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First Africa Sting Trial Results In Mistrial

On January 19, 2010, the DOJ announced (here) a new type of FCPA enforcement action.

While not the first use of undercover techniques in an FCPA enforcement action (see here), the new type of case was certainly the largest and most dramatic use of pro-active, undercover investigative techniques in the FCPA’s history.

Twenty-two executives and employees of companies in the military and law enforcement products industry were criminally indicted “for engaging in schemes to bribe foreign government officials to obtain and retain business.” However, there was no real foreign official – just FBI agents posing as representatives of a Gabon foreign official – and the case was manufactured by the government with the assistance of Richard Bistrong (an individual who previously pleaded guilty to separate FCPA violations – see here).

In announcing the indictments, Assistant Attorney General Lanny Breuer called the action a “turning point.”

The cases were assigned to Judge Richard Leon (U.S. District Court for the District of Columbia). Given the number of defendants indicted, the cases were segregated into smaller units for trial.

The first trial, which started in mid-May, involved Andrew Bigelow, Pankesh Patel, John Benson Weir, and Lee Allen Tolleson. As highlighted in this prior post, at the close of the DOJ’s case, Judge Leon dismissed a substantive FCPA count as to Patel, a substantive FCPA count as to Tolleson, and dismissed a money laundering count as to all defendants.

Yesterday, Judge Leon declared a mistrial as to all remaining counts of the DOJ’s “turning point” prosecution. For additional coverage see here from the FCPA Blog, here from Main Justice, here from Reuters, here from Law360, and here from the Wall Street Journal Corruption Currents.

Scott Fredericksen, a former DOJ prosecutor and current FCPA practitioner at Foley & Lardner (see here) offered the following analysis.

“A mistrial in the Africa Sting FCPA case represents a major disappointment for the DOJ. But for those who have followed the trial, it is no surprise. Many thought outright acquittal was a real possibility. A mistrial of course is most often declared by the court where the jury has steadfastly indicated that it is unable to reach a unanimous verdict, even after the court usually gives very strong instructions urging the jury to work harder to reach a verdict. There are other situations in which a mistrial may be declared, most often involving error in the way the case is tried or the improper admission of evidence or prejudicial information. In this case, it appears there was a failure to reach unanimity by the jury on a verdict. Often times in such situations the court may allow the counsel to interview jurors about the basis for being hung, including what the final vote was. Obviously, if the vote was heavily in favor of one side, or if, as often happens, there was a lone holdout, then counsel will be able to make informed decisions about a retrial and how the case should be tried in a retrial. It is in the discretion of the court whether to allow jurors to be interviewed. Jurors must also consent. Most judges will allow some limited amount of interviewing, including only allowing the interview to take place in court. Again, it is a discretionary decision. The mistrial puts the government between the proverbial rock and hard place. The DOJ has made this prosecution a marker in their ratcheting up of their enforcement of the FCPA. It is hard to imagine that they would not seek a retrial. Yet the case likely will only get more difficult for the prosecution. The trial exposed the weaknesses of the government’s case, including their critical witnesses, the most important of which did not testify. Will DOJ change their strategy? But now defense counsel know the evidence and testimony and can cross examine with a transcript of the DOJ witnesses in hand. Waiting in the wings are another group of experienced defense counsel whose clients’ trial has been severed but already scheduled. Finally, some observers of the trial think Judge Leon was surprised and disappointed by what he saw in the government’s prosecution sting and the evidence. This looks to be only one chapter in a now much longer story.”

Indeed, it would seem that yesterday’s mistrial is merely one chapter in a much longer story. The DOJ has indicated that it intends to refile its case against all four defendants, but will a different jury make a difference? What impact will this mistrial have on the other Africa Sting cases scheduled for trial?

Interesting, Significant and Bold

Last week I had the pleasure of participating in Securities Docket’s Year in Review webcast (see here for viewing – the FCPA portion begins at about 51 minutes).

For those of you who missed the event, below are my thoughts on four significant events from 2010, three interesting events from 2010, and two bold predictions for 2011.

The FCPA in 2010 was interesting, significant, and bold all at once. Among other things, it was a year in which Assistant Attorney General Lanny Breuer declared a “new era of FCPA enforcement.” (see here).

