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 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 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 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, 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 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 …”.
Request For Interlocutory Appeal Denied In Former Magyar Telekom Executive Case
This previous post highlighted the February 2013 decision by U.S. District Court Judge Richard Sullivan (S.D.N.Y.) in SEC v. Elek Straub, Andras Balogh and Tamas Morvai. Judge Sullivan denied the defendants’ (former executives of Magyar Telekom) pre-trial motion to dismiss and his ruling principally focused on general personal jurisdiction issues, the FCPA’s specific jurisdictional element and statute of limitation issues.
As noted in this previous post, defendants soon thereafter moved to certify Judge Sullivan’s order for interlocutory appeal to the Second Circuit. In pertinent part, the motion stated:
“The defendants respectfully submit that there is substantial ground for difference of opinion regarding the following three questions that lie at the heart of the Order: (i) whether the Court may exercise personal jurisdiction over the defendants; (ii) whether the SEC’s actions is barred by the applicable statute of limitations; and (iii) whether the SEC has adequately pled the use of an instrumentality of interstate commerce.”
Earlier this week, Judge Sullivan denied the defendants’ request for interlocutory appeal.
Judge Sullivan began by setting forth the legal standard for an interlocutory appeal:
“Litigants are generally required to wait for a final judgment before they may appeal. However, a district court may certify an immediate appeal of an interlocutory order if the court finds that the order (1) ‘involves a controlling question of law’ (2) ‘as to which there is substantial ground for difference of opinion’ and (3) ‘that an immediate appeal from the order may materially advance the ultimate termination of the litigation.’ […] District court judges have broad discretion to deny certification even where the statutory criteria are met. […] [An] interlocutory appeal is ‘a rare exception where, in the discretion of the district judge, it ‘may avoid protracted litigation.’ Consequently, ‘federal practice strongly disfavors discretionary interlocutory appeals [as they] prolong judicial proceedings, add delay and expense to litigants, burden appellate courts, and present issues for decisions on uncertain and incomplete records, tending to weaken the precedential value of judicial opinions.'”
As to the three issues presented, Judge Sullivan concluded that the applicable legal standards were not met.
Judge Sullivan also distinguished his opinion from a similar decision (here) in the S.D.N.Y. by Judge Shira Scheindlin granting Herbert Steffen’s motion to dismiss the SEC’s FCPA complaint based on general jurisdiction grounds.
Judge Sullivan stated as follows.
“Defendants also make much of the fact that, just weeks after the Court’s Order, Judge Scheindlin granted a motion to dismiss for lack of personal jurisdiction over a defendant allegedly engaged in covering up a bribery scheme. However, the Court does not find any tension between the decision in [Steffen] and its Order. In [Steffen] Judge Scheindlin acknowledged that ‘there is ample (and growing) support in case law for the exercise of jurisdiction over individuals who played a role in falsifying or manipulating financial statements relied upon by U.S. investors in order to cover up illegal actions directed entirely at a foreign jurisdiction.’ In finding personal jurisdiction to be lacking, Judge Scheindlin did not buck this trend, but rather found the facts before her to be distinguishable from these other cases. As Judge Scheindlin explained, the defendants in the Straub case ‘orchestrated a bribery scheme aimed at the Macedonian government, and as part of the bribery scheme signed off on misleading management representations to the company’s auditors and signed false SEC filings. By contrast, in [Steffen] ‘the SEC did not allege that the defendant directed, ordered or even had awareness of the cover ups that occurred at [the company] much less that he had any involvement in the falsification of SEC filings in furtherance of those cover ups. Nor is it alleged that his position as Group President of [the company] would have made him aware of, let alone involved in falsification of these filings.’ Thus, the situation presented in [Steffen], where the defendant had taken no action with any connection to the United States, is unlike this case and the others cited in the Order. Accordingly, the [Steffen] decision does not provide any reason to find that there is a difference of opinion as to whether personal jurisdiction exists in this case, let alone create ‘substantial doubt’ that the Court’s Order is correct. Moreover, Defendants do not identify any other authority that is inconsistent with the Order.”
