On December 1 2011 US District Court Judge A Howard Matz vacated the
conviction of and dismissed the indictment against Lindsey Manufacturing
Company (LMC) and two individual co-defendants, Keith E Lindsey and
Steve K Lee, because of prosecutorial misconduct. Informally referred to
as the
Lindsey case,
(1)
it was the first since the enactment of the US Foreign Corrupt
Practices Act in which a corporate defendant was tried and convicted for
violations of the act.
(2)
In dismissing the indictment with prejudice, the judge harshly
criticised the prosecution team for having made so many varied
"mistakes" over a lengthy period between 2008 and 2011 that "they add up
to an unusual and extreme picture of a prosecution gone badly awry".
(3)
The judge detailed in his order what he found to be prosecutorial
transgressions that were sufficiently serious to warrant dismissal with
prejudice. In taking such action, the judge distinguished his criticism
of the prosecution team by pointing out that:
"In this Court's experience, almost all of the prosecutors in the
Office of the United States Attorney for this district consistently
display admirable professionalism, integrity and fairness."(4)
The Department of Justice has filed a notice of appeal in the case.
Background
Following a five-week trial, on May 10 2011 the defendants were each
convicted on one count of conspiracy to violate the Foreign Corrupt
Practices Act and five counts of Foreign Corrupt Practices Act
violations. The jury deliberated for one day before returning its
verdict. The defendants were charged with having bribed two high-ranking
officials of Mexico's state-owned utility company, Comisión Federal de
Electricidad (CFE), to obtain contracts for LMC. Specifically, the
defendants were charged with having used a Mexican national named
Enrique Aguilar
(5) and his company Grupo International de Asesores SA to funnel the alleged bribes to the CFE officials.
The case was closely watched and is noteworthy for a number of
reasons. Firstly, it was the first Foreign Corrupt Practices Act case in
recent history in which a corporate defendant had chosen to litigate
the government's charges to verdict. Secondly, several seminal issues
were addressed, including the government's broad interpretation of
'foreign official' and 'instrumentality' under the act. The judge ruled
against the defendants on those issues, signalling a judicial
willingness to side with the government in its aggressive stance on
substantive interpretation of the act. Thirdly, the case was heavily
litigated by both sides, with the defendants having brought complaints
of what they claimed to be prosecutorial misconduct to the court's
attention on several occasions before, during and after trial. Before
the ruling, while the judge had shown concern during trial with certain
actions taken by the government, he noted in his order that he had given
the prosecution team significant leeway, citing strong judicial
reluctance to find intentional prosecutorial misconduct.
(6)
Lastly, despite the cited reluctance, the judge ultimately and "with
deep regret" found in this case that the prosecution "was marred by" a
wide "range of misconduct" and therefore threw out the convictions of
the defendants.
(7)
The court also cited its own failure during the fast-paced – and at
many times acrimonious – trial in failing to see "the proverbial forest
for the trees", stating that "it was difficult to step back and look
into whether what was going on reflected not isolated acts but a pattern
of invidious conduct".
(8)
The order stated that several instances of misconduct on the part of
the government "undoubtedly affected the verdicts and thus substantially
prejudiced the Lindsey Defendants".
(9)
Findings of pre-indictment misconduct
False and misleading warrant affidavits
The judge found that an affidavit executed in order to
obtain a search warrant for LMC's business premises contained false
statements. Specifically, the court found that in more than one place
the affidavit stated that LMC had made payments to another
Aguilar-controlled company when that was not the case.
(10) The judge held a pre-trial hearing on the matter under
Franks v Delaware
(438 US 154 (1978)) to address the false statements and determine
whether the warrant should be voided. At that hearing, according to the
order, the Federal Bureau of Investigation (FBI) agent who executed the
final affidavit disclosed that one of the prosecutors had inserted the
false statements into the agent's final executed affidavit without the
agent's knowledge.
