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April 26, 1999

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


Dear Mr. Vice President and Mr. Speaker:

This is my fourth annual report to Congress pursuant to 28 U.S.C. ' 595(a)(2). On February 20, 1998, I filed my third report detailing the status of the investigation and prosecutions, including the convictions, civil settlement, collection of more than $10 million in fines and penalties for the United States Treasury, and the 39-count felony indictment by a District of Columbia grand jury of former Secretary Espy. The totals now are 15 prosecutions, eight guilty pleas, one adjudication of guilt pursuant to a nolo contendere plea, two civil settlements, eight convictions by jury, one pre-trial diversion, four referrals to other agencies with public dispositions, penalties and fines for the United States Treasury of $11,438,000, and restitution totaling $796,860. There have been five not-guilty verdicts involving defendants: Alphonso Michael Espy, Henry W. Espy, Jr., Norris Faust, Gary A. Black, and John J. Hemmingson, who was acquitted of offenses tried in the District of Columbia but convicted of separate offenses in New Orleans, Louisiana. All that remains before submission of our Final Report is resolution of three active appeals B one awaiting ruling from the Supreme Court, one decided by the D.C. Circuit for which defendant has announced an intention to seek Supreme Court review, one in briefing before the D.C. Circuit and scheduled for argument in May B and one potential appeal not yet formally noticed.

In this report, I will update the investigation, referrals, litigation and prosecutions, including the Espy trial, and appeals since February 1998; discuss current office wind-down operations; and preview some issues that I will raise in the Final Report.


A. 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 fund-raising dinner attended by agricultural lobbyists, the purpose of which was to retire the campaign debt of his brother, Henry Espy. This brother ran for the Congressional seat Mike Espy vacated 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 (AFEC@). The AHenry Espy Campaign Cases@ included United States v. Alvarez T. Ferrouillet, Jr. and John J. Hemmingson (Eastern District of Louisiana); United States v. Crop Growers Corp., John J. Hemmingson and Gary A. Black (District of Columbia); United States v. Henry W. Espy, Jr., Alvarez T. Ferrouillet, Jr., Municipal Healthcare Cooperative, Inc., and Ferrouillet and Ferrouillet (Northern District of Mississippi); and In the Matter of American Family Life Assurance Company (Federal Election Commission). Additionally, the James Lake, Sun-Diamond, and Richard Douglas prosecutions, and the AFLAC referral, all discussed below, involved illegal contributions to the Henry Espy campaign debt retirement.

1. United States v. Alvarez Ferrouillet and John Hemmingson

On December 19, 1996, a jury in New Orleans 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 agents. The defendants laundered proceeds of misappropriated corporate funds through a New Orleans-area grocery store to the Henry Espy campaign's bank account to help retire Henry Espy's campaign debt. Instead of imposing the 41 to 51 month term of incarceration required under the federal Sentencing Guidelines, the trial court departed downward from the Guidelines to impose sentences of one year in a halfway house/work-release program.

The defendants appealed their convictions and we appealed the downward departure from the Sentencing Guidelines. On July 8, 1998, I argued the government's case before the Fifth Circuit. On September 30, 1998, in an opinion reported at 157 F.3d 347 (5th Cir. 1998), the Fifth Circuit affirmed both defendants= convictions on all counts, but also affirmed the 12-month sentence.

2. United States v. Crop Growers Corp., et al.

This case involved the actions of Crop Growers, Corp., a major crop insurer, in generating money for illegal corporate campaign contributions to Henry Espy to gain access to Secretary Espy and to influence his decisions concerning matters before the Department of Agriculture affecting the company. Acting through its two principal officers and shareholders, it created false vouchers, false invoices and fictitious record entries in the financial books and records to conceal the reimbursements. Crop Growers was found guilty pursuant to its plea of nolo contendere, and paid a $2 million fine to the United States Treasury. A jury acquitted the two senior officials of that company of conspiracy and of causing the Henry Espy campaign to make false statements to the FEC.

On January 3, 1997, the trial court dismissed for lack of venue four counts addressing these officials= falsifying corporate records and lying to the company=s independent auditors. With the concurrence of the Department of Justice, on April 17, 1997, I referred these four counts to the United States Attorney for the District of Montana for reindictment and trial. I made the referral for several reasons B (1) the important policy reasons for pursuing prosecution of these counts B i.e., the integrity of a public company=s books and records, and representations to independent auditors; (2) our confidence in the strength of the evidence; and (3) the initial interest expressed by the United States Attorney=s Office to pursue the dismissed charges. Because the United States Attorney=s office is no longer pursuing the matter, and because we are at the end of the investigation and the remaining counts do not relate to the giving of gratuities by a prohibited source, I transferred this matter on September 3, 1998, to the Public Integrity and Fraud Sections at the Department of Justice for final disposition. On December 8, 1998, Joshua R. Hochberg, Chief of the Fraud Section, advised me of the Department of Justice=s final decision to decline prosecution.

