As highlighted in my article, “What Percentage of DOJ FCPA Losses is Acceptable?” bringing criminal charges and marshalling the full resources of law enforcement agencies against an individual alters the lives of real people and their families, sidetracks real careers, empties real bank accounts in mounting a defense, and causes often irreversible damage to real reputations.

The manufactured Africa Sting case also had a negative impact on companies that employed the individuals charged in the case.  Previous posts here, here and here explored the various business effects of the Africa Sting case.

The Africa Sting case continues to have a negative impact on companies indirectly involved in the manufactured case.  In 2011, BlastGard International Inc. acquired HighCom Security Inc.  HighCom’s former CEO Yochanan Cohen was one of the individuals charged in the Africa Sting in January 2010.  In a recent disclosure BlastGard stated as follows.

“On January 19, 2010, the U.S. Department of Justice (“DOJ”) unsealed indictments of 22 individuals from both the law enforcement and defense supply industry, one of whom was HighCom’s then Chief Executive Officer, Yochanan Cohen, as an individual for allegedly violating [the FCPA].  (Note: On February 24, 2012, the United States District Court of Columbia, upon consideration of the government’s motion to dismiss, ordered the dismissal (with prejudice) of the indictment and superseding indictments against 22 defendants.)  HighCom was not a party to this indictment. HighCom has always taken, and continues to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad.  Following this indictment, Mr. Cohen stepped down from his daily responsibilities as CEO of HighCom.  As a result of this indictment, although not a named party to the indictment, in March 2010, HighCom was placed under a policy of denial by the U.S. State Department.  This resulted in a suspension of HighCom’s ability to export certain armor products under U.S. Government Regulations.  This effectively ended HighCom’s export capacity and significantly impacted its operations and ability to deliver product to its customers and in particular fulfill its shipment obligations under the U.N. contract awarded in late 2009.  HighCom was suspended by the US Dept. of Defense and added to its Excluded Party List. This severely restricted its ability to sell product in the US defense sector. To regain its export privileges under US State Department regulations, Mr .Cohen, as CEO and majority shareholder, was required to resign as an executive corporate officer and director and fully divest his equity interest in HighCom. On January 25, 2011, Mr. Cohen entered into a binding Letter of Intent to sell his equity interest to BlastGard International Inc. and closing occurred on March 4, 2011.”

“Concurrent with Mr. Cohen’s resignation both as a director and officer of HighCom and the sale of his equity interest to BlastGard, BlastGard filed with the US State Department to have the policy of denial lifted in order to regain HighCom’s ability to export certain armor products again.  As of March 29, 2011 this order of denial had been lifted and HighCom’s export privileges have been reinstated.  HighCom also successfully applied to the US Defense Dept to be removed from the Excluded Party List (“EPLS”). The successful reinstatement of HighCom’s export authority and its removal from the EPLS has dramatically improved HighCom’s ability to sell and market its products.  BlastGard has also been reinstated as a vendor for potential bids under the United Nations and has already completed several small orders since its reinstatement. However, on February 6, 2012, the United Nations notified the Company that the UN Secretariat Review Committee met on January 27, 2012 to review the vendor registration status of HighCom Security, Inc. The Committee noted the indictment of HighCom’s former CEO on four counts. Based on those charges, and in accordance with the UN’s policy with regards to ethics and compliance issues, placed an immediate hold on the registration status of HighCom, pending the UN’s internal review. The Company requested that the UN reconsider their decision as HighCom is under new ownership and management and that since their decision the United States District Court of Columbia dismissed all charges against the former CEO. A final decision is still pending the UN’s internal review.”

“In March 2011, BlastGard’s management team officially assumed operational control of HighCom.  Since this time we have accomplished a number of key compliance tasks and are currently in the process of finalizing manufacturing agreements with several key partners.  As stated in the paragraph above, BlastGard has received official communication from the U.S. State Department that HighCom’s export authority has been reinstated. In addition to this, BlastGard has completed registration through both the Directorate of Defense Trade Controls as well as the Bureau of Industry and Security (“BSI”). The purpose of these registrations is to allow BlastGard control over the export management and compliance program moving forward.  HighCom also completed their ISO certification which had been revoked under HighCom due to missed audits.  BlastGard management has been able to complete an internal audit and management review, in addition to meeting with BSI for the external audit review and in March 2012 HighCom secured ISO certification. Communication with the United Nations is ongoing. On February 6, 2012, the Company was notified by letter that the United Nation’s Vendor Review Committee (“VRC”) had recommended to immediately place on hold the registration status of HighCom Security. This VRC decision to place on hold our registration status was based on integrity/ethical issues surrounding the former CEO’s actions. Soon after this decision was made, we were notified that on February 21, 2012 the government dismissed all the charges against the former CEO. The Company has been in communication with the United Nations Procurement Division regarding this matter and on March 15, 2012, the Company was informed that the VRC had met regarding our request for re-instatement and that its recommendation is currently under consideration. To date we have not been re-instated but we are in communication with the United Nations Procurement Division in an effort of securing re-instatement. BlastGard has also made significant personnel changes within HighCom and restructuring of operating locations and costs. Since the completion of our acquisition of HighCom, the Company has focused its employee time and capital resources primarily on the development of the business of HighCom. Our results of operations for 2012 demonstrate the benefits of these changes.”

Other Items of Note

Yesterday’s post highlighted comments made by former Attorney General Alberto Gonzalez at the Dow Jones / Wall Street Journal Global Compliance Symposium.  Other items of note from the event concern the Africa Sting case and the SEC’s neither admit nor deny settlement policy.

Africa Sting

The jury foreman in the second Africa Sting trial (see here for the prior post) stated that there were “enough small comments through the course of [jury] deliberations [that lead the person] to believe that [the jury's] underlying view was that the defendants had acted in good faith and the FBI/DOJ in bad faith.”

The Africa Sting cases ended (see here for the prior post) by Judge Richard Leon stating, in pertinent part, as follows.

“This appears to be the end of a long and sad chapter in the annals of white collar criminal enforcement.”

“I expressed on a number of occasions my concerns regarding the way this case had been investigated and was conducted especially vis-a-vis the handling of Mr. Bistrong.”

