a Republican. In recent days he's had to defend his anti-corruption image against charges concerning the monitor appointments. The AP's report is here. "At issue," the AP says, "is Christie's acceptance of campaign cash from Herbert Stern, a former monitor for the state's medical and dental school, and his choice of two other monitors with whom he had prior ties: John Ashcroft, the former U.S. attorney general and Christie's old Justice Department boss, and David Kelley, a former U.S. attorney in Manhattan who investigated a stock fraud case involving Christie's younger brother, Todd, but declined to prosecute him." Christie, 46, says he's done nothing wrong.

Don't need 'em, don't want 'em. The always-resourceful Corporate Crime Reporter has a neat story dated April 3, 2009 titled, Guess Which U.S. Attorney Doesn’t Do Corporate Deferred Prosecution Agreements? It's Philadelphia. Linda Dale Hoffa, the office's Criminal Division chief since 1984, said this:

We haven’t done [deferred prosecution agreements] because we think it’s better to make a clear bright line decision that we are prosecuting or not prosecuting. There is either sufficient evidence to prosecute or not to prosecute. A deferred prosecution agreement can be more of a gray area. If the crime is serious enough, and it is warranted, then we will bring a prosecution. It’s not a written policy. But it has been the practice in our office.
She also said it's the same with non-prosecution agreements. Either the office makes a decision to prosecute or to decline to prosecute, in which case "we close our file.”


That's Not Justice

A former U.S. Attorney told us a few years ago: "The Justice Department has found a way to subcontract out its FCPA investigations. Now the company lawyers are taking the statements and doing the document work. It's great for the government but really bad for the employees."

The government's practice is now at the center of two securities-related prosecutions. As the Law Blog reported here, Los Angeles federal district court judge Cormac Carney has suppressed most of the government's evidence against the former CFO of Broadcom, William Ruehle. The company waived the privilege and released his statements, even though he thought the lawyers representing Broadcom were also representing him.

In suppressing Ruehle's statements to Irell & Manella, the judge couldn't have been clearer. He said:

The Government now argues that it can use Mr. Ruehle's statements to the Irell lawyers against him at the trial in this criminal case. The Government is mistaken. Mr. Ruehle's statements to the Irell lawyers are privileged attorney-client communications. Mr. Ruehle reasonably believed that the Irell lawyers were meeting with him as his personal lawyers, not just Broadcom's lawyers. Mr. Ruehle had a legitimate expectation that whatever he said to the Irell lawyers would be maintained in confidence. He was never told, nor did he ever contemplate, that his statements to the Irell lawyers would be disclosed to third parties, especially not the Government in connection with criminal charges against him. Irell had no right to disclose Mr. Ruehle's statements, and Irell breached its duty of loyalty when it did so. Accordingly, the Court must suppress all evidence reflecting Mr. Ruehle's statements to the Irell lawyers regarding stock option granting practices at Broadcom.
The judge then went further, saying:
The Court must also ensure the fair administration of justice and promote the public's confidence in the legal profession. By failing to comply with its duties under the Rules of Professional Conduct, Irell compromised these important principles. The Court simply cannot overlook Irell's ethical misconduct in this regard and must refer Irell to the State Bar for appropriate discipline.
The LawBlog said a spokesman for Irell & Manella, Charles Sipkins, called the judge’s ruling an “error” and said all of the law firm’s disclosures were proper. The government, the Law Blog said, is planning to appeal.

A similar issue has surfaced in the government's prosecution for obstruction of justice of Allen Stanford's chief investment officer, Laura Pendergest-Holt. The evidence includes statements she made in sworn testimony to the SEC. During that testimony, a lawyer from Proskauer Rose, Thomas Sjoblom, was present. He said he represented Stanford and officers and directors of his affiliated companies. But Pendergest-Holt says she believed he represented her personally. Now she's suing Sjoblom for malpractice, negligence and breach of fiduciary duty. The Law Blog's report is here. No doubt she'll raise the same issues at her criminal trial.

In a typical FCPA investigation, those giving statements to the company's lawyers probably don't know all the relevant facts -- the investigation is ongoing, after all. They can't possibly understand the implications of their words, have no idea their statements might end up outside the company, don't receive help from lawyers representing them, and probably don't even know they should have their own counsel.

And it gets worse. According to the 33 former U.S. Attorneys who wrote to Senator Patrick Leahy last year, some recent cases show that employees "can be prosecuted for making false statements to the government, even though the statements were made only to company counsel."

