Arthur Anderson And The Myth Of The Corporate Death Penalty
I have long wondered (see here for a prior post) about the “shelf life” of the Arthur Anderson prosecution. In other words, how long will the 2002 prosecution and related consequences (soon after it was convicted of a criminal charge, Arthur Anderson ceased being a viable business even though the Supreme Court overturned the verdict) guide DOJ corporate charging decisions?
Against this backdrop, I was happy to be contacted recently by Gabriel Markoff, a recent graduate of the University of Texas School of Law and current law clerk at the Southern District of Texas. Today’s post is from Markoff in which he describes his research findings and discusses a working draft of his article “Arthur Anderson and the Myth of the Corporate Death Penalty: Corporate Criminal Convictions in the Twenty-First Century” see here to download.
*****
Arthur Andersen and the Myth of the Corporate Death Penalty
The conventional wisdom states that prosecuting even the largest and most established of corporations can subject them to terrible collateral consequences that risk putting them out of business, thereby causing massive social and economic harm. Under this viewpoint, which has come to dominate the literature following the demise of Arthur Andersen after that firm’s conviction in the wake of the Enron scandal, even a criminal indictment can be a “corporate death penalty.” In fact, no less of a legal luminary than Professor and former SEC Commissioner Joseph Grundfest has stated his belief that “prosecutors can bring down or cripple many of America’s leading corporations simply by indicting them on sufficiently serious charges. No trial is necessary.” Additionally, the Department of Justice (“DOJ”) has implicitly accepted this view by declining to prosecute many large companies in favor of using deferred and non-prosecution agreements (collectively, “DPAs”). Yet there has never been any empirical evidence to support the existence of the “Andersen Effect” and the much-hyped corporate death penalty, for no one has empirically studied what happens to companies after conviction. In my Article, I do just that, and I find that—much in opposition to the warnings of extreme collateral consequences that are continually repeated in both the popular and academic literature—no publicly traded company went out of business as the result of a federal criminal conviction in the years 2001 to 2010.
I began my study by deriving a list of publicly traded companies convicted in the years 2001 to 2010 from the organizational conviction database compiled by Professor Brandon Garrett and generously made available online at the University of Virginia Law School’s library website. Public companies were defined as those that had made SEC filings and were listed on a major domestic or foreign stock exchange at the time of conviction. Companies were counted as convicted if they had been found guilty of a federal felony or misdemeanor at trial or by guilty plea. Companies that entered into DPAs were not counted as convicted. Once I derived my list, I used Google searches of business news articles, supplemented by examinations of SEC filings where necessary, to determine what had happened to the companies after they were convicted. Next, for each company that was not still in existence under the same name on the same exchange, I determined whether it had merged with or been acquired by another company under favorable conditions, or if instead it had failed. I counted a company as having failed if it went defunct, entered insolvency proceedings, or was forced into a merger or acquisition under unfavorable conditions. For each company that failed, I performed additional searches to determine whether the conviction was causally related to the failure. Finally, when the relevant plea information was available, I noted each instance where a company agreed to implement a compliance program, corporate monitor, or cooperation regime as part of its plea agreement.
To briefly summarize my most important results, I found 51 convictions of public companies between 2001 and 2010, a number that roughly tracks the U.S. Sentencing Commission’s report that 63 “openly traded” companies were convicted between 2000 to 2009. All the convictions were obtained by plea agreement, and indictments were only filed in two cases. For 36 of the 51 convictions, the convicted companies are still active on their respective stock exchanges under the same tickers. An additional 11 companies merged with another company after their conviction under favorable conditions that indicated that their health was not notably harmed by the conviction. Finally, four companies suffered business failures at some point in time following their convictions. However, not a single one of the companies failed under circumstances that could reasonable be linked to their convictions, and, in fact, only one company—Japan Airlines International—failed within three years of the date of conviction. Finally, compliance programs were put in place by plea agreement in 13 of the convictions, corporate monitors in four, and cooperation agreements in 16.
