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Giffen Update

When your case has slogged along for over seven years, a two week delay is a minor occurence.

In any event, James Giffen’s court hearing scheduled for last week has been delayed until July 29th reports Bloomberg’s David Glovin in this interesting piece. For more on the Giffen case (see here).

As Glovin notes, the long delay in the Giffen case has spawned “conspiracy theories” and open guessing “whether the U.S. remains committed” to this case.

For starters, Giffen is accused of funneling payments to foreign officials in Kazahstan, including its current President Nursultan Nazarbayev, a U.S. ally who met with President Bush in 2006 “to discuss ways to expand U.S. access to Kazakh oil,” according to Glovin.

Adding to the intrigue, Giffen has claimed, as Glovin notes, that “U.S. intelligence services, including the Central Intelligence Agency, authorized him to pay off Kazakh leaders.” Giffen’s public authority defense has caused most of the delays in the trial as the government has fought to withhold or redact many classified documents.

Over at Harper’s Magazine (see here) Scott Horton asks the question – “why is this case languishing?”

Horton states:

“Over the past decade, I discussed the case many times with Kazakhstani officials and businessmen. They were uniformly intrigued by it and keen to learn the details of their government’s darker practices—details that have steadily emerged from the case. They were also all of the same view: this case would ultimately go nowhere because it was not in the interest of the United States to expose damaging information about President Nazarbayev. Moreover, several offered that the Kazakhstani government fully understood how to ‘spin’ the American system by hiring prominent lobbyists and consultants and engaging the right political figures. It would be able to forestall the case, they assured me. I would reply that the American system didn’t work that way—that our Justice Department was independent and that prosecutorial decisions were insulated from such lobbying. Truth is, I was never myself absolutely convinced of that, and I always felt a bit naïve saying it.”

Horton concludes with this statement:

“Today, Justice Department spokesmen tell Congress that battling corruption in foreign business dealings is a high priority. They argue that corruption is undermining the war on terror, costing taxpayers billions of dollars in Iraq and Afghanistan. But the handling of the Giffen case provides skeptics with plenty of reason to doubt the sincerity of the Justice Department’s claims. Within the government there are no shortage of career personnel who believe that a properly delivered bribe to a foreign government official is a necessary sort of compromise. A government that winks at corruption in the supposed name of national security may have a hard time prosecuting it in a commercial setting.”

James Giffen Update

The FCPA enforcement action against James Giffen goes back a long way.

April 2003 to be precise (see here).

The case concerns allegations that Giffen made approximately $80 million in payments to senior Kazakhstan officials in connection with numerous deals in which American companies acquired oil and gas rights in Kazakhstan. In defense, Giffen has implicated the CIA and much of the delay in prosecuting this case revolves around access to classified documents.

The case is still active as documented in this recent Main Justice piece by Lisa Brennan.

Few have been following the Giffen case closer than Steve LeVine (see here). LeVine is author of The Oil and the Glory (see here).

A key figure in LeVine’s book is James Giffen.

In this guest post, LeVine profiles next Monday’s hearing in the Giffen case.

*****

Next week, James Giffen — the former chief oil adviser to Kazakhstan President Nursultan Nazarbayev — returns to court in New York for the longest-running U.S. foreign bribery case in history. His strategy — to gum up the works in the hope of getting all or most of the charges dropped — has thus far appeared ingenious: Seven years after being led away in handcuffs from JFK Airport, Giffen appears none-too-close to trial. But will it ultimately pay off?

If the strategy does prevail, the Giffen case could send an important signal to bribers with financial wherewithal — you can wait out the Department of Justice.

A key question at the moment is whether Giffen’s lawyers — in the vein of their already-bold, go-for-broke approach — can plausibly, and as early as next Monday, successfully motion for dismissal of the charges on the basis of his Sixth Amendment right to a speedy trial.

William Schwartz, Giffen’s chief lawyer and a former assistant U.S. Attorney in the Southern District where Giffen’s case is being heard, declined to comment on the question of a Sixth Amendment motion when I emailed him. But I rang up lawyers specializing in the Foreign Corrrupt Practices Act — the law applied to foreign bribery cases — and they made the across-the-board observation that Giffen’s strategy may not be strong enough to achieve such a straight-forward victory.

