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For an international fugitive, Viktor Kozeny seems to have it pretty good. It's not quite the life of a decade ago, when he would drop five figures on dinner and globe-trot from one country to another on his own Bombardier Challenger. But it's not bad, either.
His neighbors in the quiet gated community of Lyford Cay, Nassau, in the Bahamas include the English billionaire Joseph Lewis, former U.S. Treasury secretary Robert Rubin, and actor Sean Connery. On a Saturday in August, Kozeny, wearing flip-flops and blue tennis shorts, looks refreshed from an early morning swim in the Atlantic. At his multimillion-dollar, ocean-view home, the 46-year-old Czech national explains that he spends most of his days consulting on deals for friends and studying international public law in preparation for a future run for the European Parliament.
As the conversation turns toward his past, Kozeny talks about his life as a series of risks. There was the risk of emigrating with his family from Czechoslovakia to West Germany in 1980, then considered a crime. There was also the risk of moving to the United States in 1982 with $100 in his pocket following a chance encounter with an American professor; the academic invited him to work on a laser project, which ultimately led to Kozeny's undergraduate admission to Harvard University. And then there was the risk of moving back to his homeland in 1990, following the "Velvet Revolution," where Kozeny set up an investment company that ended up making him a multimillionaire. "They all paid off until Azerbaijan," says Kozeny. "Azerbaijan was a fiasco."
In the late 1990s Kozeny led a consortium of investors -- an august group that included some of the most recognizable names in American business and politics -- who bought up vouchers, or shares, of Azerbaijan's state-owned oil company through the country's privatization process. The goal was to buy enough vouchers to give them control of the energy company and then flip the business to one of the major oil multinationals. To ensure that the deal went down, Kozeny gave key Azeri officials millions of dollars and a large stake in the privatized company. Kozeny says the arrangements were made in response to an extortion ploy by the Azeris. In any case, the government never parted with the company, and the project ended acrimoniously, with investors accusing Kozeny of defrauding them. [See "Cast of Characters."]
U.S. government investigations also followed. And in 2005 Kozeny was indicted for conspiring to violate the Foreign Corrupt Practices Act, which makes it illegal to bribe foreign officials for business. He spent 19 months in Nassau's Fox Hill prison until a Bahamian court found that the FCPA offenses he was charged with were not grounds for extradition. The Bahamian court ordered his release in 2007 and even ruled that the Bahamian government pay a portion of his legal fees. (Kozeny has not received the fees because of a stay order.) Since then, Kozeny has lived in comfort -- but exile -- in Lyford.
But one of Kozeny's investing partners -- American entrepreneur Frederic Bourke Jr., who cofounded the iconic handbag maker Dooney & Bourke Inc. -- has not been so lucky. In July, following a six-week trial, a jury in New York found Bourke guilty of knowing about the bribes that Kozeny made to the Azeri officials. At Bourke's sentencing -- scheduled for this month -- he faces a maximum of ten years in prison. (Bourke could not be reached for comment. His lawyers did not respond to interview requests.)
It's strange that Kozeny -- the alleged mastermind behind the bribery scheme -- is living in the Bahamas, while Bourke, an investor who merely knew of the bribes, is preparing for a possible prison term. But what makes this story even stranger is that the government's FCPA investigation can be traced back to a civil suit filed by American investors against Kozeny in which Bourke was a witness for the plaintiffs. Kozeny's lawyers raised the bribes as a defense, and then alerted federal prosecutors about the bribes in the belief that Kozeny would not be charged with FCPA crimes. They were wrong. And Bourke is paying for it.
DISASTROUS INVESTMENT
Before his disastrous investment with Kozeny, Ricky Bourke lived a charmed life. He grew up in the suburbs of Detroit, attended the University of Michigan, and married Eleanor Clay Ford, whose mother was Henry Ford's only granddaughter. Although Bourke married into money, he has made plenty on his own. In the 1970s he teamed up with Peter Dooney, a talented designer at Coach Inc., to start a leather goods manufacturing company called Dooney & Bourke, which originally sold belts and suspenders, but later became best known for its stylish handbags. (In 1996 Liz Claiborne Inc., bought the company for an undisclosed amount.) In the 1990s, Bourke became one of the first major investors in genome science.