Reasonable caveats such as the possibility of selective prosecution aside, the fact remains that, if the threat of collateral consequences is as terribly dire as it is made out to be, at least some of the public companies convicted in the years 2001 to 2010 should have gone out of business as a result of their convictions. But they did not. When that fact is combined with the corresponding reality that plea agreements can be used to obtain the implementation of compliance programs and monitors just as DPAs can, the two main justifications usually cited for preferring DPAs over convictions appear groundless. That is not to say that DPAs should never be used. It is certainly possible to imagine some unique situation where a DPA would be socially and economically preferable to a prosecution and resulting conviction. But the nearly indiscriminate use of DPAs with large corporations—in contrast to the DOJ’s continued tendency to prosecute and convict small companies—that predominates today is not supportable. The stronger deterrent value of conviction should make prosecution with the goal of obtaining guilty verdicts or plea agreements the DOJ’s default method of enforcing the federal criminal law against large corporations.
It may be that the debate over the proper extent of corporate criminal liability and the use of DPAs is bound to be politically and ideologically charged. But the least that can be done is for policymakers to make decisions based on the empirical evidence, rather than on the untested dogma that has dominated the debate over the past decade. It is my hope that the results I present in my Article can make a small contribution to moving the literature in that more pragmatic—and, ultimately, more sustainable—direction.
I am happy to answer any questions that any readers may have, and I may be reached here. Thank you to Professor Koehler for allowing me this opportunity to discuss my Article.
An Update From Australia – AWB Wheat Kickbacks To Iraq Result In Sentences
Today’s post is from Robert Wyld (Partner, Johnson Winter & Slattery – here). Wyld is the Australia Expert for FCPA Professor.
*****
Nearly 13 years after wheat sales to Iraq started under the much maligned United Nations Oil-For-Food Program and 5 years after Australia’s corporate regulator, the Australian Securities and Investments Commission (ASIC) commenced civil penalty proceedings against various former AWB directors and officers, the Supreme Court of Victoria handed down on August 9th and 10th sentences against the former AWB Managing Director, Andrew Lindberg and the former AWB CFO, Paul Ingolby (see judgments at ASIC v Lindberg [2012] VSC 332 and ASIC v Ingolby [2012] VSC 339 available at www.austlii.edu.au).
Court sentences
The Victorian Supreme Court accepted the agreed submissions on facts and penalty as presented to it by ASIC and each defendant although the sentence imposed on Mr Ingolby was reduced.
The Court made the following orders:
- as against Mr Lindberg, declarations that he had contravened his duties as a director and officer contrary to s180(1) of the Corporations Act 2001, fined him $100,000 and disqualified him from managing the affairs of a corporation until 14 September 2014;
- as against Mr Ingolby, declarations that he had contravened his duties as an officer contrary to s180(1) of the Corporations Act 2001, fined him $10,000 and disqualified him from managing the affairs of a corporation until 31 December 2012.
The Court made certain observations about the conduct of each of Mr Lindberg and Mr Ingolby. The Court found that the admitted conduct was akin to an admission of negligence in the performance of their duties. The contraventions against each did not involve deliberate wrongful acts, dishonesty or any moral turpitude. The Court was satisfied that each contravention was serious, thereby warranting the imposition of a fine.
The Lindberg Contraventions
The Lindberg contraventions covered 4 matters, in that Mr Lindberg failed:
- to make inquiries as to whether the recovery of what was known as the “Tigris Debt” was in accordance with the prevailing UN resolutions or had been approved by the UN;
- to inform the AWB Board that the Tigris Debt had been recovered by inflating certain wheat contract prices and the AWB agreement with Tigris Corporation (a Gibraltar company run by a Norman Davidson Kelly, a former BHP Billiton executive) incorrectly stated the payment as a “service fee” rather than a debt and the payment to AWB of a success commission;
- to inform the AWB Board that “Project Rose” (the internal AWB review of allegations from the United States that AWB had paid kickbacks to Iraq to secure wheat contracts) was limited as 3 former employees likely to have knowledge of the kickback scheme had not been interviewed; and
- to inform the AWB Board of the evidence he learned from the UN IIC Inquiry into the Oil-For-Food Program that a Jordanian transport company, Alia For Transportation & General Trade (Alia Transport) had been used as a front to channel funds to Iraq and all suppliers, including AWB, had paid such funds to Alia Transport and then to the Iraq Government.