“I for one hope this very long, and I’m sure very expensive, ordeal will be a true learning experience for both the Department and the FBI as they regroup to investigate and prosecute FCPA cases against individuals in the future.”

Yet listening to the interview of Ronald Hosko (assistant director of the criminal investigative division of the FBI) at the Dow Jones event, one was left with the conclusion that nothing appeared to be learned.  Indeed, Hosko seemed to blame the government’s loss on Judge Leon’s evidentiary rulings and the defendants’ good lawyers.  Hosko was interviewed by Dow Jones reporter Christopher Matthews (who closely followed the Africa Sting cases) and Matthews specifically asked Hosko whether anything will change as a result of the case.  Hosko said “we will do it again – see you out there.”

Neither Admit Nor Deny

Former SEC Enforcement Director Robert Khuzami had the opportunity at the Dow Jones event to articulate a sound rationale and purpose for the SEC’s long-standing neither admit nor deny settlement policy.  (See numerous prior posts here, here, here, and here – focusing mostly on Judge Jed Rakoff’s (S.D.N.Y.) disdain of the policy. ).

Instead, Khuzami’s remarks were unconvincing.

Khuzami acknowledged that direct accountability occurs when someone is forced to admit something “on the record,” but he stated that this incremental benefit (compared to a defendant in an SEC enforcement action resolving the case by way of penalties and other relief via a neither admit nor deny settlement) presents challenges that are not worth the additional costs that come from a system that demanded such accountability.

Khuzami noted that without the settlement policy, the “SEC would get few settlements, [settlements] would happen much later in the process, [and that enforcement actions] would tie up a great deal of resources, resources that could be used for the next fraud or victim.”  Against “all those benefits,” and the defendant writing a check and reforming itself, Khuzami did not believe that “it is worth the marginal increase in accountability” to require an explicit admission.

The problem with Khuzami’s defense is the failure to recognize that such a policy insulates SEC enforcement positions from judicial scrutiny.  Indeed, the SEC explicitly acknowledged in the Bank of America enforcement action (where Judge Rakoff first expressed concerns regarding the settlement policy) that SEC settlements “do not necessarily reflect the triumph of one party’s position over the other.”

The SEC is a law enforcement agency and enforcing a law and accusing people (legal or natural) of wrongdoing should not be easy and efficiency should not be the goal.  Justice, transparency, and accountability ought to be the goals and the SEC’s neither admit nor deny settlement policy frustrates these goals.

Add Another

Add another to the list of companies subject to FCPA scrutiny.  SBM Offshore (a Netherlands-based company with ADRs traded in the U.S. and a company that provides floating production solutions to the offshore energy industry) recently issued this press release titled “Update on Internal Investigation.”  It stated, in pertinent part, as follows.

“This investigation commenced in 2012 at the request of SBM Offshore into alleged payments involving sales intermediaries in certain African countries in the period 2007 through 2011, in order to determine whether these alleged payments violated anti-corruption laws. These alleged payments came to the attention of the management board after a review of SBM Offshore’s compliance procedures in late 2011. In the course of the investigation allegations were made of improper payments in countries outside Africa but to date no conclusive proof of such allegations has been established. The investigation is being carried out by outside legal counsel and forensic accountants, with the support of the chief Governance and Compliance officer and under the oversight of the audit committee. The investigation is expected to be completed in 2013.

As the investigation is not yet concluded, SBM Offshore cannot make any definitive statements regarding the findings of the investigation. The initial feedback received to date is that there are indications that substantial payments were made, mostly through intermediaries, which appear to have been intended for government officials. Also, SBM Offshore’s new Management Board, which was appointed in the course of 2012, has found it necessary and appropriate to increase awareness of proper compliance throughout the Group up to the highest management levels.

The Company voluntarily disclosed the investigation to the Dutch Public Prosecution Service (Openbaar Ministerie) and the United States Department of Justice in 2012. The Company will update the authorities on this initial feedback from the investigation shortly. At this stage it is not possible to state anything on the outcome of the investigations, including financial or otherwise.

6-Day Sentence

Bloomberg’s David Glovin has extensively followed the Kozeny, Bourke, etc. enforcement actions.

He reports here that Clayton Lewis (a former executive at hedge fund Omega Advisors, Inc.) was sentenced to time served by U.S. District Court Judge Naomi Buchwald.  As noted in Glovin’s article, Lewis pleaded guilty in 2004 to charges that he conspired with Viktor Kozeny to pay bribes as part of a 1998 scheme to buy the state oil company in Azerbaijan. Soon after his 2003 arrest, Lewis agreed to cooperate with the DOJ and he previously served six days in jail.

A Notable Name From The Past

Roderick Hills (Chairman of the SEC in the mid-1970′s) was a notable voice in the story of the FCPA.  (See here for my article of the same name).  It is ironic (given the SEC’s current FCPA unit) that the Commission never wanted any role whatsoever in enforcing the FCPA’s anti-bribery provisions.  Indeed, Chairman Hill stated as follows during various Congressional hearings.

“The Commission does not oppose direct prohibitions against these payments, but we have previously stated that, as a matter of principle, we would prefer not to be involved even in the civil enforcement of such prohibitions. As a matter of long experience, it is our collective judgment that disclosure is a sufficient deterrent to the improper activities with which we are concerned.”

“[A]s a matter of longstanding tradition and practice, the [SEC] has been a disclosure agency. Causing questionable conduct to be revealed to the public has a deterrent effect. Consistent with our past tradition, we would rather not get into the business, however, we think get involved in prohibiting particular payments. It is a different thing entirely to try to prohibit something, to try to make a decision as to whether it is legal or illegal, or proper or improper. Under present law, if it is material, we cause its disclosure, and we need not get into the finer points of whether it is or is not legal.”

“[The SEC] would prefer not to be involved in civil enforcement of such prohibitions since they embody separate and distinct policies from those underlying the federal securities laws. The securities laws are designed primarily to insure disclosure to investors of all of the relevant facts concerning corporations which seek to raise their capital from the public at large. The [criminal payment provisions of proposed legislation], on the other hand, would impose substantive regulation on a particular aspect of corporate behavior.The Commission recognizes the congressional interest in enacting these prohibitions, but the enforcement of such provisions does not easily fit within the Commission’s mandate.”

