United States v. Giffen

Citations: 326 F. Supp. 2d 497; 2004 U.S. Dist. LEXIS 12273; 2004 WL 1475498Docket: S1 03 CR.404(WHP)

Court: District Court, S.D. New York; July 2, 2004; Federal District Court

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James H. Giffen faces a 62-count indictment for making over $78 million in unlawful payments to senior Kazakh officials, including former Prime Minister Nurlan Balgimaev and current President Nursultan Nazarbaev, violating the Foreign Corrupt Practices Act, mail and wire fraud statutes, money laundering laws, and federal income tax regulations. Giffen seeks to dismiss Counts One through Fifty-Nine, citing the act of state doctrine, and challenges specific allegations in Counts Fifteen through Twenty-Three regarding the deprivation of honest services to Kazakh citizens. The court grants part of Giffen's motion while denying others.

The indictment asserts that from 1995 to 1999, Giffen made these illicit payments to secure business for Mercator Corporation, his New York-based company. Giffen allegedly orchestrated complex financial transactions to hide these payments, which were tied to significant oil and gas projects in Kazakhstan, a nation rich in natural resources since its independence from the Soviet Union in 1991. Giffen, appointed as a Counselor to the President of Kazakhstan in 1995, and Mercator had agreements with the Kazakh government to facilitate foreign investment in its oil and gas sector, earning nearly $67 million in success fees from various projects. Additionally, Giffen deposited around $70 million in escrow accounts in Switzerland, later diverting funds to offshore entities to obscure the payments benefiting Kazakh officials, including personal gifts such as an $80,000 speedboat for Nazarbaev and covering Balgimbaev's bills. The indictment highlights the officials' significant influence over lucrative business opportunities for Giffen's firm.

Giffen and Mercator allegedly made illegal payments to senior Kazakh officials, allowing them to divert substantial sums from oil transactions for personal and official benefits. The indictment charges Giffen with multiple federal offenses, including conspiracy to violate the Foreign Corrupt Practices Act (FCPA), conspiracy to defraud Kazakhstan of tens of millions of dollars, and conspiracy to deprive Kazakhstan's citizens of their political leaders' honest services, all involving substantive mail and wire fraud counts. 

In addressing a motion to dismiss, the court accepts the indictment's allegations as true, disregarding any contrary assertions from the defendant. The FCPA prohibits U.S. individuals and companies from making illicit payments to foreign officials to gain business advantages. Although the FCPA allows for "facilitating" payments to expedite routine governmental actions, the payments in question do not qualify as such since they were aimed at influencing officials to award new business to Mercator.

Giffen contends that the charges should be dismissed under the act of state doctrine, which prevents U.S. courts from questioning the validity of actions taken by recognized foreign sovereigns within their own territories. This doctrine is rooted in the desire to avoid embarrassing the Executive Branch in foreign relations. However, since the U.S. government, through the Department of Justice, has asserted that it is acting on behalf of the Executive Branch, any concerns regarding interference with foreign affairs are alleviated.

Giffen claims that his actions, for which he is indicted, were conducted as an agent of the Kazakh government, asserting authorization to manage bank accounts and handle funds on its behalf. The court must initially determine if it needs to invalidate any official acts of Kazakhstan while addressing his charges of bribery against senior Kazakh officials. The court references the W.S. Kirkpatrick case, where it was concluded that the act of state doctrine did not preclude judicial review since the court would not assess the legitimacy of Nigerian government actions. Similarly, it finds that while factual findings might question the Kazakh government's motives, they will not rule on the legality of its public acts. Giffen’s defense hinges on his position within the government allowing him to make payments, but the court notes that the illicit activities occurred outside Kazakhstan, primarily in the U.S. and Switzerland, thus falling outside the act of state doctrine's territorial limitations. Furthermore, transactions that were commercial rather than governmental do not receive immunity under this doctrine. Giffen does not claim that the payments were lawful under Kazakh law, instead arguing they were conducted under governmental authority; however, the documentation he provides fails to substantiate that his actions were official. The court concludes that the act of state doctrine does not prevent his prosecution. Regarding the deprivation of honest services charge under 18 U.S.C. § 1346, Giffen contends that applying this to Kazakhstan extends statutory reach beyond Congress' intent and violates constitutional vagueness and international comity principles. He does not, however, dispute the indictment's basis in mail and wire fraud statutes concerning foreign victims. Section 1346 defines a scheme to defraud as including efforts to deprive someone of the intangible right to honest services.