None of the contraventions save for one involved anything surprising to those who had experienced the Cole Royal Commission into AWB’s wheat sales to Iraq. AWB and all its senior executives had consistently given evidence that they knew nothing wrong and they believed everything they did was approved by the UN and/or the Australian Government. Commissioner Cole did not accept this evidence and delivered a damning indictment on AWB’s corporate conduct[1].
Interestingly, in relation to the Tigris Debt, both ASIC and Mr Lindberg in their Agreed Facts annexed to the judgment, use as a starting point a proposition that the Iraq Grains Board (IGB) owed BHP Ltd (as BHP Billiton then was) a debt of approximately US$8m for a shipment of wheat (at [19] of the judgment). This is in direct contrast to the findings of Commissioner Cole who, having heard evidence from executives of both BHP and AWB (but not Mr Kelly who as a resident outside Australia declined to volunteer any evidence to the Commission), concluded that[2]:
- AWB concluded a sale to the IGB of 20,000 tonnes of wheat;
- BHP paid for that wheat against an AWB invoice; and
- BHP entered into the transaction on the basis that, according to the evidence from John Prescott, its former CEO, it was a gift, ostensibly given to the Iraq Government because BHP was dead keen to secure preferential treatment if certain Iraq oilfields were opened up for exploration.
The evidence before Commissioner Cole was clear – the Australian Government had told AWB and BHP that any credit offer to sell wheat in return for payment, even deferred payment outside the UN sanction regime, was not permissible. Mr Prescott said this in his evidence[3] – I did not believe or understand that the grant approved by me was a loan to Iraq. There was no obligation on Iraq to repay any amount to BHP.
In light of this evidence, ASIC’s starting point, accepted by the Court, appears very peculiar. It must be acknowledged that these events occurred long before Mr Lindberg became AWB’s Managing Director. By the time he was in charge at AWB, the “Tigris Debt”, once a gift had transmogrified into a debt and then a payment for services rendered, involving an undisclosed success fee. Some might think this gets very close to a secret commission involving the creation of false or misleading documents, while others may legitimately say no, particularly as the intent of the parties to the Tigris Debt is still hotly contested and before the Victorian Court. Perhaps it was sufficient for ASIC to start from a base upon which it could secure a successful result. After all, a regulator needs to win, even if by winning only half the story is told.
The Ingolby Contraventions
In contrast to Mr Lindberg, the Ingolby contraventions appeared more prosaic.
Mr Ingolby was subjected to one alleged contravention – that between December 2001 and September 2004, as AWB’s CFO, he failed to discharge his duties as an officer of the company, in that he:
- co-authorised payments to Alia Transport for inland transport fees;
- had information available to him that questioned the legitimacy of those fees and that they were ultimately being paid to the Iraq Government;
- took no steps to ascertain the true position;
- took no or no reasonable steps to inform the AWB Board of the information available to him,
in circumstances where he knew that the Oil-For-Food Program prohibited direct payments to Iraq and payments from the escrow account controlled by the UN could only be made for the purposes of the Program.
The Court took into account the role actually played by Mr Ingolby within AWB and the nature of how AWB conducted its wheat sale business. In short, Ingolby admitted that he failed to “join the dots” and had he done so with the benefit of hindsight, he would have realised that AWB was acting in breach of the UN sanctions (which did not, at that time, give rise to any direct civil or criminal offence in Australia). The Court accepted, in particular, that Mr Ingolby:
- acted with the degree of care and diligence consistent with his statutory obligations;
- he was not involved in making the wheat contracts;
- his areas of responsibility concerned areas outside the sales and marketing of wheat contracts; and
- he had cooperated with ASIC.
The Court therefore reduced the proposed penalty from $40,000 to $10,000 and shortened the period of disqualification.
The question still remains what would have Mr Ingolby or any other AWB executive done had they “joined the dots” – continue a very lucrative commercial relationship with Iraq selling Australian wheat to the benefit of the company and Australian wheat farmers with bumper wheat crops, or investigating and reporting the conduct to the UN with the risk of losing out on future wheat sales – therein lies the moral barometer!
