- FCPA Professor - http://fcpaprofessor.com -

At The 11th Hour

[This post is part of a periodic series regarding “old” Foreign Corrupt Practices Act enforcement actions]

The 1989 Foreign Corrupt Practices Act enforcement action against advertising agency Young & Rubicam, Inc. (“Y&R”) and its executives Arthur Klein, Thomas Spangenberg and others is one of the more interesting enforcement actions of all-time.

For starters, the enforcement action had an unusual origin.  According to media reports, in connection with an unrelated tax fraud case against Robin Moore (the author of the “French Connection” and “The Green Berets”), law enforcement officials confiscated his diaries.  Moore was a friend of Jamaican Prime Minister Edward Seaga and the diaries led to the investigation of Y&R and its executives.

The indictment [1] alleges a conspiracy between Y&R, Klein, Spangenberg and others to induce Eric Abrahams and Arnold Foote “in their official capacities with respect to the selection and retention of an advertising agency for the Jamaica Tourist Board” and to induce Abrahams and Foote “to use their influence with the Jamaica Tourist Board to affect and influence the decisions of the Board with respect to the selection and retention of an advertising agency.”

Eric Abrahams is described in the indictment as the Minister of Tourism of the Government of Jamaica and Arnold Foote is described as “a prominent Jamaican citizen with close political ties to the Jamaican Labor Party and to the Administration of Prime Minister Edward Seaga”.  As to Foote, the indictment further alleges as follows.  “Foote served as executive chairman of Martin’s Travel, an instrumentality of the Government of Jamaica, and he also acted in an official capacity on behalf of the Minister of Tourism and the Jamaica Tourist Board as an advisor to the Government of Jamaica with respect to tourism, advertising and public relations matters, including the selection and retention of an advertising agency for the Jamaica Tourist Board.

According to the indictment, the defendants “would and did arrange for and pay kickbacks” to Foote and through Foote, to Abrahams.  The indictment alleges that the “kickbacks and the manner in which they were paid would and did cause the Jamaica Tourist Board to make unnecessary and excessive expenditures for advertising services and deprived the Board of economically material information in its business dealings” with Y&R.

According to the indictment, as part of the conspiracy Robin Moore (described as a well-known author residing in Connecticut who had longstanding ties to the Island of Jamaica and was a close friend of Foote and Jamaican Prime Minister Seaga) and Frederick Sturges (described as a resident of Connecticut and an associate of Moore and Foote) “would and did act as middlemen and ‘go betweens’ for the communication of information and monies between and among the conspirators, and that certain kickback payments would be and were funnelled through bank accounts established and controlled by them.”

According to the indictment, “in order to disguise and conceal their unlawful activities, the conspirators would and did cause Y&R to enter into a contract with Ad Ventures, Ltd. a Cayman Island corporation created for the purposes of funneling kickbacks to Foote and Abrahams and affording Y&R an ostensibly legitimate reason for making such payments.”  According to the indictment, various means and devices were used to conceal the unlawful activities including: false statements to government investigators; testifying falsely before the Grand Jury; making some kickback payments in cash and others to a Cayman Islands bank account so as to make the tracing of funds more difficult; and Y&R failed to reflect the kickback payments on reports it filed with the DOJ pursuant to the Foreign Agents Registration Act.

In addition to the conspiracy charge, Y&R, Klein, Spangenberg – along with the “foreign officials” Abrahams and Foote – were also charged with violating RICO.  The predicate offenses alleged were multiple violations of the Travel Act.

The indictment further alleged that the defendants sought to buy the silence of various individuals who had threatened to expose the unlawful conduct.

Y&R, Klein and Spangenberg all pleaded not guilty and the case resulted in extensive media coverage.  In a statement, Y&R said that the criminal charges were “based on speculation and innuendo and [were] without substance or merit.”  A Y&R attorney (Thomas Barr of Cravath, Swaine and Moore) stated at the courthouse as follows.  “This is a lawsuit that involves characterization.  If you pull the characterization out, you haven’t got anything.”  Referring to the labeling of Foote in the indictment as a foreign official, Barr is quoted as follows.  “The reality is this.  Y&R makes very simple, conventional business arrangements in Jamaica.  By calling an advertising man a foreign official the prosecution has converted these charges into one of the most bizarre criminal allegations.”

