Be Careful What You Wish For

Since the January 2003 Thompson Memorandum first advocated the use of DPAs to help prosecutors pursue corporations for alleged wrongdoing, prosecutors have increasingly em-ployed and adapted this weapon in their efforts to compel corporations to cooperate. More than a dozen companies, including AIG, AOL, Banco Popular, Computer Associates, Mon-santo and most recently KPMG, have entered into these agreements since 2003 in an effort to avoid a criminal conviction that could ultimately put the company out of business. Many companies are faced with the real fear of losing professional designations and licenses (financial services firms, accounting firms, etc.), while others are faced with losing lucrative government contracts if convicted of a crime. In virtually all of these cases, the company agrees to a DPA that contains a clause whereby the corporation admits that it committed an assortment of crimes. For example, in the DPA entered into by Monsanto, the company agreed to a statement of facts that listed various bribes company employees paid to Indonesian officials, while in KPMG, the agreed facts included an admission that several KPMG partners 'engaged in conduct that was unlawful and fraudulent.' The companies must also promise to not issue any statement that contradicts the 'facts' as set forth in the agreement.

The requirement that a company sign an agreement whereby it affirmatively admits to committing crimes poses many problems to the corporation and its employees. First, the DPAs always include a condition that the prosecutor shall retain sole discretion to determine whether the company has breached the agreement by, for example, publicly contradicting the statement of facts in any manner. Contradictory statements could come from any one of the company's employees, regardless of whether the employee holds an executive or lower-level position, which creates a substantial problem for large companies. If such breach occurs during the deferred-prosecution period, which usually lasts for between 12 to 36 months, and it is not remedied to the prosecutor's satisfaction, the government can withdraw from the agreement and reinstitute the criminal charges. The method for determining such a breach is always controlled by the prosecutor and is never subject to judicial review or oversight.

In the DPA entered into by Banco Popular following a determination by the U.S. Attorney's Office in Puerto Rico that the bank's lax compliance policies allowed a customer to launder over $20 million, the bank was required to accept a comprehensive set of facts that listed the bank's culpable acts in great detail. Banco Popular agreed that if the prosecutor determined that the bank breached any section of the DPA, including failing to repudiate any statement that contradicted the statement of facts within 48 hours of notice from the prosecutor, it would have two weeks to make a 'presentation' to the prosecutor to prove the breach was either immaterial or had been cured. The DPA further provided that the prosecutor's exercise of discretion regarding whether Banco Popular breached the DPA was 'not subject to review in any court or tribunal outside the Criminal Division of the Department of Justice.' Similar 'presentation' clauses are included in virtually all DPAs and vest complete discretion with the prosecutors to determine whether a breach has occurred.

'Breach of the DPA'

In the event a company cannot remedy what prosecutors deem a breach of the DPA, the likely result is prosecution. At that point, the company would be faced with an indefensible criminal action in addition to whatever onerous and expensive conditions of the DPA it has already performed (e.g., paid fines and restitution, costly investment in compliance programs, etc.). The prosecution would be based on a set of facts that constituted a binding admission against the company. Conviction would be all but guaranteed.

Another important danger associated with agreeing to a DPA's statement of facts is the effect that agreement has on the company's individual employees. Investigations into potentially criminal acts of a company often lead to charges against both the company and some of its employees. While the corporation can often avoid prosecution by entering into a DPA, individual employees are not so lucky (e.g. Computer Associates, KPMG). When the company enters into the DPA, the employee is caught in a potentially inextricable position. The targeted employee, who is frequently terminated and often denied legal fees in an effort to appease prosecutors, is forced to fight an uphill battle against a prosecutor armed with an admission by the company that the employee committed a crime. As if that were not enough, the accused employee cannot rely of any of his co-workers to testify on his behalf because current employees would be prohibited from contradicting the facts contained in the agreed statement of facts. Contradicting it would cause a breach and subject the whole company to prosecution and potential corporate death. Accused employees are effectively stripped of their ability to mount an effective defense.

