Background and impactIn any event, the business in corporate deferred prosecu-

tion agreements has certainly been brisk, particularly since2003. The dozens of deferred prosecution agreements sincethen have involved organizations large and small, public andprivate, for-profit and not-for-profit. Two things happenedaround that time that fueled the upsurge. (See, e.g., John C.Coffee, Deferred Prosecution: Has It Gone Too Far? NAT’L

L.J., July 25, 2005, at 13.) One was the postindictment col-lapse of Arthur Andersen, which was reportedly offered adeferred prosecution agreement but refused the conditions,and the other was a memorandum from the deputy attorneygeneral describing the nine factors the U.S. Department ofJustice (DOJ) considers in corporate charging decisions.(Memorandum from Larry D. Thompson to Heads ofDepartment Components and U.S. Attorneys Re: Principles ofFederal Prosecution of Business Corporations (Jan. 20, 2003),http://www.usdoj.gov/usao/eousa/foia_reading_room/usam/title9/crm00161.htm.) That Thompson Memorandum signaledthere would be situations in which a corporation’s cooperationmight make “pretrial diversion” an option. Pretrial diver-sion—deferred prosecution—began in the early 1900s as away to handle juveniles without stigmatizing them for life ascriminals. It was mostly associated with individuals and notapplied to companies until the early 1990s. (See Benjamin M.Greenblum, What Happens to a Prosecution Deferred?Judicial Oversight of Corporate Deferred ProsecutionAgreements, 105 COLUM. L. REV. 1863 (2005).) The DOJ,therefore, did not have much in the way of standardsThompson could point to when he issued his memo. Notmuch help can be gleaned from other DOJ policies or theUnited States Attorneys’Manual on corporate pretrial diver-sion, and some have proposed that DOJ fill this void in itspolicies. (See, e.g., F. Joseph Warin & Peter E. Jaffe, TheDeferred Prosecution Jigsaw Puzzle: A Modest Proposal forReform, 19 ANDREWS LITIG. REP., Sept. 2005, at 1.)

It is no surprise, then, that the combination of powerfulprosecutors, risk-averse companies, and few standardswould produce an upsurge in deferred prosecution agree-ments for organizations. Not to mention an interestingvariety of provisions: requiring a hospital to give the pub-lic millions of dollars of free health care, obligating a

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All of the punishment, none of the guilt. What’s notto like about deferred prosecution agreements forcorporations? Prosecutors get another choice for

disposing of a corporate case other than declining orindicting. And they can still make sure wayward compa-nies will be fined, chastised, restructured, and reformed—without unduly harming innocent constituencies. From thecompany side, deferred prosecution helps it avoid the dis-traction, risk, and often devastating consequences ofindictment, trial, and conviction. The board of directorscleans house, pays money, and the company stays in busi-ness; though not without (sometimes a good bit of) pain.

A corporate deferred prosecution agreement is basical-ly a way of imposing a term of probation before a convic-tion. The government files charges but then agrees to holdthem in abeyance pending the company’s successful com-pletion of certain terms in the agreement for a period oftime. Sometimes companies get a “nonprosecution” agree-ment, the effect of which is often eventually the same. Ido not distinguish between them here.

If the conditions set forth in the agreement are met to thegovernment’s satisfaction—and to its satisfaction alonebecause there is no judicial supervision—the charges get dis-missed. Typical terms come more or less right out of the U.S.Sentencing Guidelines and include an admission of wrongfulconduct supported by a detailed factual basis (admissible in alater trial); payment of a fine (which can be quite large—KPMG paid $456 million); cooperation with the govern-ment’s ongoing investigation (which often obligates the com-pany to make its employees available and includes privilegewaivers); the adoption of compliance programs and otherreform measures such as changes in corporate governance;personnel actions (e.g., firings, demotions, reassignments);and waivers of speedy trial rights and statutes of limitationsdefenses.

Other provisions that may appear in these deferredagreements include limits on public statements, restrictionson a company’s ongoing business practices, and theappointment of a government-selected monitor to overseethe company’s compliance with the agreement’s terms. Theperiod of time in which compliance with the terms isrequired before the charges are dismissed varies fromagreement to agreement and can be 12 months (e.g., BancoPopular), 15 months (e.g., Williams Power), 24 months(e.g., America Online); 36 months (e.g., Monsanto), oreven longer.

Eugene Illovsky is the managing partner of Morrison & Foer-ster’s Walnut Creek, California, office. He specializes in white-col-lar criminal defense, Security Exchange Commission and otherregulatory proceedings, internal investigations, corporate compli-ance, antitrust, trial practice, and appeals.

CORPORATE DEFERRED PROSECUTION AGREEMENTST H E B R E W I N G D E B A T E

By Eugene Illovsky

37CRIMINAL JUSTICE n Summer 2006

company to endow a chair in business ethics at the U.S.attorney’s alma mater, or requiring a company to create1,600 new jobs in the state over 10 years.

That not everyone is completely delighted by the devel-opment is also no surprise. The reasons for the displeasurevary, of course, depending on whom you are hearing fromamong practitioners, professors, and bloggers. Some com-mentators criticize the practice precisely because it allows“corporate criminals” to opt out of the criminal justice sys-tem and avoid conviction. Defense lawyers are happy tohave another tool to help corporate clients—for whom oftenthe only real question is how soon to cooperate—avoid con-viction. At the same time, there is concern that there may bea negative effect on criminal justice. For instance, some pro-visions may hinder a person’s ability to defend him- or her-self, and privilege waivers may contribute to the perceptionthat the government is imposing a “culture of waiver” anderoding the privilege. These concerns are not calmed by thefact that prosecutors retain the sole discretion to determinewhether a company has materially breached an agreement.

Indeed, the concessions that companies make in theseagreements and the invasive nature that federal “cooperation”often entails have raised the question of whether the practicehas “gone too far.” (See John C. Coffee, supra.) Not onlyhave some proposed that DOJ provide more policy guidance,there have also been proposals that some level of judicialinvolvement is necessary to check prosecutorial power. (See,e.g., Benjamin M. Greenblum, supra.) Because of concernson a number of fronts, a working group of the American BarAssociation Section of Criminal Justice’s Corrections andSentencing Committee is analyzing some 40 deferred andnonprosecution agreements and preparing a report for thecommittee. The members include David Axelrod, BarryBoss, Kirby Behre, Peter Jaffee, Samuel Buffone, and EricJaso, and many look forward to the fruits of their efforts.

A sampling of provisions sparking debateListed below are a few types of provisions in corporate

deferred prosecutions that have engendered argument.Briefly discussing some of these terms raises just some ofthe myriad challenges and questions for companies andtheir defense counsel, not the least of which is whether theprice the company pays for peace may be too high. Such adiscussion also highlights some of the challenges andquestions for the justice system more broadly.

Waiver provisions. The American Bar Association,among others, has spoken out about DOJ practices andpolicies embodied, for instance, in the ThompsonMemorandum of making waiver of the attorney-client andwork product privileges a sign of a company’s good faithcooperation in an investigation. Practitioners’ widespreadconcern, based on experience, that there is a corrosive cul-ture of waiver among prosecutors that is eroding the privi-

lege is reflected, among other places, in a recent surveydone by a coalition of organizations and presented to theCongress and the U.S. Sentencing Commission. (See TheDecline of the Attorney-Client Privilege in the CorporateContext, http://www.acca.com/Surveys/attyclient2.pdf.)

Waiver provisions are fairly common in deferred prosecu-tion agreements. As part of the promise to cooperate with thegovernment in exchange for a prosecution deferral, compa-nies often must agree to waive attorney-client and work prod-uct privileges regarding the company’s investigation and theconduct at issue. Naturally, the government often insists thatwaiver is critical to its efforts to get fully at what wrongdoingoccurred. And perhaps the waiver issue is different when acompany waives as part of getting the benefit of deferredprosecution after it has admitted to wrongful conduct.

Of course, when a company is negotiating an agreementto avoid prosecution, its leverage to resist a waiver provi-sion is not at its highest. And, to the extent that deferredprosecution agreements are getting more prevalent—somequestion whether the government is getting deferred prose-cution agreements in cases it would otherwise decline;companies certainly would be hard pressed to see if thegovernment were bluffing in any particular case—waiverbecomes more and more simply business as usual.

Even if waivers have been negotiated rather than sim-ply demanded as a condition of cooperation, it hardlyrequires comment that their impact is the same. Certainly,the effect on the company’s pending or future civil litiga-tion is obvious. Some have also noted that waiver canactually harm corporate governance by discouraging con-sultation with lawyers and making it more difficult todetect and fix wrongdoing early. (Elkan Abramowitz &Barry A. Bohrer, Waiver of Corporate Attorney-Client andWork Product Protection, 234 N.Y. L.J. ___ (Nov. 1,2005.) So the erosion of the privilege could be at oddswith the very reforms the government has achievedthrough these agreements.

Noncontradiction provisions. An organization gettinga deferred prosecution must accept responsibility for thewrongful conduct. This is done, in part, by the company’sadmitting to a factual basis for the offense. This basis isusually set forth in a sometimes quite extensive statementof facts, which may be attached as an exhibit to the agree-ment. For instance, the statement of facts for theFirstEnergy Nuclear Operating Company agreement is atleast as long as the agreement itself. It contains a detailedversion of events pertaining to problems at the Davis-Besse Nuclear Power Station in Ohio along with severalfalse statements FirstEnergy says its employees made tothe Nuclear Regulatory Commission.

