'Not Every Mistake Is A Criminal Act'

Lawrence Goldman's posts on the White Collar Crime Prof Blog are uniformly smart and engaging.

What Goldman said last week about the over criminalization of business behavior brought to mind some recent FCPA prosecutions that ended with acquittals, mistrials, or dismissals:

Both Attorney General Eric Holder and SEC Enforcement Director Robert Khuzami defended their record, stating that not every mistake is a violation of law. Holder said, "We also have learned that behavior that is reckless or unethical is not necessarily criminal," a statement which (aside from leading me to ask why it had taken him so long to realize it) should be painted on the walls of every prosecutorial office.

Read Lawrence Goldman's full post here.

Second Mistrial In Africa Sting Prosecution

Judge Richard Leon declared a mistrial today in the prosecution of the three remaining defendants in the second Africa sting trial.

After deliberating ten days, the jury failed to reach a verdict on any counts against siblings John and Jeana Mushriqui, and Marc Morales.

Of the six defendants who started in the second Africa sting trial, none were convicted.

On Monday, the jury acquitted Patrick Caldwell and John Godsey of violating the Foreign Corrupt Practices Act.

Stephen G. Giordanella was acquitted by the judge last month before the case went to the jury.

The first Africa sting trial ended in September with a hung jury, forcing Judge Leon to declare a mistrial. The DOJ has said it will retry Pankesh Patel, Andrew Bigelow, John Benson Weir, and Lee Allen Tolleson.

Twenty-two defendants were arrested after a two-and-a-half year undercover "sting" operation by the DOJ and FBI agents. All but one defendant was arrested in Las Vegas during an annual trade show for military and law enforcement equipment companies.

Prosecutors alleged that the defendants tried to bribe the defense minister of Gabon, Africa to win contracts to provide body armor, weapons, and military gear. U.S. government agents posed as officials from Gabon.

Three defendants in the case have pleaded guilty to FCPA conspiracy or substantive charges. Haim Geri, Daniel Alvirez, and Jonathan Spiller haven't been sentenced yet.

After Judge Leon declared the mistrial today, the DOJ said it intends to retry the Mushriquis, who are siblings, and Morales. Their trial had lasted three months before the jury began deliberating.

As early as February last year, Judge Leon expressed doubt about the government's conspiracy theory in the case. "I read all 16 indictments," Judge Leon said, "and I didn't see it. I have zero sense that there was an omnibus grand conspiracy." Prosecutors went ahead anyway.

But last month, Judge Leon dismissed all conspiracy charges against the six defendants in the second trial, leaving only substantive FCPA counts. Those are generally harder to prove than conspiracy charges.

The DOJ's embattled FCPA unit has suffered a string of high-profile losses.

Earlier this month, a judge ordered the acquittal of John O'Shea, a former ABB manager in Texas, on all substantive FCPA counts he faced. The judge said the government's primary witness knew almost nothing about the case.

In December last year, a federal judge in Los Angeles dismissed indictments against Keith Lindsey and Steve K. Lee, and their company Lindsey Manufacturing. After the jury convicted the three defendants on all counts, Judge Howard Matz threw out the verdicts. He said prosecutors had withheld evidence and violated court orders, among other things. The DOJ has said it is appealing Judge Matz's ruling.

O'Shea Lawyer: The Gov't Will Have To Alter Its Strategy

Joel Androphy, left, is the lawyer who led John O'Shea's defense team to a stunning win.

On Monday, Judge Lynn Hughes tossed all twelve substantive FCPA counts against O'Shea (the judge's order is below).

We asked Androphy what the case means for future FCPA prosecutions.

"The government will have to alter its FCPA strategy in prosecuting individuals," he said. "Proving one to be a foreign official requires more than just a recitation by a lay witness; it requires expert testimony."

Should others facing FCPA charges be encouraged? Or was this case a special circumstance? A fluke result?

According to Androphy, it's not easy for the government to prosecute these cases. "It rarely has the ability to obtain the testimony of foreign witnesses," he said.  "It is difficult to obtain foreign documents. Defense lawyers should put the government to its burden of proof and not confess without a trial." 
 
What about public companies? For the past two decades, none have gone to trial. Will O'Shea encourage them to fight FCPA charges?

"It is unlikely that public corporations will try these cases," Androphy said. "Paying money is an easier exit than the risk of conviction and more money."

Mabey: Too Much Heat, Too Little Considered Observation?

By Bill Waite

The U.K. Serious Fraud Office issued a news release on Friday 13th January stating that it has reached a civil settlement with the shareholders of Mabey Engineering (Holdings) Ltd to pay over £130,000 it received in dividends from Mabey & Johnson Ltd, its wholly owned subsidiary. This has occasioned the latest round of excitement in the media regarding the Serious Fraud Office and its mandate to enforce anti-bribery legislation.

