The FCPA Blog

Judge Denny ChinThe prosecution of James Giffen for violating the FCPA is a ghostlike case. As David Glovin of Bloomberg wrote earlier this month: "Oil consultant Jim Giffen was told by a U.S. judge six months after his 2003 arrest in an international bribery scheme that he would go on trial in the fall of 2004. He’s still waiting."

His trial may be on hold, but his case made legal history years ago. Professor Elizabeth Spahn, a friend of the FCPA Blog and an occasional contributor here, has published a great article on U.S. v. Giffen and the act of state doctrine -- the notion that sovereign nations engaged in domestic actions cannot be questioned in the courts of another nation.

She says:

The act of state doctrine is not typical fare for most prosecutors or judges in U.S. criminal proceedings. The first opinion addressing the act of state doctrine in a U.S. bribery case was issued in 2002 in the Giffen prosecution [when it was still before a grand jury] by Judge Denny Chin (more recently famous for sentencing white collar criminal, Ponzi scheme architect Bernie Madoff). The 2002 Chin opinion is a landmark case of first impression. It provides helpful precedent for future decisions on the most significant legal hurdle facing prosecutors developing a case—discovering the facts of complicated bribery schemes where the documents are ostensibly protected by foreign law. [footnotes omitted]

Prof Spahn describes the Giffen case as "a gripping story of alleged grand corruption bribery suitable for a Hollywood movie." What's remarkable, she says, is that despite the best efforts of powerful U.S. lobbyists and law firms in an FCPA case allegedly involving $105 million in bribes in Kazakhstan, during one of the darkest periods in the history of the U.S. Department of Justice, the case still "demonstrates the rule of law operating even handedly, even when major oil interests are at stake."

The article can be downloaded from SSRN here. The citation is Discovering Secrets: Act of State Defenses to Bribery Cases (2009), Hofstra Law Review, Vol. 38, p. 163, 2009.

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And more from Prof Spahn. We'd like to thank her for mentioning the FCPA Blog during her talk at the June 30 ABA ROLI Anti-Corruption Mini-Seminar. She referred to us as a clearinghouse serving the FCPA / compliance community. We'll do our best to live up to that role. During the last segment of her talk, Prof Spahn suggested topics for future compliance-related research. We often hear from students and others looking for ideas, so check out what she had to say here.

Two parts of the Financial Reform Bill passed last week by the Senate and which the President has said he'll sign concern us. The first is the whistleblower bounty for securities-law recoveries, including FCPA-related settlements, that exceed $1 million.

The bounty program will result in more FCPA cases against corporations. It won't matter if they have robust compliance programs. Organizations are strictly liable for crimes committed by employees who are doing their jobs. So even if a company has an effective compliance program and has done everything possible to prevent violations, that's no defense under respondeat superior.

When the DOJ and SEC find an employee's FCPA violation, the company is presumed guilty and forced to settle the case, usually by paying a big penalty.

Companies trying to settle are also forced to help the government make cases against employees and other individuals. The companies might have to disclose information to prosecutors that the employees thought was privileged. So the rules of privilege and the right against self incrimination are short-circuited.

Before so-called financial reform creates whistleblower bounties for FCPA-related recoveries, the law of respondeat superior needs to be reformed. Corporations should be given the chance to defend themselves by showing good-faith efforts at compliance. 

The second part of the financial reform bill that concerns us is Section 1504, "Disclosure of Payments by Resource Extraction Issuers." It requires public companies involved in oil and gas and mineral development to disclose in their annual reports all extraction-related payments they or their controlled subsidiaries make to foreign governments.

The FCPA already covers illegal payments to foreign government officials. This new law covers legal payments to governments themselves.

We'll stipulate that some natural resource companies do business with corrupt overseas governments. That's because not all hydrocarbons and minerals are found under land controlled by saintly regimes. But what will happen when the payments are disclosed? Will governments and private groups mount PR campaigns against companies doing business with unpopular overseas governments? Will "extraction issuers" lose their freedom to go where the natural resources are? Will doing business with regimes that can't pass someone's smell test trigger political attacks that punish companies for legal activities that bring needed products to the rest of the world?

