Giffen Case Bogged Down by Clashes Over Classified Information and Diplomatic Debates
By Lisa Brennan | August 16, 2010 9:38 pm

The misdemeanor guilty plea deal reached earlier this month between the Justice Department and American businessman James H. Giffen was a strangely meek windup to a vast oil bribery case that had begun in 2003 as one of the government’s most aggressive  international anti-corruption efforts.

The details of the government’s decision to end the case, which had languished through the tenures of four Attorneys General, have not been disclosed until now. It is a story of how a bold, but over-ambitious, prosecution foundered on the rocky realities of global politics, government infighting, shifting DOJ priorities and disappointing courtroom setbacks.

According to more than a half-dozen people involved or briefed on the case, the government lawyers stumbled over a combination of problems, including a long-running dispute between prosecutors and intelligence officials who were unwilling to share classified information about Giffen’s dealings with a sensitive ally: Kazakhstan.

In addition, American diplomats at the State Department also balked, according to the lawyers. They were uneasy with the prospect of offending Nursultan Nazarbayev, who was implicated in the bribe allegations. The repressive president of Kazakhstan is a strategic ally of the United States in a Central Asian region where Russia and China also vie for influence.

The years of behind the scenes struggles, coupled with adverse court rulings, slowly but irrevocably undermined the government’s original case charging Giffen and others with more than 60 felony counts. The setbacks seemed to weaken the resolve of prosecutors in Washington and the Southern District of New York, where attorneys are usually known for their swagger and combative style.

In the days since DOJ struck the deal with Giffen’s lawyers, the anti-corruption legal community has eagerly analyzed the settlement to draw conclusions about how the Justice Department under Attorney General Eric Holder may be changing tactics in its attack on overseas bribery and enforcement of the Foreign Corrupt Practices Act (FCPA).

Business law professor Paul Stephan, visiting at Columbia Law School this fall, said the outcome in Giffen does offer lessons on what to expect from the new DOJ chiefs. “So we’ve learned there are considerations that will get the government to fold,” said Stephan, of the University of Virginia Law School in Charlottesville, where he holds a full professor chair.

“They don’t invest the resources unless there’s a high probability of winning. Mark Mendelsohn’s not there,” Stephan said, referring to the former deputy chief of the fraud section who led FCPA prosecutions. “When you have a change of leadership, the new ones see things differently.”

The Deal

By the time Assistant Attorney General Lanny Breuer publicly announced plans in May to reassess old and unresolved FCPA cases,  top-level prosecutors at Main Justice and the Southern District of New York were deeply engaged in coordinating an exit strategy from the Giffen case, the granddaddy of them all.

Giffen’s case had been stalled almost since it began in 2003, when he pleaded not guilty to allegedly funneling $84 million in payments from U.S. oil companies to Swiss bank accounts of President Nazarbayev and others.

The conflicting pressures on prosecutors had been troublesome from the start. The State Department didn’t want prosecutors referring to Nazarbayev as a corrupt leader in their opening statement at trial though he had been identified in the indictment as a recipient of millions of dollars in bribes, said one former prosecutor.

The CIA didn’t want the defense to find out how they get their intelligence about Kazahkstan, a reluctance that tied up discovery, said a former state department lawyer. And the government saw no end in sight. After five pre-trial adjournments, the burden of prosecuting one of the largest FCPA cases in U.S. history had become untenable,  six current and former prosecutors said.

A series of court rulings had given Giffen an upper hand, the lawyers said, and the government decided to cut its losses — even if it meant, as it ultimately did, an epic about-face. In a highly unusual deal approved Aug. 6 by U.S.  District Judge William Pauley III, Giffen, 69, resolved the government’s complex bribery case against him with a tax misdemeanor.

A single FCPA count, once seemingly the centerpiece of the multi-million dollar case, almost vanished in the plea. It resurfaced in what appeared to be a face-saving deal for the government as a single count in a corporate plea by Giffen’s  Mercator Corp., an entity that had not even been charged until the Aug. 6 hearing. It was a humiliating retreat.

“What’s unusual here is this was an SDNY prosecution against an individual on FCPA, wire fraud and money-laundering charges, and the corporation takes the hit,” said a former SDNY prosecutor. “It defies the whole paradigm of how the Southern District, or as I like to call it, the `sovereign district,’ typically handles these cases.”