In one sense, Mr Ingolby was in the classic position of a corporation CFO – not directly involved in the sales relationship with the customer, but was sufficiently across the financing processes that he was “involved” in the transactions by co-authorising payments. It is this salutary lesson to CFO in any large corporation engaged in trade in “high risk” jurisdictions – know your customer and know your business. Whether you can rely on what others tell you will depend upon the circumstances, but the more complex and lucrative the commercial pressures are, the greater the personal risk if it all goes pear-shaped.
General observations
In both judgments, the Court made it clear that it treated the allegations and contraventions as serious, and worthy of a penalty that acted to provide sufficient general deterrence to others committing similar offences. The Court’s attitude to directors and officers who are found to have contravened their clear statutory duties is best described by Justice Robson[4]:
The obligation imposed by s 180(1) demands a standard of care and diligence in directors and other officers of the corporation in managing the affairs of the corporation…The obligation is important in ensuring that proper standards of care and diligence are maintained in our corporations…The punishment determined by the Court may appear harsh in light of a career of honest and loyal conduct particularly where the personal and family hardship experienced by the defendant (Lindberg) is taken into account. Nevertheless, there is a significant public importance in appropriate standards being expected of directors and other officers of corporations. These standards of conduct are not unduly high…The contraventions…involved a lack of care and diligence in the performance of his duties that a reasonable director or other person would exercise in his position.
The ASIC proceedings continue on against the remaining defendants although for how long the war of attrition will continue, is anyone’s guess!
Politically-Speaking Is The FCPA Doomed In The Next Five To Seven Years?
Today’s post is from is Rajat Soni who recently started a new website FCPA World Monitor. If you do not currently read FCPA World Monitor you should consider adding it to your list. Soni has a nice style and an informed perspective on the issues.
*****
Politically-Speaking is the FCPA Doomed in the Next Five to Seven Years?
One of the best aspects of studying and writing about the FCPA is the large amount of thoughtful scholarship examining the various twists and turns in the statute. Given its open-ended use of terms like “foreign official”, “instrumentality” and “obtain or retain business” the FCPA has always been fertile ground for statutory stargazers and those seeking law review article topics. Indeed, a ready source of information comes from the wide body of legal scholarship providing up to the minute assessments of cases and investigations with an eye toward predicting (or perhaps astrologically guessing) the future course of litigation.
A funny feature of the academic scholarship (and law firm newsletters) is that almost every article begins with a recitation of the history of the statute. I suppose its great for the newly initiated and it can also be interesting when pondering specific issues. But for regular commentators and practitioners, the introduction to the statute almost feels as well-known and predictable as the preamble of the Constitution. To wit: (i) the statute was born out of a corollary to the Watergate scandal, (ii) Congress was appalled that hundreds of companies were paying millions of dollars of bribes and doing so via off-the-books slush funds, (iii) Congress was concerned in particular about Lockheed Martin which was receiving corporate welfare assistance at the same time it was paying foreign bribes.
I’ve read various iterations of the phrase “Watergate inspired statute” lines in literally dozens of articles. But then I stopped for a moment and thought about the historic and literally unprecedented times out of which the FCPA was born. Watergate is so cliched and barren of meaning today that its hard to remember it was a real event. Well maybe “full-blown constitutional crisis” is a better term. It has no equal in historical precedent in the last forty years (sorry, Whitewater land deals don’t cut it.) So I was playing a bit of a thought game as I perused the various political blogs lately. Can you imagine the current Congress passing the FCPA? I laughed when I thought about it. They can’t pass a budget, a debt ceiling extension or even routine funding bills. There is absolutely, positively no way today’s Congress would ever pass the FCPA, given the strength of the business lobby (such as the Chamber of Commerce and ALEC, although the latter is focused on state legislatures), the current economic malaise, and the general inability to move any legislation.