B. Conflicts of Interest within the Department of Agriculture

On April 1, 1996, the Division for the Purpose of Appointing Independent Counsels of the United States Court of Appeals for the District of Columbia Circuit, pursuant to my application, referred me for investigation and prosecution violations of federal law, other than Class B or C misdemeanors, Aby any organization or individual, related to any application, appeal or request for subsidy made to or considered by [USDA] for which [Secretary Espy] and/or his Chief of Staff Ronald Blackley intervened in the application, approval, or review process.@ In re Espy, 80 F.3d 501 (D.C. Cir. (Special Division) 1996). Ronald H. Blackley was the Chief of Staff at USDA between January 21, 1993 and February 1994. The referral and investigation led to prosecutions in United States v. Five M Farming Enterprises, Inc., Brook K. Mitchell, Sr. and Brook K. Mitchell, Jr. (District of Columbia); United States v. Norris J. Faust, Jr.(Southern District of Mississippi); United States v. Ronald H. Blackley (District of Columbia); and United States v. Richard E. Blackmore (Southern District of Mississippi).

1. United States v. Five M Farming Enterprises, Inc., et al.

In my November 1996 report, I advised you of the disposition of this case. Five M Farming Enterprises and its principal Brook Keith Mitchell, Sr., pleaded guilty on November 13, 1996 to conspiracy to defraud the USDA by making false and fraudulent statements to obtain more than $700,000 in farm deficiency payments (crop subsidies) from 1992 through 1995 in the flagrantly abused AMississippi Christmas Tree@ scheme, making false statements to the USDA and submitting false entries in books and records. Five M was Mitchell=s farming company based in Mississippi. Between May 1993 and May 1996, Mitchell was an Espy appointee to the five-member Mississippi Agricultural Stabilization and Conservation Service State Committee. A third defendant, Brook Keith Mitchell, Jr., concluded a one year pre-trial diversion program on November 13, 1997.

On March 8, 1999, the trial court sentenced Five M and Brook Mitchell, Sr., to pay full restitution in the amount of $776,860 to the USDA, and each to three years of probation. At sentencing, both defendants notified the court of their intent to appeal their conviction (guilty plea) solely on the basis of jurisdiction. Defendants have filed a motion for relief from their failure to file a late notice of appeal.

2. United States v. Ronald H. Blackley

On December 1, 1997, a jury convicted Ronald Blackley of three counts of false statements relating to his receipt of $22,025 in 1993 from prohibited sources (Mississippi agribusiness interests), after he became Secretary Espy=s Chief of Staff at USDA. Blackley made false statements on his 1993 Public Financial Disclosure Report, failing to disclose his receipt of the payments, and he subsequently lied to federal agents about these matters. On March 18, 1998, the trial court departed upward from the Sentencing Guidelines and sentenced Blackley to 27 months in jail and three years supervised release. The trial court also denied the defendant=s motion for bail pending appeal.

In sentencing Blackley, Judge Royce Lamberth stated that:

The defendant stands before me as a high ranking government official convicted of making false statements under oath. This is such a serious crime that it demands an even longer term of imprisonment in this Court's view. This Court has a duty to send a message to other high level government officials, that there is a severe penalty to be paid for providing false information under oath. There is a strong reason to deter such conduct, and to dispel all the nonsense that's being publicly discussed and debated about the seriousness of lying under oath by government officials. A democracy like ours depends on people having trust in our government and its officials.

Blackley appealed his conviction, essentially on three grounds B that the prosecution was beyond the Independent Counsel=s jurisdiction, that the indictment failed to advise him adequately of the nature of the charges against him, and that the trial court failed to give a specific instruction to the jury on one element of a charged crime. On January 26, 1999, a unanimous three-judge panel of the D.C. Circuit affirmed the three-count conviction and 27-month sentence. Circuit Judge Stephen F. Williams, the author of the Court=s opinion, wrote that

[c]oncealment of such receipts, especially in the context of a financial disclosure form intended to bring suspicious influences to the surface and in response to questions of inspectors general, tends not only to prevent discovery of underlying crimes such as receipts of bribes or gratuities, but also to reflect the perpetrator=s consciousness of guilt in those receipts.

The Court of Appeals has denied Blackley=s petition for rehearing, made with a suggestion of rehearing en banc. He has declared an intention to seek Supreme Court review.

3. United States v. Richard E. Blackmore

This prosecution and conviction arose out of criminal conduct investigated by this Office. However, I referred the matter to the Department of Justice to pursue the Government=s case. On March 25, 1998, a grand jury in the Southern District of Mississippi returned a 53-count indictment charging Blackmore with bank fraud in the disbursement of loan proceeds to fictitious and nominee borrowers and false and fraudulent promissory notes. A jury convicted him of conspiracy, 11 counts of aiding and abetting misapplication of bank funds, and five counts of aiding and abetting false entries on bank records. On January 19, 1999, the trial court sentenced Blackmore to four years and three months in jail, to be followed by five years of supervised probation/release, and ordered him to pay $842,621 in restitution.

