From a “foreign official” standpoint, must of the attention in 2011 was on the challenges in the Carson and Lindsey Manufacturing enforcement actions (see here and here for previous posts). Another “foreign official” challenge occurred in the John O’Shea case in the Southern District of Texas in which O’Shea was charged in connection with alleged bribe payments to officials of Comision Federal de Electricidad (“CFE”), a Mexican utility and the same entity at issue in the Lindsey matter.
As noted in this previous post, on the eve of trial, U.S. District Court Judge Lynn Hughes, without issuing a written decision, denied O’Shea’s motion to dismiss the indictment based on O’Shea’s argument that employees of CFE were not “foreign officials” under the FCPA. This previous post links to the briefing on the issue.
As noted in this previous post, in January 2012, Judge Hughes granted O’Shea’s motion for acquittal and found him not guilty of all substantive FCPA charges. The motion was granted at the close of the DOJ’s case and the jury was dismissed.
To be sure, there were several deficiencies in the DOJ’s case against O’Shea prompting Judge Hughes to grant the motion for acquittal. What impact, though, if any, did O’Shea’s “foreign official” challenge and the attention to this issue, have on the ultimate outcome of the case?
This post reviews information from the case record and transcripts and concludes with comments from O’Shea’s attorneys as to the question – “what impact, if any, did ‘foreign official’ have on the ultimate result in the case?”
During the trial, Judge Hughes held an evidentiary hearing concerning testimony Professor Hans Baade (here) intended to offer on behalf of O’Shea concerning the status of CFE under Mexican law. Judge Hughes indicated that his purpose in the hearing was “to find out whether the testimony would be admissible or whether the information is helpful to me in crafting [jury] instructions.” During the hearing, Professor Baade discussed the OECD Convention and its commentaries, specifically Commentaries 14 and 15 which state as follows.
14. A “public enterprise” is any enterprise, regardless of its legal form, over which a government, or governments, may, directly or indirectly, exercise a dominant influence. This is deemed to be the case, inter alia, when the government or governments hold the majority of the enterprise‟s subscribed capital, control the majority of votes attaching to shares issued by the enterprise or can appoint a majority of the members of the enterprise‟s administrative or managerial body or supervisory board.
15. An official of a public enterprise shall be deemed to perform a public function unless the enterprise operates on a normal commercial basis in the relevant market,i.e., on a basis which is substantially equivalent to that of a private enterprise, without preferential subsidies or other privileges.]
Professor Baade spoke at great length of the Mexican electricity sector and that electricity generation in Mexico was open to private and foreign competition. He stated that more than 50% of energy in Mexico is produced by private producers. During the hearing, Professor Baade also testified that CFE had no regulatory powers and that Mexican courts have concluded that CFE does not have any other public powers. Moreover, Professor Baade stated that CFE’s contracts with Mexican households are treated as consumer contracts. During the hearing, O’Shea’s counsel presented a decision from the high court of Mexico which held that in a dispute over the cutting off of electricity to a consumer, there was no jurisdiction in Mexico’s Amparo courts because there was no state action. According to Professor Baade, CFE did not receive any protection or immunity from suit in Mexico. He then described how CFE pays taxes in Mexico, receives no subsidies (rather the government subsidizes the household consumer), how CFE is subject to consumer protection laws, and how CFE’s employees are subject to labor laws.
Professor Baade’s testimony ended with the following Q&A between Sarah Frazier (O’Shea’s counsel who conducted the hearing) and Professor Baade.
Q: “Given your testimony that you have given so far, do you have an opinion as to whether CFE functions on a normal commercial basis.”
A: “Well, I would say at the market in which foreign companies and private companies are interested, it is a competitive enterprise.”
On cross-examination, the DOJ attempted to undermine Professor Baade’s testimony regarding the OECD Convention and its commentaries by, among other questions, asking as follows. “Professor, would you agree […], talking about the OECD Convention, that the convention sets a floor and not a ceiling for how much a country can criminalize international bribery?” The DOJ further asked “so, countries can have higher standards than what the OECD requires.” As to this line of questioning, Judge Hughes interjected as follows. “The Government can’t say the convention is part of American law; but when we don’t like it, we are going to ignore it. It has to bind the Government, or it can’t.” Judge Hughes further stated as follows. “[The DOJ] can’t rely on the convention as authoritative interpretations of those non-convention laws. That’s the ruling.”
