In the early spring of 2010, Mark Whitacre, a former prisoner, friend and mentor sent me information concerning corporate bribery. The case that Mark suggested I learn from concerned SK Foods, one of our nation’s largest tomato processors. According to filings in federal court, executives at SK paid bribes to purchasing managers employed by such well-known companies as Frito-Lay, Safeway and Kraft Foods. In exchange for the bribes, the corrupt purchasing managers provided lucrative contracts or confidential information on bids submitted by competitors.

Those criminal complaints, I knew, would derail the personal lives of each defendant. Victims of the corruption would include all shareholders of companies that invested millions to establish brands, and the customers who purchased products that did not receive appropriate quality assurance. The criminal charges concerning SK Foods, for example, included allegations that the company shipped millions of pounds of bulk tomato paste and puree that fell short of basic quality standards; to cover tracks, executives in the complaint falsified documents. The far-reaching corruption resulted in the processing of food for consumers with mold counts high enough to prohibit legitimate sales under federal law.

A tidbit about the criminal case against SK Foods intrigued me. It described machinations an accomplice would employ to ascertain whether a company executive would be susceptible to bribery. The conspirator would drop a crisp $100 bill on the floor while dining with someone he wanted to bribe. Then he would bend to pick up the bill, saying: “You must have dropped this. Is it yours?” If the target of the bribe said yes, the conspirator considered him receptive to the probability of influence through bribery.

Not long after I learned about the corruption case against SK Foods, I received a phone call from a man who was being investigated for bribery and kickback offenses. His name was Albert, who had a real estate development company with tens of millions in assets. Unfortunately, Albert described for me how everything that he had created— including his residency in the United States—was put into jeopardy because authorities threatened to indict him in a scheme to bribe public officials. Albert’s case, along with the case against SK Foods, made clear how companies left themselves vulnerable to criminal charges when they failed to invest sufficiently in ethical training.

After meeting Albert and listening while he described his ongoing struggles with the criminal justice system, I understood that his was the type of story that corporate trainers and human resource managers should share with employees; professors, too, should use such stories to instruct students who were about to enter the professional workforce. Stories like Albert’s illustrated the ubiquitous temptations that existed in the marketplace, and they showed the life-changing events that plagued those who abused trust and discretion. 

I met Albert early one evening at a restaurant in Long Beach. The familiar shadow of legal troubles darkened his countenance. From the sadness of his expression, his puffy face and the purple hair-thinned veins that spread across his nose and cheeks, I surmised that he had been relying upon alcohol to forget his problems. When Albert spoke, I detected a slight accent of an indistinguishable origin.

“Where are you from?”

“I live in Irvine,” Albert responded as if he had been asked the question too many times.

“It’s not really relevant but I thought I detected an accent, as if English wasn’t your first language.”

“I’ve worked all my life to cover that up. I was born in Poland. My family immigrated to the United States when I was four.” Despite attending all of his schooling in the U.S., marrying an American, rearing his three college-aged children in California, and building a thriving business, Albert’s lack of U.S. citizenship threatened his deportation to Poland. “I don’t know a single person in Poland. I hardly speak the language and I can’t read it at all. You may detect a slight accent from my upbringing but I’ve been speaking English all my life.”

“From the size of the business you’ve built, it’s clear that language hasn’t been any barrier to success.”

“Anyone with a willingness to work can succeed in America. But with success comes risk. The more financial success a man achieves—especially an immigrant—the more that others want to chop him down. If I hadn’t been born in Poland I wouldn’t be in this mess right now.”

“How did you become the target of a criminal investigation?”

Albert’s company specialized in developing raw land. He owned bulldozers, excavators, road graders, dump trucks, boom trucks and all of the equipment necessary to convert sagebrush-covered fields into tree-lined neighborhoods. By installing underground utilities, roads, curbs, gutters and sidewalks, his company laid the groundwork that provided housing and employment for thousands of people. The tax revenues such communities generated had a direct influence on municipalities, making it necessary for Albert and his staff to interact closely with local government officials.

“This entire case,” Albert explained, “originated because of Jim, the city administrator who presided over a community I was developing a few years ago. Jim had marital problems that escalated when his wife caught him having an affair with his secretary. Those domestic problems led to a corruption investigation by the FBI. Jim’s mistress had made statements in court that led to Jim being charged with violations of the Hobbs Act. To lessen his exposure to punishment, Jim started cooperating with the FBI. Now they’re investigating my company, specifically looking to see whether I was part of a bribery scheme.”

