Handling Naaman's Secret Evidence

As we mentioned a few weeks ago, Ousama Naaman's sentencing is on hold while he and the government review new evidence that may be classified.

It's a complicated process, and prosecutors now want his sentencing, first set for August 4 and then moved to September 8, delayed indefinitely.

Naaman pleaded guilty in January to an FCPA conspiracy count. As Innospec's agent, he paid $4 million in kickbacks to the Iraqi government and more than $3.5 million in bribes to senior Iraqi government officials.

He introduced the new evidence during his sentencing phase.

When a defendant wants to discover classified information or put it into evidence, there's a tricky balancing act between his right to a fair trial and national security.

In the Giffen case, for example, prosecutors agreed that Giffen's lawyers could see some classified material but couldn't tell their client about it without permission from the government and the court. In other words, the presence of the classified evidence tied the case up in knots.

That's not supposed to happen. A U.S. law -- the Classified Information Procedures Act, or CIPA -- was intended to balance the interests of everyone and make trials run smoother. The law calls for orderly disclosures, in camera conferences and hearings, interlocutory appeals, and high-level DOJ coordination.

A government filing last week in the Naaman case nicely describes how CIPA is supposed to work. (How it works in real life isn't always so clear.)

While we can't see Naaman's new evidence because it might be classified, we can see how the government proposes handling it.

Download a copy of the United States' August 22, 2011 motion for a status conference pursuant to 18 U.S.C. APP. III (CIPA) Section 2 here.

Worst FCPA Prosecutions Ever

We have enormous respect for those who serve the public, including the prosecutors at the DOJ. Without them, the 'rule of law' would just be pretty words.

But everyone is human and stuff happens.

So today we're looking at the DOJ's worst five FCPA enforcement actions of all time. Some defendants on the list faced stacked charges. Or the DOJ overreached at the sentencing phase. Or the prosecutions were a mistake to begin with.

Again, we mean no disrespect to anyone. Decisions made at the start of a case can look different later on, when all the facts are in. That's why hindsight is perfect and real life isn't.

But our job is to talk about FCPA enforcement, warts and all. And warts there sometimes are, as these five prosecutions show.

We've listed them in reverse order, with Number One being the worst FCPA enforcement decision ever.

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Number 5. Gerald and Patricia Green. The government stacked a lot of charges against the Hollywood power couple, and that apparently displeased the judge. There was conspiracy to violate the FCPA, nine substantive FCPA counts, seven money-laundering counts, and a tax charge. The Greens -- he's now 79 and she's 56 -- were facing 30 to 40 years in prison. The government wanted ten years. But the judge sentenced them to just six months in jail. Then, displaying a petty spirit, the DOJ filed a notice of appeal against the 'short' sentences. By then the government had seized almost everything the Greens owned, including their company, pension assets, and family home, leaving them indigent.

Number 4. Frederic Bourke. The co-founder of high-end handbag maker Dooney & Bourke was accused of making an investment with Viktor Kozeny, while knowing that Kozeny might bribe foreign officials with some of the money. Bourke wasn't accused of bribing anyone, or approving any bribes, or helping arrange them. Just investing in a project where he knew or should have known that bribery might happen. That's a stretch for the FCPA. On top of that, Bourke himself lost his entire $7 million investment he made with Kozeny, and dragged in family and friends, including Senator George Mitchell, who lost $200,000. After being convicted of conspiracy to violate the FCPA, Bourke faced five years in prison. The judge sentenced him to a year and a day, saying Bourke looked like a victim. He's appealing his conviction.

Number 3. William Jefferson. The former United States Congressman was given $100,000 by an undercover cooperating witness, allegedly for Jefferson to use to bribe a Nigerian official. In a later raid on Jefferson's house, $90,000 of the cash was found in his freezer, and there was no evidence Jefferson had used any of the money to bribe anyone. But to get the cash-in-the-freezer evidence admitted in court, the DOJ alleged the money was part of a scheme to violate the FCPA. The jury didn't buy the substantive FCPA charge -- the cash was in the freezer, not in the pocket of a Nigerian official. Jefferson, however, was convicted of conspiracy and of being a corrupt politician. He's appealing.

