Chapter Six Deferred Prosecution and Non-Prosecution Prosecution and Non-Prosecution Agreements. 6-1 ... DEFERRED PROSECUTION AND NON-PROSECUTION AGREEMENTS O ... or other individuals accused of

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<ul><li><p>Chapter Six</p><p>Deferred Prosecution andNon-Prosecution Agreements</p></li><li><p>6-1</p><p>"[Deferred and non-prosecution] agreements can border on theextortionate because the Justice Department knows it is in a farsuperior bargaining position, and such an imbalance can lead toabuse, and not just in the extravagant amounts of money thecorporations are forced to pay."</p><p>Former Attorney General Dick Thornburgh March 17, 2007</p><p>Chapter Six</p><p>DEFERRED PROSECUTION ANDNON-PROSECUTION AGREEMENTS</p><p>Overview. Historically, federalprosecutors have had three basicoptions when handling criminal cases. Theycould decline to prosecute their targets, filecharges and extract a plea agreement, orproceed to trial. In recent years, however, amore controversial weapon has been wieldedby prosecutors against the corporatecommunity: pretrial diversion in the form ofdeferred prosecution agreements (DPAs) andnon-prosecution agreements (NPAs). </p><p>The authority to enter into theseagreements is found in the Speedy Trial Act of1974, 18 U.S.C. 3161(h)(2). That provisionprovides that the time limits under the Act aresuspended during "[a]ny period of delay duringwhich prosecution is deferred by the attorneyfor the Government pursuant to writtenagreement with the defendant, with theapproval of the court, for the purpose ofallowing the defendant to demonstrate his goodconduct."</p><p>Once sporadically used for individuals inminor criminal matters, pretrial diversion isbeing used more frequently to resolve corporatecriminal cases. These agreements areessentially one-sided arrangements crafted byprosecutors with unchecked power, and"agreed" to by their corporate targets. There isno formal guilty plea or conviction; rather, thecompany usually acknowledges wrongdoingand agrees to cooperate with the government'songoing investigation, pay massive fines orpenalties, reform its business operations, andcomply with other specified and variedconditions, often under the watchful eye of anexpensive "corporate monitor" selected orstrongly recommended by the prosecutor. Inreturn, at the end of a "probationary" periodthat usually lasts from one to three years, thegovernment agrees to drop the charges againstthe company if prosecutors, in their soleunreviewable discretion, believe the companyhas not violated the terms of the agreement. </p><p>At the same time, prosecutors have largelyignored pretrial diversion as an option for</p><p>http://www4.law.cornell.edu/uscode/18/usc_sec_18_00003161----000-.htmlhttp://www4.law.cornell.edu/uscode/18/usc_sec_18_00003161----000-.html</p></li><li><p>6-2</p><p>resolving cases against company employees,executives, or other individuals accused ofviolating regulatory offenses. Instead ofdeclining prosecution or referring the case tothe agency for civil or administrative remedies,which should be the preferred outcome,prosecutors generally disregard the option ofpretrial diversion for individuals, file criminalcharges, and effectively extort unfair pleaagreements or convictions that often result inexcessive prison terms under the SentencingGuidelines. </p><p>NPAs generally do not require anadmission of guilt from the targeted companybecause the prosecutor does not file criminalcharges. NPAs are often quite informal andusually come in the form of a letter from theU.S. Attorney's Office signed by both parties.On the other hand, the more frequentlyemployed DPAs require a more complexprocedure. Prosecutors file criminal charges(the company having waived its right toindictment by a grand jury), but "defer"prosecuting the case as long as the companycomplies with certain conditions specified inthe DPA. The conditions usually are moredetailed and burdensome than those found inNPAs. Because criminal charges are filed,DPAs read much more like pleadings and aremore formal in nature. For example, the DPAthat the accounting firm KPMG entered into in2005 (discussed below) numbered 28 pages,not including the Statement of Facts (another10 pages), and the criminal information(another 34 pages). </p><p>Because of their almost limitless chargingdiscretion, prosecutors are able to exercisepowerful leverage over their corporate targets.To avoid indictment and not risk convictioneither by a jury or plea agreement, companiesseek and prefer pretrial diversion despite itsheavy price. A criminal investigation andindictment alone could have enormous adverse</p><p>consequences even if a company wereultimately acquitted at trial. For example,under federal procurement regulations,companies under investigation or indictmentare suspended from applying for or receivinggovernment contracts, subsidies, and assistance effectively suspending any and all of theirgovernment-related business. Publicly tradedcorporations typically face a sharp drop inshare value and debilitating class actionlawsuits. A conviction could effectively resultin a corporate