There's always tension between big oil and the U.S government. That's natural. They both control vast resources that can be used to influence domestic and foreign policy. But the government shouldn't impose disclosure requirements on businesses that the government itself isn't willing or able to meet.

For more on Section 1504, see Mike Koehler's excellent discussion here. 

Former Congressman William Jefferson's chances of winning his appeal got a big boost from the Supreme Court two weeks ago.

In Skilling v. United States, the justices narrowed the reach of the honest services statute. That law was behind most of the 11 counts Jefferson was convicted on. He was acquitted of the single substantive FCPA charge he faced but was found guilty on a conspiracy count that included both an FCPA and an honest-services element.

Jefferson, 63, was sentenced in November to 13 years in prison. He's free pending appeal.

The former nine-term Congressman from New Orleans was the first and only U.S. public official to be charged under the FCPA since it was enacted in 1977. His case will always be remembered for the $90,000 in cash found in his freezer. The money was part of $100,000 given to him by government informant Lori Mody. Prosecutors said Jefferson planned to use it to bribe Nigeria's then vice president, Atiku Abubakar.

According to a report in the Times Picayune, Judge T.S. Ellis III included in his definition of honest services fraud "concealed conflicts of interest." The Supreme Court ruling narrows the statute's use to exclude conflicts of interest. Jefferson's lawyers are saying there's no way to determine what role the conflicts allegations played in the honest-services guilty verdicts or other fraud counts, which should all be thrown out.

The honest-services object probably also dooms Count 1 of the indictment. It alleged three separate illegal conspiracies -- to solicit bribes, deprive citizens of honest services, and violate the FCPA. We argued before the Skilling ruling that the FCPA-related conspiracy count against Jefferson should be tossed. The jury's verdict form did not require it to specify which of the three illegal conspiracies the panel believed he engaged in. So his conviction on Count 1 may or may not have included a finding that he conspired to violate the FCPA. Jury accountability was lacking, and Judge Ellis himself said after the trial he regretted the way the verdict form was written.

The 4th Circuit Court of Appeals will now decide what to do with Jefferson's case. The most likely scenario is a remand to Judge Ellis, for him to decide how to apply the Supreme Court's ruling and perhaps to modify Jefferson's sentence. The ex-Congressman's lawyers are unlikely to be satisfied with anything less than a new trial. 

Smith and Wesson, the most prominent company implicated in the Shot-Show prosecutions, disclosed last week that it's being investigated by the DOJ and SEC for FCPA violations. The company said it has already spent $3.2 million in connection with the case.

The disclosure was fairly typical -- some reasons for the government's investigation, the uncertain outcome for the company, and no details about how Smith and Wesson tries to comply with the FCPA. That's too bad.

We'd like to hear more about compliance. But for now, companies and their lawyers think that information doesn't belong in SEC disclosure material. They're partly right. Once an employee pleads guilty to an FCPA offense (the usual outcome of an indictment), the company becomes strictly liable under respondeat superior. It has no defense, so information about its compliance program becomes largely irrelevant.

There's also an assumption that because a compliance program didn't prevent an FCPA offense, the program is worthless. That's wrong. Overseas bribery can happen in any company, even one with an "effective" compliance program.

Here's an idea. Instead of holding companies strictly liable for their employees' FCPA offenses, let them assert a good-faith defense. When accused of an FCPA violation, encourage companies to talk about the strengths of their compliance programs and how they tried to keep their employees on the right side of the law. Give them a chance to redeem their corporate citizenship without being pressured into a deal with the DOJ and SEC. That, in turn, will give them a powerful reason to have a robust compliance program and to disclose details about it, even before they're in trouble.

Investors, customers, suppliers, NGOs, lawmakers, and the general public want to know what companies are doing to avoid overseas corruption. We think Smith and Wesson had good intentions. In its disclosure the company said: "We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad." 