Significant Events

The Foreign Corrupt Practices Act

If anyone out there still believes that the FCPA is a law that only applies to U.S. companies, you clearly have been living under a rock.

2010 was the year of non-U.S. companies resolving FCPA exposure.

BAE (here)(I am hesitant to call this matter an FCPA enforcement action because it wasn’t, but everyone seems to be doing so), Daimler (here), Technip (here), Eni/Snamprogetti (here), ABB (here), Panalpina (here), and most recently Alcatel-Lucent (more in a future post).

It has been reported that approximately 90% of 2010 FCPA fines and penalties were paid by foreign companies.

I expect this trend to continue – albeit perhaps not at the level seen in 2010. The 4th member of the JV involved in Bonny Island bribery – JGC of Japan – has yet to settle, certain of the medical device and pharma companies that have disclosed FCPA issues are non-U.S. companies, and an emerging trend I see is an increased focus on China-based issuers. For instance, last year, 25% of the IPOs were China based issuers and last month, Rino International (see here) disclosed an FCPA inquiry, the first time I believe a China-based issuer has been the focus of an FCPA inquiry.

Two Tiers of Justice

Under basic rule of law principles, the law is to be equally and consistently applied to all subject to the law, regardless of how big or small the company is and regardless of what type of company is involved.

In a troubling trend, two tiers of justice have emerged from FCPA enforcement.
If the company is a large multinational company, the company will end up paying large fine, but chances are the company will not be charged with FCPA anti-bribery violations.

For instance, the DOJ’s allegations against BAE (see here) included that the company provided various benefits – through U.S. payment mechanisms – to influence Saudi officials through and through other conduct that clearly had a U.S. nexus. Yet, BAE, one of the world’s largest defense contractors, was not charged with any FCPA anti-bribery violation.

Daimler, according to the DOJ (see here), had a corporate culture that tolerated and/or encouraged bribery and its numerous bribery schemes involved various high-ranking executives. Yet, Daimler, was not charged with any FCPA anti-bribery violations.

It’s bribery yet no bribery, and it contributes to what I’ve called the façade of FCPA enforcement (see here).

While certain companies in certain industries appear immune from FCPA anti-bribery charges, in other instances, instances generally involving small companies such as Nexus Technologies (here) or Lindsey Manufacturing (here), the DOJ seems to come out with guns a blazing and criminally indicts the company for violating the FCPA. One can legitimately ask what did these companies do that BAE, Daimler, and some other companies didn’t do?

The two tiers of justice is also present when it comes to individual enforcement actions. As was highlighted in the recent Senate hearing, one odd aspect of the most high-profile, egregious instances of corporate bribery is that, for the most part, no individuals are charged. Yet in cases that can only be called minor in comparison, Nexus Technologies, Lindsey Manufacturing and the Haiti Teleco cases come to mind, the DOJ again seems to come out with guns a blazing and criminally indicts multiple individuals.

Companies that commit bribery on a major scale, involving hundreds of millions dollars, are still able to secure multi-million dollar U.S. government contracts (see here and here). On the other hand, individuals like Charles Jumet are sent to prison for nearly 7 years for making a $200,000 payment to secure a lighthouse and buoy contract and conspiring to violate the same law that major companies are apparently immune from violating. (See here).

DOJ officials frequently talk about the rule of law (here), and the importance of consistency and transparency in charging decisions (here), but these examples raise the issue of whether such principles are followed when it comes to FCPA enforcement.

Is the Facilitating Payments Exception Meaningless?

When Congress passed the FCPA in 1977 and amended it in 1988 it clearly understood and accepted that the statute was not going to cover every conceivable unethical payment made in transacting overseas business. (See here). The legislative history is clear on this point and that is why the FCPA contains an express exception for so-called facilitating or grease payments.

Yet one can legitimately ask whether this exception intended by Congress has any meaning.

In November, a group of companies collectively paid approximately $235 million to settle FCPA enforcement actions principally involving import permits for oil rigs, other customs and duty payments to Nigerian officials, and payments to expedite shipment of product in Nigeria and some other jurisdictions. (See here for a summary of the CustomsGate enforcement actions).

