Oil consultant James Giffen, 69, escaped jail time, criminal fines, and probation when he appeared Friday before U.S. District Judge William H. Pauley in New York.
Entries in James Giffen (23)
We're always happy to hear from lawyer Andy Spalding, left. He recently returned from a year-long Fulbright Research Grant in Mumbai, India, and is now on the faculty at the Chicago-Kent College of Law.
He's been thinking about the extraordinary case of James Giffen, the former middleman to U.S. oil companies doing business in Kazakhstan. He writes:
Dear FCPA Blog,
With James Giffen's plea on Friday to a mere misdemeanor, the case is drawing to an anti-climatic and curious close. In an era of ever-increasing fines and penalties for FCPA violations, Giffen's modest settlement seems an aberration; even more peculiar, some have commented on how the otherwise highly-capable Southern District prosecutors fumbled through this case with atypical awkwardness.
All of this gives rise to speculation that the case was subject to political pressures -- namely, that either the agencies that were asked to produce documents and stonewalled, or outside agencies that may have bore down on the Southern District, determined that the foreign policy implications of this case, involving delicate relations with resource-rich Kazakhstan, were so sensitive as to outweigh any public interest in Giffen's fulsome prosecution.
If political forces did indeed compromise the prosecution (and few of us can know for sure), does this scenario seem familiar to anyone?
Let's recall the similarly strange prosecution of BAE, the British defense contractor who allegedly paid more than $2 billion in bribes and kickbacks to a Saudi Arabian prince. The U.K.'s Serious Fraud Office opened an investigation, which it suddenly closed. We would learn that pressure to terminate the investigation came from outside (or perhaps, above) the SFO: the Blair government apparently insisted on the file's closure in response to Saudi threats to cease cooperation with the UK's anti-terrorism efforts.
The High Court in London berated the SFO for capitulating, and on appeal the House of Lords declared SFO's handling of the matter "extremely distasteful"; the SFO director resigned shortly thereafter. In apparent protest of the the SFO's decision, our DOJ opened its own investigation, and the SFO eventually reopened its file. The result? BAE settled with the DOJ for $400 million, the third-highest amount in FCPA history. But the SFO fined BAE a relative pittance -- £30 million. The parallel is unmistakable, and striking: in a case with heightened foreign policy sensitivities, allegations that seem to otherwise warrant a substantial settlement resulted in something far less.
In fairness to the DOJ, this may not be their fault: whether due to an uncooperative client, or irresistible political pressure, they may have wanted to push further but were hamstrung. Still, it raises a compelling question: Is the Giffen case America's BAE?
Last Friday in federal court in Manhattan, oil consultant James Giffen, the seven-year target of one of history's biggest individual FCPA prosecutions, was allowed to plead guilty to a misdemeanor -- failing to report a foreign bank account in a 1996 tax return. His now-dormant firm, Mercator Corporation, pleaded guilty to one count of violating the Foreign Corrupt Practices Act by giving two snowmobiles to officials in Kazakhstan in 1999.
Giffen now faces not more than a year in prison when he's sentenced on November 19, but he may not serve any jail time at all.
We called the plea deal a sputtering end for such a high-profile prosecution. The DOJ, which may have been caught flat-footed in the case by undisclosed and still-classified maneuverings in the 1990s by other three-letter U.S. agencies, put a different spin on things.
Here's what the Justice Department said in its August 6 release:
WASHINGTON – The Mercator Corporation, a merchant bank with offices in New York, pleaded guilty today in federal court in Manhattan, N.Y., to one count of making an unlawful payment to a senior government official of the Republic of Kazakhstan, in violation of the Foreign Corrupt Practices Act (FCPA), announced Assistant Attorney General Lanny A. Breuer of the Criminal Division and U.S. Attorney Preet Bharara for the Southern District of New York. Additionally, James H. Giffen, 69, of Mamaroneck, N.Y., and Mercator’s chairman, pleaded guilty today in federal court in Manhattan to one count of failing to disclose control of a Swiss bank account on his income tax return. Both pleas were before U.S. District Judge William H. Pauley III.