Following Citizens United, the very targets of the FCPA, large multi-national corporations, can now donate unlimited funds. Who do you think Charles and David Koch think should decide whether a bribe is paid: the free market or prosecutors? I have a guess. Before we get too far along, your politics can be whatever you want them to be. I am not here to argue pro or against one party or the other. I am simply asking, is the statute really that safe looking at politics as it is today. There are many people on both sides of the aisle who are troubled by the FCPA regime as it is today. And Democrats can be as corporation-friendly as Republicans.
Today’s Republicans, which are more in line with Barry Goldwater, really love corporations and really hate perceived government overreach (particularly if it is aimed corporations). I have a hard time seeing today’s politicians rejecting the common business position at the time the FCPA was being debated that businesses paying bribes were already victims because they are coerced into going along with the schemes. I also think Republicans are more open to blaming the corrupt foreign countries and their toxic political and business environments, rather than the corporations themselves. For example, who do you think Republicans would like to punish more for FCPA violations in China: errant US companies or the Chinese? Right now, the FCPA punishes the companies quite severely.
So when will the FCPA erode? If you play political guessing games, you can still come up with the same 5 to 7 year timeline. Let’s assume President Obama wins reelection (whether or not you support him). In that case, Congress will most likely continue to tip to the GOP (even the Senate could fall in 2014). Republicans will be motivated to continue holding Congress to keep a check on a Democratic White House. This means Congressional committees will be run by the GOP. With GOP committees friendly to business interests, I would be utterly unsurprised to see FCPA reform become a key business issue. Indeed, if the reform is framed as eliminating the punishment of US companies abroad while also curtailing “business uncertainty” it will fit within a broader GOP narrative, especially as our inevitably anemic recovery continues to putter along.
If President Romney takes office in January 2013, and Congress holds in its current configuration, two things will happen. First, President Romney will just shut down the vigorous FCPA enforcement regime in the DOJ and SEC. Since so much of the FCPA’s teeth is simply the government’s enforcement posture, FCPA enforcement may simply die by neglect. Marching orders will change drastically as President Romney certainly won’t tolerate the DOJ hauling CEOs to the dock. Second, if the GOP holds the House, tips the Senate and gets the White House, the statute could be amended and have additional defenses added, narrowed definitions, and perhaps even smaller penalties. One final point, if Romney loses, then a GOP-led White House is almost assured for 2016. The race will be wide-open but the nation will be ready to flip the Oval Office to the party out of power, and Republicans will be highly motivated to take back the executive branch. In which case, the same curtailment discussed here will occur in 2017 instead of 2013.
In conclusion, right now it is common and accepted wisdom to say that FCPA enforcement is vigorous and getting even more so. But that’s part of the sales pitch for FCPA, Inc. I’m not saying that there isn’t truth or hard numbers to back the claims. Rather, law firms, forensic firms, discovery consultants and accountants do themselves no particular good to downplay the FCPA. But remember that Watergate was a political earthquake in America. The GOP was literally at its weakest and most humbled point in the last seventy years. It is in this environment that the statute took flight. In that sense, the FCPA probably could not have been born at any other time, and certainly not today (like it’s transatlantic cousin the UK Bribery Act.)
Again, it doesn’t really matter if you are a Republican or Democrat or Independent. More likely than not, in the near future, the FCPA is going to become one more political football tossed about between the parties. That means its robust future is not as certain as it might seem today.
U.S. v. Siriwan Filing Sheds Light On Extradition Relations With Thailand In Pivotal Justice Department Case
Today’s post is from Mike Dearington, a rising 3L at Vanderbilt Law School and FCPA Professor reader.
*****
U.S. v. Siriwan Filing Sheds Light on Extradition Relations with Thailand in Pivotal Justice Department Case
Prosecutors in United States v. Siriwan submitted an extradition status report (here) last Friday in the Central District of California, revealing a potentially strained diplomatic relationship between officials in the U.S. and the Thai Attorney General’s office. Prosecutors charged Juthamas Siriwan, ex-governor of Tourism Authority of Thailand, and her daughter, Jittisopa, in 2009 with accepting bribes from Hollywood movie executives Gerald and Patricia Green in exchange for lucrative contracts. (See here for the previous FCPA Professor post.) The Greens were convicted in 2010 and sentenced to six months imprisonment. (See here for the previous post.)