C. The Sun-Diamond Gratuities and Illegal Contribution cases

Sun-Diamond Growers of California, Inc. is an agricultural cooperative with more than 4,500 growers. In 1994, Sun-Diamond=s combined sales and revenues were $670 million. Sun-Diamond also is the parent of Sun-Land Products of California, a for-profit corporation that processes and makes dried fruits and nuts. Between 1986 and 1997, Richard Douglas served as Sun-Diamond=s senior vice president of corporate affairs with responsibility for the co-op=s interests in Washington, D.C. The Sun-Diamond cases include United States v. Sun-Diamond Growers of California (District of Columbia); United States v. Richard Douglas (Northern District of California); United States v. James H. Lake (District of Columbia); United States v. Sun-Land Products (Northern District of California); and In the Matter of Sun-Land Products (Federal Election Commission).

1. United States v. Sun-Diamond Growers of California

In September 1996, a jury convicted Sun-Diamond of three felonies B illegal gratuities and two counts of wire fraud; and five Federal Election Campaign Act counts B 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 appealed its conviction to the D.C. Circuit. On March 20, 1998, the D.C. Circuit, while affirming the conviction on the mail fraud and illegal campaign contribution counts, reversed the gratuities conviction because it found a jury instruction to be improper. In its decision, the D.C. Circuit adopted an interpretation of the gratuities statute that would permit regulated entities to give gratuities to gain the generalized goodwill of federal officials. This interpretation conflicted with decisions of the Second, Third, Fifth and Ninth Circuits. Judge Wald, concurring in the June 18, 1998 denial of the United States' petition for rehearing en banc, found the decision=s

interpretation of 18 U.S.C. ' 201(c)(1)(A) (1994) so as not to cover any gifts or gratuities made by a regulated company to high officials of the regulating agency troubling. Given the choice, I would have construed the statutory prohibition as the Fifth Circuit has done.[] However, I have concluded that calling for a vote on the en banc petition would be futile in this case. . . . I admit that the main distinction the panel draws between gifts motivated by an official's Aposition@ and gifts motivated by an official's Aacts@ eludes me altogether.

On July 21, 1998, we petitioned the Supreme Court for certiorari, arguing that the D.C. Circuit's current interpretation of the gratuities statute will make it difficult, at best, to prosecute persons or entities for bestowing largesse on federal officials in the District of Columbia before an official takes a particular action, unless the government essentially has proof of a bribe. The Supreme Court granted certiorari on November 2, 1998. The Supreme Court heard oral argument on March 2, 1999, and we anticipate a decision by June 1999.

2. United States v. Richard Douglas

In my last report, I advised you that, on November 24, 1997, a jury in the Northern District of California convicted Richard Douglas of one count of giving $7,600 in illegal gratuities to and for the benefit of Secretary Espy. On February 20, 1998, the trial court overturned the conviction, on the ground that the Northern District of California was not the proper venue for the charges. On March 16, 1998, Douglas pleaded guilty to a one-count information charging that he made false statements to the FBI when he earlier denied giving illegal gratuities to Espy. On July 27, 1998, the Court placed Douglas on 18 months probation, ordered him to pay a $3000 fine and $100 special assessment, and required him to perform 100 hours of community service.

The Information charged Douglas with lying to the FBI in June 1994 by representing that the only time Sun-Diamond paid any expenses for Secretary Espy was when Sun-Diamond brought then-Congressman Espy to California to speak at a convention. In fact Douglas gave the following illegal gratuities to Espy: (1) Hartmann luggage valued at $2,427; (2) tickets, limousine services, and meals valued at approximately $4,590 for the Secretary and the Secretary=s girlfriend to attend the U.S. Open Tennis Tournament in New York; (3) meals valued at approximately $665; (4) $3,100 in cash for the Secretary=s girlfriend so that she could accompany Espy to the World Tree Nut Congress in Athens, Greece; and (5) a minimum of $7,000 in contributions to be made to the Congressional campaign debt retirement of Henry Espy, the Secretary=s brother. The Information also charged Douglas with making a false statement to the FBI by representing that Sun-Diamond had no issues pending before the Department of Agriculture subsequent to Espy becoming Secretary of Agriculture. In fact, Douglas knew that the following matters were pending before the USDA and Secretary Espy: (1) funding for research for alternatives to the pesticide methyl bromide in the event the Environmental Protection Agency would restrict or prohibit its use; (2) an Environmental Protection Agency regulation to phase out and eliminate the use of methyl bromide; (3) approval of the Market Promotion Program funding for the raisin industry, which would financially benefit Sun-Maid Raisins, a Sun-Diamond member cooperative; (4) a study of the Market Promotion Program, with a view to giving agricultural cooperatives preferences that were designated for small entities; (5) various pesticide issues, in addition to methyl bromide; (6) the federally funded School Lunch Program; and (7) the Teamsters strike of Sun-Diamond member cooperative Diamond Walnut. Finally, the Information charged Douglas with claiming falsely that he obtained tickets to a June 1993 Chicago Bulls-Phoenix Suns championship basketball game in Chicago for himself and Secretary Espy at no cost from Douglas= friend, a professional basketball player. In fact, Douglas knew that Secretary Espy had obtained the tickets from the Chief Executive Officer of Quaker Oats, a prohibited source.

Under the Plea Agreement, the Government agreed to dismiss the remaining outstanding charges against Douglas B the Government=s appeal of the pretrial dismissal of two false statement counts, the Government=s appeal of the granting of Douglas= motion for judgment of acquittal on the gratuities count for lack of venue, and a pending mortgage fraud case. The Plea Agreement obligated Douglas to cooperate with this Office=s ongoing investigations and to testify in the Espy trial.

