Giffen Pleads Guilty to Misdemeanor Tax Violation 7 Years After FCPA-Indictment; His Merchant Bank Pleads Guilty to FCPA Felony

Giffen Pleads Guilty to Misdemeanor Tax Violation 7 Years After FCPA-Indictment; His Merchant Bank Pleads Guilty to FCPA Felony

On August 6, 2010, the Department of Justice announced the resolution of the high-profile FCPA prosecution of James H. Giffen, who was originally indicted with great fanfare in 2003.1  Following seven years of litigation, Giffen, principal shareholder, chairman, and chief executive officer of Mercator Corporation, pleaded guilty in the United States District Court for the Southern District of New York to the misdemeanor of willfully failing to supply information regarding foreign bank accounts in violation of 26 U.S.C. § 7203.2  The Mercator Corporation, a merchant bank now essentially defunct, pleaded guilty to a one count felony of having made an unlawful payment, in the form of two snowmobiles, to a senior Kazakh government official in violation of the Foreign Corrupt Practices Act (FCPA).3 

The 2010 Information to which Giffen pleaded guilty charged him with failing to report on his 1996 tax return a Swiss bank account in the name of Condor Capital Management, a British Virgin Islands corporation that he controlled.4  The Information superseded the original 2003 Indictment which had charged Giffen with one count of conspiracy to violate the FCPA and to commit mail and wire fraud, 13 substantive FCPA violations, 8 counts of wire fraud, one count of mail fraud, one count of conspiracy to commit money laundering, 33 counts of money laundering, and three counts of filing false personal income tax returns.5

The original charges stemmed from payments allegedly made to several Kazakh government officials by Mercator and Giffen, a former counselor to the President of Kazakhstan.  The payments allegedly were made by Mercator and Giffen acting as intermediaries between Western oil companies and the Kazakh government in connection with the sale of oil and gas rights.6  Prosecutors charged that Giffen had used success fees that Mercator had received from its clients for alleged work performed by Mercator, and from oil companies in connection with the purchase of oil and gas rights, to make the illegal payments.7  In particular, it was charged that between 1995 and 2000 oil company funds allegedly intended for the purchase of oil and gas rights in Kazakhstan were diverted to Swiss bank accounts under Giffen's control, and that Giffen had transferred the funds into secret Swiss accounts owned by Kazakh government officials who then spent it on personal items such as jewelry and spa visits.8

According to the 2003 Indictment, Giffen had unlawfully paid more than $78 million to two senior Kazakh government officials in connection with six separate oil transactions in which he represented Kazakhstan.  These transactions included (1) the purchase of a 25% share in the Tengiz oil field by Mobil Oil in 1996; (2) a 1995 agreement for Mobil Oil to finance the processing and sale of gas condensate from the Karachaganak oil and gas field; (3) the purchase of a share in the Caspian Pipeline Consortium by Amoco in 1997; (4) the purchase of a share in the Karachaganak oil and gas field by Texaco and other companies in 1998; (5) the purchase of exploration rights in the Kazakh portion of the Caspian Sea by Mobil and other companies in 1998; and (6) the purchase of Caspian Sea exploration rights by Phillips Petroleum in 1998.9   

One factor that caused substantial delay post indictment was Giffen's "public authority" defense based on his claim that the Central Intelligence Agency, among others, was aware of his business activities in Kazakhstan and had condoned his actions.10  As a result, extensive pre-trial sealed proceedings were conducted under the Classified Information Procedures Act (CIPA),11 the nature and extent of which are unknown.  While the fact that Giffen had been permitted to plead to a misdemeanor violation and Mercator to a single felony based on de minimis conduct was greeted by considerable surprise, the precise reasons for the government's apparent re-assessment of its ability to try the case as indicted are likely to remain unknown. 