Number 2. Bobby Jay Elkin was a former country manager in Kyrgyzstan for tobacco company Dimon Inc, now called Alliance One International. He pleaded guilty to a one-count criminal information charging him with conspiracy to violate the FCPA. He paid more than $3 million to officials in Kyrgyzstan, mainly to keep corrupt Kyrgyz Tax Inspection Police off the company's back. The DOJ wanted him sentenced to 38 months in prison. The judge let him off with no jail time and even let him travel back overseas (with another employer). At sentencing, the judge in Roanoke, Virginia said Elkin faced a choice of "either you do this or lose your job." The judge called Elkin a hero who protected his workers when rioting broke out.

Number 1. James Giffen. The DOJ indicted Giffen, an oil consultant and middleman, for paying $84 million in bribes to the president of Kazakhstan and other foreign officials. Giffen said, and eventually convinced the judge, that he was keeping the CIA informed about everything he did, and that he always had the agency's go-ahead. After a six-year prosecution, Giffen was allowed to plead guilty to a misdemeanor tax charge, for which he received no punishment. The judge described him as a "conduit for communications on issues vital to America’s national interest in the region.” In other words, Giffen was a patriot and a hero.

FCPA Defendants Face The Verdict Of History

Should anyone be surprised by the guilty verdicts handed down Tuesday in the Lindsey case?

Not at all. History, and the odds, are always against FCPA defendants.

Others who've learned that in recent years include Gerald Green and his wife Patricia, Frederic Bourke, William Jefferson, David Kay, Douglas Murphy, and David Mead -- all convicted by juries in FCPA cases. 

Oil consultant James Giffen beat an FCPA rap and pleaded guilty to a misdemeanor tax charge, but only after the CIA apparently admitted that he and the agency had a close working relationship in Kazakhstan. It wasn't a typical FCPA enforcement action.

As we digest the tragic result for the Lindsey defendants, there are several FCPA trials looming. One in California of five defendants from Control Components Inc., another in Houston of John O'Shea, formerly of ABB. And in the District of Columbia, 19 of the original 22 shot-show defendants may go to trial. That's another case that isn't a typical FCPA enforcement action. It grew out of a government sting, with no real foreign official, and the possibility that some defendants will raise the entrapment defense.

In typical enforcment actions, why is fighting FCPA charges so tough?

Judges interpret the statutue the same way the DOJ does. Courts have upheld the DOJ's so-called expansive view of the elements of an FCPA offense. "Knowledge" and "intent" were argued about in the Bourke and Meade trials, and prosecutors won the argument. In Kay and Murphy, the so-called business nexus element -- the "obtain or retain business" language from the FCPA -- was contested, and Kay and Murphy lost. The Lindsey defendants attacked the government's view of who's a "foreign official," and that didn't work.

As for juries, they don't like bribes or corrupt foreign officials, and in all FCPA trials there are allegations of both. As someone wisely said to us this week, "If a jury clearly sees that a major crime has been committed, their sense of decency is offended, and someone has to pay."

In most cases, the alleged foreign bribery is a team effort. Lot's of people are involved. The evidence trail they leave behind is easy for prosecutors and juries to follow. Phony contracts and dummy invoices, hot money bouncing between banks, cancelled checks, shell companies, two sets of books -- it's all there, like breadcrumbs on the ground.

Finally, the DOJ has lots of arrows in its quiver. A foreign bribery case can start with an FCPA count. But the DOJ might then add conspiracy, money laundering, traveling to commit the offense, aiding and abetting, obstruction, tax-cheating, and so on. Stacking the charges may not seem fair to defendants but that's the federal system. A case with multiple related charges probably gives jurors the idea there was lots of criminal activity going on. And those same jurors then get several chances to bring in a guilty verdict on some or all of the counts.

Wikileaks, SEC Whistleblowers, and Giffen

For years now, a certain reader has been stitching together for us enforcement topics in ways we hadn't thought of.

This time our friend -- who's a top compliance professional and wants to remain anonymous -- connects the dots from a few recent headlines.

