Use Caution in Negotiating Deferred Prosecution Agreements

Daniel R. Alonso

03-01-2006


As corporate deferred prosecution and non-prosecution agreements (DPAs and NPAs) continue to proliferate in state and federal courts, the influence of prosecutors on the day-to-day operations of businesses caught in their grasp steadily increases.¹

More and more, companies desperate to avoid the collateral consequences of an indictment or criminal conviction are willing to agree to sweeping structural reforms, the creation of new and often intricate business procedures, and the appointment of independent monitors. Prosecutors, in turn, increasingly consider such provisions to be the bare minimum necessary for companies to receive the government's beneficence, in the form of an agreement to defer prosecution for a period of time or to forgo it altogether.

In recent months, KPMG, the Bank of New York (BNY), and the University of Medicine and Dentistry of New Jersey (UMDNJ), among others, have each agreed to substantial institutional reforms, as well as to the imposition of independent monitors (sometimes termed "independent examiners") to review and monitor the compliance of these entities with the terms of their respective agreements and, more generally, with the law.² UMDNJ, for example, agreed that its monitor will "conduct a comprehensive review and evaluation of all policies, practices, and procedures" and make recommendations to the Board of Trustees. Both BNY and UMDNJ agreed to create completely new positions — a "Head of Law Enforcement and Investigations" at BNY and a "Chief Compliance Officer" at UMDNJ. Not surprisingly, all three institutions agreed to severe monetary sanctions and restitution — $456 million for KPMG, $38 million for BNY, and an undetermined amount upwards of $2.8 million for UMDNJ.³ Notably, none of these agreements was groundbreaking.

But should a DPA always be the end result, and are such burdensome provisions necessary in every case? Putting aside direct financial consequences, each of the above entities will spend millions, if not tens of millions, of dollars simply to comply with the agreements, and their employees will face a panoply of new rules. Although some of these reforms may well be important and even necessary to deter future wrongdoing, white-collar defense counsel should be vigilant as to whether a DPA is appropriate in each particular case, and to whether the conditions being imposed are necessary.

Deferred Prosecution

The imposition of onerous DPAs has become an inviting prospect to prosecutors, whose traditional role was once merely to investigate and decide whether or not to bring criminal charges.⁴ A practice that did not even exist on the corporate level before the 1994 deferred prosecution of Prudential Securities in the Southern District of New York has now, nearly 12 years later, become almost routine.⁵ Two primary reasons for this trend are apparent.

The first is simply that the law makes it easy for prosecutors to do so. Because the elements of corporate criminal liability do not pose a challenging obstacle for the government,⁶ prosecutors who believe that they have uncovered wrongdoing by corporate agents often have the company in an impossible situation, particularly if conviction or merely indictment would bring collateral consequences that would make it difficult or even impossible for it to survive.⁷ As one prominent critic has noted, companies "become[] vulnerable to the extortionate demands of even well-meaning prosecutors, and prosecutors may be tempted to experiment with corporate governance in ways that exceed their competence or entitlement."⁸

But more significantly, prosecutors, most of whom were attracted to their chosen profession by the appealing but vague directive to "seek justice,"⁹ have been given the official go-ahead by policymakers to involve themselves in "good corporate citizenship."¹⁰ The January 2003 "Thompson Memorandum," which governs the decision-making process that federal prosecutors must follow when contemplating charging business organizations, suggests that "[i]n some circumstances . . . granting a corporation immunity or amnesty or pretrial diversion [the official term for DPAs] may be considered in the course of the government's investigation."¹¹

And the Sentencing Commission, which recently amended the organizational sentencing guidelines, now asks a corporation seeking fine leniency to establish that its code of conduct "promote[d] an organizational culture that encourages ethical conduct and commitment to compliance with the law."¹² The commission also allows any "remedial order imposed as a condition of probation may require the organization to . . . eliminate or reduce the risk that the instant offense will cause future harm."¹³ Although companies subject to DPAs hope never to deal with the guidelines, the commission's pronouncements can be persuasive to a prosecutor who, by deferring prosecution, has by definition already been more "lenient" than the guidelines contemplate.¹⁴