The order, which appears to have been made by consent, was granted under Part 5 of the Proceeds of Crime Act 2002. This Act “enables the enforcement authority to recover, in civil proceedings before the High Court, property which is, or represents, property obtained through unlawful conduct”. “Unlawful conduct” is any conduct which is unlawful under the criminal law of the United Kingdom or, if the conduct is undertaken outside the United Kingdom, is unlawful either under local law, or if the same conduct was undertaken in the United Kingdom, would have been unlawful.

For a Court to make such an order it must be satisfied on a balance of probabilities that any matters alleged to constitute unlawful conduct have occurred.

Here, that evidential burden was easy to overcome. The subsidiary and two of its directors had pleaded guilty to bribery offences and, in the individuals’ case, been sentenced to terms of imprisonment.

In publishing the order, Richard Alderman said:

There are two key messages I would like to highlight. First, shareholders who receive the proceeds of crime can expect civil action against them to recover the money. The SFO will pursue this approach vigorously…

The second, broader point is that shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in. This is very important and we cannot emphasise it enough. It is particularly so for institutional investors who have the knowledge and expertise to do it. The SFO intends to use the civil recovery process to pursue investors who have benefitted from illegal activity. Where issues arise, we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect.

His statements have, of course, been given the widest possible interpretation and, in the case of his first message, the fact base against which it was delivered has been largely ignored.

In Mabey, there was as clear a causal chain as it is possible to envisage between the corrupt activity, profit in the subsidiary and the dividend. Hence the prosecution and the civil action.

His second message has been widely interpreted as imposing on all institutional investors, including pension funds, an obligation to conduct rigorous due diligence before they invest, or risk losing dividend payments as a consequence. I very much doubt that this was what he intended.

Section 7 of the Bribery Act creates a specific adequate procedures defence. The Ministry of Justice’s guidance on this section makes it clear that companies are required to take necessary and proportionate steps to mitigate the bribery risks that their businesses face. They are not required to take all possible steps to mitigate any possible risk. This interpretation has been endorsed many times by the Lord Chancellor.

It would therefore be erroneous if the obligations under the primary anti-bribery statute imposed a lesser burden on the corporate to conduct due diligence than the application of the Proceeds of Crime Act. Indeed, it is difficult to see on what predicate offence such an order might be based.

Aside from this mere legal technicality, there are public interest issues and ultimately judicial control mechanisms which make an over-zealous application of the Proceeds of Crime Act unlikely.

I would suggest that what Richard Alderman was alluding to in his remarks had a great deal more to do with merger and acquisition activity, joint ventures, private equity financing and institutional FDI, and not whether a pension fund takes a short, medium or long term position in an international business listed on a major exchange.

In many cases, companies are very well aware of their obligations to conduct proper and effective due diligence prior to investment. They have had “adequate procedures” or compliance controls for the last ten years or more – not only because of compliance risk - but because it makes eminently good business sense to understand who you are doing business with.

I suggest Mr Alderman’s remarks were a reminder to those who have not yet taken this step.

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Bill Waite is a founder of The Risk Advisory Group (a sponsor of the FCPA Blog) and an expert on anti-bribery and corruption legislation. He formerly practiced as a criminal barrister before joining the Serious Fraud Office in 1991 as a prosecutor. He can be contacted here.

Shifting The FCPA Reform Debate Into High Gear

By T. Markus Funk and M. Bridget Minder

Simmering throughout 2011, the robust FCPA reform debate can now be divided into a number of distinct drafting and public policy battle fields.

Our hope in writing a recent Bloomberg Law Report piece (available in pdf here) was to advance the dialogue. We examine (1) the core criminal law theory assumptions and (2) some of the public policy objectives driving the debate, including whether reforming the FCPA is advisable on public policy grounds, and the extent to which the position that foreign governments will view even modest FCPA reform as a signal to abandon wholesale their domestic anti-corruption efforts are justified.

(Having served two years in a post-conflict environment for USDOJ/State setting up domestic anti-corruption laws and enforcement mechanisms, the latter issue was of particular concern to one of the authors). 

In the article, we also make four suggestions for reforming the FCPA.

They are:

• Provide a sensible “adequate compliance procedures” defense

• Appropriately limit successor liability

• Establish a fitting scope of corporate liability for acts of a subsidiary

• Properly define “foreign official”

To round out the analysis, we take a closer look at the theoretical assumptions grounding recent critiques of the U.S. Chamber of Commerce's calls for reform.

In the end, all sides of the debate undeniably have a genuine, well-intentioned interest in balancing the noble pursuit of a corruption-free world against the values of fairness and transparency in our domestic laws and enforcement policies. 

We hope that 2012 will see us come closer to reaching consensus.

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T. Markus Funk, a former federal prosecutor who is now in private practice and is the Co-Chair of the ABA's Global Anti-Corruption Task Force, and his Perkins Coie colleague M. Bridget Minder just authored "Bribery of Foreign Officials: The FCPA in 2011 and Beyond: Is Targeted FCPA Reform Really the “Wrong Thing at the Wrong Time”? in the Bloomberg Law Reports. It is available in pdf here.