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The mood was testy, and the lawyers on both sides were snapping at each other at a sentencing hearing in a Washington, D.C., courtroom on Sept. 17. The defendant, Chiquita Brands International Inc., had already signed a plea agreement. But that didn't stop Assistant U.S. Attorney Jonathan Malis from taking a slap at the giant produce-grower. Malis accused the company of making millions in profits while paying off Colombian right-wing terrorists for almost seven years. He said the $1.7 million in payments "fueled violence" and "paid for weapons and ammunition to kill innocent people."

Chiquita's lead defense attorney, Eric Holder Jr., shot back. He accused Malis of shading the facts, of "being a little too cute, a little too crafty," as well as "a little deceptive." Holder, a partner in the Washington, D.C., office of Covington & Burling, told the judge that the government was partly to blame for the company's plight. He stressed that Chiquita had asked the U.S. Department of Justice in mid-2003 if it should stop the payments to the terrorists: "All [the government] had to do was say, 'Yes, stop the payments.' Just say yes." But the Justice Department never said "stop."

On that fall day, U.S. District Judge Royce Lamberth accepted the company's plea to a single felony count, making Chiquita the first major U.S. corporation ever convicted of financial dealings with terrorists. Chiquita agreed to pay a $25 million fine, serve five years of probation, and hire a permanent compliance officer. Under the International Emergency Economic Powers Act, the company faced a maximum fine of twice its financial gain. Records show that it made about $49.4 million from its Colombian banana operations from September 2001 to January 2004, and could have been fined $98.8 million. But prosecutors said they took into account Chiquita's self-disclosure and full cooperation, and agreed to the much smaller fine.

One more thing, Lamberth asked before dismissing the parties: Why weren't any individual company officers named? "It gives me some pause that no individuals are being held accountable," the judge said. Lamberth was referring to the prosecutor's decision days earlier to tell several Chiquita executives, including former general counsel Robert Olson, that they would not be indicted for their roles in the scandal. Malis defended that decision, and Lamberth let it go.

That meant that back in the rolling hills of Cincinnati, where Chiquita is based and Olson, 60, lives in retirement, the ex-general counsel could start putting the pieces of his shattered life back together. For nearly four years, the federal probe had hung over Olson. If he had been charged under a statute that penalizes offering material support to terrorists, the ex-GC could have faced a maximum penalty of life in prison. Though he won't discuss the ordeal, he says, "The entire experience was a Kafkaesque nightmare that haunted me day and night for years."

Olson's role in the scandal emerges in fascinating detail from the U.S. Attorney's 18-page criminal complaint, the plea deal, the 23-page sentencing memorandum, and Chiquita's filings with the Securities and Exchange Commission. It is the stuff of spy thrillers, describing veiled threats of violence, secret payments, and an excruciating moral dilemma. These documents, as well as interviews with attorneys from both sides of the case, paint a portrait of a general counsel and a company giving in to extortion, paying the terrorists to protect their employees. Even while admitting its guilt in the plea deal, for example, Chiquita's new general counsel, James Thompson, defended the fruit grower's actions as morally right. After all, the company wasn't facing idle threats of violence; years earlier, left-wing guerrillas had killed four Chiquita employees in two separate incidents.

But prosecutors didn't buy it. Chiquita had a choice, Malis told the court: It could have left Colombia, but it made a business decision to stay. For Chiquita to say it "had no choice but to be, quote, 'a victim' of extortion for years while it reaped the profits of those Colombian operations ... does not stand any legitimate scrutiny," Malis told the judge. So, did Olson and Chiquita take the higher moral ground? Or did they, as Malis claimed, make the "expedient" choice?

Olson was an executive more accustomed to dealing with the Cincinnati Opera, where he was a trustee, than with terrorists. Even after the four-year ordeal, he still believes in what he did. "What kept me going was the knowledge that I had done nothing wrong," he says now. "I had at all times tried to do the right thing in giving the company legal advice to help it decide how to deal with a horribly difficult situation."

With annual revenues of approximately $4.5 billion, Chiquita is best known as one of the world's biggest banana producers, and for many years was the largest employer in Latin America. In fact, Chiquita, formerly the United Fruit Company, once exerted so much economic and political influence that the phrase "banana republic" referred to countries where it operated.