We are thus left with prosecutors who (a) can dictate terms to corporations whose convictions would otherwise be a virtual certainty in most cases, and (b) are encouraged to believe that they have free reign to do what they believe to be the right thing. When we add to the mix common provisions in DPAs that severely limit judicial oversight,¹⁵ few checks remain on prosecutors' use of discretion. It is no wonder that virtually every major case where the government opts not to indict the company is accompanied by a DPA.¹⁶

DPA or Declination?

The problem is that now that the Thompson Memo has firmly established the corporate DPA as a weapon of choice, prosecutors seem to be reaching for it reflexively, and companies have little choice but to acquiesce lest they face the ruinous consequences of an indictment or conviction. Although it is not even clear in many cases that the government would have sought indictment and conviction had the company contested the charges,¹⁷ companies have nevertheless entered into DPAs because fighting an indictment would simply have been too big a risk to take.

Consider, for example, the case of Merrill Lynch, which entered into an NPA with the Justice Department's Enron Task Force in 2003, requiring, among other things, an independent monitor. Although a small number of Merrill's employees have since been convicted for participating in the sham "Nigerian barge" transactions with Enron, it is questionable whether the prosecution of Merrill itself would have been a foregone conclusion but for its cooperation, or whether the NPA was simply a way to resolve the matter with an assurance of non-prosecution. After all, the crime proven at trial involved only one brief set of Merrill transactions, which enabled Enron to increase its 1999 earnings by the relatively small amount of $12 million. Would the government really have sought a conviction of the financial services giant, and the enormous collateral consequences that that would have entailed, based on these facts? Not surprisingly, Merrill did not admit wrongdoing, but instead simply "acknowledged" that the department had evidence that employees "may have violated federal criminal law," and then "accept[ed] responsibility" for its employees' conduct.¹⁸

Simply put, a prosecutor who would not otherwise charge a company with a criminal offense should not negotiate a DPA just because she can. Instead, such agreements should truly be reserved for cases where indictment would be a certainty but for leniency granted based on genuine efforts at cooperation and reform, among other Thompson Memo factors.¹⁹ In other situations, prosecutors should make the decision not to prosecute and then leave the company to face whatever civil remedies exist. Indeed, the Thompson Memo allows prosecutors to consider declination of prosecution or noncriminal alternatives to prosecution, without requiring imposition of the onerous terms that typically accompany DPAs.²⁰

Without such restraint, prosecutors will continue to be tempted to use their broad power to impute criminal liability to business entities in a way that will increasingly ensconce them in the less familiar world of corporate governance.

Terms of the Agreement

But what about those cases where it is clear that prosecution would indeed be pursued if not for the company's willingness to enter into a DPA? In such cases, defense counsel should be vigilant about burdensome conditions that have become almost standard and consider whether those conditions are appropriate in a particular case.

For example, the imposition of an independent monitor has become almost automatic. Although the proliferation of monitors in recent years has truly been a positive force in rooting out corrupt activity in the public and private sectors,²¹ monitors are not appropriate in all cases. They are extremely expensive and may impose enormous additional costs to a company by, for example, tying up the company's staff in responding to the monitor's requests, or by recommending corruption controls whose utility may be outweighed by the cost in terms of business efficiency.

After all, accounting fraud and other forms of corporate malfeasance could be virtually eliminated by assigning independent CPAs to look over the shoulder of each member of the staff of a monitored company eight hours per day, approving or disapproving every decision as the day progressed. But that, of course, would grind the business of the company to a halt.