By the time he reached his 50s, Bourke had collected all the material trophies of success: multiple homes, a private plane and a yacht. But according to the prosecution's theory at his trial, Bourke wasn't satisfied. He wanted to be a billionaire.
In 1997 Bourke came across the kind of opportunity that could get him into that club. Bourke and Kozeny were introduced by a mutual friend. Michael Dingman had served on the Ford Motor Company board, and he and Kozeny had been investing partners in the privatization of Czechoslovakia during the early 1990s. Kozeny made a killing. Just how much is in dispute: Kozeny says he made $50 million, while other estimates cited by Fortune say that it's $200 million to $700 million. Kozeny reportedly left Czechoslovakia in 1994 under a cloud of suspicion that he stole money from his countrymen. Czech authorities have since launched an investigation into Kozeny, which he calls political.
In 1997 Kozeny took up part-time residence in Aspen next door to Bourke. Kozeny's home, Peak House, as it is still called, was the highest house on Red Mountain and the kind of ostentatious display -- with its 20,000 square feet, nine bathrooms, and two swimming pools -- that could get him noticed by wealthy and respected American investors for his next venture.
It worked, according to Bourke's lawyers, who claimed that Kozeny started scheming for Bourke's money as soon as they met, feigning interest in Bourke's passion for medical science as a way to get close to him. Prosecutors say that Bourke was simply impressed with Kozeny, who was about 20 years younger but had attained a level of wealth on par with his own.
In May 1997 Bourke agreed to accompany Kozeny on a two-week trip aboard his Bombardier Challenger. They visited more than 10 countries, including Egypt, Russia, Romania, Kazakhstan, Uzbekistan, Ukraine, Mongolia and Japan.
The expedition was partially recreational. They climbed the pyramids in Egypt and, according to prosecutors, brought along prostitutes for the trip. For Bourke, who had recently divorced the Ford heiress, the excursion was a welcome distraction.
The trip was also a mission to find investment opportunities. It was on that tour that Kozeny and Bourke learned about the privatization process in Azerbaijan. As in many other countries in that region undergoing a transition from communism to capitalism, the government was issuing booklets of vouchers that would allow the public to buy stakes in state-owned companies. To attract international capital, Azerbaijan opened the process to foreigners, who were required to buy options in the companies in addition to vouchers. Kozeny and Bourke saw the potential to become Masters of the Universe. When they analyzed the going rate for the vouchers, they joked that they would be able to rename the country Vikistan or Rikistan, according to one of the participants on the trip.
But at that point, Bourke wasn't ready to invest any money. Kozeny, on the other hand, couldn't act fast enough. Kozeny's goal was to buy enough vouchers and options to gain control of the State Oil Company of the Azerbaijan Republic.
By December 1997, Kozeny says, he had spent millions of his own money establishing his investment business and buying up vouchers. But the government of Azerbaijan raised the price for SOCAR. Instead of 1 million voucher booklets, Kozeny was told, it would take 2 million voucher booklets to buy SOCAR. At the time the booklets were trading at around $100 apiece. Kozeny suddenly needed more investors, according to prosecutors.
Shortly after getting that news, Kozeny hosted an epic holiday party at Peak House in Aspen. Kozeny's guests -- who reportedly included Ivana Trump and Goldie Hawn -- were treated to a live performance by singer Natalie Cole, a six-course meal, and party gifts from Asprey's. (Kozeny says the party was merely to return the favor of being invited to the houses of other Aspen residents.)
Whatever Kozeny's intentions for the party, it appeared to help him land new investors. In January 1998 Bourke and a couple of other investors who attended the party accepted Kozeny's invitation to travel on his private jet for another worldwide investment-scouting tour. Again, one of their stops was Azerbaijan. Kozeny was eager to show them his new operation in Baku.
This time, Bourke came away convinced that he could make a lot of money from the deal. Kozeny had talked about investors making 50 to 100 times their investment, according to one participant. In March 1998 Bourke invested $5.3 million of his own money and another $2.7 million from his family and friends, including $200,000 from former Senate majority leader George Mitchell. Sophisticated institutional investors, such as Omega Advisors Inc. ($126 million), American International Group Inc. (AIG) ($15 million) and Columbia University ($15 million), also committed money to the project.
