The widely held perception that the Obama Administration’s enforcement of the Foreign Corrupt Practices Act (“FCPA”) would focus on the prosecution of individuals grew some legs last week. On Friday, July 10, 2009, after a six-week trial before United States District Judge Shira Scheindlin of the Southern District of New York, a jury convicted Frederic Bourke (“Bourke”), co-founder of handbag maker Dooney & Bourke, for conspiracy to violate the FCPA and the Travel Act, as well as making false statements to federal law enforcements officials. Bourke was acquitted of one count of money laundering.

Background

On October 6, 2005, the Department announced charges against several individuals for allegedly violating the FCPA, conspiracy, money laundering, and making false statements, in connection with a plot to bribe government officials of Azerbaijan. The indictment alleged that Viktor Kozeny (“Kozeny”), a Czech expatriate known as the “Pirate of Prague,” for purposes of acquiring privatization vouchers for state industries, along with a Swiss lawyer, Hans Bodmer (“Bodmer”), and an American associate of Kozeny, Thomas Farrell (“Farrell”), agreed to bribe, and did bribe, Azeri officials between 1997 and 1999, to encourage the privatization of the State Oil Company of the Azerbaijan Republic (“SOCAR”). The government also charged two U.S. investors, including Bourke, in the same indictment. Farrell and Bodmer previously plead guilty to charges related to the case and agreed to cooperate with the government in the prosecution of Bourke in exchange for reduced sentences.

According to the indictment,1 Kozeny devised a scheme to acquire SOCAR through the Azeri privatization program. Under this program, Azeri citizens received at no cost, vouchers that were freely tradable and could be used to bid for shares of state enterprises at auction. Foreigners intending to participate in the program were required to purchase both vouchers and matching “options” at an official government price. With two offshore companies, Oily Rock Ltd. and Minaret Ltd., Kozeny instructed Farrell to purchase privatization vouchers and options. Those purchases were primarily made using U.S. currency that was flown into Azerbaijan by private or chartered jets.

In August 1997, Kozeny and Farrell purportedly agreed with SOCAR and State Property Committee (“SPC”) Officials to transfer two-thirds of Oily Rock Ltd.’s vouchers and options to share with them the profits arising from the privatization of SOCAR. In exchange for the vouchers and options, the SPC Officials agreed to allow the Kozeny investment group to continue to purchase sufficient vouchers and options in order to acquire a controlling interest in SOCAR upon its privatization.

Among others, a Bourke investment vehicle known as Blueport International Ltd. subsequently invested approximately $8 million with Oily Rock Ltd. The indictment alleged that Bourke and others made the investments only after learning that Kozeny had previously “entered into a corrupt financial relationship with the Azeri Officials that gave those officials a personal financial incentive to permit Kozeny’s successful participation in the privatization of SOCAR.”2 The indictment further asserted that, not only did Bourke know senior government officials in Azerbaijan would be bribed with stocks, cash, and other gifts in order to manipulate the auction process, but also assisted with travel arrangements for two Azeri officials to receive medical treatments paid for by Oily Rock Ltd. Ultimately, the Azeri government decided not to sell SOCAR and Bourke, along with others, lost his share of the investment.

Pre-Trial Motions

On June 21, 2007, Bourke received some good news – Judge Scheindlin dismissed as time-barred all but the false statement counts in the indictment, including those charging conspiracy to violate the FCPA, the Travel Act, money laundering, and the substantive violations of the FCPA. On July 5, 2007, however, the government moved for reconsideration, arguing that, even under the court’s limited reading of 18 U.S.C. § 3292,3 the counts dismissed alleged conduct that occurred within the statute of limitations, i.e., after July 22, 1998. The court ultimately agreed with the government on July 16, 2007.4 As a result, it was back to the drawing board for Bourke.

In a second pre-trial motion, Bourke argued his reporting the bribes to Azeri officials in control of SOCAR’s privatization made the payments lawful because, under Azeri law, an individual who later reports a bribe can no longer be prosecuted for the payment. On October 21, 2008, Judge Scheindlin shed some light on the interpretation of the rarely invoked “local law” affirmative defense to the FCPA.5 The court disagreed with Bourke’s argument, noting that the proper “focus is on the payment, not the payer.” Thus, the court held that “there is no immunity from prosecution under the FCPA if a person could not have been prosecuted in the foreign country due to a technicality (e.g., time-barred) or because a provision in the foreign law ‘relieves’ a person of criminal responsibility.”6 The one saving grace for Bourke was the court’s ruling that he would be permitted to argue, if there was an evidentiary foundation, that he could not have violated the FCPA if he was “the victim of ‘true extortion.’”7 The court, quoting the legislative history of the FCPA, held that “’true extortion situations would not be covered’” by the Act because the corrupt intent element would be missing. In defining the meaning of “’true extortion,’” the court explained that “while the FCPA would apply to a situation in which a ‘payment [is] demanded on the part of a government official as a price for gaining entry into a market or to obtain a contract,’ it would not apply to one in which payment is made to an official to ‘keep an oil rig from being dynamited.’”8 The court reasoned that only the latter example was “’true extortion’” because in the former, the payer made a “’conscious decision’” and “could have turned his back and walked away.”9