Without Individual FCPA Defendants, There Would Be No FCPA Case Law
Lest there be any confusion, I start this post with the basics.
The Foreign Corrupt Practices Act is a criminal statute. Those that violate the FCPA ought to be charged. Those who are found guilty of FCPA violations are not worthy of commendation.
Yet in the same way the Wall Street Journal recently stated (here) that former Goldman Sachs employee Fabrice Tourre “is doing a public service by forcing the SEC to defend its theories in court,” FCPA individual defendants who have put the DOJ (or the SEC in a civil FCPA enforcement action) to its burden of proof by testing their innocence have done a public service that ought to be recognized.
By recognized, I simply mean that it needs to be recognized that without FCPA individual defendants there would be no FCPA case law.
The unfortunate reality is that it takes individual defendants to go through unpleasant experiences, and for the stars to align in terms of the individual’s risk tolerance and financial resources, for there to be any FCPA case law.
Because of Stuart Carson, Hong Carson, Paul Cosgrove, David Edmonds, Keith Lindsey, Steve Lee, Mark Jackson, David Ruehlen, Joel Esquenazi and Carlos Rodriguez – there have been legal developments concerning the “foreign official” element.
Because of Eric Mattson, James Harris, David Kay and Douglas Murphy – there have been legal developments concerning the “obtain or retain” business element.
Because of Frederic Bourke, David Kay and Douglas Murphy – there have been legal developments concerning mens rea issues.
Because of Pankesh Patel, Elek Straub, Andras Balogh, Tamas Morvai, and Herbert Steffen – there have been legal developments concerning jurisdiction.
Because of Mark Jackson and David Ruehlen – there have been legal developments concerning facilitating payments and statute of limitations.
Because of Frederic Bourke – there have been legal developments concering the local law affirmative defense.
Other FCPA individual defendants such as, but not limited to, John O’Shea and the other Africa Sting defendants of course tested their innocence as well, even if no formal FCPA case law resulted from these enforcement actions.
Each of the above individuals could have chosen the path of least resistance, and if they would have, there would be no FCPA case law. Indeed, if just three individuals (Bourke, Kay and Murphy) chose the path of least resistance, there would be very little FCPA case law.
Even with the occassional FCPA individual defendant putting the DOJ (or the SEC) to its burden of proof, so little is know about the contours of the FCPA beyond DOJ or SEC enforcement theories and prosecutorial common law.
Should your response be that much is known about the judicial contours of the FCPA, I say show me another area of law where an issue is settled because of one appellate court decision or because of a few non-binding and unreported pre-trial trial court decisions.
Regardless of the facts and circumstances given rise to their FCPA liability in the first place, the above individual defendants have indeed done a public service that ought to be recognized, because without them, there would be no FCPA case law.
FCPA Guidance Rewrites The FCPA
Readers have likely read the FCPA Guidance by now, if not multiple times.
The Guidance contains an appendix that includes, among other things, the text of the Foreign Corrupt Practices Act. In the Guidance, the enforcement agencies have rewritten the text of the FCPA and this post highlights a statutory construction error that even a first year law student would be expected to understand and recognize.
Set forth below is the text of the FCPA regarding the “obtain or retain business” element.
“anything of value to
any foreign official for purposes of
(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or
(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,
in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;
Set forth below is how the text of the FCPA is portrayed in the FCPA Guidance.
“anything of value to
any foreign official for purposes of
(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or
(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;
On one hand, the obvious error and rewriting of the FCPA in the Guidance could be attributed to scrivener’s error. After all, both the DOJ’s FCPA website and the SEC’s FCPA website contain accurate versions of the FCPA.
On the other hand, scrivener’s error seems unlikely given the substance of the Guidance and that it appears the DOJ and SEC have always wanted an FCPA statute that doesn’t exist.