In his defense, Giffen asserts that the Central Intelligence Agency either knew or should have known all along that he was diverting millions of dollars from U.S. oil companies — a total of some $80 million — to Nazarbayev and other powerful Kazakhs. When he advanced the strategy, it was exquisitely timed — in among the strongest periods of the George W. Bush Administration, with its hyper-sensitivity about the release of even unclassified documents — under the premise that the CIA was unlikely to disgorge cables and what-not that would validate Giffen’s claims. And if the CIA did refuse to so cooperate, Giffen could claim compellingly that he couldn’t receive a fair trial.

Up to this point, Giffen has proven correct — the CIA has been as slow as molassas, and has consequently tested the patience of federal Judge William Pauley. Yet, that doesn’t necessarily add up to a successful Sixth Amendment motion, experts tell me. To win, Giffen would have to show an outside reason why the long delay has occurred, and that he is being harmed by it. But as a former U.S. prosecutor who didn’t want to be identified told me, “When much of the litigation is instigated by the defendant, the defense would be hard-pressed to claim that it’s been denied a speedy trial.” As for hardship or harm, Giffen hasn’t been sitting in jail, but rather whiling away his time at home in Westchester County near the Winged Foot Golf Club.

Even so, said Richard N. Dean, a Washington-based FCPA lawyer with long experience in the former Soviet Union, that doesn’t mean that Giffen won’t prevail. He sees a more fundamental issue at stake — “I just don’t know if [the prosecution] has a case or not,” says Dean, who is a partner at Baker & McKenzie.

That is, it’s true that the CIA has dragged its heels, but so has the prosecution itself — it hasn’t seemed at all in a rush to bring the case to trial. That makes Dean wonder “how strong they think their case is, whether they believe they can overcome the defense’s assertion” of the CIA defense.

Schwartz, in other words, probably can’t abbreviate the current snail’s-pace pre-trial process: Judge Pauley is unlikely to grant a Sixth Amendment motion.

There’s always the chance that government prosecutors will demonstrate renewed spine in Monday’s hearing, and make it plain that they intend to go to trial soon — the Justice Department certainly doesn’t wish to give bribe-givers or their lawyers the idea that they can use delaying tactics to wiggle out of an FCPA case. In that event, Schwartz would need to prepare for a knock-down, drag-out jury trial that would reveal embarrassing details about his client’s luxurious, heavy-partying life abroad.

Yet, given the case thus far, one gets the impression that one or both sides wish the case would simply go away. If this is in Schwartz’s thinking, he must patiently hope that the prosecution elects to save face by dropping at least some of the more onerous charges, and perhaps then persuade Giffen to plead to lesser violations of the law.

Ready, Set, Go …

The 2010 FCPA enforcement year has begun.

Yesterday, the SEC announced (here) resolution of an FCPA books and records and internal controls action against NATCO Group Inc. – a Houston based “worldwide leader in design, manufacture, and service” of oil and gas process equipment (see here).

The SEC complaint (here) alleges that TEST Automation & Controls, Inc., a wholly-owned subsidiary of NATCO Group, “created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan.” According to the complaint, “NATCO’s system of internal accounting controls failed to ensure that TEST recorded the true purpose of the payments, and NATCO’s consolidated books and records did not accurately reflect these payments.”

According to the complaint, TEST maintained a branch office in Kazakhstan and in June 2005 it won a contract which required it to hire both expatriates and local Kazakh workers. Pursuant to Kazakh law, TEST needed to obtain immigration documentation before an expatriate worker could enter the country. Thereafter, Kazakh immigration authorities claimed that TEST’s expatriate workers were working without proper documentation and the authorities threatened to fine, jail, or deport the workers if TEST did not pay cash fines.

According to the complaint, TEST employees believed the threats to be genuine and, after consulting with U.S. TEST management who authorized the payments, paid the officials approximately $45,0000 using their personal funds for which the employees were reimbursed by TEST.

The complaint alleges that when reimbursing the employees for these payments, TEST inaccurately described the money as: (i) being an advance on a bonus; and (ii) visa fines.

The complaint further alleges that TEST used consultants in Kazakhstan to assist in obtaining immigration documentation for its expatriate employees and that “one of these consultants did not have a license to perform visa services, but maintained close ties to an employee working at the Kazakh Ministry of Labor, the entity issuing the visas.” According to the complaint, the consultant twice requested cash from TEST to help him obtain the visas and the complaint alleges that the consultant provided TEST with bogus invoices to support the payments.

