International Law Advisory - The Kozeny Saga Continues

In Rare Court Opinion Highlighting Statute of Limitations Issues,  Judge Dismisses Several Counts of an FCPA Indictment Against Individuals Allegedly Involved in the Azerbaijan SOCAR Scheme; Institutional Investor Gets Non- Prosecution Agreement Based on Weighing of McNulty Factors

On June 21, 2007, Judge Scheindlin of the Southern District of New York dismissed as time-barred several counts of the indictment of Frederic Bourke and David Pinkerton for FCPA and related violations in Azerbaijan.¹  The decision was based upon an interpretation of 18 U.S.C. § 3292, which provides that a statute of limitations can be tolled by a court for up to three years when the government is awaiting results of a request for information from a foreign government.  The court held that the only way a court could suspend the statute of limitations under 18 U.S.C. § 3292 was if the statute of limitations was still running when it considered the government’s application for tolling based upon efforts to gather foreign evidence.  In this case, the U.S. government applied to the Netherlands in October 2002 for information relating to  an investment scheme managed by Czech investment promoter Viktor Kozeny.  Kozeny allegedly sought to secure investments from a consortium of institutional and individual investors and to use the funds to make improper payments to officials to secure the right to invest in the anticipated privatization of the State Oil Company of Azerbaijan (SOCAR).²  Mr. Pinkerton is the former head of a private equity arm of American International Group (AIG).  The government did not apply to the court for tolling of the statute of limitations until July 2003, and the court did not grant the application until July 22, 2003.  Applying the five year statute of limitations for general federal crimes to the FCPA and several related counts, the judge found the statute of limitations expired between March and July 2003, after the application to the Netherlands but before the filing of the tolling application to the U.S. courts.  The judge found that because the statute of limitations had run before the application to the court to extend it, there was no way for the court to toll the already-expired limitations period.  The decision relied upon the plain meaning of section 3292, its legislative history, general statute of limitations policy considerations and the doctrine of constitutional avoidance.

The government appealed the June 21 decision in a brief filed August 21, 2007 in the Court of Appeals for the Second Circuit.  The government argued that the lower court wrongly disregarded parts of section 3292, and argued any application for extension “filed before the return of an indictment” would be proper, regardless of whether the statute of limitations had already ran before the application.  The government also argued that the court misconstrued the legislative history of section 3292, as well as the policy and constitutional considerations mentioned in the court’s opinion.  There will undoubtedly be more developments in this aspect of the FCPA jurisprudence as the appeal is fully briefed and argued, but a few observations about the case may be made at this stage:

• Increased Foreign Cooperation Prolongs Investigations.  FCPA investigations today feature much greater cooperation by foreign authorities with U.S. authorities than was the case even a few years ago.  The foreign evidence-gathering process is nonetheless one that takes significant time – often years, as the chronology of this case shows – that can substantially prolong the course of government investigations.

• The Five-Year Statute of Limitations on Criminal FCPA Violations Still Can Be Tolled for Foreign Evidence-Gathering.  Companies doing business in foreign countries should remember that section 3292 is still a powerful tool of prosecutors, allowing them to apply ex parte to the court to extend the statute of limitations up to three years in FCPA cases.  In addition, when a company is in voluntary disclosure mode or otherwise cooperating with enforcement officials, the issue may be avoided by the execution of a tolling agreement.  It should be noted that Section 3292 applies to the DOJ.  Other enforcement agencies, such as the SEC, cannot avail themselves of the benefit of section 3292. 

• Use of Conspiracy Statute to Reach Back and Charge Conduct Occurring More Than Five Years Earlier.  In addition to the DOJ’s ability to toll the statute of limitations for up to three years for foreign evidence-gathering, conspiracy charges can permit enforcement agencies to look back farther in time than direct use of the FCPA would permit.  For conspiracy, long a favored tool of prosecutors in FCPA cases, if overt acts are performed within the limitations period, the charge can reach back to cover earlier conduct.  Indeed, in this case, the court ultimately let stand the conspiracy charge for conduct that allegedly began in August 1997 because at least some of the conduct alleged to be part of the conspiracy occurred within the limitations period (i.e., after July 22, 1998). 