When threats of indictment are used to force corporations to become part of the prosecution, individual employees don't stand a chance. This aspect of the government's win-at-all-costs approach to white collar prosecutions isn't justice, and it has nothing to do with corporate compliance.

Download the trial court's April 1, 2009 Order Suppressing Privileged Communications in US v. Henry T. Nicholas III and William J. Ruehle et al here


Around The Horn

He wasn't kidding. Last week's record-setting indictment under the Foreign Corrupt Practices Act of six individuals from one company highlights the Justice Department's strategy to target people, not just companies. In September last year, Mark Mendelsohn -- the DOJ official responsible for FCPA criminal prosecutions -- told an audience: The number of individual prosecutions has risen – and that’s not an accident. That is quite intentional on the part of the Department. It is our view that to have a credible deterrent effect, people have to go to jail. People have to be prosecuted where appropriate. This is a federal crime. This is not fun and games. See our post here.

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Victims Rights? Congress didn't want prosecutors deciding American foreign policy through FCPA enforcement actions, so bribe-taking foreign officials aren't targeted. Taking that a step further, the names of bribe-takers don't even appear in FCPA complaints. That censorship may make foreign-policy sense, but it's got people in Nigeria upset and frustrated. They want to hear from the Justice Department which of their officials took any of the $182 million in bribes that KBR admitted paying, and where the money is now. Reports are here and here.

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Ask him. Prosecutors think Jeffrey Tesler knows who got KBR's bribe money. They allege he's the middleman who was spreading it around. Tesler, 60, a London lawyer, was indicted in February for violating the FCPA. He now faces up to 55 years in prison. British police arrested him in March at the request of U.S. authorities. Last week, Tesler appeared at his first extradition hearing. The London Magistrates' Court released him on bail and continued the proceedings. Here's a press report.

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An open and shut case. Aluminum Bahrain's federal civil suit in Pittsburgh against Alcoa alleging behavior that would violate the FCPA appears in the docket as "Closed." But not really. The court's order from March 2008 says, "To allow the Government to fully conduct an investigation without the interference and distraction of ongoing civil litigation, it is ordered that this case is administratively closed, to be reopened at the close of the Government's investigation." We talked about the Justice Department's intervention in the case here.

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Where's Clayton? Regarding our post yesterday about Frederic Bourke (here), a reader asked, What's happened to Clayton Lewis? He worked for Omega Advisors Inc. It invested and lost more than $100 million with Viktor Kozeny in the failed Azeri privatization program. The government said Lewis knew about the bribery scheme allegedly involving Kozeny and Bourke but went ahead with Omega's investment anyway. In 2004, Lewis pleaded guilty to onspiring to violate the FCPA. Where's he now? Still waiting to be sentenced. Almost everything in his court record is sealed. But a June 2008 letter from the DOJ said Lewis is a cooperating witness and shouldn't be sentenced until he's testified for the government at Bourke's trial. A copy of the letter can be downloaded here.

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Ashes to ashes? It's off our topic, but creepy. Two Los Angeles-area women allegedly cheated life insurance companies out of at least $750,000 by staging funerals for fictitious people. Last Wednesday, FBI agents arrested Faye Shilling, 60, and Jean Crump, 67, on federal fraud charges. According to the indictment, Shilling, a phlebotomist (a medical technician who collects blood), and Crump, an employee at a now-defunct Long Beach mortuary, cashed in life insurance policies for non-existent people they claimed had died. They allegedly obtained bogus death certificates, purchased burial plots and staged phony funerals to lend credibility to the scheme. When staging the funerals, the women allegedly "filled caskets with various materials" to make it appear they contained actual corpses. The DOJ's release is here.

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Real magic. What is it about Augusta that makes it so special? And this year was the final appearance of three-time champ Gary Player, 73. He showed up 52 times! Our favorite golf story: Gary Player was still on the practice tee, long after sunset, hitting balls. Buckets of them. Someone watching said, "I'd give anything to play golf like that man." Player looked up and said, "Would you really?" And he held out his hands to show the onlooker two bloody, torn-up palms.

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A community effort. Our thanks again to everyone who contributes time and resources to the FCPA Blog. We're thinking of our readers who send suggestions, tips, clips and encouragement. And those who order Bribery Abroad -- sometimes by the dozen. And our wonderful sponsors who stand shoulder-to-shoulder with us every day.