The Hobbs Act, I learned through research, was codified at Title 18 of the United States Code, Section 1951. The law criminalized interference with interstate commerce by “extortion,” and it defined extortion as:

 the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or  under color of official right. 

“How does a city manager’s marital infidelity lead to criminal charges for violating the Hobbs Act?” I didn’t make the connection.

“He was the city administrator,” Albert corrected me, “not the city manager. That position made him a public official, giving him influence over how leaders in the city would allocate funding, over what permits the city would issue, and over what types of financing the city would pursue. Various committees made up of council members and other leaders, including the mayor, would vote to approve major projects after considerable debate. But the city administrator position played an influential role in the prospects of each individual project.”

“Okay, I’m following you. Jim could either be a roadblock or a bridge to your project’s success.”

“Exactly,” Albert acknowledged, “and it was in our interest to work with him. We were developing a community in San Bernardino, turning a few hundred acres of red dirt into subdivisions with housing, a medical center, and shopping and office space. Jim worked closely with Tom, one of my engineers. While going over the plans, Jim hinted about the potential he saw in the project, expressing particular interest in a retirement community that was part of the planned development. That’s where the problem originated.”

“Why was that a problem?”

“Tom perceived Jim’s interest as a potential resource for the project and he acted on it. During one of their meetings, Tom showed Jim a set of site plans with the lot divisions mapped out. That version of Tom’s plans identified one of the choice lots as being reserved for Jim. When Jim asked what the proposed lot would cost, Tom projected an estimate of its valuation in time—once the community was developed with utilities, roads, curbs, gutters and sidewalks—but Tom pointed out that the lot didn’t have much value at the current stage. He offered to issue a deed for the lot to Jim as a gift.”

“Was that the bribe?” I asked.

“If it was, Tom didn’t know it. As far as he was concerned, he was sowing seeds of good will. Those were good business decisions. Tom’s compensation linked directly to his advancing the project and the budget included such expenses to induce key people. Gifting one of the project’s proposed lots may have been aggressive, but the cost basis to the project was next to nothing, especially at the early stage. Tom would be offering much higher concessions to anchor tenants in the commercial properties we would be developing down the line. Such allowances were simple big-picture costs we budgeted to see the project through.”

“So what was the problem? Were those rules against giving gifts to city managers that had decision-making authority?”

“Not the city manager.” Albert corrected me again. “Jim was the city administrator. He didn’t even have decision–making authority. The city council and the mayor would vote to make the decisions. All Jim could do was make presentations and respond to questions about how the project would influence the community. He was simply a conduit, an analyst. But Jim told Tom that since he was a public official, he couldn’t accept the gift directly. He asked whether Tom might deed the lot to his secretary.”

“Was it the woman you said was his mistress?”

“The very same—Tom didn’t care who got the deed. Jim said the law wouldn’t allow him to receive the deed because he was a public official, but Jim pointed out that his girlfriend was a private citizen, and laws couldn’t prohibit us from gifting the deed to her. Tom thought it was a great idea. He had authority over such decisions and not thinking he was doing anything wrong, Tom and he made arrangements to issue the deed to Jim’s girlfriend.”

Being a land engineer and real estate project developer, neither Tom nor his boss, Albert, understood much about criminal law. Few citizens did. They were not familiar with the implications of Title 18 USC Section 371, “Conspiracy to commit offense or to defraud the United States.” Tom may not have given the deed to Jim directly, but when Albert described the story of how Tom agreed to issue the property deed to Jim’s girlfriend, I wondered whether the government could construe his act as being part of a conspiracy to defraud the United States.

A different statute could also apply. Title 18 USC, Section 201 describes the crime of “bribery of public officials and witnesses.” It holds that:

 Whoever—directly or indirectly—corruptly gives, offers or promises anything of value to any public official … with intent to influence any official act … shall be … imprisoned for not more than fifteen years.

“Was Tom expecting anything specific in exchange for gifting the property deed to Jim’s girlfriend?” I wondered about a quid pro quo.

“All that Tom would’ve wanted was good will, an opportunity to be heard and to make a case. Giving gratuities was a part of business and it made good sense. Like I said, at the time that Tom issued the deed, the project was still in the earliest stage of development. Years would pass before the lots would be ready for building.”

“Well, one thing must’ve led to another. How did the government become interested in your company?” 

