Guest Column: Scott Horton on the Pirate of Prague and the Conviction of a Handbag Maker

Posted by: Steve LeVine on July 11

O&G is delighted to publish a guest column from Scott Horton on the trial of Frederick Bourke in the late-1990s scheme to bribe Azerbaijani leaders to sell Socar, the state oil company. As he explains, Horton has some first-hand experience with the case stemming from his representation of some unrelated parties. I first met Horton more than a decade ago in Tashkent, and have turned to him on numerous occasions for exceedingly reliable judgment on events across Central Asia, the Caucasus and Russia, including in the preparation of The Oil and the Glory. Horton is a contributing editor at Harper’s Magazine, where he writes the No Comment blog, and an adjunct professor at Columbia Law School. He has also regularly consulted with and appeared as an expert witness before the House Judiciary Committee on Justice Department oversight matters.

A jury in Manhattan rendered a split verdict yesterday in the trial of the handbag king Rick Bourke on charges arising from an investment scheme in Azerbaijan with the notorious “Pirate of Prague,” Viktor Kozeny. He was convicted of violating the Foreign Corrupt Practices Act (FCPA) and making false statements to investigators about the matter. He was acquitted on money laundering.

I followed this matter from close up. As a lawyer, I was asked to come in and direct an investigation of Kozeny’s scheme for a client, and in the course uncovered a large-scale fraud that Kozeny had worked on people who bought Azerbaijani privatization securities from his Minaret investment bank. I was involved in a series of suits against Kozeny on behalf of some of his victims and secured attachments of some of his property. I had no involvement in the matters that were the subject of the Bourke case, but I know and have met many of the witnesses who testified in the case.

In The Oil and the Glory, you gave us a good view of how the Caspian littoral attracts elements of the business world who operate on the fringe of legality, and sometimes cross the line. They play off the shadowy legal environment that pervades the region, and work with the assumption that the will of those in power (regularly the targets of their blandishments) will protect them from any form of legal accountability. But one of the problems with this calculus is revealed by this prosecution: the FCPA in the United States and comparable anti-corruption legislation in other developed states makes it a crime to offer payments to secure business or the continuation of business from a foreign government official. The Bourke case offered a fascinating and rare glimpse into the sort of dealings that are commonplace in the region.

Even though it secured a conviction, the prosecution did not make out a strong case linking Bourke to the corruption. Some of the arguments made focused on Bourke’s wealth and suggested that his desire to profit by investment in Azerbaijan was unseemly. The government’s case was at best oblique. It charged that Bourke invested with Kozeny, that Kozeny and his agents did the bribing, and that Bourke knew about it. Therefore Bourke, the investor, was just as guilty as Kozeny. The key evidence presented by the government came from Swiss lawyer Hans Bodmer and adviser Thomas Farrell, two of Kozeny’s agents who worked out a special deal with the government so they could escape serious punishment for their role in the alleged affair. But evidence adduced in the trial showed that neither of these witnesses could possibly have had the meetings they described with Bourke in which they purport to have confirmed his knowledge of the fraud. Amazingly, that didn’t stop the government from putting forward their dubious testimony.

If you follow high-profile prosecutions around the country now, you know that there has been an epidemic of crooks giving evidence to help out prosecutors that cannot possibly be correct. Their motivation is pretty clear: For giving the evidence, the prosecutors let them off the hook for their own crimes, or let them cut a deal. Of course, these are indispensible tools that enable a prosecutor to build a case. But the rule is that the prosecutors shouldn’t be offering prizes to induce people to give false evidence. That’s a rule that doesn’t appear to be closely adhered to. Increasingly, the attitude is “victory at all costs” and indifference to the truth. Being scrupulous about ethics and evidence does not appear to advance prosecutorial careers, particularly when the Justice Department has developed a consistent pattern of failing to enforce its own ethics guidelines. (In an article in the current ABA Journal, for instance, the Justice Department’s ethics arm — the Office of Professional Responsibility — is labeled the “roach motel” because “the cases go in, but nothing ever comes out.”)

It puzzles me that the government was able to get to the jury with this evidence, but I am sure there are pieces of the story I do not know. Still, I am not surprised that it was able to wrangle a conviction. A jury, especially in these times, is likely to strike out against a person of wealth and privilege it suspects has been involved in some corrupt dealings. That leads me to doubt that the convictions will stand following an appeal; indeed, the trial judge may have to test closely whether the evidence really supported the verdicts. But those are questions for the lawyers.

Now the government has its conviction, but I still think we should all be troubled that the government ever brought this case. I’ll give you three reasons why it never should have been brought.

First, the real, unquestioned malefactor in this matter is Viktor Kozeny. He masterminded the scheme, implemented it, and defrauded the other investors like Bourke in the process. But today Kozeny is sunbathing at his beachfront estate in the Bahamas. And two of the individuals who were his key agents in implementing the scam – Bodmer and Farrell – are getting off very lightly, because they offered evidence (which I believe is almost certainly untrue) that helped the government get a conviction against Bourke. One of the victims of the scam – Bourke – is facing a prison term. Doesn’t this strike you as a strange outcome?

I think Kozeny is an absolutely brilliant scam artist — one of the greatest of the last century — and I am convinced that when all is said and done, we will discover that the single greatest con he ever pulled off targeted the prosecutors who brought this case.

Shortly after the fraud was uncovered, Kozeny engaged as a lawyer James Nesland, an alumnus of the Southern District attorney’s office, for the express purpose of whipping the prosecutors in New York into a lather and sending them after his own victims. Kozeny coupled this with a threat to investors that if they pursued claims against him, they would find themselves the targets of federal prosecutions he was going to launch. In fact, Kozeny and his high-paid lawyers effectively implemented this strategy, and the federal prosecutors in Manhattan were like so much moist clay in his hands.