Against this backdrop, I enjoyed reading recent comments by Hills on the FCPAmericas Blog (see here).  Hills recently stated as follows.

“My view at the time was that the problem of bribery that we had uncovered had been dealt with and I did not support the passage of the Foreign Corrupt Practice Act. I was concerned then that broad criminalization of “questionable payments” to foreign officials would adversely affect the incentives for transparency that we had created. Nonetheless, the FCPA was passed and it has been properly amended to reduce the possibility that undue criminal actions will be brought.  It is important to remember that it was the ability of the SEC to cause disclosure that brought the scope of worldwide corporate bribery to light. What began in the 1970’s with the SEC enforcement efforts is now a worldwide crusade against the use of bribes to secure business. Today I accept that the FCPA has had, on balance, a positive effect on the reduction of bribery and that similar laws in other countries can have a similar effect. However, criminalization alone is not a useful policy. By itself it is an incentive to conceal. Without effective independent auditing, fair enforcement of FCPA type legislation is unlikely. Also, I believe that in the United States and elsewhere, prosecutorial discretion is essential if we are serious about reducing the corruption. Payments that are made in response to extortion demands or payments that are made by lower level corporate officials contrary to the policies of their employer should surely be treated differently than money crassly offered to buy corrupt official action. In short, as other countries are following the United States’ lead they need to understand that the criminalization of corporate bribery is not enough. If a country does not have effective means of causing broad transparency with effective auditing and independent oversight, FCPA type laws make it too easy to use improper payments as a political weapon.”

Spot-On

In a recent Q&A on Law360, Haywood Gilliam Jr. (Covington & Burling), stated as follows.

“Q: What aspects of your practice area are in need of reform and why?

A: Foreign Corrupt Practices Act enforcement stands out as an area in need of further reform. Over the past several years, FCPA enforcement has been characterized by the U.S. Department of Justice and U.S. Securities and Exchange Commission advancing aggressive enforcement theories, but there have been limited opportunities for courts to scrutinize those theories. Most FCPA enforcement cases end in negotiated resolutions such as deferred prosecution or nonprosecution agreements. In that context, regulators often insist that the settling company or individual accept the government’s expansive theories as a condition of resolving the case.  For example, the DOJ has extracted penalties from non-U.S. based, non-U.S. traded companies not covered under the four corners of the statute by asserting broad theories such as aiding and abetting or conspiracy — even when the foreign entity has not taken any action in the U.S. As a practical matter, that could be a hard case to prove at trial — but the government almost never has to.  The result of this trend has been to enshrine the government’s aggressive enforcement positions as quasi-precedent: The law means what the DOJ and SEC say it means, and defendants (especially publicly traded companies) seldom have a realistic opportunity to push back in court, given the financial and practical costs of fighting a contested enforcement action. Relatively recently, district courts have begun to weigh in on these theories, which is a positive development, but there still is a dearth of FCPA case law as compared to other areas of criminal law.  This absence of settled law makes it challenging for companies to decide how to handle thorny FCPA compliance issues. For example, companies routinely face a difficult choice in deciding whether to self-report potential violations to the government, as opposed to thoroughly investigating and remediating the issues internally. While regulators insist that they will give “meaningful credit” to companies that self-report, the tangible benefits of doing so are far from clear. The recent FCPA resource guide issued by the DOJ and SEC says that the agencies place a “high premium” on self-reporting, but does not give concrete guidance as to how the government weighs self-reporting in deciding whether to charge a case, as opposed to offering a deferred prosecution or nonprosecution agreement, or declining the case outright. While the resource guide is a start, companies and their counsel would benefit from more specific guidance when they are weighing the potential, but uncertain, benefits of disclosure against the cost and distraction that can result from voluntarily handing the government a case that otherwise might not have come to its attention.”

Gilliam’s spot-on comments would make for good conversation with his firm’s new Vice-Chair, former Assistant Attorney General Lanny Breuer.

In a recent Q&A on Law360, Mary Spearing (Baker Botts) stated as follows.

“Q: What aspects of your practice area are in need of reform and why?

A: It would be good for the practice if there was more litigation surrounding the scope and breadth of the statutes as applied and the government were put to the test. Currently, so much is being defined in settlements reached with the government. More frequent trials would render more judicial oversight of the government’s readings of the scope of the statutes’ reach.”

*****

A good weekend to all.

Two years ago today, for the first time in FCPA history a motion to dismiss was filed, with the benefit of a detailed and complete overview of the FCPA’s extensive legislative history on the “foreign official” element (see here for my declaration) ,challenging the DOJ’s interpretation that employees of alleged state-owned or state-controlled enterprises are “foreign officials” under the FCPA.

The Carson ”foreign official” challenge lead to other “foreign official” challenges in the Lindsey Manufacturing and John O’Shea matters, as well as the 11th Circuit appeal pending in the Joel Esquenazi and Carlos Rodriguez matter – the first time in FCPA history that “foreign official” will be directly before an appeals court.  You of course are entitled to your own opinion as to the end results in the Carson, Lindsey Manufacturing and O’Shea matters, including whether “foreign official” impacted the results.  (See prior posts here and here).

It is interesting to note that since the Carson ”foreign official” challenge two years ago, there has been no new case in which an individual has been charged with an FCPA anti-bribery violation based on the theory that SOE employees are “foreign officials.”

February 21, 2012

One year ago today, the DOJ moved to dismiss the Africa Sting cases after suffering several losses in the first two sets of trials.   (See here for the prior post).  The dismissal occurred shortly after the jury foreman in the second trial wrote this guest post published on FCPA Professor.

In granting the DOJ’s motion, Judge Richard Leon stated as follows.

“This appears to be the end of a long and sad chapter in the annals of white collar criminal enforcement.  Unlike takedown day in Las Vegas, however, there will be no front page story in the New York Times or the Post for that matter tomorrow reflecting the government’s decision today to move to dismiss the charges against the remaining defendants in this case.  Funny isn’t it what sells newspapers.

The good news, however, is that for these defendants, agents, prosecutors, defense counsel and the Court we can get on with our professional and personal lives without the constant strain and burden of three to four more eight week trials hanging over our heads.