While that is an absurd example, it is crucial that those negotiating DPAs carefully consider whether each remedial measure to be imposed, including the monitor, is absolutely necessary to a particular problem and that it will not frustrate one of the most important goals of the DPA: to allow the company to thrive while putting the scandal behind it. To be sure, effective compliance programs and some of the remedial measures imposed by DPAs may not only serve to avert future wrongdoing, but are also a virtual necessity to demonstrate a company's good faith should something go wrong in the future.²² But it is easy for rules and processes to quickly overwhelm discretion, creativity, and initiative in accomplishing the business of the company, something that defense counsel need to argue forcefully when negotiating DPAs.²³

Suggestions for the Future

Companies will most certainly continue to face criminal liability in the future. In negotiations on their behalf with prosecutors, counsel should keep the following in mind:

• Would the results of the investigation lead the government to charge this company and seek its conviction? If the answer is no, counsel should forcefully argue that the government should simply decline prosecution rather than entering into a DPA.

• Counsel should carefully scrutinize any corporate reorganization or remedial measures to be imposed. After all, the company is in the best position to explain its business operations to the government, and to convince prosecutors that particular remedial measures simply would not work in a particular industry. If necessary, counsel should consult experts on corporate governance for advice on whether particular corruption controls would accomplish their salutary purpose and not unduly interfere with business functions.

• In cases where an independent monitor might not be appropriate, counsel should argue that the enormous costs involved, both monetary and in terms of efficiency, are not justified by the problems that led to the DPA. If the government nevertheless decides to impose a monitor, it is crucial that the person selected be acutely aware of the costs involved. Although monitors have been in the news of late in connection with public companies or other large organizations, many times the entities to which monitors are assigned are smaller construction companies, labor unions or public agencies, for which out-of-pocket cost is definitely a factor.

• If a monitor is to be appointed, counsel should try to reserve for the company the right either to suggest or reject particular individuals, or at a minimum have a right of consultation. Some DPAs go on for years, and the company may have to live with the choice long after the prosecutors that negotiated the agreement have moved on to other cases or left public service.

• Even after the monitor has been appointed, it is crucial that counsel work closely with him to make sure that he is sensitive to the potential for business inefficiency. Counsel should meet with the monitor as early as possible and ensure that he understands the company's business operations and the need for the presence of the monitor to interfere as little as possible with those operations.

Daniel R. Alonso, a partner in the white-collar litigation and internal investigations group of Kaye Scholer, is the former chief of the criminal division in the U.S. Attorney's Office for the Eastern District of New York. He participated in the negotiation of the agreement with the Bank of New York, discussed in this article.

Endnotes:

1. Although DPAs and NPAs are different by definition, they are functionally similar and will be referred to in this article generically as "DPAs." The usual difference is that while an NPA is an agreement at the outset not to prosecute at all unless there is a breach, a DPA typically involves the filing of an accusatory instrument whose prosecution is suspended, or "deferred" for a specified time period. If the defendant complies with all of the terms of the agreement, the accusatory instrument is dismissed. Although it is typical to file an accusatory instrument when a DPA is negotiated, it is not required. See U.S. Attorney's Manual, § 9-22.010.

2. Deferred Prosecution Agreement Between KPMG LLP and United States Attorney's Office for the Southern District of New York, dated Aug. 26, 2005; Non-Prosecution Agreement Between the Bank of New York and the U.S. Attorney's Offices for the Eastern and Southern Districts of New York, dated Nov. 4, 2005; Deferred Prosecution Agreement Between UMDNJ and United States Attorney's Office for the District of New Jersey, dated Dec. 29, 2005 (all on file with author). As part of the agreements, KPMG accepted responsibility for tax fraud; BNY for intentionally failing to file a suspicious activity report, aiding and abetting fraud by a branch manager, and failing to have effective controls in place in connection with large and suspicious wire transfers from Russia; and UMDNJ for health care fraud in connection with double-billing Medicaid.

3.Id.

4. See, e.g., David B. Pitofsky, "Monitor/Examiner's Role Under Deferred Prosecution Agreements," NYLJ, Sept. 14, 2005, at 4; Steven R. Peikin, "Deferred Prosecution Agreements: Standard for Corporate Probes," NYLJ, Jan. 31, 2005, at 4; Alan Vinegrad, "Deferred Prosecution of Corporations," NYLJ, Oct. 9, 2003, at 4.