According to media reports, many were shocked that Klein and Spangenberg were criminally charged.  Quotes to the media included the following.

“[Klein] is the straightest guy in the world.  I was absolutely shocked at the charges.  Of all the people I know in advertising, I don’t know anyone I’d least expect this to happen to.”

“Of all the people I’ve worked with, I’d rank them in the upper 10 percent for their ethical conduct.”

Y&R and Klein moved to dismiss the RICO charge.  Among other things, the defendants argued that the FCPA “cannot serve as a basis for a Travel Act violation, nor in turn as a predicate for a RICO violation.”  The court denied the motion to dismiss the RICO charge.  (See here [2] for the decision).

The defendants also moved to dismiss the conspiracy charge concerning payments to Abrahams on the ground that prosecution of that aspect was time-barred.  The defendants argued that “Abrahams ceased to be Jamaica’s Minister of Tourism more than five years prior to the return of the indictment.”  The court noted that a conspiracy charge is timely if it alleges the commission of at least one overt act in furtherance of the conspiracy within the applicable five-year statute of limitations and rejected the defendants’ arguments.  The court stated as follows.

“Whether Abrahams withdrew from the conspiracy is a question of fact for the jury.  Nor does Abrahams’ resignation as Minister of Tourism necessarily end the alleged conspiracy or his participation in it.  The indictment charges overt acts committed in furtherance of a single conspiracy from 1984 until 1989.  The allegation of overt acts committed within five years meets the requirements of the statute of limitations.”

The defendants also moved for a bill of particulars requesting specific information as to particular allegations including: the facts which supported the allegations that Mr. Foote was a foreign official within the meaning of the FCPA.  The court stated that “adequate notice of the manner in which Mr. Foote obtained his status as a foreign official” was provided in the indictment.  [See the above description of Foote’s status]. 

Of further interest from the pre-trial proceedings, the DOJ moved to make an opening statement at trial.  The opinion states as follows.

“The government claims that the complexity of this case, both factually and legally, as well as the nature of the evidence to be presented warrant the need for opening statements.  First, the government argues that the term ‘foreign official’ as defined in the FCPA has a meaning broader than the ordinary meaning of the phrase.  Without categorizing the evidence for the jury, the government claims that the jury might misinterpret the significance of the evidence.  This amounts to a request to make a legal argument during opening statement which is precisely what should be avoided in opening statements.  Second, the government contends that a substantial portion of its case depends on ‘a complex confluence of circumstantial evidence’ which a jury may not understand if it is not allowed to make an opening statement.  However, ‘a mere recitation’ of what evidence is going to be presented does not necessarily ‘help jurors better understand the evidence when it is introduced.’  To go beyond that would risk stepping into the realm of legal argument which is not allowed.”

Shortly before the trial was to begin in February 1990, Y&R pleaded guilty (see here [3] for the plea agreement).  Pursuant to the plea agreement, Y&R agreed to pay a $500,000 criminal fine.  Although not apparent from the plea agreement, Y&R pleaded guilty to one count of conspiracy to violate the FCPA.

If your only source of FCPA information is the DOJ’s FCPA website [4], this is where the story stops.  But the story does indeed continue.

The company issued the following press release on February 9, 1990.

“Young &  Rubicam Inc., announced today that it had reached an agreement with  the U.S. Attorney for the District of Connecticut under which the  government agreed to drop all RICO charges against the agency that had been brought in indictments on Oct. 6, 1989.  The charges were  made in connection with the agency’s successful attempts to obtain the advertising account of the Jamaica Tourist Board in 1981.