(11)
The judge ultimately ordered production of all 14 drafts of the
affidavit, after which it was revealed that the first 12 drafts did not
contain the false statements. Nevertheless, at the
Franks hearing on the affidavit the judge found probable cause without the false statements and declined to void the search warrant.
(12)
In recounting the various acts of what the court now found to have been
misconduct, the order also noted that the false language at issue was
contained in five other affidavits executed after the first affidavit,
and had been used to support search or seizure warrants in the case.
The judge also noted that the first search warrant affidavit was
additionally misleading in what it did not contain. He explained that
during the
Franks hearing on the first affidavit, the
government also disclosed for the first time that the affidavit had
failed to include the fact that approximately $430,000 in the Grupo
account used to fund the alleged bribes to the CFE officials came from
someone other than LMC. The order indicates that it was this information
that led the court to require the prosecution to produce all drafts of
the affidavit.
Warrantless search of LMC buildings
The judge noted that FBI agents compounded the harm caused by the first
affidavit containing the false information by searching not only the LMC
building covered by the warrant, but also two LMC buildings that were
not covered by the warrant.
Purposeful insertion of improper language in search warrant
The order also revealed that the FBI improperly reviewed electronically
stored information found on seized LMC computers as a result of improper
language in the search warrant. According to the judge, the language
authorised the case agents – instead of a "filter" team – to review the
electronically stored information. The court noted that it had
previously found the error to be attributed to "clumsy drafting, not bad
faith". However, in the order, the judge stated that although he still
found:
"that this violation was not invidious . . . the improper
language . . . was not present in 11 of the 14 versions of the warrant,
thereby permitting the inference that the Government purposely inserted
it in the final version."(13)
Grand jury testimony of FBI agent
The judge was particularly troubled by the grand jury testimony of one
of the FBI agents, who testified before the grand jury four times in
order to obtain the indictment against the defendants. The order
addressed six instances of what the court held amounted to false or
misleading testimony
(14):
- During two of the agent's grand jury appearances, the prosecutors
displayed a chart connecting in an unbroken line both LMC and a company
from another Foreign Corrupt Practices Act investigation to both
Sorvill, the alleged intermediary in the other investigation, and Grupo.
The court found that by doing so, the agent's testimony "suggest[ed] a
non-existent link between LMC and Sorvill" and was similar to the false
statements regarding Sorvill that were contained in the first search
warrant affidavit.(15)
- Regarding a July 3 2006 contract between LMC and Grupo, the agent
testified that the contract was created and executed in response to an
Internal Revenue Service (IRS) audit which questioned the payment of 30%
commissions to Grupo. The judge corrected the record, saying that "In
fact, LMC had no notice of any audit when that contract was executed,
and the IRS audit that LMC did learn about later on did not relate to
tax year 2006 or to commissions".(16)
- Before the grand jury testimony, the agent had received copies of
several contracts totalling $8 million that LMC had entered into with
CFE before retaining Aguilar. The contracts were either in English or
translated into English. In response to a grand juror's question as to
whether Lindsey had a history of winning CFE contracts, the agent
nevertheless testified that LMC did not have much business with CFE
before Aguilar became LMC's sales representative.
- The agent testified that in response to FBI questioning conducted
when the search warrants for the LMC premises were executed, Lee said
that he "[d]idn't want to know. Just didn't want to know" what the 30%
commission (to Grupo) was going to be used for.(17) The judge noted that:
- the agent was not present at the interview of Lee;
- the FBI's memorandum of that interview contained no such statement; and
- the prosecutors acknowledged that Lee never made such a statement.
- The agent testified to the grand jury that in response to an IRS
audit, Lee told LMC's bookkeeper to reclassify the Grupo commissions
before turning documents over to LMC's accountant. The conversation
between Lee and the accountant was in fact not related to an audit and,
with one possible exception, the commissions were not reclassified.