As I highlight in my article “Grading the FCPA Guidance,” the most disturbing portion of the Guidance concerns the ‘‘obtain or retain business’’ element of the FCPA. The Guidance asserts that ‘‘in 1998, the FCPA was amended to conform to the requirements of the [OECD] Anti-Bribery Convention,’’ and ‘‘these amendments expanded the FCPA’s scope to include payments made to secure ‘‘any improper advantage.’’
The notion that the FCPA’s 1998 amendments conformed the FCPA to the OECD Convention and expanded the FCPA’s scope to include payments made to secure ‘‘any improper advantage’’ is demonstratively false.
Indeed, the DOJ’s position on this specific issue was rejected by both the trial court and the appellate court in United States v. Kay, a case involving payments to Haitian “foreign officials” for the purpose of reducing customs duties and sales taxes a company owed the Haitian government.
The trial court decision stated:
“The OECD Convention had asked Congress to criminalize payments made to foreign officials ‘‘ ‘in order to obtain or retain business or other improper advantage in the conduct of international business.’’ . . . Congress again declined to amend the ‘‘obtain or retain business’’ language in the FCPA . . . . Congress did not insert the ‘‘improper advantage’’ language into the ‘‘obtain or retain business’’ provision of the FCPA.”
Although the Fifth Circuit overruled the trial court’s decision granting the defendants’ motion to dismiss, the appellate likewise court stated as follows concerning the FCPA’s 1998 amendments:
“When Congress amended the language of the FCPA, however, rather than inserting ‘any improper advantage’ immediately following ‘obtaining or retaining business’ within the business nexus requirement (as does the Convention), it chose to add the ‘improper advantage’ provision to the original list of abuses of discretion in consideration for bribes that the statute proscribes.’’
Others have pointed out this key statutory difference as well, including Philip Urofsky, a former DOJ Assistant Chief of the Fraud Section. Writing after the 2010 CustomsGate cases involving use of Panalpina (see here for the prior post), Urofsky stated (here) as follows.
“When criminal liability is at issue … it is important that the borders of the statute be carefully limned. Unfortunately, the government’s pleadings in the Panalpina cases do more to blur than clarify the limits of the law. For example, in some cases, the DOJ did not even plead the language of the FCPA but used instead that of the OECD Convention. For example, in Pride International, the conspiracy count alleged that the payments in question were ‘to make corrupt payments to a Mexico government official in order to obtain or retain business and to obtain other favorable treatment.’ Similarly, in the Noble NPA, the DOJ stated that the FCPA was intended to prohibit bribes ‘for the purpose of obtaining or retaining business or securing any improper advantage.’ In each case, the italicized language is simply not a part of the statutory element.”
The enforcement agencies state that the Guidance sets forth “what the law is” and has claimed that the document took nearly a year to draft.
Thus, the above statutory construction error is troubling, yet telling at the same time.
Looking Back On The Eckhardt Amendment
Yesterday’s post (here) highlighted the FCPA’s first mega-enforcement action involving multiple actors.
The story remained open as to George McLean (Vice President of Solar Turbines International (“Solar”), a division of International Harvester Company), and Luis Uriarte (the Latin American Regional Manager of Solar).
As noted in the prior post, soon after McLean and Uriarte (and several others) were indicted in October 1982, in November 1982 the DOJ also filed a criminal information against International Harvester (see here). The information was based on the same core set of allegations as in the October 1982 indictment and was based on the conduct of its employees McLean and Uriarte. International Harvester pleaded guilty to conspiracy to violate the FCPA (see here) and was ordered to pay a $10,000 fine and agreed to also pay $40,000 civil cost reimbursement. (Notice the italics).