Further, the government dropped all the indictments charging that the agency was guilty of bribery of Arnold Foote, a Jamaican advertising executive, for the purposes of his bribing the Minister of Tourism, Eric Anthony Abrahams.  In addition, all  charges against Arthur Klein, an executive vice president of Young & Rubicam, and Thomas  Spangenberg, a former senior vice president of the agency  were dismissed.

The company, in order to put the case entirely behind it, agreed to plead guilty to conspiring to violate a section of the Foreign Corrupt Practices Act (FCPA) and accepted a fine of  $500,000.  The section of the Act under which the plea is made has been a controversial part of the law because it requires organizations and people who are placed in positions where criminal  activities may be taking place in a “reason to know” relationship with those activities, whether or not they, in fact, did know or if the events did or didn’t occur.  This section of the Act is no longer in the statute, having been removed by Congress in 1988.  Y&R was charged with events that allegedly took place in 1981 when this portion of the statute was in effect.  Ironically, if the case were brought today there would have been no such charge.

A Young & Rubicam spokesperson said, ‘We are particularly  pleased that one of Y&R’s finest individuals, Arthur Klein, has been cleared completely of all charges made against him.  The failed indictments caused Klein and his family extraordinary grief, and to  us this was the worst part of this entire procedure.  His complete exoneration is a cause for major celebration around Y&R.

The government no longer claims that the agency won the competition for the account on anything but the merits of its  presentation, or that Arnold Foote was a public official, as had  been charged.  To the best of Y&R’s knowledge, there is no  evidence that any monies were given to Abrahams.

For  its part, Young & Rubicam did agree that beginning in late 1981, some of its employees did on occasions hear reports of alleged  bribery efforts.  These rumors alleged that Foote, who had been  retained by Y&R to represent the agency in Jamaica, was using  money paid to him by the agency to bribe Abrahams.  Young &  Rubicam itself is not charged with paying bribes.  In fact, an  investigation by the agency in 1986 could find no evidence to support those rumors, and the government has conducted a four-year  investigation, and it has never proved that such bribes occurred.  Both of the individuals deny that any bribes were paid.  There is now no charge that any Young & Rubicam employee, past or present, knew enough ‘individually’ about these rumors to cause a violation.  Thus the agency agreed that because of that knowledge by ‘some’ of its employees it can be construed that it ‘technically’ entered into a “conspiracy.”

The  spokesperson stated, ‘In hindsight, we agree that an early investigation should have been carried out sometime during 1982 when these rumors began surfacing.  We did complete an investigation in 1986 and discovered no evidence of bribery.  The government in its four-year investigation has also not made such a discovery.  So, in  fact, we would have looked and found nothing.  But looking back, we agree that we should have done it in 1982; hence our guilty plea to that violation. ‘In fact we have been pressing since early October for an early decision so that the agency can put the matter  behind us and get on with our business.  This certainly allows us to  do just that.'”

[For on the FCPA’ original knowledge standard applicable to third-party payments, see this [5] prior post.]

As to the “reason to know” standard, media reports quote U.S. Attorney Stanley Twardy as follows.  “The ‘reason to know’ plea meant that while no individual within Y&R knew enough to understand that a law was being violated, the cumulative knowledge of the group working on the account, who should have been in touch with each other, would have given the agency the requisite information.”

According to media reports, the DOJ’s case “fell apart” on the eve of trial “when Y&R’s attorneys submitted to the [DOJ] a document that had been subpoenaed two years ago and that made clear, in the words of U.S. Attorney Twardy, “that Arthur Klein was not aware of what was going on.”  Twardy further stated that the document “suggested quite strongly that Spangenberg did not have criminal intent.”  Twardy further stated:  “We got a transcript of a tape of a phone conversation that made it obvious that the accusations against Mr. Klein were totally without merit.  Ironically, we’d been trying for two years to get a hold of that tape.”  Another media report quoted Twardy as follows.  “The transcript of the conversation was extremely exculpatory, meaning it gave evidence that Klein and in turn Spangenberg were not knowledgeable of the illegal aspects of the payments …”.