Judicial Oversight of Corporate Deferred Prosecution Agreements

The groundwork for Fokker was laid 19 months earlier in the Eastern District of New York. On July 1, 2013, Judge John Gleeson issued an opinion in United States v. HSBC Bank USA, N.A., No. 12-CR-763, 2013 WL 3306161 (E.D.N.Y. July 1, 2013), in which he took a detailed look at the underpinnings of the potential for judicial review of a DPA. HSBC and DOJ had agreed to a DPA to settle HSBC's alleged violations of the Bank Secrecy Act and U.S. economic sanctions laws ' the International Emergency Economic Powers Act and the Trading With the Enemy Act. HSBC agreed to forfeit $1.256 billion, admit to criminal wrongdoing, submit to a corporate compliance monitor and take steps to improve corporate compliance policies and procedures.

When the parties filed the DPA along with an Information laying out HSBC's alleged unlawful conduct, they requested that, in accord with what has been standard procedure for corporate DPAs, Judge Gleeson stay the case and exclude the five-year term of the DPA from the Speedy Trial Act clock so that the possibility of further prosecution was preserved while HSBC complied with the conditions of the DPA. Time under the Speedy Trial Act can be excluded for “delay during which prosecution is deferred by the attorney for the Government pursuant to written agreement with the defendant, with the approval of the court, for the purpose of allowing the defendant to demonstrate his good conduct.” 18 U.S.C. ' 3161(h)(2). When Judge Gleeson began to scrutinize the terms of the DPA, both the government and HSBC argued that Judge Gleeson's sole authority was to decide whether to grant the exclusion.

Judge Gleeson did not agree and examined the terms of the DPA itself. He ultimately granted the exclusion of time, making the required finding that the DPA was indeed intended to divert HSBC from prosecution and was not simply “a vehicle for fending off a looming trial date,” but he bristled at the parties' suggestion that such a finding was sufficient on its own and announced that the court also had the power to approve the terms of the DPA itself under the court's supervisory power. Relying on a line of cases going back 85 years, Judge Gleeson explained that the court's supervisory power “permits federal courts to supervise the administration of criminal justice among the parties before the bar” in order to “protect the integrity of judicial proceedings.” 2013 WL 3306161, at *4. Judge Gleeson recognized that “[t]he Executive Branch alone is vested with the power to decide whether or not to prosecute,” id. at *7 (citing United States v. Bonnet-Grullon, 212 F.3d 692, 701 (2d Cir. 2000)), but he viewed the DPA as a middle path between prosecution and dismissal of charges: “By placing a criminal matter on the docket of a federal court, the parties have subjected their DPA to the legitimate exercise of that court's authority.” Id. at *5. He was the first judge to broaden the court's supervisory power in this manner.

Having articulated this standard, Judge Gleeson then reviewed and approved the terms of the DPA ' including the punishment, the scope of HSBC's admitted misconduct and the steps it took to remediate its compliance and control problems. His review was more focused, however, on whether the DPA “smack[ed] of lawlessness or impropriety” than on whether the punishment was sufficient. He then theorized how a DPA could be undermined by impropriety. For example, a DPA contingent on the corporation's continued cooperation ' a typical requirement of DPAs ' could be tainted by the government's coercing the corporation to waive attorney/client privilege or deny attorney fees to its employees. Judge Gleeson theorized that in the event of a breach of the terms of the DPA by the corporation, an impropriety would occur if the government might offer remediation in the form of an offer to fund an endowed chair at the United States Attorney's alma mater. Id. at *6. Or possibly if the monitor needs to be replaced, it would be improper if the replacement's “only qualification for the position is that he or she is an intimate acquaintance of the prosecutor proposing the appointment.” Id. Examining the case at hand, Judge Gleeson concluded that his “review of the DPA, and my knowledge of the actions that have been taken pursuant to the DPA thus far, reveal no impropriety that implicates the integrity of the Court and therefore warrants the rejection of the agreement.” Id. at *7. Without evidence of procedural impropriety, he had little reason to reject the DPA.

