OIC Smaltz: Annual Reports to and Testimony before Congress

February 20, 1998

The Honorable Albert Gore, Jr.
Vice President of the United States
and President of the Senate
The Honorable Newt Gingrich
Speaker of the House of Representatives
Washington, D.C. 20510-6250

Dear Mr. Vice President and Mr. Speaker:

This is my third annual report to Congress pursuant to 28 U.S.C. ¤ 598(a)(2). In my first annual report, submitted on December 28, 1995, I described the events leading to my appointment and the activities of this office's first year in operation. My second annual report, submitted on November 15, 1996, described our second year in operation, informing you of our first indictments and convictions. During my office's third year, and since the last report, we have obtained convictions of five individuals, three corporations, one law firm, civil settlement with a Wall Street securities firm and collected $10.6 million in fines and penalties for the United States Treasury. Also of significance, in consideration of my investigative mandate, a federal grand jury indicted former Secretary of Agriculture Espy on 39 felony counts, and Tyson Foods, Inc., identified in the Attorney General's application for the appointment of an Independent Counsel as having given illegal gratuities to Secretary Espy amounting to "several hundred dollars in value," pleaded guilty to giving approximately $12,000 worth of gratuities to the Secretary.

THE INVESTIGATION SINCE NOVEMBER 15, 1996

The Henry Espy Campaign Cases
On September 14, 1994, Attorney General Reno referred to me for investigation the related matter of Secretary Espy hosting a March 31, 1994 fundraising dinner at the 116 Club in Washington, attended by agricultural lobbyists, the purpose of which was to retire the campaign debt of his brother. Henry Espy ran for the Congressional seat vacated by Mike Espy when he resigned to serve as Secretary of Agriculture. During the campaign, Henry Espy incurred a debt exceeding $100,000, and the campaign failed to file numerous reports with the Federal Election Commission ("FEC"). In addition to the cases discussed in this section of my report, the James Lake, Sun-Diamond, and Richard Douglas prosecutions also involved illegal contributions to the Henry Espy campaign debt retirement. The Attorney General's referral of this related matter led, to date, to the following prosecutions by this office and, in turn, to one referral by this office to the FEC:
1. United States v. Alvarez T. Ferrouillet, Jr., et al.
  On December 19, 1996, in a case that I tried with Michael Davis, Assistant United States Attorney from Baton Rouge, Louisiana, and Jacob Frenkel, Senior Counsel from the Division of Enforcement of the Securities Exchange Commission, a jury in New Orleans, Louisiana convicted Alvarez T. Ferrouillet, Jr. and John J. Hemmingson of interstate transportation of $20,000 obtained by fraud and money laundering, and Ferrouillet of false statements to federal law enforcement agents. The jury convicted Ferrouillet, a New Orleans lawyer and chairman of Secretary Espy's brother's campaign debt retirement committee, of ten counts, including laundering the proceeds of the misappropriated funds through a New Orleans area grocery store to the campaign's bank account and lying to United States Customs and Department of Agriculture Office of Inspector General Special Agents concerning the source of the funds. The jury convicted Hemmingson, the President, Chairman of the Board and largest shareholder of Crop Growers Corporation, the country's then second largest crop insurance company, of misappropriating the $20,000 from a corporate subsidiary and the company's shareholders for the purpose of contributing the funds to help retire Henry Espy's campaign debt and two of three counts of laundering the funds.
  
  Although the federal Sentencing Guidelines required and the United States Probation Office recommended a 41 to 51 month term of incarceration for Ferrouillet and Hemmingson, the trial court judge, on May 14, 1997, opined that the defendants' conduct fell outside the "heartland" of money laundering as contemplated by Congress and sentenced both defendants to one year in a half-way house/work-release program. The Court also sentenced Hemmingson to pay a $30,000 fine and $20,000 restitution to Crop Growers. Ferrouillet's sentence was consolidated with his guilty plea from Oxford, Mississippi, discussed below. The Court also imposed a $10,000 fine on Ferrouillet. Both defendants are appealing their convictions and we are appealing the sentences.
2. United States v. Crop Growers Corp., et al.
     On May 30, 1996, a District of Columbia federal grand jury returned a 17 count indictment against Crop Growers, John Hemmingson and Gary A. Black for conspiracy, impeding the Federal Election Commission ("FEC") by causing the Henry Espy for Congress Committee to file false federal campaign disclosure reports, failing to keep accurate books and records, omitting to disclose material facts in different filings with the Securities and Exchange Commission ("SEC") and securities fraud. The Indictment also charged Hemmingson and Black with falsifying the financial books and records of a public company and lying to the company's outside independent auditors. This case, based on our research, represented the first application of the federal securities laws, in particular the Foreign Corrupt Practices Act ("FCPA"), to an unlawful campaign contribution scheme in a criminal indictment.
  
     The evidence revealed a scheme to make illegal contributions to Henry Espy's campaign in 1993 and 1994 — 26-$1000 conduit contributions in 1993 by senior corporate officials, agents and family members that the company reimbursed and a $20,000 debt retirement contribution in 1994. The Indictment charged the defendants with conspiring to generate money to be used for illegal corporate campaign contributions to Henry Espy for the purpose of gaining access to Secretary Espy in order to favorably influence his decisions concerning matters affecting Crop Growers before the Department of Agriculture. Among the matters pending before the Department of Agriculture that concerned Hemmingson were Secretary Espy's contemplated revisions to the crop insurance program and the Federal Crop Insurance Reform Act of 1994. In order to conceal the reimbursements, Crop Growers, acting through Hemmingson, Black and others, created false vouchers (check requisitions for travel reimbursement), false invoices (increased bills submitted to Crop Growers), and fictitious entries (recording as travel advances, travel reimbursements, expense advances, consulting fees, computer purchases, an advance on crop loss adjustments, and attorneys fees) in the financial books and records of the company. When Crop Growers later became a public company, the false entries were summarized in the company's certified financial statements filed with the SEC, but disguised as legitimate expenses.
  
     On January 3, 1997, the trial court dismissed the counts that alleged the defendants concealed material facts by failing to make certain disclosures in filings with the SEC and the securities fraud count based on vagueness and ambiguities in the disclosure requirements of the federal securities regulations. United States v. Crop Growers Corp., 954 F. Supp. 335, 347-348 (D.D.C. 1997). In fact, the court's specific language was that "the SEC clearly knows how to write specific disclosure requirements into its regulations, and has chosen not to do so for uncharged criminal conduct." Id. at 346. The court also dismissed for lack of venue Hemmingson's and Black's falsification of corporate records and lying to the auditors. I referred to the United States Attorney for the District of Montana the four counts dismissed for lack of venue so that the defendants would not be allowed to escape prosecution because of the dismissal or because of the unique nature of Independent Counsel prosecutions.
  
     The trial court opinion, notwithstanding the dismissal of certain counts, established several critical propositions. First, the books and records provisions of the Securities Exchange Act of 1934 ("Exchange Act"), contained in the FCPA, apply to corporations that disguise political contributions to campaigns for federal office. Second, falsifying accounting records, including preparation of financial statements to conceal such contributions, can be prosecuted as criminal violations under the Exchange Act. Third, false statements by corporate officials to auditors about the accuracy of the books and records can constitute criminal offenses. Fourth, the reach of the criminal proscriptions of the books and records provisions of the FCPA extend to the years immediately preceding the year in which a corporation goes public. Fifth, financial statements fall within the definition of "books and records" under the federal securities laws. And sixth, a corporation can be both a victim and a participant in crimes arising out of the same facts.
  