In the DOJ’s filing, prosecutors expressed discomfort with providing an extradition-status update pursuant to court order, which they noted was “highly unusual in a public setting and strongly discouraged for many policy and case specific reasons.” One of these reasons, no doubt, was that the status update forced prosecutors to admit that the U.S. “has not yet received a response from Thailand regarding extradition.”
The Siriwan case is interesting also because it could be instrumental to DOJ efforts to curb foreign bribery, as it is an example of prosecutors uniquely targeting a “foreign official.” One of the oft-cited shortcomings of the FCPA is that it is purely a “supply side” enforcement scheme. In other words, the FCPA targets only those paying bribes, and does not prohibit receipt of such bribes by the foreign officials who demand them.
Indeed, critics have declared that, by targeting only the supply side, the law fails to appreciate the nature of foreign bribery. Bribery is not economically beneficial to corporations because of the risks and costs, yet corporate representatives nonetheless often pay bribes because they are economically extorted by foreign officials. Officials like Siriwan have been known to set the bidding process and are often first to broach the subject because of their powerful bargaining positions. Although the FCPA prohibits only bribe payments—and not receipts—the Siriwan case is somewhat of a DOJ workaround.
In Siriwan, prosecutors did not charge FCPA violations, as the Siriwans made no bribery payments. But prosecutors did charge substantive money-laundering. The Money Laundering Control Act (MLCA) prohibits the conveyance of funds to or from the U.S. “with the intent to promote the carrying on of specified unlawful activity.” Just what unlawful activity qualifies is an open question here.
Prosecutors argue that the Greens’ bribe payments represent specified unlawful activity, as do the Siriwans’ violations of Thai laws. On the other hand, the Siriwans contend the money-laundering charges are pulling “double duty” and that one cannot promote illegal payments by receiving illegal payments. The Siriwans’ motion to dismiss (see here for the prior post) has been pending since August 2011.
Siriwan may determine whether money-laundering is a viable tactic in the DOJ’s efforts to curb foreign bribery. The DOJ has expressed an interest in demand-side prosecutions. In 2009, prosecutors charged Robert Antoine and Jean Rene Duperval, formerly of Haiti Teleco, a state-owned national telecommunications company, with money laundering after each allegedly accepted bribes. (See here for the prior post.) Antoine pled guilty and was sentenced to four years in prison; Duperval was convicted and sentenced to nine years in prison in May 2012.
If prosecutors prevail in Siriwan, we can expect the DOJ to pursue a greater number of foreign officials under the MLCA, reminiscent of the way prosecutors pursued foreign executives in the 1990s/2000s under U.S. Antitrust laws due to a lag in foreign anti-trust enforcement. If U.S. prosecutors can bring foreign officials within their purview, the DOJ may have more tools to reign in foreign bribery.
Inside The “Africa Sting” Trial: Anatomy Of A Failed Prosecution
A guest post today from Eric Bruce, Matthew Menchel and David McGill. The authors were all trial counsel during the first “Africa Sting” trial in the United States District Court for the District of Columbia. Bruce and Menchel are partners at Kobre & Kim LLP and lead their Washington, DC and Miami offices respectively and McGill is an associate in the firm’s New York office.
*****
Inside The “Africa Sting” Trial: Anatomy Of A Failed Prosecution
Many media outlets and commentators have dedicated a great deal of attention to the DOJ’s decision to abandon its prosecution of 22 executives from the military products industry for alleged FCPA and money laundering violations arising from a first-of-its-kind sting operation that included an FBI agent posing as a representative of the minister of defense for the West African nation of Gabon. And rightfully so—after all, it is not every day that the DOJ chooses to walk away from a major investment of investigative and prosecutorial resources, as well as 22 indictments, let alone in a high-profile context such as the “Africa Sting” case. But for those on the front lines of the trial, the DOJ’s extraordinary decision to retreat from this case was the culmination of a long-running tactical chess match between the government and defense counsel that began long before the first witness was sworn in.