Judge Gleeson's opinion raised serious questions about the role of the district court in the administration of a DPA. His clear concern was that the court not be considered a “potted plant” and that a pending criminal proceeding not be considered “window dressing.” He understood, however, that district courts must be careful before wading into the thickets of prosecutorial discretion and he appreciated the novelty of his approach. In his opinion, Judge Gleeson quoted the U.S. Supreme Court opinion in Wayte v. United States, 470 U.S. 598, 607 (1985), in which that court stated that a prosecutor's “broad discretion rests largely on the recognition that the decision to prosecute is particularly ill-suited to judicial review. Such factors as the strength of the case, the prosecution's general deterrence value, the government's enforcement priorities, and the case's relationship to the government's overall enforcement plan are not readily susceptible to the kind of analysis the courts are competent to undertake.”

United States v. Fokker Services

Roughly a year and a half later, Judge Leon relied on Judge Gleeson's opinion in rejecting approval of the DPA reached between the DOJ and Fokker. The latter was charged with conspiracy to unlawfully export U.S.-origin goods to U.S.-sanctioned countries. The conspiracy was alleged to have stretched from 2005 to 2010, and encompassed over 1,100 shipments. Moreover, Fokker continued to make illegal shipments despite an internal working group informing management that such activities violated U.S. law. In 2010, however, Fokker conducted an internal investigation, replaced much of its top management, took steps to begin improving its compliance procedures and self-reported the violations to the U.S. government. The DPA filed in the District of D.C. ' imposing an 18-month self-reporting period and penalty of half the profits earned as a result of the unlawful shipments (the other half was paid to the Bank of International Settlements (BIS) and the Office of Foreign Assets Control (OFAC) in a separate settlement) ' followed the impending investigation.

Whereas Judge Gleeson reviewed the terms of the DPA to determine whether any impropriety occurred in its formation, Judge Leon focused more on the punishment to which the DOJ had agreed. Judge Leon stated that his review was not undertaken “lightly” and that he was aware his supervisory powers were to be exercised “sparingly,” but he also believed that “the Court must consider the public as well as the defendant.” According to Judge Leon, “giving the Court's stamp of approval to either overly lenient prosecutorial action, or overly zealous prosecutorial conduct” would “compromise [the] integrity of judicial proceedings.” Fokker Services, 2015 WL 129291, at *5. Judge Leon then concluded that the DPA was overly-lenient and “grossly disproportionate to the gravity of Fokker Services' conduct in a post-9/11 world,” id . at *6, and rejected the DPA.

Implications

Judge Leon's decision presents potentially serious issues for corporations seeking to negotiate a resolution to pending or potential charges for business crimes. The first question is whether the DOJ will change its policies on corporate prosecutions to account for the possibility that DPAs may not be approved by district courts. If the Department views DPAs with too much uncertainty, it may decide to push for more guilty pleas, which bring with them disastrous collateral consequences for corporations, particularly those in heavily regulated industries. Alternatively, DOJ could opt for more non-prosecution agreements (NPA), which are strictly contractual and need not be filed in federal court and from which DOJ can extract the same settlement conditions as from DPAs (financial penalties, monitors, self-reporting, and so on). However, NPAs do not carry with them the same public relations benefit for the government of being able to announce bringing charges against a corporate bad actor. Current public opinion regarding corporate prosecutions is trending toward harsher enforcement of the laws, so an increase in NPAs seems the less likely result.

