On March 17, The Luck of The Irish: The Tenth Circuit Reverses The Convictions of Joseph Nacchio

St. Patrick’s day is a lucky day for the Irish– and on March 17th everyone is Irish. At least it may seem that way to the former Quest Communications CEO Joseph P. Nacchio. On March 17th the Tenth Circuit Court of Appeals handed down an opinion reversing Mr. Nacchio’s conviction on nineteen counts of insider trading and remanded his case for retrial to a new district court judge. U.S. v. Nacchio, Case No. 07-1311 (10th Cir. March 17, 2008). While Mr. Nacchio raised several issues on appeal, including questions concerning the exclusion of proffered classified evidence and relating to the jury instructions, the one that secured him reversal concerned the exclusion of defense economic expert Professor Daniel Fischel.

Professor Fischel was retained to testify as a defense witness regarding Mr. Nacchio’s stock trading patterns and the fact that they were inconsistent with possessing inside information. The key to the reversal was the adequacy of the defendant’s Criminal Rule 16 disclosures and the failure of the district court judge to allow any type of hearing or obtain any evidence relating to a Daubert issue.

Federal Criminal Rule 16 requires a defendant seeking to offer expert testimony to disclose that fact to the government along with the substance of the opinion and other information if the defense has requested similar information from the government. Absent a defense request, disclosure is not required.

In Mr. Nacchio’s case both sides agreed that disclosure was required. The defense furnished a brief description of the proposed testimony. That description did not include any description of Professor Fischel’s methodology. It did however reference the Professor’s vitae and identify his opinions and the basis for them. After briefing the district court, without argument, excluded the testimony.

The Court of Appeals reversed. In reaching its conclusion the Court of Appeals held that “the district court’s belief that Rule 16 also requires extensive discussion of a witness’s methodology was incorrect, and its exclusion of the evidence an abuse of discretion. “ Slip. Op. at 16 (emphasis original). Rule 16 disclosure, according to the court, is only designed to provide notice and “more complete pretrial preparation” by the opposing side. It is not designed to permit the court to make a Daubert determination as was done here. Here the Court held that the defendant’s disclosure was adequate because it set forth the substance of the proposed opinions, along with their basis and reasons for the opinions.

The Tenth Circuit viewed the district court’s ruling as confusing Federal Criminal Rule 16 with the expert disclosure mandated by the Civil Rules: “The district court’s error may have proceeded from confusion between the civil and criminal rules. Unlike under the civil rules, an expert in a criminal case is not required to present and disclose an expert report in advance of testimony. A Rule 16 disclosure must contain only ‘a written summary of any testimony’ and “describe the witness’s opinions, the bases and reasons for those opinions, and the witness’s qualifications’ quoting Fed. R. Crim. P. 16(b)(1)(iv).” Id. at 20. Accordingly, the district court’s comment that a Rule 16 disclosure is “pretty close” to a civil expert report is error.

The Court also rejected the government’s claim that in any event the proposed testimony would have been inadmissible under Daubert. Here there was no hearing or other submission in the district court on this question. Accordingly, the Circuit Court held “[t]he district court could not make an informed Daubert determination without hearing such testimony [regarding the basis for the testimony] or receiving submissions on the issue in some other form.” Id. at 23.

Finally, the Circuit Court conducted a careful review of the evidence to determine whether Mr. Nacchio could be retried. Following a detailed review of the evidence the Court concluded that there was more than sufficient evidence to sustain a conviction by a properly instructed jury. Accordingly, the case was remanded for retrial – but, at Mr. Nacchio’s request, to a different district judge. For now the luck of St. Patrick’s day and the Irish had visited Joseph Nacchio.

The FCPA: The New SEC and DOJ Enforcement Priority – Part VII, Industry Wide Investigations

Two hallmarks of the new FCPA enforcement priority is industry wide investigations and a focus on individuals. In the past the focus tended to be on individual business organizations. Now however both the SEC and DOJ have broadened their focus to key on entire industries while, at the same time giving increased attention to the prosecution of individuals.

