Private Investor Frederic Bourke Sentenced to Prison and $1 Million Fine

On November 11, 2009, New York Federal Judge Shira Scheindlin sentenced private investor and businessman Frederic Bourke to a prison term of a year and a day, a criminal fine of $1 million and three years supervised release for his involvement in a bribery scheme in Azerbaijan in the late 1990s.  Earlier this fall, the judge issued an opinion denying Bourke’s motions to enter a judgment of acquittal on both counts on which he was convicted and, in the alternative, a new trial. 

These developments mark the end of the trial phase of a case that has produced a number of landmark FCPA developments, including rare judicial opinions on a number of FCPA issues, the most important of which is likely the evidentiary standard required to satisfy the statute’s knowledge requirement.  The Bourke case represents the first time that federal prosecutors have secured the conviction of an individual at trial for conspiracy to make payments based on “willful blindness” to a substantial probability that the third party payee would use the funds to make payments to foreign officials, as opposed to having any actual knowledge that bribes were being paid.  As we have set out in our prior alerts (July 22, 2009; November 14, 2008; October 27, 2007; and November 8, 2005) these developments have significant implications for portfolio and direct investors, joint venturers and consortium members, as well as companies engaging a wide range of third parties in their business dealings more broadly.

The Bourke sentencing also marks the beginning of a string of sentences to be handed down to individuals who recently have been convicted of or pled guilty to FCPA and related charges.  In addition to any new substantive law to come out of these proceedings, the severity of the sentences handed down may well have a significant impact on the willingness of individuals to litigate FCPA cases to trial in the future.  For his part, Mr. Bourke’s sentence represents a significant departure from the 10-year prison sentence which the prosecutors had asked for, and likely reflects the particular facts associated with his case.  The first of these new round sentencings, that of former Congressman William Jefferson, took place on Friday, November 13.  In contrast to Bourke’s relatively light sentence, Congressman Jefferson received a 13-year prison term for his conviction on multiple corruption-related charges, including conspiracy to violate the FCPA, in connection with business dealings in West Africa.  Whether his sentence or that of Bourke’s is more indicative of things to come will be revealed in the coming weeks.

Bourke Case History

Bourke’s conviction and sentence arise out of his involvement in an investment consortium, Oily Rock Ltd. (“Oily Rock”), in which he had invested over $8 million in the late 1990s.  The promoter of Oily Rock was Victor Kozeny, a Bahamas-based Czech businessman known as the “Pirate of Prague” for his allegedly corrupt dealings in the Czech Republic in the early 1990s, who allegedly used Bourke’s and others’ investments to pay bribes to Azeri government officials to effect the privatization of the State Oil Company of Azerbaijan (“SOCAR”) and to gain a controlling interest in SOCAR, once privatized.

The U.S. Department of Justice accused Bourke of investing with knowledge that Kozeny would use the funds to make payments to the Azeri officials.  Bourke was charged with a number of offenses in connection with the investment, some of which were dropped or thrown out by the Judge as the case progressed from 2005 until the present.  Bourke stood trial this year in the Southern District of New York on charges of conspiracy to violate the FCPA and the Travel Act, conspiracy to engage in money laundering, and a single count of making false statements to federal agents.  The jury reached its verdict and Bourke was convicted on the FCPA conspiracy and false statement counts on July 22, 2009. 

Conscious Avoidance: A “Head in the Sand” Approach Results in Jail Time

Although each of the written opinions arising from the Bourke case (addressing tolling the statute of limitations while the government was waiting for evidence requested from foreign governments and the FCPA’s local law affirmative defense) are important given the lack of judicial guidance on the FCPA to date, the Bourke case is particularly noteworthy for Judge Scheindlin’s opinions regarding what constitutes “conscious avoidance” or “willful blindness”. In an opinion and order dated May 29, 2009, Judge Scheindlin permitted the Government to introduce certain evidence to establish Mr. Bourke’s knowledge of a bribery scheme carried out by Mr. Kozeny using Oily Rock funds. The Government had argued that direct evidence of Bourke’s knowledge that Kozeny was paying bribes to Azeri officials was not required in order to establish “willful ignorance” or conscious avoidance, and that circumstantial evidence (such as unrelated reports of acts of corruption by Kozeny and the reputation for corruption in the country and type of investment (privatized assets of former Soviet Bloc countries) in general and in the contemplated transaction in particular) were sufficient.  For his part, Bourke had argued that such generalized “red flags” could not support a criminal conviction.