Although some commentators argue that DPAs allow prosecutors to avoid causing companies irreparable harm by giving them a chance to rehabilitate themselves and escape conviction, the unregulated content of these agreements leaves much room for abuse. Because the agreed statement of facts can someday come back to haunt the company, it's crucial that the statement be fair and crafted in a way that allows the company to adhere to it and avoid contradiction. Unfortunately, the in-herent problems that these statements cause individual employees are not likely to be corrected because prosecutors want to control the moves of the company, and the company wants to save itself even at the expense of its employees.

Stanley S. Arkin ([email protected]), a member of this newsletter's Board of Editors, is senior partner at New York's Arkin Kaplan Rice LLP. He is the lead author of 'Business Crime' and 'The Prevention and Prosecution of Computer and Technology Crime' and a fellow of the American College of Trial Lawyers. Barrett N. Prinz is an associate at Arkin Kaplan Rice. The firm currently represents one of the individuals indicted in the KPMG matter.

In the wake of the demise of Arthur Andersen following the partnerships' indictment by the federal government, prosecutors are increasingly pressuring corporations to enter into deferred-prosecution agreements (DPAs) to avoid ' at least temporarily ' full-blown criminal prosecutions. While these agreements may seem to offer an attractive option to embattled companies faced with the prospect of a lengthy and potentially devastating criminal prosecution, the freedom with which the individual prosecutors operate when crafting the agreements should cause concern. The standard DPA requirement that the company accept, and agree to never challenge, a government-crafted statement of facts enumerating the illegal acts forming the basis of the government's case puts the company in a precarious position that can ultimately result in a pre-packaged conviction if the company breaches any provision of the DPA. This potential pitfall must be recognized from the outset, and the effects of stipulating to the government's facts have to be considered before a company enters into any DPA.

Unjustifiable Clauses

While most DPAs contain an assortment of standard clauses ' requiring that the corporation pay fines and restitution, cooperate with investigators, and implement compliance programs, to name a few ' some DPAs now include extraordinary clauses that simply cannot be justified. In its June 2005 DPA, Bristol-Myers Squibb, in addition to agreeing to the normal comprehensive DPA provisions, was forced to endow a chair of corporate ethics at Seton Hall University Law School, the alma mater of the U.S. Attorney for the District of New Jersey, who signed the DPA for the government. In similar heavy-handed fashion, the Oklahoma Attorney General forced MCI to agree in a DPA to create 1600 new jobs within the state over a ten-year period as a requirement for allowing the company to avoid prosecution. Tactics like these have led one legal commentator to question whether this seemingly unchecked power has left companies 'vulnerable to the extortionate demands of even well-meaning prosecutors,' who 'may be tempted to experiment with corporate governance in ways that exceed their competence or entitlement.' See John C. Coffee, Jr., Deferred Prosecution: Has It Gone Too Far?, Nat'l L. J., Vol. 27, No. 25, July 25, 2005, at 13. Although requiring corporations to agree to a statement of facts may not seem as drastic as the examples above, this facet of a DPA has the potential to cause a company much greater harm. Therefore, a company must carefully weigh the risks and benefits of entering into such an agreement.

Since the January 2003 Thompson Memorandum first advocated the use of DPAs to help prosecutors pursue corporations for alleged wrongdoing, prosecutors have increasingly em-ployed and adapted this weapon in their efforts to compel corporations to cooperate. More than a dozen companies, including AIG, AOL, Banco Popular, Computer Associates, Mon-santo and most recently KPMG, have entered into these agreements since 2003 in an effort to avoid a criminal conviction that could ultimately put the company out of business. Many companies are faced with the real fear of losing professional designations and licenses (financial services firms, accounting firms, etc.), while others are faced with losing lucrative government contracts if convicted of a crime. In virtually all of these cases, the company agrees to a DPA that contains a clause whereby the corporation admits that it committed an assortment of crimes. For example, in the DPA entered into by Monsanto, the company agreed to a statement of facts that listed various bribes company employees paid to Indonesian officials, while in KPMG, the agreed facts included an admission that several KPMG partners 'engaged in conduct that was unlawful and fraudulent.' The companies must also promise to not issue any statement that contradicts the 'facts' as set forth in the agreement.