As they case proceeded, they paid no real attention to Kozeny and the actual perpetrators of the fraud. Indeed, a state prosecutor working on the case told me that it was “impossible to get the feds to pay attention to Kozeny,” and that they were “bizarrely fixated on bagging a big Wall Street investor, whether there was evidence for it or not.” That pretty much aligned with my own observations of their conduct. They poured all their attention into Kozeny’s victims, driven by Kozeny’s self-serving claims that the victims knew of and were full participants in the scam. And this explains in part why Kozeny is soaking up the rays today, while a man that Kozeny fleeced out of millions faces sentencing.

Why would young prosecutors rise to the bait? Why would their supervisors let them? That would require us to look behind the impenetrable veil of prosecutorial discretion, which cloaks an awful lot of misconduct these days, as House Judiciary Chairman John Conyers has noted. But if you understand how the internal politics of the Justice Department works, you can understand how they were scammed. The pitch put to them was simple. Going after Kozeny would be an old-hat fraud claim. Nothing new. Nothing exciting. No breaking of new ground. But charging the co-investors would allow a young prosecutor to make his reputation — it would be an opportunity to break new ground by establishing the secondary liability of co-investors. And Justice had long been looking for the right case on the back of which the principle could be established. Kozeny offered up the bait, and the prosecutors in Manhattan fell for it.

In this respect, Kozeny is a lot like Sir Edmund Backhouse, the great charlatan-fraudster of the early days of the twentieth century, who was the subject of a psychological biography by Hugh Trevor-Roper called A Hidden Life. Backhouse ended a career of breathtaking frauds without ever facing a prosecution, or even a criminal inquiry. How? As Trevor-Roper noted, he was always careful to study the government with care, to offer it something, to enmesh it in an embarrassing or compromising manner in his scams. He always offered the government another fish, easier to grab, and somehow a more satisfying catch. And most importantly, Backhouse fully understood the world of petty bureaucratic vanities and played it to his benefit, masterfully. But Backhouse should move over. Kozeny has greatly outdone him.

Second, in international law we have a defense call tu quoque which would, in a world governed by sounder principles of justice, have stopped this prosecution in its tracks. The word means “you do it too.” And the point is simple. The conduct that the government is criminalizing in this case through the prosecution of Bourke is conduct in which the very government that brought these charges openly and flagrantly engages. I’ve been studying the course of U.S. government contracting, particularly associated with the Department of Defense, over the course of the eight years. I don’t know whether Kozeny actually bribed Azerbaijani government officials in an effort to gain control of the State Oil Company of Azerbaijan. But I do know that agents acting with the authority and approval of U.S. Government bribed officials of foreign governments in connection with a series of schemes to acquire and develop military installations in Central Asia. I’ve studied these cases in some detail, and shared some of my research with NBC News and the New York Times. The evidence is unequivocal that, for instance, in the case of the Manas base in Kyrgyzstan, Defense Department agents granted multimillion-dollar no-bid contracts to the family of the Kyrgyz president to induce him to grant the base concession. It was a flat out violation of the FCPA. An FBI investigation into the matter was squelched. I’ve seen comparable corrupt deals involving the United States government in at least five other countries (Uzbekistan, Iraq, Kuwait, Jordan and Turkmenistan). In fact, I’d say that in audacity, the Kozeny schemes pale in comparison with those carried out by Uncle Sam, with utter impunity.

The message that the Justice Department is sending us is pretty clear: Foreign corrupt practices are an exclusive preserve of the U.S. Government. Copy our own conduct, and we’ll prosecute you. After all, we’re shameless.

The point here is that if the United States is going to enforce the FCPA (and I believe it should vigorously enforce the statute), its enforcement shouldn’t be selective. And it should start with agents of the U.S. Government because they have in fact been involved in the highest profile FCPA violations in the last decade; and the impunity surrounding their conduct brings cries of contempt and hypocrisy down on the United States. But of course, bringing a case that involves high ranking officials of the Bush era would not be a smart career move for a young prosecutor in Manhattan.

Third, this case reflects a false allocation of precious prosecutorial resources. The case was developed over the last six years. During that period of time, the “sheriff of Wall Street,” as the U.S. Attorney in Manhattan is known, failed to bring a single enforcement action looking into any of the massive frauds and gross malpractices that brought the nation’s financial community to the brink of depression. The case of Bernie Madoff, which was repeatedly flagged and blown off, is a telling example.What were Manhattan prosecutors doing at this time? They deployed the prosecutorial equivalent of the Red Army in a very dubious effort to take down (and that’s the only word for it) the Governor of New York, Eliot Spitzer, over the fact he was visiting a prostitute. And they brought cases like the Martha Stewart and Bourke prosecutions, which seem designed to advance the careers of individual prosecutors, not to do substantial justice. In the course of the last century, the public has never been so poorly served by its federal prosecutors as today. Their mercurial, irresponsible conduct is a big part of our current problem. The U.S. Attorney’s office in Manhattan, just like Main Justice, is in extremely bad need of adult supervision.

But on balance, criminal inquiry into the scams in Azerbaijan was a good thing, and prosecutions may well have been warranted. Here we witnessed a very bad exercise in targeting. Are the prosecutors trying to send a message that investment in developing markets has a new risk element — risk of prosecution because a fraudster is also involved in the marketplace? That can’t be a proper policy, because we should be promoting the global movement of investment capital — that’s essential to holding New York’s position on the global financial markets.