- FCPA Professor - https://fcpaprofessor.com -

The Giffen Gaffe

Perhaps one day the true story will be told about the DOJ’s prosecution of James Giffen.

I don’t pretend to know what happened behind the scene other than to know that something significant occurred behind the scene.

That conclusion is compelled when an original indictment (see here [1]) charging “Giffen with making more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan in connection with six separate oil transactions, in which the American oil companies Mobil Oil, Amoco, Texaco and Phillips Petroleum acquired valuable oil and gas rights in Kazakhstan” is resolved via a one-paragraph superseding information (see here [2]) charging a misdemeanor tax violation.

Sure, DOJ can say that it prosecuted a functionally defunct entity, The Mercator Corporation – in which Giffen was the principal shareholder, board chairman, and chief executive officer – with violating the FCPA’s anti-bribery provisions. Yet that criminal information (see here [3]) merely alleges that “Mercator caused the purchase of two snowmobiles that were shipped to Kazakhstan for delivery to KO-2” (a senior official of the Kazakh Government).

You read that correctly.

From an FCPA perspective this entire, nearly decade-long prosecution, was reduced to allegations about two snowmobiles for a Kazakh official.

So what was that something significant that occurred behind the scene?

I don’t know.

But I do know this.

Part of Giffen’s defense was that his actions were taken with the knowledge and support of the Central Intelligence Agency, the National Security Council, the Department of State and the White House. The DOJ did not dispute the fact that Giffen had frequent contacts with senior U.S. intelligence officials or that he used his ties within the Kazakh government to assist the United States. With the court’s approval, Giffen sought discovery from the government to support such a public authority defense and much of the delay in the case was due to the government’s resistance to such discovery and who was entitled to see such discovery.

Perhaps it was that public airing of the information in these documents would be embarrassing to the U.S. government or impact U.S. foreign relations with a key oil and gas producing country.

If so, it is troubling to think that our government condones bribery, when done with the approval or the wink and nod of government officials, while aggressively prosecuting commercial actors – often times based on untested and dubious legal theories.

For the record, Giffen pleaded guilty (see here [4]) last Friday to a one-count criminal information charging him with willfully failing to supply information on tax returns regarding foreign bank accounts in violation of 26 USC 7203. The information charges, and Giffen pleaded guilty to, filing a U.S. individual income tax return which failed to report that he maintained an interest in, and signature and other authority over, a bank account in Switzerland in the name of Condor Capital Management, a British Virgin Islands corporation he controlled. In pleading guilty, Giffen also relinquished right, title and interest he may have had, directly or indirectly, in several named Swiss bank accounts.

Pursuant to the plea agreement, Giffen’s sentencing range will be 0 to 6 months and the applicable fine range will be $250 to $5,000.

For the record, Mercator also pleaded guilty (see here [5]) last Friday to a one-count criminal information charging it with violating the FCPA’s anti-bribery provisions. According to the information, Mercator “advised Kazakhstan in connection with various transactions related to the sale by Kazakhstan of portions of its oil and gas wealth.” The information alleges that between 1995 and 2000 Mercator was paid approximately $67 million in success fees for its work in assisting the Kazakh Ministry of Oil and Gas Industries develop a strategy for foreign investment in the oil and gas sector and coordinating the negotiation of numerous oil and gas transactions. The information charges that certain senior officials of the Kazakh government (including KO-2) had the authority to hire and pay Mercator and that Mercator was therefore “dependant upon the goodwill” of the officials. The one-paragraph statutory allegation merely states that Mercator “caused the purchase of two snowmobiles that were shipped to Kazakhstan for delivery to KO-2.”

As indicated in the plea agreement, the DOJ and Mercator could not agree on whether the 1998 Sentencing Guidelines or the 2009 Sentencing Guidelines apply – an issue that will be left for the court to decide. If the 2009 guidelines apply, the plea agreement sets forth a fine range of $650,000 to $1.3 million. If the 1998 guidelines apply, the plea agreement sets forth a fine range of $30,000 to $60,000.