Does he have an over-active imagination? It's tempting to think so. Except he's been spot on more times than we can count.

Here's what he said this week:

Dear FCPA Blog,

Fascinating post last Friday about Wikileaks and the FCPA. I believe like you that there is potential for these leaks to implicate or at least provide fodder for those interested in FCPA enforcement.

However, I also wondered how this might apply or relate to the new FCPA whistleblower provisions (if at all). Perhaps if Wikileaks was smart it would turn this information over to the SEC and it may not have to worry about its on-going funding challenges.

(Ever since I first heard of Wikileaks, I thought it would be the perfect forum for corporate whistleblowers to come forward.)

The other aspect is the Giffen effect, where these payments may be state sponsored and therefore problematic from an enforcement perspective. Obviously the situation would not be pretty no matter how you slice it.

We’ll see if anything comes out. I understand those news organizations that got a sneak peek are still reviewing the documents.

Thanks again.

Doing Better For The World

Professor Andrew Brady Spalding of the Chicago-Kent College of LawBy Andy Spalding

The absurd conclusion to the Giffen prosecution illustrates, as effectively as any case could, the foreign policy debacle that is FCPA enforcement.  

As I have previously written on the FCPA Blog, U.S. industry lost much of its influence in Kazakhstan following Giffen's arrest. The void was filled by Chinese companies who, most assuredly, did not bribe less.  Now, with the judge in Giffen's trial essentially suggesting that the DOJ was wrong to go after him, there are no winners at all in this seven-year saga. The DOJ didn't get its man. U.S. influence in a crucial region diminished. And the Kazakhstani people were left vulnerable to a business presence that they largely resent but feel powerless to resist. Everybody loses.

The U.S. Chamber Institute for Legal Reform has issued a credible set of proposed amendments. We must remember, however, that the impact of FCPA enforcement is felt not just by the U.S. business community; it is also felt by the citizens of the countries where enforcement actions take place, and these are usually developing countries. With their interests in mind, I would like to suggest five reasons to amend the FCPA:

1.  Studies confirm that the present FCPA enforcement regime leads to a decrease in foreign direct investment in developing countries. Kazakhstan is but a single example; we have multiple reports from the U.S. Department of Commerce and academic economists confirming this predictable and intuitive effect. Indeed, one former high-ranking DOJ attorney personally told me that she considered this a good thing --
that withdrawing our FDI from corruption-prone countries will aid in the fight against global corruption. I submit that it will not, for the reasons below.

2.  We influence developing countries through our presence, not our absence. Such was the original vision of the FCPA, as the legislative history reflects -- we would set a good example in developing countries by operating there without participating in corruption. Indeed, the president of one of the biggest conglomerates in Asia told me that the prospect of curbing corruption in his country lies not in any effort that his government might initiate, but in increased interaction with companies that are subject to the FCPA.

3.  Curtailing our FDI has exactly the opposite effect.  The FDI void is filled by companies from countries that are not subject to anti-corruption measures. These "black knights" move in and do business in precisely the ways the FCPA seeks to prevent, thus perpetuating the culture and practices of corruption. This is currently occurring throughout the developing world.

4.  FDI is the best remaining tool for promoting good governance in developing countries. Economic sanctions haven't worked. Government aid hasn't worked. And military occupation is most certainly not working. Indeed, each has tended to increase, not decrease, corruption. So what is left?  FDI is the best tool we've got.

5.  We increasingly believe that a corrupt-free government is a human right. The Obama Administration has made this very claim. While the DOJ has historically focused on the perpetrators of corruption, we
should start thinking of the victims: the citizens of developing countries. I propose that we not leave them to be ravaged by companies that bribe recklessly.

We can do better -- for ourselves and for the world.

Andrew Brady Spalding is a member of the faculty at Chicago-Kent College of Law. He conducted research in Kazakhstan as a Fulbright Scholar on the impact of FCPA enforcement. Professor Spalding's research has been featured in the Wall Street Journal, Forbes, and various international publications. He has lectured to law schools, business schools, and political science departments throughout the United States and the world, including India, Turkey, Thailand, Bangladesh, Kazakhstan, the United Arab Emirates, and South Africa.