Category: Guest Posts

George McLean

This is the second part of a two-part series concerning George McLean, a historic individual in terms of Foreign Corrupt Practices Act history in that he was the first to put the DOJ to its burden of proof in FCPA history.  And he won, both in terms of a pre-trial dismissal of substantive FCPA charges (see this prior post) and at trial on an FCPA conspiracy charge as he was found not guilty.

Part one of the series detailed McLean’s life prior to the criminal indictment in 1982, his views concerning the circumstances leading up to the case, and his decision to fight for his innocence and the impact it had on his life.

Part two of George McLean’s story has him waiting for the jury verdict in his case.  McLean also comments on the DOJ calling his not guilty verdict merely a “sympathy verdict” and offers his perspective on the so-called Eckhardt Amendment (see this prior post) no longer being a part of the FCPA.  You will learn what McLean (78 years old) is up to today as well as his observations regarding FCPA enforcement and FCPA Inc.

George McLean continues his story in his own words.

*****

Q. Describe your feelings just prior to the jury rendering its verdict?

A. I had been waiting on a hard wooden bench near the entrance to the courtroom. In fact, I spent most of the 2 to 3 hours wait stretched out asleep. I had been severely sleep deprived for the 2 weeks prior to the trial and the 3 weeks of the trial. My wife was waiting with me and reading a book. I was feeling extremely confident, but there was the glimmer of apprehension that something would go wrong as the jury weighed the evidence. I just wanted it to be over. The verdict was rendered quickly considering the length of the judge’s instructions and the minimum time it would take the jury to go through the necessary steps prescribed. When we were given notice that a verdict had been reached after the quick deliberation the signs surely signaled an acquittal. The expression on the faces of most of the jurors when they returned to the courtroom, some of whom were making direct eye contact with me, was a dead giveaway of the verdict. On the other hand the prosecutor was looking very nervous.

Q. Describe your feelings after learning of the jury verdict?

A. I expected an acquittal verdict, but nevertheless there was a tremendous feeling of relief. I jumped off my chair and exclaimed loudly, “Up the Irish.” I then hugged my Irish wife who was in the front row and I embraced my magnificent lawyer Charlie Sullivan. I noticed that the lonely prosecutor looked stunned which he shouldn’t have been because, knowing the facts, he should have never brought me to trial. My wife said later that it must have taken 10 minutes for the blood to move from his toenails back to his face. 

Q. In press reports, the DOJ prosecutor is quoted as saying that the not guilty verdict did not exonerate you, but that it was merely a sympathy verdict by the jury. How did you feel about that statement?

A. It was pure sour grapes by the prosecutor who at that point had to be concerned about his future at the DOJ which as it turned out ended shortly thereafter in 1986. I contacted the Wall Street Journal shortly after my acquittal which they hadn’t found fit to report on. I challenged the fact that they had reported on the Crawford indictment and Harvester plea bargain in front page articles that portrayed me as being guilty. Only then did they place a short article on an inside page which included the prosecutor’s quote after they had contacted him. I appeared at the office of the editor of the San Diego Union-Tribune who had run a front page article and devoted a full inside page to my indictment which included generous contributions from the prosecutors who were trying to make a home run to their careers. The Union -Tribune then ran a minimal article on my acquittal. The NY Times and other newspapers picked up on the WSJ article including the prosecutor’s quote.

After the trial, while in the courtroom, I talked in length to one of the male jurors who was anxious to relate to me how the deliberation process had gone. He had personally decided early on that the charge never should have gone to trial and that the government had no case. After the jury went through the judge’s deliberation instructions the first vote was taken with ten in favor of acquittal and two against. The juror described the two as being very conservative and religious and they couldn’t believe the government would indict someone who wasn’t guilty. It didn’t take long for this juror and the forewoman to explain the situation to the two and have them again review the exculpatory evidence. They quickly changed their minds and the second vote was unanimously in favor of acquittal.

As I recall, the judge either appointed or recommended the election of the forewoman to her position. She was obviously a very intelligent professional. I had a short conversation with her in the courtroom and she expressed similar sentiments as the other juror. Several weeks later, by chance, I ran into this woman in a departure area at Houston International airport. We had a 15 to 20 minute conversation wherein she expressed her opinion that my prosecution was a travesty of justice and she wished me good luck as I resumed my business career and normal family life. She commented that at the beginning of the trial, the jury concluded that the lovely woman in the front row of spectator benches had to be my wife.

I learned from reliable sources that the prosecutor was advised by his superior to drop the case against me after the “nolo” deal that removed all the other defendants and denied him the opportunity of his big show trial featuring his remaining high-profile defendant, Don Crawford, a Houstonian. The highest profile potential defendant, former “Dow 30” company International Harvester, was previously ordered removed from the indictment by the Associate Attorney General to the chagrin of the government’s trial attorneys and the Associate Attorney General left them the inglorious task of negotiating their guilty plea. And I am sure it bothered the prosecutor that I had for over two years in hearings and pleadings, accused the prosecution of wrongdoings such as lying and destroying grand jury evidence which I was able to do with impunity because I was not an officer of the court bound to treat the prosecutors with professional courtesy. So for whatever his reasoning, the prosecutor ignored the advice of his superior and went forward with my trial because I wouldn’t plead guilty to a charge similar to Uriarte. The trial cost the government a bundle which the prosecutor had argued two years earlier they couldn’t afford in answer to my motion for separation and a speedy trail.

The prosecutor showed up for trial on his own, without his high-powered Washington team who reportedly had seen enough of me and could read the writing on the wall. The prosecutor not only made a fatal decision in bringing me to trial probably for emotional reasons, but he conducted the trial like a rank amateur. First of all, he had to know from the credible evidence that I was not guilty. He had to know from pre trial hearings that the trial judge felt I was not guilty. He had to know from my offer to give evidence without immunity to the Houston grand jury that I was not guilty. He had to know that calling several Solar present and former employees as prosecution witnesses not knowing how they would answer his questions would be a risky business. Most importantly he had to know that the accusatory proffers of their star witness made while he was plea bargaining were suspect.  The investigators had obviously not bothered to carefully check out the facts surrounding their star witness’s proffers. As it turned out this witness was easily unmasked on cross-examination and shown to be a plea bargaining liar the prosecutor wanted to believe. The cooperation agreement negotiated with this witness in May 1981 states in article 2, that “if the proffers are inaccurate or untruthful..…this agreement shall be null and void at the discretion of the United States.” If this was deemed as such the witness “shall thereafter be subject to prosecution for any federal criminal violations.” It is understandable that the government never prosecuted this witness for violating his Cooperation Agreement because of the added embarrassment it would cause the government prosecutors on top of losing the trial.

The prosecutor certainly made a poor decision when he insisted, against good advice, to bring me to trial alone. After several years of good work, the government had secured pleas from the guilty ones as well as Uriarte and Harvester who were not guilty and then they risk tainting their record. The cost of my trial certainly ate into the millions of dollars in fines they had collected from some of the guilty defendants. In a way, I sympathize in the way the prosecutor screwed up when his ego got in the way. I agree, a not guilty verdict does not unfortunately constitute exoneration because it does not erase the stigma of a grand jury indictment no matter how it was obtained.

Q. After the conclusion of your case, describe the rest of your life and career up to the present moment?

A. Later in 1985 I co-founded a business partnership, Turbo Power Systems, between a major Houston energy company, two European engineering/manufacturing companies I had been consulting for, an electronics company in Houston and myself. The purpose of the partnership was to commercialize a high-efficiency electric power plant design I had developed and patented. The patent is registered as the “Triple Combined Cycle.” It also received “Qualifying Facility” (QF) renewable energy status from the U.S. Department of Energy.