It seems a bit silly when several major companies settle an FCPA enforcement action for this amount of money to ask the question – did the conduct at issue even violate the FCPA, but this question should be asked in connection with the CustomsGate enforcement actions. It is also a question that can legitimately be asked as to several other recent FCPA enforcement actions that involve permits, licenses, certifications and other administrative tasks that have nothing to do with obtaining or retaining government contracts.

The issue as I see it is not whether such payments are ethical, but whether such payments violate the narrow anti-bribery provisions Congress intended and whether, once again, the DOJ and the SEC are actually enforcing the FCPA as Congress intended or whether the FCPA has morphed into a broader corporate ethics statute.

If the FCPA should become a broader corporate ethics statute, let Congress make that decision – not the DOJ or the SEC.

Emergence of a Plaintiff’s Bar

The FCPA, it has been held by some courts, does not contain a private right of action – yet there are other legal avenues available to plaintiffs to hold companies that violate the FCPA accountable. (See here).

Common causes of action include derivative claims against officers and directors, securities fraud claims by investors, RICO claims, unfair competition claims and antitrust claims such as last year when one of Innospec’s competitors sued it in Virginia state court in connection with its recently settled FCPA enforcement action. (See here).

Such causes of action have been pursued before 2010, but 2010 witnessed an explosion in such claims and so-called investigations by plaintiff firms representing investors.

The most noteworthy example is what I called the feeding frenzy surrounding SciClone Pharamaceutials. (See here). Last August, the company simply made an FCPA disclosure – that it was contacted by the SEC and the DOJ in connection with the government’s pharma industry sweep. The company’s stock dropped about 30%. Within weeks about a dozen plaintiff firms announced “investigations” and/or filed securities fraud cases – never mind the company’s stock price regained all that value within about a month.

When a company’s FCPA violations are found to be condoned or encouraged by the board or officers, such plaintiff causes of action would seem to be warranted.

However, these types of FCPA violations are rare – the more typical situation is where, because of respondeant superior, a company faces FCPA exposure because of the actions of a single or small group of employees whose conduct was in violation of the company’s FCPA policies and procedures. In these typical situations, I question what value these so-called “investigations” by plaintiff firms have or what purpose these derivative or securities fraud claims serve.

Interesting Events

Giffen Enforcement Action

When an enforcement action begins with allegations (here) that James Giffen made more than $78 million in unlawful payments to two senior Kazakhstan officials in connection with oil transactions for major American oil companies and abruptly ends with a one-paragraph superceding information (here) charging a misdemeanor tax violation and the company he worked for settling an FCPA enforcement action focused solely on two snowmobiles (here) – I call that interesting.

Even more interesting is that part of Giffen’s defense was that his actions were taken with the knowledge and support of the CIA, the National Security Council, the Department of State and the White House. (See here for a prior post).

A few years ago George Clooney and Matt Damon starred in Syriana (here) a movie about the FCPA.

The Giffen enforcement action presents a superb Hollywood script – it is the most mysterious conclusion to an FCPA enforcement action ever – made even more interesting given that the presiding judge called Giffen a cold war hero and stated that the case should never have been brought in the first place. (See here for the prior post).

Africa Sting Cases

In January 2010, the DOJ arrested 22 defendants – most while attending a gun show in Las Vegas – in connection with a major undercover sting operation in which the government, utilizing an individual who had already pleaded guilty to separate FCPA violations, assisted the government in manufacturing a case involving a fake foreign official from Gabon. (See here, here and here for prior posts).

The defendants (see here) are principally owners or employees of small gun and weapons companies.

I would put this case in the interesting category.

Contrary to media reports and even DOJ statements, it is not the first time undercover tactics were used in connection with an FCPA investigation (see here), but the magnitude and breadth of the tactics were indeed unprecedented.

This case is far from over and the remaining defendants are sure to raise entrapment, among other legal issues, and this will be an interesting case to follow in 2011.

The Africa Sting case has draw the attention of an industry that probably had never thought much about FCPA compliance. Thus, regardless of the ultimate outcome of the case, it has likely resulted in an industry and small enterprises thinking more proactively about FCPA compliance and risk assessment.