Bourke Prepares His Defense

Frederic Bourke is taking video testimony from a critically ill friend that may help prove Bourke was an innocent victim of a massive investment fraud perpetrated by Viktor Kozeny. Bourke, 62, goes on trial June 1 for violating the Foreign Corrupt Practices Act. He's accused of helping the Czech-born Kozeny bribe officials in Azerbaijan in a failed attempt to take over the state oil company, Socar. Bourke faces up to 35 years in prison on FCPA charges, money laundering and lying to federal investigators.

In late March, the federal court in New York City granted Bourke's request to take video testimony from Harry Demetriou, a British citizen who's been living in Miami. Demetriou has advanced bladder cancer. After five years of chemotherapy and surgeries, Bourke said his friend now plans to stop all treatment and "let the cancer run its course." Rule 15(a) of the Federal Rules of Criminal Procedure allows a party to depose witnesses to preserve testimony for trial because of exceptional circumstances. "Mr. Demetriou offers significant exculpatory evidence and is unavailable to appear at trial," Bourke said. The government didn't oppose his request.

Demetriou invested $500,000 in 1998 in Blueport, Inc., the company Bourke set up to handle investments by his family and friends in the Azeri deal. The court pleading said, "Mr. Demetriou suffered the same financial fate as Mr. Bourke -- he lost his entire investment." Bourke invested $8 million with Kozeny.

Bourke and Kozeny were indicted under the FCPA in 2005. Kozeny, 45, has been a fugitive living in the Bahamas for ten years. He's fighting extradition to the U.S. and is also wanted by authorities in the Czech Republic, where he's accused of stripping Czech pensions funds of $1.1 billion.

According to Bourke's court filing, Demetriou was at several meetings in 1998 that included Bourke, Kozeny and others the government says were involved in the plot to bribe Azeri officials. He also attended meetings for investors before and after Bourke learned about Kozeny's alleged illegal actions. Bourke said, "Mr. Demetriou was aware of and in some instances personally involved in Mr. Bourke's efforts to draw attention to and expose Mr. Kozeny's wrongdoing."

Bourke has maintained that he invested with Kozeny only after lawyers advised him the deal didn't violate any laws. But soon after investing, he said he suspected illegal behavior and became a whistleblower. His lawyers said he traveled to Azerbaijan to warn then-President Heydar Aliyev about the scheme. He later testified before a New York grand jury "as a victim of Kozeny's fraud." New York state prosecutors charged Kozeny with fraud for keeping $182 million of his investors' money.

In August 2008, a Washington, D.C.-based non-profit watchdog group that defends whistleblowers, the Government Accountability Project, said Kozeny's scheme in Azerbaijan came to light "in 1999, when U.S. investor and whistleblower Frederic Bourke came forward and exposed the fact that at least one major investor had been defrauded." Bloomberg reported (here) that Bourke provided documents and funding to GAP.

Last month, Bloomberg's David Glovin reported (here) that Bourke plans to challenge key parts of the government's case. Prosecutors said the scheme to bribe Azeri leaders involved giving them vouchers Azeri citizens could use to participate in privatizations. With $350 million from his investors, Kozeny was supposed to buy enough vouchers to gain control over Socar if it was privatized. U.S. prosecutors allege Kozeny and Bourke gave some of the vouchers to Azeri officials.

But according to documents Glovin saw before the judge sealed them, Bourke will argue that most of the vouchers can be accounted for. They're now in the hands of Gerald O’Shaughnessy, another Kozeny investor who lives in Wichita, Kansas. O'Shaughnessy hasn't been charged in the case. "The documents tell of O’Shaughnessy’s years-long quest to recover the $350 million he and other investors gave Kozeny to buy vouchers," Glovin's story said. O’Shaughnessy gained control of about three-quarters of the outstanding vouchers by 2003. "He then sought to force the Azeris to buy them for $350 million so investors could recover their lost stakes, the documents show."

In a pretrial hearing last September, Bourke argued that any payments to Azeri officials didn't violate the FCPA. He said that under Azeri law, once he reported the payments to the country's president, they weren't punishable there. Therefore, he argued, he was protected by the FCPA's local-law affirmative defense. It provides that a payment to a foreign official is permitted if it was "lawful under the written laws and regulations of the foreign official’s" country. 15 U.S.C. §§ 78dd-1(c)(1), 78dd-2(c)(1) and 78dd-3(c)(1).

But the trial judge ruled against Bourke. Judge Shira Scheindlin said Azerbaijan's law relieving a bribe payer from criminal liability if the bribe is properly reported doesn't make the payment lawful when it was paid. Instead, she ruled, reporting the bribe erases the stain of criminality retroactively. While a person cannot be guilty of violating the FCPA if the payment was lawful under the foreign law, she said, there's no immunity merely because a person couldn't be prosecuted in the foreign country due to a technicality (see our post here).