I for one hope this very long, and I’m sure very expensive, ordeal will be a true learning experience for both the Department and the FBI as they regroup to investigate and prosecute FCPA cases against individuals in the future.

Two years ago, at the very outset of this case I expressed more than my fair share of concerns on the record regarding the way this case has been charged and was being prosecuted.  Later, during the two trials that I presided over I specifically commented again on the record regarding the government’s very, very aggressive conspiracy theory that was pushing its already generous elasticity to its outer limits.  Of course, in the second trial that elastic snapped in the absence of the necessary evidence to sustain it.

In addition, in that same trial, I expressed on a number of occasions my concerns regarding the way this case had been investigated and was conducted especially vis-a-vis the handling of Mr. Bistrong.  I even had an occasion, sadly, to chastise the government in a situation where the government’s handling of the discovery process constituted sharp practices that have no place in a federal courtroom.

Notwithstanding all of this water over the dam, and there has been a lot of water, I’m happy to see and I applaud the Department for having the wisdom and courage of its convictions to face up to the limitations of its case as revealed in the past 26 weeks of trial and the courage to do the right thing under the circumstances.

Having served at the higher levels of the Department, I know that that was not an easy decision.  They never are, when so much has been invested, and the agents and the prosecutors are so convinced of the righteousness of their position.  I for one however am confident this will be in the end a positive, if not painful, lesson that results in better prosecutions of individuals in the future under the FCPA.  As for the defendants, I hope the healing process is a swift one and that they get back to their normal lives in the very near future.

Finally, I would be remiss if I did not comment on the tireless and spirited effort by the defense counsel from all over the country who came here to try these very lengthy and complicated cases under difficult circumstances and some even pro bono.  Their hard work and effective advocacy are a testament to how strong our criminal defense bar is nationwide.

As so without further adieu I grant the government’s motion to dismiss.  The defendants are excused.”

Sleepless Nights

According to this recent article by Ashby Jones of the Wall Street Journal, FCPA enforcement is one of “three concerns costing big-company lawyers the most sleep.”

Briefings Complete

One of the bigger FCPA stories of 2012, and one that will reach into 2013 as well, are challenges by foreign defendants in two separate SEC Foreign Corrupt Practices Act enforcement actions.

Prior posts here and here have discussed the briefing in SEC v. Herbert Steffen (a former Siemens executives).

Prior posts here and here have discussed the briefing in SEC v. Elek Straub, Andras Balogh and Tamas Morvai (former Magyar Telecom executives).

Defendants in both actions recently filed reply briefs.

Steffen (here) argues in summary fashion, as follows.

“In its opposition, the SEC asks this Court to assert personal jurisdiction over a defendant: (1) who is a German citizen and resident; (2) who conducted no business in the United States; (3) whose only alleged U.S. “contact” resulted from the unilateral actions of another party; (4) whose allegedly improper conduct occurred entirely outside the United States; and (5) whose conduct was not aimed at and caused no injury in the United States. This request should be rejected. Because the SEC has not met its burden to plead legally sufficient allegations establishing personal jurisdiction over Mr. Steffen, its complaint must be dismissed. In addition, the SEC has failed to explain how its action against Mr. Steffen is not barred by the applicable statute of limitations, 28 U.S.C. § 2462. In addition, although the SEC acknowledges that the purpose of the statutory tolling provision is to ensure that a defendant does not evade U.S. prosecution by “fleeing to another country” where he is “difficult to locate and serve,” it ignores that Mr. Steffen did nothing to evade the SEC, and that the SEC was able to locate him and obtain an order to serve him by publication in Germany, the country of his nationality and residency. Under these circumstances, accepting the SEC’s argument would mean that claims against foreign-national defendants who reside abroad are perpetual, not subject to any time limitations. Finally, even if this Court were to accept a continuing violation theory for securities violations, it does not help the SEC’s case because Mr. Steffen did not take any unlawful acts within the limitations period. For all of these reasons, the motion to dismiss should be granted with prejudice.”

Straub, Balogh and Morvai’s reply brief (here) addresses many of the same jurisdictional and statue of limitations issues at issue in the Steffen challenge.  In addition, the former Magyar Telekom executive’s brief argues that: (1) the pertinent SEC filing the SEC relies upon in making certain allegations was not even filed with the Commission, (2) the SEC has failed to allege corrupt use of an instrumentality of interstate commerce by the defendants; and (3) the SEC has failed to allege the identity of the alleged foreign bribery recipients.

With both the DOJ and SEC bringing more FCPA enforcement actions against foreign actors – for instance in 2011 90% of DOJ individual prosecutions were against foreign nationals and 100% of SEC individual prosecutions were against foreign nationals – the challenges are noteworthy.  Particularly so because Judge Leon, in the Africa Sting case, rejected the DOJ’s jurisdictional theory against U.K. national Pankesh Patel (see here for the prior post) in what was believed to be the first instance of judicial scrutiny concerning FCPA jurisdiction against foreign nationals.

Africa Sting Lawyers Recognized

Two Africa Sting defense lawyers were recently recognized by Law360 as White Collar MVPs.

Michael Madigan (Orrick Herrington & Sutcliffe) represented John Gregory Godsey, who was found not guilty by the jury.  (See here for the prior post).  Commenting on the Africa Sting cases, Madigan stated as follows.  “This case stands out as a significant one. There are certain cases that come along that alter the system of justice and I think this is really one of them.”

In the Law360 article, Madigan was specifically cited for his leadership in leading defense discovery efforts which resulted in the FBI having to turn over its text messages with Richard Bistrong.   According to the article, the Africa Sting case was the ”first major criminal trial to achieve court-ordered production in discovery of thousands of text messages between FBI agents of the government’s key cooperating informant.”  As noted in the article – “The texts showed FBI agents joking with the informant that ‘you could sell snow to an Eskimo’ — a notion that undercut allegations that Godsey and other defendants were willing participants in a bribery scheme. The texts also revealed FBI agents wondering who would play them when Hollywood made a movie about the investigation.”

Eric Dubelier (Reed Smith) was also recognized for his work on the Africa Sting case, specifically his pro bono representation of R. Patrick Caldwell, a former secret service agent and Vietnam veteran, who was also found not guilty by the jury.

