Non-prosecution and deferred prosecution agreements (NPAs, DPAs) are the most troubling and toxic feature of our criminal justice system relevant to business organizations.
In numerous prior posts (see here for instance), I have discussed how use of NPAs and DPAs to resolve alleged corporate criminal liability presents problematic policy issues across a broad spectrum. The use of such alternative resolution vehicles in the FCPA context contributes to the ”facade of FCPA enforcement” (again across a broad spectrum) that I wrote about here and I further discussed the distortive features of NPAs and DPAs in the FCPA context in my 2010 Senate testimony – see here.
I have long called for NPAs and DPAs to be abolished in the FCPA context and will do so again next week at the National Press Club in Washington, D.C. in this event sponsored by Corporate Crime Reporter.
One does not really have to search far to find critics of NPAs and DPAs.
Most recently, as highlighted in this prior post, former Attorney General Alberto Gonzales stated at the Dow Jones Global Compliance Symposium that FCPA enforcement actions resolved via NPA and DPAs do not necessarily reflect instances of companies violating the FCPA, but rather companies feel compelled to agree to the agreements. Equally problematic, Gonzales said, is that enforcement actions resolved via these vehicles mean that “legitimate wrongdoing is not being prosecuted as it should.” Gonzales continued by saying that it is “easy, much easier quite frankly” for the DOJ to resolve FCPA inquiries with NPAs and DPAs, that such resolution vehicles have “less of a toll” on the DOJ’s budget, and that such agreements “provide revenue” to the DOJ. It is all “unfortunate” Gonzales stated.
Yet NPAs and DPAs continue to flourish – perhaps because they make the DOJ’s (and now SEC as well) job easier, they pad enforcement statistics, and, let’s face it, they expand the market for legal services.
Indeed, as I noted at the Dow Jones event, the fact that regulators and the regulated seem to approve of these agreements should itself be a red flag. I’ve long argued that abolishing NPAs and DPAs - coupled with an FCPA compliance defense - could accomplish much including negating many of the troubling and toxic features of our criminal justice system relevant to business organizations.
This post discusses the views of a notable person concerning NPAs and DPAs. And those views are spot on! When articulated, this person was already a high-profile individual, and this person has since assumed an even higher-profile.
The year was 2005 and this person, a former U.S. Attorney in a high-profile district, appeared at an industry event. This person’s views were reduced to paper in a published article (but because I don’t have copyright permission, I do not link to the full article, but provide a cite at the end of the post).
This person stated as follows.
“On the federal level especially, the sweep of corporate criminal liability could hardly be broader. All of you in this audience probably know the law well, but its breathtaking scope always bears repeating: If a single employee, however low down in the corporate hierarchy, commits a crime in the course of his or her employment, even in part to benefit the corporation, the corporate employer is criminally liable for that employee’s crime. It is essentially absolute liability.”
This person next criticized the DOJ’s then guiding principles of prosecution – the so-called Thompson Memo - which have not really undergone much substantive change since then, but have largely been incorporated into the U.S. Attorneys Manual.
“The factors are being used by some prosecutors not so much as factors in making their charging decisions, but as means to force companies to behave and reform themselves as the prosecutors, fashioning themselves as the new corporate governance experts, think they should.”
“Deferred prosecution agreements by which the government allows a company to avoid a criminal indictment but by which the government forces a company to pay lots of money, admit its wrongdoing, often agree to the government’s detailed version of the facts under investigation and prosecution of a company’s employees, install a corporate monitor for some period of time and adopt a variety of enhancements to its compliance and governance mechanisms. Who made federal prosecutors into such super-regulators? Is their pro-activity a good thing?”
This person recognized her own fault for the current system because she “conceived of the first deferred prosecution agreement for a company – in 1994, in the case of Prudential Securities.” This person stated as follows.
“So, I must bear my share of responsibility for how government prosecutors are today using the easy prospect of corporate criminal liability and the Thompson Memorandum to inject themselves to deeply into the business of corporate America and to dictate how companies must respond to government investigation. But, having now been on the receiving end of these measures in my representations of companies in criminal investigations, I have seen the light and urge that some prosecutors should change or at least moderate how they are treating companies in criminal investigations.”
Turning to the root causes of misconduct and how things should proceed, this person stated as follows.