3. United States v. James H. Lake

James Lake was a lobbyist for Sun-Diamond Growers. In October 1995, he pleaded guilty to charges of wire fraud and illegal contributions to the Henry Espy campaign. On January 31, 1998, the trial court sentenced Lake to a total fine of $150,000 and two years probation. The Court also imposed on Lake, as a special condition of probation, the requirement that he write and distribute to more than 2,000 lobbyists and entities, at his own expense, a monograph detailing the criminal provisions of the Federal Election Campaign Act relating to corporate and conduit contributions to candidates for federal political office. On June 26, 1998, Lake distributed the monograph as required under the terms of his probation

4. United States v. Sun-Land Products and

In the Matter of Sun-Land Products

During its investigation of Sun-Diamond=s gifts to Espy, this office discovered additional criminal violations by a Sun-Diamond affiliate, Sun-Land Products, and referred these matters to the Department of Justice. Consequently, Sun-Land Products of California pleaded guilty in the Northern District of California to a two-count Criminal Information charging that, in 1992 and 1993, it illegally made conduit contributions totaling $37,000 to two federal political campaigns in violation of the Federal Election Campaign Act. Sun-Land made these conduit contributions using stipends paid to non-management directors. As part of the Plea Agreement entered on August 26, 1998, Sun-Land paid a total of $480,250 and entered into a conciliation agreement with the Federal Election Commission. The payment encompassed the maximum possible $400,000 criminal fine, $250 in special assessments, and an $80,000 civil penalty to the FEC.

In pleading guilty, Sun-Land admitted that, in 1992 and 1993, its Board of Directors approved a $2,500 stipend to be paid to non-management directors with the suggestion that they be used for political contributions to political organizations or candidates to whom Sun-Land wanted contributions to be made. In 1992, after issuing the stipends, Sun-Land Asuggested@ that the Bush-Quayle >92 Primary Committee Inc. receive contributions. The total amount of the contributions to Bush-Quayle from non-management directors who received the stipend, and in some cases certain family members, was $16,000. In 1993, after issuing the stipends, Sun-Land Asuggested@ that Campaign America, Senator Robert Dole=s political action committee, receive contributions from the stipend scheme. The total amount of the contributions to Campaign America from non-management directors who received the stipend, and in some cases certain family members, was $21,000. The stipends were corporate funds intended for political contributions, which Sun-Land disguised to appear as individual contributions and presented as a group to each of the specified campaigns.

This Office uncovered and substantially investigated the unlawful stipend scheme during its investigation of illegal gratuities by Sun-Diamond and its member cooperatives to former Secretary Espy. Once we determined that Sun-Land did not use the stipends as a means of giving things of value to Secretary Espy or to contribute to Espy=s brother=s Congressional campaign, I turned over the completed investigation to the Department of Justice=s Public Integrity Section for prosecution.

D. Super Bowl Atlanta and Smokey Bear B Espy=s Tickets

Secretary Espy attended the January 30, 1994 Super Bowl in Atlanta, Georgia. The Espy indictment charged the former Secretary with receiving a Super Bowl ticket from Oglethorpe Power Corporation and its agent, Smith Barney, Inc., and Fernbank, Inc. Smith Barney gave the ticket, which cost it $2,200, to Espy while it was seeking Espy's assistance to convince the Department of the 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. Secretary Espy went outside the Department of Agriculture to the Secretary of the Treasury and the Vice President, in support of Oglethorpe's loan refinancing proposal. On these facts, this office brought United States v. Smith Barney, Inc. (District of Columbia), the first civil action for damages and civil penalties instituted by an Independent Counsel. This action resulted in Smith Barney's payment of $1,050,000 in settlement of a civil tort and conflict-of-interest action. The full particulars are set forth in my Third Annual Report to Congress dated February 20, 1998.

E. The Tyson Foods Gratuities and Cover-Up

Tyson Foods processes, produces and markets poultry and red meat, and, consequently, is subject to heavy regulation by the Department of Agriculture. When the Attorney General applied to the Special Division in August 1994 for the appointment of an Independent Counsel, she specifically delineated allegations of illegal activities by Tyson Foods and its principals in giving illegal gratuities to Secretary Espy. Those illegal gratuities, and efforts to conceal them, are the gravamen of the Tyson Foods cases B United States v. Tyson Foods, Inc. (District of Columbia); and United States v. Jack L. Williams and Archibald R. Schaffer, III (District of Columbia).

1. United States v. Tyson Foods, Inc.

On December 29, 1997, Tyson Foods, Inc. pleaded guilty to a one-count criminal information charging that the company gave more than $12,000 in illegal gratuities to Secretary Espy for or because of official acts Espy performed or would perform. Tyson Foods, Inc.=s sentence included payment of $6-million in fines and investigative costs, full compliance with a comprehensive corporate compliance program, and probation.