Breuer and SDNY U.S. Attorney Preet Bharara, with input from CIA and State Department officials, coordinated the end game through line attorneys long steeped in the case,  two current and former prosecutors said.

Just when the plea negotiations actually began is unclear, but a law professor who co-teaches a course on the Giffen case with former DOJ prosecutor Mendelsohn, speculates that the talks heated up once Mendelsohn made his May DOJ exit.

Breuer, through DOJ spokesman Laura Sweeney, declined to comment last week, as did Yusill Scribner, spokesman for Bharara. Mendelsohn was traveling abroad and unavailable.

Clifford Rones of DOJ’s Counterespionage Section, who came into the case in 2004, and assistant U.S. Attorney Lee Renzin, a SDNY line lawyer assigned in 2008, did much of the heavy lifting for the government in negotiating the deal. One or both are said to have held a series of meetings in New York with defense attorney William Schwartz of Cooley Godward & Kronish LLP.  A June 7 status conference was adjourned four times in anticipation of the settlement.

All three lawyers appeared at the Aug. 6 hearing before Pauley;  none of them responded to requests for comment for this story. Schwartz said of his client, who left the courtroom smiling after the Aug. 6 hearing:  “Jim Giffen is gratified to begin to put this matter behind him, more than seven years after the indictment in the case and 10 years after the investigation began.”

Breuer previewed the Aug. 6 Giffen plea when he said at a breakfast meeting in Manhattan on May 4 that the issue of resource allocation would govern DOJ’s decisions on old historical cases like Giffen’s.  DOJ, he said,  has had more success in recent years pursuing corporate bribery cases against big corporations that self-disclose their FCPA compliance problems and hire counsel to investigate potential violations.

Asked whether the DOJ would continue to prosecute older, document-driven FCPA cases, Breuer did not rule it out. “I think you’ll see a mix, frankly,” he said May 4.   He added that his fraud chief, Denis McInerney, a former SDNY prosecutor, knows the tension that old FCPA cases, such as Giffen and another involving handbag magnate Frederic Bourke Jr. and Czech entrepreneur Viktor Kozeny, can cause between prosecutors at Main Justice and their counterparts in SDNY.

A Winding Road to Settlement

Giffen, a former counselor to Nazarbayev, was arrested  at JFK Airport in March 2003 for paying bribes for four years starting in 1995 in the form of fur coats and cash to the Kazakh president and then-Prime Minister Nurlan Balgimbayev, also a major figure in the development of Kazakhstan’s petroleum resources.

A prominent oil adviser, Giffen had carved a lucrative niche for himself during the Cold War as an authority on U.S.-Soviet trade with an inside track to Nazabayev. Through Mercator, he acted as an intermediary for oil giants including Mobil Oil Corp., now part of Exxon Mobil Corp., in Central Asia in the 1990s.

The DOJ case, an extremely ripe seven years old, was begun under the Clinton administration, and had a high priority back then. But the case seemed to fall by the wayside under George W. Bush amid a quiet but insistent lobbying effort by the Kazakhs to remove Nazarbayev as a defendant.

The sputtering case seemed like it might receive a revitalizing boost in April with the assignment of a fresh team of prosecutors. Anirudh Bansal, co-chief of SDNY’s Complex Frauds Unit, and James Koukios, a lawyer in DOJ’s Criminal Fraud Section, were added, but Rones and Renzin did most of the work, said a former prosecutor familiar with the matter.

The plea deal, announced on a hot Friday afternoon in lower Manhattan, took FCPA practitioners and independent media outlets in Kazakhstan and Russia by surprise. Some said it sent a hypocritical message, one that was antithetical to the DOJ’s newly ramped-up zero-tolerance corruption policy. DOJ often uses the line to justify more voluntary corporate disclosure and stiffer penalties.

“The government can’t proclaim its zero tolerance toward corruption anymore with a straight face,” said a former SDNY prosecutor.  “It will now have to call it `low tolerance.’   The U.S. is supposed to pride itself as a leader on foreign corruption. Here, they blinked at the last minute. ”

The most damaging impact of the settlement may be felt, not in the U.S., but in Kazakhstan. The country may have had the most to lose from the abortive ending of the case, an independent reporter there said. Corruption has only gotten worse in Kazakhstan in the seven years since Giffen was indicted.

Over the years, Nazarbayev has poured money into promoting his image in the U.S. through advertising while imposing censorship at home. Independent broadcasters have been blacked out and newspapers shut down — many Kazakhs have had no access to information about the case or the role of their president as alleged recipient of millions of dollars in bribes.