Prior to trial, Bourke made one significant motion in limine to preclude the government from offering background evidence regarding the level of corruption in Azerbaijan. On May 29, 2009, the court denied the motion, finding that the government had adequately demonstrated its intention to present evidence of corruption in Azerbaijan and that Bourke could have learned as a “highly successful investor with significant access to professional services” that there was a high probability that bribes were being paid in that country.10 The court specifically cited evidence of conversations “in which Bourke was warned by his counsel that Azerbaijan was like the ‘Wild West’ and that doing business in Azerbaijan was like the movie ‘Chinatown,’ where there are ‘no rules[,]’” as relevant to the government’s charge of “conscious avoidance.” With that ruling in place, Bourke headed to trial.

The Trial and the Verdict

According to the press release issued by the Department,11 the evidence presented at trial demonstrated that, beginning in August 1997 until fall 1998, Bourke and others conspired to pay bribes to Azeri government officials. Prosecutors also established that, in June 1998, Bourke knew that Kozeny arranged for Oily Rock Ltd. to increase its authorized share capital from $150 million to $450 million in order for the additional $300 million worth of shares to be transferred to government officials. As charged in the indictment, prosecutors proved that Bourke both knew of lavish gifts and other things of value, as well as personally arranging for two Azeri officials to travel to New York and receive medical treatments paid for by Oily Rock Ltd.

In April and May 2002, Bourke was interviewed by the Federal Bureau of Investigation and stated that he was not aware that Kozeny made any payments to government officials in Azerbaijan. The government rested its case on the testimony of two witnesses – Farrell and Bodmer – both of whom testified that Bourke was well aware of the bribes. Indeed, Farrell testified that, in the spring of 1998, Bourke asked him on two occasions whether Kozeny was paying Azeri officials enough in bribes. Bodmer testified that, in 1998, he explained to Bourke the arrangement to give the Azeri government a twothirds share in the investment deal. The defense sought to downplay the testimony by pointing out inconsistent dates, however, one juror commented that the substance of the conversations was the critical factor rather than the timing of the conversations. Bourke did not testify.

The prosecution also argued that Bourke should have known that bribes would be paid in connection with this deal and that he intentionally “stuck his head in the sand.” The prosecution repeated with this theme in its closing statement, noting, “He didn’t ask any of his lawyers to do due diligence.” Furthermore, the prosecution highlighted the fact that other potential investors, such as the head of Texas Pacific Group, decline to invest citing possible FCPA red flags, whereas Bourke “was ready to jump in.”12 This appeared to be a significant factor in Bourke’s conviction because, as the jury foreman later stated, “It was Kozeny, it was Azerbaijan, it was a foreign country. [Bourke was] an investor. It’s his job to know.”13

Bourke faces up to five years in prison and a maximum fine of $250,00 or twice the gross gain or loss resulting from the violations on each of the two counts on which he was convicted. Bourke’s attorneys have indicated that an appeal is likely.

Kozeny, who was also charged in October 2005, has vehemently asserted that the FCPA does not apply to him as a foreign national. The government has vigorously pursued his extradition, but, in October 2007, the Supreme Court of the Bahamas blocked Kozeny’s extradition, ruling that the FCPA charges against Kozeny did not apply to him as an Irish citizen and that “American legislation” did not correspond with the Bahamian penal code.14 Kozeny currently resides in the Bahamas.

The Need for Effective Due Diligence

The Bourke conviction highlights the importance of conducting effective due diligence and implementing FCPA compliance policies and procedures. In this poor economy, it is enticing for many companies to scale back on conducting rigorous due diligence, compliance audits and internal investigations, unless a problem has arisen or the government has initiated an investigation. However, it is always more costly to do so at that stage. As Mendelsohn15 has stated, “companies need to be especially vigilant in this economic climate to not cut back [on compliance]. Our law enforcement efforts are not going to be scaled back, and so it would be, I think, a grave mistake for a company to take that path.”

The Bourke case is also a wake up call for experienced businessmen and women as well. When a deal too good to be true is presented to an employee or officer of a company, it is important to first conduct basic due diligence such as, at a minimum, determine the reputation of the person making the proposal, its nature and legitimacy, and the country or region involved to evaluate risk.16 Had Bourke, as a sophisticated investor, done so, it might have provided Bourke with a viable defense to the “knowing” element of a FCPA violation.

Comparatively, Bourke had a very minor role in the overall scheme and based his defense on the theory that he was a victim; however, the jury saw through his defense and expected him to learn more about the investment given the high risk nature of the country and identity of the major player in the deal.

Links to Relevant Documents:

Government’s Press Release Announcing Indictment

Government’s Press Release Regarding Guilty Verdict