From our perspective as defense counsel for Pankesh Patel, a U.K. citizen who went to trial in the opening trial of the “Africa Sting” case, there were two especially critical developments that shaped the outcome of the first trial and contributed mightily to the DOJ’s failed prosecution efforts: (1) the Court’s pre-trial ruling on the admissibility of alleged evidence of prior bad acts; and (2) our unusual decision to call the government’s lead case agent as the sole defense witness in our case-in-chief.
The 404(b) Rulings
As the saying goes, every battle is won or lost before it is ever fought. And this case was no exception. After reviewing the documents and recordings evidence produced by the government before trial, it became immediately clear to us that the legal fight over the admissibility of alleged “prior bad acts” evidence would have an enormous impact on the trial.
The government argued that its vast collection of alleged prior bad acts evidence should be admitted under Federal Rule of Evidence 404(b) as evidence of the defendants’ knowledge and intent. Alternatively, the government argued that if any of the defendants asserted an entrapment defense (given that the charges arose from a sting operation), the same prior bad acts evidence should be admissible to show that the defendants were predisposed to commit FCPA violations.
The government, however, exercised almost no restraint in the type and quantity of evidence they sought to admit under Rule 404(b). In their Rule 404(b) Notice, the government sought to admit evidence of an additional seven allegedly corrupt deals against the four defendants in the first trial. Seeking to admit such a wide range of prior bad acts evidence pertaining to deals outside the U.S. was, in our view, a strategic misstep by the government. This scattershot approach by the government bolstered our argument that the evidence should be excluded under Rule 403 because admitting the evidence would risk transforming an already-complex, multi-defendant trial into a divergent series of mini-trials involving witnesses and events from all over the globe.
Moreover, because our client, Mr. Patel, was a U.K. citizen operating a small U.K. company who had not done any prior deals in the United States, we also advanced some unique arguments that further highlighted the prejudice and confusion that would have arisen if the alleged prior bad acts evidence was admitted. For example, we argued that evidence concerning allegedly corrupt conduct by a U.K. citizen in Nicaragua, if true, might violate U.K. law or Nicaraguan law, but it could not possibly demonstrate our client’s intent or predisposition to violate U.S. law, let alone the FCPA in particular, where that alleged conduct had no connection to the United States and our client was not even a U.S. citizen.
Ultimately, the Court agreed with our arguments and denied the government’s motion to admit the alleged prior bad acts evidence, largely under a Rule 403 analysis. Having succeeded in substantially narrowing the scope of trial, our next challenge was to make the flaws in the government’s sting operation the focus of trial.
The “Commission Sandwich”
As former federal prosecutors, we were familiar with the DOJ’s guidelines pertaining to undercover operations and, more specifically, the requirement that the illegality of the deal be made reasonably clear to the targets of an investigation. In this case, we believed there were significant problems with the manner in which the government ran the sting operation—most notably, its reliance on the cooperating witness, Richard Bistrong, to make strategic decisions about the operation and how to explain the illegality of the Gabon deal in various meetings with the defendants. Further, instead of allowing Bistrong’s importance in the operation to gradually recede as an FBI undercover assumed greater responsibility, as is traditionally the case with sting operations, the government made the critical mistake of allowing Bistrong to “call the shots” and make key investigative decisions throughout the entire investigation.
For example, at Bistrong’s suggestion, the government chose to describe the allegedly corrupt payment to the Gabonese Minister of Defense as a “commission” when speaking with the defendants, instead of using any number of words that would have more clearly connoted its supposed illegality – e.g., bribe, kickback, payoff, “butter up,” “grease,” etc. Worse yet, having chosen an innocuous word for the payment, the government—again, at Bistrong’s urging—intentionally buried the commission reference between perfectly legitimate discussion about other aspects of the transaction, thereby further increasing the chances that a target would miss it. Bistrong even came up with a catch phrase for this technique—he called it the “commission sandwich.” In a text message that Bistrong sent to the lead FBI case agent explaining his approach, Bistrong proudly explained “I just think its important to sandwhich [sic] the commission statement.”