Hedge Fund Gets Non-Prosecution Agreement Based on Weighing of McNulty Factors, After Adopting an FCPA Policy and Forfeiting $500,000

Omega Advisors, a U.S.-based hedge fund that was a major investor in Kozeny’s consortium, has resolved its exposure in the case with a non-prosecution agreement.³  The hedge fund invested over $100 million in the scheme to obtain interests in the privatized SOCAR.  In 2004, a principal of Omega pleaded guilty to conspiracy to violate the FCPA and violating the FCPA.  Omega’s agreement included a $500,000 civil forfeiture penalty, as well as a requirement to continue to cooperate with authorities.   

• Continued Influence of the Thompson/McNulty Memorandum.  In its press release, the Department of Justice noted that its decision-making process was based on the “Principles of Federal Prosecution of Business Organizations” memorandum (commonly known as the Thompson or (successor) McNulty Memorandum).  The department noted that Omega’s cooperation, implementation of an FCPA compliance policy, lack of previous FCPA violations and the prosecution of the Omega principal were factors considered in reaching its non-prosecution decision. 

• Application of FCPA to Private Equity Firms and Other Institutional Investors.  This agreement highlights that enforcement authorities expect private equity firms to conduct FCPA due diligence in connection with their investments.  The decision not to prosecute Omega relied upon Omega’s adopting an FCPA compliance policy.  Omega also had to agree to forfeit $500,000. 

• Tools to Resolve a Criminal Enforcement Action.  This case reflects the DOJ’s continued use of a variety of tools to resolve FCPA cases.  The outcome here, a non-prosecution agreement, carried fewer ongoing commitments than other possible dispositions might have.  Here, apart from the forfeiture, Omega only was required to continue cooperating with the government.  In contrast, deferred prosecution agreements typically have included a lengthy list of actions the company must take to avoid prosecution.  It is unclear from the press release to what extent Omega’s past cooperation included waivers or privilege or some of the other extraordinary steps highlighted in recent enforcement actions, such as Baker Hughes.

Of the other indictees in this case, the alleged mastermind, Victor Kozeny, remains in the Bahamas after a Bahamian court denied a U.S. extradition request.  The United States plans to appeal that ruling.  Hans Bodmer, a foreign lawyer that advised the consortium, was convicted previously, while Tom Farrell, who assisted the consortium, and Clayton Lewis, formerly of Omega, previously entered guilty pleas to certain charges.  AIG, the institutional investor in the consortium for whom Pinkerton had worked, and Pharos Capital Management have not been the subject of any enforcement action.

For further information on this case, please feel free to contact Lucinda Low at 202.429.8051, Ed Krauland at 202.429.8083, Pat Norton at 202.429.8034, Erik Kitchen at 202.429.8132, Andrew Irwin at 202.429.8177, David Lorello at 44(0)20.7367.8007, Owen Bonheimer at 202.429.6266, Tom Best at 202.429.8079, Negar Katirai at 202.429.8028, or Sarah Lamoree at 202.429.6488.  Read more about our FCPA/Anti-Corruption Practice.

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_{1. United States v. Kozeny, Case No. 05 Cr. 518, (S.D.N.Y) Opinion and Order dated June 21, 2007 (dismissing on statute of limitations grounds all counts except false statements charge); United States v. Kozeny, Case No. 05 Cr. 518, (S.D.N.Y) Memorandum Opinion and Order dated July 16, 2007 (reinstating FCPA conspiracy count, money laundering conspiracy count, and one count of FCPA violation).}

_{2. For more information on the alleged scheme, seeU.S. Government Aggressively Prosecutes Individuals Allegedly Involved in Bribery Tied to Foreign Investment in Azerbaijan.}

_{3. DOJ Press Release, U.S. Announces Settlement with Hedge Fund Omega Advisors, Inc. in Connection with Omega’s Investment in Privatization Program in Azerbaijan, July 6, 2007.}