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Article Excerpt
Deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs) are proliferating. In the four years between 2002 and 2005, prosecutors and major corporations entered into twice as many of these agreements (also called pretrial diversion agreements) as in the previous ten years combined. (1) The trend appears to be accelerating. According to one estimate, thirteen DPAs and NPAs were executed in 2006, (2) and another thirty-seven corporate diversion agreements were publicly announced in 2007. (3) Some believe that pretrial diversion has become the "standard" means for concluding corporate criminal investigations. (4) In short, DPAs and NPAs are tools that have transformed the way federal prosecutors and defense counsel interact. The marked increase in their use is arguably the most profound development in corporate white collar criminal practice over the past five years.
In the typical corporate deferral scenario, the prosecutor files a criminal charge against a company, but agrees not to prosecute the claim so long as the entity complies with the terms of a deferral agreement. (5) (In a non-prosecution, or "cooperation" scenario, no charges are filed.) (6) The company avoids the severe collateral consequences of indictment (7) by voluntarily entering a probationary period during which it will (1) enact substantial internal reforms and (2) cooperate with the government, effectively helping prosecutors build a case against individual employees. (8) The company also makes restitution payments, and often submits to federal monitoring. If at the end of the deferral period the prosecutor is satisfied that the company has fulfilled its obligations, he or she dismisses the charges. If, on the other hand, the prosecutor perceives that the company is failing or has failed to abide by the terms of the agreement, the government reserves the right to declare a breach and to proceed criminally against the corporation. (9)
Corporate pretrial diversion agreements are a byproduct of a relatively recent shift in Department of Justice (DOJ) policy. This shift reflects an evolving view of the purpose and function of the criminal law in the corporate context. In a post-Enron world, DOJ officials appear to believe that the principal role of corporate criminal enforcement is to reform corrupt corporate cultures--that is, to effect widespread structural reform (10)--rather than to indict, to prosecute, and to punish. (11) By focusing more on prospective questions of corporate governance and compliance, and less on the retrospective question of the entity's criminal liability, federal prosecutors have fashioned a new role for themselves in policing, and supervising, corporate America. They have become the New Regulators.
Some have questioned the appropriateness of this new role. (12) Others have questioned the legitimacy of the manner in which it has been achieved (13) Remarkably, this important policy shift has occurred "from the bottom up": DOJ leadership has issued no public guidance focusing on corporate pretrial diversion, leaving individual United States Attorney's Offices (USAOs) to experiment and, in some cases, to push the envelope of prosecutorial practice. Even more remarkably, this fundamental shift in the goals and functions of the criminal law (and the role that DPAs and NPAs have played in facilitating it) has sparked little discussion in the nation's broader policy discourse--until now.
As this Essay goes to press, Congress is actively considering legislation that would direct DOJ's leadership to issue appropriate guidance regarding corporate pretrial diversion. (14) Current activity in the legislative arena is largely a response to a recent controversy over the selection and payment of DPA-imposed federal monitors (15)--a controversy that spurred DOJ policymakers to announce internal guidelines regarding such monitoring arrangements in early March 2008. (16) Whether Congress takes further action in light of this development remains to be seen; the important point is that DOJ finally has taken the first steps towards confronting the issue of DPAs and constructing a consistent national policy.
Such a policy is sorely in need--and should address considerably more than the selection of federal monitors. In fact, prosecutors' increasing reliance on DPAs and NPAs raises numerous challenges for companies and their counsel, and impacts a range of important legal concepts. These include federal-state relations, the separation of powers, and the basic role of the prosecutor--not to mention the function of the criminal law. One hopes the recent interest this subject has generated will encourage critical scrutiny of all the implications of DOJ's recent deferral strategy. This Essay introduces many of the key issues, providing a background history of the rise of corporate pretrial diversion and exploring in depth many of the significant trends that emerged in 2007--a year that, according to one estimate, witnessed a 70% increase in the number of executed DPAs. (17) Our hope is that DOJ leadership will acknowledge the important policy shift that has quietly taken place; recognize the considerable inconsistencies in current practice; and take appropriate action. Failing that, DPAs and NPAs may be a ripe and necessary area for legislative intervention.