Greater Scrutiny and Why Questions

2010 also saw greater scrutiny and why questions about the FCPA, FCPA enforcement and what I have called FCPA Inc.

For the time time in nearly a decade, Congress held hearings (see here) on the FCPA in which some basic why questions were asked.

The U.S. Chamber sponsored a paper (here) titled “Restoring Balance – Proposed Amendments to the FCPA” that was widely covered and, in some circles, railed.

Several members of Congress are legitimately scratching their heads as to why companies that settle fraud, bribery and corruption cases continue to secure lucrative U.S. government contracts and the House passed a bill (here) that seeks to debar companies found to be in violation of the FCPA from receiving U.S. government contracts. Problem is, because of the façade of FCPA enforcement (see here), it will be an impotent bill.

In May 2010, Congressman Towns, chairman of the House Committee on Oversight and Government Reform, sent a letter to Attorney General Holder expressing concern that settlements of civil and criminal cases, including FCPA cases, by the DOJ are being used as a shield to foreclose other appropriate remedies such as suspension and debarment. (See here for the prior post).

And in Spring 2010, Forbes ran a front-page story titled “The Bribery Racket,” an article, notwithstanding some of its flamboyant language, raised several valid and legitimate questions and issues when it comes to FCPA enforcement. (See here for the prior post).

This scrutiny in 2010 raised valid and legitimate public policy questions that hopefully will be picked up on in 2011.

Bold Predictions

After a year in which (1) the largest individual prosecutions involved a fake “foreign official” (2) the most egregious cases of corporate bribery were prosecuted without FCPA anti-bribery charges; and (3) a signature case abruptly ended with a misdeamenor tax violation and a corporate prosecution involving two snowmobiles, I wonder what bold will look like in 2011.

Here are two bold predictions for 2011.

The Dodd-Frank Whistleblower Provisions Will Have a Negligible Impact on FCPA Enforcement

My (what seems) contrarian thoughts are the same as when I first made this post in July.

Enforcement of the U.K. Bribery Act Will Be Disciplined and Measured

The U.K. Bribery Act, already delayed, and with implementation slated for April 2011, has been the subject of much discussion and much over-hype in my opinion.

It has been called the FCPA “on steroids” (here) and if one subscribes to the industry marketing material, you might be left with the impression that the end of the world is near.

True, the Bribery Act is broader than the FCPA. For starters, it is an all-purpose bribery and corruption statute and addresses bribery and corruption in the private sector – not just bribery to “foreign officials” like the FCPA.

True, the Bribery Act has potentially a very broad reach – so does the FCPA.

True, the Bribery Act has no exception for facilitating payments – the FCPA does – although as highlighted above, query whether this exception means anything.

However, the Bribery Act has the “adequate procedures” defense – something the FCPA does not have – but query whether it should.

Thus, while the Bribery Act is indeed more broad than the FCPA, because of this defense, it is at the same time more narrow than the FCPA.

Public statements by U.K. officials suggest that this adequate procedures defense is a meaningful defense. For instance, in September at the World Corruption and Compliance Forum, an event I chaired in London, the U.K. Attorney General (Dominic Grieve) stated (see here) that “any company small or large” that puts into place a system of adequate procedures “has nothing to fear” when an employee or agent “goes off the rails” and makes a bribe payment. Attorney Grieve said that a company should have nothing to fear if it is “walking the walk, and talking the talk” when a rogue employee makes an improper payment. On the other hand, Attorney Grieve stated that that “those who don’t heed the warnings and don’t take the necessary steps have something to fear.” Richard Alderman, the Director of the U.K. Serious Fraud Office, stated in October (see here) as follows. “I have heard some people say that this offence is one of strict liability. I do not agree. No offence will have been committed if there were adequate procedures. I have also heard people say that the fact of bribery might mean that there were inadequate procedures by definition and so the defence can never be made out. Again, I do not agree. In the real world there may be occasional lapses despite adequate procedures rigorously enforced. The issue ultimately for the Judge and jury (and for the SFO in deciding on a prosecution) will be – were those procedures adequate?” As to the adequate procedures defense, Vivian Robinson (General Counsel of the Serious Fraud Office) said in an October webcast (here) that because of the defense “there is every reason to be optimistic that we won’t get as a result of the Act and this particular section a huge expanse in the number of prosecutions of corporates.”

