A Breaththrough in Recognizing Who is a Corruption Victim

A decision of the U.S. District Court for the Eastern District of New York ruling shareholders of a company damaged by bribery are “corruption victims,” and its order affirming $135 million in damages establish an important precedent. The decision and order were handed down in a case arising from the prosecution of OZ Africa Management for violating the Foreign Corrupt Practices Act. OZ, a subsidiary of a U.S. hedge fund, had pled guilty to participating in a bribery scheme Israeli billionaire Dan Gertler engineered to gain control of the Democratic Republic of the Congo’s mineral resources.  As the case was about to close, shareholders in Africo, a Canadian company whose mining rights had lost value thanks to the bribery, filed a claim for damages under the Mandatory Victim Restitution Act, a statute requiring criminal defendants to compensate victims of their crimes.    

OZ and the prosecutors in the case both opposed the shareholders’ claim. Under the act, those claiming they were injured by a criminal offense must show they were “directly and proximately harmed” by it. Several events occurred between OZ’s bribes and the injury Africo’s shareholders sustained that blurred the causal link between the two. Both the government and OZ asserted that these intervening events made the shareholders at best indirect victims of corruption. And in any event the injuries were so far removed from the bribery that it could not be said the bribery proximately caused them.  Finally, OZ argued the damage the shareholders suffered, loss of the chance to develop the mine, could not be readily quantified, making any award “speculative” and “hypothetical.”

The difficulty in showing the harm from corruption is “direct” and “proximately” caused, and the challenge of precisely calculating the damage are not just hurdles to those seeking compensation for corruption under American law. They are commonly cited as reasons why, though virtually all nations permit corruption victims to sue for damages in accordance with article 35 of the UN Convention Against Corruption (here), virtually no one has (here, here [21ff], and here). While the court in OZ Africa Management was only construing a U.S. law, its reasoning offers courts in other jurisdictions precedent for awarding damages when their citizens are injured by corruption.  

The Corrupt Scheme

The corruption that damaged Africo’s shareholders began in 2006. A former Africo employee had corruptly obtained a secret judgement from a Congolese court assigning him Africo’s interest in the Kalukundi mine, a rich, undeveloped vein of copper and cobalt in the country’s southeast. Africo learned of the judgement in April 2007 and immediately filed suit in the DRC to set aside the judgment. The mine was the company’s only significant asset and until its rights were restored, the company would find it difficult to finance the mine’s development.

At the same time Africo’s suit was proceeding through the DRC courts, OZ began investing in a corporation Gertler, a confidant of the DRC president Laurence Kabila, had established to corner rights to the nation’s mineral resources. The plan included gaining control of the Kalukundi mine, and the first step, taken before OZ Africa entered the picture, involved bribing DRC judges to issue the secret ruling to the former employee. The corruption continued after OZ Africa became an investor. Getler used money from OZ’s investment to pay off judges, court personnel, and the DRC attorney general to delay Africo’s suit while he negotiated to acquire Africo. Facing a cash crunch that would likely result in bankruptcy, Africo had no choice but to agree to sell him a controlling interest, an interest he later exercised to halt development of Kalukundi.

The Shareholder’s Damage Theory

The crux of the shareholders’ damage claim was that the corruption led to the failure to develop Kalukundi, and they thus lost whatever profits would have come from its development. The damages they sought were based either on the current value of undeveloped mine or its value had it been developed. They submitted estimates of each prepared by an expert they had retained.

Direct injury

As the shareholders acknowledged, they did not hold the rights to the mine directly.  Rather, as the figure below taken from an OZ submissions shows, they held them through holding sharers in the Canadian public company Africo. That company in turn owned shares in a Canadian private corporation that owned shares in a Congolese trust company that owned shares in a Congolese corporation that held a permit to develop the Kalukundi property where the mineral deposit was located. The long chain of title, OZ argued, negated any claim the shareholders were directly harmed.  If anyone was, OZ contended, it was Africo, and under U.S. law “an injury to a corporation is not a ‘direct’ injury to its shareholders, much less to shareholders removed several times over.”

The court overcame this argument by treating the shareholders’ interest in the mine as an “intangible” property right.  When put this way, it followed that the bribery “directly” affected the value of their right, the long chain of intermediaries between the shareholders and the mine notwithstanding.  And nothing in the victim compensation law, the court said, suggested the law was meant to deny holders of intangible property rights compensation for their losses. Hence, the shareholders met the test of being “directly harmed” by the bribery.

