January 22, 2010

Going Undercover for a White-Collar Sting

Filed under: Uncategorized — ktetaichinh @ 8:49 pm
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Peter J. Henning, a professor at Wayne State Law School, specializes in issues related to white-collar crime and follows them for DealBook’s White Collar Watch.

The federal charges filed this week against 22 arms industry executives, accusing them of violating the Foreign Corrupt Practices Act, were a result of a little-used technique in white-collar crime investigations: the undercover sting. As Diana B. Henriques reports in The New York Times today, the defendants were charged with paying bribes to undercover F.B.I. agents posing as foreign government officials to obtain a cut of a $15 million contract to equip the presidential guard of an as-yet unidentified African country.

Most white-collar crime cases involve investigations that begin after the transactions at issue are completed, sometimes years later. This is particularly true of cases involving foreign corporate bribery, which are usually reported by the company involved in the bribe payment that turns itself in and cooperates with the government in the hope of avoiding charges or mitigating any punishment.

The Justice Department boasted that the indictments were the largest prosecution of individuals for violating the Foreign Corrupt Practices Act and the first use of agents working undercover to nab those willing to pay bribes. Of course, this is not the first time the government has had its agents pose as foreigners interested in doing business in the United States. The famous Abscam corruption investigation in the late 1970s was the first large-scale undercover sting operation that resulted in a number of prosecutions of white-collar defendants, including one senator and some House representatives.

Undercover stings are common in narcotics and stolen property cases, and defendants caught on tape or photographed exchanging their wares have no real defense to the charge. In a white-collar sting, however, an issue that often arises is whether the defendants were entrapped by the government, or whether the agents engaged in outrageous conduct by improperly encouraging the defendants to engage in conduct through high-pressure tactics.

The defendants in this case are executives at a number of companies, including Smith & Wesson, involved in the military and law enforcement supply business. The indictments are nearly identical in describing how the government solicited bribes from them in exchange for receiving contracts for their wares. Starting in May, meetings occurred in Miami and Washington at hotels and a restaurant, and payments were made to the unidentified African nation’s supposed officials by check and wire transfer.

In the Abscam case, the frontman for the sting was Melvin Weinberg, described in one judicial opinion as a “career swindler.” In the latest bribery sting, the government used a person it identifies only as “Individual 1” as the point of contact with the defendants, offering them the contracts in exchange for the bribe. Also, two F.B.I. agents posed as officials of the ministry of defense, which would purchase the products. Individual 1 is described as “the former vice president of international sales for a company that manufactured and supplied law enforcement and military equipment to law enforcement to customers around the world.”

The background and conduct of Individual 1 will be the focal point for any defense of entrapment or outrageous government conduct that might be offered by the defendants. If the cooperating executive entered into some type of plea bargain or received immunity in exchange for acting as the frontman, then questions will be raised about his trustworthiness. How he approached the executives charged in the case and what types of enticements he offered or pressure he applied may support a claim that these were otherwise innocent business people ensnared in a trap laid by the government.

The entrapment defense focuses on the defendant’s subjective predisposition to commit the crime, whether the person was otherwise willing to engage in criminal conduct when presented the opportunity or was persuaded by the government to act in a way he otherwise would not have without the government’s sting. As the Supreme Court once said, “A line must be drawn between the trap for the unwary innocent and the trap for the unwary criminal.” Courts and juries are usually not very open to entrapment claims, but focusing the case on the government’s conduct can help put the defendant in a more sympathetic light.

Undercover stings in white-collar cases are controversial because the defendants are generally law-abiding citizens, unlike those dealing in drugs or stolen property who can hardly complain that they are unwary innocents. After Abscam, Congress considered legislation to require prior approval for undercover operations as a means to limit the discretion of prosecutors and investigative agencies to use a sting to cases in which there was some basis to believe the target was willing to engage in criminal activity before the investigation began. The legislation never advanced, and undercover stings have been used successfully in public corruption cases, like Operation Greylord in Chicago, which resulted in the conviction of a number of judges and lawyers working in the Cook County courts.

This is the second recent white-collar case in which the Justice Department used an investigative tactic to gather evidence that is normally employed in more common street crime cases. The Galleon Group insider-trading prosecution involved wiretaps on the telephones of hedge fund traders and law firm associates in an effort to catch them in the act of exchanging valuable information in advance of their trading.

The latest undercover sting involving bribes for overseas business is another means of investigating a case while it occurs, rather than after the fact, when it is much more difficult to ferret out the relevant information.

Using these new tactics in white-collar crime cases is not without controversy. Don’t be surprised to hear the defendants in the foreign bribery case argue that the government manufactured the crimes they are accused of committing by trapping unwary innocents. In the Galleon case, the billionaire hedge fund operator Raj Rajaratnam plans to challenge the use of the wiretaps, arguing that there was no need for them.

What is clear is that the Justice Department is willing to use investigative tools that were once largely ignored in white-collar crime cases as part of a shift away from being simply reactive to reported wrongdoing. We may be witnessing the dawn of a new era in white-collar investigations.


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