Naturally, the “commission sandwich” and the way in which the FBI let a highly-incentivized informant orchestrate the sting operation were important themes we wanted to weave into our defense. But resolving the tactical question of how to bring the “commission sandwich” and other serious flaws in the sting operation to light at trial ultimately required a bold stroke.
Calling the Lead Case Agent
In the weeks leading up to trial, we became convinced that, as a matter of trial strategy, the government would not call its star cooperating witness, Richard Bistrong, to the witness stand. It was not simply that Bistrong had a lot of “baggage,” though the sheer amount of it – including corruption, false statements, habitual drug use, and frequenting prostitutes – was staggering. Rather, it was Bistrong’s conduct during the sting operation itself, including lying to defendants about the legality or illegality of the deal and discouraging them from seeking legal advice, that led us to conclude that the government would leave Bistrong on the sidelines. After all, the government already had tape recordings of all of the calls and meetings involving the defendants’ discussions with Bistrong and the undercover agents. So why risk putting him on the stand?
When the government filed a series of motions on the eve of trial seeking to preclude the defense from, among other things, impeaching non-testifying witnesses; making missing witness arguments; attacking the legitimacy of the government’s undercover techniques; and making use of recordings not otherwise introduced by the government, our hunch was proven correct. Not only that, but it had also become clear to us that the government intended to go even farther and would not call its own lead case agent, FBI Special Agent Christopher Forvour, as a witness. By avoiding Bistrong and Agent Forvour, the government’ s strategy, it seemed to us, was to present a sanitized version of the sting operation through witnesses who were several steps removed from the operational decisions, thereby leaving us with little room to bring out evidence of the investigation’s shortcomings.
To countermand this strategy, we asked the government witnesses who were called as witnesses a series of questions about strategic decisions relating to the sting operation. If the answer was “I don’t know,” the next question was always “Well, who would know?” The answer was always the same: Agent Forvour. We took this approach for two reasons. First, we thought this strategy would at least raise questions in the minds of the jurors as to why the government never called its lead case agent, who was present at counsel’s table for the entire trial. Second, it set the stage for us to possibly call Agent Forvour as a witness in our defense case to get answers to questions that everyone in the courtroom was now curious about.
Ultimately, after a lot of internal debate amongst the trial team, we made the very unusual decision to call the lead case agent in our case-in-chief. It was not a decision without risks. Calling a professional witness over whom you have no control and who does not want to help you, without knowing what he will say, can easily backfire. Nevertheless, because the government had largely succeeded to that point in limiting the trial evidence to tape recordings admitted through witnesses who had no role in directing the investigation, we felt the jury lacked a clear understanding of the serious problems underlying the government’s investigation.
In the end, the strategy worked. Through Agent Forvour, we were able to demonstrate the major flaws in the government’s investigation and demonstrate just how much Bistrong, as opposed to the FBI, was in charge of key operational decisions and scripting what words would be used to describe the unlawful payments to the defendants during the sting. In the process, we believe that we came across as truth-seekers (a critical element to any advocate’s credibility), shedding light on all the things that the government had strived to keep from the jury. The momentum of the entire case swung in our direction during that examination. It was truly a game-changing decision.
While the net result of the first trial was a deadlocked jury and a mistrial, our ability to capitalize on the government’s avoidance of its two key witnesses worked well enough that the government changed its trial strategy 180 degrees and decided to call both Bistrong and Agent Forvour in the second trial. But because we succeeded in locking the government into positions that were developed during the first trial, it fared no better the second time around. The second trial also ended in a series of mistrials and acquittals and, thereafter, the government decided to end this failed prosecution, dismissing all remaining charges against all 22 defendants.
The Future of FCPA Enforcement
While it remains to be seen exactly how the DOJ’s failed prosecution of the “Africa Sting” case will impact future enforcement efforts, this sort of high-profile setback will undoubtedly impact the way in which the DOJ and the FBI conducts their investigations and evaluates their cases for prosecution. At the same time, we expect that companies and individuals who find themselves as targets of FCPA enforcement efforts will become increasingly aggressive in resisting the Department’s interpretation of the statute, which had gone largely unchallenged in the years preceding the “Africa Sting” trial.