by T. GormanPosted on Posted in SECActions

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 president’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 “entry fee” 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 “gist of the meeting was to communicate [to] investors that [Kozeny] had a relationship with the government in some way.”

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 SOCAR’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. Bourke’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 government’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. Kozeny’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. Bourke’s attorney – he waived privilege – 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 government’s theory. The Court held that “this 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 “the record contains ample evidence that Bourke had serious concerns about the legality of Kozeny’s business practices and worked to avoid learning exactly what Kozeny was doing.”

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.

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by T. GormanPosted on Posted in SECActions

In Congressional hearings over the past two years, DOJ officials have faced repeated questioning about the lack of FCPA prosecutions against individuals. While the DOJ and the SEC have negotiated FCPA settlements involving huge payments by the likes of Siemens AG, BASF, JGC and other international giants, those cases have yielded few prosecutions against the individuals alleged in the court papers to have been involved.

Now however the DOJ, along with the SEC, has a partial answer to the questions: Eight former senior executives and agents of Siemens were charged with criminal violations of the FCPA by the Department of Justice. U.S. v. Sharef, 11 Crim 1056 (S.D.N.Y.). Seven of those executives were also charged by the SEC in a parallel civil action. SEC v. Sharef, 11 CIV 9073 (S.D.N.Y. filed Dec. 13, 2011). One former executive settled with the SEC.

The actions center on conduct first revealed in the record setting FCPA settlement in 2008 involving Siemens A.G. The allegations in the criminal indictment and the civil complaint arise out of commitments by Siemen’s executives and agents to pay over $100 million in bribes to Argentine officials to win a $1 billion contract. Named as defendants in the indictment are Uriel Sharef, a former member of the central executive committee of Siemens AG; Herbert Steffen, a former CEO of Siemens Argentina; Andres Truppel, a former CFO of Siemens Argentina; Ulrich Bock, Stephan Singer and Eberhard Reichert, former senior executives of Siemens Business Services or SBS; and Carlos Sergi and Miguel Czysch, intermediaries and agents of the company.

The conduct traces to 1994 when the government of Argentina issued a tender for bids for the DNI project which was to create a new system of national identity booklets with state of the art national id cards. During the bidding process the defendants and others committed Siemens to paying about $100 million in bribes to officials of the Argentine government, members of the opposition party and candidates for office who were likely to come to power during the project. Approximately $31.3 million was paid after March 12, 2001 when Siemens became a U.S. issuer. The defendants used various means to conceal the payments including 17 off-shore shell companies. The project had an estimated value of $1 billion over its life time. In 1998 the project was awarded to a special purpose subsidiary of Siemens.

In 1999 the government suspended the project. When a new government came to power in Argentina, the defendants are alleged to have committed Siemens to paying additional bribes to the new officials. Existing obligations to other officials were also paid.

Nevertheless, in May 2001 the project was terminated. In an effort to recover the lost profits on the project, the defendants caused Siemens to instituted an arbitration against the government of Argentina in Washington, D.C. During that proceeding the fact that the contract was secured through the payment of bribes was suppressed. At the same time Siemens continued to fulfill its obligations to various government officials by making the promised bribe payments in part conceal its activities according to the charging papers. Indeed, payments were even made through a related arbitration instituted in Switzerland by agents of the defendants. Siemens prevailed in the Washington arbitration, securing an award of about $217.

In 2009, following a change in management and the initiation of proceedings by the Munich prosecutors office, the company began cooperating with the DOJ and the SEC as well as German prosecutors. At that time the scheme first was revealed. The company decided to forego the right to the arbitration award.

The indictment alleges violations of the FCPA, conspiracy to commit wire fraud, conspiracy to commit money laundering and substantive wire fraud. The SEC’s complaint alleges violations of Exchange Act Sections 30A, 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5). Both actions are pending.

The SEC settled with defendant Bernd Regendantz, the former CFO of SBS from February 2002 to 2004. He is alleged to have authorized two bribe payments totaling about $10 million. Mr. Regendantz consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 30A and 13(b)(5) and from aiding and abetting violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). He agreed to pay a civil penalty of $40,000 which was deemed satisfied by the payment of a €30,000 administrative fine ordered by the Public Prosecutor General in Munich, Germany.

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