In 1986, I also co-founded Pipeline Compressor Systems, Inc. (PCSI) in Houston, Texas for the purpose of commercializing my design of the high-tech natural gas pipeline compressor that became known as the MOPICO, an acronym for MOtor PIpeline COmpressor. My partners included high-tech engineering companies based in Switzerland, Belgium, France and Italy who manufactured all the components.  After several years, it became evident that trying to manage a venture with participants from five different countries wasn’t going to work because all the participants were marching to corporate drummers with differing objectives. A decision was made to consolidate the management of the MOPICO and related products under Sulzer Brothers Turbo Div. in Zurich. I sold my interest in the venture to Sulzer in December 1999, but continued to do some consulting for them. In the meantime, Sulzer Turbo was sold to MAN in Germany one of the largest engineering companies in the world. I am proud to say the product is now highly successful and continues to be developed for advanced applications around the world in the oil and gas business.

In the mid 1980’s I provided, as a consultant, the conceptual design for the only peat fired power plant ever built in the U.S. It is located in Maine.  I received a fee of $300,000 which was very welcome considering the financial licking I had taken during my prosecution. The plant was constructed by a Belgium company and its operation was subsidized as a renewable energy project by the U.S. Department of Energy as part of the 1970’s program to make the U.S. energy independent.

In the mid 1990’s, I was commissioned as a consultant, by a group of Canadian energy industry entrepreneurs in Calgary to provide conceptual compressor station designs for a proposed high pressure (up to 1,935 psi) 2300 mile gas pipeline from northeastern British Columbia to Joliet, Il. outside Chicago.  This line went into service in December 2000.

At the conclusion of my trial in 1985, my suit against Harvester was still in its early stages of adjudication. I filed my original complaint, George S. McLean v. International Harvester,  pro se on October 22, 1984, in the midst of defending myself in the criminal case and trying to make a living as a consultant. Some months later, I hired Charles Sullivan (who also represented me at trial) on a contingency basis and thereafter he filed several amended complaints as depositions were taken and discovery progressed. Harvester’s outside lawyers, fought us tooth and nail and hired a former favorite clerk of the judge as their local Houston representative presumably to give Harvester a political advantage. The judge made some unfavorable and unfair decisions particularly in the period surrounding my trial. The court dismissed counts 1 through 7 of the 3^rd amended complaint, limiting discovery, and denying as moot my motion to file a 4^th amended complaint.

The 5^th Circuit affirmed the district court on the above except for count 6, indemnification where they determined Harvester must reimburse me for my legal expenses in my criminal defense.  McLean v. Harvester, 817 F. 2d 1214 (5^th Cir. 1987).  The adjudication continued and Sullivan remained in the case until the fall of 1989 when he withdrew by mutual agreement. Incidentally Charlie Sullivan is one of the finest people I have ever known. At this point I was again proceeding pro se. About this time the old trial Judge finally retired and the case was taken over by a new Judge who denied me two of the forms of indemnification I demanded. I filed a very long and complete appellant’s brief which was successful. The 5^th Circuit remanded the case back to the district court to award me appropriate indemnification for expenses I incurred in my expungement action and appropriate pro se attorney’s fees if the district court should determine I was forced to conduct my defense pro se because of “unscrupulous conduct” by Harvester.  McLean v. Harvester, 902 F .2d 372 (5^th Cir. 1990).

At this point late in 1990, I was then in position to hire a lawyer to prepare for trial. The case continued toward trial when unexpectedly at the urging of the judge in a pre trial hearing, Harvester agreed to negotiate. I assume they didn’t want to risk being found guilty of  “unscrupulous conduct” toward a former loyal employee. Our primary witness was going to be Harvester’s former chief counsel and managing partner at its outside law firm who convinced the Associate Attorney General to pull them from the indictment and negotiated their guilty plea and later became chief counsel of General Motors and then president and CEO of the prestigious Aspen Institute. After seven long years, the case was settled financially “on the courthouse steps” as jury selection was imminent.

After the criminal trial I was able to reestablish more of a normal family life as well as resuming my business career. However, the pursuit of Harvester continued to take away from my time until December 1991 when the case was settled.

My daughters were 5 and 8 when I was indicted and they were subject to embarrassment and derision by some of their friends and classmates because of the wide local news coverage and the usual whispering campaigns by narrow-minded adults. Most of that had stopped 2 ½ years later when I was acquitted.

But once you are indicted one is seldom exonerated in the eyes of some people no matter what the circumstances. I almost completely lost 2 ½ years of being a father and husband during such a critical time in our daughter’s young lives. They were keen on sports including soccer, softball, golf, tennis, skiing, swimming and sailing in their elementary school and high school days. I unfortunately missed most of their team sports events during the period of the criminal case. After the case, I got involved in coaching their youth softball and soccer teams and we introduced them to golf and sailing. Shortly after the trial, we bought a 25 ft. sailboat and we started sailing on weekends as a family. That summer we also bought a 1985 VW camping van that we used for camping in the Sierra’s, etc. We still have the van with 180,000 miles and a new engine.

Since selling my compressor business interests to my European partners, I have confined my business activities to investing. I was involved in corporate finance for many years as part of my business responsibilities as well as studying economics and financing at the senior executive program of the MIT Sloane graduate business school. I limit my investment activities and research to a couple of hours a day. I spend several hours each day reading, writing, working outside, exercising and running errands. I follow world political, social equality and certain business and sports activities closely.

Q. Do you keep informed on FCPA issues and enforcement actions? If so, what is your reaction to this “new era of FCPA enforcement?

A. Over the years since my case, I have read every article I noticed concerning the FCPA in a newspaper or magazine. The articles have usually related to plea bargain settlement with the DOJ or SEC for violations by U.S. headquartered companies. Earlier on, there were frequent articles about potential major revisions to the FCPA legislation.

I kept my eyes open for comments on the Eckhardt Amendment. I was dismayed when the legislators did away with  Eckhardt in 1988. I assume the DOJ lobbied Capital Hill hard to get rid of it. When the Associate Attorney General pulled Harvester out of the indictment, discovered records show that the prosecutors knew immediately they had an Eckhardt problem prosecuting Uriarte and myself. It was an interesting catch-22 situation as I detailed earlier in my answers. They needed our convictions to legitimize the bogus Harvester guilty plea. They vainly tried to convince the trial court and 5^th  Circuit that Harvester’s guilty plea satisfied the requirement of Eckhardt to allow them to prosecute Uriarte and myself on the 43 counts.

I hate to imagine the number of employees who have been made scapegoats for their U.S. employers and left hung out to dry since the Eckhardt Amendment was eliminated.

I also noticed reports on the attempts by the OECD and OAS countries to cooperate in attacking the international bribery situation. The attempts at writing meaningful protocols at the end of their several bribery conventions that accomplished little must have been interesting.

The activity in government prosecutions in the last several years especially by the SEC certainly shows that FCPA Inc. is alive and thriving. The enforcement activity seems to have dropped off in the last two years probably more the result of the worldwide business recession than effective compliance to the law as a result of successful prosecutions.

I have also taken notice of more recent anti-bribery actions in Britain, Germany and other OECD countries several of whose foreign offices were known to have formerly supported their manufacturer’s worldwide bribery activities. And of course more recent FCPA actions or scrutiny against BAE, Siemens, Wal-Mart and others have been widely covered in all the media far beyond the business pages.

As far as I see it, the “new era of FCPA enforcement” is nothing more than a change in the tactics within FCPA Inc. The FCPA legislation signed into law by Jimmy Carter  in 1977 seemed little more than a well-intentioned, but ill-conceived, attempt by our government to export our  U.S. business morality around the world. To begin with, the U.S. system of lobbyists influencing federal legislators and legislation via super PAC donations is basically corrupt, but it is now federally regulated and therefore legal. And of course, it is domestic and not foreign. Foreign countries have to look at the hypocrisy of the U.S. anti bribery statutes and enforcement with skepticism. I ask the question, how is the U.S. going to deal with the problem of corruption in our trade with growing economies like China and India where systems of tributes and bribery became part of their cultures in ancient times.