     On January 21, 1997, the trial court found Crop Growers guilty, pursuant to its plea of nolo contendere, to one count of conspiracy and one count of making and keeping false books and records in violation of the FCPA. Crop Growers paid a $2 million fine to the United States Treasury.
  
     Hemmingson and Black went to trial on the three remaining counts in the indictment — conspiracy and causing the Henry Espy campaign to make false statements to the FEC. The two substantive counts charged Hemmingson and Black, by virtue of their roles in the conduit contribution scheme, with causing the campaign to fail to identify three Crop Growers subsidiaries, rather than the persons who actually wrote the checks, as the contributors to Henry Espy' campaign. On February 13, 1997, the jury acquitted the two defendants.
3. United States v. Henry W. Espy, Jr., et al.
     The Henry Espy case began as part of the Indictment originally returned on July 9, 1996 in New Orleans, Louisiana. However, on November 6, 1996, the New Orleans trial court judge transferred to the Northern District of Mississippi for trial the first six counts of the indictment — conspiracy and false statements to a federally insured financial institution in connection with a $75,000 loan to Henry Espy.
  
     On February 24, 1997, Ferrouillet, who as a result of the transfer was a defendant in New Orleans and Oxford, and Municipal Healthcare Cooperative, Inc., Ferrouillet's corporate alter ego for conducting his insurance business, pleaded guilty to the conspiracy and five false statements counts. Ferrouillet guaranteed the bank loan, with his law firm, Ferrouillet & Ferrouillet, as guarantor. The court transferred Ferrouillet's sentencing back to New Orleans for consolidation with his 10-count felony conviction. The sentence on the 16 felony counts was 12 months in a half-way house/work release program. The court sentenced Municipal Healthcare to five years of inactive probation. Ferrouillet & Ferrouillet pleaded guilty to one count of conspiracy to defraud Henry Espy's hometown Mississippi bank in connection with the loan and was sentenced to pay a $10,000 fine.
  
     Henry Espy thus became the lone remaining defendant in what began as a five defendant case. On February 28, 1997, in a bench trial, the judge entered a Judgment of Acquittal on the five counts of false statements to a federally-insured bank. On March 4, 1997 the Judge entered a Judgment of Acquittal on the remaining conspiracy count.
4. In the Matter of American Family Life Assurance Company
  During the investigation, this Office uncovered illegal corporate and conduit campaign contributions to the Henry Espy campaign debt retirement effort by the American Family Life Assurance Company ("AFLAC"), a New York Stock Exchange - listed and Fortune 500 company. In September 1994, AFLAC's Vice President of Marketing Support, solicited two independent AFLAC insurance agents and their wives to each contribute $1,000 to Henry Espy's failed congressional campaign, and subsequently authorized the issuance of checks using AFLAC corporate funds to reimburse the contributions. My office declined prosecution because, as noted in the company's Conciliation Agreement with the FEC, AFLAC's vice president was the only employee involved in the unlawful reimbursement scheme. Before referring the matter to the FEC for administrative resolution, we obtained AFLAC's agreement to pay an $80,000 penalty and its consent to the FEC's jurisdiction.
  
  On January 14, 1998 the FEC made public the Conciliation Agreement. AFLAC paid an $80,000 civil penalty and admitted to knowingly and willfully violating the corporate contribution and conduit contribution provisions of the Federal Election Campaign Act ("FECA").
The Department of Agriculture's Chief of Staff: Ron Blackley
Ronald H. Blackley was the Chief of Staff at USDA between January 21, 1993 and February 1994. During the mid-1980s, Blackley worked in Mississippi for the Agricultural Stabilization and Conservation Service ("ASCS"), an agency of the USDA. The USDA description of Blackley's Chief of Staff position was the "alter ego" to the Secretary of Agriculture and specified that he "shared with the Secretary the burdens and responsibilities of his office." Blackley also served as an agriculture aide to then-Congressman Espy from 1989 until Espy's appointment as Secretary. When illegal conduct by Blackley came to light, the Department of Justice refused to prosecute him and vigorously opposed my January 25, 1996 application for investigatory and prosecutive jurisdiction to the Division for the Purpose of Appointing Independent Counsels of the United States District Court for the District of Columbia Circuit ("Special Division"). On April 22, 1997, the Special Division referred to me the following:
The referral of this related matter led to the following prosecutions:
1. United States v. Five M Farming Enterprises, Inc., et al.
  In my last report, I advised you of the disposition of this case. Five M Farming Enterprises and Brook Keith Mitchell, Sr. pleaded guilty on November 13, 1996 to conspiracy to defraud the USDA by making false and fraudulent statements to obtain in excess of $700,000 in farm deficiency payments in the flagrantly abused "Mississippi Christmas Tree" program, making false statements to the USDA and submitting false entries in books and records. Between May 1993 and May 1996, Mitchell was an Espy appointee to the five member Mississippi ASCS State Committee. Sentencing has not yet been scheduled. Brook Keith Mitchell, Jr., a college student and the third defendant, concluded a one year pre-trial diversion program on November 13, 1997.
2. United States v. Norris J. Faust, Jr.
  On November 19, 1996, a grand jury in the Southern District of Mississippi indicted Norris Faust, Jr., the Executive Director of the Farm Services Agency for the State of Mississippi, on three counts of perjury. On March 8, 1993, in contravention of agency protocol, Faust rescinded an agency regulation that enabled Brook Mitchell, Sr. to collect farm subsidies on behalf of his sons without disclosing that they were full-time college students and had insignificant involvement in the operation of Mitchell's farm. Mitchell, who lobbied to get Faust his position, and Blackley, who was Chief of Staff and represented Mitchell as a paid consultant in a USDA appeal contesting the denial of subsidies to Mitchell, had urged Faust to rescind the regulation. Faust lied to the federal grand jury on three different occasions regarding the circumstances surrounding the rescission in order to hide the true motives behind his conduct. On February 14, 1997 the jury acquitted Faust on the three perjury counts.¹
3. United States v. Ronald H. Blackley
  On April 22, 1997, a federal grand jury in the District of Columbia indicted Blackley on three counts of false statements relating to his receipt of $22,000 in 1993 from Mississippi agri-business interests, which were prohibited sources, after Blackley became Chief of Staff at USDA. The agri-businesses that gave him the $22,000 were clients of Blackley's consulting business and had matters pending before the USDA. In fact, these businesses sought and received in excess of $400,000 in USDA subsidies in the one year that Blackley served as Espy's Chief of Staff. During this period, Blackley also attempted to influence and reverse a USDA decision not to provide one of the businesses with the amount of subsidies it requested. The agri-businesses made payments to Blackley, his wife and his son. On December 1, 1997 the jury convicted Blackley on all counts. Sentencing before the Honorable Royce C. Lamberth is scheduled for March 13, 1998.
The Sun-Diamond Gratuities and Illegal Contribution cases
Sun-Diamond Growers of California, Inc. describes itself as a "mega-cooperative," an agricultural cooperative with more than 4,500 growers operating as Diamond Walnut Growers (operator of the world's largest processing plant for walnuts), Sun Maid Growers of California (producer of 30 percent of California's raisins), Sunsweet Growers, Hazelnut Growers of Oregon (producer of nearly 20 percent of Oregon's hazelnuts), and Valley Fig Growers (producer of nearly 50 percent of California's figs). Sun-Diamond also is the parent of Sun-Land Products of California, a for-profit corporation that processes and makes dried fruits and nuts. In 1994, Sun-Diamond's combined sales and revenues were $670 million; in 1993 its net proceeds were $51.5 million. Since 1986, Richard Douglas served as Sun-Diamond's senior vice president of corporate affairs, responsible for all of Sun-Diamond's interests in Washington, D.C. The Sun-Diamond cases include the following three prosecutions:
1. United States v. Sun-Diamond Growers of California
  In my last report, I advised you that, in September 1996, a jury in the District of Columbia convicted Sun-Diamond of three felonies — illegal gratuities and two counts of wire fraud, and five Federal Election Campaign Act misdemeanors — one illegal corporate political contribution count and four illegal conduit contribution counts. On May 13, 1997, the court sentenced Sun-Diamond to five years probation, with special conditions, and a $1,500,000 fine. Sun-Diamond has appealed its conviction.
  
