The Department of Justice may be celebrating record settlements in enforcement actions against companies accused of violating the Foreign Corrupt Practices Act, but its success with FCPA cases that go to trial is mediocre at best.
In fact, more defendants—including companies—are taking on the Justice Department in court rather than agreeing to plead guilty and, according to law firm Gibson Dunn, many of them are winning.
Now FCPA experts expect more defendants to risk the expense and potentially stiffer penalties of going to trial, instead of agreeing to settle cases. “For so many years, FCPA enforcement rarely saw the inside of a courtroom,” says Mike Koehler, a law professor at Butler University. “Thankfully, that is beginning to change.”
In late December, the Justice Department suffered one of its biggest losses to date, when U.S. District Judge Richard Leon dismissed conspiracy charges against six defendants, stemming from the largest prosecution during the FCPA's 35-year history.
Divided into four groups of defendants, the criminal trials arose out of an elaborate undercover sting operation orchestrated by the Federal Bureau of Investigation and the Justice Department in December 2009, when federal agents arrested 22 executives in the military equipment industry for allegedly bribing a foreign official from Africa to secure defense contracts in that country.
Following the indictments, Assistant Attorney General Lanny Breuer touted a group of the cases as a “turning point” in FCPA enforcement, but it ended up turning in an unexpected direction. During the second trial of the series, Judge Leon, in an uncommon procedural move, dismissed the government's conspiracy charges against six of the defendants after 12 weeks of trial.
Expressing serious doubt and reservations about the government's conspiracy theory, Leon explained in his decision: “The Court does not believe the government has produced sufficient evidence to enable a rational trier of fact to conclude beyond a reasonable doubt that each of these six defendants participated in the overarching conspiracy charged in the superseding indictment in this case.”
“If you look at the allegations and the evidence, the defendants didn't know each other. Many of them have never met, never spoke to each other,” says Richard Cassin, managing partner of Cassin Law and author of an FCPA blog. “So part of that case was flawed from the beginning and was just lacking in evidence.”
The decision effectively exonerated defendant Stephen Giordanella, whose only charge against him was taking part in the conspiracy. The Justice Department said it will retry the remaining five defendants on FCPA violations this year, with the third and fourth set of defendants scheduled to go to trial this spring.
Some FCPA experts say they are surprised the Justice Department is appealing the case. “I think the last thing the Department of Justice wants for its FCPA enforcement program is to get appellate court decisions that will have precedential value,” says Koehler. Yet, by appealing the case, “you're essentially giving the Ninth Circuit the ability, if it wants to, to comment on FCPA enforcement and other theories.”
The cases also highlight a new trend in FCPA enforcement—aggressive tactics that are far more common in international drug enforcement cases and spy novels. Cassin adds that he doesn't believe the sting operation was even warranted. “I think the government's resources could be spent in better ways,” he says. “There are lots of potential FCPA prosecutions out there. It just maybe wasn't the best strategy.”
“For so many years, FCPA enforcement rarely saw the inside of a courtroom,” says who maintains a blog about FCPA issues. “Thankfully, that is beginning to change.”
—Mike Koehler,
Law Professor,
Butler University
The latest decision was not the only setback for the government in the Africa sting case. In the first trial that took place in July 2011, Judge Leon declared a mistrial for the first four defendants after the jury deadlocked. Three other defendants pled guilty to conspiracy charges in March and April 2011.
“A mistrial in the Africa Sting FCPA case represents a major disappointment for the DoJ, but for those who have followed the trial, it is no surprise,” Scott Fredericksen, a former DoJ prosecutor and current FCPA practitioner at law firm Foley & Lardner, stated in a client alert. “Many thought outright acquittal was a real possibility.”
Lindsey Dismissal
The Justice Department took another significant blow on Dec. 8, when California U.S. District Judge Howard Matz dismissed a conviction against Lindsey Manufacturing in the case U.S. v. Noriega. In May, a Los Angeles federal district court jury convicted the company and two senior executives of bribing government officials in Mexico—the first time in the FCPA's history that a case has ever gone all the way to a jury verdict.
In the latest decision, however, Judge Matz said the magnitude of government misconduct warranted the dismissal, providing this laundry list of reasons:
“[T]he Government team allowed a key FBI agent to testify untruthfully before the grand jury, inserted material falsehoods into affidavits submitted to magistrate judges in support of applications for search warrants and seizure warrants, improperly reviewed e-mail communications between one defendant and her lawyer, recklessly failed to comply with its discovery obligations, posed questions to certain witnesses in violation of the Court's rulings, engaged in questionable behavior during closing argument, and even made misrepresentations to the Court. Consequently, the Court throws out the convictions.”
“It's so unusual that after a jury verdict a judge would decide to dismiss the indictments,” says Cassin. Furthermore, it was dismissed with prejudice, meaning that unless the Ninth Circuit overturns Matz's ruling, the Lindsey defendants cannot be recharged, he says.
The fact that defendants are taking FCPA cases to trial and even winning, could embolden other defendants to fight the cases. “The DoJ is not infallible when it comes to enforcing any criminal statute, including the FCPA,” says Koehler. “There are many vulnerabilities. There are many aggressive enforcement theories.”
Still, so far the defendants who have rolled the dice with a jury are individuals or small companies. FCPA experts expect larger companies to continue to pursue the strategy of seeking non-prosecution agreements or a deferred prosecution agreement. Ninety-nine percent of companies are going to choose that option over going to trial, says Koehler. “You are not going to convince too many corporate counsel to put the DoJ to its burden of proof.”
2011 ENFORCEMENT STATISTICS
The following graph tracks the number of FCPA enforcement actions initiated by the Justice Department and the SEC during the past eight years.
Source: Gibson Dunn.
“No public company has ever challenged the FCPA in court and is not likely to,” agrees Cassin. “If an employee is found to have committed bribery, the company is automatically guilty, so mounting a defense would be extremely difficult.”
More to Come
The conclusion of many more significant FCPA appeals are on the horizon. In June, a California federal court will decide the fate of five former employees of California-based Control Components, who were accused of paying bribes to foreign officials in order to secure contracts in several countries.
In another notable case, the Eleventh Circuit will hear an appeal from Carlos Rodriguez, who was sentenced to seven years in prison in October 2011 for his role in a scheme to bribe officials at the Haiti state-owned telecommunications company.
The Haiti Teleco case will mark “the first time in FCPA history that an appellate court—as opposed to a trial court—is going to be squarely faced with the DoJ interpretation of ‘foreign official,'” says Koehler. Following the conclusion of that trial, scheduled to begin in July, two other defendants in the same case also will be tried.
What is most significant about the cases of Lindsey, Control Components, and Haiti Teleco is that defense lawyers in each case asked the judges to dismiss FCPA accounts due to the ambiguity around the term “instrumentality.” The FCPA prohibits U.S. companies and employees from paying bribes to foreign officials to obtain business abroad, but the law vaguely defines “foreign official” to mean an “officer or employee of a foreign government or any department, agency, or instrumentality thereof.”
Defense attorneys argued that foreign state-owned enterprises—as opposed to government agencies—should not be covered by FCPA because state-owned entities are not an instrumentality. In each case, however, the judges denied the motion and adopted the DoJ's expansive definition. “That was a very important development in 2011,” says Cassin.
2012 hasn't started off well for those who hope to challenge the Justice Department's definition of foreign officials. On Jan. 5, Texas District Judge Lynn Hughes denied John O'Shea's motion to dismiss based on the defense's argument that employees of Mexican utility Comision Federal de Electricidad are not “foreign officials” under the FCPA.
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