It is well established that in many friendly countries U.S. manufactured military material is sold with tributes being made or some other quid pro quo. These transactions are legal when the Pentagon is the middle man between the manufacturer and the foreign government, and justified for “national security” reasons.

The recent FCPA guidance issued by the government appears to be of limited value to the U.S. exporters in furtherance of their conforming to the inadequate statute and limited case-law. Another basic question is how should the countries of the world legislate against international bribery in various foreign countries where the payment of tributes has been part of their culture for hundreds of years and where the foreign participants are experts in soliciting and extorting bribes? The answer has not been found by the OECD and OAS conventions on the subject or by the U.S. Congress, DOJ, SEC, State and Commerce Departments, etc. Perhaps the answer lies in regulation and a system of licenses or fees. This has worked in the alcohol business in most countries around the world as well as fueling the governments’ coffers. The marijuana business in the U.S. seems to be heading in that direction as the only practical solution. The regulation of marijuana seems to work in the Netherlands.

In the meantime, young lawyers continue to be educated on the FCPA, then join the prosecution forces at the DOJ and SEC and finally end up at the defense side at white-collar law firms or corporate legal staffs. The games played in the world within the reach of FCPA Inc. have evolved in a similar manner as the individual and corporate tax games. I see no incentive to lawyers and legislators to kill the game.

Q. You are in a unique situation of having participated, pro se, in defending yourself  in a high-profile DOJ criminal indictment and a civil suit as well as participating, pro se, in your related civil action against International Harvester. Do you have any additional relevant observations of the justice system as a result of your cases?

A. Yes, first of all, the use of plea bargaining in a multi defendant criminal case is ripe for abuse especially by sloppy or unscrupulous prosecutors. I suspect it is still particularly useful in FCPA cases particularly without the obstacle of the Eckhardt Amendment. In my case, the government’s star witness, in his proffers, accused me of being in a conspiratorial meeting that never occurred. The facts were obviously never checked out. In my grand jury appearance, at least two of the jurors slept through most of the session, three jurors showed no interest and only one was properly attentive.

The government altered a key part of the transcript of my Washington grand jury testimony to support my indictment and the Harvester guilty plea offer of proof. My altered grand jury testimony was read to the indicting Houston grand jury. My offer to testify before the Houston grand jury was refused by the prosecutors. The grand jury should have made that decision. The Houston grand jury was upset when Harvester was pulled out of the indictment at the last moment and they protested to the DOJ management in Washington who quelled the protest. In my case, the prosecutors obvious abused their management of the Houston grand jury and I believe they broke the law as well.

The original trial judge in the criminal case was suffering from terminal cancer and he had to unfortunately leave the bench in the middle of the case. He seemed very competent to me and he suffered through my lack of courtroom experience with patience and understanding which I appreciated. He unfortunately couldn’t recognize the prosecutor’s use of dirty tricks against me which I brought to the court’s attention on several occasions. I have already commented on the first judge in my civil action. It irritated me that sometimes trial judges acted like god almighty and were very stingy in writing opinions to their orders.

On the other hand, Chief Justice Singleton performed like god almighty and wrote clear opinions and a well thought out and equitable set of jury instructions at my trial. In pre-trial hearings when I questioned the honesty of the prosecutors, the judge always found in favor of the prosecutors because they are members of the court. That was unfortunate but understandable.

The 5^th Circuit showed great insight in making their two key findings in my favor. When I made my oral argument in the government’s appeal of the trial court’s dismissal of the 43 counts, one of the 3 judges helped me through my presentation with a string of questions that showed he had read my brief with great care. In my unsuccessful appeal of the trial court’s denial of my motion to expunge my name from the Harvester guilty plea court documents, the 5^th circuit said that my naming was of no advantage to the prosecution in my criminal case. However, six years later in my Harvester civil action, the 5^th Circuit, in their lengthy favorable opinion, indicated that they then fully understood what the government’s game was in naming me as Harvester’s scapegoat. On the other hand in my brief for the appellant, I was able to detail exactly how the government was using my naming in trying to get around the Eckhardt Amendment.  When I was struggling with my pro se defense I often got helpful advice on procedures from clerks at the district court in Houston and the 5^th Circuit in New Orleans.

In summary, I think the guilty plea system is a necessary evil that is easily abused by prosecutors. The same can be said for the federal grand jury system. Federal trial judges have a tough job and they are not all up to the same standard. The 12 jurors found the right answer quickly in my trial, but that apparently it is not always the case.

FCPA Inc. and the laws surrounding worldwide corruption need urgent fixing and the situation is not receiving proper attention because it is basically impractical to effectively legislate the business morals of differing cultures worldwide, friend or foe, to march to the beat of a common moral drummer. It is certainly impossible in many countries to stamp out the cultural practice of the traffic cop or customs official soliciting bribes as well as paying tribute to the head of state in order to do business in his country.

So the U.S. will probably maintain an effort of enforcing the present FCPA that very few seem to like and pursuing the violators of the present FCPA statute and fining them. Most companies probably treat the fines as a normal cost of doing business and they hire lawyers to minimize the expense and keep their executives out of jail. And at the end of each year, a growing number of law firms will issue their marketing reports as to how their part of FCPA Inc. performed during the year. And these law firms and the SEC and DOJ will continue to advise the Congress not to radically change the legislation that provides so many billable hours at outrageous rates and million of dollars in fines to the government.

George McLean

This post concerns a historic individual in terms of Foreign Corrupt Practices Act history.

Prior posts here and here provided necessary background information concerning the DOJ’s FCPA enforcement action against George McLean (a former Vice President of Solar Turbines International (“Solar”), a division of International Harvester Company).  As indicated in the prior posts, McLean (and several others) were criminally charged in 1982 for FCPA and related offenses.

Unlike others in the case (and indeed unlike most other FCPA individual defendants over the course of FCPA history), McLean fought back, believed in his innocence, and for the first time in FCPA history, put the DOJ to its burden of proof.  McLean won, both in terms of a pre-trial dismissal of substantive FCPA charges (see this prior post) and at trial on an FCPA conspiracy charge as he was found not guilty .  The most amazing part of McLean’s story is that, for the most part, McLean fought back as a pro se defendant (in other words, he represented himself).

This post (part one in a two-part series) is presented in a Q&A format in which McLean tells his story.  It is a human story to be sure and I encourage you to visit this photo montage of McLean (currently 78 years old) prior to reading the post.  Even though McLean prevailed against the DOJ, his victory was not without costs.  The thousands of hours he spent on his defense consumed his life and took him away from his young family, damaged his reputation, and changed his life forever.

In part one of George McLean’s story, he shares his views on several issues connected to his prosecution.  McLean’s story provides a rare insight into the criminal justice system from a criminal defendant who experienced it.  You will learn how McLean refused DOJ plea agreements, claimed DOJ prosecutorial misconduct, and testified in his own defense.

Beyond being a compelling human story, McLean’s story also further dispels the widely held myth that the DOJ has a high degree of success in FCPA enforcement actions when put to its burden of proof.  To the contrary, before the Africa Sting defendants, before Lindsey Manufacturing, Keith Lindsey and Steven Lee,  and before John O’Shea (all FCPA defendants who recently ultimately prevailed against the DOJ in FCPA enforcement actions – see here for additional reading), there was George McLean.

This is George McLean’s story in his own words.

*****

Q. Generally describe your life and career prior to being criminally indicted in October 1982?

A. I was born in New York City in 1934 and raised in Yonkers, New York. My father was an Assistant U.S. Attorney for the Southern District of N.Y. before he entered private practice.  I graduated from Cornell University in 1958 with Bachelor of Mechanical Engineering (BME) and Master of Engineering (ME) degrees. I received a certificate of completion from the Program for Senior Executives at M.I.T. Sloane Business School in 1979.  I served a short time on active duty as an enlisted man in the Navy reserve at Great Lakes, Il. in the winter of 1959-1960.