According to court documents, Mercator advised Kazakhstan in connection with various transactions related to the sale of portions of Kazakhstan’s oil and gas wealth. Three senior officials in the government of Kazakhstan had the power to substantially influence whether Mercator obtained and retained lucrative business, as well as the authority to pay Mercator substantial success fees if certain oil transactions closed, as well as to decide whether or not those transactions would close. According to court documents, Mercator was therefore dependent upon the goodwill of those senior officials, and in an effort to maintain its lucrative position, Mercator caused the purchase of two snowmobiles in November 1999. The snowmobiles were shipped to Kazakhstan for delivery to one of the officials.
According to the criminal information to which Giffen pleaded guilty, Giffen filed a U.S. Individual Income Tax Return, Form 1040, on March 27, 1997, for himself for the calendar year 1996, which failed to report that he maintained an interest in, and a signature and other authority over, a bank account in Switzerland in the name of Condor Capital Management, a British Virgin Islands corporation he controlled.
In 2007, the United States brought a separate, related civil forfeiture action in U.S. District Court in Manhattan against approximately $84 million on deposit in Switzerland. The civil complaint alleged that the funds were traceable to unlawful payments to senior Kazakh officials in connection with oil and gas transactions arranged by Mercator for Kazakhstan. According to a 2007 agreement between the United States, Switzerland and Kazakhstan, the funds are being used by a non-governmental organization in Kazakhstan, independent of the Kazakh Government, to benefit underprivileged Kazakh children.
Mercator faces a maximum fine of the greater of $2 million or twice the gross gain or loss resulting from the offense. Giffen faces a maximum sentence of one year in prison and a fine of up to $25,000.
Bloomberg's David Glovin is reporting that James Giffen will plead guilty to a tax-related misdemeanor today in federal court in Manhattan.
Giffen has spent more than seven years fighting charges that he bribed government officials in Kazakhstan. Prosecutors alleged that Giffen, 69, paid $84 million to Kazakh President Nursultan Nazarbayev and other officials in violation of the FCPA. He was a middleman for several Western oil companies.
Giffen "will enter a plea today in federal court in Manhattan to failing to supply information about foreign bank accounts in his tax return," Glovin reported. In addition, Giffen’s investment bank, Mercator Corp., will plead guilty to a single FCPA offense.
Giffen's prosecution has been stuck while the parties fought about access to classified documents and procedural matters. Giffen had claimed the U.S. government knew about his work in Kazakhstan and the alleged payments he arranged to leaders there. He has been free on bail since his arrest in 2003.
Glovin's report didn't say what punishment Giffen might face from his plea deal.
The 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.
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.
Andy Spalding, a lawyer on a year-long Fulbright Research Grant in Mumbai, India, writes to us from time to time. Here's his latest dispatch:
Dear FCPA Blog,
I have just returned from a week in Almaty, Kazakhstan, which your readers know to be an FCPA hot spot. I tried to preach the anti-corruption message through a series of lectures at one of the law schools, and interviewed a number of local practitioners. This experience taught two undeniable lessons:
1. It is nearly impossible to overstate the importance of curbing corruption in Kazakhstan. Graft is endemic (the country ranked a miserable 120 on the 2009 Corruption Perception Index) and perpetuates all manner of legal and social pathologies. The citizens of Almaty are perhaps as cynical about their government as any I have ever met, and with very good reason. Worse yet, U.S. companies have participated in, and reinforced, this culture of corruption, as we all learned through watching the James Giffen case explode in 2003. But this brings me to the second lesson:
2. The present FCPA enforcement regime has done that country tremendous harm. How did the U.S. respond to the discovery of systematic bribery by U.S. companies in Kazakhstan? The same way that we respond to nearly every such revelation: we slapped severe criminal sanctions on myriad U.S. persons and hoped that other companies would get the message. Those companies did indeed get a message; whether it is the message we want to convey is a very interesting question. Since Giffen's arrest, western investment in the oil and gas sector in Kazakhstan has dropped precipitously. This is hardly surprising, and some would argue that it is precisely the desired outcome. But consider what happened in its wake. In that same period of time, investment has gone up, just as rapidly, from a well-capitalized country that has refused to adopt the OECD Convention: China.