death sentence, harming innocentemployees, stockholders, and the economy.Accordingly, federal prosecutors can dictateharsh DPA and NPA terms and conditions,even if the underlying case is weak and even ifany individuals charged are acquitted. </p><p>Growing Trend of Pretrial Diversion.The first corporate NPA was entered into inMay 1992 with Salomon Brothers, resulting ina civil penalty of $290 million for improperlyauctioning Treasury securities. The first DPAwas made with Armour of America in 1993,which required only a $20,000 civil penalty anda corporate compliance program, but noadmission of criminal or civil liability for anarms export violation. In 1997, DOJestablished general guidelines for U.S.Attorneys to consider in deciding whether touse pretrial diversion, but they were designedmore for individuals than corporations, andallowed for inconsistent application. See U.S.Attorneys' Manual 9-22.010 (1997). </p><p>From 1992 through 2002, there were only11 corporate DPAs and 7 NPAs, totaling 18agreements, or an average of less than 2 peryear. However, after the creation of theCorporate Fraud Task Force in 2002 followingthe Enron scandal, the subsequent indictmentand collapse of Arthur Andersen LLP, and theissuance of the Thompson Memorandum inJanuary 2003, overly aggressive prosecutorsincreasingly turned their sights on companies</p><p>http://www.usdoj.gov/usao/eousa/foia_reading_room/usam/title9/22mcrm.htm#9-22.010http://www.usdoj.gov/usao/eousa/foia_reading_room/usam/title9/22mcrm.htm#9-22.010</p></li><li><p>6-3</p><p>and their executives for criminal prosecution.The number of DPAs and NPAs roseaccordingly. The Thompson Memo's inclusionof alternative resolutions to indictment forcompanies that have cooperated with DOJ as aprosecutorial option may have also spurredmore DPAs and NPAs. During the five-yearperiod from 2003 to 2007, there was a recordnumber of 55 DPAs and 30 NPAs, a total of 85agreements, or an average of 17 per year. Mostof those were entered into over the last twoyears. In 2006, there were 20 agreements,whereas in 2007, there were 38, almost a 100percent increase. </p><p>Approximately 60 percent of thoseagreements involved alleged violations offederal health care laws, food and drug laws,and the Foreign Corrupt Practices Act (FCPA).As for environmental offenses, the current headof DOJ's Environmental Crimes Section, StacyMitchell, stated on March 7, 2008 at the ABAAnnual Institute on White Collar Crime thatshe does not believe in DPAs, and that if DOJis not going to prosecute, then the mattershould be referred for civil disposition.However, she also said her section willcontinue to follow the Holder, Thompson, andMcNulty Memos, which contemplate the use ofDPAs. Nevertheless, as these overall numbersreflect, there is a growing trend to use DPAsand NPAs, which will continue so long asaggressive prosecutors target companies andhold them vicariously liable for the wrongdoingof their employees. </p><p>While DPAs are generally used by DOJ forresolving criminal cases against corporations,they have been used recently in a few cases tosettle charges against corporate executives afterindictment where the government's case wasparticularly weak. For example, DPAs wereentered into by DOJ with Frank Quattrone ofCredit Suisse in 2006, and with four executivesof Reliant Energy Services, Inc. in 2007. </p><p>DOJ's Corporate Leniency Policy: Stolt-Nielsen. In addition to NPAs and DPAs, thereare other pretrial diversion programs that aresometimes used either by the JusticeDepartment or certain government agencies forspecific areas of the law. For example, inAugust 1993 the Antitrust Division of DOJinstituted a Corporate Leniency Policy wherebya corporation is given amnesty if it is the first tocome forward to report illegal anti-competitiveactivity with other companies, cooperates withthe government investigation, and makesrestitution to any injured parties. </p><p>However, as one major company quicklydiscovered, immunity from prosecution underthis policy is not guaranteed. In January 2003,Stolt-Nielsen, S.A., a shipping company,entered into a Conditional Leniency Agreement(a form of NPA) with DOJ, reciting that thecompany had terminated its anticompetitiveactivity involving customer allocation as soonas it was discovered and agreeing to cooperatein the government's investigation. On March 2,2004, without any warning, DOJ decided torevoke the agreement because it believed thatStolt-Nielsen continued its anticompetitivepractices after March 2002, the date thecompany represented that it had ceased theactivity. </p><p>Stolt-Nielsen sued the government indistrict court to enforce the amnesty agreementand prevailed; unfortunately, the decision wasreversed on appeal. Stolt-Nielsen, S.A. v.United States, 442 F.3d 177 (3d Cir. 2006),cert. denied, 127 S.Ct. 494 (2006). In adubious opinion, the Third Circuit held thatDOJ's claim that Stolt-Nielsen breached theconditions of the leniency agreement wasnot subject to preindictment review, absentspecific provision in the agreement to thecontrary. In short, Stolt-Nielsen had to waituntil it was indicted before it could seek anyjudicial review.