I joined the Solar Division of International Harvester in Washington, D.C. in the Spring of 1963 after working as an engineer for the Ingersoll-Rand Company in New York City for 4 years.  At Solar, I worked as a sales engineer assigned to various U.S. Navy, Coast Guard and commercial airline accounts.

After I got married, my wife and I moved to Sausalito, California across the Golden Gate Bridge from San Francisco. I was establishing new sales offices in San Francisco and Anchorage for Solar at the time.  We moved to San Diego in late 1970 when I was promoted to Solar’s manager of  international sales. Our two daughters were born in the 1970’s.

At Solar I rose from sales engineer to Vice President with responsibilities for worldwide sales, field service, international operations and corporate development. I was also president of Solar Turbines, Ltd., a subsidiary of International Harvester. I left Solar on December 15, 1980 when I was abruptly fired without cause when I refused Harvester’s offer for me to resign. At the time, I was strongly objecting to their plan to auction Solar off to the highest bidder to help avoid bankruptcy. After 17½ years at Solar I was given 1 hour to clean out my desk and was escorted out the front door by an armed guard. Several weeks earlier they had forced my boss, the Solar  division president, who was also vehemently objecting to the auction, into early retirement. It took several days for the initial shock of my abrupt firing to wear off and my bitterness over the treatment I had been dealt by my long time employer. Only a month earlier, I was interviewed as a potential candidate to replace my former boss as Solar’s president by a H.R. consultant retained by Harvester. I quickly came to the conclusion I would leave the corporate world and work for myself. I had broad experience in the design of compressors, gas turbines and electrical systems used by the oil and gas industry. And my over 15 years experience in marketing this machinery around the world had facilitated my establishment of friendly professional relationships with many potential clients.  At the end of the holidays I tested the water with several potential clients for my services and received sufficient positive response to decide to establish myself as an independent engineering and business consultant. I immediately incorporated myself in California as George S. McLean & Associates, Inc.

By mid January 1981, I had landed my first consulting job and soon others.  In early 1982, I contracted with Ross Hill Controls Company (RHCC), an electronics firm in Houston, Texas to develop a business plan and marketing organization for a variable frequency A.C. motor drive system product line based on solid state electronics technology.  While the RHCC assignment was taking up most of my time, I undertook an urgent consulting assignment for the U.S. Dept. of Commerce on behalf of the White House to determine if a U.S. equipment and technical data embargo was successful in impeding the work on a 3000 mile natural gas export pipeline from northwestern Siberia to Western Europe.

In early September 1982, I received a phone call from a Commerce official who had learned I had been a sales executive working closely with the USSR Ministry of Gas (now Gazprom) and had negotiated contracts for Solar compressors and generators with the USSR Ministry of Foreign Trade. The Commerce official wanted to know if I could determine the effectiveness of the embargo which I said I could. I made a verbal consulting agreement with Commerce and flew from Los Angeles to Paris.  After four days in Europe, I had gathered enough hard evidence to prove that the embargo was completely ineffective. I hurried back to Washington to present my findings on a Saturday meeting at the Commerce Dept. headquarters to a disappointed group of staffers from Commerce, State and the White House. The Export Administration Act was amended a week later to terminate the ill-advised embargo.

Little did I know at the time, but in the meantime, down Pennsylvania Avenue, in the Justice Department the prosecutors were busy setting me up in the Crawford indictment and as one of two scapegoats in the Harvester plea bargain as part of their brilliant prosecution strategy. For my part, I had just helped save the White House from making a bad international political situation worse if they had continued with their non effective embargo.

Q. Your indictment was part of a much broader case that also involved other individuals and companies. Your case and the related cases were the FCPA’s  first mega enforcement action. Describe the circumstances giving rise to the cases?

A. The 42 page indictment document dated October 22, 1982 presents the prosecutors detailed summary of the cases. Much of this document, as far as my involvement, is incorrect and convoluted as subsequent discovery, hearings and testimony at my trial would show.  Briefly, during the late 1970’s, Petroleos Mexicanos (Pemex), the national petroleum company of Mexico, purchased large quantities of gas turbine compressor equipment used to capture and transport from the well heads to processing plants high volumes of natural gas produced in association with the crude oil. The Solar Division of International Harvester Company was the dominant worldwide supplier of such equipment. I was Solar’s vice-president responsible for worldwide sales of this equipment. Crawford Enterprises, Inc., (CEI) was a broker and lessor of gas compression systems who frequently purchased equipment from Solar for resale or lease. Solar, as prime contractor, had supplied Pemex with equipment since the mid-seventies. During the period of accelerated development at Pemex in the late 1970’s, Solar had also acted as a subcontractor for CEI, who had contracted with Pemex to build complete compression plants. In early 1979 the DOJ initiated grand jury investigations into allegations that U.S. businessmen had bribed Pemex officials in violation of the new FCPA law.

I testified to the Washington grand jury on January 8, 1990, without immunity, after an 8 hour session the previous day with Harvester lawyers. On October 22, 1982, a 49 count indictment was filed in federal district court charging CEI and nine individuals. I, along with another Solar employee, was named in one count of conspiracy and 43 substantive counts of aiding and abetting CEI in violating the FCPA. Harvester was unexplainably missing from the indictment.

I later learned that the government advised my Harvester appointed lawyer in August 1981 that I was a target of the investigation; this information was withheld from me until June 1982. On June 22, 1982 a letter was sent to my Harvester appointed lawyer inviting me to testify without immunity to the Houston (indicting) grand jury. The letter was withheld until May 1983. The Harvester lawyers tried unsuccessfully during the summer of 1982 to kill the probe and they continued to assure me they would never plea bargain with the government and not to worry. They were blowing about how they had enlisted the help of the Illinois congressional delegation to help kill any indictment. I would later learn that the prosecutors were telling Harvester that I and another key Solar employee were plea bargaining. At that point the Harvester lawyers had in fact opened a secret plea negotiation with the government and they became incommunicado as far as I was concerned. I then became extremely anxious of the situation and on the morning of October 18, 1982, against the strong advise of my Harvester appointed lawyer, I directed him to contact the prosecutors conducting the Houston grand jury by phone and convey my offer to testify immediately and without immunity. They got back to him a couple of hours later and said it was too late although they continued to question witnesses for another day and a half. Also unbeknownst to me at the time the Harvester lawyers were frantically springing into action.

Several hours later during the evening of  October 18^th the Harvester general counsel personally delivered a 3 page memo to the U.S. Associate Attorney General and conferred with him and others at the Justice Department in Washington. The memo stated that Harvester understood the Solar president, who was also a Harvester corporate officer, would not be indicted and proposed their “respondeat superior” defense. The next morning the prosecutors at the grand jury in Houston were advised that the Associate Attorney General had ordered Harvester removed from the indictment.

At arraignment of all the Crawford defendants in Houston on November 3, 1982 there was a strong rumor circulating that Harvester was plea bargaining. On November 9, 1982, I wrote the Harvester president and told him that I was ready to help them refute any government charges because the indictment was without substance as far as Solar was concerned and that I and the other indicted Solar employee had conducted our business with Pemex under the strict guidance of the company lawyers. My letter and a similar letter from the former Solar president to the Harvester  board chairman were ignored. On November 16^, 1982, the Wall Street Journal reported Harvester was pleading guilty because they had very little money.  I was in Houston on November 18, 1982 pursuing a consulting assignment and I attended the hearing in federal court where Harvester pleaded guilty to a one count of conspiracy to violate the FCPA while urging respondeat superior, that is, Uriarte (the other Solar employee indicted) and I were guilty simply because the government said we were guilty. Harvester was fined $10,000 and court costs.  When I read the court document I was shocked to see myself labeled as being guilty and I felt stupid at having believed the information the Harvester lawyers had been feeding me. I was livid when I confronted one of Harvester’s lawyers on the sidewalk outside the court house. He threatened to withdraw their legal support if I “declared war” on Harvester.