Proximately caused

“Proximate cause” is the term American law uses when one person’s actions are sufficiently related to the injuries a second sustains that the action’s author is liable for damages. It is not a factual question determined by the laws of physics. Rather, as a leading authority on American law explains, it is resolved on the basis of ”mixed considerations of logic, common sense, justice, policy, and precedent” (Prosser, Handbook of the Law of Torts) .  

The prosecution argued the bribes OZ financed were not the proximate cause of the shareholders injuries.  The bribes that triggered their loss were those that procured the secret judgment taking Africo’s rights in Kalukundi, and they predated OZ’s investment with Gertler. OZ pointed out that Africo was without funds to develop the mine before any bribes were paid and to secure sufficient financing it would have had to sell a controlling interest anyway.  Moreover, the several events that occurred after the bribes were paid affected the value of the right to develop Kalukundi, and there were many contingencies – civil war, economic downturn, local unrest — that could have affected it as well. There simply was no straightforward causal path between the bribes and the loss.

The court was not persuaded that the intervening events negated proximate cause. Moreover, even though OZ only became involved after the initial theft of Africo’s rights, it was still liable for the damage that that theft had caused. Once a defendant joins a criminal conspiracy, under American law the defendant is liable for all acts of the conspiracy, a principle that extends to compensation for harm caused by a criminal conspiracy. The initial theft of Africo’s rights surely exacerbated its financial problems, the court observed, but there is no way to know whether Africo would have been forced to sell a controlling share in the company to obtain needed financing. “And, in any event, it lost the opportunity to do so fairly, which is a harm recompensable under the [victims compensation law].”

While the court did not acknowledge it, the extraordinary degree of corruption the case revealed — more than $20 million in bribes paid to Kabila, a top aid, and judges — likely influenced its finding of proximate cause. It is a commonplace in American tort law that the the more reprehensible a defendant’s conduct, the more likely a court will find it was the proximate cause of the claimant’s injuries (here and here). It is hard to imagine any more reprehensible conduct than the corruption of both a nation’s leader and its judicial system.

Quantification of damages

The shareholders were entitled to damages to restore them to the position they would have been in but for the bribery. To determine the amount, their expert had to make several assumptions about how ore prices would have changed between 2008 and 2018, what interest rates would have been, and estimate other factors that would have affected the mine’s development and the earnings it would have produced. The government questioned several of the assumptions. OZ argued that the same uncertainties that blurred the causal chain made calculating the amount of damages the shareholders sustained “hypothetical, speculative” and “fanciful.”

That quantifying the damages to which they were entitled was particularly difficult did not mean shareholders were to be denied recovery the court held. In rejecting that argument, the court was on strong ground. It is well-established in American law that, when the wrong makes it hard to determine damages exactly, a reasonable estimate will suffice. As the Supreme Court explained in a 1931 decision:

“Where the tort itself is of such a nature as to preclude the ascertainment of the amount of damages with certainty, it is enough if the evidence show the extent of the damages as a matter of just and reasonable inference, although the result be only approximate. The wrongdoer is not entitled to complain that they cannot be measured with the exactness and precision that would be possible if the case, which he alone is responsible for making, were otherwise.” 

There is nothing special about the court’s decision in OZ Africa Management save perhaps the quality of its reasoning, and nothing that limits the holding to American cases. The court’s appreciation of the harm corruption does and the need to compensate those it injures are written into the the United Nations Convention Against Corruption. Its ruling should be followed in any jurisdiction when those damaged by bribery or other forms of corruption seek compensation.

(Note on terminology. The American federal law requiring those convicted of a crime or pleading guilty to a crime to compensate the victims is named the Mandatory Victim Restitution Act.  In American criminal law, the term “restitution” is used to mean compensating victims for their losses whereas in a law suit brought in a civil court that term can mean either the disgorgement of the benefits a wrongdoer realized from his or her wrongful act or damages paid to a victim to compensate for the losses the wrongdoing caused.  To avoid confusion, this post follows the recommendation of the American Law Institute and uses “victim compensation” to describe payments to crime victims to make up for losses caused by the commission of a crime.)

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