Shortly after Barack Obama was elected president in 2008, he appointed a team of experienced white-collar criminal defense attorneys to head up the Department of Justice. Eric Holder, the co-chair of his campaign, got the top job of attorney general. Holder had been head of the Washington office of Covington & Burling, a powerful D.C. white-shoe law firm. Joining him from Covington was Lanny Breuer, who became head of the Criminal Division. Steven Fagell, also of Covington, came over to serve as the deputy chief of staff and counselor to Breuer. Jim Garland moved over to serve as counselor and deputy chief of staff to Holder.
In early 2009, the United States was grappling with the financial crisis and the mortgage-backed securities implosion. While many people argued about real criminal conduct on the part of some investment bankers, mortgage companies, and others in the financial sector, Breuer’s interest seemed to be elsewhere. When he took over as head of the DOJ’s 900-lawyer Criminal Division, “the substantive law most of interest” to him proved to be . . . the FCPA.33 Early on, he expressed his view that FCPA was one of his “top priorities.”34
Breuer’s and Holder’s interest in the anticorruption law is curious because of Covington’s role in actually drafting the bill. (The firm
USING THE LEGAL SYSTEM TO EXTORT35Source: www.sec.gov/spotlight/fcpa/fcpa-cases.shtml and http://www.justice.gov/criminal/fraud/fcpa/cases/2013.html.
brags on its website that “Covington lawyers have a unique command of anti-corruption laws, in part due to our role in helping draft the Foreign Corrupt Practices Act of 1977.”36) While at Covington & Burling, Holder and Breuer were both listed as “senior FCPA lawyers” (in a May 9, 2008, email alert sent out by Covington—entitled “FCPA-2007 Enforcement Trends”—that noted that Holder and Breuer “represent corporations before the DOJ, SEC and other government agencies, conducting internal investigations and developing corporate anti-corruption compliance programs”). At that time, anticorruption services were hardly a big business for Covington. FCPA enforcement cases were on the rise, but still relatively rare. Holder, Breuer, and their fellow attorneys at Covington were about to change that, radically expanding the scope of the law while aggressively using it as a tool to increase the demand for their own services and very possibly as a tool of political intimidation.
In 2009, according to the DOJ’s Criminal Division, there were at least 120 companies subject to FCPA investigations.37 A special unit was set up in the FBI to investigate FCPA cases. The SEC also set up a specialized unit, and it became a top priority for the Obama Department of Justice.38 Breuer bragged in November 2010 that the law’s “enforcement is stronger than it’s ever been—and getting stronger.”39
Legal scholars and professionals who tracked the law were befuddled. Why the sudden explosion of antibribery investigations coming out of Washington? One professor wrote about the SEC’s “unexplained aggressive enforcement” that was taking place.40 Another noted that “FCPA enforcement in recent years has expanded across almost every conceivable dimension.”41
One law professor expressed concern about the “recent radicalization of [FCPA] enforcement. . . . In short, the way the Act has been enforced lately has transformed the substantive law and shaken the business world.”42
The sort of cases that were being pursued and prosecuted bore little relationship to the bribery of foreign government officials to procure government contracts. Holder and Breuer were now charging companies and individuals “not alleged to have engaged in or even known about the wrongdoing.”43
The Justice Department cast a remarkably wide net that included expansive definitions of what a “government official” was and what constituted a “bribe.” How wide? Lanny Breuer admitted that essentially no company was immune from charges of misconduct, given the new standard. “There will always be rogue employees who decide to take matters into their own hands,” he said. “They are a fact of life.”44 Ignorance of what a midlevel employee or overseas consultant might be doing was no defense. Large corporations were charged because they “directly or indirectly” gave gifts to overseas individuals. These gifts didn’t need to be cash bribes. Offering “sightseeing trips” could get you into legal trouble.45 A large pharmaceutical company made a contribution to a legitimate charity in Poland, but was charged with wrongdoing because it had not accurately reflected the contribution in its financial statements.46 Royal Dutch Shell was charged with conspiracy to violate the antibribery law based “solely on the allegations that [its] express door-to-door courier service” offering expedited delivery into Nigeria paid money to Nigerian customs officials so equipment could be delivered quickly. Yet even if the company didn’t know about the payments, it was deemed to have received an “improper advantage” in the African country.47
These were not exactly traditional examples of bribery. There were no large cash payments to government ministers or luxury sports cars purchased for a midlevel bureaucrat. Now firms were facing possible criminal charges for giving such gifts to overseas individuals as “bottles of wine, watches, cameras, kitchen appliances, business suits, television sets, laptops, tea sets, and office furniture.” Pharmaceutical companies that offered even very small gifts to a physician, nurse, or midwife might now face criminal prosecution under the Justice Department theory that these health care workers are “government officials.”48
A former assistant chief of the DOJ Fraud Section noted that “some of the government’s cases appear to blur the lines or muddy the waters when it comes to the limits of the statute.”49 That was putting it mildly.