Testimony in my Harvester civil action would later reveal the details surrounding the plea bargain.  The DOJ was determined that I should be indicted and that under the Eckhardt Amendment, Harvester also had to be indicted. During the period from October 19 through November 5, 1982, Harvester lawyers understood that the prosecutors were attempting to buttress the 43 aiding and abetting charges made against me in the October 22^nd indictment and to apply pressure on Harvester  to accept DOJ’s theory of the case.

The Harvester lawyers accepted the proposition that Harvesster had to accept DOJ’s versions of the Information, Offer of Proof and Plea Agreement, in order to attain Harvester’s goals of a one count conspiracy charge with a $10,000 fine coupled with a commitment that Harvester would not be charged with criminal income tax evasion. Both Harvester lawyers testified that there was no evidence that Harvester was guilty of either substantive violations of the FCPA or conspiring to violate the FCPA, that Harvester was not pleading guilty because it was guilty, that Harvester had been “bludgeoned” into agreeing to the prosecution positions and the Harvester lawyer believed that “it was vital for Harvester to resolve the charges quickly before they would interfere with lender negotiations even if it meant pleading guilty against (his) wishes as a lawyer who believed there was no merit in the charges.”

In October 1983 the need was felt by Harvester management to make decisions in the best interest of Harvester and the attitude of the Harvester General Counsel was that he had to balance the responsibilities to the company and its pensioners to keep the Company alive even though no one at Harvester doubted my innocence. Harvester and its attorneys decided they could not spend the next two years or whatever it took to prove themselves in the courts. They determined to “take the least of all evils to keep the company alive” and save the maximum number of jobs which entailed setting me up as their scapegoat.

In the words of the Harvester General Counsel, “Doing ethics is the maximizing the good for the most people and minimizing the evil, and in many cases you make choices where you cannot avoid adverse consequences to a few, but you say, ‘what’s the net?’ Is there any other course of action I could have taken that would have produced more good and less ill? I couldn’t think of any I reached my conclusion after a great deal of soul-searching, and I don’t think I was missing any relevant facts when I made that decision, and I did a lot of consulting with others. I didn’t rely only on my own judgment. This was talked about with Harvester’s President, Harvester’s Chairman, and a Harvester Director, “in view of all our obligations and our trials and tribulations at the time.”

Q. When, where and how did you learn of your indictment?

A.  I learned of my indictment late on the morning of October 22, 1982 when I removed a Wall Street Journal from a vending machine outside the Pennsylvania Ave. entrance  to the Commerce Department building in Washington, DC. I had been collecting my consulting fees from my Russian pipeline assignment and negotiating a new retainer arrangement for other assignments. And there on the front page was an article on the indictment.

I sat on a bench and read the lengthy article. I was somewhat shocked that I was included because of the assurances to the contrary being given to me by the Harvester lawyers before the period of silence. I was puzzled by Harvester’s omission as a defendant. I was back in San Diego the next day and the headlines across the front page of the San Diego Union in bold letters was “EX-SOLAR OFFICIALS ACCUSED OF BRIBERY.” The story complete with photos and special “art” work took up the entire third page. The story had also appeared on the front pages of the New York Times, Los Angeles Times and many other prominent newspapers.

The Justice Department goes out of their way with their public relations campaigns when they plan to pressure a defendant into pleading guilty as part of their prosecution strategy as well as seeking approbation from the public. They did so in supplying the San Diego Union a more than adequate and distorted story of their investigation and indictment which put a lot of pressure on me and my wife of 17 years and our 5 and 8 year old daughters and exposed us to scrutiny and unjust ridicule in our community. When I was acquitted of the final count at trial, I was lucky to get a 4 inch single column story buried on an inside page of the San Diego Union and then only after I personally confronted the editor-in-chief about their muckraking reporting of my indictment 3 years earlier. The Wall Street Journal relegated even less inside space to the story.  

Q. How did the indictment and defending yourself against the allegations specifically affect your life and career?

A. After the initial shock of the indictment wore off, I had to quickly determine where I stood, where I wanted to go and my options for getting there. I knew I was innocent of the allegations against me and I realized there was a strong cooperation between the government and Harvester lawyers which landed me in the indictment and as Harvester’s scapegoat in their plea bargain. I couldn’t figure out where the false information came from which the government used to allege the several illegal overt acts in which I was alleged to have participated in. I knew that false information was being told and that false testimony must have been sworn to.

In the course of adjudication of the Crawford and Harvester cases, there were false statements made to the courts by the government and Harvester lawyers regarding me which they knew they could get away with as long as the government could get a guilty plea from me or convict me of one felony. By the time of the Harvester guilty plea, the government had approached me with two plea offers, one in the summer of 1982 and the second on November 5, 1982. They approached me two more times on the subject, in writing on October 7, 1983 and shortly before my trial.

My answer was always no. I would never plead guilty to something I didn’t do no matter what the inducement. Also, my success in the corporate world and in private business as a consultant and running an engineering business has a lot to do with the reputation I had built for being straight forward, honest and truthful. How could I continue to successfully pursue my international consulting business if I pled guilty to international bribery? Establishing a new consulting business was taking up most of my time. My defense against the government allegations would be time-consuming even with a team of lawyers. The first thing I had to resolve was the question of my defense counsel.

On November 22, 1982, two days after the Harvester guilty plea hearing, the lawyer they appointed for me asked for $200,000 collateral to stay in the case because he was afraid that Harvester wouldn’t continue to pay his bills. He suggested I take out a mortgage in that amount on my house. Harvester had advised him that any further advancement of fees and expenses would be contingent upon me executing an undertaking to repay if found guilty and that advances would be subject to Harvester’s continuing review. In the meantime, Harvester was refusing to pay the other indicted Solar employee’s lawyer and they then fired the lawyer. I quickly decided there was no way I could work with a lawyer completely beholden to Harvester who needed to have me found guilty to justify their guilty plea wherein I was named as their scapegoat. On January 3, 1983 I released my lawyer. I couldn’t fire him because I hadn’t hired him.

In late December 1982 I visited the University of San Diego law library for the first time to start familiarizing myself with the legal system. I initiated my first law library search by thumbing through cardboard library index cards in wooden index file boxes. The next step was accessing the law books on the shelves since there was no such animal as the internet and electronic  law books. There was two copying machines available for $.05 per page.

I started my legal career by reading the FCPA statute and studying the legislative history. Early in 1983, I discovered the legislative history of the Eckhardt Amendment that became very important to me. On January 7, 1983, I filed a 9 page document with the court wherein I advised the “Honorable Judge of the Court” that I could not afford a lawyer and I petitioned the court to appoint a Houston law firm to represent me or to order Harvester to pay for a lawyer of my choice who was not beholden to Harvester in any way. This motion was denied after a hearing. The court didn’t appear to have any idea of the potential cost of my defense. Also in my initial court filing I quite unabashedly described how the Harvester and government lawyers had been providing false information to the court and falsifying documents with impunity in their violations of the “Federal Conspiracy Act, the United States Attorney’s Manual, and the Code of Professional Responsibility.”  I suggested a special prosecutor be appointed to investigate their gross misconduct. I was right on, but we know how far I got at that time. So began my pro se legal career.

From the time I released my Harvester appointed lawyer in January 1983 to the acquittal of the conspiracy count at trial in May 1985, I spent an estimated 3300 hours of my own time in my defense including 1860 hours in preparing 51 pleadings and 5 miscellaneous documents totaling about 550 pages for submittal to the federal trial courts in Houston, 200 pages in pleadings/documents for my four pro se 5^th Circuit cases, three times as appellant and once as appellee, and 125 pages of submittals in my two unsuccessful petitions to the Supreme Court for writs of certiorari.