  On September 7, 1996, the trial Court ruled that illegal gratuities to public officials did not require showing a nexus between the gratuity and a specific official act. Instead, the Government only must prove the existence of a status gratuity —that the gratuity-giver has a matter "within the purview of the official receiving the gratuity," and the gratuity was provided simply because of the official's position. United States v. Sun-Diamond Growers of California, 941 F. Supp. 1262, 1266 (D.D.C. 1996). In the appeal, Sun-Diamond seeks to rewrite the gratuity statute, 18 U.S.C. ¤ 201(c)(1)(A), by requiring the government to demonstrate a nexus between the gratuity and a specific official act. Both sides have briefed and argued the case for the Court of Appeals for the District of Columbia Circuit.
2. United States v. Richard Douglas
     In my last report, I advised you of the indictment of Richard Douglas on October 15, 1996, in the Northern District of California on 17 counts of illegal gratuities to a public official (Secretary Espy), mail and wire fraud, illegal corporate and conduit campaign contributions, and false statements to the FBI. On April 2, 1997, the Honorable Thelton E. Henderson severed the nine wire fraud counts alleging Douglas committed fraud in his mortgage application for a half-million dollar house in Oakland, California, from the gratuities and illegal campaign contribution counts.² Judge Henderson also dismissed the two counts that charged Douglas with making false statements o the FBI concerning whether Sun Diamond had matters pending at the USDA and whether he gave gratuities to Secretary Espy, and that he received free tickets to the June 1993 Chicago Bulls-Phoenix Suns National Basketball Association championship from New York Knicks guard Greg Anthony when in fact Espy obtained the tickets from a Quaker Oats corporate executive.
  
     On November 24, 1997 a jury convicted Douglas on one count of giving $7,600 in illegal gratuities to and for the benefit of Secretary Espy. The illegal gratuities included a new set of luggage worth $2,427, tickets, limousine rides and meals for Secretary Espy and his girlfriend to attend the 1993 U.S. Open in New York valued at $4,590, and approximately $655 in meals. The jury was unable to reach a verdict on the second count of illegal gratuities, a $3,100 airplane ticket to Espy for his girlfriend to accompany Espy on a trip to Greece. The jury acquitted Douglas on the remaining counts.
  
     This case exemplifies, among other things, how trial court delays hinder the progress of an Independent Counsel's office operation. The first trial, on the gratuities and illegal contributions, commenced exactly one year, to the day, after the initial trial setting conference on October 28, 1996, when the court deferred setting a trial date upon request of defense counsel. Notwithstanding our repeated requests for an early trial date, the trial court did not do so at hearings or requests made on December 2, 1996, February 26, 1997 and April 14, 1997. Although on April 30, 1997 the court set a "firm" trial date of September 16, 1997, on August 21, 1997, Judge Henderson vacated the trial date because of the unavailability of defense counsel and reset trial for October 21, 1997. Unavailability of defense counsel resulted in one additional postponement until October 28, 1997.
  
     Although Judge Henderson originally committed to beginning the wire fraud trial two weeks after the conclusion of the first trial, he still has not yet set a trial date. As discussed below under Appellate Matters, we appealed the court's dismissal of the two false statement counts, and, as a result of a January 26, 1998 United States Supreme Court opinion "on point," expect to prevail and proceed to trial on the charges.
3. United States v. James H. Lake
  In the first disposition obtained by this office in October 1995, James Lake pleaded guilty to wire fraud and making illegal contributions to the Henry Espy campaign. Douglas, in managing Sun-Diamond's Washington lobbying staff, directed Lake's work, and that of his firm, Robinson Lake Sawyer and Miller, a wholly owned subsidiary of Bozell Worldwide. Sun-Diamond paid Lake an annual retainer of $240,000. The wire fraud count was for defrauding his company of his loyal and honest services by submitting a false $5,000 invoice to a charity dinner, and the FECA counts were for an illegal corporate campaign contribution and conduit contribution to Henry Espy's campaign more than one year after his primary election defeat. Lake testified as a government witness in United States v. Sun-Diamond Growers and United States v. Richard Douglas.
  
  On January 31, 1998, the Honorable Ricardo M. Urbina sentenced Lake to to pay a fine of $150,000, representing $100,000 for the wire fraud count and $25,000 for each FECA count, and two years probation. The Court also required that Lake, as a special condition of probation, write and distribute to more than 2,000 lobbyists and entities, at his own expense, a monograph detailing the criminal provisions of FECA relating to corporate and conduit contributions to candidates for federal political office. The monograph is to cover four areas of FECA: (1) its contribution limits; (2) its prohibitions and criminal provisions regarding corporate campaign contributions; (3) its prohibitions and criminal provisions regarding conduit contributions; and (4) methods of preventing criminal violations. Additionally, the Court required Lake to distribute the monograph to the 490 members of the American League of Lobbyists, the 1,602 political action committees sponsored by corporations, and the 41 political action committees sponsored by cooperatives. Federal law does not require the lobbyists to register with the FEC.
Super Bowl Atlanta and Smokey Bear — Espy's Tickets
As first reported in the press on August 25, 1994, Secretary Espy made an official government trip to and attended the January 30, 1994 Super Bowl in Atlanta, Georgia.³ When Secretary Espy first made plans to attend the game, there also were plans to honor Smokey Bear, the mascot of the United States Forest Service which is under USDA jurisdiction. On approximately January 21, 1994, Secretary Espy learned that there were no official USDA events scheduled for the Super Bowl. So he then caused his staff to schedule and attempt to schedule meetings in Atlanta during Super Bowl weekend to justify his travel and attendance. Secretary Espy billed the government for travel, two nights' lodging and other expenses for his trip to Atlanta.

In addition, to attending the football game, Espy did meet with senior officials of Oglethorpe Power Corporation concerning its efforts to refinance $3 billion worth of debt guaranteed by the Rural Electrification Administration, an agency of the USDA. Espy obtained one ticket to the game from Smith Barney, which was working for Oglethorpe on the refinancing, and four tickets from Fernbank Museum of Natural History, which invited Espy and assembled an exhibition marking Smokey's 50th birthday. Fernbank publicly stated that it paid $900 for the four tickets, $200 more than their face value, for tickets for Espy's girlfriend and children. Fernbank obtained a $71,000 Federal Financial Assistance Grant for the 1994 Smokey Bear exhibition. At the game, two 30-second animated video public service announcements honored Smokey Bear during halftime.