McLean and Uriarte filed a motion to dismiss the indictment principally based on the so-called Eckhardt amendment that was then part of the FCPA. In June 1983, Judge George Cire (S.D. Tex.) granted the motion to dismiss the substantive FCPA charges against them, but not the conspiracy charge. The DOJ appealed the dismissal which lead to a Fifth Circuit opinion. Before summarizing Judge Cire’s decision, as well as the Fifth Circuit’s decision, this post provides background information on the so-called Eckhardt amendment.
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The Eckhardt amendment was named after Representative Robert Eckhardt (D-Tex). If you read my detailed history of the FCPA, “The Story of the Foreign Corrupt Practices Act,” you will learn that Eckhardt was a leader in the House as to what would become the FCPA. My article provided a detailed overview of the FCPA legislative history, yet at the same time to keep the article at a publishable limit, omitted certain side issues also found in the FCPA’s extensive legislative history.
One side issue that developed towards the later part of the FCPA’s legislative history as the basic contours of the law began to take shape, and an issue of great concern to Representative Eckhardt, was that individual corporate actors might be put at a disadvantage in defending themselves in an FCPA enforcement action.
Representative Eckhardt stated in an April 1977 hearing, in pertinent part, as follows.
“I don’t have any compunctions against making acts of foreign bribery illegal for the corporation. […] [T]he [corporate] defendant would always be able to marshal what evidence there was to contradict any contention that the company had anything to do with the bribery. With respect to that necessary element of the case without which a conviction could not be had, the defendant would be peculiarly in control of the evidence, both overseas evidence and domestic evidence. But this is not so with respect to the individual who is an agent of such issuer and who is being accused of an act overseas where the totality of the proof would be from activities overseas. Indeed, the corporations interest might even be in conflict with that of the agent. The corporation might desire to have Joe Bloke found to have intentionally engaged in bribery and to have been the sole moving agent, that is, the company never agreed to it and the quicker they can convict Joe Bloke, the better off the company is. It is relieved of responsibility and it has a sacrificial lamb in Rome and everybody forgets about the activity.”
[…]
“I don’t find any difficulty whatsoever with the corporation’s position as a defendant because indeed it has a very inside road to testimony and information. […] [I]t seems to me that there is a vast difference between the position of the individual defendant accused of having violated the act and the corporate defendant. Besides, the individual defendant can be clapped in jail and the corporation can’t be clapped in jail.”
In September 1977, Representative Eckhardt testified before a House committee and likewise stated, in pertinent part, regarding H.R. 3815 (a bill he introduced, which in compromise with S. 305, ultimately became the FCPA).
“[W]e were so concerned about the individual penalty as a means of making a scapegoat of an individual that we provided in our bill that unless the corporation were found to be guilty there could not be an individual penalty at all.”
In short, the FCPA originally contained the following introductory language as to the penalty provisions applicable to employes or agents of issuers of domestic concerns “whenever an [issuer or domestic concern] is found to have violated [the FCPA’s anti-bribery provisions] …”.
*****
Back to McLean and Uriarte’s challenge.
In granting the motion to dismiss the substantive FCPA charges against them, Judge Cire noted that the defendants’ employer, International Harvester, pleaded guilty to conspiracy and not to a substantive FCPA offense. Judge Cire reasoned that “conspiracy and the related substantive offense which is the object of the conspiracy are separate and distinct crimes.”
Accordingly, Judge Cire concluded as follows. “Since International Harvester plead guilty to conspiracy and not to a substantive FCPA violation, it has not been found to have violated the FCPA. The Eckhardt amendment protects employees like McLean and Uriarte from prosecution under the FCPA when their employer has not been found to have violated the FCPA.” (See here for Judge Cire’s Memorandum and Order).
The DOJ appealed Judge Cire’s order and presented three arguments on appeal: (1) that the FCPA does not require the employer be convicted of an FCPA violation, only that it be established in the employee’s trial that the employer violated the FCPA; (2) that McLean, as an individual, may be charged with aiding and abetting FCPA violations; and (3) that International Harvester’s conviction of conspiracy was sufficient.