Whether Mercator’s and/or Giffen’s actions were indeed taken with the knowledge and support of the Central Intelligence Agency, the National Security Council, the Department of State and the White House, the following paragraph from the Mercator plea agreement would seem relevant:

“Because the offense involved an elected official or a public official in a high-level decision-making or sensitive position, the offense level is increased 4 levels pursuant to U.S.S.G. 2C1.1(b)(3).”

That provision (see here [6]) defines “public official” to include, among other categories, an individual “in a position of public trust with official responsibility for carrying out a government program or policy; acts under color of law or official right; or participates so substantially in government operations as to possess de facto authority to make governmental decisions.”

DOJ releases in FCPA enforcement actions are typically peppered with get-tough, this sends a message type of language. The release (see here [7]) in the Giffen / Mercator enforcement action does not contain any quotes from DOJ officials.

William Schwartz of Cooley Godward Kronish LLP (here [8]), a former Assistant United States Attorney in the United States Attorney’s Office for the Southern District of New York where he was Deputy Chief of the Criminal Division, represented both Giffen and Mercator.

So, what to make of the Giffen Gaffe.

It seems that Giffen prevailed not because of the facts or the law, but because he possessed significant leverage over the government in that he asserted his actions were taken with the knowledge and support of the Central Intelligence Agency, the National Security Council, the State Department and the White House.

Few FCPA defendants can make a similar claim. Thus, resolution of the Giffen case would seem to have little or no effect on the nuts and bolts of future FCPA enforcement actions.

Yet, resolution of the Giffen case does raise some troubling issues as to the DOJ’s enforcement of the Foreign Corrupt Practices Act.

For starters, the Giffen case and the Frederick Bourke case (see here [9] for prior posts) generally marked the beginning of the FCPA’s resurgence. Regardless of the outcome of Bourke’s Second Circuit appeal, the trial phase ended with the sentencing judge saying:

“After years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both.”

In both the Giffen and Bourke cases, the DOJ made spectacular allegations only to see these enforcement actions end with a whimper.

The Giffen resolution would also seem embarrassing for the Justice Department which actively preaches the transparency and anti-corruption gospel message around the world while calling on other countries to increase enforcement of their own bribery laws.

However, what does it say about transparency in our country when a case that begins with criminal allegations of more than $78 million in unlawful payments to senior Kazakh officials ends with a misdemeanor tax violation and a largely meaningless FCPA enforcement action against a functionally defunct entity focused merely on two snowmobiles?

The Giffen resolution should further enrage segments of the business community that justifiably see a double standard in that certain business practices seem tolerated when done in connection with government business or policy, yet aggressively prosecuted, often times based on untested and dubious legal theories, when done in connection with a purely commercial transaction.

The Giffen Gaffe is troubling enough in isolation.

Coupled with another bribery blunder from approximately six months ago, it is an open question whether the government’s enforcement of the FCPA, to borrow a parliamentary phrase, would survive a no-confidence vote.

In February, the DOJ alleged (see here [10]) that BAE, the largest defense contractor in Europe and the fifth largest in the U.S. as measured by sales, “provided substantial benefits” “through various payment mechanisms both in the territorial jurisdiction of the U.S. and elsewhere” to a Saudi official “in a position of influence” to award fighter jet deals. The DOJ stated that BAE “provided support services to the [Saudi official] while in the territory of the U.S.” and that these benefits “included the purchase of travel and accommodations, security services, real estate, automobiles and personal items.” The DOJ alleged that over $5 million in invoices for benefits provided to the Saudi official were submitted by just one BAE employee during a one year period. Yet resolution of the BAE enforcement action contained no FCPA charges.

Sure the U.S. may prosecute the most bribery cases in terms of shear numbers compared to other countries.

Yet, as is becoming increasingly obvious, many of those cases are settled via privately negotiated resolution vehicles that are not subjected to any meaningful judicial scrutiny and are based on dubious and untested legal theories.

On the flip side, when allegations of egregious or widespread bribery are alleged, the charges are not even FCPA anti-bribery violations.

Before another U.S. government official goes abroad to spread the anti-corruption gospel, preach transparency, and question other countries commitment to prosecuting bribery, it would seem that our government and Justice Department first need to examine its own enforcement of the FCPA.