- In response to a question from a grand juror, the agent testified
that as much as 90% to 95% of the funds in the Grupo account came from
LMC. However, in an earlier affidavit, the agent had accurately stated
that LMC's deposits into Grupo's account totalled only approximately 70%
of the funds. The judge noted that the "material difference between
these sworn statements is something even [the FBI] acknowledged at
trial".(18)
The judge made special note of the testimony discussed in these last
four points; all were given during the agent's final appearance before
the grand jury on October 21 2010, the day on which the indictment was
returned against the defendants. The judge found that each was
"indisputably material", having been reflected in the government's
theories of the case before the grand jury and at trial. The judge also
pointed out that some of that testimony was a direct response to
questioning from the grand jury.
(19)
Finally, the order cited potentially exculpatory omissions in the
agent's grand jury testimony. Although the prosecution correctly argued –
and the judge acknowledged – that the government was not obligated to
present exculpatory evidence to the grand jury, the order stated that:
"While viewed in a vacuum, the Government…is correct…the
omissions are not irrelevant because [the standard to be applied for the
dismissal motion] is whether, in its totality the Government's conduct
was so improper and harmful to the Defendants as to have violated their
rights, undermined the very foundations of judicial integrity, or
otherwise been so egregious as to require a deterrent sanction."(20)
Findings of post-indictment misconduct
Failure to produce agent's grand jury testimony
In discussing what he considered to be additional misconduct following
the indictment, the judge acknowledged that the agent's numerous errors
in the grand jury testimony did not establish that perjury was knowingly
committed. The court speculated instead that "perhaps [the agent] was
sloppy, or lazy, or ill-prepared by the prosecutive team", and concluded
that the prosecution had determined that the agent would be a poor
witness and "that its investigation was terribly flawed".
(21)
The judge further concluded and cited the prosecution's acknowledgement
that it wanted to keep the agent from testifying in order to avoid
questions about the investigation.
Thus, under established principles, if the agent did not testify at
trial, the defendants would not be entitled to see transcripts of her
grand jury testimony unless they contained exculpatory material.
However, the judge revealed that he had ordered the agent to testify in a
hearing on one of the defendants' motion to suppress a statement that
he was alleged to have made during the search of the LMC premises.
Following that hearing, "in light of several major problems that had
surfaced in the suppression hearing testimony" and upon the defendants'
motion for production of all transcripts of the agent's testimony, the
court inspected the grand jury testimony transcripts in private
and then ordered that the prosecution produce all transcripts of the agent's grand jury testimony to the defendants.
(22)
After having been admonished by the court on several occasions for
failing to meet discovery obligations, discussed in the order, the
prosecution represented on April 7 2011 that it had conducted "a top to
bottom review of discovery" and that "[w]e have done what we believe not
only meets our obligation but exceeds it".
(23)
At the time of the representation, none of the agent's grand jury
testimony had been produced to the defendants; nor were any produced
until eight days later and 10 days after opening statements had been
given at trial. In the course of the post-verdict motion to dismiss
activity, the prosecution disclosed that it had not turned over the
transcript from the agent's October 14 2010 testimony.
Angela Aguilar's privileged communications
According to the order, Angela Aguilar was in custody through the
conclusion of the trial. The judge had granted to a "filter" team the
assistant US attorney's
ex parte application filed on January
28 2011 to permit the prosecution to obtain telephone conversations
recorded by the Bureau of Prisons between Angela and Enrique Aguilar.
Later, the prosecutors disclosed that as early as December 9 2010, the
lead prosecutor had obtained from the bureau not only the phone
conversations that were the subject of the
ex parte
application, but also copies of Angela Aguilar's emails, some of which
included communications between Angela Aguilar and her attorneys.
According to the order, the prosecutors neither sought nor obtained the
court's permission to receive these emails and misrepresented how they
had obtained them.