“All prosecutors recognize – or should – that no matter how good a company’s corporate culture and compliance program are, there will always be crimes committed by employees. When that invariably occurs, prosecutors shouldn’t be automatically jumping into a Thompson factor analysis to decide whether to charge the company. Only if the crime in question was serious, pervasive in the organization and senior management had at least some culpability, either active or by virtue of willful blindness, did federal prosecutors generally consider a corporate indictment under the Holder Memo [DOJ policy before the Thompson Memo]. Now, it seems that every case of corporate crime is a candidate for Thompson Memo analysis and potentially a corporate charge. Ths difference in process matters a lot in practice. What happens as a result is that some prosecutors automatically invoke the Thompson Memo criteria at the outset of every investigation and immediately start ‘grading’ a company on its performance in the government’s investigation. [...] No longer are the threshold issues of the seriousness and pervasiveness of the crime and management involvement always considered as thresholds to cross before considering the criminal liability of the company.”
“You get the picture – the process has, in some sense, gone backwards and is sometimes skipping a big and important threshold question – is the particular case an appropriate case to even consider for a possible corporate charge. If the answer is no, that formerly ended the inquiry. Today, nearly every company is put through the Thompson factor analysis. Today, before making their decisions about charging companies, some prosecutors are exerting considerable – some say, extreme -pressure on corporate behavior under the not so subtle threat that if the company doesn’t do as the government wishes, the company risks, at the end of the day, being indicted.”
“To ensure that a company does not become that ‘rare’ case resulting in a corporate indictment with all of its attendant negative consequences, a company must not poke the government in the eye by declining any of its requests or suggestion of how a cooperative, good corporate citizen is to behave in the government’s criminal investigation. This template, in my view, can give prosecutors too much power.”
This person next talked about the “problem” of “who the wrongdoers are, who is culpable in the eye of the beholder and the government isn’t always right” and stated as follows.
“To figure out who is a wrongdoer, a lot of it turns on, for example, the very hard-to-get-at issues of knowledge and intent. Especially, in this age of 20/20 hindsight and rule changing mid-stream and e-mails assumed to be read and digested by all to whom they are sent, it is not as easy as the government often thinks it is to figure out who is culpable.”
“If a company, after a thorough investigation, does not agree with the government on who is guilty of wrongdoing, what does the company do when the government is rattling its sabers about insufficient remediation? Throw overboard those the government believes have done wrong to save the company, or fight for them and try to convince the government that it is wrong? A horrible Hobson’s choice if a prosecutor is insistent.”
This person next directed her attention to DPAs.
“In the last year or two, we have seen a virtual epidemic of these – federal prosecutors are agreeing not to indict a company if the company will agree to a deferred prosecution agreement or its equivalent. [...] They are becoming a rather routine way of resolving investigations of corporate crime as to companies.”
“… I feel that the deferred prosecution trend may be sweeping too broadly. At times, a deferred prosecution agreement with a corporation can be justified and do some, or even significant good. Some crazy U.S. Attorney in 1994 though so. But it should not be, as it may be becoming, a semi-automatic response by the government in responding to corporate crime. Most cases of corporate crime should result in no action by the government against corporations that have responded appropriately to the wrongdoing and any remaining problems of controls, compliance and corporate culture. There is no need for continued government presence; such presence can indeed retard further progress and act as a drag on the company’s business and stock price. Deferred prosecution agreements, especially if they include the filing of detailed criminal charges against the company, can also unfairly stigmatize the reputation of a good company or firm. And they can have other negative collateral consequences. Prosecutors should pause and take a breath before seeking deferred prosecution agreements and decide whether they are truly needed and in the company’s and public’s best interest.”
You will likely not find a more informed and forceful critique of the most troubling and toxic feature of our criminal justice system relevant to business organizations than as set forth above. But there is more from this person besides just the one article excerpted above.
In this 2005 interview with Corporate Crime Reporter, this person struck similar themes.
Q: Some people believe that deferred and non prosecution agreements are replacing straight out declinations. Others say – no, they are replacing criminal charges. What’s your take?