Based on the above allegations, the SEC charged NATCO with FCPA books and records and internal control violations even though the complaint is completely silent as to any involvement or knowledge by NATCO in the conduct at issue. This action is thus the latest example of an issuer being strictly liable for a subsidiary’s books and records violations (see here for a prior post).

Without admitting or denying the SEC’s allegations, NATCO agreed to pay a $65,000 civil penalty. According to the SEC’s findings in a related cease and desist order (here), during a routine internal audit review, NATCO discovered potential issues involving payments at TEST, conducted an internal investigation, and voluntarily disclosed the results to the SEC. The order also lists several other remedial measures NATCO implemented.

I’ve noted in prior posts that one of the effects of voluntary disclosure is that it sets into motion a whole series of events including, in many cases, a much broader review of the company’s operations so that the company can answer the enforcement agencies’ “where else may this have occurred” question.

On this issue, the SEC order states that NATCO “expanded its investigation to examine TEST’s other worldwide operations, including Nigeria, Angola, and China, geographic locations with historic FCPA concerns.” However, the SEC order notes that “NATCO’s expanded internal investigation of TEST uncovered no wrongdoing.”

According to the complaint, at all times relevant to the complaint, NATCO’s stock was listed on the NYSE, but in November 2009 NATCO became a subsidiary of Cameron International Corporation (here) (an NYSE listed company) and NATCO’s NYSE listing ended.

The NATCO enforcement action is “as garden variety” of an FCPA enforcement action as perhaps one will find. Not only does moving product into and out of a country expose a company to FCPA risk, but so too does moving employees into and out of a country.

The NATCO civil penalty also demonstrates that in certain cases, the smallest “cost” of an alleged FCPA violation are the fines or penalties, figures which are so dwarfed by investigative, remedial and resolution costs.

Baker Hughes – BJ Services Merger

The press (see here among other places) is reporting that Baker Hughes has agreed to buy BJ Services in a $5.5 billion cash and stock deal.

Both companies should be familiar to FCPA followers and there are many FCPA issues present in this announced merger.

For starters, a bit of background.

In 2007, Baker Hughes settled parallel DOJ and SEC FCPA enforcement actions concerning business conduct in Kazakhstan, Nigeria, Angola, Indonesia, Russia, and Uzbekistan. (See here for the DOJ release and related materials, see here for the SEC release and related materials). Combined fines and penalties were a then FCPA-record $44 million.

In 2004, BJ Services consented to entry of an SEC cease-and-desist order finding that it violated the FCPA’s anti-bribery, books and records, and internal control provisions in connection with the business conduct of its wholly-owned Argentinean subsidiary. (See here for the SEC order).

In addition, in its 2008 Annual Report (filed in November 2008 see here) BJ Services indicated (at pgs. 69-70) that it voluntarily disclosed to the DOJ/SEC the results of an internal investigation concerning problematic business conduct in the Asia-Pacific region that could implicate the FCPA. To my knowledge, no enforcement action has yet resulted from this disclosure.

At a minimum, the following FCPA issues are present in the Baker Hughes / BJ Services announced merger.

Baker Hughes settled the 2007 FCPA enforcement action by agreeing to a deferred prosecution agreement (see here). Pursuant to Paragraph 8 of the DPA, Baker Hughes agreed to engage an independent monitor to review the company’s compliance with the FCPA for a period of three years. Thus, per the DPA, Baker Hughes is still under an FCPA monitor – an individual who no doubt has been busy or soon will be busy in ensuring that Baker Hughes properly integrates BJ Services into Baker Hughes’ existing FCPA compliance policies and procedures.

What about the issue of Baker Hughes purchasing a company with disclosed, yet apparently unresolved, FCPA issues? This is one area where the DOJ has offered up substantive guidance to acquiring companies and the following DOJ Opinion Procedure Releases are relevant (in whole or in part): 08-02 (see here), 08-01 (see here), 04-02 (see here), and 03-01 (see here). For additional reading (see here).

I like to tell my students that the business law issues we cover in class are not merely historical, but rather are issues that companies deal with on a daily basis. For all you FCPA students out there, the Baker Hughes – BJ Services merger announcement provides a good real-world “issue-spotting” exam.

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