The concern of increased guilty pleas is not unfounded; we have a historical analogue in which a judge's rejection of a settlement between a corporation and the government eventually caused negative consequences for defendants. In 2011, Judge Jed Rakoff of the Southern District of New York issued an opinion rejecting the SEC's settlement with Citigroup over mortgage-backed securities on the basis that the settlement cost of $285 million was no more than the cost of doing business and that Citigroup was not required to admit wrongdoing. See SEC vs. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011). The decision has since been vacated by the Second Circuit (see SEC vs. Citigroup Global Markets, Inc., 752 F.3d 285 (2d Cir. 2014)), but it nonetheless has had a lasting effect on SEC policy. The SEC in June 2013 announced that it would revise its policy of allowing companies to neither “admit nor deny wrongdoing” in settlements, indicating the intention to force admissions more often. Concern is well-founded that those admissions could in turn lead to stronger shareholder lawsuits. The SEC has in recent years also increasingly retreated to the home-field advantage of its administrative courts. Practitioners have expressed concern that resort to administrative proceedings results in inferior due process protections for defendants as, for example, federal courts grant broader discovery rights. The Wall Street Journal also has reported that the SEC maintains a higher “win” rate in administrative proceedings.

White collar practitioners will also have a more difficult task in advising their clients in the wake of Judge Leon's decision. Negotiations with the government over criminal charges are already akin to fighting blindfolded with both hands tied behind one's back and, given the infrequency with which corporate criminal cases go to trial, a practitioner's responsibility can often be to minimize damage as best as possible. In the wake of Judge Leon's opinion, representations are bound to be even more difficult. First, the decision adds a layer of uncertainty to any settlement with the government as counsel will be unable to predict whether a district judge will decide the agreed-upon penalty is sufficiently harsh. Second, the opinion increases the government's leverage in negotiations because the government will be able to use the specter of a district judge rejecting the settlement as a way to extract additional penalties.

Conclusion

Judge Leon rejected the DPA because he believed that it did not adequately punish a corporation that flagrantly and knowingly violated United States sanctions laws over a period of several years, but what is unclear is precisely what consequence Judge Leon believed would or should result from his decision. In the closing paragraph of the opinion, Judge Leon wrote: “I am not ordering or advising the Government, or the defendant, to undertake or refrain from undertaking any particular action ' I am merely declining to approve the document before me. I remain open to considering a modified version in the future should the parties agree to different terms.” Fokker Services, 2015 WL 729291, at *6. Given that the opinion criticizes the defendant's conduct and calls the penalty agreed to in the DPA “anemic,” it is hard not to read it to telegraph particular actions Judge Leon believed should be taken, which seemingly is not a judicial role.

Because the penalty levied against HSBC was so large, it is impossible to know whether the severity of HSBC's punishment played a role in Judge Gleeson's decision to approve the DPA before him. The opinion appears, however, to be concerned less with the severity of the penalty and more with identifying and, if necessary, remedying any procedural or due process improprieties that may have occurred in the process of the parties reaching a settlement. Judge Leon's discussion of the integrity of the courts and the administration of justice was connected more to the effect of the sentence itself, and thus it remains to be seen what broad-ranging effects will result from his choice. In the meantime, Fokker has filed a notice of appeal, so the D.C. Circuit Court of Appeals may soon be the first appellate court to have the opportunity to weigh in on this issue.

Jodi Misher Peikin ([email protected]), a member of this newsletter's Board of Editors, is a principal at Morvillo Abramowitz Grand Iason & Anello PC, New York. Peter Janowski is an associate with the firm.

Earlier this year, the Department of Justice (DOJ) and a subsidiary of a Dutch aerospace technology company, Fokker Services B.V. (Fokker), reached an agreement to resolve charges that the company had conspired to unlawfully export goods originated in the United States to Iran, Burma, and Sudan ' countries on the U.S. sanctions list. The terms of the agreement were unremarkable: Fokker would pay a fine equal to the profits it earned in the unlawful export transactions, implement a compliance program, and comply with U.S. export laws for 18 months. If Fokker met the terms of the deferred prosecution agreement (DPA) for the period of deferral, the criminal charges that were to be filed in federal court along with the DPA would be dismissed. As is the case for virtually all corporate prosecutions in the United States, the matter appeared to have been resolved by settlement.