The Fifth Circuit began its decision (here) as follows.
“We are presented for the first time with the question of whether the FCPA permits the prosecution of an employee for a substantive offense under the Act if his employer has not and cannot be convicted of similarly violating the FCPA.”
The Fifth Circuit began its decision as follows.
“Our task in interpreting the FCPA ‘is to construe the language so as to give effect to the intent of Congress. To do so, we look primarily to the language of the statute and secondarily to its legislative history, which includes the ‘purpose the original enactment served, the discussion of statutory meaning in committee reports, the effect of amendments-whether accepted or rejected-and the remarks in debate preceding passage.”
[See this recent post highlighting the importance of the FCPA’s legislative history]
The Fifth Circuit then reviewed the “found to have violated” language of the Eckhardt amendment and stated as follows.
“Hearings were conducted on the precurser to the final version of the Eckhardt Amendment in April of 1977 by the subcommittee of the House Interstate and Foreign Commerce Committee. The subcommittee examined two proposed bills: (1) H.R. 3815, introduced by Congressman Bob Eckhardt, which imposed as a prerequisite to the conviction of an employee a showing of violation of the Act by the issuer or domestic concern, and (2) H.R. 1602 which had no such requirement. At the hearing, Congressman Eckhardt, the subcommittee chairman, in discussing H.R. 3815 [… stated as follows].
“Indeed, the corporations [sic] interest might even be in conflict with that of the agent. The corporation might desire to have Joe Bloke found to have intentionally engaged in bribery and to have been the sole moving agent, that is, the company never agreed to it and the quicker they can convict Joe Bloke, the better off the company is. It is relieved of responsibility and it has a sacrificial lamb in Rome and everybody forgets about the activity.”
The Fifth Circuit then stated as follows.
“Congressman Eckhardt pointed out the dependence of the agent on the corporation for an adequate defense since the corporation, due to its superior resources, would be in a much better position than the employer to defend against accusations of wrongdoing in a foreign country. He articulated concern over legislation that would require the agent alone to bear the burden of refuting allegations of FCPA violations. He was also troubled about giving the uncharged corporate employer incentive to both disavow knowledge of the agent’s activity and to let the agent bear all responsibility for the wrongdoing. This problem was avoided […] because what would become the Eckhardt Amendment ‘would require the government … to prove in the first instance that the issuer had violated the section, because that is the condition precedent to the holding of any agent responsible.”
After reviewing other aspects of the FCPA’s legislative history, the Fifth Circuit concluded that “both the language of the Act and its legislative history reveal a clear intent to impose criminal sanctions against the employee who acts at the behest of and for the benefit of his employer only where his employer has been convicted of similar FCPA violations.”
The Fifth Circuit then stated as follows.
“We hold that in order to convict an employee under the FCPA for acts committed for the benefit of his employer, the government must first convict the employer. Because the government failed to convict Harvester and under the plea agreement will be unable to indict Harvester and try it with McLean, the Act bars McLean’s prosecution.”
In so holding, the court observed that “it is well-settled that a conspiracy to commit an offense and the commission of a substantive offense are separate and distinct crimes.”
Uriarte was subsequently charged in a one-count superseding information and pleaded guilty to “accessory after the fact” in violation of 18 USC 3. He was placed on probation for one year. (See here).
As for McLean, contrary to what the FCPA Blog stated in this prior post, the Fifth Circuit’s decision did not end the DOJ’s case against McLean in that the decision only addressed the substantive FCPA charges against him that were dismissed by the trial court. The Fifth Circuit decision did not address the conspiracy charge against McLean.
As to the conspiracy charge, McLean proceeded to trial and was found not guilty by the jury.
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Stung by its McLean defeat, the DOJ sought to repeal the Eckhardt Amendment. In a September 1986 FCPA reform hearing in the Senate, John Keeney (Deputy Assistant Attorney General, Criminal Division) submitted a written statement, which read in pertinent part, as follows.