Query: is Kazakhstan any better off now? I can tell you that the Kazakhstanis most certainly do not think so. There is a level of apprehension there about rising Chinese investment and influence that is quite shocking. A lawyer from a leading U.S. firm said, "My clients used to all be from the west, and now they're almost all Chinese." Another lawyer said, "The Chinese don't like to spend as much on lawyers, because they solve their legal problems through other means." Those of us in anti-corruption circles know exactly what that lawyer meant. The law students are petrified by the prospect of working for, or with, Chinese companies -- "they don't do business the same way," so many of them told me. And yet, many of these same students are taking Chinese language classes.
Will corruption go down in Kazakhstan after the Giffen case? Certainly not. Has our withdrawal of FDI from Kazakhstan somehow set that country on the road to reform? This answer is also certain.
What's the remedy? Finding a way to enforce the FCPA that deters bribery without deterring investment in developing countries like Kazakhstan. We're smart enough to figure it out. Simply washing our hands of corruption by pulling out of developing countries like Kazakhstan, leaving them to be ravaged by companies that bribe without any fear of penalty, is morally irresponsible.
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Readers with experiences in Kazakhstan or similar countries are welcome to comment as well.
Colorado-based independent oilman Jack Grynberg filed a 311-page complaint in December with the European Commission. He's asking for an investigation into alleged bribery and tax evasion in Kazakhstan by several oil companies he once partnered with. His claims relate to oil and gas developments dating back to the early 1990s -- the same ones at the center of the U.S. prosecutions of James Giffen and Brian Williams. See our post James Giffen And America's Secrets.
Grynberg, 78, who speaks six languages including Russian, is alleging "wholesale bribery and corruption of top Kazakh government officials." He claims the corruption led to his company's loss of rights in the Greater Kashagan and Karachaganak Oil Fields -- estimated to hold more than 9 billion barrels of recoverable oil and 25 trillion cubic feet of natural gas.
His complaint names BP plc, StatoilHydro A.S.A., Total S.A., Royal Dutch Shell plc, ENI S.p.A., ExxonMobil, ConocoPhillips, and Inpex.
In a release he sent to the FCPA Blog, he said:
My lawsuit in Brussels will attempt to open the window on this large scale bribery, tax evasion and corruption scheme, obtain subpoena power, and finally answer . . . questions which have remained unanswered for too long. It is unfortunate that the U.S. Department of Justice is attempting to prosecute the messengers, namely Mr. James H. Giffen and Mr. Brian J. Williams, instead of the main criminals and their cheif executives. My hope is that the European Commission will take a more balanced and assertive approach.
The complaint to the EC asserts that the alleged bribery infringed Articles 81 and 82 of the EEC Treaty (antitrust and abusive behavior).
Why the European Commission? Grynberg says he's exhausted his potential U.S. remedies and hasn't been able to subpoena the witnesses he needs (he deposed Giffen, who asserted his 5th Amendment privilege). Grynberg's civil fraud and Rico suit in the District Of Columbia against BP, Statoil, British Gas, and their top executives was bounced last year. The court ordered private arbitration in Canada under agreements Grynberg had signed for the projects.
Grynberg has a rich history of litigation, some of it productive. According to his own documents, he has been "pursuing fraud in the energy industry for the past 15 years." He cites these examples:
- In 1995, he filed one of the first False Claim Act qui tam lawsuits against 60 natural gas pipeline companies in the U.S., listing "13 ways condensate (light oil) and natural gas are stolen from federal and Native American lands."