It was a wildly risky investment. One investor who actually hired lawyers to investigate the deal -- Texas Pacific Group founder David Bonderman -- declined to put money in. The investment depended on a decree from the president of Azerbaijan to privatize SOCAR. No decree, no privatization; then no returns for investors.
But according to prosecutors, Kozeny had a plan: He would give Azeri officials a stake in the action. In exchange for privatizing SOCAR, Kozeny promised the officials a free, two-thirds stake in the private company and a share of the profits that would come from a subsequent sale. Kozeny had help. His man on the ground in Baku, Thomas Farrell, was the quarterback, managing the cash used to buy vouchers and pay off Azeri officials. And Kozeny's lawyer in Switzerland, Hans Bodmer, was the engineer, setting up bank accounts around the world for Azeri officials.
But by the end of 1998, the investment had gone nowhere. The Azeris had not privatized the oil company and showed no signs of doing so in the near future. Meanwhile, investors, including AIG and Omega, suspected that Kozeny had defrauded them. In a suit filed in 1999 in London, they alleged that he had sold them options from his personal holdings at huge markups, which was a violation of their investment agreement. And they claimed that Kozeny had walked away with more than $100 million.
THE AZERBAIJAN FIASCO
Although Bourke was not a plaintiff in the litigation against Kozeny, he was a cheerleader for AIG and Omega. He was still upset over losing his money, and he suspected that Kozeny had defrauded him and others. He submitted an affidavit in the civil case and was hoping to see a criminal investigation launched against Kozeny. One of the American investors, Robert Evans Jr., chairman of Evans Industries Inc., and Bourke's friend from childhood, told him to forget about it. Evans repeated to Bourke what a lawyer had once told him: "You can't outpiss a skunk."
Kozeny knew that the Americans wanted to make him pay dearly for the Azerbaijan fiasco, but he was not about to back down. In court papers filed in the U.K. civil suit, he claimed that he had given Omega, AIG and other investors just what they had bargained for: a chance to get in on a risky investment. Plus, he played the FCPA card, insisting that he had kept the investors informed about the payments to the Azeri officials.
Along with his British lawyers at SJ Berwin in London, Kozeny consulted with two former U.S. prosecutors -- Donald Bierman of Bierman, Shohat, Loewy & Kegerreis in Miami and James Nesland of Cooley Godward Kronish in Broomfield, Colo. Bierman and Nesland advised him that as a foreign national, he was not subject to the FCPA. In November 1998 Congress amended the FCPA to make it clear that foreign nationals working for a "domestic concern" were subject to its criminal liability provisions, but Bierman and Nesland contended that Kozeny's bribes were made well before that amendment. (Neither Nesland nor Bierman returned phone calls to The American Lawyer. Information attributed to Bierman and Nesland comes from court papers filed in the Bahamas.)
Kozeny's lawyers didn't stop there. In September 2000 Bierman and Nesland decided to voluntarily visit the U.S. attorney's office in New York. It was a risky move. No federal criminal investigation had been initiated, and none appeared on the horizon. But Bierman and Nesland wanted Kozeny to be cleared of any wrongdoing, which would give them the upper hand in the London case. So they met with Alan Kaufman, then chief of the criminal division in New York, and assistant U.S. attorney Richard Strassberg. Bierman and Nesland laid out what Kozeny would say in a "Queen for a Day" proffer session.
According to Bierman, Strassberg and Kaufman were "highly skeptical" of Kozeny's story, given that he was being sued for fraud over the deal. If sophisticated investors like Omega and AIG were liable for FCPA violations, why would they sue Kozeny and risk exposing their own wrongdoing through discovery?