Albert told me that Jim’s wife initiated divorce proceedings after she discovered that Jim was betraying her with his secretary. Those domestic problems led divorce attorneys to begin unraveling the ball of string. They deposed Jim’s mistress under oath. During the deposition she told the attorneys that Jim had arranged for Tom to deed a piece of property to her, and that she had later deeded the same property to Jim. The property became an issue in Jim’s divorce proceedings, and as they turned ugly, Jim’s wife fed the federal authorities information that Jim was up to something shady with the property transaction.” 

“But if Tom gave the property to Jim’s girlfriend, and if Tom didn’t ask Jim to do anything specific for him, how does the transaction lead to criminal problems?”

“That’s what the Hobbs Act was all about.” Albert explained how the FBI worked with federal prosecutors to indict Jim for the crime of extortion under Hobbs. To prove his case, the government only had to show that as a public official, Jim received a payment that he wasn’t entitled to receive while knowing that Tom made the payment in return for official acts. 

“So even though Jim didn’t ask anything of Tom, Jim was guilty of extortion simply by receiving the property—even though he received it indirectly from his girlfriend?”

Albert nodded his head, explaining that it was Jim’s status as a public official that subjected him to the criminal charges. Government prosecutors didn’t need to show any specific agreements between Tom and Jim. Yet Jim made a proposal to the city council that the city issue municipal bonds to finance the project’s development and prosecutors would introduce the proposal as evidence of an implied agreement between Jim and Tom.

“That was his role though,” Albert insisted. “He was the city administrator, and the city council relied on him to study the project’s feasibility. Municipal bond financing would lead to the types of utility installations that would later result in millions of dollars in new tax revenues, better services for the community, more employment, and all types of other benefits for the city. Jim couldn’t authorize a single dime of expenditures. All he could do was present findings that would show how the municipal bond financing would influence community development. The property he received wasn’t going to have any influence on how members of the city council would vote. The numbers would have to stand on their own.”

“I’m sure you’re right,” I said, “but can I ask a question?”

“I know what’s on your mind,” Albert nodded, clenching his jaw.

“If Jim wasn’t a decision maker, why would Tom have given him a property deed for free?”

“Projects like ours take years in the making. That’s because every decision by the city gets made by a committee. Bureaucracy can slow projects down for months, even years. With interest costs, fluctuating market conditions, and other factors, those delays can add millions to a project’s overall cost. The company pays for performance,” Albert rubbed his temple, “and Tom’s compensation would depend on his ability to meet or exceed budgetary targets. At the earliest stage of development, the cost of a few lots here and there didn’t amount to more than the cost of a few meals or tickets to the Angels game. But the good will could go a long way toward advancing the project through the red tape. That’s all Tom was after—a little access—nothing crazy or inappropriate. It wasn’t as if he was buying the city council to disburse public funds.”

The business model that Albert described didn’t sound nefarious on the surface, at least not to me. It wasn’t quite the same as a kickback scheme. Title 18 of the U.S. Code, Section 874, is one of the federal statutes that criminalize kickbacks involving public officials. A kickback scheme provides a more direct link, as the kickback induces an offender to perform (or to refrain from performing) a specific act in direct exchange for hidden compensation. In contrast, according to what Albert told me, Tom was not inducing Jim to violate his duties as a public official when he offered to deed the property. All he wanted was access and fair consideration, as Albert told the story.

Although the financial crimes in which I participated as a stockbroker didn’t include public officials, a kickback scheme played a role. While working at UBS, I was one of two stockbrokers of record for the GLT Venture Fund. My trading partner at UBS, Kenneth Sorosky, and I both had reason to believe that Keith Gilabert, the hedge fund manager who ran the GLT Venture Fund was dishonest and misleading his clients. Both Kenneth and I owed a duty to our profession that we ignored. With our clear and convincing evidence that Keith was manipulating his GLT Venture Fund to perpetuate a Ponzi scheme, Kenny and I had a moral, ethical, and legal responsibility to report the fraud. Yet the GLT Venture Fund was generating hundreds of thousands of dollars in trading commissions. Besides that, Keith provided me with thousands of dollars in illegal kickbacks every month in specific exchange for my ignoring his scheme.