United States District Judge Richard Leon of the District of D.C. had a different view. In United States v. Fokker Services B.V., ' F. Supp. 3d ', 2015 WL 729291 (D.D.C. Feb. 5, 2015), Judge Leon rejected the terms of the DPA. In his view, the agreement did not impose a sufficient punishment for the level of misconduct engaged in by the company. The decision has obvious effects on the government's case against Fokker, but it also could have repercussions that extend far beyond the case, including the potential to alter DOJ's policy on deferred prosecution agreements; the creation of critical uncertainty for white collar defense practitioners; and the raising of interesting questions about the role of the judiciary in corporate criminal negotiations and settlements.

United States v. HSBC Bank

The groundwork for Fokker was laid 19 months earlier in the Eastern District of New York. On July 1, 2013, Judge John Gleeson issued an opinion in United States v. HSBC Bank USA, N.A., No. 12-CR-763, 2013 WL 3306161 (E.D.N.Y. July 1, 2013), in which he took a detailed look at the underpinnings of the potential for judicial review of a DPA. HSBC and DOJ had agreed to a DPA to settle HSBC's alleged violations of the Bank Secrecy Act and U.S. economic sanctions laws ' the International Emergency Economic Powers Act and the Trading With the Enemy Act. HSBC agreed to forfeit $1.256 billion, admit to criminal wrongdoing, submit to a corporate compliance monitor and take steps to improve corporate compliance policies and procedures.

When the parties filed the DPA along with an Information laying out HSBC's alleged unlawful conduct, they requested that, in accord with what has been standard procedure for corporate DPAs, Judge Gleeson stay the case and exclude the five-year term of the DPA from the Speedy Trial Act clock so that the possibility of further prosecution was preserved while HSBC complied with the conditions of the DPA. Time under the Speedy Trial Act can be excluded for “delay during which prosecution is deferred by the attorney for the Government pursuant to written agreement with the defendant, with the approval of the court, for the purpose of allowing the defendant to demonstrate his good conduct.” 18 U.S.C. ' 3161(h)(2). When Judge Gleeson began to scrutinize the terms of the DPA, both the government and HSBC argued that Judge Gleeson's sole authority was to decide whether to grant the exclusion.

Judge Gleeson did not agree and examined the terms of the DPA itself. He ultimately granted the exclusion of time, making the required finding that the DPA was indeed intended to divert HSBC from prosecution and was not simply “a vehicle for fending off a looming trial date,” but he bristled at the parties' suggestion that such a finding was sufficient on its own and announced that the court also had the power to approve the terms of the DPA itself under the court's supervisory power. Relying on a line of cases going back 85 years, Judge Gleeson explained that the court's supervisory power “permits federal courts to supervise the administration of criminal justice among the parties before the bar” in order to “protect the integrity of judicial proceedings.” 2013 WL 3306161, at *4. Judge Gleeson recognized that “[t]he Executive Branch alone is vested with the power to decide whether or not to prosecute,” id . at *7 (citing United States v. Bonnet-Grullon , 212 F.3d 692, 701 (2d Cir. 2000)), but he viewed the DPA as a middle path between prosecution and dismissal of charges: “By placing a criminal matter on the docket of a federal court, the parties have subjected their DPA to the legitimate exercise of that court's authority.” Id . at *5. He was the first judge to broaden the court's supervisory power in this manner.