United States v. Smith Barney, Inc.
On July 29, 1997, Smith Barney, Inc. paid $1,050,000 to the United States in settlement of a civil tort and conflict of interest action for giving Secretary Espy a Super Bowl ticket in 1994 valued at $2,200. The Complaint charged that Smith Barney gave the gratuity to Secretary Espy while Smith Barney's Public Power Group was seeking Espy's assistance to convince the Department of Treasury to reconsider a decision not to waive more than $286 million in prepayment penalties on a $3.1 billion loan to Smith Barney's client, Oglethorpe Power. This case was the first civil action for damages and civil penalties brought by an Independent Counsel. Additionally, we believe that this was the first case brought by the United States under the tort theory of interference with an agency relationship and the first application of 18 U.S.C. ¤ 209 against a non-government person or entity. Although Smith Barney denied legal liability, the Wall Street securities firm accepted responsibility for the conduct of its employee for participating in and procuring a violation of Secretary Espy's fiduciary duty to the United States and interference with his agency relationship with the United States Department of Agriculture and the Executive Branch of the United States Government.

The facts of the Smith Barney case also were unique in that Secretary Espy went outside of the Department of Agriculture in support of Oglethorpe's loan refinancing proposal — on several occasions to the Secretary of the Treasury, once to the Director of the Office of Management and Budget, and twice to the Vice President of the United States. Where Fernbank paid $225 for each of four tickets for the Secretary, Smith Barney paid a ticket scalper a total of $6,600, $2,200 for each of three tickets, one of which Espy received. The Complaint alleged that the Smith Barney Managing Director responsible for the Oglethorpe account used an Atlanta-based financial printer to purchase the Super Bowl tickets. When the financial printer issued an invoice to Smith Barney for "Super Bowl tickets," the Managing Director instructed the financial printer to falsify and reissue the invoice to read "printing consultation fee on Oglethorpe Power Project," eliminating any reference to Super Bowl tickets.
The Tyson Foods Gratuities and Cover-Up
The role of Tyson Foods, Inc. and its principals in the giving of illegal gratuities to Secretary Espy has been a central component of this investigation since its inception. In Attorney General Janet Reno's August 8, 1994 application to the Special Division for the appointment of an Independent Counsel, she made the following representations concerning violations of federal criminal law by Tyson Foods:
In re Espy, Application to the Court Pursuant to 28 U.S.C. ¤ 592(c)(1) for the Appointment of an Independent Counsel, Petition No. 94-2 (D.C.Cir., filed Aug. 8, 1994) at 1-2. My appointment followed from and was as a result of this application. The following prosecutions relate specifically to Tyson Foods' conduct:
1. United States v. Tyson Foods, Inc.
      On December 29, 1997 Tyson Foods, Inc. pleaded guilty to a one count criminal information before Judge Urbina in the District of Columbia to giving more than $12,000 in gratuities to Secretary Espy. The unlawful gratuities that Tyson Foods gave Espy for or because of official acts Espy performed or would perform, all in violation of 18 U.S.C. ¤ 201(c)(1)(A) (the illegal gratuities provision of the federal criminal code), consisted of (1) four tickets to the January 18, 1993 Presidential Inaugural Dinner for a total cost of $6,000; (2) air transportation (round trip for Secretary Espy's girlfriend and one way for Secretary Espy) on a Tyson Foods jet, meals, lodging, and entertainment at the May 14-16, 1993 Don Tyson/John Tyson Birthday Party weekend, Tyson Management Development Center, Russellville, Arkansas, valued in the approximate amount of $2,556; (3) a Tyson Foundation scholarship check for Secretary Espy's girlfriend, issued on January 4, 1994, in the amount of $1,200 for the first semester of an eight semester college program; and (4) airline tickets for Secretary Espy's girlfriend, skybox tickets, food, and limousines for the Dallas Cowboys—Green Bay Packers January 16, 1994 playoff game in the approximate amount of $2,271. Tyson Foods gave these gratuities to Secretary Espy while it had a number of matters pending before the Department of Agriculture, including, among other things, an emergency interim final rule issued on or about August 16, 1993, by the USDA that required processors, including Tyson Foods, to place safe handling instructions on all raw meat and poultry packaging labels.
  
      As part of the Plea Agreement, Tyson Foods agreed to pay $6 million in fines and investigative costs. On January 12, 1998 Judge Urbina accepted the terms of the plea agreement negotiated between my office and Tyson Foods, modified only by the addition of a four-year term of probation, and sentenced the company to pay the $6 million in fines and investigative costs, adhere to a comprehensive Corporate Compliance Agreement and fully cooperate with this office's ongoing investigation and prosecutions of Secretary Espy, Tyson Foods' principal lobbyist Jack Williams and Tyson Foods official Archibald Schaffer. The Compliance Agreement entered into with the USDA and Office of Independent Counsel was unprecedented in its breadth — requiring Tyson Foods to: (1) appoint a new Chairman of the Audit Committee of the Board of Directors; (2) retain an outside expert to review, evaluate and comment on Tyson Foods' relevant internal reporting structure and controls, relevant policies and procedures and implementation of the controls, policies and procedures; (3) require the Audit Committee and independent auditors to (a) review officer expenses, and (b) review all contracts for lobbying and consulting services relating to matters dealing with the Executive Branch and expenses attendant thereto; (4) design, establish, and begin implementing a compliance program which includes (a) a Corporate Code of Conduct and Compliance Policy; (b) distribution of the Corporate Code of Conduct and Compliance Policy to Tyson Foods directors, officers, managers, employees, consultants, lobbyists, or others employed or retained by Tyson Foods involved in matters relating to the USDA and dealing with USDA officials; (c) certifications by those to whom Tyson Foods is required to distribute the Code of Conduct and Compliance Policy that they understand and will comply with applicable laws and regulations and with the policies set forth in the policy; and (d) conduct annual training programs concerning, among other things, the fiduciary duties and other obligations of officers and directors; (5) establish an Ethics Compliance Committee; (6) appoint an Ethics Compliance Officer; (7) create a log of all substantive contacts by Tyson Foods officers and directors with representatives of all federal agencies at the Contracting Officer level and above; (8) prepare a quarterly Compliance Report; and (9) review its internal reporting structure and controls to assure that the control environment, accounting system and procedures can be relied on to assure reporting of transactions in accordance with generally accepted accounting principles.
  
