Regulating the 'new regulators': current trends in deferred prosecution agreements.

• Author: Spivack, Peter
• Position: Twenty-Third Annual Survey of White Collar Crime

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.

1. 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)

   1. 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)

   2. 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...