In addition, I spent over 300 hours traveling to hearings and meetings in various cities including 18 round trips between San Diego and Houston for hearings and trial. These hearings and meetings consumed another 400 hours. I also spent another 600 hours in preparation for trial and attendance at my 3 weeks trial. This time and the out-of-pocket expenses do not include my civil case against Harvester that overlapped the other actions and was finally settled in 1991. In my pro se “career” lasting from 1982 to 1991, I had a reasonable “batting average” in the federal court system but made all the big hits necessary to clear my record and recoup my expenses.

You can see from the hours I spent on the cases, the time away from my career and family was devastating especially in the period from the fall of 1982 until after my acquittal at trial in the spring of 1985. The adjudication of my civil suit against Harvester until its settlement in December 1991 was less intense because my neck was not in a noose with the government determined to nail me with all their tricks and chicanery.

I missed out on much of my daughters’ childhood activities when I was traveling to Houston. I missed out when I was home because I was forever preparing a document at the law library, or at home, going to the post office or FedEx office and often working late into the night and on a number of occasions all night long. I wrote my documents out by hand which I then took to a typist who didn’t have a “new-fangled” word processor. There were many copies of my documents to be made at a local shop because of the large number of defendants required to be serviced. This all put an undo burden on my wife and on our relationship. She not only had to raise our daughters on her own but she had to put up with my stress.

I fortunately had several faithful clients who believed in my innocence and gave me all the work I could handle when not tied up with work on the case. We were able to barely just get by financially for a couple of the years with my reduced income and some borrowing. I had to put my business plans on hold for three years.

Q. Nearly all the defendants in the case (corporate or individual) decided to plead guilty or no contest and declined to put the DOJ to its ultimate burden of proof. You did not choose that path but immediately began to mount a defense? Why? Did you ever consider pleading guilty? Did the DOJ ever offer you a plea agreement?

A. At the time the Crawford indictment was returned it was impossible to know what was going on behind the rumor mill. It would be revealed later during discovery that several individuals and companies who were known targets and had appeared before the Washington and/or Houston grand juries had made deals with the government and pled guilty to various charges and/or offered favorable grand jury testimony with immunity in exchange for their deal.

The biggest question mark surrounded the omission of International Harvester, a prime target, from the indictment. That question was answered less than four weeks later when International Harvester pled guilty to a single charge. The principal defendants, Crawford Enterprises, Inc. and its owner Don Crawford had already assembled a high-powered legal team and were preparing a vigorous and expensive defense and served in the role of lead counsel.  The other secondary individual defendants were being represented by various counsel funded by their corporate employers who had already plead guilty. In November 1983 Uriarte, who was not guilty of anything, but could not stand the pressure when Harvester dropped his legal support, plead guilty to a single 18 USC 3 violation and was sentenced to one year of unsupervised probation. The no contest “nolo” pleas in 1985 were actually not so subtly suggested by the prosecutors who had just arrived at the Houston courtroom from Washington for a pre-trial hearing just days before the scheduled beginning of the trial. The rumor was and is that in the course of discovery at that time certain Mexican banking information involving Bechtel Corp. was revealed that could be embarrassing to the Republican party because two ex Republican cabinet officials were then senior executives at Bechtel. The nolo pleas were suggested to all the remaining defendants through their various defense counsel.

A meeting was held and everyone agreed to negotiate with the government except for me. I turned them down without hesitation. This did not sit well with some of the counsel who were basically racking up billing hours as they rode on the backs of the lead counsel who were doing all the work. They were afraid the government would back out of any deal unless all the defendants agreed to a deal, because of the added cost of a long trial for one defendant who the government had to know wasn’t guilty. And they needed my guilty plea to justify the Harvester guilty plea.

Chief Judge John Singleton invited me for a private meeting in his chambers to discuss the risks involved with me taking on the federal prosecutors pro se in a high-profile trial. I think he was also apprehensive about how he could give me a fair trial without counsel. He had already demonstrated that in the previous pre-trial hearing when he described my treatment by Harvester as being “dropped in the grease” while they got out of the case with a “parking ticket.” I had advised the court as part of pre-trial procedure that my defense would be predicated on the fact that the only reason I was in the case was because I had been set up by high-ranking DOJ officials and International Harvester as Harvester’s scapegoat. The lead DOJ prosecutor protested vehemently against my intended defense and the judge essentially took my position in a long argument from the bench with the DOJ prosecutor.

In the end, my defense was allowed. I thanked the judge in his chambers for his concern and I told him I would hire counsel if I could raise the money. I was able to borrow the necessary funds from friends and I hired Charles Sullivan, a tax lawyer who had never represented a criminal defendant and certainly not in a federal court white-collar trial. The judge gave us 10 days to prepare for a three-week trial against the team of DOJ prosecutors who had been preparing for years.

The DOJ started suggesting plea bargains long before the indictment. They offered to negotiate an attractive guilty plea with me on at least four occasions and at least once in writing which I turned down in writing. The last offer was in the courtroom just before the jury was seated. I turned down all their offers without hesitation because, first of all, I was innocent and not about to compromise my self-respect no matter what pressure they would exert on me. The DOJ prosecutors were using the old chain of command strategy of offering sweet deals to guilty underlings going up the chain of command in order to reach their objective of nailing the big guns. They were so successful early on with their plea bargain strategy that they believed the fabricated accusations of their star witness who had pleaded guilty of bribery and was cooperating with testimony to lessen his fines and avoid a possible jail term.

Q. Discuss the specifics of your defense, both pre-trial and at trial?

A. After reading the indictment I knew immediately I was innocent of all the charges and I recognized that at least several of the purported overt acts involving me were absolute fantasy. I was equally puzzled that International Harvester was missing from the indictment. I was assuming that the Harvester lawyers were still pursuing their inculpable position with the DOJ and would probably be added to the indictment at a later date. When I tried to reach the Harvester lawyers and other officials who had been professing that they would be continuing to defend the Company, Uriarte and myself against any DOJ charges because they believed in our innocence, they were suddenly incommunicado. Then credible rumors starting circulating that Harvester was plea bargaining. As naïve as I turned out to be about the legal profession at the time, I found it difficult to believe that the high-powered in-house lawyers and Harvester’s well regarded outside counsel could be giving misleading information to Uriarte and me that they would never plea bargain when they where in fact in the middle of several weeks of negotiation of a plea deal. Several weeks later my worst fears played out when Harvester pleaded guilty in November 1982 with Uriarte and me set up as their scapegoats. On January 3, 1983, I released my Harvester chosen lawyer and several days later the court denied my motion to appoint counsel for me or compel Harvester to pay my legal fees. I was at that point proceeding pro se. My first action in my own defense was on January 11, 1983 when I filed a very amateurish but effective motion to dismiss my indictment based on the “Eckhardt Amendment.”

As discovery progressed in the spring of 1983, information was extracted from the government which helped explain how I was accused of alleged wrongdoings. On June 24, 1983, the trial court issued the order and opinion dismissing the 43 aiding and abetting counts based on the Eckhardt Amendment. The trial court failed to dismiss the conspiracy count because it was a separate issue. Eventually, the government appealed and the 5^th Circuit affirmed the trial court order after verbal argument. In my pro se brief, I urged the 5^th Circuit to invoke their “equitable powers” and dismiss the conspiracy count. In their August 10, 1984 order, the court, in denying me, said because I had not filed a cross-appeal the issue was not properly before them.

As time rolled on into 1983 and 1984, I basically rode on the backs of the very experienced lead counsel who were racking up millions of dollars in fees. Early on I pursued an unsuccessful motion to expunge references to me in the Harvester plea bargain court papers which identified me as being guilty and I pursued a motion to separate my case from the other defendants and provide me with a speedy trial on my remaining conspiracy count.  Both motions were denied and affirmed in the 5^th Circuit. The 5^th Circuit said my being named in the Harvester plea was of no advantage to the government in my prosecution. Little did they know at the time. The government argued that a speedy trial for me would cost the government undo expense.