      Although the USDA did find cause to debar Tyson Foods from procurement and non-procurement programs, the USDA determined that the terms and conditions of the Compliance Agreement provided adequate assurance that Tyson Foods' future dealings with the federal government would be conducted with the high integrity the federal government expects of its business partners, and that suspension, debarment, or action was not necessary to protect the USDA's interests. As a term of the four year probation, the Court required Tyson Foods also to make quarterly reports to the Court regarding its dealings with federal officials and separate reports to the Court on its performance of the Compliance Agreement.
2. United States v. Jack L. Williams and Archibald R. Schaffer, III
      On January 15, 1998, a District of Columbia Grand Jury returned a 15-count second superseding indictment charging Jack L. Williams, Tyson Foods' principal Washington lobbyist, and Archibald R. Schaffer, III ("Schaffer"), Tyson Foods' official in charge of Media, Public and Governmental Affairs and the company's lobbying activities, with conspiring to defraud the United States and the USDA of the right to the honest services of Secretary Espy, to violate the illegal gratuities provisions of Title 18 and the Federal Meat Inspection Act of 1907 and to make false statements to federal law enforcement officers to conceal their knowledge of the illegal gratuities. The Indictment alleged that Williams and Schaffer conspired to commit these offenses with four unindicted co-conspirators — Tyson Foods, Don Tyson (chairman of the Board of Directors of Tyson Foods and control person over approximately 90 percent of its voting shares), John Tyson (Tyson's son, a member of Tyson Food's Board of Directors, president of the Beef and Pork Division, and a trustee of the Tyson Foundation) and the Tyson Foundation (a not-for-profit Arkansas charitable corporation controlled by the Tyson family). The Indictment superseded two previous indictments of Williams, one charging that Williams made false statements to FBI agents and USDA Office of Inspector General agents, and one charging Williams with giving illegal gratuities to Secretary Espy and making the false statements.
  
      A grand jury first indicted Williams on September 17, 1996 on the two false statements counts. On March 21, 1997, a jury convicted Williams on both counts of lying to the federal law enforcement agents. On June 4, 1997, the trial court granted a defense motion for a new trial upon claiming the unavailability of certain evidence. The information in question involved testimony by a government witness who was not testifying concerning any underlying facts in the case, rather he was a witness concerning the materiality to the investigation of false statements by Williams and others. We asserted that a 15-year old false statement in a totally unrelated affidavit in an administrative matter, after which the agent was promoted, was irrelevant to the witness' credibility; however, the court disagreed.
  
      On September 30, 1997, the grand jury returned a superseding indictment charging Williams with the two false statements counts and two additional charges of violating the illegal gratuities provision of the Meat Inspection Act. The second superseding indictment returned on January 15, 1998, which included Schaffer, is scheduled for trial before Judge Robertson on June 15, 1998.
Indictment and Prosecution of the Secretary: United States v. Alphonso Michael Espy
   On August 27, 1997, for the first time in more than seventy years and only the second time in American history, a federal grand jury indicted a Secretary of a Department of the United States and member of the President's Cabinet for accepting illegal gratuities.⁴ The District of Columbia federal grand jury indicted former Secretary of Agriculture Alphonso Michael Espy on 39 counts of wire and mail fraud, a public official accepting illegal gratuities, violations of the Meat Inspection Act and the Travel Act, false statements, tampering with a witness and causing a criminal act to be done. The charges include violating his duty to provide honest services to the American public by taking more than $35,000 in things of value for his own benefit, and that of his girlfriend and his family, from prohibited sources during a fifteen month period in 1993 and 1994. ⁵

   The focus of the Indictment is Secretary Espy's acceptance of things of value from firms and individuals with business before the USDA⁶ — Sun-Diamond and its lobbyist (Market Promotion Program, Methyl Bromide, Teamsters Union strike at Diamond Walnut, Commodity Letter of Credit Program, USDA commodities purchases, the "Delaney Clause," USDA position for Kimberly Schnoor, and Elsmere/BKK land swap); Tyson Foods and its lobbyist ("zero tolerance" policy for fecal contamination of poultry, safe-handling labeling, fresh/frozen labeling, and USDA inspections and certifications); Oglethorpe (refinancing $3.1 billion in REA bonds); Smith-Barney (refinancing $3.1 billion in REA bonds for Oglethorpe); the EOP Group, Inc., a Washington, D.C. political and business consulting company that represented organizations before USDA and employed Espy's girlfriend after he became Secretary of Agriculture (refinancing $3.1 billion in REA bonds for Oglethorpe, product use approval for Konjac Flour, and representation of National Agricultural Chemical Association); Quaker Oats Corporation, a multi-national food company doing business in the areas of grain-based cereals and snacks, and with a food division that processes red meat products (USDA compelled recall of 1.8 million pounds of meat); and Fernbank ($71,000 contract). The illegal gratuities that Espy accepted and/or solicited included: luggage (Sun-Diamond and Douglas) valued at $2,427; cash to his girlfriend (Sun-Diamond and Douglas) in the amount of $3,200; U.S. Open tennis tickets and limousines (Sun-Diamond and Douglas) valued at $4,446; tickets to a Washington Bullets-New York Knicks NBA basketball game (Sun-Diamond and Douglas) valued at $222; Waterford Crystal Bowl (Sun-Diamond and Douglas) valued at $173; four seats to a Presidential Inaugural dinner (Tyson Foods/Williams) valued at $6,000; Russellville birthday party, including airfare, meals, lodging and entertainment (Tyson Foods/Williams) valued at $2,556; Tyson Foundation scholarship check to his girlfriend (Tyson Foods/Williams) valued at $1,200; weekend trip to Dallas, Texas, including airfare, limousines and tickets to the Dallas Cowboys-Green Bay Packers NFL Playoff football game (Tyson Foods/Williams) valued at $2,087; Super Bowl ticket (Oglethorpe Power/EOP Group/Smith Barney) valued at $2,200; employment for his girlfriend (EOP Group) value not assigned; tickets to the Chicago Bulls-Phoenix Suns NBA Championship basketball game (Quaker Oats) valued at $90; and four Super Bowl tickets (Fernbank) valued at $857.

   Among the additional felonies charged in the Indictment were offenses related to Secretary Espy's efforts to conceal his illegal conduct — tampering with a witness and false statements. The charge of witness tampering (18 U.S.C. ¤¤ 1512(b)(2)(A) and (B) and 1512(b)(3)), which exposes the former Secretary to possible 10 years incarceration, relates to his directing another USDA employee under his immediate supervision to alter an official document. On April 8, 1994, in response to a request from Special Agents of the USDA Office of Inspector General ("USDA-OIG") to produce a copy of his travel itinerary for the January 15 - 16, 1994 weekend, Espy met with and directed a member of his staff to delete certain information from his official travel itinerary and create an altered travel schedule. The false itinerary omitted all references to his girlfriend, Don Tyson, limousine service provided by Tyson Foods and the Dallas-Green Bay NFC playoff game which Espy and his girlfriend attended as guests of Tyson Foods. After Secretary Espy approved the altered itinerary, he then caused a member of his staff to deliver the false itinerary, on his behalf, to the USDA-OIG Special Agents.

   The false statements counts (18 U.S.C. ¤ 1001) involve lying to federal law enforcement agents, lying to the Executive Office of the President and filing false Financial Disclosure reports. Secretary Espy lied to USDA-OIG Special Agents about his receipt of things of value from Tyson Foods. He lied to FBI Special Agents about his receipt of the NBA playoff tickets from Douglas, claiming, as did Douglas, that the tickets came from Greg Anthony. He also lied to the FBI agents about other things of value he received from prohibited sources. Moreover, he concealed material facts from and lied to Leon Panetta, President Clinton's then Chief of Staff, and Lloyd Cutler, then White House Counsel, in response to their questions concerning Espy's unlawful receipt and solicitation of gifts, gratuities, and things of value from prohibited sources. Espy told Panetta and Cutler, in substance, that "there's nothing else out there," when he knew at the time of his statement that he had concealed and covered up certain illegal gratuities that he received and/or solicited illegally. Espy also lied to the President's representatives about all of the gratuities that he had received from prohibited sources. Finally, Espy filed Personal Financial Disclosure Report forms for the years 1993 and 1994 on which he failed to disclose reportable gifts that he received from prohibited sources and others. The value of the undisclosed gifts and gratuities was approximately $6,761 for 1993 and $3,191 for 1994.