Bourke hired a new lawyer last month to lead his defense team. Denver-based Harold A. Haddon replaced Dan Webb. Haddon's former clients include John and Patsy Ramsey and Kobe Bryant.

Download Frederic Bourke's Motion to Take Video Deposition of Witness for Trial Preservation filed March 26, 2009 here.

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Coming Events. Kevin Abikoff and Gregory Williams, partners at Hughes Hubbard & Reed LLP, will chair a BNA Briefing on the FCPA. It's happening Tuesday, April 21, from 8:00 AM to noon, at 1801 S. Bell Street, Arlington, Virginia. The panel includes Helen Garlick, former assistant director of the U.K.'s Serious Fraud Office and now senior director of investigations in London for Nardello & Co. She was recently featured on Frontline: Black Money.


Six More Indicted In Valve-Maker Case

In the biggest multi-party indictment of individuals yet under the Foreign Corrupt Practices Act, six more former executives of Control Components Inc., an Orange County, Calif.-based valve company, were charged yesterday with a decade-long conspiracy to win contracts by bribing officials at foreign state-owned companies.

The six individuals charged in the indictment are:

  • Stuart Carson, 70, of San Clemente, Calif., the former chief executive officer of Control Compenents. He's charged with one count of conspiracy to violate the FCPA and the Travel Act, and two counts of violating the FCPA;
  • Hong (Rose) Carson, 45, of San Clemente, Calif., the former director of sales for China and Taiwan of the company (Stuart Carson's wife). She's charged with one count of conspiracy to violate the FCPA and the Travel Act, five counts of violating the FCPA, and one count of destruction of records in connection with a matter within the jurisdiction of a department or agency of the United States;
  • Paul Cosgrove, 61, of Laguna Niguel, Calif., the former director of worldwide sales for Control Components. He's charged with one count of conspiracy to violate the FCPA and the Travel Act, six counts of violating the FCPA and one count of violating the Travel Act;
  • David Edmonds, 56, of San Clemente, Calif., the former vice president of worldwide customer service at the company. He's charged with one count of conspiracy to violate the FCPA and the Travel Act, three counts of violating the FCPA and two counts of violating the Travel Act;
  • Flavio Ricotti, 47, of Italy, the former vice-president and head of sales for Europe, Africa and the Middle East. He's charged with one count of conspiracy to violate the FCPA and the Travel Act, one count of violating the FCPA and three counts of violating the Travel Act; and
  • Han Yong Kim, 47, of Korea, the former president of the company's Korean office. He's charged with one count of conspiracy to violate the FCPA and the Travel Act, and two counts of violating the FCPA.
Earlier this year, two other former executives from Control Components admitted paying bribes and have been cooperating with authorities. Richard Morlok, 55, the former finance director, and Mario Covino, 44, the company's former director of worldwide factory sales, pleaded guilty to one count of conspiracy to violate the FCPA (see our posts here and here). Sentencing for both is now scheduled for July 20, 2009.

The alleged conspiracy involving the six newly indicted executives stretched from at least 1998 to 2007. The indictment charges that from 2003 to 2007, they caused Control Components to make at least 236 corrupt payments in more than 30 countries. The Justice Department says the company earned net profits of $46.5 million from sales gained by the alleged corrupt payments.

For all of the defendants, the FCPA and Travel Act counts each carry a maximum penalty of five years in prison and a fine of the greater of $250,000 or twice the value gained or lost. The destruction of records count against Hong (Rose) Carson carries a maximum penalty of 20 years in prison and a fine of $250,000.

The alleged corrupt payments were made to officials at state-owned entities including Jiangsu Nuclear Power Corp. (China), Guohua Electric Power (China), China Petroleum Materials and Equipment Corp., PetroChina, Dongfang Electric Corporation (China), China National Offshore Oil Corporation, Korea Hydro and Nuclear Power, Petronas (Malaysia), and National Petroleum Construction Company (United Arab Emirates).

Control Components designs and makes valves for the oil, gas, nuclear, coal and power plant industries. It is owned by British-based IMI plc, which trades on the London Stock Exchange under the symbol IMI.L.

An indictment is merely an accusation and the defendants are presumed innocent until and unless proven guilty beyond a reasonable doubt.

View the DOJ's April 8, 2009 release here.

Download the indictment here.