A: For the most part, not exclusively, for the most part, I think there would not have been, or at least should not have been, any kind of criminal charge in most of the cases. In some of them, there might well have been. Certainly, to the extent that you are substituting a deferred prosecution agreement for a case where you have decided to otherwise indict, then the prosecutors are appropriately limiting the use of deferred prosecution agreements. But it is almost becoming an automatic reaction in many cases beyond those where it should be used. Prosecutors are thinking – before we close out this case that involves any kind of corporate crime, we should get something from the companies.
And the something these days is a deferred prosecution agreement. In most of the cases, the resolution should have been nothing on the criminal side, or perhaps a cooperation agreement. Obviously, the government has an interest in making sure that companies continue to cooperate in the investigation and prosecution of individuals. The prosecutors tend to think that there is no cost to the companies of deferred prosecution agreements. It clearly doesn’t carry the same stigma of an indictment. But it has a tremendous reputational as well as monetary cost. The focus needs to be narrowed somewhat to cases where you think it really is appropriate to do something as to that company. The law allows you to proceed against the company in virtually every case where you have a single employee who has committed a crime. But clearly your exercise of discretion in the vast majority of cases should involve nothing criminal vis-à-vis the company – assuming the company has responded appropriately to the government investigation and addressed the problem.
A settlement on the civil side should be a sufficient government response in the vast majority of cases. And the Thompson memo, which governs federal prosecutors in deciding what to do about a company, says – it will be the rare case where a company should be indicted.
And it should also be the rare case where the government seeks a deferred prosecution agreement from the company – you need to have a reason for doing that.
Is it an alternative to what you have already decided for sure would be an indictment so you need some sanction? That’s a situation that could lead to a deferred prosecution agreement appropriately. Do you feel that this particular company needs to have bells and whistles and enhanced`compliance programs supervised by the criminal side of the government?
That situation could arise, but if you already have an SEC settlement that already has all of those bells and whistles and safeguards, then what are the criminal authorities really adding, other than to have something to show for their investigation as to the company?
Elsewhere during the Q&A, the person stated as follows.
“My point is that the government should be more sparing in its use of deferred prosecution agreements and limit those to situations where they certainly would have indicted otherwise for all the right reasons on their part. Or limit use to where the SEC or other civil regulators failed to act against the corporate culture that the government feels needs to be fixed.
Prosecutors are at their best when they decide to charge or not and not get into managing corporate America.”
“Prosecutors are at their best when it comes to corporate criminal prosecutions when they decide either to indict or not indict and not get into the management of a company.”
The following Q&A is also instructive.
Q: When you cut the Prudential Securities deal, did you see that as a groundbreaking case?
A: No. I thought it was the right result for that case. It may have been the first deferred prosecution. It was certainly not something I thought I was likely to do again. It was a very special situation. And in fact, other prosecutors didn’t jump on the bandwagon. And nor did I when I was U.S. Attorney. We decided to indict or not. You may have a non-prosecution agreement, but not a deferred. I did not think it would catch on.
Q: But it did.
A: Ten years later. It is a tool that prosecutors have. They clearly reassessed themselves after Arthur Andersen. You saw the collateral consequences coming to roost in Andersen. The Justice Department realized in very concrete stark terms – do I really want these kinds of consequences. Are we really serving the public interest? And so, the tool is available to them to go down several notches. You combine that with the number of cases they are involved in – and you get the results we have been seeing. And prosecutors are like anybody else – when they devote a lot of time and effort to a case, they want something to show for it.
And so I fear the deferred prosecution is becoming a vehicle to show results.
Perhaps you have guessed by now. The above person is Mary Jo White, the new Chairman of the SEC.
While not a top official at the DOJ, the SEC has many of the same policies and procedures in place that White criticized above, including alternative resolution vehicles such as NPAs and DPAs. Indeed, earlier this week in the Ralph Lauren enforcement action (see here for the prior post), the SEC used an NPA in the FCPA context for the first time.
Perhaps White should spend her first few months at the SEC answering some of the questions she previously posed and otherwise addressing the pressing issues she previously discussed.
But that is unlikely to happen as White has promised “aggressive” and “unrelenting” SEC enforcement.
[The article authored by White at the beginning of this post is - Mary Jo White, Corporate Criminal Liability: What Has Gone Wrong? 37th Annual Institute on Securities Regulation 815, 820 (PLI Corp. Law & Practice, Course Handbook Series No. B-1517, 2005)]