Having articulated this standard, Judge Gleeson then reviewed and approved the terms of the DPA ' including the punishment, the scope of HSBC's admitted misconduct and the steps it took to remediate its compliance and control problems. His review was more focused, however, on whether the DPA “smack[ed] of lawlessness or impropriety” than on whether the punishment was sufficient. He then theorized how a DPA could be undermined by impropriety. For example, a DPA contingent on the corporation's continued cooperation ' a typical requirement of DPAs ' could be tainted by the government's coercing the corporation to waive attorney/client privilege or deny attorney fees to its employees. Judge Gleeson theorized that in the event of a breach of the terms of the DPA by the corporation, an impropriety would occur if the government might offer remediation in the form of an offer to fund an endowed chair at the United States Attorney's alma mater. Id. at *6. Or possibly if the monitor needs to be replaced, it would be improper if the replacement's “only qualification for the position is that he or she is an intimate acquaintance of the prosecutor proposing the appointment.” Id. Examining the case at hand, Judge Gleeson concluded that his “review of the DPA, and my knowledge of the actions that have been taken pursuant to the DPA thus far, reveal no impropriety that implicates the integrity of the Court and therefore warrants the rejection of the agreement.” Id. at *7. Without evidence of procedural impropriety, he had little reason to reject the DPA.

Judge Gleeson's opinion raised serious questions about the role of the district court in the administration of a DPA. His clear concern was that the court not be considered a “potted plant” and that a pending criminal proceeding not be considered “window dressing.” He understood, however, that district courts must be careful before wading into the thickets of prosecutorial discretion and he appreciated the novelty of his approach. In his opinion, Judge Gleeson quoted the U.S. Supreme Court opinion in Wayte v. United States , 470 U.S. 598, 607 (1985), in which that court stated that a prosecutor's “broad discretion rests largely on the recognition that the decision to prosecute is particularly ill-suited to judicial review. Such factors as the strength of the case, the prosecution's general deterrence value, the government's enforcement priorities, and the case's relationship to the government's overall enforcement plan are not readily susceptible to the kind of analysis the courts are competent to undertake.”

United States v. Fokker Services

Roughly a year and a half later, Judge Leon relied on Judge Gleeson's opinion in rejecting approval of the DPA reached between the DOJ and Fokker. The latter was charged with conspiracy to unlawfully export U.S.-origin goods to U.S.-sanctioned countries. The conspiracy was alleged to have stretched from 2005 to 2010, and encompassed over 1,100 shipments. Moreover, Fokker continued to make illegal shipments despite an internal working group informing management that such activities violated U.S. law. In 2010, however, Fokker conducted an internal investigation, replaced much of its top management, took steps to begin improving its compliance procedures and self-reported the violations to the U.S. government. The DPA filed in the District of D.C. ' imposing an 18-month self-reporting period and penalty of half the profits earned as a result of the unlawful shipments (the other half was paid to the Bank of International Settlements (BIS) and the Office of Foreign Assets Control (OFAC) in a separate settlement) ' followed the impending investigation.

Whereas Judge Gleeson reviewed the terms of the DPA to determine whether any impropriety occurred in its formation, Judge Leon focused more on the punishment to which the DOJ had agreed. Judge Leon stated that his review was not undertaken “lightly” and that he was aware his supervisory powers were to be exercised “sparingly,” but he also believed that “the Court must consider the public as well as the defendant.” According to Judge Leon, “giving the Court's stamp of approval to either overly lenient prosecutorial action, or overly zealous prosecutorial conduct” would “compromise [the] integrity of judicial proceedings.” Fokker Services, 2015 WL 129291, at *5. Judge Leon then concluded that the DPA was overly-lenient and “grossly disproportionate to the gravity of Fokker Services' conduct in a post-9/11 world,” id . at *6, and rejected the DPA.

Implications

Judge Leon's decision presents potentially serious issues for corporations seeking to negotiate a resolution to pending or potential charges for business crimes. The first question is whether the DOJ will change its policies on corporate prosecutions to account for the possibility that DPAs may not be approved by district courts. If the Department views DPAs with too much uncertainty, it may decide to push for more guilty pleas, which bring with them disastrous collateral consequences for corporations, particularly those in heavily regulated industries. Alternatively, DOJ could opt for more non-prosecution agreements (NPA), which are strictly contractual and need not be filed in federal court and from which DOJ can extract the same settlement conditions as from DPAs (financial penalties, monitors, self-reporting, and so on). However, NPAs do not carry with them the same public relations benefit for the government of being able to announce bringing charges against a corporate bad actor. Current public opinion regarding corporate prosecutions is trending toward harsher enforcement of the laws, so an increase in NPAs seems the less likely result.

