Friday, March 20, 2015

The Power of Deferred Prosecution

In recent years the Justice Department’s white-collar agenda has been marked by skyrocketing corporate settlements due in large part to the government’s increased reliance on Deferred Prosecution Agreements (DPAs). The use of these and similar agreements continue to be an essential enforcement tool for the U.S. Department of Justice and have become a hallmark of the government’s response to white-collar crime under the leadership of Attorney General Eric Holder.

 A DPA is a provisional settlement of a criminal lawsuit whereby the prosecutor agrees to suspend -- but not to dismiss -- any prosecution with the general requirements that the corporate-defendant agree to pay a fine, admit to misconduct, and reform internal operations through heightened compliance often under the watchful eye of government-selected compliance monitors. Following a satisfactory completion of these requirements, the charge would ultimately be dropped.

The types of white-collar cases that usually warrant DPAs also involve lengthy and expensive trials which consume much of the governments’ resources. Deferred Prosecution Agreements allow authorities to utilize these scarce resources more efficiently. Perhaps most useful to the government are the significant fines DPAs typically result in, which then can be used to help fund further judicial enforcement. Given the potential benefits to the government, some believe it is only a matter of time before DPAs become the standard means of corporate prosecution.

Corporations may feel particularly vulnerable to DPAs based on two key factors: vicarious corporate criminal liability, and the collateral consequences of the initial indictment prior to, and independent of, any eventual conviction. The first factor began as a trend over a decade ago when Larry Thompson, then Deputy U.S. Attorney General, exhorted federal prosecutors to use vicarious liability to extract favorable settlements to reform corporate defendants from the outside. The Thompson memorandum insisted that corporations receive a temporary reprieve only if they pay restitution, purge themselves of individual wrongdoers, and agree to walk the straight and narrow under heightened scrutiny and compliance mandates.

The second factor, collateral consequences of the initial indictment, is of particular concern to corporations. Simply filing an indictment or threatening the suspension of licenses and permits by state and federal regulators may trigger huge collateral repercussions sufficient to drive the firm out of business. While a conviction carries at most a million-dollar fine, the indictment determined at the prosecutor's discretion threatens incalculable monetary losses.

In one notable agreement, Bristol-Myers Squibb was caught with a potential securities violation for inflating its quarterly earnings using the deceptive business practice known as “channel stuffing”. Certain BMS staff falsely instructed distributors to purchase large amounts of BMS products up front, with the understanding that down the road they could return the excess for a refund. The alleged securities violation arose from the overstated earnings in their quarterly report with no accounting for the contingent liability for the future returns.

Bristol-Myers Squibb agreed, under the DPA, to pay a $100 million fine and make contributions of $350 million to a fund for present and former shareholders. BMS also agreed to purge its ranks of the parties responsible for the scheme. The agreement also required BMS to exhibit "exemplary corporate citizenship," which took the form of a compliance monitor. This essentially authorized former federal district court judge Frederick B. Lacey to attend all corporate meetings and review all documents, and report his findings to the New Jersey Attorney General. Furthermore, BMS was ordered to restructure its internal operations and appoint a new Chief Compliance Officer to assist Mr. Lacey.

However, DPAs may erode the most elementary protections of criminal law by turning the prosecutor into judge and jury, which Judge Richard Leon of the District of Columbia described as "promot[ing] disrespect for the law." Judge Leon unprecedentedly rejected a federal DPA involving Fokker Services. Under the DPA, Fokker agreed to pay $21 million in penalties for violating sanctions of the Office of Foreign Assets Control (OFAC) involving Burma, Sudan, and Iran. The alleged violations occurred between 2005 and 2010, during which time Fokker fulfilled almost 1200 shipments of aircraft parts to customers in the prohibited countries, primarily Iran.

Judge Leon asserted the Court’s “supervisory power” to reject the proposed DPA, specifically citing the gravity and pervasiveness of the conduct and the leniency of the penalty imposed on the company. The fine of $21 million matched the total revenue from the illegal transactions, ignoring any damages. The Court also cited the failure to prosecute individuals, or even impose disciplinary measures on employees involved in the wrongdoing who remained employed at the company.

By requiring a corporation to surrender their autonomy in addition to levying hefty fines, the use of DPAs may generate enough backlash from the private sector to convince the DOJ to limit the use of DPAs to a case-by-case basis. Alternatively, the use of such agreements continues to prove the most cost efficient method of prosecution, allowing the DOJ to handle more cases and instill more corporate compliance. If this trend continues as expected, navigating Deferred Prosecution Agreements may become a necessary skill of the criminal law practitioner.

Michael Coburn
Staffer, Criminal Law Practitioner

Photo by Jasselynseet via Wikimedia Commons

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