When the transcript of my Washington grand jury appearance was finally made available by the government, I immediately noticed that 4 ½ pages were left blank. I knew from notes that I made immediately after I left the grand jury room that the missing pages contained information that would have made the Harvester plea bargain impossible. I motioned the court for the government to produce the missing 4 ½ pages. The government said the missing pages were colloquy between the prosecutor and the grand jury. When I persisted, the government produced a fabricated 4 ½ pages of colloquy. I questioned why would the court reporter include this alleged chatter in the transcript of my testimony? On my insistence she swore that it was a truthful transcript. About a year after my trial when I was pursuing my suit against Harvester, we took the deposition of Harvester’s former outside counsel lawyer who had briefed me before my grand jury appearance. One of the documents he produced at his deposition was the transcript of my grand jury testimony which had been serviced to him by the government at least two years earlier. This document included the 4 ½ missing  pages. If I had this true copy at the time there never would have been a trial and one or more DOJ lawyers could have been facing serious misconduct charges.

My primary defense strategy was to show the jury how Solar and I had legally carried out the Pemex business under the legal guidance of its staff lawyers who were well versed in the FCPA. We felt It would be risky to rely on the manner in which the government lawyers, with the close cooperation of Harvester, had set me up in the case as Harvester’s scapegoat because it might be difficult for some jurors to swallow because they most likely would understandingly believe “lawyering” is a most honorable profession. We had 10 days to prepare for trial. The judge ordered the government to make their copies of Solar’s Pemex business files available to us. A former Solar project manager who worked on the Pemex projects made himself available to help us prepare for trial and to testify at the trial. We worked about 18 hours a day in preparation. We also lined up the retired manager of the Bechtel Corporation pipeline division as a character witness and to explain how construction was carried on in the oil and gas business.

The prosecutor turned out to be the biggest help to us. He called the former Solar president, my boss, as a witness as well as Uriarte and another top Solar Sales manager who had worked for me. They all testified strongly in my behalf both in direct and in cross-examination. The biggest help was the government’s star witness who was a former Solar salesman. On direct, he told the government’s scripted cock and bull story. On cross, he was forced to admit that key incriminating information about me that he had proffered to the government when he was plea bargaining was untrue, but he blamed the untruths on his lawyer who submitted the proffers. His believability on anything was compromised after he related the story about entertaining several of his Pemex customers in a whorehouse.

It was always key to my strategy that I take the witness stand in my own defense because I had nothing to hide. Charlie Sullivan kept me on the stand for most of a morning. My cross-examination was the piece de resistance. After the first few minutes it turned into a debate. I finally had my chance to face my accuser. The DOJ prosecutor had asked me shortly before trial why I wouldn’t plea bargain with him and I told him sarcastically that I didn’t want to deny him his “day in court.” But I also meant it. After all the government’s dirty tricks and pressure on me and my family, I wanted to clear my name in court and then go after Harvester. From the jury’s reaction to my testimony and their short deliberation before acquittal, that’s one debate I concluded I won hands down. From time to time I read the transcript of my cross-examination with satisfaction.

*****

Stay tuned for part two of George McLean’s story.

Puzzled By Straub And Steffen

Prior posts here and here summarized the recent judicial decisions in SEC v. Straub and SEC v. Steffen.

Today’s post is from Russ Ryan (Partner, King & Spalding).  Prior to joining King & Spalding, Ryan spent ten years in the SEC’s Division of Enforcement, including his last three years as Assistant Director of the Division.  Ryan, along with his colleagues at King & Spalding (Gary Grindler – former DOJ Acting Deputy Attorney General – and Ehren Halse-Stumberg), recently published this client alert on the cases.  Ryan contributes this guest post admitting to some confusion regarding the common thread between Straub and Steffen on the issue of personal jurisdiction.

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Am I the only one puzzled that the courts in both Straub and Steffen considered largely dispositive whether or not the respective defendants participated in the deception of U.S. shareholders by signing false accounting certifications or falsifying financial statements?

The irony of the courts’ focus on misleading financial statements is that in neither case – nor in most other Foreign Corrupt Practices Act cases, for that matter – did the SEC even allege that the relevant company’s financial statements were materially misstated.  Likewise, nobody was charged with securities fraud under Securities Exchange Act Section 10(b) and Rule 10b-5, presumably because none of the bribes or falsified records were material to the companies involved, which is typical in an FCPA case.  Indeed, neither Magyar nor Siemens was charged even with violating the periodic reporting requirements of Exchange Act section 13(a) and the rules thereunder for Form 10-K and 10-Q filings, which don’t require proof of scienter, but do require proof of materiality.

In short, in neither case did the SEC ever allege that financial statements were materially misstated, much less that U.S. shareholders were misled by them.  Of course, mere acknowledgment of this point invites the question of to what extent the fight against foreign bribery has to do with the SEC’s core mission of protecting U.S. investors.  Indeed, as Professor Koehler’s article “The Story of the Foreign Corrupt Practices Act” highlights, the SEC did not want any role in enforcing what would become the FCPA’s anti-bribery provisions.

Let’s face it:  Most foreign bribery by employees of U.S. issuers and domestic concerns, although perhaps reprehensible, does not materially mislead or harm the shareholders of these companies, nor is it intended to do so.  To the contrary, even if misguided and short-sighted, most foreign bribery is intended by the bribing employees to enrich their companies, and by extension their shareholders, by boosting real sales and increasing actual revenue.  The primary victims are the company’s competitors and the foreign agency or department whose official was corrupted by the company’s bribe – not shareholders.

It’s true, of course, that if and when a company is caught engaging in bribery, the resulting publicity, investigations, and penalties can hurt the company and its shareholders.  But this harm is no different from that which flows from the exposure of any kind of corporate criminal misconduct, little of which falls within the SEC’s jurisdiction.

It’s also true that most foreign bribery involves some evasion of a company’s internal accounting controls and/or some degree of falsification of a company’s books and records, conduct well within the SEC’s core area of interest whenever an issuer is involved.  But these transgressions typically occur entirely or substantially at a remote subsidiary of the issuer and, even in the aggregate, rarely come close to being material to the issuer itself.

The SEC’s theory is usually that the remote subsidiary’s books and records “roll up” into the issuer’s, and thus are part of the issuer’s own books and records, so they are fair game.  As this prior FCPA Professor post highlighted, the SEC has also argued that payments that violate the FCPA are qualitatively material even if quantitatively immaterial.  For present purposes we can stipulate to the reasonableness of these positions.

But it brings us back to the issue of personal jurisdiction over foreign employees of issuers who lack any meaningful connection with the United States other than working for a company that happens to have SEC-registered securities and SEC filing obligations.  Whether the foreign employee participates in a bribe or a falsification of books and records outside the United States, it is hard to see how that conduct could ever be viewed as a deliberate effort to mislead U.S. shareholders, much less suffice to subject the employee to personal jurisdiction in a law enforcement case being prosecuted in a U.S. court.  And why courts would consider this the lynchpin of their personal jurisdiction analysis is likewise far from clear.

Gabelli’s Broader Implications

Today’s post is from Russ Ryan (Partner, King & Spalding).  Prior to joining King & Spalding, Ryan spent ten years in the SEC’s Division of Enforcement, including his last three years as Assistant Director of the Division.

*****

Professor Koehler has already ably analyzed (see here) the Supreme Court’s recent statute of limitations decision against the SEC in Gabelli.  The Court’s opinion obviously was limited to the precise statute of limitations question before it, but I view it – perhaps with a generous helping of wishful thinking – as an encouraging sign that the justices may be ready, willing, and able to take on other troubling issues that arise as federal law enforcement agencies continue to blur the lines between traditional criminal prosecution and increasingly punitive “civil” prosecution.

SEC enforcement is a classic example of such civil prosecution.  And, in a nod to the primary focus of this website, SEC enforcement of FCPA violations comes perhaps closest to the bull’s eye, because in nearly all cases the SEC works side-by-side with criminal prosecutors in investigating and announcing its own civil cases.