I. SOME BACKGROUND HISTORY
Deferral is not a new concept; prosecutors have utilized this tool for decades. Traditionally, however, the government deferred the prosecution of individuals usually juveniles or first offender street criminals in an effort to reduce docket congestion and to allow these wrongdoers an opportunity to rehabilitate themselves without suffering the stigma of conviction. (18) Federal prosecutors seldom diverted the adjudication of corporate crimes. In an era when the normal punishment for convicted companies was a relatively minor fine, (19) and in which convicted executives rarely went to jail, the "traditional strategy of corporate criminal defense lawyers was to persuade the government to indict the corporation, not culpable executives." (20)
A. Corporate Deferrals in the 1990s
The first notable break with this practice occurred in the early 1990s. In 1992, the government initiated an investigation into Salomon Brothers for securities fraud violations. The company cooperated extensively with prosecutors and regulatory personnel, paid substantial fines and forfeitures, restructured its management, and voluntarily undertook wide-ranging reforms to avoid future misconduct. Salomon's cooperation, as well as its commitment to transforming its corporate culture, convinced the United States Attorney not to indict the company. (21) Though the Salomon case did not involve a formal non-prosecution agreement, it provided a clear message to companies that full cooperation, and the sincere willingness to clean house, could lead to favorable results.
Two years later, the United States Attorney for the Southern District of New York agreed to defer prosecution of Prudential Securities for securities fraud for three years, in return for substantial internal reforms. This was the first deferred prosecution agreement involving a major company. In many ways the Prudential Securities DPA's influence continues to be felt. (22) At the time, however, the case was seen as "a very special situation" (23); few prosecutors availed themselves of the new tool of corporate pretrial diversion. According to one estimate, only eight more corporate DPAs and NPAs were executed in the 1990s. (24) Even the United States Attorney who negotiated the Prudential Securities deferral thought it was not something she "was likely to do again." (25) Most prosecutors saw their corporate charging decision as a choice between binary, black-or-white absolutes: indict the company or decline to prosecute. They believed their expertise lay in determining retrospective questions of criminal liability. (26) The gray, uncertain area of deferrals seemed to invite prosecutors to insinuate themselves into prospective corporate governance issues. This was unappealing, especially considering the absence of formal guidance from DOJ regarding organizational prosecutions. (27)
This guidance finally came in 1999 in the form of a memorandum issued by then-Deputy Attorney General Eric Holder titled "Federal Prosecution of Corporations." Holder's Memorandum outlined various factors that prosecutors could consider in deciding the threshold question of whether to proceed against a company. Despite the examples of Prudential Securities and other recent corporate diversion agreements, however, the Holder Memorandum made no formal mention of deferral. DPAs remained rare into the new century. (28)
B. Challenges of the 21st Century
Then came the corporate fraud scandals of the early 2000s. Congress responded by passing the Sarbanes-Oxley Act. (29) President Bush established the Corporate Fraud Task Force in July 2002 "to investigate and prosecute significant financial crimes" (30) in the post-Enron, post-WorldCom, post-Adelphia era. United States Attorneys paid new attention to corporate crime, assigning more lawyers to criminal matters and partnering with agencies like the SEC more often from the inception of an investigation. (31) These were but a few of the responses to increased political pressure from the public, and from shareholders, to root out corporate fraud. In reaction to traditional prosecutorial practice, then, a new competing paradigm was emerging: corporations as a whole had to be held responsible for their actions. (32) Merely fining the company no longer seemed a sufficient deterrent to future wrongdoing.