The company's power and influence, though, was challenged by violent terrorist groups. In the case against Chiquita, the Justice Department took aim at its payments to a right-wing organization that called itself the United Self-Defense Forces of Colombia, or AUC, short for its Spanish name, Autodefensas Unidas de Colombia. Court records, reports by Amnesty International, and a report by the United Nations Commission on Human Rights all say that the AUC (which disbanded last year) was a brutally violent paramilitary group that killed, kidnapped, raped, tortured, and "disappeared" thousands of Colombian citizens, trade unionists, and human rights activists.

According to court records, Chiquita's Colombian subsidiary, Banadex S.A., first began funding the group in 1997 after receiving veiled threats directed at its property and employees. (Before that, Banadex paid the left-wing terrorists who had controlled the region.) Chiquita sent money to the AUC roughly each month "to protect the employees and property of Banadex," court records say. Payments were always disguised as either a check to a third party who passed the money to the AUC, or as income to a Banadex employee who paid the AUC in cash.

Olson was aware of the AUC's true nature. Records show that he assigned an in-house attorney to investigate the payments in the fall of 2000. The lawyer's research concluded that the AUC was "a widely known, illegal vigilante organization." Whether to pay them was strictly an ethical question, because at that time it was not yet a crime in the United States or Colombia to give money to terrorist groups. Olson and the in-house attorney reported the study's results to the audit committee of Chiquita's board of directors. The lawyers' report concluded that making the payments was extortion and "not a voluntary decision," the records say. However, the directors decided to continue the payments.

But in 2001, the AUC's legal status changed. Then-Secretary of State Colin Powell added the AUC to the roster of "specially designated foreign terrorist organizations." Being placed on this list, which contains mostly Middle East-based groups like Al Qaeda and Hamas, means that U.S. companies cannot legally do business with them.

Court records show that Chiquita claims that its executives never saw the news coverage of that designation, including reports carried in major U.S. newspapers, the local Cincinnati newspapers, and nearly everywhere in Colombia. So the payments continued.

At least three top Chiquita executives, according to the records, took part in the decisions to pay off the AUC. Though court documents identify them only as individuals A, B, and C, sources close to the case say they are Cyrus Freidheim Jr., then chief executive officer and now CEO of the Sun-Times Media Group in Chicago; Roderick Hills, director and head of Chiquita's audit committee until he left earlier this year; and Olson. Lawyers for all three insist that they did nothing wrong under the circumstances.

Olson claims they first learned that the AUC was a designated terrorist group only when an unidentified in-house lawyer stumbled across the designation on the Internet in February of 2003, according to court records. Olson then alerted Hills, a former chairman of the SEC, whose wife is Carla Hills, the U.S. trade representative under President George H.W. Bush.

Records show that soon afterward, Olson called Chiquita's outside counsel, Laurence Urgenson in the D.C. office of Kirkland & Ellis. Urgenson subsequently told Olson and the company on at least five different occasions in February and March of 2003 that the monies were illegal and that Chiquita "must stop the payments." Later on, when Chiquita waived its attorney-client privilege, notes taken by Urgenson's associate during these conversations became part of the public record. Still, Chiquita didn't halt the payments.

Eventually, Urgenson advised Olson to either end the payments or report them to the Justice Department. After Urgenson's warning, according to the records, Olson replied that he was of the opinion to "just let them sue us, come after us," and that Freidheim and Hills agreed. But records show that Olson took Urgenson's advice to the full board of directors. The board decided that the company should disclose the payments to the Justice Department and seek its guidance. So in April of 2003, Olson and Hills trekked to Washington to meet with Justice officials led by Michael Chertoff, then assistant attorney general for the criminal division at the Justice Department, now the secretary of Homeland Security. Urgenson joined them.

Olson and Hills told Chertoff that if the company simply stopped paying the terrorists, Chiquita would be endangering its employees. Moreover, suddenly pulling out of Colombia would have serious economic and political repercussions for that country, a close U.S. ally. Chiquita suggested that Chertoff consult with the U.S. Department of State and other federal agencies concerned about Colombia's stability.

