Amazon data center dispute led to strange government intervention

It was an unusual threat in an unusual dispute, involving the massive, complex web of data centers in Northern Virginia that Amazon has spent billions of dollars creating and made billions more using to host cloud computing services. The company, which says it accounts for about a fifth of the personal property taxes paid in Fairfax, Loudoun and Prince William counties, alleges some of that lucrative business was tainted by collusion between a real estate developer and its own employees.

But such fraud cases are difficult to prove, and this one has been particularly troubled. When prosecutors in the Eastern District of Virginia initiated the call, on the verge of depositions, the case had already led to the withdrawal of a federal judge and an FBI agent over ethical concerns.

Court records offer a glimpse into an ongoing investigation by the government and a parallel civil lawsuit. Things began the way civil cases often do, with a tip. Actually, two.

The first went straight to Amazon founder Jeff Bezos. (Bezos owns The Washington Post.)

“I never considered myself a rat,” Danny Mulcahy wrote in the late-2019 email, now reproduced in court records. “But … it is disheartening when people are rewarded so grossly for unscrupulous behavior.”

He was a former employee of a Colorado commercial real estate firm called Northstar, which had contracted to build and manage multiple data centers for Amazon in Loudoun and Prince William. Mulcahy claimed that Amazon employees had taken kickbacks as part of those deals.

He later said his suspicions were raised by the amount of money going to a trust benefiting the brother of an Amazon employee. Those same payments were noted by Northstar Chief Operating Officer Tim Lorman, who a month later raised the issue with the investment firm financing the Amazon deal.

Amazon alleges in court filings that its investigation revealed Northstar funneled money to two Amazon employees, Casey Kirschner and Carl Nelson, through Kirschner’s brother Christian, and that both the employees and Northstar had profited from separate real estate deals with Amazon.

“The evidence that has come to light … is damning and leaves no doubt that Defendants violated the federal RICO statute and engaged in multiple acts of wire fraud, honest services fraud, money laundering, and other unlawful acts over a multiyear period,” attorneys for Amazon alleged in their most recent complaint.

By February 2020, Amazon’s attorneys had contacted the U.S. attorney’s office for the Eastern District of Virginia, according to court records. Amazon sued in the same court in late April, a few weeks after the FBI raided the homes of the alleged fraudsters. The Justice Department that spring seized funds from the defendants through civil forfeiture. Nelson had to turn over more than $800,000; Northstar chief executive Brian Watson and his company were ordered to put $25 million in escrow. (Because he did not, citing lack of funds, a receiver now controls his assets.)

The defendants have fought back, saying that Amazon was imagining a criminal scheme out of complicated real estate deals that were vetted by an attorney. Amazon has accused that attorney of facilitating the fraud, which he has denied.

Watson has filed his own court case in Delaware, saying that thin allegations are being used to cut him out of a lucrative partnership. His attorney Stan Garnett said the case against him is “based on innuendo and misunderstandings” and that Watson had no knowledge of or involvement in any money going to an Amazon employee.

Casey Kirschner and Nelson say that all the deals were extensively negotiated and scrutinized by people above their level, and that what Amazon considers criminal is at worst a disagreement over the terms of a noncompete agreement.

“I did my level best for the company,” Nelson said. “I continue to believe the truth will prevail.”

Amazon has not specified damages, citing confidentiality.

Lawyers representing Amazon have consulted with the Justice Department more than 75 times about the case, according to court records, but charges have not yet been filed.

Thomas M. DiBiagio, a former U.S. attorney for the state of Maryland, said these kinds of fraud cases “are difficult to prove,” because “they require strong and substantial evidence of a criminal intent.”

It is not uncommon for criminal prosecutors to ask for a pause in civil litigation to allow their own work to take priority. But the Jan. 24 call began with a request from Assistant U.S. Attorney Jamar Walker that nothing be recorded. Then fellow prosecutor Matt Burke spoke directly to the litigants. Two people who heard the call described it to The Washington Post. They spoke on the condition of anonymity to discuss ongoing litigation.

Burke told Amazon on the call to “get out of our way,” promising that the government would “run this to the ground” despite “horrible” press about the company. He made the analogy of prosecuting people who rob drug dealers.

Then he said that if the defendants were “truly innocent … we will figure that out,” but that “if you choose not to agree to a stay, you’ll get what you deserve.”

The defendants would then be “forced to make an impossible choice” between refusing to answer questions in the civil case or lying under oath, Burke said on the call. If they chose the latter, he said he would indict them for perjury or obstruction, “regardless of whether you committed any other crime.”

The defendants’ attorneys viewed that statement as a veiled threat and a not-subtle suggestion that their clients couldn’t testify truthfully. After they raised those concerns with supervisors in the prosecutor’s office, according to the people involved, the government returned the bulk of the seized funds, and Burke stopped working on the case. He followed a federal judge who recused himself after learning that his family owned Amazon stock and an FBI agent who was accused of breaching attorney-client privilege during a search.

Since the call, in depositions, both Mulcahy and Lorman have said they didn’t have hard evidence of fraud.

“I said … this is how I believe things had happened. I didn’t say with sort of empirical authority that these — all these things did happen,” Mulcahy testified in March.

Attorneys for Amazon who had said in repeated sworn statements that they “could competently testify” to their “personal knowledge” of fraud withdrew the declarations and said they “mistakenly included form language” — the attorneys had no firsthand knowledge, only what they had learned from others. A magistrate judge in April called it “a big mistake” and “sloppy lawyering” but allowed Amazon to submit new filings.

Both the criminal investigation and the civil litigation are ongoing. The defendants are now pushing for a settlement conference or trial date, saying Amazon has probably spent more on attorneys’ fees than it stands to gain. Amazon dismissed those proposals as ploys to “run out the clock” on turning over information and “push a no-fraud narrative that is irreconcilable with the record.”

The U.S. attorney’s office for the Eastern District of Virginia declined to comment on the case, as did attorneys for Amazon.

Devlin Barrett and Teo Armus contributed to this report.