Perhaps the largest industry wide inquiry centers on the United Nations Oil For Food Program (“OFFP”). According to the Report of the Independent Inquiry Committee Regarding the OFFP, produced by a committee chaired by former Federal Reserve Chairman Paul Volker, “Iraq manipulated the Program to dispense contracts on the basis of political preference and to derive illicit payment from companies that obtained oil and humanitarian goods contracts.” The report concludes that 2,253 companies made over $1.8 billion in illicit payments to the Iraqi government. Subsequently, a number of companies disclosed inquiries related to the program.

Following the issuance of the Report, the SEC and DOJ opened investigations. A number of enforcement actions related to the OFFP have been brought. Some of these actions have been brought with the assistance of other regulators such as the Office of Foreign Asset Control (“OFAC”). The prosecutions have involved contracts on both the oil and humanitarian side of the program. On the oil side, the cases typically involve the payment of “surcharges” to Iraq’s Oil Marketing Organization by the contracting company. On the humanitarian side the actions typically involve the payment of “after sales service fees” frequently paid by inflating the value of the contract and the agent’s commissions. Examples of the cases brought to date include the following:

El Paso Corporation: Based on the oil side of the program the SEC claimed the company paid $2.1 million in surcharges on 15 contracts on which the company made a profit of $5.4 million. The SEC action was settled with a statutory injunction prohibiting future violations of the books, records, and internal control provisions and the payment of $5.4 million in disgorgement (tied to the criminal settlement) and a civil penalty of $2.2 million. The criminal inquiry was resolved with a non-prosecution agreement under which the company agreed to forfeit $5.48 million which will be transferred to the Development Fund of Iraq sanctioned under a U.N. resolution. SEC v. El Paso Corp., Civ. Action No. 07-00899 (S.D.N.Y filed Feb. 7, 2007).

Textron, Inc.: Based on the humitarian side of the OFFP, the case centered on what the SEC claimed were “kickback payments” of $650,000 paid by two French subsidiaries as “after sales service fees” made by inflating the value of the contract and the agent’s commissions which the company later reimbursed. To resolve the SEC inquiry the company consented to the entry of a statutory injunction prohibiting future violations of the books, records and internal control provisions and the payment of $2.2 million in disgorgement, $450,000 in prejudgment interest and an $800,000 civil penalty. Textron also agreed to comply with certain undertakings regarding its FCPA program. The DOJ inquiry was resolved by entering into a non-prosecution agreement and agreeing to pay a fine of $1.15 million. SEC v. Textron, Inc., Civ. Action No. 07001505 (D.D.C. Filed Aug. 23, 2007); see also DOJ press release here.

Additional actions brought last year based on the OFFP include:

—SEC v. York International Corp., Civil Action No. 7-01750 (D.D.C. Filed Oct. 1 2007); U.S. v. York International Corp., No. 07-01750 (D.D.C. Filed Oct. 1, 2007).

—SEC v. Ingersoll-Rand Co. Ltd., Civil Action No. 07-01955 (D.D.C. Filed Oct. 31, 2007); U.S. v. Thermo King Ireland Ltd., No. 07-296 (D.D.C. Filed Oct. 31, 2007); U.S. v. Ingersoll-Rand Italiana S.P.A., No. 07-00294 (D.D.C. Filed Oct. 31, 2007).

—U.S. v. Chevron Corp., Civil Action No. 07-10299 (S.D.N.Y. Filed No. 14, 2007); (in addition to the SEC action the DOJ inquiry was resolved with a non-prosecution agreement; the inquiries by OFAC and New York County District Attorney’s Office were resolved with the payment of fines).

Finally, one settlement of note involve SEC v. Akzo Nobel, N.V., Civil Action No. 07-02293 (D.D. C. Filed Dec. 20, 2007) and the related DOJ inquiry. The SEC action was settled with a standard statutory injunction prohibiting future violations of the FCPA books, records and controls provisions, the payment of $1.6 million in disgorgement, $584,000 in prejudgment interest and a civil penalty of $750,000. The DOJ investigation concluded with a non-prosecution agreement. As part of this agreement DOJ deferred the payment of any fine in view of the expected action by the Dutch authorities. This is the first time DOJ has deferred to a foreign regulator in an FCPA case.

Next: Cases against individuals