Although some have sought to draw an analogy between the Giffen-Mercator resolution and the UK government's instructions to the UK's Serious Fraud Office to prematurely terminate its investigation and prosecution of BAE, the cases are dissimilar.  The BAE matter was reportedly discontinued following the complaint of another government.  By contrast, the Department of Justice obtained an indictment, and counsel for the government and for Giffen and Mercator appear to have pressed their cases in the courts with vigor.  In this instance, the more likely reason for the negotiated conclusion of this matter was a re-assessment of the trial merits by the government, especially in light of the seven years that have elapsed without a trial, and the need for its limited resources on other matters.  At a recent conference, Assistant Attorney General Lanny Breuer agreed that the Department should assess the value of continuing to commit extensive manpower and other resources to aging cases.  There is no known reason to believe that any pressure, political or otherwise, was exerted to influence the Department's decision to resolve the Giffen-Mercator case in this manner.

Pursuant to his misdemeanor plea agreement, Giffen's stipulated Sentencing Guidelines range is 0 to 6 months and a potential fine of $250 to $5,000, although a violation of 26 U.S.C. § 7203 carries a maximum sentence of one year in prison and a $25,000 fine.12  Giffen and Mercator also relinquished their interest in the funds in certain Swiss bank accounts.13  Mercator is subject to a fine of up to $1.3 million to be determined by the court.14 

As a result of a related civil forfeiture action in the Southern District of New York, prosecutors had reached an agreement in 2007 with the governments of Switzerland and Kazakhstan15 regarding $84 million on deposit in Switzerland allegedly traceable to illegal payments made to Kazakh government officials in connection with oil and gas arrangements that Mercator had arranged.16  Pursuant to that agreement, the funds were to be used by a non-governmental organization in Kazakhstan to benefit underprivileged Kazakh children. 

Interestingly, notwithstanding the dismissal of the 60 felony count indictment and the extensive legal expenses of the defense, the two plea agreements included a provision pursuant to which Giffen and Mercator waived any claim they may have had under the Hyde Amendment,17 which permits a federal court to award attorneys' fees and court costs to a criminal defendant where the court determines that the actions of the United States were vexatious, frivolous, or in bad faith.

The editors would like to thank Margaret Ryznar for her contribution to this FCPA Alert.

1 Press Release, Department of Justice, New York Merchant Bank Pleads Guilty to FCPA Violation; Bank Chairman Pleads Guilty to Failing to Disclose Control of Foreign Bank Account, Aug. 6, 2010, available at [hereinafter DOJ Press Release].
2 Information, United States v. James H. Giffen, S4 03 Cr. 404 (WHP) (S.D.N.Y. 2010), available at [hereinafter Giffen Information].
3 Information, United States v. The Mercator Corporation, S3 03 Cr. 404 (WHP) (S.D.N.Y. 2010), available at [hereinafter Mercator Information].
4 Giffen Information, supra note 3.
5 Press Release, United States Attorney Southern District of New York, American Businessman Charged with $78 Million in Unlawful Payments to Kazakh Officials in 6 Oil Transactions; Former Mobil Corp. Executive Indicted for Tax Evasion in Kickback Scheme, Apr. 2, 2003, available at [hereinafter U.S. Attorney Press Release].
6 See DOJ Press Release, supra note 2.
7 See U.S. Attorney Press Release, supra note 6.
8 Id.
9 Id.
10 James Giffen Plea Agreement, Aug. 6, 2010, available at [hereinafter Giffen Plea Agreement].
11 18 U.S.C. App. III. §§ 1-16 (2010).
12 Id.
13 Id.  See also Mercator Corporation Plea Agreement, Aug. 6, 2010, available at [hereinafter Mercator Corporation Plea Agreement].
14 The Department of Justice and Mercator disagreed on the applicability of the 1998 Sentencing Guidelines versus that of the 2009 Sentencing Guidelines, leaving the issue for the court to resolve.  Under the 1998 Guidelines, the fine range is $30,000 to $60,000.  Under the 2009 Guidelines, the fine range is $650,000 to $1.3 million.  See Mercator Corporation Plea Agreement, supra note 14.
15 See DOJ Press Release, supra note 2.
16 Id.
17 Hyde Amendment, Section 617, P.L. 105-119 (Nov. 26, 1997).  See also Giffen Plea Agreement, supra note 11; Mercator Corporation Plea Agreement, supra note 14.



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