Exactly what Chertoff told the Chiquita executives became a hot-button issue in the case. The Justice Department admitted in the plea deal that Chertoff said the payments were illegal and "the issue of continued payments was complicated." According to Holder, Chertoff told the Chiquita officials that "this is a heavier meeting than I expected," and that he would get back to them. Olson and Hills believed, according to attorneys close to the case, that there was an "unspoken but clear understanding" with Chertoff that they could temporarily continue the payments while Chertoff considered the options. Chertoff declined to comment for this story.

Holder told the sentencing court that he suspects the government did not want to explicitly say to stop the payments "and then have blood on its hands if someone was, in fact, killed." So Justice took what Holder called a middle position-acknowledging that the payments were illegal, but not explicitly saying "stop."

Holder was clearly outraged by the department's waffling. He said in court that if Chiquita's disclosure had occurred under his watch as deputy attorney general, and if his Justice Department staff had failed to act on it, "heads would have rolled."

But Chertoff failed to act. Records show that Olson and Hills reported back to Chiquita's board of directors that there would be "no liability for past conduct," but there was "no conclusion on continuing the payments." They said Chertoff would get back to them. But he never did.

The executives did, however, eventually hear from the U.S. Attorney's Office. Chertoff handed off the case to U.S. Attorney Roscoe Howard Jr., then the U.S. Attorney in D.C., just before Chertoff left office in June 2003. Howard opened the Chiquita probe as a murder investigation. Murder?

"They [terrorists] were capturing American citizens in Colombia and holding them for ransom or killing them. What would you call it?" asks Howard, now a partner in the Washington office of Troutman Sanders. By that autumn, Howard says, his office made it very clear to Chiquita that it would be held accountable for both past and future payments, "regardless of what they thought [Chertoff] had told them."

Records support Howard's assertion. In the fall of 2003, Kirkland's Urgenson sent Olson a note advising that Justice "officials have been unwilling to give assurances or guarantees of nonprosecution ... and cannot endorse current or future payments." But Chiquita continued the payments.

Then, in December, Hills e-mailed other directors that an audit committee investigation of the payments was under way "because we appear to [be] committing a felony." By early 2004 Hills hired Richard Thornburgh, the former U.S. attorney general, to represent the audit committee. Thornburgh, of counsel at Kirkpatrick & Lockhart Preston Gates Ellis in Washington, D.C., didn't return calls for comment.

Thornburgh's involvement triggered a pitched battle inside the Justice Department over whether to charge the company. When Chiquita "didn't hear what it wanted to hear" from the U.S. Attorney's Office, Howard says, the company "ran back across the street" to the Justice Department. Records suggest that Justice's criminal division began playing tug-of-war with Howard's office over how to handle Chiquita, even as the company continued sending funds to the AUC through February 2004.

Howard decided to serve a search warrant on the company and subpoenas on the directors. On March 24, 2004, sources close to the case say David Nahmias, then senior counsel in the criminal division in D.C., called Howard's office to try to persuade him to cancel them. Howard confirms the call. (Nahmias, now U.S. Attorney in Atlanta, referred questions to the Justice Department, which wouldn't comment on Nahmias's role.) Despite Nahmias's plea to wait, Howard's office pushed on. The same day Nahmias called, federal agents served the warrants on Chiquita's Cincinnati headquarters, taking documents and other materials. At the same time, agents served subpoenas on the directors, who were meeting in Fort Lauderdale. Prosecutors informed Chiquita that they were investigating both the company and individual officers' roles.

There was no payment to the AUC that March, nor would there be any more. After a few months of legal negotiations, Chiquita sold its Colombian banana holdings in June 2004 to a local company for over $43.5 million. The deal included long-term contracts to buy more than $33 million worth of bananas from the same farms.

By this time, Howard had left the U.S. Attorney's Office for private practice. But another prosecutor involved in the case recalls trying to go forward with charges. "We wanted to go to the grand jury and seek an indictment for providing material support to terrorists," says this lawyer, who asked to remain anonymous. Under the "material support" law, violators can be fined and imprisoned for up to 15 years. However, if the death of any person results from the material support, then a violator can be imprisoned for life.