But Bierman and Nesland came away from the meeting with the understanding that if Kozeny was truthful during his proffer session, prosecutors would seriously consider giving him immunity and using him solely as a witness. So for two days in November 2000 at the U.S. embassy in Nassau, Kozeny spilled his guts to assistant U.S. attorney Michael Gilbert, deputy chief of the fraud section Peter Clark, and Federal Bureau of Investigation special agent George Choundas. Kozeny told them that he had indeed made a deal with the Azeris to give them two-thirds of a privatized SOCAR, but he said that it was part of a criminal extortion plot. He told the prosecutors that Azeri criminals with connections to the government had captured two of his men in Baku who were carrying $1 million worth of vouchers and $1 million in cash. Kozeny believed that if he didn't pay the ransom, they would be killed. (They were spared.) He also told the prosecutors that the American investors had been informed of the arrangement when they came on board.
Thanks to Kozeny, an FCPA investigation that would span the globe for five years was put into motion. The task of the prosecution was set: Find out who knew about Kozeny's bribes.
The assignment was a prosecutor's dream. There were big fish involved in the deal: Mitchell, Omega chief Leon Cooperman and Richard Friedman, a Boston real estate developer and friend of President Bill Clinton, to name a few.
And it was the kind of cutting-edge case that the government had been looking out for. Rather eerily, Peter Clark of the U.S. Department of Justice (now a partner at Cadwalader, Wickersham & Taft), who had been in charge of FCPA investigations, said at a panel in 1997 that the government had become interested in investigating "transactions being brought to U.S. companies primarily by European business people" involving "governments of countries which were formerly part of the Soviet Union."
The job of putting the case together fell heavily on George Choundas and Mark Mendelsohn. Choundas had been on the case since day one. Before becoming an FBI agent, he had spent two-and-a-half years as an associate at Cravath, Swaine & Moore. Mendelsohn, an assistant U.S. attorney, became the lead lawyer on the case in the spring of 2001. (Neither Mendelsohn nor Choundas responded to messages seeking comment.)
Mendelsohn and Choundas got one of their first big breaks from Thomas Farrell, Kozeny's top lieutenant on the ground in Baku. Farrell, a stout, strawberry blonde-haired Virginian, had done translating work for Kozeny in Russia before going to Baku. One of Farrell's jobs was to buy vouchers and options from local Azeris. It was a dangerous gig. He and his couriers were harassed by Chechen mafia members who wanted protection money. Farrell was also responsible for importing suitcases of cash from Switzerland -- each million was referred to as a "box of chocolates" -- to purchase vouchers. On one occasion, he also delivered millions in cash inside a duffel bag to a key Azeri official. But he was paid handsomely -- eventually. After Farrell complained about his salary, Kozeny tossed him bonuses totaling $700,000. In late 1998, when the project looked like it had stalled, Farrell moved back to St. Petersburg.
In November 2001 Farrell was in Virginia for a wedding when he received an e-mail from a friend in Russia who said that a Manhattan assistant district attorney was looking for him. (Since 2000, the Manhattan D.A.'s office had been investigating fraud allegations against Kozeny, which largely mirrored the civil cases against him.) When Farrell returned to Russia, he contacted a friend, who put him in touch with attorneys at Coudert Brothers in St. Petersburg. Eventually, the assignment came to Coudert partner Stephen Best in Washington, D.C. (Best is now a partner at Dewey & LeBoeuf.)
Best quickly learned about the federal investigation, which he regarded as more dangerous to his client. Best arranged to meet with Choundas and Mendelsohn at Coudert's London office in January 2002. At that meeting, Farrell laid out everything he knew about the failed SOCAR deal. He told them about Swiss lawyer Hans Bodmer's contribution to the scheme and the fact that Bourke was aware of the bribes. According to Farrell, Bourke had twice asked him whether Kozeny was paying the Azeris enough.
After their meeting with Farrell, Choundas and Mendelsohn wanted to know more about Bourke's role. His attorney, Stanley Twardy, a former U.S. Attorney for the District of Connecticut now at Day Pitney, had already been retained by Bourke in connection with the civil litigation against Kozeny. Bourke was also cooperating with the Manhattan D.A.'s investigation. According to Twardy, Choundas and Mendelsohn told him that Bourke was a subject of their investigation, not a target.
On Feb. 28, 2002, Twardy went to see the two investigators in downtown Manhattan. Twardy explained to them what Bourke would say in a proffer session and tried to feel out where the investigation was headed. Eventually, both sides agreed to the terms of a future proffer session in which Bourke would receive limited immunity.