Against this background, the government moved against accounting giant Arthur Andersen for its role in the Enron affair. Arthur Andersen refused initially to accept responsibility for its misconduct and would not agree to major structural reforms. The company's failure to promptly cooperate triggered its indictment in March 2002. Subsequent discussions over a deferred prosecution collapsed, principally because the company viewed prosecutors' demands for cooperation as too onerous. (33) Three months later, a Texas jury convicted the company. The Arthur Andersen episode proved ultimately to be an unmitigated disaster. (34) The company's indictment "effectively put the eighty-nine-year-old firm out of business and forced tens of thousands of people to find new jobs. It also had a dramatic effect on the accounting industry, by turning the 'Big 5' into the 'Big 4.'" (35)
The implosion of Arthur Andersen highlighted the challenge facing DOJ at the turn of the twenty-first century: to aggressively root out corporate fraud while remaining sensitive to the considerable collateral consequences of moving criminally against an entire entity. Then-Deputy Attorney General Larry D. Thompson announced DOJ's response to this challenge in a memorandum published in early 2003 entitled "Principles of Federal Prosecution of Business Organizations." This memorandum (the "Thompson Memo") superceded the Holder Memorandum. The two guidance documents actually shared much in common; the Thompson Memo added but a few (admittedly significant) lines. (36) The Thompson Memo emphasized that "[t]he main focus of [its] revisions is increased emphasis on and scrutiny of the authenticity of a corporation's cooperation" with government investigations. (37) Most relevant here, the Holder Memorandum had stated that prosecutors could consider rewarding a company's cooperation by, among other things, granting it immunity or amnesty. The Thompson Memo added "pretrial diversion" to these two options, (38) thus formalizing DOJ's recognition of an alternative somewhere in between the "all-or-nothing choice between indicting (and destroying) a company and giving it a complete 'pass.'" (39)
The number of executed DPAs and NPAs has burgeoned since the publication of the Thompson Memo. (40) (Since 2003, some of the most prominent companies in America, including AIG, America Online, Boeing, Bristol-Myers Squibb, Health-South, KPMG, MCI, and Merrill Lynch have entered pretrial diversion agreements. Foreign companies like British Petroleum and Smith & Nephew have entered into deferral agreements, as well.) (41) Equally significant, in that time the government has not filed criminal charges against a single major corporation without also having a DPA in place. (42)
C. The Thompson Memo Courts Controversy
The Thompson Memo spoke of the authenticity of the company's cooperation. It also expressly mentioned pretrial diversion as a potential "reward" for sincere cooperation. Federal prosecutors were quick to put the two together, entering (and executing) more deferrals, on the one hand, but also demanding more from companies as tokens of "authentic" cooperation, on the other. Two provisions of the Thompson Memo, each with implications for the company's employees, appeared in particular to influence prosecutors' views on the sincerity of a company's cooperation: the guidance concerning privilege waiver, (43) and the guidance concerning the company's payment of individuals' legal fees. (44) Both provisions, and the manner in which prosecutors implemented them, soon became lightning rods for controversy.
In the privilege waiver context, many believed prosecutors were exerting undue leverage in deferral negotiations to force desperate companies (with Andersen on the mind and wishing at all costs to avoid the death sentence of an indictment) (45) to compromise not only their shareholders' interests, (46) but also the interests of individual employees. (47) As one defense lawyer observed at the time, "Practitioners' widespread concern, based on experience, [is] that there is a corrosive culture of waiver among prosecutors that is eroding the privilege ..." (48) While critics fingered the Thompson Memo (49) as the source of the problem, the Thompson Memo actually had simply re-stated the Holder Memorandum's language regarding waiver. (50) In fact, a number of the dozen or so pretrial diversion agreements negotiated in the 1990s had contained some type of privilege waiver. (51) The defense bar had (rightly, in our view) protested then. (52) Nonetheless, the chorus grew stronger after 2003.