This prosecutor says he waited for the deputy attorney general to sign off on presenting the evidence to the grand jury, "and that usually takes a couple weeks." With this case, though, it took more than three years. Among other things, he says, Thornburgh wrote a letter to then-Attorney General John Ashcroft that successfully delayed the proceedings while Chiquita tried to convince Justice to drop the case, or at least agree to a nonprosecution agreement.

The strategy almost worked. From mid-2004 to late 2005, a noticeable gap appears in the investigation's progress. For one thing, the company's SEC filings discuss no new events. For another, records show that Chiquita's legal fees related to the investigation dropped from $8 million in 2004 to $2 million in 2005. After the investigation was rebooted in late 2005, legal fees jumped back up to $8 million in 2006, and $6 million for the first half of 2007 as the company closed its plea deal.

Part of the delay also seems due to shifting Justice Department personnel. From the time of Chiquita's disclosure to the day of its plea, the case had passed through three U.S. Attorneys for the District of Columbia, numerous Assistant U.S. Attorneys, and four deputy attorneys general in Main Justice. In addition, at the department the case passed from the criminal division into the hands of the newly created national security division. Spokesman Dean Boyd rankles at the suggestion that there was a tug-of-war between departments that delayed the case. "The [tug-of-war] allegations are unfortunate and distorted," he says. "In fact, the department does not acknowledge any delay. We reached the plea agreement after an extensive investigation and discussion."

The final decision to accept a plea deal was a three-way compromise hammered out among the U.S. Attorney, Chiquita, and the national security division of Justice. The key person in this pact was Justice's Kenneth Wainstein, who won't discuss his role. In the fall of 2005 he was confirmed to replace Howard as U.S. Attorney and inherited the case. A year later, Wainstein was promoted to assistant attorney general in charge of the national security division. By late 2006, when plea negotiations began, the criminal division at Main Justice had turned the case over Wainstein's unit. In essence, according to those close to the new assistant AG, he convinced his new staff and his former staff to end the tug-of-war. It was Wainstein who finally settled on the plea deal, and it was he who decided not to charge the individuals.

Today Chiquita's new management is still grappling with fallout from the case. Families of Colombians killed or tortured by the AUC have filed at least three lawsuits against Chiquita, one a class action, accusing the company of funding the violence.

The top three executives who were under federal investigation are gone. Freidheim, who left at the end of 2003, has gotten into trouble as CEO at the Sun-Times Media Group because, according to SEC records, he failed to tell the board that he was the subject of a federal investigation. Freidheim argued that he did disclose it once it became public knowledge.

Hills left Chiquita quietly in January, when he chose not to stand for re-election to the board. And Olson left the company in August 2006 in what was announced as an early retirement at age 60. But the terms of his leaving -- spelled out in SEC records -- suggest otherwise. He received a year's pay and bonuses, plus compensation to a management consultant to work with him on unspecified matters, as well as payment for the lawyer who negotiated his termination package. Olson, who worked for 16 years in the legal department at Penn Central Corporation and rose to general counsel there before joining Chiquita in 1996, would say only that he retired.

As for handling the payments to the AUC, Olson's attorney, Robert Litt, says his client acted appropriately. "If your child is kidnapped by terrorists who demand money to return your child, will you pay it? I think yes, you would. I would," says Litt, a partner in the D.C. office of Arnold & Porter. "There was no other way to protect [Chiquita's] people."

Professor Deborah Rhode, head of Stanford Law School's Keck Center on Legal Ethics and the Legal Profession and founding director of Stanford's Center on Ethics, doesn't condone what Chiquita did -- but she acknowledges that Olson was faced with a difficult decision. "This is a really hard place for a general counsel who wants to do the right thing," Rhode says. Yet Rhode believes Chiquita's actions, however well-intentioned, were wrong because the AUC used the money to buy weapons that killed innocent people.

She sees the Chiquita tale offering an important lesson for other companies struggling with moral dilemmas. People of integrity often feel entitled to respond in kind when they think someone else is doing wrong to their company or their employees, Rhode observes. But in the end, Rhode says, there is only one answer: Follow the law. "You simply cannot establish a rule of law if multinational companies feel free to violate it when their own employees and interests are at stake," she concludes. That's a lesson Chiquita learned the hard way.

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