A company then also typically agrees that it, as well asits lawyers, employees, or agents, will make no statement“contradicting” anything in the statement of facts. A typi-

38 CRIMINAL JUSTICE n Summer 2006

cal example is the Roger Williams Medical Center’s agree-ment prohibiting any contradictory statement by “presentor future attorneys, agents, officers, directors, trustees, oremployees.” And, as in the KPMG agreement, it is in thesole discretion of the government whether that contradicto-ry statement should be imputed to the organization. Thegovernment, also in its sole discretion, will decide whetherany such contradictory statement is a material breach ofthe agreement. To avoid being in breach, the organizationmust—usually within 48 hours—repudiate the statement tothe DOJ as well as to the recipient of the statement, andagree to the DOJ’s public release of the repudiation.

Of course, it could be difficult for a large organizationto keep tabs on every statement generated by its agentsand employees. (The KPMG agreement requires the DOJto notify KPMG of the supposedly contradictory state-ment.) Not to mention that this provision, like the waiverprovision, raises the cost of any parallel civil cases.

Aside from the impact on the company of such a provi-sion, it affects employees’ ability to defend themselves in anyongoing government investigation. Not only are they toldthey must cooperate with the government (indeed, their jobsmay depend on it), but they may feel pressure to testify con-sistently with the agreed-upon version of facts. If an execu-tive strays from the detailed factual statement the companyhas agreed to, the company’s repudiation of his or her state-ment or testimony may be the least of his or her problems.

Neither will the job of those defending former employeeswho have been charged be made any easier. It creates onemore obstacle to access to current employee witnesses andraises the question of whether their testimony has alreadybeen signed and sealed in any event. Further, this assumescounsel is getting paid; some organizations may feel pres-sured to refuse to indemnify an employee for the costs of adefense on the ground that the government will view organi-zations making such payments as being less than cooperative.

Business limitation and governance reform provi-sions. All deferred prosecution agreements require a com-pany to commit to future compliance. Some have provi-sions that restrict the organization’s ongoing businessactivities. For instance, in the government’s tax shelterinvestigation, KPMG agreed, among other things, to per-manently cease its private client and compensation andbenefits tax practice. It also agreed to certain detailedthresholds it would apply in providing clients with “cov-ered opinions” under the agreement. Bayerische Hypo-und Vereinsbank AG, in the agreement arising from its taxshelter problems, agreed to similar restrictions on itsinvolvement in tax advice and transactions.

The agreements also can provide for various types ofcorporate governance reforms. Usually, the company at a

minimum must agree to institute a new, or beef up anexisting, compliance and ethics program, appoint a com-pliance officer, and ensure all employees have access to ahotline of some type to allow anonymous reporting of anynoncompliance. The government may very well requirechanges in board of directors composition or the creationof board committees. Some of these more creative provi-sions have caused commentators such as Professor Coffeeto express concern that shareholders’ rights to choosedirectors might be sacrificed to a prosecutor’s experimentin corporate governance. (See John C. Coffee, supra.)

Finally, the agreement may require the appointment ofan independent, government-selected monitor for someperiod to oversee compliance with its terms—at the com-pany’s expense. The deferred prosecution agreement forthe University of Medicine and Dentistry of New Jerseyoffers an interesting example. As is typical, the monitor isresponsible for tracking compliance with the terms of thedeferral agreement, as well as with all other laws and reg-ulations. The monitor is to be promptly notified by theuniversity of any “allegations of unlawful conduct or otherwrongdoing” and kept abreast of any investigation. Theagreement charges the monitor with reviewing and evalu-ating corporate structure, effectiveness of legal and auditfunctions, health program billing, training, security pro-grams, and management compensation, among otherthings. It also gives the monitor unfettered access to allinformation, documents, and employees as he or shedeems necessary. Aside from the business issues of copingwith an independent monitor, complicated legal issuesmay arise—from insurance coverage for the acts of themonitor (sometimes the agreement mentions indemnifica-tion, as in Roger Williams Medical Center) to the privi-leged status of information to which the monitor hasaccess (which is effectively everything).

While some question the impact of prosecutor-imposedcorporate reforms—for which there may be no empiricalsupport of their effectiveness—on the country’s system ofbusiness, others view these reform provisions as a goodthing, an innovative form of “responsive regulation” ofcorporate activities.

These are just a few of the interesting issues for debatethat appear to be arising from deferred prosecution agree-ments. There are likely to be more calls for some change:fuller DOJ standards, judicial involvement, or something elsetriggered by a court challenge. Given the importance of theseagreements to the prosecution and defense of corporate whitecollar cases, we can be assured of an interesting debate.

Editor’s note: For more on this topic, see Ethics,Page 42.