(24)
Testimony regarding another case
According to the judge, the prosecutors improperly elicited testimony
from a witness who pleaded guilty in a different case that involved
bribery of CFE officials. Even after a limiting instruction from the
judge, the prosecutors used this testimony in closing argument. Although
the judge had overruled an objection at the time, in dismissing the
case the judge stated:
"in retrospect, [the Court] should not have [overruled the
objection]. . . . The suggestion that Lee and other LMC witnesses had
any connection to [the prosecution's witness] or ever even knew anything
about him was not only misleading, but contrary to the Court's ruling."(25)
'Wilful blindness' closing argument
Before closing arguments at trial, the judge had rejected prosecutorial
requests to give the jury stand-alone instructions regarding 'deliberate
ignorance' or 'wilful blindness'. Despite this, during closing
arguments, prosecutors stated that "the law is saying you can't turn a
blind eye".
(26)
The judge sustained an objection to this statement, but the prosecutor
then told the jury that the defendants "cannot see all of this smoke and
all of these red flags and then close their eyes", and covered his eyes
with his hands.
(27)
In the order, the judge carefully pointed out that the prosecutor at
fault "was not directly or personally responsible for the numerous other
forms of misconduct", and that his actions could have been "entirely
unintentional".
(28) Nevertheless, the judge found that:
"Now that the Court has had the benefit of appraising . . . in
light of the supplemental briefing [on the Motion to Dismiss] . . . the
Court finds that this improper argument undoubtedly resonated with at
least some of the weary jurors."(29)
Comment
The judge made it clear that he was displeased by many of the actions
of the prosecutors in this case, saying that "The prosecutor's job
isn't just to win, but to win fairly, staying well within the rules".
(30)
It is therefore tempting to interpret this case as a judicial attempt
to curtail the aggressive enforcement strategies employed by the
government in Foreign Corrupt Practices Act investigations over the past
several years, but it is not clear whether the case will have such a
pervasive impact.
Despite the ultimate dismissal and harsh words of the court in its
order, during the trial the judge ruled in the prosecution's favour on
many motions, including eight previous motions to dismiss the
indictment. Of those previous motions to dismiss, at least five were
premised upon claims of prosecutorial misconduct. Equally important, the
judge ruled against the defendants on substantive motions challenging
the government's broad interpretation of the Foreign Corrupt Practices
Act.
It is probable that the judge's rebuke to the prosecution team and
resulting dismissal will instil caution in the government when
determining whether to seek indictment in the first instance and how it
proceeds if it chooses to do so. For example, a factor that the court
appeared to consider in dismissing the indictment against the defendants
is that, in the court's estimation, "[t]he case against the Lindsey
Defendants was far from compelling".
(31)
However, the judge included in his order that the defendants were not
entitled to a finding of factual innocence. He also pointed out the
financial and emotional toll exacted on the defendants and stated
clearly throughout his order that "dismissing an indictment is a
disfavored remedy".
(32)
While the case is certainly a defeat for the government, and the second such defeat this year,
(33) companies and individuals can take limited comfort from the
Lindsey
case. As Charles E DuRoss, the Department of Justice's deputy chief of
the Fraud Section, stated in November of 2011, the Department of Justice
"will continue to follow evidence and bring [Foreign Corrupt Practices
Act] charges when we think appropriate".
(34) Although this statement – similar to others made in recent years by Department of Justice officials – was made before the
Lindsey
dismissal, there is little reason to anticipate substantial government
retrenchment from its aggressive posture on the Foreign Corrupt
Practices Act.
More Foreign Corrupt Practices Act cases can be expected to go to
trial, and therefore more wins for both defendants and the prosecution.
The
Lindsey case demonstrates that defendants can and should
strenuously challenge the government when appropriate to do so. However,
defendants have yet to achieve a trial ruling, much less a verdict,
that significantly curbs the government's broad reading and application
of the Foreign Corrupt Practices Act in the past decade. Companies and
individuals should continue to implement risk-based compliance
programmes designed to prevent or detect corruption issues in the first
instance, rather than finding themselves in the position of challenging
the government at trial.