   On December 15, 1997, Judge Urbina dismissed four counts in the Indictment — three counts of violating the illegal gratuities provision of the Meat Inspection Act and the one count of false statements to the Executive Office of the President. Judge Urbina denied Espy's motion to dismiss the thirteen counts charging illegal receipt of gratuities by a public official under Title 18. Judge Urbina dismissed the Meat Inspection Act gratuities counts by reading the statute narrowly and finding that the Act did not apply to the Secretary of Agriculture. He dismissed the count charging false statements to the President's Chief of Staff and the White House Counsel, both members of the Executive Office of the President, by finding that the Executive Office of the President was not a department of the United States covered by the false statements statute. As discussed below, we appealed the dismissal of these counts.

   The court originally scheduled Espy's trial to begin on March 30, 1998. On February 13, 1998, the court, acting on a motion of the defendant that we opposed vigorously, continued the Espy trial until some unstated future date after the Court of Appeals for the District of Columbia Circuit renders its decisions in the Government's Espy and defendant's Sun-Diamond appeals.

II
APPELLATE MATTERS

   This office's appellate practice encompasses the three stages of an Independent Counsel's investigative and prosecutive jurisdiction — the grand jury investigation, post-indictment but pre-trial interlocutory appeals, and post-conviction relief. In my last report, I wrote that "[i]t has become clear in the course of this investigation that persons resisting an independent counsel investigation or prosecution see the question of the independent counsel's jurisdiction as a productive avenue for delaying tactics."⁷ As recently as November 1997, we were filing briefs opposing motions to quash grand jury subpoenas. The most notable challenge to a grand jury subpoena issued by this Office, and challenge to our jurisdiction, came from the White House. That grand jury litigation and related appeal gave rise to the June 17, 1997, decision of the United States Court of Appeals for the District of Columbia Circuit in In re: Sealed Case, 116 F.3d 550 (D.C. Cir. 1997)⁸ concerning an October 14, 1994 subpoena to the White House for relevant documents. The D.C. Circuit vacated the district court's September 30, 1996 order denying our motion to compel the documents. Although the appellate court did not overturn the lower court's decision, it ordered the district court to "identify and release specific items of evidence that might reasonably be relevant to the grand jury's investigation" and afford the Office of Independent Counsel "an opportunity to make out a sufficient showing of need in regard to other evidence." Id. 582. To date, we still have not received the "identified and specific items" the Circuit Court ordered the district court to turn over eight months ago.

   There currently are two post-indictment/pre-trial matters before the appellate courts. The first, now pending before the Ninth Circuit, is Judge Henderson's April 2, 1997, dismissal of the two false statements counts against Richard Douglas, discussed above at page 11. The fundamental issue on appeal was whether Douglas' conduct fit within the "exculpatory no" defense to criminal charges brought under 18 U.S.C. ¤ 1001, and whether such a defense should exist.⁹ Several circuits, including the Ninth Circuit, had adopted the "exculpatory no" defense. On November 5, 1997, following oral arguments, the Ninth Circuit deferred decision pending ruling in United States v. Brogan. On January 26, 1998, the Supreme Court held that "[b]ecause the plain language of ¤ 1001 admits of no exception for an Ôexculpatory no,' we affirm the judgment of the [Second Circuit disallowing the Ôexculpatory no' defense]." Brogan v. United States, ___ U.S. ___, 1998 WL 23151, at p.5. The Supreme Court decision is consistent with the position my office took with the trial court and Ninth Circuit in Douglas.¹⁰ We currently are preparing supplemental briefs addressing whether Brogan applies retroactively to Douglas.

   The other pre-trial ruling on appeal is Judge Urbina's dismissal of the three Meat Inspection Act and one false statement to the Executive Office of the President counts in United States v. Espy, discussed above at pages 22-23. The appeal by the Government raises two issues. The first is whether the gratuities section of the Meat Inspection Act (21 U.S.C. ¤ 622), which forbids the acceptance of things of value by "any officer or employee of the United States authorized to perform any of the duties prescribed by this subchapter," applies to a former Secretary of Agriculture, who at the time he accepted gratuities was an officer of the United States authorized to perform duties prescribed by the Act. The second issue, is whether the False Statement Statute (18 U.S.C. ¤ 1001), which prohibits false statements made "in any matter within the jurisdiction of any department or agency of the United States," reaches false statements made to officials in the Executive Office of the President in the course of an investigation ordered by the President concerning the ethical conduct of a Cabinet officer. The trial court's rationale for dismissing the Meat Inspection Act counts was that "Congress did not intend for ¤ 622 to extend to the Secretary of Agriculture." The trial court's rationale for dismissing the false statement count was that "defendant's alleged false statements were not made in matters within the jurisdiction of any executive Ôdepartment' of the United States." We are arguing that the district court's dismissal of the four counts resulted wholly from a blatant misreading of the applicable statutes. The D.C. Circuit will hear oral arguments on March 25, 1998.

   Three defendants currently are seeking post-conviction relief from Courts of Appeals — Sun-Diamond from the D.C. Circuit and Ferrouillet and Hemmingson from the Fifth Circuit. On December 11, 1997, the D.C. Circuit heard oral arguments in the appeal of United States v. Sun-Diamond Growers, and the matter is under submission to the Court. As the conviction involved giving illegal gratuities to Secretary Espy, Judge Urbina, who tried the Sun-Diamond case and will preside over United States v. Espy, indicated that a pronouncement from the D.C. Circuit concerning illegal gratuities may cause him to reconsider his pre-trial rulings in Espy. Both sides are still briefing United States v. Ferrouillet and Hemmingson for the Fifth Circuit, in which, as discussed above at page 3, the Government has appealed the sentence.¹¹ The Fifth Circuit has not determined whether to schedule oral argument.

III
REFERRED MATTERS

   During the past year we have referred several matters that we uncovered during our investigation to other agencies for further investigation, as necessary, and/or prosecution. These referrals are as follows: (1) United States Attorney in Montana — the four Foreign Corrupt Practices Act counts dismissed for lack of venue in the District of Columbia Hemmingson-Black prosecution; (2) Department of Justice — gratuities from a major agri-business to public officials, including members of Congress, outside of the Department of Agriculture; (3) Department of Justice — program loan fraud in excess of $500,000 by a corporation and individual; (4) Department of Justice — Mississippi Christmas Tree scheme in excess of $450,000 involving a ten-person farming operation; (5) Department of Justice — use of Board of Directors stipends for illegal corporate and conduit campaign contributions; and (6) Federal Election Commission — the AFLAC conduit contributions to the Henry Espy debt retirement effort discussed above at page 6.

   With the exception of the AFLAC referral that resulted in a Conciliation Agreement and payment of an $80,000 civil penalty, the other matters are pending. The United States Attorney in Montana advised me that her office will make a prosecution determination in 60 to 90 days. I will keep you apprised in future reports of the dispositions of each referral.