In 1988, Congress enacted Section 1346 to counter the Supreme Court's decision in McNally v. United States, which had ruled that the mail fraud statute did not cover schemes depriving individuals or governments of intangible rights, including honest services from public officials. Section 1346 reinstated the criminalization of schemes depriving others of the "intangible right of honest services." The court must evaluate pre-McNally case law to determine if this theory applies to U.S. citizens depriving foreign nationals of honest services by foreign officials. The government argues that pre-McNally cases supported this application; however, it only references a couple of indictments from 1978 and lacks any supportive judicial decisions. The government also cites the case of United States v. Lazarenko, where a court dismissed honest services charges against a former Ukrainian president due to the government's failure to demonstrate a violation of a Ukrainian law analogous to Section 1346. The current case lacks any allegations concerning Kazakh law. The court concludes that the absence of pre-McNally precedent does not support the application of the honest services theory in an international context. Consequently, Section 1346 does not criminalize all deprivations of honest services, nor does it grant broad discretion to define "honest services" case by case. The government's argument that Congress's 1988 amendments to the Foreign Corrupt Practices Act (FCPA) acknowledged that foreign bribery fell under the mail and wire fraud statutes is unpersuasive, as legislative history does not clarify original statutes. Discarded proposals are not useful for interpreting existing laws.

Congress did not intend for the intangible right to honest services to include bribery of foreign officials in foreign countries. Giffen argues that applying the honest services theory to his alleged foreign bribery scheme is unconstitutionally vague. The court agrees, noting that Section 1346 does not explicitly mention foreign bribery, and its legislative history is silent on the issue. The void-for-vagueness doctrine mandates that penal statutes must clearly define offenses to ensure that ordinary individuals understand the prohibited conduct, thereby preventing arbitrary enforcement. 

The Second Circuit has assessed vagueness challenges to Section 1346 in the context of domestic private-sector kickbacks, but this case presents a different question regarding its application to foreign bribery. Section 1346 was enacted to address the deprivation of the right to honest services, a concept not recognized for foreign citizens prior to the McNally decision. Previous cases applying this theory predominantly involved public sector corruption within the U.S.

The court highlights that determining whether Giffen's actions deprived Kazakh citizens of honest services necessitates an understanding of the relationship between Kazakh citizens and their government, which lacks a clear legal framework analogous to Section 1346. Consequently, the court concludes that applying Section 1346 to Giffen is constitutionally vague, as it does not provide adequate notice of what conduct is prohibited.

Additionally, Giffen claims the application of the intangible rights theory presents a non-justiciable controversy, asserting that a duty of honest services must be owed by government officials to the public. He argues that while the concept of honest services is well-defined in the U.S., it is ambiguous in Kazakhstan. The indictment fails to provide facts or legal context regarding the meaning of honest services by Kazakh officials to their citizens. The government’s assertion that the duty of honest services is not exclusively American does not adequately address the lack of clarity in the Kazakh context, particularly given Kazakhstan's attempts to obstruct the investigation and prosecution.

Kazakhstan struggles to define 'honest services' within its governance, highlighting a gap in anti-corruption accountability. The suggestion to apply U.S. legal standards extraterritorially in Kazakhstan is deemed inappropriate; instead, cooperation between U.S. and Kazakh authorities is recommended. The principle of comity, which is merely a rule of construction, does not restrict legislative power and is irrelevant where Congress has specified otherwise. Without congressional authorization to expand the application of Section 1346 beyond pre-McNally precedent, the court cannot consider such an extension. 

The court denies Giffen's motion to dismiss Counts One through Fifty-Nine of the indictment but grants his motion to dismiss parts of Counts Fifteen through Twenty-Three that pertain to depriving Kazakh citizens of their officials' honest services. Notably, on March 15, 2004, the Government filed a superseding indictment with additional tax offense charges, which Giffen did not contest. Giffen initially cited a statute of limitations defense but later abandoned it after the Government obtained a tolling order. He served as Mercator's principal shareholder and executive, and documentation submitted by him indicates appointments to various official roles by Kazakh officials.