Endnotes
(1) US v Noriega,
US District Court, Central District of California, Western Division of Los Angeles, Case 2:10- cr- 10131-AHM-4.
(2) For further details please see "
Jury convicts first corporate Foreign Corrupt Practices Act defendant".
(3) Lindsey case, Order Granting Motion to Dismiss, at 5.
(4) Id.
(5) Aguilar and his wife Angela
Aguilar were also indicted as co-defendants in the case. Aguilar has
not been arrested. Angela Aguilar was arrested and defended against a
count of conspiracy to commit money laundering at trial. She was
convicted, entered into a 'time served' settlement with the prosecution
and has returned to Mexico.
(6) Order, at 1-2.
(7) Order, at 2, 28.
(8) Order, at 5.
(9) Order, at 36.
(10) A company also allegedly
controlled by Aguilar by the name of Sorvill was the purported conduit
for bribes in another Foreign Corrupt Practices Act investigation by the
Department of Justice in which one of the
Lindsey case
prosecutors was involved. The judge noted that "the prosecutors pushed
aggressively to link Sorvill to the Lindsey Defendants, when in fact
there was no evidence even suggesting the Lindsey Defendants ever heard
of Sorvill". Order, at 3.
(11) At the hearing, the
assistant US attorney responsible for insertion of the false statements
said that there had been a misunderstanding and that when he asked the
agent to identify any errors in his changes, the agent had not
identified the statements that the court found to be false. Order, at 9.
(12) The prosecution's attempt at the post-verdict dismissal stage to rely on the court's earlier
Franks
motion denial was rebuked by the judge, who held that "The issue at
this point is … not whether there was sufficient, non-tainted cause to
obtain a warrant, but whether the Government's submission to a … judge
of an affidavit containing a material falsehood was part of an overall
course of conduct that requires the sanction of dismissal". Order, at 9.
(13) Order, at 10.
(14) Order, at 11-12.
(15) Id, at 11.
(16) Id, at 11
(17) Id, at 12, citing the transcript of the grand jury testimony from October 21 2010 at page 22.
(18) Id, at 12.
(19) Order, at 12.
(20) These omissions, described by the defendants as "an effort to conceal important and exculpatory information", included that:
-
Hurricane Wilma hit Mexico in July 2006, causing CFE to obtain
immediately emergency restoration systems, and the first significant
post-Aguilar contract between LMC and CFE was signed shortly thereafter;
-
the IRS audit found no irregularities in LMC's payments to Grupo and no taxes owing; and
-
a source other than LMC had deposited $433,000 into Grupo's account. Order, at 13 n12.
(21) Order, at 13-14
(22) Order, at 15.
(23) Order, at 16 citing the Court's Docket 642, page 47.
(24) The judge found that the
prosecutors' actions directly affecting only Angela Aguilar were
nevertheless relevant to the dismissal motion because:
-
the "broad legal principle" underlying all grounds for dismissal
based on misconduct is that "the prosecution has the duty to comply with
its legal obligations in every case"; and
-
the defendants were accused of conspiring with Aguilar, and both
Aguilars were accused of conspiring with each other. Order, at 18.
(25) Id, at 21.
(26) Id, at 22.
(27) Id, at 22.
(28) Id.
(29) Id, at 23.
(30) Order, at 29, citing
US v Kojayan, 8 F 3d 1315, 1323 (9th Cir 1993).
(31) Order, at 37.
(32) Order, at 38, citing
US v Rogers, 751 F 2d 1074, 1076-77 (9th Cir 1985).
(33) Earlier this year a
mistrial was declared in the prosecution of the first four "Shot Show"
defendants. See Transcript of Trial Record,
US v Patel, 09-cr-00335 (DDC July 7 2011).
(34) American Conference Institute, 26th National Conference on the Foreign Corrupt Practices Act, November 8 2011.