Since the plea, we have with staff of the Department of Agriculture focused on monitoring Tyson Foods= implementation of the Compliance Agreement. The following are some of the issues we have addressed: (1) appointment of the Ethics Compliance Officer B the government rejected four candidates for the position proposed by Tyson Foods management before agreeing to the appointment of a candidate with appropriate credentials and no prior affiliation with the company; (2) review, evaluation, comment and revision of certain internal controls, policies and procedures, and implementation of those systems; (3) review and issuance of comments to the Corporate Code of Conduct and Compliance Policy; (4) identification for Tyson Foods of those officials at certain federal agencies with whom any contact would require entry in a contact log; and (5) review of quarterly Compliance Reports.

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 against 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 lobbying activities. The Indictment charged both defendants with conspiring to defraud the United States and the Department of Agriculture 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 B 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 also charged Williams and Schaffer with committing the substantive offenses of mail and wire fraud, providing unlawful gratuities to public officials, and violating the Meat Inspection Act, and Williams with making false statements to federal investigators. 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.

On June 26, 1998, a jury convicted Williams of two counts of making false statements to government agents. Specifically, he concealed his knowledge of (1) Tyson Foods= having gratuities worth $1,119 to Secretary Espy and others, (2) the Tyson Foundation scholarship to Secretary Espy=s girlfriend, and (3) the nature of Williams= relationship with Secretary Espy and Dempsey. On November 2, 1998, the trial court sentenced Williams to pay a $5000 fine.

The jury also returned a verdict of guilty against Schaffer on two counts of giving illegal gratuities to Secretary Espy B a $2,556 gratuity in connection with the Tyson birthday party in violation of the Meat Inspection Act and a $6,000 gratuity for four tickets to a Presidential inaugural dinner in violation of the gratuities statute. On September 21, 1998, the trial court granted Schaffer=s post-verdict motion for judgment of acquittal and set aside the jury=s verdict. The Government is appealing the trial court=s ruling, and Schaffer has cross-appealed, asserting that if his conviction is reinstated he is entitled to a new trial. Briefing is complete, and the D.C. Circuit will hear oral argument on May 12, 1999, pursuant to the Government=s motion to expedite.

F. Robert Mondavi Corp. :Beer and Wine

On July 21, 1998, the Robert Mondavi Corporation, a California vintner, paid $100,000 to the United States in settlement of a civil tort and conflict of interest action for giving 1) six bottles of wine valued at $187 to or for the benefit of Espy in 1993; and 2) dinner valued at $207 to and for the benefit of Espy and his girlfriend in 1994. Mondavi gave the gratuities while there were matters of interest to the company within Secretary Espy's jurisdiction, and in conjunction of discussion of these issues between the company and Espy.

This case was the second civil action for damages and civil penalties, and followed the structure of our 1997 case against Smith Barney under a tort theory of interference with an agency relationship by a non-government person or entity. Mondavi admitted legal liability and accepted responsibility for the conduct of its principal internal lobbyist for participating in and procuring a violation of Secretary Espy=s fiduciary duty to the United States and for interfering with his agency relationship with the Department of Agriculture and Executive Branch.

In addition to the $100,000 penalty, the Settlement with Mondavi included (1) a public education program, (2) Mondavi=s agreement to institute a comprehensive compliance program, which included the appointment of an Ethics Compliance Officer responsible directly and collectively to the General Counsel, President and C.E.O., and Chairman of the Board of Directors, and (3) payment of $20,000 toward the cost of the Independent Counsel's investigation. Meriting particular note is the public education program, wherein Mondavi committed to spend at least $30,000 and work in conjunction with a leading California graduate business school or university to sponsor free lectures and panel discussions focused on the bribery, gratuity and campaign finance laws and corporate compliance issues. The purpose of the program is to educate current and future business leaders about the importance of the laws prohibiting or limiting the giving of gratuities to government officials. Mondavi is also required to publish a monograph addressing corporate compliance with the bribery, gratuity and campaign finance laws, and distribute it to industry-recognized vintners and wine-making businesses in the United States and trade associations representing the wine industry by May 21, 1999. Finally, Mondavi agreed to sponsor and cause to be published not fewer than three articles addressing issues of legal compliance in corporate dealings with public officials by July 2000.

G. Indictment and Prosecution of the Secretary: United States v. Alphonso Michael Espy

On October 1, 1998, former Secretary of Agriculture Espy became only the second member of a President's cabinet to go on trial for accepting illegal gratuities., On December 2, 1998, a District of Columbia jury acquitted the former Secretary on all counts. The fact that a jury decided to acquit the defendant was certainly disappointing, given the compelling evidence developed and presented. Hopefully, however, the message of the case still will be that public officials are on notice that accepting things of value from persons they regulate, or making false statements to federal law enforcement agents, will be investigated and, where appropriate, prosecuted. That will be and should be the standard, regardless of whether there exists an institution of an Independent Counsel, as long as the American public believes that nobody is above the law and public officials should be subject to the same laws as those who elect them.