As demonstrated by the Innospec matter (see here), the U.K. courts are playing, and rightfully so, a much greater role than U.S. courts in reviewing bribery and corruption cases. I’ve been told that even if the SFO prosecutes a corporate bribery case with an NPA or DPA, the U.K. courts will still play a meaningful oversight role – a role that is unfortunately not true here in the U.S.

In sum, I don’t see how companies already subject to the FCPA and already thinking about compliance in a pro-active manner, have much to worry about when it comes to the U.K. Bribery Act because of the adequate procedures defense.

I will be surprised if U.K. enforcement of the Bribery Act reaches the level of U.S. enforcement of the FCPA and I will be surprised if the U.K. Bribery Act develops outside of the judicial system as has generally been true with U.S. enforcement of the FCPA.

Africa Sting – Will Economic Realities Result in Additional Pleas?

The Africa Sting case (see here for numerous prior posts) is best known as the largest undercover sting operation in FCPA history.

The sting operation resulted in lots of video recordings, telephone recordings, documents and search warrant material.

According to a recent DOJ discovery filing (see here) the following, among other things, have been turned over to defense counsel:

“615 audio and video recordings of more than 150 meetings;”

“5,287 recorded telephone calls between the defendants and the cooperating witness, identified as Individual 1 in the indictments, and between the defendants and undercover FBI agents;”

“recordings of telephone calls between Individual 1 and FBI agents;”

“certain calls, approximately a minute or less in length, recorded in connection with the undercover investigation;”

“in excess of 5,000 pages of documents relating to Individual 1, including reports, expense paperwork, bank statements, quotes, emails, notes, drug tests results, payment receipts, and Skype text messages, among others;”

“emails from the accounts of Individual 1 and the undercover FBI agents;”

“nearly 3,000 pages of text messages from the telephone Individual 1 used in connection with the undercover operation;”

“documents related to the undercover investigation that are not directly related to Individual 1, including case administration documents, FBI reports, bank records, product information, and search warrant materials;” and

“materials seized during the 13 search warrants executed in connection with the undercover investigation relating to the defendants” including a total of “approximately 242,000 pages of documents,” “electronic media, including desktop computers, laptop computers, USB drives, zip discs, memory cards and DVDs, among other items, seized during the searches,” and “photographs taken in connection with the search warrants and logs of those photographs, as well as search diagrams and seizure inventories.”

The government had vast resources at its disposal in conducting the sting and continues to have vast resources at its disposal in prosecuting the case.

The defendants do not.

Another distinguishing feature of the Africa Sting case is that it involves many small-business owners.

The lawyers for the Africa Sting defendants have a duty to competently represent their clients.

That means the lawyers will have to review all of the above-referenced material (as well as other material) to better understand the facts of the case and their client’s exposure.

That is going to be very expensive. And all this is required before “active” lawyering (i.e. motions to dismiss, etc.) even begins.

Some will say, well, the Africa Sting defendants should have thought about this before (allegedly) violating the law.

Others will say, this case points out the difficulties of litigating against a DOJ with vast resources.

Will the economic realities of this situation lead to more plea deals over the summer?

Will the cost of testing an innocence claim simply be too high such that additional defendants may raise the “white flag” of surrender? If so, is it because the defendants are guilty of the crimes charged, or because of the economic realities of the situation?

*****

For the latest Main Justice update on the Africa Sting case (see here).

FCPA Undercover

The Africa Sting case is indeed the largest and most dramatic use of pro-active, undercover investigative techniques in an FCPA investigation.

However, contrary to numerous reports and even statements attributed to DOJ officials, the Africa Sting case is not the first time that pro-active, undercover investigative techniques have been used in an FCPA investigation. In other words, this is not a new development as demonstrated below.

Shu Quan-Sheng

In September 2008, Shu Quan-Sheng (a naturalized U.S. citizen and President, Secretary, and Treasurer of AMAC International (“AMAC”), a high tech company located in Virginia with an office in Beijing, China) was charged in a criminal complaint (see here and here) with, among other things, offering bribes to Chinese “foreign officials” in violation of the FCPA.