Tom’s gifting of the property deed that went to Jim (indirectly) lacked that element of underhanded, specific performance that a kickback required. Although the Hobbs Act made it a crime for a public official like Jim to accept payment or something of value that he was not entitled to receive (like a property deed), I could understand how a honest business owner like Albert might lack an awareness of the illegality when he authorized his employer to make such gifts. On the surface—and from Albert’s perspective—Tom was making a good business decision by anticipating obstructions to progress and deploying resources effectively. Yet that strategy implied an ignorance of the law, and ignorance would not serve as an effective shield from prosecution or its consequences.

I’ve spoken with hundreds of white-collar offenders through my work. Although many were consciously and deliberately deceptive (like Kenneth Sorosky, Keith Gilabert, and myself in our securities fraud), too many were sucked into the criminal justice system because of their failure to understand what acts constituted a crime. On occasion I heard stories from executives like Richard, another client of mine who believed that he was setting steps in motion to protect his employer from criminal prosecution of corporate crimes; instead, his incomplete actions resulted in his own felony conviction and prison term.

Richard’s case involved violations of the Sherman anti-trust legislation that prohibited collusion. He was a senior executive for a global corporation with numerous divisions and billions in annual revenues. In an effort to advance his career, Richard agreed to accept a temporary assignment as a leader in a different division from the chemical division he had specialized in during the first two decades of his career.

The new division to which Richard transferred was in the business of manufacturing rubber, and it enjoyed the privilege of being one of only three global companies that dominated the world market for rubber. To Richard’s dismay, upon his assumption of control in the temporary position, he observed patterns of collusion and price fixing with the conglomerate’s two competitors, and he knew the practice violated anti-trust laws. Richard faced a moral dilemma. He did not want to be a party to violating the law, but neither did he want to sabotage his career by reporting to law enforcement the long-standing illegal practices of his colleagues. Instead, Richard made personnel changes and implemented new policies to discontinue the anti-trust violations.

Yet Richard’s actions did not go far enough to shield him from prosecution for white-collar crime. Leaders from one of the other two global competitors made a decision to protect that corporation from prosecution. The corporation entered into an immunity agreement with the U.S. Justice Department. In exchange for providing evidence that prosecutors could use against Richard’s company and the other company that had been a long-standing partner in the price-fixing conspiracy, prosecutors would not indict the whistle-blowing partner.

Rather than applauding the changes that Richard implemented to stop price-fixing practices during his brief tenure leading the rubber division, Richard became a scapegoat for the corporation when corporate lawyers negotiated a plea agreement with the Justice Department. Richard served several months in federal prison due to corporate crimes that took place during his brief tenure—before he could implement changes that would bring the rubber division into compliance with the law.

Richard’s case was but one of numerous examples of white-collar offenders who never suspected that they were breaking criminal laws. His vulnerability to criminal charges materialized because the changes he implemented to phase out price fixing patterns provided indisputable evidence of this involvement—even if that involvement was to discontinue the practice.

In Albert’s case, on the other hand, the possible crime was even more abstract. Tom acted on his discretion to gift a property deed to Jim. Despite there not being accusations of bribery of a public official for anything specific, the Hobbs Act made it illegal for Jim to accept anything of value from Tom. Per Jim’s request, Tom deeded the property to Jim’s mistress. When Jim began cooperating with federal authorities, they began investigating Albert’s company and whether he had any culpability in the offense.

The potential prosecution had monumental significance for Albert because of his immigration status. Although he had lived in the United States since childhood as a lawful permanent resident, Albert never went through the official process of obtaining U.S. citizenship. According to Title 8 of the U.S. Code, section 1227: 

any alien who is convicted of a crime for which a sentence of more or longer may be imposed, is deportable.

 If prosecutors found sufficient evidence to indict Albert for having a role in the offense—as a knowing conspirator or otherwise—he would face more than criminal charges; a conviction would result in the government ordering Albert’s deportation to Poland, separating him from his family and all that he built in the United States.

The United States Code and the codes of all 50 states provide a menu that includes criminal offenses numbering in the tens of thousands. Although it would be unreasonable to expect business executives to understand all of the ways that their decisions and actions could expose them to criminal problems, businesses that offered their executives opportunities to participate in ethical training would go far toward reducing vulnerabilities to prosecution for white-collar crime, corporate crime, and all of the ancillary problems that accompany entanglements with the criminal justice system.

Chapter Fifteen Questions

  1. Why would Albert be vulnerable to criminal prosecution if it was Tom who deeded the property to Jim’s mistress? 
  2. What ethical implications accompanied Tom’s agreement to deed a property to Jim’s mistress?
  3. What responsibility do business leaders have in establishing ethical principles within their corporate cultures?
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