Former Secretary Espy faced trial on 38 felony counts of wire and mail fraud, accepting illegal gratuities, violations of the Meat Inspection Act and the Travel Act, tampering with a witness and causing a criminal act to be done. The charges also included 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 the benefit of his girlfriend and his family, from prohibited sources during a 15-month period in 1993 and 1994. Upon conclusion of the Government=s case at trial, and on motion of the defendant, the court dismissed eight counts. The thirty counts that went to the jury consisted of three basic categories of allegations B (1) Espy took things of value, directly or indirectly, in violation of the ethical and criminal prohibitions against public officials accepting such things; (2) Espy did not disclose those things of value on his Public Financial Disclosure Forms (SF-278), as required by law; and (3) when federal investigators from the USDA-Office of Inspector General and the FBI questioned him about his acceptance of these gifts and favors, Espy made false statements and submitted altered documents to the investigators.

During the course of the investigation and before a trial date had been set for these charges, I applied to the Special Division to refer prosecutorial jurisdiction over Auncovered evidence of other serious violations of law by Secretary Espy and others close to him.@ In re Espy, 145 F.3d 1365, 1367 (D.C. Cir. (Special Division) 1998). In a public court filing, Espy=s lawyers described the matter as Athe management of Mr. Espy=s congressional campaign account,@ noting that the government intended to offer evidence that:

[b]eginning in or about early 1992 and the defendant [Michael Espy] continuing through in or about 1993, in agreement with others, concealed the embezzlement of funds from his congressional campaign account and impeded attempts by and made false statements to investigators and Federal agencies concerning the amount of missing campaign funds.

Espy=s counsel wrote that

Athe amount of money allegedly embezzled from the campaign account is significant. Indeed, it is roughly three times the total value of [the] gratuities charged in the indictment [of Michael Espy],@

and that the Independent Counsel stated its evidence implicated

A(1) Mr. Tom Espy, Mike Espy=s brother, and a former treasurer of his congressional campaign account; and (2) Mr. Wardell Townsend, an administrative assistant to Mr. [Michael] Espy during his tenure as Congressman from the Second District of Mississippi.@

On June 12, 1998, the Special Division denied my request for referral jurisdiction of the matter, agreeing with the Department of Justice=s position that the request amounted to an expansion of my jurisdiction beyond the authority of the Special Division. The panel found that the allegations did Anot involve any alleged misuse of the office of Secretary of Agriculture by Espy, any acceptance of payments or gifts from persons having business with that Department, or any similar pattern of conduct.@ The Department of Justice ultimately declined to investigate further or prosecute the referral.


This office=s appellate practice has encompassed all stages of an Independent Counsel=s investigative and prosecutorial jurisdiction B the grand jury investigation, post-indictment but pre-trial interlocutory appeals, and post-conviction relief. There currently are three post-trial matters before the appellate courts -- two before the Court of Appeals for the District of Columbia Circuit (United States v. Blackley (No. 98-3036) and United States v. Schaffer (Nos. 98-3123 and 98-3126)), and one awaiting the decision of the Supreme Court (United States v. Sun-Diamond (No. 98-131)). Additionally, in United States v. Five M Farming Enterprises, Inc., defendants have moved for leave to file a late notice of appeal. These matters are discussed above.

An additional appellate matter completed last year concerned the case against Secretary Espy. On pre-trial motions, the trial court dismissed three illegal gratuities counts under the Meat Inspection Act and one count of making false statements to the Executive Office of the President. The Government appealed, raising two issues B (1) whether the gratuities section of the Meat Inspection Act, which forbids the acceptance of things of value by Aany officer or employee of the United States authorized to perform any of the duties prescribed by this subchapter,@ applied to the Secretary of Agriculture; and (2) whether the false statement statute (18 U.S.C. ' 1001), which prohibits false statements made Ain any matter within the jurisdiction of any department or agency of the United States,@ reached false statements made to officials in the Executive Office of the President. On June 16, 1998, the D.C. Circuit, in United States v. Espy, 145 F.3d 1369 (D.C. Cir. 1998) reinstated the three gratuities counts, holding that the former Secretary was subject to the provision of the Meat Inspection Act forbidding the acceptance of gratuities by those Aauthorized to perform@ duties under the Act (id. at 1371). However, the D.C. Circuit agreed with Espy that his false statements to the Executive Office of the President were beyond the scope of 18 U.S.C. ' 1001, as the statute was written at the time. The applicable statute, 18 U.S.C. ' 6, has since been amended and would now clearly cover such statements.


During the past three years, I referred to other agencies for further investigation and prosecution possible violations of federal law uncovered during our investigation. The referrals include:

(1) to the United States Attorney in Montana B the four Foreign Corrupt Practices Act counts against the two principal officers of Crop Growers Corp. dismissed for lack of venue in the District of Columbia, discussed supra at pages {3-4};

(2) to the Department of Justice B allegations against Richard Blackmore of program loan fraud in excess of $800,000, discussed supra at page 7;

(3)  to the Department of Justice B allegations that Sun-Land Products= Board of Directors used stipends for illegal corporate and conduit campaign contributions, discussed supra at page 12;

(4) to the Federal Election Commission B allegations that American Family Life Assurance Corporation (AFLAC) made conduit contributions to the Henry Espy debt retirement effort, discussed in my 1998 Report to Congress at page {6};

(5)  to the Department of Justice B allegations related to the concealment of funds removed from Mike Espy=s congressional campaign account, discussed supra at pages 21-22;

(6) to the Department of Justice B allegations of lodging, recreational amenities and meals improperly provided to another member of the Cabinet;

(7)  to the Department of Justice and the Federal Election Commission B allegations of a scheme to provide illegal conduit and corporate contributions to the political action committee of a senior member of Congress;

(8) to the Department of Justice B allegations that a major agribusiness provided gratuities to public officials, including members of Congress, outside of the Department of Agriculture; and

(9) to the Department of Justice B allegations of a second AMississippi Christmas Tree@ scheme in excess of $450,000 involving a ten-person farming operation.