Over four full days in the spring of 2002, Mendelsohn quizzed Bourke about the transaction. In an unusual show of cooperation, Bourke agreed at the outset to waive the attorney-client privilege he had with his corporate lawyers from Proskauer Rose and a Detroit firm then known as Bodman & Longley, who advised him in connection with the Azeri transaction. It's common for prosecutors to later turn on witnesses who cooperate in a proffer session, but after four days of interviews with Mendelsohn and Choundas, Twardy apparently never thought that Bourke was going to become a target.
Throughout 2002 and 2003, the federal investigation mushroomed. Mendelsohn and Choundas had a second interview with Kozeny in the Bahamas in January 2002. They also interviewed David Pinkerton, who headed up AIG's private equity group; he said he didn't know that a senior Azeri official had an interest in the privatization project.
Mendelsohn and Choundas kept in touch with Farrell throughout that period as well. They met with him again in London before they gave him a cooperation agreement. In March 2003 Farrell came to New York to plead guilty to violating the FCPA and conspiracy to violate the FCPA. In his agreement, Farrell promised to cooperate with the government's investigation in the hope of receiving a better deal from his sentencing judge.
Mendelsohn and Choundas next turned their sights on Hans Bodmer, whom Kozeny had instructed to set up holding companies and trusts for Azeri officials and their family members. Mendelsohn didn't show much interest in getting to know Bodmer's side of the story. In early August 2003, a grand jury filed an indictment against him while Mendelsohn sought his arrest. But Bodmer presented a logistical challenge. The Swiss government did not allow for the extradition of Swiss nationals. So the Justice Department made an application to Interpol for Bodmer's arrest. Secretly, Interpol waited until Bodmer left Switzerland.
That time came in August 2003. Bodmer, who served as pro bono counsel to an international sports organization, had traveled to Daegu, South Korea, for an event. According to a person familiar with the investigation, Bodmer was inside an auditorium when he was notified that the Korean police were waiting outside for him. He was allowed to go back to his hotel and call his wife. From there, the police took him to a 10-by-10-foot jail cell, where he spent the next five-and-a-half months without contact with U.S. counsel.
As the summer of 2003 came to a close, Twardy, Bourke's lawyer, had been in the process of setting up meetings between Mendelsohn and Bourke's corporate attorneys on the privatization deal. The meetings kept getting postponed. Just before Labor Day, Twardy received a call from Mendelsohn. The prosecutor's message: Bourke was now a target of the investigation.
SWISS LAWYER IN A SOUTH KOREAN JAIL
In the fall of 2003, Mendelsohn told Twardy that Bourke was going to be charged. Around the same time, Mendelsohn told Benjamin Brafman of Brafman & Associates, who had joined Kozeny's legal team in 2002, that his client would also be charged. But for months, the feds didn't move against either Bourke or Kozeny. (The Manhattan district attorney, however, announced in October 2003 an indictment against Kozeny over the alleged options fraud he committed against American investors.)
The FCPA case against Kozeny appeared to weaken further in 2004. After months in a South Korean jail, Hans Bodmer finally waived extradition and was transferred to a New York jail, where he spent two weeks. Bodmer's lawyers from Skadden, Arps, Slate, Meagher & Flom -- Robert Bennett and Saul Pilchen -- successfully argued against further detention in the United States.
Following Bodmer's release, Pilchen and Bennett filed a motion to dismiss. In July 2004, Judge Shira Scheindlin denied their request to dismiss the money laundering charge. But crucially, she granted their motion to dismiss the FCPA charge. Judge Scheindlin found that the FCPA did not apply to foreign nationals before the act was amended in 1998. (A few months later, Bodmer pleaded guilty to money laundering.) Her decision would later be used by Kozeny's lawyers to bolster their position that their client also was not subject to the FCPA.
That year, Bourke's attorneys -- which by then included Robert Cleary of Proskauer Rose -- had made a pitch to then-U.S. attorney David Kelley to stave off an indictment. Pinkerton's attorney, Barry Berke of Kramer Levin Naftalis & Frankel, was also making pleas to senior officials in the U.S. attorney's office to head off an indictment of the AIG executive.