“The Department also wishes to highlight a serious law enforcement problem in both the existing law and in [a Senate bill to amend the FCPA], with respect to the prohibition against convicting an employee (and, in the present FCPA, an agent) of an issuer or domestic concern unless the domestic concern itself is ‘found to have violated’ the Act. The purpose of this provision, known in the present FCPA as the Eckhardt Amendment, was to prevent a company from labeling an employee as a renegade, thereby making him a scapegoat for the company’s criminal acts, and forcing him to bear alone the full economic burden of defending the criminal charges as well as the potential criminal sanctions. This goal, unfortunately, has not been met. There is nothing to prevent a company from pleading guilty to a FCPA violation thereby forcing the employee or agent to defend by himself. Situations similar to this have occurred in the cases brought thus far.”
“While the Eckhardt provision falls short of fulfilling its purpose, it also makes it more difficult to prosecute certain classes of individuals regardless of the quantum of evidence as to their guilt or that of their employers. In the only reported opinion on this issue, an appellate court construed Eckhardt to mean that a company must be convicted of a FCPA violation rather than merely be ‘found to have violated’ the act.”
“In that case, a company entered a pre-indictment guilty plea to conspiracy to violate the FCPA rather than to a substantive violation of the Act. The conspiracy plea was permitted because of the serious financial condition of the company and the real possibility that the imposition of a substantial fine would force it into bankruptcy. Two company employees were indicted for multiple FCPA violations as well as for conspiracy to violate the FCPA. The government offered to present proof beyond a reasonable doubt that the company had violated the FCPA and suggested that the Court instruct the jury to make the required Eckhardt finding prior to considering the guilt or innocence of the employees. The Court rejected these alternatives and dismissed the FCPA charges. In our view, this construction of the statute does not comport with the intention of Congress in enacting the Eckhardt language.”
“A similar problem exists where a company, over the objection of the United States, enters a plea of nolo contendere to FCPA violations. In that situation, a court could enter a judgment of conviction against the company for FCPA violations without necessarily making a finding as to guilt for purposes of the statute. Arguably, the United States might be prevented from prosecuting an employee or an agent of that company following such a conviction. Such an argument has recently been made by a fugitive defendant who, as agent for a domestic concern, acted as the conduit for transmitting in excess of 10 million dollars in bribes to two foreign officials on behalf of the company which pleaded no contest to 48 FCPA charges. Given the current state of the law, the eventual resolution of this issue is not completely free from doubt. What is clear is that there is no justification for allowing conduct of this sort to go unpunished.”
“Should the Subcommittee wish to retain the language of Eckhardt, the Department would suggest that it clarify what is meant by “found to have violated.” Alternatively, the Subcommittee might wish to substitute some other language which more clearly sets out the intent of Congress. If the Subcommittee wishes to insure that the goals of Eckhardt are met, we suggest adding language requiring a company to indemnify an employee’s attorney’s fees unless it can be shown that the employee was clearly was operating as a renegade or without the company’s knowledge. The Department is willing to work with the Subcommittee to clarify the Eckhardt provisions.”
A relevant House Conference Report in April 1987 (Rep. 100-576) as to a bill to amend the FCPA stated, in pertinent part, as follows.
“Anti-bribery Provision – House Repeal of Eckhardt Amendment
House bill. The House bill repealed the so-called Eckhardt amendment to the FCPA by deleting the lead-in clause of present law, which reads “whenever an issuer/domestic concern is found to have violated …”. The deleted language had the effect of providing that employees or agents could not be prosecuted for FCPA violations unless the domestic concern or issuer, whichever the case may be, had been found to have violated the Act.
Senate amendment. The Senate amendment contained no comparable provision.
Conference agreement. The Senate receded to the House.
When the FCPA was finally amended in 1988, among its changes, was repeal of the so-called Eckhardt amendment.