The Independent Counsel Reauthorization Act of 1994 requires that I conduct all activities Awith due regard for expenses@ and Aauthorize only reasonable and lawful expenditures.@ 28 U.S.C. '' 594(l)(1)(A)(i) and (ii). I note again that we chose office space in Alexandria, Virginia, where our cost per square foot is significantly less than that for comparable space in the District. We continue to maintain 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, 1998 verifies my accomplishment of this objective. To promote this goal, the staff I hired and retained to administer office operations were known to me, had experience with Independent Counsel operations, administration and financial management, and/or were familiar with the relevant federal laws and regulations.

Upon the completion of the Espy trial, we moved swiftly to reduce staff size. The number of attorneys has decreased from nine full-time and five active part-time to four full-time, one part-time assisting with appellate work, and another assisting with the Final Report and related matters. I expect to reduce further the full-time staff of attorneys to two by the end of June. There no longer are any agents assigned to this office from any agency, compared to seven agents and one on-call accountant before the Espy trial. I have downsized the administrative and support staff to the minimum needed for completion of the Final Report and final shutdown to the following B (i) the Administrative Officer; (ii) the Executive Staff Assistant who has maintained the filing system since I opened the office and who is responsible for archiving; (iii) my Confidential Assistant/Press Officer; (iv) the information systems administrator; (v) one Paralegal; (vi) one Legal Secretary; (vii) the Property Manager; and (viii) one Clerk. My staff is participating in an ad hoc working group with the National Archives in order to facilitate and expedite the archiving process which normally is undertaken after the final report is filed and the attorneys= fees issues resolved.


In my first report, I expressed concern about the hardship created by travel reimbursement and per diem regulations on detailees from other agencies. In my second report, I addressed the need to clarify the scope of an independent counsel=s statutory jurisdiction, investigative and prosecutorial, because of the numerous but meritless defense challenges to jurisdiction. In my third report, I wrote about various sources of delay in advancing and concluding Independent Counsel investigations, and discussed judicial inaction and non-action as sources of greatest delay. In this, my fourth report, I will touch on some of my views concerning the Independent Counsel statute, as you consider its fate, and will preview some additional substantive legislative and administrative issues that I intend to raise in my Final Report.

The Independent Counsel Statute

As long as we accept the fundamental proposition that APublic Service is a Public Trust,@ the need for an Independent Counsel statute in the American legal system remains. The primary purpose of the statute was to restore and maintain public confidence in the system=s ability to investigate wrongdoing by high-end Executive Branch officials. If the pundits are correct, the country apparently no longer has faith in the way Independent Counsels investigate and prosecute these high-profile matters. And if this is true, the opponents of Independent Counsel investigations have succeeded in destroying the statute and its purpose.

Initially, I advocated certain modifications to the statute. Because the statute most probably will not be renewed in the near future in a form resembling the present, I reluctantly join those recommending that it not be renewed at this time. There is in the public=s perception too much misunderstanding, too much invective, and too much disinformation about the statute=s provisions, how it works, and its actual application. The statute was not a bad one B it was well-intended and was and is necessary. It was the product of thoughtful consideration by the 95th Congress, which had witnessed a country ravaged by the Watergate crisis. That Congress was well acquainted with the history of three Presidents arbitrarily dismissing special prosecutors; it had a sense of the constitutional issues and crafted a statute that passed constitutional muster. The Supreme Court confirmed the constitutionality of the statute in Morrison v. Olson, 487 U.S. 654 (1988), with one justice dissenting. Nonetheless, many of the statute=s numerous critics still persist in their dogmatic charge that the statute is in fact unconstitutional. This is a remarkable scenario indeed, where academics, senior government officials, and even presidents continually proclaim the unconstitutionality of a statute our Supreme Court has directly held is constitutional.

I agree with Deputy Attorney General Holder=s recent statement that Aactions and decisions under the Act both by Independent Counsels and by the Attorney General inevitably and unavoidably become such targets for attack that public confidence in the administration of justice in these high-profile cases has been undermined rather than enhanced.@ But, has anything changed since Attorney General Janet Reno appeared before you in 1993, after the statute last lapsed, concerning why these matters cannot be investigated by the Department of Justice? She then testified A[t]here is an inherent conflict whenever senior executive officials are to be investigated by the Department of Justice and its appointed head, the Attorney General.@ During her testimony, she quoted Archibald Cox=s testimony from the first enactment of the statute, that A[t]he pressure, the divided loyalty, are too much for any man, and as honorable and conscientious as any individual might be, the public could never feel entirely easy about the vigor and thoroughness with which the investigations were pursued. Some outside person is absolutely essential.@

Attorney General Reno=s premise was true then and is true today. The Department of Justice has in these situations a patent conflict of interest. The public needs to be assured that law enforcement has rooted out alleged or extant criminal conduct. If allegations are unfounded, an independent investigator can reassure the public that no cover-up occurred. Since Congress passed the Independent Counsel Act, only seven of 20 Independent Counsels have brought any criminal proceedings.

