Deferred Prosecution Agreements: What Questions Should We Be Asking?

In the post-Enron era, corporate counsel are seeing more government investigations that lead to 'deferred prosecution agreements' (DPAs). In these arrangements, the government formally accuses a company of criminal conduct, but agrees to hold the prosecution in abeyance pending the company's efforts to make amends. These cases include such well-known names as KPMG, Computer Asso-ciates and Bristol Myers Squibb.

Why are these settlements suddenly coming onto the scene? In a sense, they are not entirely new. The reality of the corporate world is that major companies simply do not go to trial on criminal matters. Before DPAs, there were various forms of consent decrees, settlement agreements and corporate integrity agreements. The latest variation comes partly from a reference in the Thompson Memorandum advising federal prosecutors to consider this tool. From the government's perspective, these agreements provide enormous ongoing leverage: The company has agreed to what the government wants, it has admitted on the record that it engaged in wrongdoing, and any violation allows the government to use the company's admissions without new charges being filed. Companies avoid the uncertainty of trial, destructive publicity and the diversion of management's attention that comes with battling criminal charges. But what are the implications of this trend and the questions we should be asking?

Who Is Paying?

Each new case invariably comes with an enormous price tag. Hundreds of millions of dollars often must be paid; sometimes to shareholder victims of securities fraud, sometimes to the government. In these agreements, the government negotiates huge payments. But whose money is this? It is not the money of the individual employees who broke the law ' that is pursued separately. While no manager can be happy about writing these checks, is there nevertheless an element of truth to the idea that managers are, in effect, paying with someone else's money? The money is essentially taken from the shareholders who happen to own the shares at the time the fine is paid, not necessarily when the crime occurred.

Indeed, management likely knows that the day the settlement is announced, almost no matter how large the fine, the company's stock will go up because the market prefers certainty. So why not pay the money and 'get this behind us'? The managers writing the checks did not commit the crime, and they will be judged on their business performance, not the size of the fine. There is thus an enormous flaw in this system. Short of bankruptcy, no amount of money has the effect prosecutors imagine it has: It may just be a form of wealth transfer.

Should Companies Turn Themselves in, or Just Wait and Cooperate?

In some DPA cases, the companies turned themselves in. The government explains that this is one reason the company was treated more leniently ' but the same company still pays a huge fine. The government also enthusiastically lauds the company's cooperation. Even if the company first had to be caught breaking the law, as long as management then falls on its sword and cooperates, the government's reaction seems to be equally positive.

One could fairly ask, why penalize a company that voluntarily reports wrongdoing? Should the government consider that many more companies may be involved in wrongdoing than ever admit to it? If the government punishes those who disclose, what is the economic incentive to disclose? And what is the lesson the government teaches? Is it crime that doesn't pay? Or is it just the reporting of crime that is so expensive? Our firm's experience is that voluntary disclosure does matter to the government. But reading the DPAs and press releases, a cynic could easily conclude that it makes more sense to keep quiet, and if the offense is discovered, go overboard to cooperate.

Contrast this approach with that of the Department of Justice's Antitrust Division. From the time that it switched the corporate leniency program from a half-hearted 'trust us' approach to a commitment to drop criminal treatment for the first to disclose, the Department of Justice (DOJ) has had amazing success in breaking open enormous global conspiracies. Perhaps the most telling endorsement is that legal systems in the EU (including France and Germany) and around the world have followed the successful U.S. model for encouraging disclosure. The reason is simple ' it works because the government sets an understandable standard and makes a commitment.

Rather than bringing indictments based on the information the company hands to them and then dishing out fines through these DPAs, would it not be better policy to treat companies with diligent compliance programs that discover and disclose violations more like government allies? Certainly. Require them to punish the individual wrongdoers, make victims whole, and take steps to prevent recurrence of the violation. But why punish those who come forward, when those who do not may escape completely unscathed?

Are the Checks and Balances Out of Balance?

What does it take to get a company to willingly pay hundreds of millions of dollars, turn in senior executives and agree to intrusive reforms? Lurking in these cases is the issue of prosecutorial power, which is often applied without meaningful judicial supervision.

The U.S. has had the outstanding good fortune of having a highly professional cadre of prosecutors in its federal system. But is the message of Jefferson and Madison that we can safely depend on the good will of those in government? Would we ever consider giving any human being the power we give prosecutors to run other parts of the government?