- In 2007, Congresswoman Carolyn Maloney of New York introduced H.R. 435 (reintroduced this year as H.R. 1462), intended to stop the theft of condensate on federal and Native American lands in ways Grynberg identified.
- In September last year, he was awarded $5.66 million in a federal suit in the District of Columbia against the Central African Republic's President, Minister of Mines and Energy, and former Ambassador to the U.S. His suit claimed they demanded a $2 million bribe for an exclusive oil and gas development concession that Grynberg was ready to develop under previously signed agreements. He has also filed a complaint about the bribe demand in the International Centre for Settlement of Investment Disputes of the World Bank. A hearing is scheduled in Paris later this month.
- He's pushing amendments to the Foreign Corrupt Practices Act in Congress through H.R. 6188, which would create a private right of action under the FCPA.
Download the executive summary of Jack Grynberg's complaint to the European Commission here.
Nearly everything in the court's electronic record of James Giffen's criminal prosecution is beyond reach. Almost 200 pleadings and orders are in the docket but only a dozen can be viewed or downloaded, and the indictment isn't one of them. It's sealed tight, buttoned down, locked up. Or so it seemed just last week.
Then Cody Worthington from the District of Columbia said: "Well, apparently it’s not sealed in the case Grynberg vs. BP et al. . . it’s Exhibit 4 in that case . . .1:08-cv-00301-JDB. I just looked it up in Pacer and it’s available for anyone with an account and $2.40." Cody said he'd been keeping a copy of the Giffen indictment on his hard drive for awhile -- "collecting electronic dust." So he sent us a copy.
Download a copy of Exhibit 4 from the complaint in Grynberg et al v. BP P.L.C. et al (U.S. District Court District of Columbia (Washington, DC) Civil case #: 1:08-cv-00301-JDB) here.
A final note: Grynberg's suit was dismissed as to all defendants after they won orders to compel arbitration. Our original post about his civil complaint against BP, Statoil and British Gas and some of their current and former executives is here.
In the 1990s, according to the Justice Department, American businessman James Giffen had the title of counselor to the president of Kazakhstan. His job was to help with "priority investment projects relating to the exploration, development, production, transportation, and processing of oil and gas." That made him hugely important in Kazakhstan and far beyond.
In 1991, Kazakhstan had become the last republic to declare independence from the Soviet Union. Its spectacular oil and gas reserves suddenly became available and American energy companies wanted in. From 1996 to 1998, four of them landed deals -- Mobil Oil, Amoco, Texaco and Phillips Petroleum. In 2003, a federal grand jury in New York indicted Giffen. It alleged that he used $78 million collected from the U.S. oil companies as success fees or escrowed deposits to bribe Kazakhstan's president and its oil and gas minister.
Giffen was charged with violating the Foreign Corrupt Practices Act, conspiracy to violate the FCPA, mail and wire fraud, failing to disclose foreign bank accounts, money laundering and conspiracy to launder money. He faced more than 80 years in prison.
That was then. Now, more than six years after the DOJ announced the indictment, the question is whether James Giffen will ever go on trial. "The diplomats usually win over the prosecutors," one Washington insider told us recently, "and it would seem Kazakhstan is too important to continue the Giffen case."
When arrested, Giffen was carrying a Kazakhstan diplomatic passport. His lawyers have said whatever he did there had the full approval of the U.S. government. To prove it, two years ago Giffen asked the American government to produce documents from its files about his activities in Kazakhstan. In April this year, federal district judge William H. Pauley III issued an order saying the government had produced "a substantial volume" of classified information under CIPA -- the Classified Information Protection Act.
But at the government's request, the judge said only Giffen's lawyers can review the classified material. If they think they need to show any of it to Giffen himself, they first need permission from the government agency that produced it, presumably the CIA or a similar enterprise. Giffen's 62-count indictment and almost everything else in the court record is now a state secret, hidden from view. Of the 194 items in the docket, only a dozen are available to the public -- mainly innocuous scheduling orders and notices of lawyers' appearances. The government's responses to Giffen's discovery demand are deemed so sensitive they're even off limits to Giffen himself. How then would a jury ever get to see them?
With that street-smart aphorism in mind, we went looking for Foreign Corrupt Practices Act-related cases where lawyers were alleged to be on the wrong side of the law.
Turns out there aren't many. Here's the rundown:
Jeffrey Tesler -- indicted by a Houston grand jury in February. Prosecutors say he was a middleman who handled or arranged corrupt payments from KBR to Nigerian officials. The London lawyer was arrested by British police in March at the request of American authorities, who are trying to extradite him to stand trial in the U.S.
Two American law firms were mentioned in November 2008 during an anti--corruption sweep in China. Avon had disclosed possible FCPA violations involving payments to Chinese regulators. Authorities there were reported to be reviewing foreign investment cases in which the two U.S. firms with offices in Hong Kong and Beijing played a role. The firms (and their lawyers) haven't been named.
J. Bryan Williams, a lawyer in Virginia, was an executive at Mobil Oil. He was also a friend of James H. Giffen, an American businessman arrested in New York in 2003 for paying $78 million in bribes to an adviser of Kazakhstan's president and former oil and gas minister. Williams took a $2 million kickback from Giffen for helping negotiate a deal involving Kazakhstan's Tengiz oil field. Williams pleaded guilty in September 2003 to tax charges and was sentenced to 46 months in prison. Giffen is awaiting trial.
Hans Bodmer, a Swiss lawyer, represented Viktor Kozeny, the Czech-born fugitive charged with Frederic Bourke with bribing government officials in Azerbaijan. Bodmer was indicted by a New York federal grand jury in August 2003 on single counts of conspiracy to violate the FCPA and to launder money. The court dismissed the FCPA charge, ruling that before being amended in 1998, the FCPA didn't apply to non-U.S.-resident foreign nationals who served as agents of domestic concerns. Bodmer then pleaded guilty to conspiracy to launder money. He's never been sentenced.
Attorney Philippe S.E. Schreiber represented Saybolt Inc. It's president, David Mead, said during his 1998 trial that he paid a $50,000 bribe to government officials in Panama only after Schreiber said it wouldn't violate the FCPA. That advice was wrong. Saybolt and Mead were charged with violating the FCPA. Mead was convicted and sentenced to four months in prison, home detention and probation, and a $20,000 fine; Saybolt's FCPA offenses resulted in five-years probation and a $1,500,000 fine. And Schreiber? Saybolt's shareholders sued him for legal malpractice (the case was settled in 2005); and the government never indicted him.
Alfredo Duran, a Miami lawyer, was charged in 1989 with arranging a bribe to officials in the Dominican Republic. The government said a $20,000 to $30,000 payment was intended to secure release of an airplane confiscated in a drug case. Duran's co-defendant jumped bail and returned to the Dominican Republic. At Duran's federal trial in Florida on FCPA charges, the court excluded evidence concerning the fugitive co-defendant, resulting in Duran's acquittal.
In 1994, attorney Harold Katz was indicted for bribing an Israeli Air Force officer to induce the purchase and maintenance of GE aircraft engines worth $300 million. The bribes, paid into Swiss bank accounts, totaled $7.8 million. A co-defendant was charged under the FCPA, while Katz faced mail and wire fraud and money laundering charges. He was never apprehended and remains a fugitive.
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That's it, then. Pretty thin record, isn't it? So the verdict on Mr. Puzo's wisdom about that briefcase? Well, either he's wrong when it comes to the FCPA and lawyers aren't the culprits after all. Or he's right and they don't get caught.