IV
ADMINISTRATIVE AND FINANCIAL REPORT

   The Independent Counsel Reauthori-zation Act of 1994 requires that I conduct all activities "with due regard for expenses" and have "authorized only reasonable and lawful expenditures." 28 U.S.C. ¤¤ 594(l)(1)(A)(i) and (ii). To that end, we located our office in Alexandria, Virginia, three miles south of National Airport, where rents were less than in the District of Columbia. As I have since my appointment, I have implemented and maintained a system of financial controls, internal to this office and with personnel from the Administrative Office of the United States Courts, that are effective in assuring that costs are reasonable and proper. The General Accounting Office's Audit Report covering my office's expenditures through March 31, 1997 verify my accomplishment of this objective. Further consistent therewith and in the interest of efficiency, I have hired staff who were either known to me, had experience with Independent Counsel operations, administration and financial management, and/or were familiar with the relevant federal laws and regulations to administer office operation.

   In addition to the information provided in this report, during the past year I have responded to an detailed request for information received November 18, 1996 from Senator Carl Levin. I trust that the information I furnished in my six replies — dated April 30, 1997, June 9, 1997, June 10, 1997, July 31, 1997, September 17, 1997, and November 13, 1997, have assisted you in your oversight responsibility for Independent Counsels.

V
COMMENTS AND CONCERNS

   In my first report, I expressed concern about the hardship created by travel reimbursement and per diem regulations on detailees to my office, which continues to be a cause of turnover in qualified staff. In my second report, I addressed the need to clarify the scope of an independent counsel's statutory jurisdiction, investigative and prosecutive, because of the large number, but meritless, judicial challenges to jurisdiction. Both of these issues, which are subject to legislative remedy, are a source of delay in advancing and concluding Independent Counsel investigations. As I share Congress' concern for, and in fact experience great frustration from, unnecessary delays in Independent Counsel investigations and prosecutions, I write about what is the source of greatest delay — judicial procrastination and non-action. The Courts are the Source of Greatest Delay for Independent Counsel Cases

   The Special Division, in its published decision in In re Espy, 80 F.3d 501 (D.C. Cir. 1996), noted that the 14 month period ending in approximately February 1996 produced 43 litigated motions challenging my office's jurisdiction in grand jury matters. Since then, and as recent as November 1997, the challenges continue, with the total far surpassing the 43 mentioned by the Special Division. The principal jurisdictional challenge has been to subpoenas issued by my office. The average delay for the district court supervising the grand jury in the District of Columbia to respond to jurisdictional challenges in 1995, 1996 and much of 1997 was approximately 15 weeks. Delays of this length impair the efficient functioning of the institution of an independent counsel and, without doubt, have extended manifold the length of operation of this office.

   Unnecessary delays of approximately four months in duration have a direct effect on, among other things, agent manpower and allocation of agent resources. Agents from different agencies on detail to this investigation perform various assigned tasks in different phases of the investigation tailored to their areas of expertise. However, the detail agents are senior investigators, typically supervisory special agents, from, for example, the FBI, USDA-OIG and Customs. The detailing agencies expect their agents to return within a reasonable period of time, generally one year. Additionally, most aspects of the investigation are integrally related, comprising pieces of a larger puzzle. When an investigative avenue is tied up awaiting judicial resolution of an issue, I reassign the agent to a different issue or phase of the investigation. That agent then may become unavailable to return to the original assignment upon a decision from the court, if the new issue is active. Alternatively, the detailing agency may return the agent to his or her official duty station. If the agent who has spent time and learned an issue cannot return to the Office of Independent Counsel, the agency may send another agent in his or her place. This precipitates additional delay attributable to the "learning curve" associated with a particular issue.

The Impact of Multiple District Litigation on Costs

   An additional factor that impacts costs is multiple district litigation. Ironically, a criminal defendant may influence a legal proceeding by his choice of where he committed the crime. Ferrouillet committed his offenses in Louisiana and Mississippi, and aided and abetted a crime in Montana. Faust lied to the grand jury in Mississippi. The Northern District of California was the only common venue for all 19 counts on which Douglas was indicted. The requirement of seeking return of an indictment, and more importantly conducting a trial, in a venue other than the District of Columbia adds significant cost to an Independent Counsel investigation. Unlike United States Attorneys Offices which are located in every federal judicial district in the United States, Independent Counsels must create satellite offices in order to function effectively in the distant district. The criminal conduct that my investigation uncovered and fell within our prosecutorial jurisdiction necessitated operating three satellite offices during the past year. Two of the offices, which now are closed, were in New Orleans, Louisiana (United States v. Henry Espy, et al. indictment and United States v. Ferrouillet and Hemmingson trial), and Oxford, Mississippi (United States v. Henry Espy, et al. trial). The third satellite office, which will remain open until mid-March 1998, is in San Francisco, California (United States v. Douglas indictment and trial).

   In locating offices in the Northern District of Mississippi and Northern District of California, we contracted with GSA to obtain low-cost space. In New Orleans, the GSA was unable to accommodate our time constraints for opening an office. As a result, the GSA issued a waiver so that we could obtain a lease in New Orleans. When setting up an office for trial, we confronted the reluctance of landlords to grant short-term leases of indeterminate length. Although we sought office space in the United States Attorneys offices in these jurisdictions, they were unable or unwilling to accommodate us.

The San Francisco Office

   The operation of satellite offices, particularly when the courts impose additional delays, increases operations costs. The San Francisco office, opened November 1996 in anticipation of an early 1997 trial date, best illustrates the severe financial strain resulting from court-driven delays. The monthly cost of operating and maintaining the San Francisco office with minimal staff, while awaiting a trial date, was $35,000 to $40,000 a month. Beginning in approximately July 1997, the cost rose in excess of $85,000 to support (including pay) a full staff — a team of lawyers, agents, and support staff, and prepare for a trial we anticipated would begin in mid-September.

   The one year from indictment to trial in the first of the two Douglas cases in San Francisco also highlights the professional staffing problems associated with trial date postponements facing Independent Counsels. Extended judicial delays may give rise to disbanding an entire trial team and restaffing the case, causing repetition of trial preparation and adding to mounting expenses.¹² The year-long delay forced me to recast the trial team three times. In fact, had the first Douglas case not proceeded to trial in late October 1997, I stood to lose the two Assistant United States Attorneys, one from San Francisco and the other from Tampa, Florida, detailed to my office for the trial. In anticipation of scheduling a reasonable trial date, the two United States Attorneys consented to the details upon my representation that they would complete the two trials in October. I now must again restaff the trial team because, on February 12, 1998, the United States Attorney for the Middle District of Florida advised me that he would not make available for the mortgage fraud case the Assistant United States Attorney who served as my lead counsel in the gratuities-FECA case. The mortgage fraud case, the second trial, still does not have a trial date.

   Additionally, in November 1996, I relocated a lawyer from Washington to San Francisco to oversee the office we opened for a trial expected to begin in January 1997. She was an integral part of the trial team in the companion case, United States v. Sun-Diamond, tried in Washington in September 1996. This lawyer was intimately conversant with the factual and legal issues in the West Coast case. She subsequently married and left the office in May 1997 to raise a family.

The New Orleans and Oxford Offices

   The Henry Espy indictment in New Orleans gave birth to a second satellite office, Oxford, Mississippi, when the trial court transferred six counts to Henry Espy's home district. On February 9, 1996, a senior narcotics prosecutor from the United States Attorney's Office in New Orleans began a detail to work on the Henry Espy and Ferrouillet aspect of the investigation. In June 1996, I opened the New Orleans office in anticipation of seeking an indictment and a possible trial. New Orleans was the logical venue for prosecuting the offenses surrounding Henry Espy's $75,000 bank loan guaranteed by Ferrouillet and the laundering, and concealment, of the $20,000 campaign debt retirement payment. On July 9, 1996, the grand jury returned an indictment, and, on August 8, 1996, superseded the indictment to add Hemmingson as a defendant. The defendants twice moved, and we opposed, to continue the trial date. In October 1996, when the court changed the trial date from early November 1996 to December 1996, the Assistant United States Attorney from New Orleans returned to the United States Attorney's Office to prosecute a major narcotics case. As a result, on October 18, 1996, six weeks before trial, an Assistant United States Attorney from Baton Rouge, Louisiana joined me and another trial lawyer to complete the trial team. The jury convicted the defendants on December 19, 1996; however the court did not sentence the defendants until May 14, 1997. During the five months between verdict and imposition of sentence, the defendants filed 14 motions. I closed the New Orleans office in March 1997.

   Additionally, on November 6, 1996 the trial court transferred the first six counts of the Indictment to the Northern District of Mississippi for trial. This necessitated opening another office in Oxford, Mississippi, which we operated between February 1 and March 15, 1997.

Attorney Turnover

   In addition to the effect of judicial delays on agent manpower, the delays have directly effected attorney tenure. I currently have ten full-time attorneys on staff. Since mid-1995, my staff has averaged sixteen to twenty attorneys. Since opening the office, 41 attorneys have worked for this office, of which only two — my former Deputy, Counsellor, and now Senior Advisor and I — have worked on the investigation since the beginning. In less than four years, thirteen full-time attorneys have left this office, most to return to Department of Justice assignments or pursue other professional opportunities.¹³ As I noted above, the year-long judicial delay in Douglas forced me to recast the trial team three times, and almost a fourth. Qualified senior trial lawyers are essential to the successful completion of an independent counsel's mission, regardless of whether an investigation results in even one indictment or prosecution. The turnover among attorneys that I experienced as a direct consequence of judicial delays has added unnecessarily to the length of this investigation.

VI
CONCLUSION

   My cases have involved prosecuting both sides of the offense of illegal gratuities involving federal officials — the receiving and the giving. The motive for these illegal acts is rooted in the importance of access to and the ability to influence persons and entities regulated by the federal government. Our 13 cases to date reflect the susceptibility of the regulator and the regulated to crossing the line from how the political process was designed to work to manipulation of the process by corrupt means and concealment of the illegal conduct.

   If you have any questions concerning the content of this report or my work as Independent Counsel, I would be pleased to respond.

Respectfully,

Donald C. Smaltz
Independent Counsel

1. Notwithstanding the acquittal, one of the jurors wrote the following in a Letter to the Editor of the Jackson, Mississippi Clarion Ledger published on February 27, 1997:

There is no question that Norris Faust Jr. did rescind an important farming regulation which only would benefit an influential elite. By his own admission, Faust stated that he never even had reviewed the important documentation in the regulation before he changed it.

So the consideration of reinstating Norris Faust Jr. [as Farm Service Director] would only be equivalent to rescinding the fairness and equality of our system and our country.Back

2. The mortgage fraud fell within the scope of my investigative jurisdiction. At my request, the Attorney General, on October 15, 1996, referred to me for prosecution "[t]hat Richard Douglas may have obtained a mortgage loan in 1993 by making false representations and submitting false writings and documents to a broker and lender."Back

3. Some facts discussed in the two introductory paragraphs to this section derive exclusively from press reports. Oglethorpe Power Corp. and Fernbank have not been charged criminally or civilly.Back

4. During the 1920s, in the "Tea Pot Dome" scandal, so-named for a naval petroleum reserve in Salt Creek, Wyoming, President Calvin Coolidge's Secretary of the Interior, Albert Fall, was indicted and found guilty of accepting bribes totaling $300,000 from the principals of two private companies to which he had granted and leased petroleum drilling rights. On June 16, 1992, Secretary of Defense Caspar W. Weinberger became the second cabinet Secretary indicted this century -- on five counts of obstruction, perjury and false statements in the Iran-Contra affair.Back

5. The text provides an overview of the Indictment, the full text of which accompanies this letter as Attachment 1.Back

6. The Government set forth in detail the matters pending by the prohibited sources discussed in this paragraph in a Bill of Particulars filed in United States v. Espy on January 5, 1998, which accompanies this letter as Attachment 2.Back

7. The trial courts consistently have upheld the prosecutive jurisdiction of this office, denying pre-trial defense motions to dismiss for lack of jurisdiction. United States v. Sun-Diamond Growers of California, Inc., 941 F. Supp. 1262, 1272-5 (D.D.C. 1996); United States v. Henry Espy, et al., No. 96-198 (E.D. La. October 9, 1996), 1996 WL 586364, *5-6; United States v. Crop Growers Corp., et al., 954 F. Supp. 335, 342 (D.D.C. 1997): United States v. Blackley, No. 97-0166 (RCL) (D.D.C. November 12, 1997), 1997 WL 754224, *10; United States v. Alphonso Michael Espy, et al., No. 97-0335 (RMU) (D.D.C. December 23, 1997), 1997 WL 795807, *12-14.Back

8. On August 29, 1997, the D.C. Circuit unsealed its opinion in this matter. (121 F.3d 729).Back

9. As characterized by the Supreme Court, the "central feature of [the 'exculpatory no'] doctrine is that a simple denial of guilt does not come within [the scope of 18 U.S.C. § 1001]." Brogan v. United States, ___ U.S. ___, 1998 WL 23151, at p.2. Back

10. Justice Scalia, writing for the majority in Brogan, wrote that:

We cannot imagine how it could be true that falsely denying guilt in a Government investigation does not pervert a governmental function. Certainly, the investigation of wrongdoing is a proper governmental function; and since it is the very purpose of an investigation to uncover the truth, any falsehood relating to the subject of the investigation perverts that function.Back

Id., at p.2.

11. On May 14, 1997, the trial court departed downward from the United States Sentencing Guidelines and held that the defendants' conduct (Ferrouillet's 16 felony counts and Hemmingson's conviction for interstate transportation of stolen property, money laundering and illegal monetary transactions) fell outside the "heartland" of money laundering. The Government is arguing to the Fifth Circuit that the trial court defied the intent of both Congress and the Sentencing Commission, by refusing to treat money laundering as money laundering. The Probation Department recognized that the Guidelines commanded a 41-51 month sentence of incarceration, rather than one year in a half-way house/work release program. That at least one other court already has cited to the trial court's "heartland" analysis to circumvent the Sentencing Guidelines evidences the importance of this appellate issue.Back

12. A grand jury indicted Douglas on October 18, 1996. At the October 28, 1996 arraignment, in February 1997, and again on April 9, 1997, we requested an early trial date. It was not until April 30, 1997 that the court set a trial date of September 16, 1997. The September 16, 1997 trial date slipped to October 21, 1997, then to October 28, 1997 upon defense attorney requests.Back

13. One left because of the federal income tax consequences of per diem after one year, and two left because of pregnancy. Back Back to top