5. See Mary Jo White, "Corporate Criminal Liability: What Has Gone Wrong," 1517 PLI/Corp 815, 818 (2005); Vinegrad, supra note 4.

6. The general rule is that a corporation is responsible for the criminal acts of its officers, agents and employees that are (1) committed within the scope of their employment and (2) for the benefit of the corporation." New York Central & H. R.R. v. United States, 212 U.S. 481, 493-95 (1909). Because only one such agent is necessary to find liability of the entity, this doctrine makes imputing criminal liability "to the corporation rather easy." V.S. Khanna, "Corporate Criminal Liability: What Purpose Does it Serve?" 109 Harv. L. Rev. 1477, 1529 (1976).

7. For example, a company could be debarred from contracting with the government or could lose a license to operate in a regulated industry. Less drastic but still potentially fatal is the adverse publicity and loss of good will that a criminal charge or conviction can bring. For a company involved in securities or commodities trading, auditing and accounting, or asset management, a felony conviction means that, for all practical purposes, the company will cease to exist. See Benjamin M. Greenblum, "What Happens to a Prosecution Deferred? Judicial Oversight of Corporate Deferred Prosecution Agreements," 105 Columbia L. Rev. 1863, 1886 (2005).

8. John C. Coffee, Jr., "Deferred Prosecution: Has it Gone Too Far?" National Law Journal, July 25, 2005 (available at http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=1122023111380).

9. American Bar Association Standards for Criminal Justice, Standard 3-1.2(c), The Prosecution Function ("The duty of the prosecutor is to seek justice, not merely to convict.").

10. See Michael A. Simons, "Vicarious Snitching: Crime, Cooperation, And 'Good Corporate Citizenship,'" 76 St. John's L. Rev. 979, 995 n.71 (2002). Ironically, the UMDNJ DPA actually contains a commitment by UMDNJ "to achieving exemplary corporate citizenship." See UMDNJ DPA, supra note 2, at 1.

11. See Memorandum from Larry D. Thompson, "Principles of Federal Prosecution of Business Organizations," (Jan. 20, 2003) (the "Thompson Memo"), available at http://www.usdoj.gov/dag/cftf/business_organizations.pdf, at 7.

12. U.S.S.G. § 8B2.1 (a) (2) (2005).

13. U.S.S.G. § 8B1.2(a) (2005).

14. See Stephanie Martz, "Trends in Deferred Prosecution Agreements," The Champion, Nov. 2005, at 43 ("One can argue that the Organizational Sentencing Guidelines set the precedent for this degree of prosecutorial involvement in corporate governance.").

15. Though they need not, most DPAs do involve the filing of an accusatory instrument, and thus, the involvement of a court. However, while there is technical oversight by a court in such circumstances, the reality of the contract provisions of most DPAs take any meaningful review out of the hands of the judge. For example, both the KPMG and UMDNJ agreements provide that the decision whether the defendant breached is in the "sole discretion" of the particular U.S. Attorney. KPMG DPA, supra note 2, at 15; UMDNJ DPA, supra note 2, at 7. At least one commentator has suggested that many of the inequities inherent in DPAs would be ameliorated by provisions for greater judicial involvement. Greenblum, supra note 5, at 1896 - 1904.

16. See Peikin, supra note 4, at 4 ("Once used almost exclusively to dispose of minor cases against individual offenders, DPAs have become a standard means of resolving major corporate investigations.").

17. White, supra note 5, at 825.

18. Non-Prosecution Agreement Between Merrill, Lynch & Co., Inc. and U.S. Department of Justice, Enron Task Force, dated Sept. 17, 2003, at 2 (on file with author).

19. White, supra note 5, at 825 ("Most cases of corporate crime should result in no action by the government against corporations that have responded appropriately to the wrongdoing and any remaining problems of controls, compliance and corporate culture.").

20. The commentary to section X of the Thompson Memo provides: