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  • Chapter Six

    Deferred Prosecution andNon-Prosecution Agreements

  • 6-1

    "[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."

    Former Attorney General Dick Thornburgh March 17, 2007

    Chapter Six

    DEFERRED PROSECUTION ANDNON-PROSECUTION AGREEMENTS

    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).

    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."

    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.

    At the same time, prosecutors have largelyignored pretrial diversion as an option for

    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

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    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.

    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).

    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

    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.

    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).

    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

    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

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    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.

    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.

    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.

    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.

    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.

    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.

    http://www.ca3.uscourts.gov/opinarch/051480p.pdfhttp://www.ca3.uscourts.gov/opinarch/051480p.pdfhttp://www.ca3.uscourts.gov/opinarch/051480p.pdf

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    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.

    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.

    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

    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.

    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 &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.

    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

    http://www.ca3.uscourts.gov/opinarch/051480p.pdfhttp://www.ca3.uscourts.gov/opinarch/051480p.pdfhttp://www.ca3.uscourts.gov/opinarch/051480p.pdf

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    negate the DPA.

    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.

    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.

    Corporate counsel and commentators haveidentified the following features of DPAs andNPAs to be of particular concern and in need ofbeing addressed:

    1. Waiver of Attorney-Client Privilege.

    One of the more objectionable conditionsfound in many agreements requires thecorporation to waive attorney-client and workproduct privileges. Encouraged by theThompson Memo, which spawned a "culture ofwaiver" (discussed in greater detail in ChapterFive), prosecutors often require waivers tofacilitate their ongoing investigation of possible

    wrongdoing by company employees and tomake it easier to verify the company'scompliance efforts. However, since theissuance of the McNulty Memo in December2006, which was intended to formalize requestsfor waivers by prosecutors, only about 10percent of the DPAs and NPAs have containedexpress waiver requirements. Most of theremainder, though, have a provision that waivercould be required per the McNulty Memoguidelines. See LAWRENCE D. FINDER & RYAND. MCCONNELL, AM. BAR ASS'N, WHITECOLLAR CONFERENCE, ANNUAL CORPORATEPRE-TRIAL AGREEMENT UPDATE-2007 (March2008).

    Forcing companies to waive thesevenerable privileges deters employees fromseeking advice about internal problems theymay have uncovered, from taking correctiveaction, or from implementing complianceprograms already in place, lest thosecommunications are turned over to prosecutorsin some future investigation. No court couldrequire a company to waive its privileges aspart of any sentence if the company were foundguilty of an offense, yet such conditions havebecome standard fare in many DPAs andNPAs.

    2. Cooperation with Prosecutors.

    Another objectionable feature of manyDPAs is the open-ended and ill-definedrequirement that the corporation fully cooperatewith the prosecution and not protect allegedlyculpable employees. In essence, thecorporation has been effectively deputized toassist prosecutors in carrying out theirinvestigative duties, which unfairly pits theemployer against its employees. This DPAcondition has forced companies to discharge orpunish certain employees; to refrain fromentering into joint defense agreements betweenthe company and targeted employees; and to

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    deny or limit the amount of defense feesadvanced for the employees' defense, eventhough payment of fees is either contractuallyrequired or routinely provided for, as a matterof company policy. Such restrictions have beenapplied not just to employees who have beenindicted, but also to those whom thegovernment merely suspects of wrongdoing.

    For example, in August 2005, DOJ andKPMG entered into a DPA regarding taxshelter plans that it had offered to its clients butfailed to register with the IRS. The DPArequired that KPMG, among other things, shutdown its tax practice; pay fines, restitution, andpenalties totaling $456 million; and fullycooperate with the investigation. Theprosecutor grilled the company before enteringinto the agreement about whether KPMGintended to advance defense fees of its partners,as its policy and practice had previouslyallowed. Although there was no expressprovision in the DPA precluding the companyfrom paying the attorney's fees of its targetedpartners, KPMG was pressured to curtail thepayment of defense fees to its employees.

    As Judge Lewis Kaplan concluded in thecriminal case against the indicted employees,"KPMG refused to pay [the employees' defensefees] because the government had theproverbial gun to its head." United States v.Stein, 435 F. Supp. 2d 330, 336 (S.D.N.Y.2006). The court subsequently dismissed theindictments against 13 of the 16 KPMGemployees, finding that their constitutionalrights to counsel and due process were violatedby the government. 495 F. Supp. 2d 390(S.D.N.Y. 2007). The Stein case is furtherdiscussed in Chapter Five.

    3. Lack of Principled, Predictable, andUniform Standards.

    DPAs and NPAs have also been roundly

    criticized because of the inconsistent andunpredictable manner in which the 93 U.S.Attorney's Offices determine whether to declinea prosecution, enter into a DPA, NPA, or filecharges. There are no governing standards orguidance to U.S. Attorneys on selecting pretrialdiversion. Moreover, as noted, even if pretrialdiversion is chosen, the terms of a DPA or NPAcan vary widely from case to case. Consider,for example, the following two seeminglysimilar cases that resulted in grossly disparateagreements in neighboring U.S. Attorney'sOffices.

    The U.S. Attorney's Office in the SouthernDistrict of New York in Manhattan investigatedShell Oil Company for securities fraud relatingto the overstatement of its oil and gas reservesby almost 25 percent. In June 2005, thecompany entered into an NPA where there wereno charges filed, no admission of guilt wasextracted, and the company agreed toreasonable conditions to cooperate withprosecutors and comply with the law.

    Across the river, the U.S. Attorney inNewark, New Jersey, Christopher Christie,investigated Bristol-Myers Squibb (BMS) for asimilar securities charge of inflating its salesand earnings. Yet in June 2005, Christierequired BMS to enter into a DPA with a longlist of onerous terms in sharp contrast to theShell Oil case. In addition to "codifying" theinvestigative and remedial steps that BMS hadalready begun to undertake when it discoveredthe problem, BMS was further required toadmit guilt; cooperate fully with thegovernment; accept an independent monitor fortwo years; pay a record $300 million inrestitution (in addition to approximately $539million BMS had already agreed to pay to itsshareholders); appoint a non-executiveChairman of the Board and another Boardmember approved by Christie; and endow achair in business ethics at Seton Hall University

    http://online.wsj.com/public/resources/documents/kpmg062307.pdfhttp://online.wsj.com/public/resources/documents/kpmg062307.pdfhttp://online.wsj.com/public/resources/documents/kpmg062307.pdf

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    Law School, the alma mater of the U.S.Attorney. See also 2006 DPA with OperationsManagement International, Inc. ($1 million tohelp endow Chair at U.S. Coast GuardAcademy).

    Thus, what appeared to be two similarsecurities violations involving two companiesresulted in grossly disparate dispositions. Asa pair of leading experts in this area havecomplained, "[c]ompanies [and their counsel]should not be required to guess blindly at theresults of their cooperation in government-steered criminal investigations, nor should theirfate rest in the random lot of what prosecutor oroffice they happen to draw." F. Joseph Warin& Andrew S. Boutros, Deferred ProsecutionAgreements: A View From the Trenches and aProposal for Reform," 93 VA. L. REV. IN BRIEF107, 116 (June 18, 2007). To remedy thisunpredictable practice, Messrs. Warin andBoutros have proposed, along the linessuggested in the Recommendations below, thatDOJ establish clear and consistent guidance forall U.S. Attorneys and Main Justice to follow indeciding whether to use pretrial diversion andwhat the terms should be.

    4. Lack of Judicial Review.

    As previously discussed, because of theimbalance in the bargaining positions betweenthe government and the corporation,prosecutors are able to use economic duress toexact burdensome and unnecessary conditionsin DPAs. To make matters worse, there is noeffective judicial review to determine whetherthe conditions of a DPA or NPA werereasonable ones, were the result of economicduress, or whether DOJ's decision tounilaterally declare a breach and proceed withprosecution was justified.

    Nevertheless, many corporationsreluctantly prefer to operate under this sword of

    Damocles rather than risk the adverse collateralconsequences to the company, its innocentemployees, and its shareholders from aprosecution and possible conviction. If DOJeven threatens to revoke the agreement becauseit believes the terms of the DPA are not beingfully complied with, the corporation willaccede to the prosecutor's wishes and conformits response and behavior to forestall arevocation of the agreement, no matter howunreasonable DOJ's position is. For thisreason, there has never been a revocation of aDPA or NPA, except in the Stolt-Nielsen case,because DOJ has the unreviewable power toimpose its interpretation of the terms of theagreement. On the other hand, if DOJ were todecide to terminate a plea agreement for lack ofcompliance, a court would review DOJ's claimto determine if the alleged breach wereintentional or material. Accordingly, the lackof judicial involvement over whether there wasa breach is a serious problem that should beaddressed.

    5. Appointment and Powers of Monitors.

    Another growing criticism of DPAs is themanner of appointing monitors and the powerthey wield in overseeing the company'scompliance with the terms of the DPA. Themonitors are usually retired federal judges,former prosecutors, or other experiencedpersons that are selected by the U.S. Attorney,but appointed by the court.

    Company executives and managers arerequired to file regular reports with the monitoron meeting compliance requirements. Themonitor, however, does not report to the courtbut to the U.S. Attorney instead. Thus, themonitor, who may have little or no experiencewith the company's operation, has assumed, ineffect, certain managerial powers over thecompany. This arrangement can interfere withcorporate governance and can affect both

    http://www.virginialawreview.org/inbrief.php?s=inbrief&p=2007/06/18/warinhttp://www.virginialawreview.org/inbrief.php?s=inbrief&p=2007/06/18/warinhttp://www.virginialawreview.org/inbrief.php?s=inbrief&p=2007/06/18/warinhttp://www.virginialawreview.org/inbrief.php?s=inbrief&p=2007/06/18/warin

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    management's and shareholders' rights. Forexample, in September 2006, the monitorappointed to oversee the DPA with BMS,former federal judge Frederick B. Lacey, aswell as U.S. Attorney Christopher Christie"recommended" to the Board of Directors tofire its CEO and General Counsel, which it did,even though the recommendation had nothingto do with the original securities violation or afinding that DPA had been violated.

    The issue of how monitors are selectedcame to a head in September 2007 whenChristie entered into four related DPAs and oneNPA with five medical supply companiescharged with anti-competitive practices. In ano-bid contract, the U.S. Attorney selected fivemonitors to be paid by each of the companiessubject to the agreements. One of the monitorsselected by Christie to oversee ZimmerHoldings DPA was his former boss, AttorneyGeneral John Ashcroft, and Ashcroft'sconsulting firm. This agreement provided thatZimmer would pay as much as $52 million infees to Ashcroft's firm over a period of just 18months. While Ashcroft may indeed be asuitable monitor, the selection drew widespreadpublicity and raised issues of cronyism becausethere is no judicial oversight in the appointmentprocess.

    Congressional Response. On December17, 2007, U.S. Rep. Bill Pascrell, Jr. (D-NJ)proposed a Statement of Principles that DOJshould use in crafting DPAs. This was a directresponse to the lack of standards governing theterms of DPAs and appointment of monitors,especially with respect to the DPAs by the U.S.Attorney for New Jersey with Bristol-MyersSquibb and the five medical supply companies.In brief, Congressman Pascrell's proposalwould require written guidelines for DPAs;restore judicial oversight on the terms of theDPA and selection of the monitor; require theExecutive Office of the United States Attorneys

    to screen and select monitors; and provide fulldisclosure of the terms of all DPAs.

    On January 22, 2008, U.S. Rep. FrankPallone, Jr. (D-NJ) went a step further andproposed legislation (H.R. 5086) that wouldrequire the Attorney General to issue guidelineswith respect to DPAs, thereby limiting thediscretion of prosecutors. In particular, thefeatures of the bill would require (1) DOJ toconsider the potential harm of a DPA oninnocent employees and shareholders; (2)judicial approval of the DPA; (3) appointmentof federal monitors by a federal judge ormagistrate and payment of the monitoraccording to a pre-approved fee schedule; and(4) judicial determination as to whether any ofthe terms of the DPA have been breached. Inaddition, congressional requests have beenmade to DOJ for more details about the no-bidcontracts for the monitors. While there areseparation of powers problems with some ofthese suggestions, there is widespread criticismof DOJ's practice in this area.

    Responding to some of this criticism, onMarch 7, 2008, DOJ issued new guidelines onthe selection, scope of duties, and duration ofmonitors. Memorandum from Craig S.Morford, Acting Deputy Attorney General,Selection and Use of Monitors in DeferredProsecution Agreements and Non-ProsecutionAgreements with Corporations (March 7,2008). Under this new policy, the DeputyAttorney General would approve theappointment of monitors. This change inpolicy came just a few days beforecongressional oversight hearings were held onDPAs by the House Committee on theJudiciary, Subcommittee on Commercial andAdministrative Law (March 11, 2008).

    Conclusion. Prosecutors have sharplyincreased the use of pretrial diversion over thelast five years against corporations. Although

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    DPAs and NPAs have prevented negativeexternalities that would otherwise ensue fromprosecution, the terms imposed have raisedserious questions about overreaching by federalprosecutors, which imposes additional costs onthe corporation, its employees, and others.While DOJ has long exercised its authorityunder RICO to have monitors or receiversappointed to oversee labor unions whoseleaders have been found guilty of racketeering,no similar authority exists for DOJ's closesupervision of corporations that have enteredinto DPAs.

    As Professor Brandon Garrett of theUniversity of Virginia Law School concludedfrom his review of NPAs and DPAs "[f]ederalprosecutors have stepped far outside of theirtraditional role of obtaining convictions, and, indoing so, [sought] to reshape the governance ofleading corporations, public entities, andultimately entire industries. This developmenthas gone largely unexamined." Brandon L.Garrett, Structural Reform Prosecution, 93 VA.L. REV. 853, 936 (2007). With recentcongressional interest in this subject, and DOJ'snew policy on the appointment of monitors, along overdue examination of the DPA practicehas only begun.

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    RECOMMENDATIONS

    1. DOJ should establish an advisory committee under the Federal Advisory Committee Act(FACA) consisting of prosecutors, corporate and defense counsel, and other interestedparties to develop a transparent and consistent policy setting forth clear and uniformguidance for the use of pretrial diversion that will be considered by all U.S. Attorney'sOffices and Main Justice in determining whether they will decline prosecution, or proposeeither a DPA or NPA. The Deputy Attorney General should review proposed decisionsto use pretrial diversion to ensure consistency and curtail abuse. Corporations and defensecounsel need predictability and guidance in making major decisions that could haveenormous impact on the company, its employees, shareholders, and the economy.

    2. DOJ should not limit the use of NPAs and DPAs to corporations but should also use themfor individuals accused of regulatory offenses if DOJ rejects the use of administrative andcivil remedies, and does not decline prosecution altogether.

    3. DOJ should develop guidance that directs prosecutors to exercise their charging discretionregarding corporations in the following manner:

    A. Decline prosecution altogether if civil or administrative remedies are sufficient toremedy the violation, provide restitution, and deter future wrongdoing.

    B. If wrongdoing exists at the upper level management, but is isolated, an NPA shouldbe used for the corporation when non-criminal remedies are not appropriate, butonly if the company cooperates.

    C. If wrongdoing was widespread throughout the company, and remedial measures arelikely to be effective, a DPA should be offered to the company with appropriateconditions that do not unduly interfere with corporate governance.

    D. If wrongdoing is widespread and the corporation is a repeat offender, only thenshould criminal prosecution be considered.

    4. DPAs and NPAs should provide for pre-indictment review if DOJ claims that thecorporation breached any of the terms or conditions.

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    REFERENCE MATERIALS

    Note: A listing of WLF publications relevant to this chapter can be found in the Appendix.

    Preet Bharara, Corporations Cry Uncle And Their Employees Cry Foul: Rethinking ProsecutorialPressure on Corporate Defendants, 44 AM. CRIM. L. REV. 53 (2007).

    LAWRENCE D. FINDER & RYAN D. MCCONNELL, AM. BAR ASS'N, WHILE COLLAR CONFERENCE,ANNUAL CORPORATE PRE-TRIAL AGREEMENT UPDATE-2007 (March 2008).

    Lawrence D. Finder & Ryan D. McConnell, Devolution of Authority: The Department of Justice'sCorporate Charging Policies, 51 ST. LOUIS L.J. 1 (2006).

    Brandon L. Garrett, Structural Reform Prosecution, 93 VA. L. REV. 853 (2007).

    F. Joseph Warin & Andrew S. Boutros, Deferred Prosecution Agreements: A View From theTrenches and a Proposal for Reform, 93 VA. L. REV. IN BRIEF 107 (June 18, 2007).

    F. Joseph Warin & Jason C. Schwartz, Deferred Prosecution: The Need for Specialized Guidelinesfor Corporate Defendants, 23 J. CORP. L. 121 (1997).

    Candace M. Zierdt & Ellen S. Podgor, Corporate Deferred Prosecutions Through The LookingGlass of Contract Policing, 96 KY. L.J. 1 (2007).

    Websites:

    HHS Listing of Corporate Integrity Agreements, http://oighhs.gov/fraud/cia/index.

    Hearing on Deferred Prosecution: Should Corporate Settlement Agreements Be Without Guidelines?Before the House Subcomm. on Commercial and Admin. Law of the Comm. on the Judiciary (March11, 2008) (written testimony available at http://judiciary. house.gov/oversight.aspx?ID=425.).

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    TIMELINE: DEFERRED PROSECUTION AND NON-PROSECUTION AGREEMENTS

    1974: Speedy Trial Act of 1974 provides for deferred prosecution agreements, approvedby the court. 18 U.S.C. 3161(h)(2).

    1986: Department of Defense (DOD) develops Corporation Integrity Agreements (CIAs)that provide for leniency for companies that self-report violations.

    May 1992: First DOJ Non-Prosecution Agreement (NPA) with a corporation entered into withSalomon Brothers.

    Aug. 1993: DOJ's Antitrust Division develops Corporate Leniency Policy providing immunityfrom prosecution if company is first to report an antitrust violation.

    Dec. 1993: First Deferred Prosecution Agreement (DPA) with a corporation entered into withArmour of America.

    1996: Health and Human Services (HHS) develops CIAs.

    1997: DOJ establishes general guidance for U.S. Attorneys using pretrial diversion, butguidance not geared for corporations.

    Mar. 2002: Arthur Andersen indicted in Enron scandal.

    July 2002: Corporate Fraud Task Force established by President Bush.

    1992-2002: 18 NPAs and DPAs were made with DOJ over 10-year period.

    2003-2007: 85 NPAs and DPAs were made with DOJ over 5-year period.

    Jan. 2003: Memorandum of Larry Thompson, Deputy Attorney General, Principles of FederalProsecution of Business Organizations.

    Jan. 2003: Stolt-Nielsen, S.A. receives immunity agreement from DOJ's Antitrust Division.

    Mar. 2004: DOJ revokes Stolt-Nielsen immunity agreement; Stolt-Nielsen sues DOJ.

    June 2005: Shell Oil NPA for securities violation; mild conditions imposed by U.S. Attorneyfor the Southern District of New York. However, Bristol-Myers Squibb DPA forsimilar violation imposed by U.S. Attorney for New Jersey results in large finesand strict conditions, including the endowment of a chair in business ethics at SetonHall University Law School, the alma mater of the U.S. Attorney.

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    Aug. 2005: KPMG DPA requires penalties of $456 million and full cooperation; KPMG limitsadvancement of defense fees to targeted employees.

    Mar. 2006: Third Circuit rules that Stolt-Nielsen cannot seek pre-indictment review ofimmunity termination by DOJ. Stolt-Nielsen, S.A. v. United States, 442 F.3d 177(3d. Cir. 2006).

    June 2006: Judge Kaplan rebukes DOJ for pressuring KPMG to withhold defense fees totargeted partners. United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006).

    July 2006: Operations Management International, Inc. DPA requires $1 million to help endowa Chair of Environmental Studies at the U.S. Coast Guard Academy.

    Sept. 2006: The monitor overseeing the DPA with BMS and the New Jersey U.S. Attorneyrecommends that BMS fire its CEO and General Counsel, which it did, eventhough there was no finding of breach of the 2005 DPA.

    Dec. 2006: McNulty Memo issued, curbing prosecutors' requests for waiver of privileges andwithholding of defense fees to targeted employees.

    Mar. 2007: DOJ resolves criminal indictments against Reliant Energy Services, Inc. and fourexecutives with DPAs due to weakness of government's charges that the companyand executives were manipulating California's energy market.

    Sept. 2007: U.S. Attorney for New Jersey enters into separate DPAs with five medical supplycompanies, including Zimmer Holdings, and in a no-bid contract, appoints formerAttorney General Ashcroft as a monitor who could receive up to $52 million infees.

    Nov. 2007: Court dismisses indictment against Stolt-Nielsen, ruling that company compliedwith terms of the NPA. United States v. Stolt-Nielsen, S.A., 524 F. Supp. 2d 609(E.D. Pa. 2007). DOJ declines to appeal.

    Dec. 2007: U.S. Rep. Bill Pascrell, Jr. (D-NJ) proposes written guidelines by DOJ for enteringinto DPAs and judicial oversight over appointment of monitors.

    Jan. 2008: U.S. Rep. Frank Pallone, Jr. (D-NJ) introduces legislation (H.R. 5086) that wouldrequire the Attorney General to issue guidelines with respect to DPAs and judicialoversight over compliance with the DPA and appointment of monitors.

    Mar. 2008: DOJ issues new guidelines regarding the selection and approval of monitors by theDeputy Attorney General. House Judiciary Subcommittee holds hearings on theissue.

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