In the Law360 article, Dubelier stated as follows regarding his representation of Caldwell.  “Having spent time in the government myself and knowing people like Pat, I thought, You know what? If anyone deserves to represented, this guy does.  Pat really had held only two jobs his entire life: the first as a US soldier in combat, the second as a U.S. Secret Service agent.  His whole career had been in service to the U.S., but it had earned him nothing close to the resources he needed to defend himself against this prosecution. Providing Pat with the defense he deserved was simply the right thing to do.”

As noted by the Law360 article, “After the acquittals — and the mistrials of three additional defendants — and after a concerned jury foreman penned an open letter expressing deep skepticism about the case, the government ultimately dropped the case against the remaining defendants including those awaiting trial and three who already had pled guilty.”

See here for the February 6, 2012 guest post on FCPA Professor by the Africa Sting jury foreman.

Voluntary Disclosure

Willkie Farr & Gallagher FCPA attorneys Martin Weinstein, Robert Meyer and Jeffrey Clark recently published a new book, “The Foreign Corrupt Practices Act:  Compliance, Investigations and Enforcement.”

In this recent Metropolitian Corporate Counsel interview, the authors answer various questions, including the following.

Q: Do you advise your clients to self-report?

Weinstein: We are very cautious about self-reporting to the government. We certainly sometimes advise companies to self-report, but in general we believe that most companies can handle their compliance problems properly without disclosure or government involvement and can appropriately remediate compliance issues and be prepared to respond should the government ever inquire.  Companies across industries fix compliance problems – for instance, in a target company that they are acquiring or have just acquired – every day, without the assistance of the U.S. government.  This is good all around: it allows the acquiring company to proceed with the acquisition, raises the standard of compliance in the acquired company, and permits the government to deploy its enforcement resources where they are needed most. Our book clearly sets forth how to proceed down such a path. That said, the book also discusses the kinds of circumstances in which self-disclosure may be necessary or advisable and helps readers navigate through that fact-specific, critical strategic decision.

Small Bribes In Russia

Relevant to the question I often ask – do FCPA violations occur because companies have bribery as a business strategy or because companies are subject to difficult and opaque business conditions abroad  – is this recent Washington Post article concerning the prevalence of small bribes in Russia.

FCPA Satire

If you like satire, you must check out this post by James McGrath at his Internal Investigations blog.

*****

A good weekend to all.

*****

Richard Bistrong Reports To Prison

Paul Calli

This Johnny Cash song is an appropriate background song for this post.

Following a lifetime of lying , cheating and stealing, Friday night it all caught up to Richard Bistrong and he turned himself in to serve his 18 month prison sentence at the United States Penitentiary in Lewisburg, PA.   The Federal Bureau of Prisons makes that information available to the public here  and calculates his release date as January 15, 2014.

Bistrong, as you know from previous FCPA Professor posts, as well as articles in the New York Times and Washington Post, became a member of the team with the FBI and the FCPA unit at Main Justice – then led by Hank Bond Walther – to concoct what will perhaps go down as the most ill conceived and greatest failure ever in the enforcement of U.S. criminal law: the “Africa Sting” case.

Bistrong’s lifetime of drug transactions, bribery, tax evasion, prostitution crimes, predilection for “hard core pornography” (you can’t truly appreciate the impact of that phrase until you hear Mike Madigan from Orrick articulate it to a jury), is second to none and turned out to be merely a lead-in to his staggering moral transgressions and self-inflicted personal failures, all of which came out during the trial or in trial preparation.

Against this backdrop, it was not without drama when sometime in November 2011 during the second trial , after two years of pretrial litigation and DOJ’s unsuccessful prosecution that resulted in no convictions and a hung jury in the first Africa Sting trial (during which the government elected to not call its star witness), Bistrong entered the court room to begin a month of testimony.  It really was “all eyes” in the court room on the person about whom everyone had heard so much, and you could hear a pin drop.  After all, in a text message later introduced into evidence Bistrong wrote to Chris Farvour, his FBI handler, “tell Hank (Bond Walther) that I’m an ace on cross exam!”

I remember that after a real short time it became apparent that Bistrong was the most narcissistic person I had ever heard.  It wasn’t just that he could not tell the truth – I think everyone expected that eventuality – it was that he seemed to think he was above criticism and above everyone else.  He was smug and self-righteous.  He didn’t seem contrite at all.  He wanted to argue.  He gave the impression that he felt he was smarter than everyone else, especially than the lawyers cross examining him.  He gave a false portrayal of himself on the witness stand, and tried to get the jury to believe he was someone they could trust.  He tried to make forced eye contact with the jurors, and it was uncomfortable to watch him do so.  Heck, why wouldn’t he think he could pull off that manipulation one last time?  He had been doing it his whole life, including recently.  But it was perplexing, because Bistrong’s words, tone and demeanor recorded on tape and in text messages with his BFF’s in the FBI could not be reconciled with the Bistrong that he tried to sell while on the witness stand.  After a while many of the jurors turned away from him and couldn’t’ look at him even as he testified.  Those who looked at him to me seemed to be interested in him more as a psychology case study than as someone whose testimony they could ever trust.  As the jury foreperson wrote in his FCPA Professor guest post (here), “…more than one juror voiced concern that it would be unjust for the defendants in this case to be convicted when the government relied so heavily on Mr. Bistrong who freely admitted on the stand more illegal acts than the entire group of defendants was accused of…” and “the jury with near unanimity found nearly all of the prosecution witnesses to be evasive and combative.”  In the end, Bistrong’s venality and greed got the best of him.

I can’t imagine a more talented, committed, and passionate group of defense attorneys than the ones with whom I had the honor of trying the Africa Sting case.  It was a remarkable experience to watch them shine throughout, and vindicate their clients.  Notwithstanding all that legal talent, however, the most concise, poignant and important summary of this case came from the bench.   As United States District Judge Richard J. Leon wisely cautioned: “We certainly don’t want the moral of the story to be: Steal big. Violate the law big. Cooperate big.  Probation.”

I hope that everyone on the Bistrong team understands that.