In a recent case (Stolt-Nielsen, S.A. v. United States, 2006 WL 722160 (3^rd Cir., Mar. 23, 2006)) ' the only one in which the Antitrust Division ever found it necessary to revoke an agreement not to prosecute as part of its voluntary disclosure program ' the Third Circuit Court of Appeals essentially held that such an agreement could not be used to prevent prosecution. From its lofty heights, the appellate court ruled that it is enough protection that issues can be raised once the company is brought to trial. Nothing more need be done before that time.

But what is the reality? For a publicly traded company in America being subject to prosecution is, in every possible way, a form of punishment. Just the announcement of an investigation will hammer the stock. Major corporate cases almost always settle. Through DPAs, the rules for a company can be set without judicial approval. What controls are there on the conditions of settlement, when the only recognized protection occurs at a point that is mostly irrelevant, ie, the trial that never happens in corporate criminal cases? Imagine telling defendants in death penalty cases that they do not need to worry about due process since they can always sue for wrongful death after the process is finished.

This is not to argue for onerous controls on prosecutorial discretion. It is important to keep a balance and give prosecutors the freedom they need to properly select cases, marshal resources and settle cases on reasonable terms. But does it make sense in a system of limited government to buy the Third Circuit's logic? Perhaps an early warning on this point is a startling provision in the State of Oklahoma's DPA with MCI. One term of settlement of this criminal case is that MCI is to undertake efforts to add 1600 jobs to its employee base in that state. If this works for prosecutors in Oklahoma, why not even more pet projects for other prosecutors?

One constructive reform that might help ' without handicapping the authorities ' is to require more consistent and open reporting on what happens at the enforcement level. An analogy is instructive. When federal judges impose sentences in criminal cases, the information is reported to the U.S. Sentencing Commission so that the Commission, Congress and the public know what is happening. But prosecutors who play a role that is equally high in public policy concerns operate without this transparency. Why not seek similar reporting by federal prosecutors, including all U.S. Attorneys offices? These reports could include all instances of DPAs (including centralized and publicly accessible filing of all agreements), all instances where parties are asked or agree to waive privilege protections, and all cases in which a company requests that consideration be given to its compliance program in order to receive more lenient treatment. Why not place governmental activity in the sunshine in this crucial area?

Will Prison and Fortunes in Fines Turn the Tide?

DPAs mandate enormous fines and corporate help in getting the individual offenders into prison. Every press release carries the same line: 'We are sending them a message.' Ironically, in an age when communication is global and instantaneous, here is one message we keep sending that never seems to get through. Is it rational to conclude that ever-larger fines and throwing executives in jail will prevent corporate crime? Will we consider this effort a success when we can fine a company in the billions and put corporate executives on death row? Or are we missing something?

Why is it that ever-increasing fines and jail terms seem not to penetrate the corporate world? Perhaps the reasons are not really so complex. It may simply be that good people do not think they are doing anything wrong, so they are not deterred. Bad people do not think they will ever get caught, so they are also not deterred. Corporate criminals do not see their victims, insulated as they are within the corporate world. So despite the messages sent by DPAs, the cases continue. And the next waves of corporate crime are probably already well on their way.

Should the Message Be That Money
Counts and Compliance Does Not?

One factor that should be carefully weighed in negotiating DPAs is what the company did to prevent violations. What was its compliance program and how did it work? Why did it fail in this instance? However, looking at the paper records, this seems almost an afterthought. The press releases and DPAs discuss many things, such as the size of the fine, the company's cooperation, etc. But rarely do they grant any insight into what the company had in place to prevent violations, and why it failed. A cynic could easily read the wrong message into this pattern: 'If, but only if, you get in trouble, go all out to please the government, help nail the prior management, and install reforms that will appeal to the prosecutor. But until then, does it matter if you have a real compliance officer, if your training was effective, if you did compliance audits?' If any of that mattered, why is it not in the press releases? On the other hand, paying out the shareholders' money and cooperation in putting executives in jail leaps out from the pages of the press releases and the DPA. Should that be the overarching message?

As compliance professionals, my colleagues and I know that in fact these things do matter. We have reviewed company compliance programs at the request of the DOJ, and these factors weigh heavily in the balance. But they need to be treated as important parts of the public message.

Imposed Compliance Programs:
Cure Or Punishment?