Rocket Scientist Sentenced To Prison

The Virginia-based physicist who sold controlled space-launch technology to China by bribing government officials there has been sentenced to 51 months in prison. Shu Quan-Sheng (left), 68, a native of China, naturalized U.S. citizen and PhD physicist, pleaded guilty in November 2008 to one count of violating the Foreign Corrupt Practices Act and two counts of violating the Arms Export Control Act. Shu had already forfeited $386,740 to the federal government before being sentenced to prison.

Shu is the President, Secretary and Treasurer of AMAC International Inc., a high-tech company based in Newport News, with another office in Beijing. AMAC performs research through grants funded by the Small Business Research program on behalf of the Department of Energy and the National Aeronautics and Space Administration (NASA).

Shu violated the FCPA by offering "percentage points" in 2006 worth a total of $189,300 to officials at a research institute affiliated with the China Academy of Launch Vehicle Technology. He was trying to land a contract to develop a liquid hydrogen tank system for a heavy payload launch facility located on Hainan Island in the PRC. In January 2007, the $4 million hydrogen liquefier project was awarded to a French company that Shu represented.

Shu violated the Arms Export Control Act by willfully exporting a defense service from the United States to the PRC without first obtaining the required export license or written approval from the State Department. He provided the PRC with assistance in the design and development of a cryogenic fueling system for space launch vehicles to be used at the heavy payload launch facility on Hainan.

The investigation involved the FBI, U.S. Immigration and Customs Enforcement, and the U.S. Department of Commerce, Office of Export Enforcement.

In a prior post we noted that Shu's arrest in September 2008 was similar to arrests earlier that month of U.S. citizens Nam Nguyen, Joseph Lukas, Kim Nguyen, and An Nguyen, along with their Philadelphia-based company, Nexus Technologies (see our post here). They were charged with one count of conspiracy to violate the Foreign Corrupt Practices Act and four substantive counts of violating the FCPA. They're accused of bribing government officials in Vietnam to secure contracts to supply high-tech items -- including third-party underwater mapping and bomb containment equipment, helicopter parts, chemical detectors, satellite communication parts and air tracking systems. That case doesn't yet involve charges under U.S. export laws.

Download the DOJ's April 7, 2009 release here.


Latin Node Inc. Pleads Guilty

A former privately held company that had serious undisclosed Foreign Corrupt Practices Act violations when it was acquired by a U.S. public company has pleaded guilty and agreed to pay a fine of $2 million over the next three years. Latin Node Inc. (Latinode), a Florida corporation, pleaded guilty on April 7, 2009 to a one-count criminal information in the U.S. District Court for the Southern District of Florida. It was charged with violating the FCPA's antibribery provisions by making improper payments in Honduras and Yemen.

Soon after Coral Gables, Fla.-based eLandia International Inc. acquired Latinode in 2007, it discovered potential FCPA violations. The DOJ said eLandia self-reported them immediately, conducted an internal FCPA investigation, shared the results of the investigation with the DOJ, cooperated fully in the government's investigation, and took appropriate remedial action, including terminating senior Latinode management involved in or having knowledge of the violations. eLandia trades on the over-the-counter bulletin board under the symbol ELAN.OB.

In eLandia's Form 10Q/A for September 2008, it said: [W]e engaged in a review of Latin Node's internal controls and legal compliance procedures within its finance and accounting department as a part of our acquisition and integration of Latin Node. As a result of this review, certain past payments in Central America were identified as having been made in the absence of adequate records and controls for a U.S. public company. We have initiated an internal investigation to determine whether any direct or indirect payments by Latin Node prior and subsequent to its acquisition by us were made in violation of the Foreign Corrupt Practices Act ("FCPA"). The internal investigation of the FCPA matter is being conducted by a Special Committee of the Board of Directors. The Special Committee has retained independent legal counsel to assist in the investigation of the FCPA matter.

eLandia also disclosed that its purchase price for Latin Node "was approximately $20.6 million in excess of the fair value of the net assets acquired from Latin Node mostly due to the cost of the FCPA investigation, the resulting fines and penalties to which it may be subject, the termination of Latin Node's senior management, and the resultant loss of business. Therefore, we allocated approximately $20.6 million of the purchase price as a direct charge to operations during the quarter ended June 30, 2007."