Reading Bistrong’s recent comments in a Forbes article (here), it is clear Bistrong maintains the belief that he is a “victim” and “fallen hero” who did something noble.  In reality, nothing could be farther from the truth. I hope that prison is the place where Richard Bistrong is able to finally right his ship, come clean with himself and learns how to be truthful, and that he comes out prepared and able to be a productive member of society, during his three years on federal supervised release and beyond.

The manufactured Africa Sting case may be over, but it effects are still being felt.

Allied Defense Group (“ADG”) employed Mark Frederick Morales, one of the individuals charged in the case.  The company stated in its recent quarterly filing (here) as follows.

“In February and March, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. Since this time, the Company’s FCPA counsel has had several discussions with the DOJ and SEC regarding the agencies’ respective inquiries. Based upon these discussions, it appears likely that resolution of these inquiries will involve a payment by the Company to at least one of these government agencies in connection with at least one transaction involving the former employee of Mecar USA. At this point, the amount of this payment is undeterminable.”

As noted in this previous post, in January 2010, ADG agreed to be acquired by Chemring Group PLC.

Another publicly traded company that employed an Africa Sting defendant, Amaro Goncalves, is Smith & Wesson.  The company disclosed in its most recent quarterly filing (here) as follows.

“On February 21, 2012, the DOJ filed a motion to dismiss with prejudice the indictments of the remaining defendants who are pending trial, including our former Vice President-Sales, International & U.S. Law Enforcement. On February 24, 2012, the district court granted the motion to dismiss. We cannot predict, however, when the investigation will be completed or its final outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.”

Even though the individual Africa Sting cases are over, the case provided a point of entry into several companies and an entire industry and its effects are still being felt as demonstrated by the above disclosures.

Orthofix

This previous post discussed the July enforcement action against Orthofix International.  As noted in the post, the specifics of the DOJ’s allegations were not known as the information against Orthofix was filed under seal.  The information (here) was recently unsealed.  In summary fashion, the DOJ alleged as follows under the heading “corrupt conduct.”  “From [2003 through March 2010], with the knowledge of Orthofix Executive A [a citizen of Peru and legal permanent resident in the U.S. who was a senior manager of Orthofix Inc. (an indirectly wholly owned subsidiary) and responsible for sales operations in Latin America], Promeca [an entity incorporated and headquartered in Mexico and an indirectly wholly owned subsidiary of Orthofix International] and its employees paid approximately $300,000 to Mexican officials, in return for agreements with IMSS and its hospitals to purchase millions of dollars in Orthofix International products.”

IMSS is a social service agency of the Mexican government that provided public services to Mexican workers and their families and the Mexican Officials identified in the information are as follows.

Mexican Official 1 – a deputy administrator of Magdelena de las Salinas (a hospital in Mexico City that IMSS owned and controlled)

Mexican Official 2 – the purchasing director of Magdelena de las Salinas

Mexican Official 3  – the purchasing director of Lomas Verdes (a hospital in the State of Mexico that IMSS owned and controlled)

Mexican Official 4 – a sub-director of IMSS

According to the information, “Executive A knew of the payments and things of value [provided to the Mexican Officials] but failed to stop the scheme or report the scheme to Orthofix Interntional or Orthofix’s Inc.’s compliance department.”

Under the heading “Internal Controls” the information alleges, among other things, as follows.  “Orthofix International,which grew its direct distribution footprint in part by purchasing existing companies, often in high-risk markets, failed to engage in any serious form of corruption-related diligence before it purchased Promeca.  Although Orthofix International promulgated its own anti-corruption policy, that policy was neither translated into Spanish nor implemented at Promeca.  Orthofix International failed to provide any FCPA-related traning to many of its personnel, including Executive A.  Orthofix also failed to train Promeca personnel for years on the FCPA, to test regularly or audit particular transactions, or to ensure that subsidiary maintained controls sufficient to detect, deter or prevent illicit payments to government officials.”

The information charges one count of violating the FCPA’s internal control provisions.

Checking In On Wal-Mart

During the media feeding frenzy after the New York Times Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV.  At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.

Spitzer of course was right.

During its second quarter earnings call (see here for the transcript) Wal-Mart executives stated as follows.   ”Within core corporate, we incurred approximately $34 million in expenses related to third-party advisors reviewing matters involving the Foreign Corrupt Practices Act and we expect these expenses to continue through the rest of the year.”  Later in the call, the following was said.  “We also expect to incur approximately $35 to $40 million in expenses for the review of matters relating to the Foreign Corrupt Practices Act during each of the remaining quarters for this fiscal year.”

In other news, on the civil litigation front, as noted in this Reuters article “an Indiana union pension fund that owns shares in Wal-Mart Stores Inc has sued the company to gain access to thousands of internal documents related to allegations that a Wal-Mart subsidiary bribed Mexican government officials.”  According to the report, the lawsuit, filed in Delaware’s Chancery Court, alleges the “company had made a ‘woefully deficient’ production of documents following an earlier out-of-court demand and that hat documents were produced were ‘so heavily redacted,’ or blacked out, they were nearly worthless.”

Turning to Capital Hill, several prior posts have chronicled efforts by Representative Elijah Cummings and Henry Waxman to conduct a shadow investigation of Wal-Mart in the aftermath of the New York Times article (see here for the previous post).  As indicated in this recent press release and this recent letter the lawmakers are growing impatient.  In pertinent part, the letter to Wal-Mart CEO Michael Duke stated as follows.

“We are writing to give you a final opportunity to respond to our requests for information about allegations that your company violated the Foreign Corrupt Practices Act. Although you have stated on multiple occasions that you intend to cooperate with our investigation, you have failed to provide the documents we requested, and you continue to deny us access to key witnesses. Your actions are preventing us from assessing the thoroughness of your internal investigation and from identifying potential remedial actions.

During the course of our investigation, we have learned that Wal-Mart’s concerns about potential violations of the Foreign Corrupt Practices Act are not limited to operations in Mexico, but are global in nature. Your outside counsel informed us that, before allegations of bribery in Mexico became public, Wal-Mart retained attorneys to conduct a broad review of the company’s anti-corruption policies. This review identified five “first tier” countries “where risk was the greatest.” Wal-Mart then conducted a worldwide assessment of the company’s anti-corruption policies, culminating in a series of recommendations and policy changes based on those findings.