But finally, in May 2005, Mendelsohn made good on his word and filed indictments under seal against Kozeny, Bourke and Pinkerton. All three were charged with money laundering and FCPA violations, while Bourke and Pinkerton were also charged with making false statements to federal agents. In October the indictments became public. At a press conference, Mendelsohn appeared alongside Manhattan U.S. Attorney Michael Garcia, who announced that Kozeny had been arrested in Lyford, and that Pinkerton and Bourke had voluntarily surrendered to the FBI.
THE ONE LEFT STANDING
Not much went as planned for the government following the indictments. In June 2007 Judge Scheindlin dismissed the indictments against Pinkerton and Bourke on statute of limitations grounds, but subsequently reinstated some of the charges following the government's request for reconsideration. Later that fall, prosecutors lost their extradition battle against Kozeny. And then, last summer, they dropped their case against Pinkerton, writing in a court filing that pursuing the case further "would not be in the interest of justice."
Bourke was the one left standing. At his trial in July, a new cast of characters was introduced. In January 2005 Mendelsohn had become deputy chief of the fraud section at Main Justice. The lead trial duties were left to Manhattan Assistant U.S. Attorney Harry Chernoff. He was joined by fraud section assistant chief Robertson Park and Assistant U.S. Attorney Iris Lan.
Bourke had new lawyers as well. When it became clear that Stanley Twardy might have to testify at Bourke's trial, he had to bow out. Proskauer's Cleary also became conflicted out when his firm's advice to Bourke in the SOCAR investment became central to the case. Bourke's next hire, Winston & Strawn chairman and star trial lawyer Dan Webb, withdrew from the case in March without explanation. Eventually, Bourke settled on a team from Haddon, Morgan, Mueller, Jordan, Mackey & Foreman, led by Harold Haddon, and Jones Day's John Cline. (Other Winston & Strawn attorneys assisted Bourke at trial.)
Their strategy was to paint Bourke as a crusader who tried to ring the bell on Kozeny's alleged fraud. Chernoff and the other prosecutors, meanwhile, tried to establish that Kozeny and Bourke shared an especially close relationship, but that Bourke actively took steps to avoid liability for Kozeny's bribes.
Ironically, the information provided by lawyers at Bodman -- whom Twardy insisted that prosecutors talk to -- was used against him at trial. During discovery, prosecutors were given a tape of Bourke discussing with his lawyers in 1998 his potential liability in the Azeri transaction in the event it was revealed that the deal was not handled at arm's length. The conversation had been taped because one of Bourke's lawyers had just moved into a new office and didn't have a place to take notes, so he turned on his recorder. At trial, prosecutors played the tape for the jury as evidence that Bourke was aware of the corrupt plan.
Ultimately, however, it was the testimony of Bodmer and Farrell that provided the government with its best evidence. Both men testified that Bourke had told them that he was aware of the bribes.
Despite the guilty verdict, Kozeny doesn't give high marks to the prosecution, which, after nine years, had only secured a nonprosecution agreement with Omega and three guilty pleas -- in addition to the Bourke conviction -- from Bodmer, Farrell and Clayton Lewis, a former employee of Omega who, prosecutors say, knew of the corrupt arrangement with the Azeris. (None of the men have been sentenced. And no other American investor has been charged with knowing about the bribes.)
Kozeny, whose childhood passions were math and science, says the government missed an opportunity to round up all of the American investors who, he says, knew about the bribes. The effect, says Kozeny, would be to create a prisoner's dilemma in which each individual pursues a self-interested strategy to avoid jail that ultimately results in all of them going to jail: "The more [people] you put in the courtyard, the better chances you have for successful prosecutions. Essentially, this could have been put to a mathematical model for optimality."
So far, Kozeny has been kept out of the courtyard. And despite the time he spent at Fox Hill prison, Kozeny still believes that going to the prosecutors first was the right move.
But the government's extradition case is now on appeal. His criticisms of the prosecutors aside, Kozeny is hoping for a change of heart. "I hope the Southern District reconsiders," he says. Otherwise, he will spend several more years in paradise -- and in limbo.