The requirement that a company sign an agreement whereby it affirmatively admits to committing crimes poses many problems to the corporation and its employees. First, the DPAs always include a condition that the prosecutor shall retain sole discretion to determine whether the company has breached the agreement by, for example, publicly contradicting the statement of facts in any manner. Contradictory statements could come from any one of the company's employees, regardless of whether the employee holds an executive or lower-level position, which creates a substantial problem for large companies. If such breach occurs during the deferred-prosecution period, which usually lasts for between 12 to 36 months, and it is not remedied to the prosecutor's satisfaction, the government can withdraw from the agreement and reinstitute the criminal charges. The method for determining such a breach is always controlled by the prosecutor and is never subject to judicial review or oversight.

In the DPA entered into by Banco Popular following a determination by the U.S. Attorney's Office in Puerto Rico that the bank's lax compliance policies allowed a customer to launder over $20 million, the bank was required to accept a comprehensive set of facts that listed the bank's culpable acts in great detail. Banco Popular agreed that if the prosecutor determined that the bank breached any section of the DPA, including failing to repudiate any statement that contradicted the statement of facts within 48 hours of notice from the prosecutor, it would have two weeks to make a 'presentation' to the prosecutor to prove the breach was either immaterial or had been cured. The DPA further provided that the prosecutor's exercise of discretion regarding whether Banco Popular breached the DPA was 'not subject to review in any court or tribunal outside the Criminal Division of the Department of Justice.' Similar 'presentation' clauses are included in virtually all DPAs and vest complete discretion with the prosecutors to determine whether a breach has occurred.

'Breach of the DPA'

In the event a company cannot remedy what prosecutors deem a breach of the DPA, the likely result is prosecution. At that point, the company would be faced with an indefensible criminal action in addition to whatever onerous and expensive conditions of the DPA it has already performed (e.g., paid fines and restitution, costly investment in compliance programs, etc.). The prosecution would be based on a set of facts that constituted a binding admission against the company. Conviction would be all but guaranteed.

Another important danger associated with agreeing to a DPA's statement of facts is the effect that agreement has on the company's individual employees. Investigations into potentially criminal acts of a company often lead to charges against both the company and some of its employees. While the corporation can often avoid prosecution by entering into a DPA, individual employees are not so lucky (e.g. Computer Associates, KPMG). When the company enters into the DPA, the employee is caught in a potentially inextricable position. The targeted employee, who is frequently terminated and often denied legal fees in an effort to appease prosecutors, is forced to fight an uphill battle against a prosecutor armed with an admission by the company that the employee committed a crime. As if that were not enough, the accused employee cannot rely of any of his co-workers to testify on his behalf because current employees would be prohibited from contradicting the facts contained in the agreed statement of facts. Contradicting it would cause a breach and subject the whole company to prosecution and potential corporate death. Accused employees are effectively stripped of their ability to mount an effective defense.

Although some commentators argue that DPAs allow prosecutors to avoid causing companies irreparable harm by giving them a chance to rehabilitate themselves and escape conviction, the unregulated content of these agreements leaves much room for abuse. Because the agreed statement of facts can someday come back to haunt the company, it's crucial that the statement be fair and crafted in a way that allows the company to adhere to it and avoid contradiction. Unfortunately, the in-herent problems that these statements cause individual employees are not likely to be corrected because prosecutors want to control the moves of the company, and the company wants to save itself even at the expense of its employees.

Stanley S. Arkin ([email protected]), a member of this newsletter's Board of Editors, is senior partner at New York's Arkin Kaplan Rice LLP. He is the lead author of 'Business Crime' and 'The Prevention and Prosecution of Computer and Technology Crime' and a fellow of the American College of Trial Lawyers. Barrett N. Prinz is an associate at Arkin Kaplan Rice. The firm currently represents one of the individuals indicted in the KPMG matter.