DPAs typically speak of reforms to be made by the company's management. Imposing compliance programs is a key area, but the record suggests it pales in comparison to the money. Money, after all, captures the headlines. But the reforms can be what has a lasting impact. It is crucial that those who are drafting the DPAs and monitoring their performance know something about the subject. Unfortunately, compliance and ethics programs are not a romantic and dramatic topic. It is not what their law professors waxed eloquently about. But it is what affects employees in their everyday jobs. And it is the only way companies can actually translate the law into what happens in the day-to-day workplace.

There is an unrecognized risk to imposed programs, particularly if a prosecuting attorney is venturing into this field for the first time. The amount of information and knowledge that has accumulated about corporate compliance and ethics is daunting; this is no longer a 'fly by the seat of the pants' area of practice.

There is reason to worry about this. Recent experience with misguided legislative efforts to impose compliance programs do not give reason to be optimistic. See, Murphy, 'Mandavolent Compliance,' 19 Ethikos 8 (Sept/Oct 2005).

People who do not know this area may not even realize just how much there is to know. It is easy to do compliance work poorly and ineffectively. Consider one company that went through the prosecutorial wringer and pledged reform. The reform came in a series of excruciatingly boring video pledges by the new executives falling over themselves in their commitment to do the right thing, and in 'ethics' training that seemed as far removed as possible from what had actually happened in the company (eg, including a totally unrelated segment about a company that 'ethically' refused to lay off people in a recession ' although the video did not mention that the 'ethical' company later went bankrupt).

The prosecutors who negotiate and monitor these compliance provisions have a tough job and need to know the area. They can get this knowledge in the short term by retaining outside experts (we have played this role for some prosecutors). They can also actively participate in the growing compliance and ethics field. For example, they can join such groups as the Society of Corporate Compliance and Ethics (SCCE) and take advantage of the training that is available in this field. SCCE will soon have a certification program for compliance professionals ' prosecutors and regulators can tap into this rising level of professionalism in assessing, imposing and monitoring programs. Compliance and ethics programs can prevent corporate crime when they are done right; government support will speed that process along.

Government needs to enforce the laws, and there is no sympathy here for corporate criminals. DPAs are now part of the government's arsenal, but this can become a much more effective process if it comes with greater transparency and more informed attention to the crucial field of compliance and ethics programs.

In the post-Enron era, corporate counsel are seeing more government investigations that lead to 'deferred prosecution agreements' (DPAs). In these arrangements, the government formally accuses a company of criminal conduct, but agrees to hold the prosecution in abeyance pending the company's efforts to make amends. These cases include such well-known names as KPMG, Computer Asso-ciates and Bristol Myers Squibb.

Why are these settlements suddenly coming onto the scene? In a sense, they are not entirely new. The reality of the corporate world is that major companies simply do not go to trial on criminal matters. Before DPAs, there were various forms of consent decrees, settlement agreements and corporate integrity agreements. The latest variation comes partly from a reference in the Thompson Memorandum advising federal prosecutors to consider this tool. From the government's perspective, these agreements provide enormous ongoing leverage: The company has agreed to what the government wants, it has admitted on the record that it engaged in wrongdoing, and any violation allows the government to use the company's admissions without new charges being filed. Companies avoid the uncertainty of trial, destructive publicity and the diversion of management's attention that comes with battling criminal charges. But what are the implications of this trend and the questions we should be asking?

Who Is Paying?

Each new case invariably comes with an enormous price tag. Hundreds of millions of dollars often must be paid; sometimes to shareholder victims of securities fraud, sometimes to the government. In these agreements, the government negotiates huge payments. But whose money is this? It is not the money of the individual employees who broke the law ' that is pursued separately. While no manager can be happy about writing these checks, is there nevertheless an element of truth to the idea that managers are, in effect, paying with someone else's money? The money is essentially taken from the shareholders who happen to own the shares at the time the fine is paid, not necessarily when the crime occurred.

Indeed, management likely knows that the day the settlement is announced, almost no matter how large the fine, the company's stock will go up because the market prefers certainty. So why not pay the money and 'get this behind us'? The managers writing the checks did not commit the crime, and they will be judged on their business performance, not the size of the fine. There is thus an enormous flaw in this system. Short of bankruptcy, no amount of money has the effect prosecutors imagine it has: It may just be a form of wealth transfer.

Should Companies Turn Themselves in, or Just Wait and Cooperate?