During the hearing, the DOJ candidly stated that it was unprepared by Professor Baade’s testimony concerning the status of CFE.
Judge Hughes “foreign official” jury instructions included the following.
“A foreign official is an officer or employee of the government of a country other than the United States. The Commission is not an integral part of a foreign government’s public function merely because it is government owned. It must be exercising a public governmental function. An official of a public agency does not perform a governmental function when his agency operates in his area substantially as a private agency — as its private agency competitors do, without preferences, subsidies or other privileges. If you conclude that the Government has proved beyond a reasonable doubt that the Commission is an agency of the Mexican Government, some of its officials may be responsible for operations of the Commission that are not governmental. To the extent that a part of the Commission operates a business on substantially the same terms as private companies, its officers in that part are not public officials. Mexican law excludes private companies from the sale of electricity to households. On the other hand, the Commission — the Constitution statutes and regulations allow for private generation of electricity or self-consumption, cogeneration, export and sale to the Commission for resale, including to households. The Mexican Constitution forbids monopolies, but it has reserved high levels of regulation of ownership in a few areas, like oil and electricity. Although the Commission receives no protection as to subsidies, it has to sell power for household use at a rate set by the government. If the Commission loses money on those sales, the Government allows it to deduct those losses from the charge it owes for the use of Mexico’s capital. The Commission may be sued under normal civil jurisdiction in the Mexican courts. Its contracts with household customers are governed by the Mexican commercial and civil law and by Mexican Consumer Protection Commission. The Commission’s board of directors includes government officers and three members of the Electricians Union. The Commission has no regulatory powers. The Electrical Regulatory Commission (in Spanish C.R.E.) issues licenses and permits in Mexico for the generation, transmission and supply of electricity in Mexico. The Secretary of Energy established tariffs for categories of users.”
During the hearing on O’Shea’s motion for acquittal, it is clear that Judge Hughes was troubled by the DOJ’s “foreign official” position and its lack of preparation as to the unique attributes of CFE. During the hearing, Judge Hughes stated that the DOJ “is supposed to know before it brings the indictment that it can prove that it is a governmental entity … in fact you should have to convince the grand jury of it.” Judge Hughes further commented that “it does trouble me, although I don’t think it’s relevant to this motion, that the Government did not present evidence on governmental status on which a reasonable grand jury could have relied.”
The following exchange between the DOJ’s Chuck Duross and Judge Hughes then followed.
DUROSS: I believe, Your Honor, that we presented evidence that it was a state owned company.
COURT: The statue is more subtle than that. I’m not saying you couldn’t have done it or they wouldn’t have indicted him.
DUROSS: The statute says an instrumentality of a foreign government. I think in fairness, Your Honor, it is not a stretch to think that a company that is created by, owned by and operated by a foreign government, could be considered an instrumentality. I think in the sharps relief of a trial in which we are going to be challenged on those issues, we needed to have been more prepared and we were not.
COURT: I don’t know what was presented to the Grand Jury, but as I observed several days ago, the Government should have been prepared before they brought the charges to the Grand Jury. It’s something you have to prove. And you shouldn’t indict people on stuff you can’t prove.
DUROSS: Understood, Your Honor.”
I posed the following question to O’Shea’s counsel Sarah Frazier (Berg & Androphy – here) “what impact, if any, did ‘foreign official’ have on the ultimate result in the case” and her response is as follows.
“What impact did our foreign official challenge have on the result of the case? As you mention, Judge Hughes categorized the challenge as not relevant to our Rule 29 motion, and I have to take his statement at face value – there were more than sufficient grounds for relief without it. I do think that by re-thinking the presumptions that the Government has consistently forwarded regarding the foreign official element, such as that all state-owned entities’ employees must be foreign officials, and taking this new factual tack that involves really understanding the industry and the government’s role in it, we earned the Court’s respect and took the Government out of its comfort zone. I’ve often wondered whether the challenge would have swayed the jury. I doubt they had the chance to understand the relevance of it during the Government’s case, but I think we could have guided them through it with Professor Baade. And I suspect that if the jury decided they liked Mr. O’Shea (we did expect he would testify), the foreign official challenge might have been an avenue they might seek out in order to acquit him.”