One warranted criticism of the statute=s current format is the inefficient framework for conducting criminal investigations and prosecutions. It is inefficient because each Independent Counsel must start from ground zero, literally creating a brand new, but temporary, law office from scratch. This process inevitably invites criticism for taking too long and spending too much money. But I disagree with Deputy Attorney General Holder that this Department of Justice is up to the task of investigating senior government officials and coping with these supercharged cases. The powerful evidence is the ACampCon@ task force of more than 100 Department of Justice lawyers and FBI agents, which went nowhere for approximately one year until Assistant United States Attorney Charles LaBella was Abrought in to inject the task force with a more aggressive spirit.@ Add to that the numerous investigations and prosecutions (about 30) of the seven Independent Counsels appointed since 1994, the Salt Lake City Olympic Games bribery probe, Ruby Ridge, Waco, and the Oklahoma City bombing. Consider whether the Department of Justice could have handled all of these cases competently. As long as senior government officials are alleged to have committed criminal acts, and, as this Attorney General testified, there is an inherent conflict of interest whenever Executive Branch officials are to be investigated by the Department of Justice and the Attorney General, then who is left to conduct the investigation? Someone outside the Department of Justice must conduct these investigations.

At some point in the future, when the next crisis develops and public confidence is shaken, demands for an investigation by someone independent of the President and the Attorney General will require reconsideration and enactment of a new statute. When that occurs, I invite you to consider a differently configured independent counsel statute. Under that statute, the President would appoint an Independent Counsel, subject to confirmation by the Senate, who would serve a predetermined term of 10 years, and who could only be fired by a President for good cause. That Independent Counsel would have responsibility for the investigation and prosecution of all allegations of misconduct by all senior federal officials in the Executive, Legislative and Judicial Branches, to insure an even application of the law to each of the three branches of government. These changes could improve the law by, among other things, (1) allowing an effective investigation from the outset by eliminating the need for the limited preliminary investigation within the Department of Justice; (2) reducing delays in the investigative process and opportunities for jurisdictional challenges; (3) preserving the confidentiality of investigations; (4) blunting tactics designed to demonize the Independent Counsel, whom the President would appoint and the Senate would review and confirm; and (5) decreasing operational and staffing inefficiencies, and costs.

Legislative Considerations Unrelated to the Independent Counsel Statute

My Final Report to Congress will present for your attention several ideas for amending federal statutes or highlighting certain issues that have been derived from our experiences. At that time, in appropriate detail, we will discuss, inter alia, the following: (1) requiring agricultural cooperatives of a certain minimum size to make and keep financial records in a manner consistent with the books and records provisions of the Securities Exchange Act of 1934, (2) requiring agricultural cooperatives of a certain minimum size to provide, at a minimum, annual (financial) reports to the cooperative members and the Department of Agriculture; (3) including on all government forms warnings about the implications under 18 U.S.C. ' 1001 of making false statements; (4) imposing on judges who supervise federal grand juries specific time parameters for resolving grand jury matters, thereby reducing delays in grand jury proceedings;

(5) granting to the Department of Justice concurrent civil jurisdiction for enforcement of violations of Title 15 of the United States Code; (6) amending the Federal Sentencing Guidelines to recognize fully the severity of violations of federal law by senior government officials, including false statements to federal agents and other government officials, and (7) establishing within the Bureau of the Census a division or unit designed to work exclusively on jury selection in civil and criminal cases to compete with defense attorneys= use of jury consultants in high profile cases.


With the acquittal of Secretary Espy, some have questioned the success of the overall investigation. The proper gauge should be whether we fulfilled our statutory mandate to Afully investigate and prosecute,@ which we did. I stand confidently behind each and every decision to prosecute, decline prosecution and refer matters to other agencies. The fact that a jury decided to acquit Secretary Espy was certainly disappointing, particularly in light of the compelling evidence developed and presented. The prosecutor does not convict B rather, he is obligated to present fully and fairly all admissible evidence in support of the indictment. The jury is the body that determines whether to convict or acquit the defendant. But those looking for a statistical measure of our effort should weigh our 13 criminal prosecutions and two civil cases; criminal convictions of seven individuals, five corporations, and one law firm; two civil dispositions; several referred matters prosecuted by the Department of Justice and the Federal Election Commission; fines and penalties totaling $11,438,000; and restitution to the United States and corporate shareholders.

As I wrote last year, my cases have involved prosecuting both sides of the offense of illegal gratuities involving federal officials B the receiving and the giving. The motive for these illegal acts stems from the importance of access to and the ability to influence persons and entities regulated by the federal government. As the representatives of the people now charged with deciding who best can conduct such investigations in the future

in an environment free from inherent conflicts of interest, we only can hope that your decision will reflect the positive and negative lessons, and wisdom gained, from the investigations associated with the present and previous Administrations.


Donald C. Smaltz Independent Counsel


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