In some DPA cases, the companies turned themselves in. The government explains that this is one reason the company was treated more leniently ' but the same company still pays a huge fine. The government also enthusiastically lauds the company's cooperation. Even if the company first had to be caught breaking the law, as long as management then falls on its sword and cooperates, the government's reaction seems to be equally positive.

One could fairly ask, why penalize a company that voluntarily reports wrongdoing? Should the government consider that many more companies may be involved in wrongdoing than ever admit to it? If the government punishes those who disclose, what is the economic incentive to disclose? And what is the lesson the government teaches? Is it crime that doesn't pay? Or is it just the reporting of crime that is so expensive? Our firm's experience is that voluntary disclosure does matter to the government. But reading the DPAs and press releases, a cynic could easily conclude that it makes more sense to keep quiet, and if the offense is discovered, go overboard to cooperate.

Contrast this approach with that of the Department of Justice's Antitrust Division. From the time that it switched the corporate leniency program from a half-hearted 'trust us' approach to a commitment to drop criminal treatment for the first to disclose, the Department of Justice (DOJ) has had amazing success in breaking open enormous global conspiracies. Perhaps the most telling endorsement is that legal systems in the EU (including France and Germany) and around the world have followed the successful U.S. model for encouraging disclosure. The reason is simple ' it works because the government sets an understandable standard and makes a commitment.

Rather than bringing indictments based on the information the company hands to them and then dishing out fines through these DPAs, would it not be better policy to treat companies with diligent compliance programs that discover and disclose violations more like government allies? Certainly. Require them to punish the individual wrongdoers, make victims whole, and take steps to prevent recurrence of the violation. But why punish those who come forward, when those who do not may escape completely unscathed?

Are the Checks and Balances Out of Balance?

What does it take to get a company to willingly pay hundreds of millions of dollars, turn in senior executives and agree to intrusive reforms? Lurking in these cases is the issue of prosecutorial power, which is often applied without meaningful judicial supervision.

The U.S. has had the outstanding good fortune of having a highly professional cadre of prosecutors in its federal system. But is the message of Jefferson and Madison that we can safely depend on the good will of those in government? Would we ever consider giving any human being the power we give prosecutors to run other parts of the government?

In a recent case (Stolt-Nielsen, S.A. v. United States, 2006 WL 722160 (3^rd Cir., Mar. 23, 2006)) ' the only one in which the Antitrust Division ever found it necessary to revoke an agreement not to prosecute as part of its voluntary disclosure program ' the Third Circuit Court of Appeals essentially held that such an agreement could not be used to prevent prosecution. From its lofty heights, the appellate court ruled that it is enough protection that issues can be raised once the company is brought to trial. Nothing more need be done before that time.

But what is the reality? For a publicly traded company in America being subject to prosecution is, in every possible way, a form of punishment. Just the announcement of an investigation will hammer the stock. Major corporate cases almost always settle. Through DPAs, the rules for a company can be set without judicial approval. What controls are there on the conditions of settlement, when the only recognized protection occurs at a point that is mostly irrelevant, ie, the trial that never happens in corporate criminal cases? Imagine telling defendants in death penalty cases that they do not need to worry about due process since they can always sue for wrongful death after the process is finished.

This is not to argue for onerous controls on prosecutorial discretion. It is important to keep a balance and give prosecutors the freedom they need to properly select cases, marshal resources and settle cases on reasonable terms. But does it make sense in a system of limited government to buy the Third Circuit's logic? Perhaps an early warning on this point is a startling provision in the State of Oklahoma's DPA with MCI. One term of settlement of this criminal case is that MCI is to undertake efforts to add 1600 jobs to its employee base in that state. If this works for prosecutors in Oklahoma, why not even more pet projects for other prosecutors?

One constructive reform that might help ' without handicapping the authorities ' is to require more consistent and open reporting on what happens at the enforcement level. An analogy is instructive. When federal judges impose sentences in criminal cases, the information is reported to the U.S. Sentencing Commission so that the Commission, Congress and the public know what is happening. But prosecutors who play a role that is equally high in public policy concerns operate without this transparency. Why not seek similar reporting by federal prosecutors, including all U.S. Attorneys offices? These reports could include all instances of DPAs (including centralized and publicly accessible filing of all agreements), all instances where parties are asked or agree to waive privilege protections, and all cases in which a company requests that consideration be given to its compliance program in order to receive more lenient treatment. Why not place governmental activity in the sunshine in this crucial area?