The concern of increased guilty pleas is not unfounded; we have a historical analogue in which a judge's rejection of a settlement between a corporation and the government eventually caused negative consequences for defendants. In 2011, Judge Jed Rakoff of the Southern District of New York issued an opinion rejecting the SEC's settlement with Citigroup over mortgage-backed securities on the basis that the settlement cost of $285 million was no more than the cost of doing business and that Citigroup was not required to admit wrongdoing. See SEC vs. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011). The decision has since been vacated by the Second Circuit (see SEC vs. Citigroup Global Markets, Inc., 752 F.3d 285 (2d Cir. 2014)), but it nonetheless has had a lasting effect on SEC policy. The SEC in June 2013 announced that it would revise its policy of allowing companies to neither “admit nor deny wrongdoing” in settlements, indicating the intention to force admissions more often. Concern is well-founded that those admissions could in turn lead to stronger shareholder lawsuits. The SEC has in recent years also increasingly retreated to the home-field advantage of its administrative courts. Practitioners have expressed concern that resort to administrative proceedings results in inferior due process protections for defendants as, for example, federal courts grant broader discovery rights. The Wall Street Journal also has reported that the SEC maintains a higher “win” rate in administrative proceedings.

White collar practitioners will also have a more difficult task in advising their clients in the wake of Judge Leon's decision. Negotiations with the government over criminal charges are already akin to fighting blindfolded with both hands tied behind one's back and, given the infrequency with which corporate criminal cases go to trial, a practitioner's responsibility can often be to minimize damage as best as possible. In the wake of Judge Leon's opinion, representations are bound to be even more difficult. First, the decision adds a layer of uncertainty to any settlement with the government as counsel will be unable to predict whether a district judge will decide the agreed-upon penalty is sufficiently harsh. Second, the opinion increases the government's leverage in negotiations because the government will be able to use the specter of a district judge rejecting the settlement as a way to extract additional penalties.

Conclusion

Judge Leon rejected the DPA because he believed that it did not adequately punish a corporation that flagrantly and knowingly violated United States sanctions laws over a period of several years, but what is unclear is precisely what consequence Judge Leon believed would or should result from his decision. In the closing paragraph of the opinion, Judge Leon wrote: “I am not ordering or advising the Government, or the defendant, to undertake or refrain from undertaking any particular action ' I am merely declining to approve the document before me. I remain open to considering a modified version in the future should the parties agree to different terms.” Fokker Services, 2015 WL 729291, at *6. Given that the opinion criticizes the defendant's conduct and calls the penalty agreed to in the DPA “anemic,” it is hard not to read it to telegraph particular actions Judge Leon believed should be taken, which seemingly is not a judicial role.

Because the penalty levied against HSBC was so large, it is impossible to know whether the severity of HSBC's punishment played a role in Judge Gleeson's decision to approve the DPA before him. The opinion appears, however, to be concerned less with the severity of the penalty and more with identifying and, if necessary, remedying any procedural or due process improprieties that may have occurred in the process of the parties reaching a settlement. Judge Leon's discussion of the integrity of the courts and the administration of justice was connected more to the effect of the sentence itself, and thus it remains to be seen what broad-ranging effects will result from his choice. In the meantime, Fokker has filed a notice of appeal, so the D.C. Circuit Court of Appeals may soon be the first appellate court to have the opportunity to weigh in on this issue.

Jodi Misher Peikin ([email protected]), a member of this newsletter's Board of Editors, is a principal at Morvillo Abramowitz Grand Iason & Anello PC, New York. Peter Janowski is an associate with the firm.