Corporations and executives, of course, were eager to know how they could comply. A large corporation with thousands of employees around the world needed to have an effective compliance program. But Breuer explained that setting up a compliance system was not a defense. “We can’t engage in some sort of formalistic solution from a script that says if you check the following six boxes you’re guaranteed this outcome,” he said.50 So how could companies comply with the law and avoid the possibility of jail? As Professor Amy Westbrook noted, they had no guidance from the government.51
“The FCPA is enforced like no other law,” wrote another legal scholar. “The FCPA simply means what the DOJ and SEC says it means and ‘FCPA law’ largely develops through privately-negotiated agreements, subject to little or no judicial scrutiny.”52 One partner at the power law firm Gibson, Dunn & Crutcher summarized the uncertainty: “In this environment, you need to anticipate that the [government] is going to pursue any legal theory that it feels is remotely supportable. To some extent, you have to expect the unexpected.”53
The Holder regime didn’t just target firms, it named names. As Lanny Breuer put it, “One cornerstone of our FCPA enforcement policy: the aggressive prosecution of individuals.”54 The prosecution of specific executives went up dramatically, putting directors, officers, and even shareholders at risk “even if they did not have actual knowledge of the corrupt nature of the payments.”55 Little surprise that “executives reportedly spend sleepless nights wondering if their company will be the next target of an FCPA enforcement action.”56
Even more troubling is how the Justice Department selectively enforced the law, evidence that Jackson’s warnings in 1940 were prophetic. Enforcement and penalties have been random. The Justice Department approach “penalizes similar bad actors with mismatched severity,” said one legal expert.57
When asked by a congressional committee to explain how they chose which companies to go after, Assistant Attorney General Ronald Welch wouldn’t provide a direct answer, but rather, referred to general principles of prosecution.58 The DOJ admitted in an FCPA guideline that it had “declined to prosecute both individuals and corporate entities” in several dozen instances without explaining exactly why.59
One lawyer, writing in the Northwestern Journal of International Law and Business, put it bluntly: FCPA enforcement, he asserted, “has been largely inconsistent with traditional ‘rule of law’ values that emphasize the need to clearly def
ine prohibited behavior, treat similar cases similarly, and apply a separation of powers structure.”60
What with the Justice Department’s aggressive and selective investigations and prosecutions, ambiguities in the law itself, and criminal investigations for small gifts of wine or cameras, the law has created real fear in the executive suite, which is what any extortion scheme is supposed to do: “throw fear.” Even the suspicion that you have violated the law can be expensive. It can drive down a company’s stock price, and class-action attorneys can file additional civil suits alleging executive “misconduct” whether the underlying charge is proven or not.
The question is: why? We have already seen why the Obama enforcers might not have prosecuted many bankers, and criminal prosecutors have laid off bundler Jon Corzine. They needed their campaign cash. But why, instead, prosecute so many transnational firms in such arbitrary ways?