Will Prison and Fortunes in Fines Turn the Tide?

DPAs mandate enormous fines and corporate help in getting the individual offenders into prison. Every press release carries the same line: 'We are sending them a message.' Ironically, in an age when communication is global and instantaneous, here is one message we keep sending that never seems to get through. Is it rational to conclude that ever-larger fines and throwing executives in jail will prevent corporate crime? Will we consider this effort a success when we can fine a company in the billions and put corporate executives on death row? Or are we missing something?

Why is it that ever-increasing fines and jail terms seem not to penetrate the corporate world? Perhaps the reasons are not really so complex. It may simply be that good people do not think they are doing anything wrong, so they are not deterred. Bad people do not think they will ever get caught, so they are also not deterred. Corporate criminals do not see their victims, insulated as they are within the corporate world. So despite the messages sent by DPAs, the cases continue. And the next waves of corporate crime are probably already well on their way.

Should the Message Be That Money
Counts and Compliance Does Not?

One factor that should be carefully weighed in negotiating DPAs is what the company did to prevent violations. What was its compliance program and how did it work? Why did it fail in this instance? However, looking at the paper records, this seems almost an afterthought. The press releases and DPAs discuss many things, such as the size of the fine, the company's cooperation, etc. But rarely do they grant any insight into what the company had in place to prevent violations, and why it failed. A cynic could easily read the wrong message into this pattern: 'If, but only if, you get in trouble, go all out to please the government, help nail the prior management, and install reforms that will appeal to the prosecutor. But until then, does it matter if you have a real compliance officer, if your training was effective, if you did compliance audits?' If any of that mattered, why is it not in the press releases? On the other hand, paying out the shareholders' money and cooperation in putting executives in jail leaps out from the pages of the press releases and the DPA. Should that be the overarching message?

As compliance professionals, my colleagues and I know that in fact these things do matter. We have reviewed company compliance programs at the request of the DOJ, and these factors weigh heavily in the balance. But they need to be treated as important parts of the public message.

Imposed Compliance Programs:
Cure Or Punishment?

DPAs typically speak of reforms to be made by the company's management. Imposing compliance programs is a key area, but the record suggests it pales in comparison to the money. Money, after all, captures the headlines. But the reforms can be what has a lasting impact. It is crucial that those who are drafting the DPAs and monitoring their performance know something about the subject. Unfortunately, compliance and ethics programs are not a romantic and dramatic topic. It is not what their law professors waxed eloquently about. But it is what affects employees in their everyday jobs. And it is the only way companies can actually translate the law into what happens in the day-to-day workplace.

There is an unrecognized risk to imposed programs, particularly if a prosecuting attorney is venturing into this field for the first time. The amount of information and knowledge that has accumulated about corporate compliance and ethics is daunting; this is no longer a 'fly by the seat of the pants' area of practice.

There is reason to worry about this. Recent experience with misguided legislative efforts to impose compliance programs do not give reason to be optimistic. See, Murphy, 'Mandavolent Compliance,' 19 Ethikos 8 (Sept/Oct 2005).

People who do not know this area may not even realize just how much there is to know. It is easy to do compliance work poorly and ineffectively. Consider one company that went through the prosecutorial wringer and pledged reform. The reform came in a series of excruciatingly boring video pledges by the new executives falling over themselves in their commitment to do the right thing, and in 'ethics' training that seemed as far removed as possible from what had actually happened in the company (eg, including a totally unrelated segment about a company that 'ethically' refused to lay off people in a recession ' although the video did not mention that the 'ethical' company later went bankrupt).

The prosecutors who negotiate and monitor these compliance provisions have a tough job and need to know the area. They can get this knowledge in the short term by retaining outside experts (we have played this role for some prosecutors). They can also actively participate in the growing compliance and ethics field. For example, they can join such groups as the Society of Corporate Compliance and Ethics (SCCE) and take advantage of the training that is available in this field. SCCE will soon have a certification program for compliance professionals ' prosecutors and regulators can tap into this rising level of professionalism in assessing, imposing and monitoring programs. Compliance and ethics programs can prevent corporate crime when they are done right; government support will speed that process along.

Government needs to enforce the laws, and there is no sympathy here for corporate criminals. DPAs are now part of the government's arsenal, but this can become a much more effective process if it comes with greater transparency and more informed attention to the crucial field of compliance and ethics programs.