In addition, we have obtained internal company documents, including internal audit reports, from other sources suggesting that Wal-Mart may have had compliance issues relating not only to bribery, but also to “questionable financial behavior” including tax evasion and money laundering in Mexico.”

Pipeline Report

Add NCR Corporation and Expro International to the list of companies under FCPA scrutiny.

NCR

Global technology company NCR Corp. recently disclosed here as follows.

This previous post regarding the recent Pfizer enforcement action raised the following question(s).

Does anyone truly believe that the only reason Chinese doctors prescribed Pfizer products was because under the “point programs” the physician would receive a tea set?  Does anyone truly believe that the only reason Czech doctors prescribed Pfizer products was because the company sponsored educational weekend took place at an Austrian ski resort?  Does anyone truly believe that the only reason Pakistani doctors offered Wyeth nutritional products to new mothers was because the company provided office equipment to the physicians?

The questions were asked in the context of disgorgement remedies, but can also be asked in the context of product safety.  One can safely assume that if the enforcement agencies had any evidence to suggest that the products at issue jeopardized public safety, the enforcement agencies would have alleged such facts, as they occasionally do in FCPA enforcement actions (see Innospec for instance).

The absence of such allegations make this recent article by Online Pharmacy Safety foolishly speculative.  The article states as follows.

“[The conduct at issue in the enforcement action] puts the safety of consumers at risk.   If large companies are able to bribe their way to getting more business, and anticipate government officials to turn a blind eye, the wrong products could be getting into the hands of consumers worldwide.  The Pfizer products approved by foreign governments and prescribed by doctors may not have been the best product available, which could endanger consumers. Doctors put selfishness at the expense of patients, and the company was putting profits ahead of its public safety.”

Harvey Silverglate (author of Three Felonies a Day: How the Feds Target the Innocent) hit the ball out of the park with this recent Wall Street Jouranl op-ed.  Referring to the recent Gibson Guitar Lacey Act enforcement action and how the resolution documents muzzle the company (as is typical in FCPA NPAs and DPAs), Silverglate wrote as follows.

“Through these and myriad other techniques, federal investigator and prosecutors create an alternative reality that favors their own institutional interests, regardless of the truth or of justce.  All citizens and companies become subject to the Justice Department’s essentially unfettered power.  Remedying this problem cannot be left to the victims of this governmental extortion, because their risks are too high if they fight; nor will their lawyers likely blow the whistle, since the bar makes a tidy living by playing the game.  It is up to the rest of civil society to let the Justice Department emperor know that we see he is not wearing clothes.”

*****

A good weekend to all.

Bistrong, of course, was not charged in connection with the Africa Sting case.   As noted in this prior post, in February 2009 he pleaded guilty to real-world conduct including conspiring with others: (i) to obtain for his employer [Armor Holdings] United Nations body armor contracts (valued at $6 million) by causing his employer to pay $200,000 in commissions to an agent while knowing that the agent would pass along a portion of that money to a United Nations procurement officer to cause the officer to award the contracts; (ii) to obtain for his employer, a $2.4 million pepper spray contract with the National Police Services Agency of the Netherlands by paying a Dutch agent approximately $15,000 while knowing that the agent would pass along some of that money to a procurement officer with the Police Services Agency to influence the contract; and (iii) to obtain for his employer (although it was never obtained), a contract to sell fingerprint ink pads to the Independent National Elections Commission of Nigeria by making kickback payments to a commission official indirectly through an intermediary company.

In this letter to Judge Leon, Bistrong candidly acknowledged spending a portion of his adult life ”engaged in dishonest, deceitful and illegal behavior.”  (See here for a copy of Bistrong’s sentencing memorandum).

Nevertheless, in its sentencing memorandum (here) the DOJ stated as follows.  “Given Bistrong’s substantial assistance to law enforcement, the government recommends that Bistrong be sentenced within the guideline range to a sentence that includes a combination of probation, home confinement, and/or community service.”  After detailing Bistrong’s cooperation, the DOJ stated “put simply, the length, depth, breadth, and thoroughness of Bistrong’s proactive cooperation was extraordinary.”  As to the failure of the Africa Sting cases, the DOJ stated as follows.  “[T]he dismissals and acquittals were not caused by a failure of Bistrong’s cooperation or assistance. Like any other case involving cooperating witnesses, the government views Bistrong’s cooperation in the investigation and prosecution of others independently from the outcome of the Gabon case against others. Credit should be based on Bistrong’s truthfulness and the completeness of his cooperation, irrespective of the outcome of any particular investigation, case, or trial.”

As to the DOJ recommending no prison time for Bistong, Judge Leon remarked, as noted in this post by Mike Scarcella at the Blog of LegalTimes, that the DOJ was “asking for the moon.”  In this Wall Street Journal Corruption Currents post, Chris Matthews describes “a courtroom packed with prosecutors, agents from the Federal Bureau of Investigation and a handful of the men Bistrong helped to indict gathered to learn his fate.”  Matthews quotes Judge Leon as follows in rejecting the DOJ’s sentencing recommendation.  “We certainly don’t want the moral of the story to be: Steal big. Violate the law big. Cooperate big. Probation.”

Michael Madigan (Orrick – here) who represented an individual defendant in the Africa Sting case and who was present at yesterday’s sentencing observed as follows.  “Judge Leon had it right on in observing that Bistrong got a huge break on the front side by being charged only with a one count conspiracy despite years of serious criminal conduct both in the US and in England (where he received immunity, with the help of the DOJ).  The Judge’s rejection of the DOJ’s recommendation of probation was well warranted on the facts of the case.  For example, the evidence showed Bistrong made millions illegally and actually made $1.2 million while acting as a government informant which the government allowed him to keep for his personal use (such as paying for his luxury wedding at the Ritz Carlton overlooking the Pacific while he was serving his difficult duty as a government informant).  Bistrong was a one man crime wave who richly deserved his jail sentence.”

*****

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.

I was pleased to participate along with John Buretta (Deputy Assistant Attorney General,  Criminal Division, Department of Justice);  Charles Cain (Deputy Chief, FCPA Unit, Securities and Exchange  Commission); France Chain (Senior Legal Analyst,  Anti-Corruption Division, OECD);  Stanley Sporkin; and Eric Bruce (Partner,  Kobre & Kim  LLP).  The program was moderated by Thomas Gorman (Partner,  Dorsey & Whitney LLP) and Frank Razzano (Partner,  Pepper Hamilton LLP).