The answer may not be hard to find. Panicked corporations and executives lawyered up—precisely what the extortionist had hoped for. Many corporations and executives turned to Holder’s and Breuer’s old law firm, Covington & Burling. The firm expanded its practice accordingly. Steven Fagell, who had migrated to the Justice Department from Covington to serve as counselor to Breuer, returned in 2010 to Covington, where he became the “co-chair of the global anti-corruption practice group.”61 Jim Garland, who had made a similar migration to serve as Holder’s counselor, also returned to Covington to work on anticorruption and white-collar criminal defense issues. As Holder and Breuer pursue their aggressive and widespread strategy of investigation and possible prosecution, Covington is doing a roaring business representing the very firms in the Justice Department’s crosshairs. The firm openly brags on its website that in 2010 it “successfully obtained two FCPA Opinion Releases from the U.S. Department of Justice” for its corporate clients, giving them guidance on particular issues. The firm also notes that it has performed “anti-corruption risk assessments for more than 30 global enterprises” and also represented an executive for KBR (Halliburton’s subsidiary), which was under investigation into alleged bribery. Covington also has an enormous practice helping corporations doing business in China avoid bribery charges.62
Other government lawyers who had helped ramp up enforcement of FCPA have left public service to join other firms. Mark Mendelsohn left the Justice Department and headed to a New York law firm to defend corporations from FCPA charges. On its website the firm brags that Mendelsohn “was responsible for overseeing all investigations and prosecutions under the FCPA” and that his “background and experience will be an enormous asset to our clients, which are facing increased scrutiny.” Mendelsohn is believed to be making $2.5 million a year in his new job.63
And the money to be made isn’t just in defending corporations under investigation. Many large companies, concerned about the law, voluntarily approach the Justice Department when they uncover possible violations, to ask for guidance. This is a business opportunity for well-connected law firms.
The Department of Justice requires many companies to hire a “monitor” to make sure they are complying with the ambiguous FCPA law. Usually the choice is someone who—yes, you guessed it—previously worked at either the Justice Department or the SEC. The fees for this kind of work can be enormous—up to $10 million a year or more. When the chemical firm Innospec pled guilty in March 2010 to technical violations of the law, Judge Ellen Segal Huvelle was furious at the high “monitoring fees” the firm was forced to pay. “It’s an outrage that people get $50 million to be a monitor,” she said in her Washington, D.C., courtroom. “It’s a boondoggle.”64
Attorney General Jackson had warned that prosecutors could pick the man and then find a technical violation to selectively target him. That appears to be precisely what the Justice Department and the SEC have been doing with the antibribery law. As two lawyers put it in the Securities Regulation Law Journal, the DOJ creates a circumstance where “vague standards and policies hinder compliance and make enforcement inconsistent.” This creates conditions for abuse.65 The department doesn’t choose to enforce the law broadly. Instead, it focuses on certain “targeted industries,” to whom it sends “sweep letters,” asking firms to come clean. The government makes it clear that investigators will go easier on these targeted firms if they turn in competitors. Hank Walther, the former assistant chief of the Foreign Corrupt Practices Act Unit at Justice, left in January 2012 (in order to work for the power firm Jones Day on antibribery compliance). He explained in an interview: “One of the purposes of DOJ’s use of industry-wide investigations is to encourage each company to be the first one in the door to admit its own wrongdoing, then to tell DOJ everything it knows about its competitors who are also engaged in similar forms of wrongdoing. . . . Companies that are in the government’s crosshairs are expected to disclose their own wrongdoing, then cooperate and provide information about their competitors.”66 As one legal scholar notes, however, these industrywide investigations can turn into “boundless enforcement agency fishing expeditions, the cost of which [is] borne by the companies subject to the sweeps.”67
How are the industries targeted? Justice Department and SEC officials won’t say. But it is interesting to note that the Holder regime’s first “sweep” letter went to the oil and gas industry just days after the midterm elections in November 2010.68 (In the elections held just days earlier, the oil and gas sector had given almost four times more money to the opposition party than it had given to the president’s party.69 Was that a factor?)