A year later, the United States Sentencing Commission added fuel to the fire. The federal organizational sentencing guidelines had always provided for a reduction in the culpability score that factors in a company's fine calculation so long as the company reported the offense and "fully cooperate[d] in the investigation." (53) In November 2004 the Sentencing Commission amended the commentary to this provision by inserting language suggesting that "full" cooperation may include, and sometimes require, privilege waiver. (54) Reactions were heated, with critics contending that the commentary essentially rewarded governmental bullying and gave prosecutors even more license to extract waivers. (55) Heedful of this criticism, the Sentencing Commission in April 2006 voted unanimously to delete the new language. Though this change did not directly constrain prosecutors' pre-charging behavior, (56) the Commission's turnabout indicated a subtle critique of recent prosecutorial practice with respect to privilege waivers. (57)
Around the same time, Judge Lewis Kaplan expressed a far less subtle critique of post-Thompson Memo prosecutorial conduct. Judge Kaplan's criticism lay, however, in a different area: the apparent practice, in the case before him, of federal prosecutors who conditioned acceptance of a deferral agreement with the company, KPMG, on KPMG's agreement not to pay its former employees' legal fees. In a blistering opinion, Judge Kaplan publicly chastised federal prosecutors for holding the "proverbial gun" to the company's head (58) and ruled that they had violated the former employees' Fifth and Sixth Amendment rights. (59) Additionally, he expressed sotto voce a critique of KPMG's DPA. (60) Judge Kaplan did not, however, go so far as to void the agreement. (61)
The events of 2006 evidently caught the attention of senior policymakers at DOJ. (62) In December 2006, then-Deputy Attorney General Paul McNulty issued a directive (the "McNulty Memo") that superceded the Thompson Memo. (63) The McNulty Memo squarely addressed the privilege waiver issue, making clear that attorney-client communications should be sought only in rare cases and that any waiver requests had to be authorized by the prosecutor's supervising United States Attorney, by the Assistant Attorney General in charge of DOJ's Criminal Division, and in some cases by the Deputy Attorney General himself. The new guidance also addressed the question of employees' legal fees. As Mr. McNulty noted in a speech, "The new guidelines now generally prohibit prosecutors from considering whether a corporation is advancing attorneys' fees to employees or agents under investigation or indictment." He observed, however, that in "extremely rare cases, fee advancement can be considered where the totality of the circumstances show that it was intended to impede a government investigation." (64)
The McNulty Memo reproduced verbatim the Thompson Memo's single mention of pretrial diversion. (65) Designed to build "transparency into prosecutors' deliberative process" and to "increase[] the fairness, discipline, and consistency" (66) of their corporate charging decisions, the McNulty Memo nonetheless failed to provide any further guidance in an increasingly important area: the negotiation of deferred prosecution and non-prosecution agreements.
II. PRETRIAL DIVERSION AGREEMENTS IN 2007
As 2007 dawned, corporate defense lawyers found themselves asking several questions with respect to pretrial diversion agreements. Would their number keep increasing? How would the McNulty Memo affect these agreements, if at all? In the continuing absence of any specific guidance from DOJ, how would these agreements evolve? To help answer these questions, we have analyzed all thirty-seven publicly announced corporate diversion agreements negotiated in 2007 by federal prosecutors. (67) Though our data set is almost certainly not comprehensive, (68) it does reveal certain interesting, underlying trends:
A. Continued Devolution of Authority
A small number of United States Attorney's Offices negotiates the vast majority of corporate pretrial diversion agreements. (69) In 2007 these offices included the Southern District of New York (eight); the District of New Jersey (five); the Western District of Virginia (four); the Northern District of California (three); the District of Massachusetts and the District of Columbia (two each); and the Southern District of California, the Southern District of Florida, the Eastern District of New York, and the District of Rhode Island (each with one). (70) The DOJ Criminal Division's Fraud Section entered into ten agreements. (71)
A large percentage of the white collar crimes that are committed surely occurs in the jurisdictions listed above. But the fact that a handful of offices across the nation is driving DOJ policy in this area indicates a continued willingness on the part of the Department's leadership to abdicate its responsibility to provide uniform guidance--a state of affairs critics have described as a "devolution of authority." (72) The ramifications of Main Justice's inactivity in this area are profound. The differences (some subtle, some significant) that one continues to see in the terms of completed agreements suggest that whether a company is offered a DPA, and what the terms of that agreement are, could very likely turn on the luck of the draw regarding which office happens to handle the prosecution. (73)
1. A Tale of Two Districts
A comparison between the two USAOs that executed the highest number of pretrial diversion agreements in 2007 reinforces this point. Indeed, these neighboring offices the Southern District of New York and the District of New Jersey-exhibit considerably...
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