Before some of its business was discontinued by eLandia, Latinode provided wholesale telecommunications services using internet protocol technology to countries throughout the world, including Honduras and Yemen. From March 2004 through June 2007, it paid or arranged payments of $1,099,889 to third parties to be used to bribe officials at Hondutel, the Honduran state-owned telecommunications company. The payments were in exchange for an interconnection agreement and a reduced rate per minute under it. The payments were made from Latinode's Miami bank account and approved by the company's senior executives. Recipients included a member of the evaluation committee responsible for awarding Hondutel interconnection agreements, the deputy general manager (who later became the general manager) of Hondutel, and a senior attorney for Hondutel.

And from July 2005 to April 2006, Latinode made 17 other payments from its Miami bank totaling $1,150,654, either directly to Yemeni officials or through a third-party consultant, in exchange for favorable interconnection rates. Internal company emails showed that the intended recipients included the son of the Yemeni president; the vice president of operations at TeleYemen, the Yemeni government-owned telecommunications company; other officials of TeleYemen; and officials from the Yemeni Ministry of Telecommunications.

View the DOJ's April 7, 2009 release here.

Download the criminal information here.

Download the plea agreement here.

Download the sentencing memo here.


Dear BAE And Prince Bandar: You're Boring

That, at least, is the verdict from Tony Perry of the LA Times in his review of "Frontline: Black Money." The PBS documentary by Lowell Bergman and Oriana Zill de Granados features the story of BAE and the Saudi Prince. Perry says the show "is first-class journalism: high-minded, fact-filled and balanced, with some eye-catching visuals." The problem, he says, is that Americans have moved on.

"Months ago," Perry writes, "in the world before the AIG bonuses, Bernie Madoff's Ponzi scheme and credit derivatives, news that the U.S. was looking at BAE as a test of U.S. anti-bribery laws would have seemed interesting, a nice bit of reporting. Now there's something unsettling about the prospect of government lawyers taking actions that could throw more Americans out of work. . . In journalism there is a concept called 'being overtaken by events' in which news developments undercut your story before it's published. 'Black Money' has been overtaken by a tidal wave."

But while the Times' Perry was lamenting the producers' unfortunate timing, his colleagues at the paper, Tom Hamburger and Josh Meyer, apparently thought otherwise. What caught their eye wasn't BAE or Prince Bandar, but Former FBI Director Louis J. Freeh. He's been representing the Prince and speaks for him in the Frontline program.

Alexandra Wrage had this to say about Freeh's on camera performance: If Bush and Blair make you wince, Louis Freeh will make you cringe. Freeh represents Prince Bandar and argues that a plane given to Bandar by BAE was for Saudi Arabia’s military purposes and was not a personal gift. And, no, according to Freeh, the fact that Bandar used the plane himself and had it painted in the colors of his beloved Dallas Cowboys doesn’t change the aircraft’s military nature.

Hamburger and Meyer report that Freeh's staunch defense of Prince Bandar is drawing some high-level flack. They quote Richard Clarke, a counter-terrorism advisor to Presidents Clinton and George W. Bush. He told the Times, "Someone [like Freeh] who characterizes himself as a U.S. patriot and national security advocate ought not to be on the side of someone blackmailing people not to investigate crimes by threatening to withdraw a nation's cooperation against terrorists."

Freeh has said "the claim that Prince Bandar attempted to interfere" with the British investigation is "refuted by the facts." But the U.K. High Court found otherwise. It said that in July 2006, as the Serious Fraud Office was about to obtain access to Swiss bank accounts, "those described discreetly as 'Saudi representatives' [made] a specific threat to the Prime Minister's Chief of Staff, Jonathan Powell: if the investigation was not stopped there would be no contract for the export of Typhoon aircraft and the previous close intelligence and diplomatic relationship would cease." (See our post here)

And the U.K. Guardian reported that the two-judge High Court panel "heard unchallenged allegations that it was Prince Bandar, the alleged beneficiary of £1bn in secret payments from the arms giant BAE, who threatened to cut off intelligence on terrorists if the investigation into him and his family was not stopped. Investigators said they were given to understand there would be 'another 7/7' and the loss of 'British lives on British streets' if they carried on delving into the payments."

Dennis Lormel, a former supervisory agent with the FBI working on the BAE case, said although he has "utmost regard" for Freeh's integrity, it's still "a mistake for him to represent someone who reportedly helped shut down the British investigation into BAE," according to the LA Times' story.

BAE, meanwhile, seems to be heading in another direction from the Prince. Its statement quoted in the LA Times said: "BAE Systems' view is that the interests of the company as well as of all its stakeholders, including the general public, are best served by allowing these investigations to run their course. The company is working with regulators towards that end, with a view to achieving resolution of the ongoing investigations."