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Looking Back On The Eckhardt Amendment

Yesterday’s post (here) highlighted the FCPA’s first mega-enforcement action involving multiple actors.

The story remained open as to George McLean (Vice President of Solar Turbines International (“Solar”), a division of International Harvester Company), and Luis Uriarte (the Latin American Regional Manager of Solar).

As noted in the prior post, soon after McLean and Uriarte (and several others) were indicted in October 1982, in November 1982 the DOJ also filed a criminal information against International Harvester (see here).  The information was based on the same core set of allegations as in the October 1982 indictment and was based on the conduct of its employees McLean and Uriarte.  International Harvester pleaded guilty to conspiracy to violate the FCPA (see here) and was ordered to pay a $10,000 fine and agreed to also pay $40,000 civil cost reimbursement.  (Notice the italics).

McLean and Uriarte filed a motion to dismiss the indictment principally based on the so-called Eckhardt amendment that was then part of the FCPA.  In June 1983, Judge George Cire (S.D. Tex.) granted the motion to dismiss the substantive FCPA charges against them, but not the conspiracy charge.  The DOJ appealed the dismissal which lead to a Fifth Circuit opinion.  Before summarizing Judge Cire’s decision, as well as the Fifth Circuit’s decision, this post provides background information on the so-called Eckhardt amendment.

*****

The Eckhardt amendment was named after Representative Robert Eckhardt (D-Tex).  If you read my detailed history of the FCPA, “The Story of the Foreign Corrupt Practices Act,” you will learn that Eckhardt was a leader in the House as to what would become the FCPA.  My article provided a detailed overview of the FCPA legislative history, yet at the same time to keep the article at a publishable limit, omitted certain side issues also found in the FCPA’s extensive legislative history.

One side issue that developed towards the later part of the FCPA’s legislative history as the basic contours of the law began to take shape, and an issue of great concern to Representative Eckhardt, was that individual corporate actors might be put at a disadvantage in defending themselves in an FCPA enforcement action.

Representative Eckhardt stated in an April 1977 hearing, in pertinent part, as follows.

“I don’t have any compunctions against making acts of foreign bribery illegal for the corporation.  […]  [T]he [corporate] defendant would always be able to marshal what evidence there was to contradict any contention that the company had anything to do with the bribery.  With respect to that necessary element of the case without which a conviction could not be had, the defendant would be peculiarly in control of the evidence, both overseas evidence and domestic evidence.  But this is not so with respect to the individual who is an agent of such issuer and who is being accused of an act overseas where the totality of the proof would be from activities overseas.  Indeed, the corporations interest might even be in conflict with that of the agent.  The corporation might desire to have Joe Bloke found to have intentionally engaged in bribery and to have been the sole moving agent, that is, the company never agreed to it and the quicker they can convict Joe Bloke, the better off the company is.  It is relieved of responsibility and it has a sacrificial lamb in Rome and everybody forgets about the activity.”

[…]

“I don’t find any difficulty whatsoever with the corporation’s position as a defendant because indeed it has a very inside road to testimony and information.  […]  [I]t seems to me that there is a vast difference between the position of the individual defendant accused of having violated the act and the corporate defendant.  Besides, the individual defendant can be clapped in jail and the corporation can’t be clapped in jail.”

In September 1977, Representative Eckhardt testified before a House committee and likewise stated, in pertinent part, regarding H.R. 3815 (a bill he introduced, which in compromise with S. 305, ultimately became the FCPA).

“[W]e were so concerned about the individual penalty as a means of making a scapegoat of an individual that we provided in our bill that unless the corporation were found to be guilty there could not be an individual penalty at all.”

In short, the FCPA originally contained the following introductory language as to the penalty provisions applicable to employes or agents of issuers of domestic concerns “whenever an [issuer or domestic concern] is found to have violated [the FCPA’s anti-bribery provisions] …”.

*****

Back to McLean and Uriarte’s challenge.