An affidavit (see here) in support of the criminal complaint by an FBI special agent describes several pro-active, undercover investigative methods including court authorized electronic surveillance and physical surveillance. Among other things, the affidavit describes several phone conversations Shu participated in connection with the bribery scheme.

Shu plead guilty to FCPA violations (among other charges) and was sentenced to 51 months in prison. (see here).

Gerald and Patricia Green

In January 2008, Gerald and Patricia Green, owners and operators of Film Festival Management (a private Los Angeles based private entertainment company) were criminally indicted for conspiring to bribe an official with the Tourism Authority of Thailand (TAT) and for making improper payments to the TAT official in violation of the FCPA. (see here and here).

The criminal charges were supported by an affidavit (see here) from an FBI special agent which describes several pro-active undercover investigative methods, including a multiple agent trip to Thailand to witness Mr. Green meeting with the Thai “foreign official.”

In September 2009 (see here), the Greens were found guilty by a federal jury of substantive FCPA violations, conspiracy to violate the FCPA, and other charges. The Greens are scheduled to be sentenced in March 2010.

William Jefferson

In June 2007, then U.S. Congressman William Jefferson was criminally indicted (see here and here). The charges included substantive FCPA violations and conspiracy.

According to numerous media sources (see here), the FBI affidavit released in connection with the investigation describes several pro-active, undercover investigative techniques including cooperating witnesses wearing FBI wires and video surveillance.

In August 2009, Jefferson was acquitted of substantive FCPA charges by a federal jury, but convicted of a wide range of other charges. (see here for more on the Jefferson case). In November 2009, Jefferson was sentenced to 13 years in prison and he remains free on bail pending his appeal.

WrageBlog (see here) has also identified two other previous instances of pro-active, undercover investigative techniques employed in connection with FCPA investigations.

Historically Massive Sting Operation

Back in November, Assistant Attorney General Lanny Breuer, in a speech (see here) before an FCPA audience said that “[a]lthough many of these cases come to us through voluntary disclosures, which we certainly encourage and will appropriately reward, I want to be clear: the majority of our cases do not come from voluntary disclosures. They are the result of pro-active investigations ….”

Today, the DOJ announced (here) the indictment of 22 (no that is not a typo) “executives and employees of companies in the military and law enforcement products industry” for engaging in a scheme to bribe foreign officials to obtain and retain business.

Per the DOJ release, the 16 unsealed indictments “represent the largest single investigation and prosecution against individuals in the history of DOJ’s enforcement of the FCPA.”

Just how pro-active was this investigation?

According to the release, the “indictments allege that the defendants engaged in a scheme to pay bribes to the minister of defense for a country in Africa.”

However, there was a catch.

There was “no actual involvement from any minister of defense.”

Rather, the defendants “allegedly agreed to pay a 20 percent ‘commission’ to a sales agent who the defendants believed represented the minister of defense for a country in Africa in order to win a portion of a $15 million deal to outfit the country’s presidential guard.”

Just who was the sales agent?

An undercover FBI agent, according to the release.

The names of the indicted individuals as well as the indictments can be found here. Each of the indictments allege substantive FCPA violations, conspiracy to violate the FCPA, and conspiracy to engage in money laundering.

All but one of the individuals was arrested yesterday in Las Vegas. The other was recently arrested in Miami.

In the same November 2009 speech, Breuer noted that the FBI – FCPA specific squad was “growing in size and in expertise” and the release notes that the “investigation is the first large-scale use of undercover law enforcement techniques to uncover FCPA violations…”

Point taken, as the DOJ release notes that “approximately 150 FBI agents executed 14 search warrants” in locations across the country in its investigation.

The DOJ also release suggests that this massive alleged bribery scheme is also being investigated on both sides of the Atlantic as the “United Kingdom’s City of London Police executed seven search warrants in connection with their own investigations into companies involved in the foreign bribery conduct that formed the basis for the indictments.”

Stay tuned for more specifics in this massive case – which I will refer to as “Africa Sting.”

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