Still, we'd like to know more about what S&W and other companies do to comply with the FCPA. Fixing respondeat superior will encourage them to tell us.

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Here's Smith and Wesson's full FCPA disclosure from its latest annual report:

Foreign Corrupt Practices Act (FCPA)

On January 19, 2010, the U.S. Department of Justice (“DOJ”) unsealed indictments of 22 individuals from the law enforcement and military equipment industries, one of whom was our Vice President−Sales, International & U.S. Law Enforcement. We were not charged in the indictment. We also were served with a Grand Jury subpoena for the production of documents. We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad. Although we are cooperating fully with the DOJ in this matter and have undertaken a comprehensive review of company policies and procedures, the DOJ may determine that we have violated FCPA laws. We cannot predict when this investigation will be completed or its outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, or if our employee is convicted of FCPA violations, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts, and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.

SEC Investigation

Subsequent to the end of fiscal 2010, we received a letter from the staff of the SEC giving notice that the SEC is conducting a non−public, fact−finding inquiry to determine whether there have been any violations of the federal securities laws. It appears this civil inquiry was triggered in part by the DOJ investigation into potential FCPA violations. We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad. Although we are cooperating fully with the SEC in this matter, the SEC may determine that we have violated federal securities laws. We cannot predict when this inquiry will be completed or its outcome. If the SEC determines that we have violated federal securities laws, we may face injunctive relief, disgorgement of ill−gotten gains, and sanctions, including fines and penalties, or may be forced to take corrective actions that could increase our costs or otherwise adversely affect our business,
results of operations, and liquidity. We also face increased legal expenses and could see an increase in the cost of doing business. We could also see private civil litigation arising as a result of the outcome of this inquiry. In addition, responding to the inquiry may divert the time and attention of our management from normal business operations. Regardless of the outcome of the inquiry, the publicity surrounding the inquiry and the potential risks associated with the inquiry could negatively impact the perception of our company by
investors, customers, and others.

The Senate's version of the financial reform bill can be downloaded here. Under the bill, which still needs to be reconciled with the House version and signed into law, FCPA whistleblowers could receive from 10% to 30% of amounts recovered through enforcement actions. The SEC would decide the final amount based on the originality and value of the information provided and how directly it led to the financial penalty against the defendant.

As we said last month, paying FCPA whistleblowers will increase enforcement actions. But will justice be served?

The way U.S. law now works in most places, organizations are strictly liable for crimes committed by employees who are doing their jobs. Even if a company has an effective compliance program and has done everything possible to prevent violations, that's no defense under respondeat superior. When the DOJ and SEC find an employee's FCPA violation, the company is presumed guilty and forced to settle the case, usually by paying a big penalty.

Beyond that, most FCPA settlements require the company to help prosecutors make cases against employees and agents. The companies may have to disclose to the feds documents and conversations the individuals probably thought were privileged. So the presumption of guilt and denial of legal protections spreads from the company to its people.

Someone in government asked us not long ago if we're in favor of private enforcement of the FCPA -- civil suits by private litigants against FCPA violators -- as happens with antitrust, RICO, and securities law violations, among others. We said no. Private FCPA enforcement sounds good but because of respondeat superior, it's also worrying.

Companies facing FCPA allegations are forced to settle with the DOJ and SEC. Those settlements and the admissions leading to them -- whether supported by trial-worthy evidence or not -- could put corporations at an extreme disadvantage in follow-on civil suits. Private FCPA enforcement would magnify the injustice caused by the undiluted application of respondeat superior.

What's the fix? Give organizations the right to defend themselves against criminal charges. Let them show that they tried to prevent the bribery. The good-faith defense would be a powerful incentive for companies to have strong compliance programs. It would give them their day in court if they want it, and relieve pressure for shot-gun settlements that can rob both the company and its people of a fair trial. The only thing that might be lost is the DOJ's perfect batting average in FCPA cases against organizations -- a legal anomaly that's a symptom not of health in the criminal justice system but disease.

Enforcement of the FCPA is a good thing. But not when the price is fundamental fairness for corporate and individual defendants.