Judge Scheindlin affirmed her May 29, 2009 opinion in her October 13, 2009 order denying Bourke’s motions for a judgment of acquittal and, alternatively, a new trial, finding that there was sufficient evidence for the jury to have found that there was “a high probability that payments [to Azeri officials] were illegal and [that Bourke] deliberately avoided confirming this fact.”  The order cited the same evidence that had been at issue in the May 29, 2009 opinion, and went on to cite evidence that Bourke and a co-investor had deliberately structured their involvement in the Oily Rock venture so that they would not learn about potential corrupt dealings they suspected Kozeny might be involved in.  It was on the strength of this evidence alone – of Bourke’s apparent deliberate avoidance of learning of Kozeny’s business practices, Bourke’s knowledge of general facts that suggested bribery was likely, and his failure to do due diligence or otherwise affirmatively satisfy himself that improper payments were not being made by Kozeny in connection with SOCAR – that likely landed Bourke in prison.

Implications of the Conviction and Sentence Going Forward

This case has brought to the forefront a number of significant issues facing both individuals and investors when dealing with third parties, especially in the context of risky investments.  First, the U.S. Department of Justice has now convinced a federal judge to ratify their aggressive position on the quantum of evidence required to convict under the FCPA’s standard for vicarious liability.  If Bourke fails in his appeal to the Second Circuit, companies and individuals should expect more FCPA investigations and prosecutions pursued by the Justice Department on the strength of circumstantial evidence only.

The case also reflects the potency of conspiracy charges in FCPA cases.  The government ultimately did not pursue a straight FCPA charge in the case, although it had initially signaled its intention to do so. 

The Bourke case highlights the need for companies - especially portfolio and direct investors – to conduct FCPA/anti-corruption-focused due diligence on their investment targets and the third parties investing for them, among other third party business relationships a company enters into.  It also highlights some of the difficult quandaries investors can face if they discover a partner in a venture in which they have made an investment is engaging in corrupt practices.  Remaining in the venture at that point without taking steps to address the issue may give rise to liability.

Last, the sentences about to be handed down in FCPA prosecutions - filmmakers Gerald and Patricia Green (December 17, 2009), former defense contractor employee Leo Winston Smith (December 18, 2009), former Willbros  executives Jason Steph (January 28, 2010) and Jim Bob Brown (January 28, 2010), former Willbros consultant Paul G. Novak (February 19, 2010)  and former Nexus Technologies Inc. partner Joseph Lukas (April 10, 2010) - are likely to affect defendants’ willingness to proceed to trial in FCPA cases in the future.  While Judge Scheindlin gave Frederic Bourke a comparatively light sentence, it is likely the product of the peculiar facts of the case (including that the investment was singularly unsuccessful) and the relative remoteness Bourke maintained from Kozeny’s corrupt dealings.  Indeed, Judge Scheindlin stated as she handed down Bourke’s sentence that her lenience was due, at least in part, to the fact that “after years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim, a crook, or a little bit of both.” [1]  The Greens and Messrs. Smith, Steph, Brown, Novak, and Lukas may not be as fortunate given the circumstances of their cases, especially in light of the 13-year sentence handed down on November 13, 2009 to former Congressman Jefferson, whose case is now (in)famous for the $90,000 in cash found in his freezer.  Of course, a tougher approach and more draconian sentences are likely to reduce individuals’ willingness to litigate FCPA cases to trial in the future.

We will continue to keep you apprised of developments related to FCPA enforcement, including the upcoming sentencing proceedings and any Bourke appeal.  If you have any questions or for further information, 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; Philip Khinda at 202.429.8189; Matt Herrington at 202.429.8164; Brian Heberlig at 202.429.8134; Andrew Irwin at 202.429.8177; Julia Court Ryan at 202.429.6418; David Lorello at 44(0)20.7367.8007; Alexandra Baj at 202.429.6478; Tom Best at 202.429.8079; Owen Bonheimer at 202.429.6266; Michael Pass at 202.429.8101; Brittany Prelogar at 202.429.5518; Sarah Lamoree at 202.429.6488; William Gordon at 202.429.8013; Vincenza Rabenn at 202.429.1305.

[1] David Glovin, “Bourke Gets One Year in Prison in Azerbaijan Bribery Case,” Bloomberg News, November 11, 2009.