Hedge funds were also targeted after the 2010 elections. According to the Wall Street Journal, the SEC was launching a “sweep” of the hedge fund industry for possible FCPA violations. Federal investigators were apparently interested in whether hedge funds in the United States had provided “excessive entertainment or travel expenses” for employees of foreign government pension funds or government investment funds.70 Curiously, the hedge fund industry during the 2010 election had begun a dramatic about-face.71 In 2008 the industry had given over $13.2 million to Democrats and less than $6.6 million to the GOP. But in 2010, an off-year election, hedge fund firms donated $6 million to Republicans and $5.6 million to Democrats. Hedge fund managers continued their race to the right in 2012, giving $11.8 million to Republicans and only $3.8 million to Democrats.72 Were these two events related? Possibly. In October 2010, President Obama had told an audience bluntly, “We are going to punish our enemies and we’re gonna reward our friends who stand with us on issues that are important to us.”73
Other targeted industries included pharmaceuticals, tobacco, and arms manufacturers. (Each of these industries tended to favor Republicans over Democrats in 2010.) Why were these sectors selected? Politics? Legal strategy? A little of both?
I am not necessarily arguing that partisanship is paramount. Money may matter even more. Compare the FCPA cases with the Justice Department’s treatment of Wall Street firms—which may be populated by Republican voters but have produced (as we have seen) plenty of donations for the Obama campaigns. Remember that prosecutors looked into the affairs of MF Global, which lost $1.6 billion of its investors’ money and improperly mingled client funds with the company’s own capital, yet in the end brought no criminal charges. Moreover, after executive Jon Corzine testified before Congress that the mingling was unintended by him, the government indicated that criminal charges could not be brought absent any intent to commit fraud. But this standard should be held for foreign corruption as well: if an executive has no knowledge of or intention to bribe, the government should not pursue that individual. Yet for the Obama Justice Department, foreign corrupt practices apparently require neither intent nor knowledge.
A troubling pattern emerged in 2012 during the heated presidential election. The Justice Department chose to pursue investigations and possible criminal indictments against a group of individuals who were heavily involved in supporting Mitt Romney in the general election. These antibribery charges focused on the records portion
of the law, whether it was faulty record-keeping about donations to charities or actions by companies affiliated with the target firm, whose executives clearly did not have knowledge of wrongdoing. It should raise serious questions about Robert Jackson’s warnings about identifying the person first and then looking for a technical violation of the law. Consider the targets:
Koch Industries: The privately held company owned by Charles and David Koch came under investigation for potential FCPA violations after the company fired several employees from a European subsidiary who were involved in alleged payments to officials in Africa, India, and the Middle East.74 The Koch brothers were among the largest contributors to the effort to defeat President Obama in November 2012.
Las Vegas Sands, Inc.: This business is owned by Sheldon Adelson, and it suddenly found itself facing three FCPA investigations concerning its casinos in Macau, China. Adelson was a large and generous campaign contributor to Mitt Romney and to super PACs looking to defeat Obama (after having spent large sums on Newt Gingrich during the primaries). Adelson’s company would later disclose in SEC filings that “there were likely violations of the books and records and internal controls provisions” of the law, not the actual bribing of foreign officials.75
News Corporation: The global information and news corporation, headed by Rupert Murdoch—who was critical of Obama and owns Fox News—was investigated by the DOJ relating to the phone-hacking scandal in the United Kingdom using the FCPA. The law was intended for when government officials are bribed in exchange for government contracts. That of course didn’t apply in this case.
Extortion: How Politicians Extract Your Money, Buy Votes, and Line Their Own Pockets Page 14