Frederic Bourke, Jr., co-founder of accessory company Dooney & Bourke, lost another round in his long running battle against FCPA charges. The Second Circuit Court of Appeals affirmed the verdict of the jury, finding him guilty of FCPA conspiracy and making false statements charges. U.S. v. Kozeny, Docket No. 09-4704 (2nd Cir. Decided Dec. 14, 2011). The case may well serve as a warning to those involved in international business transactions.
The action traces to the late 1990s when Azerbaijan began converting state-controlled industries to private ownership through a voucher initiative. SOCAR, the state-owned oil company, was one of the assets under consideration, although most observers considered it unlikely that the government would privatize the entity because of its importance to the economy.
In the spring of 1997 Victor Kozeny formed two companies in connection with potential acquisitions from the government. One was the Minaret Group, an investment bank. The other was Oily Rock, an entity formed to purchase privatized assets from the Azerbaijani government. These entities were created shortly after Messrs. Kozeny and Bourke returned from a trip abroad to view potential investments, including those in Azerbaijan. At the time Mr. Kozeny was known as the Pirate of Prague for his shady dealings during the earlier privatization of state-owned industries in the Czech Republic. Mr. Bourke was aware of this reputation.
Mr. Kozeny and Thomas Farrell later met Ilham Aliyev, the then presidentâ€™s son and vice-president of SOCAR. Mr. Aliyev introduced them to others including the chair of the State Property Committee and his deputy, Barat Nuriyev with whom there were discussions about acquiring SOCAR. Mr. Nuriyev estimated the number of state issued vouchers that would be required to make the acquisition. He also stated that an â€œentry feeâ€ would have to be paid to various government officials including the president. That fee was intended to encourage the president to issue the decree necessary to privatize SOCAR. Arrangements were subsequently made for the officials to receive two thirds of the profits from the privatization of SOCAR without investing any money through a complex web of entities Victor Kozeny had his attorney create.
Subsequently, Mr. Kozeny sought outside investors. Mr. Bourke and other potential investors met with Mr. Nuriyev and toured the Minaret Group offices in Aberbaijian. One member of the group testified that the â€œgist of the meeting was to communicate [to] investors that [Kozeny] had a relationship with the government in some way.â€
Following a return trip to Baku, the capital of Aberbaijian, Mr. Bourke created an investment company called Blueport. He put in $7 million. He also recruited other investors. Eventually about $8 million was invested in Oily Rock. Following another trip to Baku Mr. Bourke was advised by his counsel that being linked to corrupt practices could expose the investors to FCPA liability. To shield the investors, two additional companies were formed. Mr. Bourke joined the board of each.
Victor Kozeny and his group continued making arrangments with government officials regarding the potential sale of the oil company. Those included increasing the number of shares in Oily Rock government officials would receive. He also had for Swiss bank accounts established for several Azeri officials including the daughter of the president. From May to September 1998 nearly $7 million in intended bribe payments were wired to these accounts. Mr. Bourke and others also arranged and paid for medical care, travel and lodging in the U.S. for Mr. Nuriyev and his son. Nevertheless, by the end of 1998 Victor Kozeny abandoned all hope of SOCARâ€™s privatization.
In 2005 Messrs. Bourke, Kozeny and others were indicted on FCPA charges. Mr. Kozeny fled to the Bahamas. Mr. Bourke was convicted following a jury trial.
Mr. Bourkeâ€™s appeal focused on the question of knowledge. Specifically, he objected to an instruction on conscious avoidance claiming that it lacked a factual predicate. He also argued that the instruction was erroneous since the government claimed that he actually knew about the bribes and, in any event, it improperly permitted conviction based on negligence.
The Second Circuit rejected each claim. Under established Second Circuit precedent a conscious avoidance instruction permits a jury to find culpable knowledge on the part of a defendant when the evidence demonstrates that he intentionally avoided confirming a fact. The instruction is only proper when the defendant asserts the lack of some specific aspect of knowledge required for conviction and the facts are sufficient to warrant giving the charge the Court held.
Here the governmentâ€™s primary theory was that Mr. Bourke had actual knowledge. Nevertheless, there is ample evidence to support giving the instruction in this case, according to the Court. This is because the testimony established that Mr. Bourke knew of the pervasive corruption in the country, Mr. Kozenyâ€™s reputation as the Pirate of Prague and that he created companies which were designed to shield him from liability. Tape recordings involving Mr. Bourke and another investor in which he voiced concerns about whether Mr. Kozeny and his company were paying bribes also support this conclusion. This evidence was bolstered by the testimony of Mr. Bourkeâ€™s attorney â€“ he waived privilege â€“ that he advised his client he could not just look the other way if he thought there was wrong doing.
The Court also rejected a claim that giving the instruction was inconsistent with the governmentâ€™s theory. The Court held that â€œthis same evidence [which supports the conclusion of conscious avoidance] may also be used to infer that Bourke actually knew about the crimes.
Finally, the Court rejected the contention that the conscious avoidance charge impermissibly permitted conviction based on a negligence theory. In this regard the Court concluded that â€œthe record contains ample evidence that Bourke had serious concerns about the legality of Kozenyâ€™s business practices and worked to avoid learning exactly what Kozeny was doing.â€
In the end it is clear that not knowing or taking steps to be shielded from knowing is insufficient. If there are serious concerns about a business transaction, it is better not to proceed than risk liability. Mr. Bourke was sentenced to 366 days in prison.