</p><p>http://www.ca3.uscourts.gov/opinarch/051480p.pdfhttp://www.ca3.uscourts.gov/opinarch/051480p.pdfhttp://www.ca3.uscourts.gov/opinarch/051480p.pdf</p></li><li><p>6-4</p><p>DOJ subsequently indicted Stolt-Nielsen,which, in turn, renewed its challenge. OnNovember 29, 2007, the district court sharplyrebuked DOJ for precipitously revoking theimmunity agreement and dismissed theindictment. The court found that DOJ simplydid not prove that Stolt-Nielsen failed to takeprompt action to terminate its anticompetitiveactivity or that the company breached theagreement in any way. United States v. Stolt-Nielsen, S.A., 524 F. Supp. 2d 609 (E.D. Pa.2007). On December 21, 2007, the JusticeDepartment wisely announced that it would notappeal the dismissal, likely sensing anunfavorable outcome.</p><p>Corporate Integrity Agreements (CIAs).In addition to DOJ's Antitrust CorporateLeniency Policy, the Departments of Defense(DOD) in 1986 and Health and HumanServices (HHS) in 1994 developed CorporateIntegrity Agreements (CIAs). Under thesesettlement agreements, which are akin to NPAs,companies doing business with those federalagencies agree to disclose fraud and otherwrongdoing, provide periodic reports over afive-year period, and institute corporatecompliance and reform programs. In return, thecompanies avoid being suspended or debarredfrom future government contracts and likelyavoid being referred to DOJ for criminalprosecution. In some cases, CIAs are used inconjunction with DPAs. The use of CIAs bythe Office of Inspector General of HHS rosesharply from only four CIAs in 1994 to a peakof 233 in 1998, with a current rate ofapproximately 100 per year. </p><p>Many of the CIAs provide for set penaltiesif the company fails to comply with its terms,as interpreted by HHS. As in their DPAcounterparts, many of the terms in CIAs areburdensome, intrusive, or of questionablevalidity. For example, many CIAs ban off-label marketing by pharmaceutical and medical</p><p>device companies, which infringes on theirFirst Amendment commercial free speechrights and effectively precludes a judicialchallenge to the ban. To underscore the powerof HHS to enforce this questionable ban, asdiscussed in Chapter One, Purdue Frederickand three of its corporate officers were forcedto plead guilty in May 2007 for "unlawful"pharmaceutical marketing practices by lower-level employees, of which they were unaware.In late 2007, HHS began proceedings toexclude these executives from working for thecompany. </p><p>Criticism of Abusive DPAs and NPAs.Precisely because a targeted company is facingruinous liability both criminally and civilly,there is a great deal of compulsion andeconomic duress that forces companies toaccede to prosecutors' demands on theconditions they insert into DPAs and NPAs, nomatter how burdensome. Accordingly, somehave argued that doctrines of duress andunconscionability, which courts have used tovoid commercial contracts, may also be used inthe criminal context. See Candace M. Zierdt &amp;Ellen S. Podgor, Corporate DeferredProsecutions Through The Looking Glass ofContract Policing, 96 KY. L.J. 1 (2007).Indeed, in the interest of justice and fairdealing, courts generally impose a higherstandard of good faith and fair dealing when thegovernment, rather than a private party, issetting the conditions.</p><p>The terms and conditions of DPAs canvary widely from one case to the next, and fromone prosecutor to another. Some terms, such asthe payment of restitution and an agreement tocomply with the law in the future, are generallynon-controversial, although they can becomeproblematic. For example, a company'sagreement to comply with the law includes allcorporate employees; thus, a minor breach ofany regulatory offense by any employee can</p><p>http://www.ca3.uscourts.gov/opinarch/051480p.pdfhttp://www.ca3.uscourts.gov/opinarch/051480p.pdfhttp://www.ca3.uscourts.gov/opinarch/051480p.pdf</p></li><li><p>6-5</p><p>negate the DPA. </p><p>Other terms, drawn from the nine chargingfactors in the Thompson Memo and thosespecified in the U.S. Sentencing GuidelinesCorporate Compliance Program, raise moreserious questions and go well beyond thesanctions that otherwise could be imposed by acourt even if the company were prosecuted andfound guilty of an offense. </p><p>For example, forbidding a company frompublicly denying aspects of their "wrongful"conduct raises both First Amendment andbusiness concerns. In a 2006 DPA settlinggovernment charges about the safety conditionsat its nuclear power plant, FirstEnergy NuclearOperation Company paid $28 million in finesand penalties for the alleged violations andagreed not to dispute the company's culpability.However, the company subsequently submitteda $200 million claim to its insurer for thecorrosion damage that led to the charges givingrise to the DPA. Questions were then raised asto whether FirstEnergy's otherwise routinesubmission of an insurance claim violated theDPA, which forbade the company fromdenying the charges that it was responsible forthe plant's damage.</p><p>Corporate counsel and commentators haveidentified the following features of DPAs andNPAs...</p></li></ul>