In granting the motion to dismiss the substantive FCPA charges against them,  Judge Cire noted that the defendants’ employer, International Harvester, pleaded guilty to conspiracy and not to a substantive FCPA offense.  Judge Cire reasoned that “conspiracy and the related substantive offense which is the object of the conspiracy are separate and distinct crimes.”

Accordingly, Judge Cire concluded as follows.  “Since International Harvester plead guilty to conspiracy and not to a substantive FCPA violation, it has not been found to have violated the FCPA.  The Eckhardt amendment protects employees like McLean and Uriarte from prosecution under the FCPA when their employer has not been found to have violated the FCPA.”  (See here for Judge Cire’s Memorandum and Order).

The DOJ appealed Judge Cire’s order and presented three arguments on appeal:  (1) that the FCPA does not require the employer be convicted of an FCPA violation, only that it be established in the employee’s trial that the employer violated the FCPA; (2) that McLean, as an individual, may be charged with aiding and abetting FCPA violations; and (3) that International Harvester’s conviction of conspiracy was sufficient.

The Fifth Circuit began its decision (here) as follows.

“We are presented for the first time with the question of whether the FCPA permits the prosecution of an employee for a substantive offense under the Act if his employer has not and cannot be convicted of similarly violating the FCPA.”

The Fifth Circuit began its decision as follows.

“Our task in interpreting the FCPA ‘is to construe the language so as to give effect to the intent of Congress.  To do so, we look primarily to the language of the statute and secondarily to its legislative history, which includes the ‘purpose the original enactment served, the discussion of statutory meaning in committee reports, the effect of amendments-whether accepted or rejected-and the remarks in debate preceding passage.”

[See this recent post highlighting the importance of the FCPA’s legislative history]

The Fifth Circuit then reviewed the “found to have violated” language of the Eckhardt amendment and stated as follows.

“Hearings were conducted on the precurser to the final version of the Eckhardt Amendment in April of 1977 by the subcommittee of the House Interstate and Foreign Commerce Committee. The subcommittee examined two proposed bills: (1) H.R. 3815, introduced by Congressman Bob Eckhardt, which imposed as a prerequisite to the conviction of an employee a showing of violation of the Act by the issuer or domestic concern, and (2) H.R. 1602 which had no such requirement. At the hearing, Congressman Eckhardt, the subcommittee chairman, in discussing H.R. 3815 [… stated as follows].

“Indeed, the corporations [sic] interest might even be in conflict with that of the agent. The corporation might desire to have Joe Bloke found  to have intentionally engaged in bribery and to have been the sole moving agent, that is, the company never agreed to it and the quicker they can convict Joe Bloke, the better off the company is. It is relieved of responsibility and it has a sacrificial lamb in Rome and everybody forgets about the activity.”

The Fifth Circuit then stated as follows.

“Congressman Eckhardt pointed out the dependence of the agent on the corporation for an adequate defense since the corporation, due to its superior resources, would be in a much better position than the employer to defend against accusations of wrongdoing in a foreign country.  He articulated concern over legislation that would require the agent alone to bear the burden of refuting allegations of FCPA violations. He was also troubled about giving the uncharged corporate employer incentive to both disavow knowledge of the agent’s activity and to let the agent bear all responsibility for the wrongdoing.  This problem was avoided […] because what would become the Eckhardt Amendment ‘would require the government … to prove in the first instance that the issuer had violated the section, because that is the condition precedent to the holding of any agent responsible.”

After reviewing other aspects of the FCPA’s legislative history, the Fifth Circuit concluded that “both the language of the Act and its legislative history reveal a clear intent to impose criminal sanctions against the employee who acts at the behest of and for the benefit of his employer only where his employer has been convicted of similar FCPA violations.”

The Fifth Circuit then stated as follows.

“We hold that in order to convict an employee under the FCPA for acts committed for the benefit of his employer, the government must first convict the employer.  Because the government failed to convict Harvester and under the plea agreement will be unable to indict Harvester and try it with McLean, the Act bars McLean’s prosecution.”

In so holding, the court observed that “it is well-settled that a conspiracy to commit an offense and the commission of a substantive offense are separate and distinct crimes.”

Uriarte was subsequently charged in a one-count superseding information and pleaded guilty to “accessory after the fact” in violation of 18 USC 3.  He was placed on probation for one year.  (See here).

As for McLean, contrary to what the FCPA Blog stated in this prior post, the Fifth Circuit’s decision did not end the DOJ’s case against McLean in that the decision only addressed the substantive FCPA charges against him that were dismissed by the trial court.  The Fifth Circuit decision did not address the conspiracy charge against McLean.

As to the conspiracy charge, McLean proceeded to trial and was found not guilty by the jury.

*****

Stung by its McLean defeat, the DOJ sought to repeal the Eckhardt Amendment.  In a September 1986 FCPA reform hearing in the Senate, John Keeney (Deputy Assistant Attorney General, Criminal Division) submitted a written statement, which read in pertinent part, as follows.

“The Department also wishes to highlight a serious law enforcement problem in both the existing law and in [a Senate bill to amend the FCPA], with respect to the prohibition against convicting an employee (and, in the present FCPA, an agent) of an issuer or domestic concern unless the domestic concern itself is ‘found to have violated’ the Act.  The purpose of this provision, known in the present FCPA as the Eckhardt Amendment, was to prevent a company from labeling an employee as a renegade, thereby making him a scapegoat for the company’s criminal acts, and forcing him to bear alone the full economic burden of defending the criminal charges as well as the potential criminal sanctions.  This goal, unfortunately, has not been met.  There is nothing to prevent a company from pleading guilty to a FCPA violation thereby forcing the employee or agent to defend by himself.  Situations similar to this have occurred in the cases brought thus far.”

“While the Eckhardt provision falls short of fulfilling its purpose, it also makes it more difficult to prosecute certain classes of individuals regardless of the quantum of evidence as to their guilt or that of their employers.  In the only reported opinion on this issue, an appellate court construed Eckhardt to mean that a company must be convicted of a FCPA violation rather than merely be ‘found to have violated’ the act.”

“In that case, a company entered a pre-indictment guilty plea to conspiracy to violate the FCPA rather than to a substantive violation of the Act.  The conspiracy plea was permitted because of the serious financial condition of the company and the real possibility that the imposition of a substantial fine would force it into bankruptcy.  Two company employees were indicted for multiple FCPA violations as well as for conspiracy to violate the FCPA.  The government offered to present proof beyond a reasonable doubt that the company had violated the FCPA and suggested that the Court instruct the jury to make the required Eckhardt finding prior to considering the guilt or innocence of the employees.  The Court rejected these alternatives and dismissed the FCPA charges.  In our view, this construction of the statute does not comport with the intention of Congress in enacting the Eckhardt language.”

“A similar problem exists where a company, over the objection of the United States, enters a plea of nolo contendere to FCPA violations.  In that situation, a court could enter a judgment of conviction against the company for FCPA violations without necessarily making a finding as to guilt for purposes of the statute.  Arguably, the United States might be prevented from prosecuting an employee or an agent of that company following such a conviction.  Such an argument has recently been made by a fugitive defendant who, as agent for a domestic concern, acted as the conduit for transmitting in excess of 10 million dollars in bribes to two foreign officials on behalf of the company which pleaded no contest to 48 FCPA charges.  Given the current state of the law, the eventual resolution of this issue is not completely free from doubt.  What is clear is that there is no justification for allowing conduct of this sort to go unpunished.”

“Should the Subcommittee wish to retain the language of Eckhardt, the Department would suggest that it clarify what is meant by “found to have violated.”  Alternatively, the Subcommittee might wish to substitute some other language which more clearly sets out the intent of Congress.  If the Subcommittee wishes to insure that the goals of Eckhardt are met, we suggest adding language requiring a company to indemnify an employee’s attorney’s fees unless it can be shown that the employee was clearly was operating as a renegade or without the company’s knowledge.  The Department is willing to work with the Subcommittee to clarify the Eckhardt provisions.”

A relevant House Conference Report in April 1987 (Rep. 100-576) as to a bill to amend the FCPA stated, in pertinent part, as follows.

Anti-bribery Provision – House Repeal of Eckhardt Amendment

House bill.   The House bill repealed the so-called Eckhardt amendment to the FCPA by deleting the lead-in clause of present law, which reads “whenever an issuer/domestic concern is found to have violated …”.  The deleted language had the effect of providing that employees or agents could not be prosecuted for FCPA violations unless the domestic concern or issuer, whichever the case may be, had been found to have violated the Act.

Senate amendment.  The Senate amendment contained no comparable provision.

Conference agreement.  The Senate receded to the House.

When the FCPA was finally amended in 1988, among its changes, was repeal of the so-called Eckhardt amendment.

The FCPA’s First Mega Enforcement Action

[This post is part of a periodic series regarding “old” FCPA enforcement actions]

The year was 1982 and the Foreign Corrupt Practices Act was nearing five years old.  Up to this point, enforcement was sparse and focused on single-actor type cases.  See here, here, here, here and here for FCPA enforcement actions up to this point.

In 1982, the first FCPA mega-case was brought and it involved five corporate defendants and twelve individual defendants.

Specifically, in October 1982, the DOJ brought an indictment (here) against:

  • Crawford Enterprises Inc. (“CEI”) (a Houston based private company that sold compression equipment systems to oil and gas companies);
  • Donald Crawford (CEI’s Chairman and sole shareholder and, at certain relevant times, CEI’s President);
  • William Hall (CEI’s Executive Vice President and, at certain relevant times, CEI’s President);
  • Ricardo Beltran (President and majority shareholder of Grupo Industrial Delta, a Mexican corporation);
  • Mario Gonzalez (a U.S. citizen who assisted Grupo Delta and CEI communicate with certain alleged foreign officials);
  • Andres Garcia (a U.S. citizen who assisted Grupo Delta and CEI communicate with certain alleged foreign officials);
  • George McLean (Vice President of Solar Turbines International (“Solar”), a division of International Harvester Company);
  • Luis Uriarte (the Latin American Regional Manager of Solar);
  • Al Eyester (President of Ruston Gas Turbines “Ruston”);and
  • James Smith (Vice President of Ruston).

The indictment charged a conspiracy between the defendants and others to pay money to Mexican foreign officials and Grupo Delta “knowing that all or a portion of such money would be offered, given or promised directly or indirectly” to foreign officials for the purpose of influencing the acts and decisions of the officials “in their official capacity, and inducing them to use their influence with Pemex so as to affect and influence the acts and decisions of Pemex in order to assist” Crawford, the other defendants, and others in “obtaining or retaining business with Pemex.”

The indictment alleges that Petroleos Mexicanos (“Pemex”) was the “national oil company wholly owned by the Government of the Republic of Mexico and was responsible for the exploration and production of all of the oil and natural gas resources of Mexico and for acquiring the equipment, including compression equipment systems, necessary for such exploration and production.”

The indictment alleged that “Pemex was an instrumentality of a foreign government” and that two individuals (Ignacio de Leon and Jesus Chavarria) were “foreign officials” based on their positions of “subdirector of Pemex responsible for the purchase of goods and equipment on behalf of Pemex” and “subdirector of Pemex responsible for the exploration and production of Mexican oil and natural gas.”

[As an aside, it should be noted that in the recent “foreign official” challenges, the DOJ has argued that its charging decision in the Crawford cases as to Pemex demonstrated the validity of its position that employees of SOEs are “foreign officials” under the FCPA.  For instance, the recent FCPA Guidance states that the SEC and DOJ ‘‘have pursued cases involving instrumentalities since the time of the FCPA’s enactment’’ and that the ‘‘second-ever FCPA case charged by the DOJ’’ involved bribes to executives of the Mexican national oil company.  

However being consistently wrong, does not make one right and, as noted in my article “Grading the FCPA Guidance,” missing from the Guidance discussion or associated citations on this issue, is any reference to the fact that George McLean, the only defendant in the series of related cases to put DOJ to its burden of proof at trial, was found not guilty by the jury.]

The conspiracy charge alleged that CEI and Crawford agreed to pay and paid the “foreign officials” “bribes equalling approximately 4.5% of each Pemex purchase order for compression equipment systems in which” CEI participated and that “it was further a part of the conspiracy” that CEI and Crawford arranged with defendants Beltran, Gonzalez and Garcia that Grupo Delta would: “(a) hold itself out as the Mexican agent of CEI, while in truth acting primarily as the conduit for the bribe payments; (b) disguise the bribe payments as ‘commissions’ due by providing to CEI false and fictitious invoice for each payment received; and (c) provide Gonzalez and Garcia with a base of operations from which to perform their function as middlemen and channels of communications between the co-conspirators” and the foreign officials.”

The indictment further alleged that the defendants used the term “folks” as a code word for the “foreign officials” “in order to conceal from others their true identities as Pemex officials and the existence of the bribe scheme.”  The indictment alleged that “in order to create a pool of money with which to pay bribes” CEI along with Solar and Ruston “submitted to Pemex bids which were inflated to include a 4.5% markup for the “folks.”

The indictment alleged that CEI, along with Solar and Ruston received purchase orders from Pemex for compression equipment systems in the approximate amount of $225 million and that approximately $10 million in bribe payments were made to the “foreign officials” as part of the bribery scheme.

In addition to the conspiracy charge, the indictment also alleged approximately fifty substantive FCPA anti-bribery violations against various combinations of the defendants.  The indictment also charged CEI, Crawford and Hall with an obstruction charge based on allegations that the defendants destroyed certain documents relevant to a grand jury subpoena.

Media reports described the action as the first major criminal investigation under the FCPA.  According to the reports, in November 1982, CEI, Crawford, Hall, Garcia, McLean, Uriate, and Eyster pleaded not guilty.  Crawford and Hall stated that while commission payments were made to Grupo, no such bribes were paid to Pemex officials.

CEI released a statement which said that “despite vigorous and repeated denials by Crawford Enterprises of any wrongdoing in connection with these allegations, the investigation has continued for nearly 3.5 years.”  The company said that Pemex and the Mexican government had looked into similar charges and found no wrongdoing in the award of Pemex contracts to Crawford.  The company’s statement further indicated as follows.  “Four factors accounted for CEI’s success in becoming one of Pemex’s principal gas compression contractors:  its proven experience in the industry; its aggressive delivery schedules that other firms simply could not match; its maintenance and repair of equipment installed in Mexico; and the lower costs to Pemex as a result of all the above.”

Prior to the above-reference October 1982 indictment, in September 1982 the DOJ charged Ruston Gas Turbines Inc., C.E. Miller Corporation and Charles Miller based on the same core set of allegations.  The DOJ charged Ruston Gas Turbines in a one count criminal information (see here) with a substantive FCPA violation and the company pleaded guilty and was ordered to pay a $750,000 fine (see here).  The DOJ charged C.E. Miller Corporation and Miller (President, Chairman of the Board, and majority shareholder of the company) in a one count criminal information charging substantive FCPA violations and aiding and abetting FCPA violations. (See here).  C.E. Miller Corporation and Miller both pleaded guilty and the company was ordered to pay a $20,000 fine and placed on probation for three years (see here) and Miller was sentenced to three years probation (see here).

Prior to the above-referenced September 1982 charges, in May 1981 the DOJ charged Gary Bateman (an International Sales Manager for CEI and also Chairman of the Board, President and sole shareholder of Applied Process Products Overseas, Inc.) in a multi-count information (see here) charging various misdemeanor violations of the Currency and Foreign Transactions Reporting Act concerning the transportation of money to Mexico in connection with the bribery scheme.  Bateman pleaded guilty and agreed to pay a civil penalty of approximately $330,000.  In January 1983, the DOJ also charged Applied Process Products Overseas, Inc. in a one-count information (here) charging a substantive FCPA violation based on the same core set of allegations.  The company pleaded guilty and was ordered to pay a $5,000 fine.  (See here).

After the above-referenced October 1982 charges, in November 1982 the DOJ also filed a criminal information against International Harvester (see here).  The information was based on the same core set of allegations as set forth above and based on the conduct of its employees McLean and Uriarte.  International Harvester pleaded guilty to conspiracy to violate the FCPA (see here) and was ordered to pay a $10,000 fine and agreed to also pay $40,000 civil cost reimbursement.

The DOJ’s offer of proof in the International Harvester case (see here) contained the following statement.

“After Solar had agreed to participate and to cooperate with CEI, and pursuant to the 1977 enactment of the Foreign Corrupt Practices Act [International Harvester’s long-standing Policy on Conflicts of Interest and Ethical Business Conduct] was revised and supplemented to affirm that improper payments prohibited by the Act were also prohibited as a matter of company policy.  In 1977, 1978, 1979, and 1980, through an annual audit process, each International Harvester managerial employee was required to certify his or her compliance and to report any action that might conflict with company policy for review by the Office of the General Counsel and corrective action, if warranted.  During those years, Uriarte and McLean each reported in the annual audit process that he was aware of International Harvester policy and had taken no action in violation thereof.  Insofar as each of them participated in the conspiracy described herein, he accordingly concealed from International Harvester his participation and the participation of the Solar Turbine Division.  Neither Solar employee held a position which required him to report to International Harvester management.  There has been no evidence that any officers, directors or management of International Harvester knew of or participated in the conspiracy charged.”

In January 1983, the DOJ charged Marquis King (an officer and director of C.E. Miller) in a one-count information charging a misdemeanor violation of the Currency and Foreign Transactions Reporting Act concerning the transportation of money to Mexico in connection with the bribery scheme. (See here).  King pleaded guilty and he was sentenced to 14 months probation and ordered to pay a $5,000 fine.  (See here).

In June 1985, CEI pleaded guilty to conspiracy to violate the FCPA and 46 substantive FCPA violations.  (See here).  CEI agreed to pay a $10,000 criminal fine as to the conspiracy charge and $75,000 as to each of the 46 substantive charges for a total fine amount of $3,460,000.  At the same time, the following defendants pleaded nolo contendere:  Donald Crawford, Al Eyster, James Smith, Andres Garcia, and William Hall.  Crawford pleaded nolo contendere to conspiracy to violate the FCPA and 46 substantive FCPA violations and was ordered to pay a total fine amount of $309,000 (see here); Eyster pleaded nolo contendere to conspiracy to violate the FCPA and 41 substantive FCPA violations and was ordered to pay a total fine amount of $5,000 (see here); Smith pleaded nolo contendere to conspiracy to violate the FCPA and 44 substantive FCPA violations and was ordered to pay a total fine amount of $5,000 (see here); Garcia pleaded nolo contendere to conspiracy to violate the FCPA and 46 substantive FCPA violations and was ordered to pay a total fine amount of $75,000 (see here); and Hall pleaded nolo contendere to conspiracy to violate the FCPA and 32 substantive FCPA violations and was ordered to pay a total fine amount of $150,000 (see here).

That leaves McLean and Uriarte.  Stay tuned for the rest of the story.

Of further note from this enforcement action, Pemex filed a civil suit in U.S. District Court in Houston against Crawford, CEI, the two foreign officials, and twelve others in a bid to recover monies allegedly extracted from Pemex.  In its complaint, Pemex sought several million dollars in both compensatory and punitive damages from Crawford and the other entities based upon the same conduct that was alleged in the DOJ enforcement actions.  Pemex’s suit was based upon alleged violations of the Sherman Antitrust Act,  the Robinson-Patman Act, and the Racketeering Influenced and Corrupt Organizations Act.  Pemex also asserted causes of actions based upon commercial bribery and common law fraud.  Various of the defendants in the civil action sought relevant documents from Pemex and it was ultimately held in contempt for not producing the documents.  For additional background on this case, see 643 F.Supp. 370; 826 F.2d 392.

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