So why is Gabelli so encouraging in this regard?  For starters, the Court’s unanimous opinion explicitly rejected the notion that the SEC should be treated like a private plaintiff when it sues people in its law enforcement capacity.  To the contrary, the opinion correctly notes that when the SEC accuses private businesses and citizens of breaking the law, and seeks government-imposed punishment for those violations, the SEC is “a different kind of plaintiff” seeking “a different kind of relief.”

Specifically, the SEC’s role is much closer to that of a traditional criminal prosecutor than that of an injured shareholder seeking compensation for investment losses.  At one point, in fact, the Court explicitly characterized the SEC’s role in Gabelli as “a prosecutor seeking penalties.”

This recognition – which was long overdue – logically invites much broader questions than simply the starting gun for the SEC’s statute of limitations.  If the SEC’s enforcement role is more like that of a criminal prosecutor than a private plaintiff, why shouldn’t the SEC be held to some of the same procedural and evidentiary burdens of a prosecutor rather than benefitting from the more relaxed standards accorded to private plaintiffs?

For example, why should the SEC be able to prosecute and punish private citizens under the relatively forgiving “preponderance of evidence” burden of proof rather than “guilt beyond reasonable doubt” – or at least “clear and convincing evidence”?  As Justice Scalia pointed out in his questioning of the government’s lawyer during oral argument in Gabelli, “You just call it a civil penalty and you don’t have to prove it beyond a reasonable doubt.”

Why too should the SEC be entitled to infer guilt from a defendant’s exercise of his or her constitutional right to remain silent, or to hammer that adverse inference home before the judge and jury deciding the case?  And why should the SEC be entitled to seek additional law enforcement penalties even after the defendant has already been punished in a parallel federal criminal case involving the same offense?   Finally, why shouldn’t an accused securities law violator facing a government law enforcement prosecution – even if nominally civil – have an absolute right to the assistance of competent counsel, paid for by the government if the defendant can’t afford it?

The Supreme Court didn’t have to address these questions in Gabelli, and for the most part lower courts have generally sided with the SEC whenever such questions have arisen.  But I’m not sure the SEC will have compelling answers to these questions if they should ever reach the Supreme Court.  And given the Supreme Court’s decisive rejection of the SEC’s position in Gabelli – unanimously, less than two months after oral argument, and requiring only a 11-page opinion – those answers may not come easy for the SEC.

Who Will Be The Real Medal Winners At Sochi?

Today’s post is from Ethan Burger.  Burger is a D.C.-based attorney who has followed Russian-connected transnational crime and corruption for over a decade and until recently was a member of University of Wollongong’s Law Faculty.  He can be contacted at ethansb@post.harvard.edu.

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Who Will Be The Real Medal Winners At Sochi?

Corruption exists throughout the world, but its forms vary according to numerous factors such as form, scale, consequences and beneficiaries.  It is difficult not to be a little bit skeptical over Russian President Vladimir Putin’s recent agitation over his sudden appreciation of the magnitude of the apparent corruption in connection with the preparations for the 2014 Sochi Winter Olympics.

According to recent press reports, Russia’s Winter Games will be the most expensive Olympics ever – more so than the 2008 Beijing Summer Olympics — the cost of which is estimated to have exceeded the equivalent of $40 billion – an exact figure cannot be determined given the non-market nature of the Chinese economy.

Earlier this week, it was revealed (here) that the Sochi Winter Olympics will cost the Russian people at least five times greater than was originally budgeted by approximately 1.5 trillion rubles ($51 billion at current exchange rates).  These are not matters of mere cost overruns.  This particular situation is either the product of large-scale petty corruption or the political realities of contemporary Russia.  It would be unrealistic to think that this could take place without money passing hands – furthermore, it is unlikely that all the work for the games is being accomplished solely by Russian companies and individuals.

Russian President Putin fired one of the Vice Presidents of the Russian Olympic Committee Akmet Bilalov, reported to be the owner of a company which was constructing the ski jump and related facilities before selling its stake to state-owned Sberbank last year.  This situation is likely to prove just the tip of the iceberg.  One wonders whether the Russian President is more upset over the existence of the situation or that this apparent manifestation of corruption was not benefiting his people.   In any event, such public corruption is not good for Russia or the President’s image.

Indeed, there is some indication that Mr. Putin and his favorites may be treating the Games as his latest cash cow. (See here from NBC News).  For instance, the world’s largest gas company, Gazprom, formerly state-owned, seems to control directly or indirectly a large share of the construction activity related to the Olympics. According to one report (here) about 6 years ago, “in a sensational interview in Germany’s Die Welt Stanislav Belkovsky, the well-connected insider who initiated the Kremlin campaign against Yukos in 2003, made specific claims about Putin’s wealth. He alleged that Putin owned . . . 4.5 percent of Gazprom.”  The report further noted that Mr. Putin’s total personal fortune was likely to be greater than $41 billion making him one of the world’s 10 wealthiest persons.  In the view of some observers, Russia is a contemporary equivalent of the English East India Company.   It is not business acumen that has made the Russian President one of the richest men in the world.  No one knows how many of his subordinates are his shills or how many shell companies he is a partial beneficial owner in does business in Russia or with the backing of the Russian state outside its territory.

To my knowledge, bribery, kickbacks and rigged-bidding is illegal within the territory of all of the world’s more than 200 states. The use of the term “state” is deliberate here since most of the world’s polities represented in the Olympic Games could be thought of as mere territories where elites control particular territories.  The individuals who inhabit such territories are not subject to a “social contract” where they pay taxes in exchange for the receipt of services and they are often powerless to change the ruling governments even if they might root for the teams carrying their “nation’s” flag.

One might classify states where people exercise genuine civil and political rights as countries. The fact that the World Olympic Committee allows a state to send a team to participate in the games or the United Nations grants a state the right to participate in the international body’s activities does not a country make.  Many elites of many states enrich themselves through the sale of licenses, the collection of custom duties or the sale of raw materials.  In some respects, they resemble kleptocracies – where the equivalent of organized crime groups conduct their business, but under the guise of legal authority.  The Winter Olympics constitute major opportunities to earn money.

In 2011, Russia enacted, but selectively implemented legislation that prohibited the payment of bribes abroad to obtain or retain business.  Granted, given limited resources, there is always an element of discretion to law enforcement activity.    In early 2012, Russia became a signatory to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the Anti-Bribery Convention), which entered into force in 1999.  If recent events are any indication (e.g. the 2010 Commonwealth Games held in New Delhi or the 2008 Summer Olympics held in Beijing), it is not a matter of whether there will be corruption in the preparation and carrying out of the games, but its scale.

What makes Russia a special case is the high degree of politicalization of law enforcement, much of which is seemingly feudal in nature – with the central authorities usually controlling the most profitable business endeavors.  Perhaps, Mr. Putin’s concern about corruption is for public consumption or reflects anger that he and his favorites are not the beneficiaries of the corrupt conduct.

In 2011, Transparency International published a survey of 3,000 business executives from developed and developing countries, which ranked Russian companies as the most likely to have firms that paid bribes to obtain business.  The concept of nationality of a company can be misleading since where it is formed need not indicate the nationality of the beneficial owners of the actual bribe payers.  Thus, one needs to be careful when analyzing the characteristics contributing to the high cost of next year’s very expensive Winter games.

Nevertheless, at the Olympics, individuals will win medals.  Fans will cheer.  Food and beverages will be consumed as well as souvenirs sold and hotel rooms filled.   Let there be no doubt, the real winners of the games in Sochi will be the public officials and business persons – many of whom will be the same people – and a large share of whom will have obtained their business opportunities through bribes paid to public officials.   There should be no doubt that many of the same persons will also regard themselves as fortunate that Russia will be hosting the 2018 World Cup Games.