Alexy Tikhonov, a Moscow-based reporter who has covered the Giffen case since its inception, said the government’s decision to end prosecution is disappointing to him and his colleagues in independent media who’ve been cut off from their Kazakh readers and viewers. “They effectively shut all the independent channels, and they pushed all the printing houses not to publish our newspaper,” Tikhonov said.

During the Aug. 6 plea hearing, Pauley set a Nov. 19 sentencing date and told Giffen, who faces a maximum term of six months in prison, to notify him if he plans to travel oversees before then. The judge then had some kind words for the government. (A transcript of the proceeding is embedded below.)

“I want to note that this has been obviously a very lengthy and protracted proceeding in which all counsel have worked long and hard, and I commend the prosecutors in having the courage to take another look at this case,” the judge said.  “I think it speaks in the highest traditions for the United States Attorney’s office and the Department of Justice.  But that’s all I will say for now.”

How Giffen Got His Leverage

Within a year of his indictment in April 2003, Giffen sought discovery to support a possible public authority defense, claiming that, by its actions, the U.S. government effectively authorized his conduct. The discovery requests, sustained over government objection, triggered the Classified Information Procedures Act, known as CIPA, which governs the handling of classified documents in criminal proceedings.

The process, derisively referred to as “gray mail” by some prosecutors, tipped the scales in Giffen’s favor even though privately law enforcement officials expressed skepticism that Giffen had been sought out by intelligence agencies to gather information beyond routine requests for debriefings on his travels and contacts in Kazakhstan.

Nevertheless, infighting between DOJ lawyers and the CIA caused long delays over over access issues and how much information should be turned over to defense lawyers.  It led to lengthy sealed court proceedings and in camera judicial reviews — a standard feature of CIPA proceedings.

When the government appealed a classified discovery order, in a pre-trial interlocutory appeal, it lost. The motion was filed in limine, which meant only the parties in the case could see it. Prosecutors had hoped to undermine Giffen’s public authority defense, but the appeals court ruled in a sealed January 2007 order that it had no jurisdiction over the issue, according to prosecutors who saw it.

Still, the appeals judges offered advice at the end of their opinion that cast serious doubt on Giffen’s defense, former prosecutors who saw it said.

One former DOJ prosecutor familiar with the dispute expressed the frustration over the unraveling of the case. “Giffen never said who in the CIA he reported to. And many of us believed his defense was bogus.  This was a case that prosecutors could prove on paper.  It wasn’t one where you had to worry about witnesses who might die off.”

The discovery disputes between DOJ and CIA continued through June 2009 even as Pauley approved a  government proposal to let defense counsel see certain documents.

Law professor Stephan, who worked as counselor at the State Department in 2006 and 2007, said CIA-DOJ infighting over discovery had little to do with national security issues. The CIA’s objection to releasing the analytical reports sought by Giffen’s defense team, he said, arose from agents not wanting Giffen to read their descriptions of intelligence sources and gathering methods.  “Agents don’t want the defendant getting hold of that information,” Stephan said.

In the end, Stephan said, the case had grown so complex and difficult to explain that it might have only confused a jury.

At the State Department, Stephan noticed evidence of the difficulties posed by the Giffen case, he said.  Yet last year’s conviction of the handbag magnate Bourke in a case that involved assertions that  current and former leaders of Azerbaijan were corrupt proves that the government can overcome the hurdles such cases present, and win, Stephan said.

“The Giffen defense has been a huge burden on the government,” Stephan said. “When I was in the State Department, we had a blanket of e-mail that would come in about the case.  It’s a very plausible scenario that Giffen, as the self-styled counselor to Kazakhstan’s president, would have had a record of CIA contacts.”

A question, raised by former SDNY prosecutor Marcus Asner of Arnold & Porter LLP at a recent Council on Foreign Affairs breakfast, alluded to the belief among some prosecutors in New York that prosecutors have gotten “bogged down going after individuals” and that the bang from cases like Giffen’s may not be worth the time and effort it takes to build them.

“When you have a complicated historical case and a well-funded defense, it’s very difficult for the government to make the case,” Asner, who declined to discuss the Giffen plea,  said last week.  “If there’s no cooperator, and if cooperation among government agencies is lacking and the government is unable to get a big head start, it’s very difficult to get what you need to prove your case beyond a reasonable doubt to the jury.”

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