Deferred prosecution agreements raise concerns.

• Author: Cunningham, Colleen
• Position: President'sPAGE

In late August, the Justice Department won a landmark case against KPMG LLP. A "deferred prosecution agreement" was entered into, whereby prosecution will be delayed until Dec. 31, 2006, and if KPMG stays out of the tax shelter business and cooperates with officials in related cases, the case will be dropped. KPMG admitted to criminal tax fraud and agreed to pay a $456 million penalty. At the same time, the government announced an indictment of eight former KPMG partners and an outside attorney, with more indictments likely (as reported in the press).

While deferred prosecution agreements have been around for some time, the KPMG case continues a trend by the Justice Department that began in early January 2003. Earlier, when Arthur Andersen's indictment put the firm out of business and 28,000 employees out of work, there was an understandable outcry: Why should the actions of a few individuals put an entire firm out of business?

In January 2003, then-Deputy Attorney General (and head of President Bush's Corporate Fraud Task Force) Larry Thompson issued what is now widely known as the "Thompson Memo." After Arthur Andersen's demise, the government was understandably skittish about putting another company (particularly another large accounting firm) out of business. The memo sets forth the view that if a company cooperates, prosecutors should consider dropping charges against the company itself. However, it leaves the door open for indictments of company executives and employees.

A typical deferred prosecution agreement might include an indictment of the company, a requirement that it admit guilt, a large fine and/or restitution to victims (usually shareholders), some form of external monitoring and agree to cooperate in the prosecution of responsible individuals. In exchange, the government will "defer" prosecution for a certain period (usually 18 months to two years) and, if the conditions of the agreement are met, drop the indictment altogether. Alternatively, if the company fails to comply, the government can prosecute on the indictment.

Deferred prosecution agreements enable the government to get everything it might have gotten through a trial (fines, admission of guilt, changes to the company's governance) except a conviction itself. Statements made in the deferred prosecution agreement can be used against the company in related suits, such as civil suits and securities suits.

A few observations here. First, I am not a lawyer, and these...