An audio version of the 90 minute program can be downloaded here.  Below is a breakdown of topics discussed along with the approximate minute mark(s) of the discussion.

4 – 11 minutes – Eric Bruce (defense counsel in the Africa Sting case) provides an inside view of the case.

11 – 13 minutes – discussion of 78dd-3 jurisdictional issues, including in the Africa Sting case

13 – 19  minutes – discussion of various issues including corporate FCPA resolutions, whether the DOJ is more of a regulator than prosecutor in FCPA cases, and the DOJ’s view of the Africa Sting cases including whether it learned anything from the cases

19 – 24 minutes –  Stanley Sporkin weighs in as to the origins of the FCPA’s books and records and internal control provisions, says that the DOJ was hunting in the wrong place in the Africa Sting cases and says that FCPA enforcement needs to get back to the basics of “blocking and tackling”

25 – 30 minutes – discussion of the “foreign official” issue in which the DOJ says that “no one really conveys that they are confused” about what “foreign official” means

30 – 38 minutes – discussion of facilitation payments and whether the enforcement agencies have ignored this statutory exemption

38 – 41 minutes – I raise the question of whether the FCPA has morphed into an all-purpose corporate ethics or governance statute and discussion regarding what is the best way to expand the FCPA – through charging decisions or through Congressional action

42 – 50 minutes – discussion of compliance issues and how best to reward corporate compliance as well as the recent Garth Peterson / Morgan Stanley case in which I pose to the DOJ and the SEC the question of whether the outcome would have been any different if the FCPA had a formal compliance defense

50 – 55 minutes – discussion of miscellaneous issues including transparency in enforcement, cooperation issues and self-reporting

55 – 67 minutes – further discussion of compliance issues, including whether a compliance defense would be a “race to the bottom” or a “race to the top,” whether there is a Washington D.C. beltway view on FCPA compliance, and whether the increase in FCPA enforcement is doing anything to properly incentivize business conduct

67 – 71 minutes – discussion of whether there is any practical difference in the corporate liability standards in the U.K. Bribery Act and the FCPA

72 – 76 minutes – further discussion of the Africa Sting cases

77 – 79, 83 – 86 minutes – DOJ responds to a question regarding FCPA guidance, including timing and specifics

80 – 83 minutes – discussion as to whether it is acceptable not to self-report if the company otherwise implements a variety of internal remedial measures

87 – 89 – once again the issue of whether the DOJ has learned anything from the Africa Sting cases

*****

If you are aware of other FCPA video or audio programs and would like to provide a similar annotation as to issues, please consider this an open invitation to do a guest post as many could benefit.

As noted in “What Percentage of DOJ FCPA Losses is Acceptable” (here) bringing criminal charges and marshalling the full resources of law enforcement agencies against an individual is an awesome power that our government possesses. That power alters the lives of real people and their families, sidetracks real careers, empties real bank accounts in mounting a defense, and causes often irreversible damage to real reputations.

David Painter has experienced this awesome power and felt its real effects.  In January 2010, David Painter was one of the twenty-two defendants charged in the Africa Sting case.  See here for the DOJ release.  Painter was among the group of Africa Sting defendants criminally charged, but the charges against him and others were dismissed after the DOJ suffered defeats and other setbacks in the first two trials and after the jury foreman in the second Africa Sting trial made this guest post on FCPA Professor.

This recent article from the U.K. Daily Mail tells Painter’s story.

The story tells how Painter (a U.K. citizen and former chief executive of Surrey based 3S - Security Support Solutions Ltd.) was taken down by an FBI SWAT team who thrust their semi-automatic rifles through his car door in Las Vegas, handcuffed him, and led him away at gunpoint.  Painter said “it was like having a bomb dropped on your life. There is a dark side to our world, a place beyond our control where governments and their agents can do what they want.  My life is the flotsam left in the wake of America’s obsession with policing the world. I have never contravened the rigorous controls and laws in my line of business.”  Painter adds “after I was arrested I felt as if I’d just dropped off the radar of my real life, as though I’d disappeared into the American prison system and would never be discovered.  I had no access to an international telephone or money, no lawyer, no useful communication from my own government. I got one visit from a British consular official in Las Vegas who had come to check up on my medical welfare.”

The story tells of Painter’s five week journey through the U.S. prison system (he was moved from Las Vegas to San Bernadino, California and from there on ‘Con Air’ to Oklahoma, from Oklahoma he was shuttled to Harrisburg, Pennsylvania, from where he was driven to his arraignment and bail hearing in Washington DC).  According to the article, “he slept on a concrete floor; was stripped naked, bent over and searched in public; shared an open latrine in a cell with two dozen inmates and was handcuffed, shackled and chained at the waist when he was moved.”  Painter said “There were moments of humor, but it was mostly a matter of survival. I was locked in cells with up to 90 other men, from Mafia types and Hispanic drug barons to fathers who’d committed mortgage fraud.   I learned not to ask to watch the news, not to snore, not to be embarrassed about my body and to zone out.  It was rough. I saw men being pepper-sprayed. I went hungry and thirsty and was perpetually cold. The whole experience is designed to make you feel precisely what you are: crushable.”

Yet Painter declined to plea bargain.  In the story, he states as follows.  “My dramatic arrest and the way I was treated in prison was to soften me up for a plea bargain. Ninety per cent of people in my situation accept one because of the almost insurmountable odds against fighting the limitless resources of the DOJ.  But I am not the kind of man to perjure myself in court. I could not confess to something I had not done. We sold our home and cashed up the fruits of a lifetime of work to fund the fight.”

Indeed, the story tells of Painter selling his home and liquidating his assets and pensions to pay for his legal fees.  As detailed in the story, in May 2010, Painter was permitted to go home to the U.K. to his wife and two children.  There “he worked on his defense as he would a job.”

The story closes by noting that David Painter and his family are “slowly righting the ship.”  Painter says, “I tell the story of the Gabon deal and think, you couldn’t make it up.  But, of course, they did.”