White-Collar Crime
November 2005, Page 43

Trends In Deferred Prosecution Agreements
By Stephanie Martz

Several other large corporations have also staved off criminal indictment through the use of deferred prosecution agreements: Computer Associates, Bristol-Myers Squibb, and AOL. An examination of these agreements shows that the terms of KPMG’s are extreme in certain instances and entail concessions that are nearly unprecedented in the realm of privately held firms. However, they are not entirely unusual. Any firm that finds itself in the sights of a federal prosecutor will encounter pressure to waive certain rights and give
up certain amounts of self-governance. The agreements’ common terms yield the following principles for defense lawyers and clients to keep in mind:

(1) There are no standards governing the appropriate terms for Deferred Prosecution Agreements. Federal prosecutors are not limited by the terms of the Thompson Memorandum, or anything else, in deciding the critical reforms to which a company must agree to avoid the corporate death penalty. Therefore, the terms of a Deferred Prosecution Agreement range from the absurd to, if not the sublime, the acceptable in light of what is at stake. At one end of the spectrum is the agreement for Bristol-Myers Squibb, in which New Jersey United States Attorney Christopher Christie maintains a personal hand in the monitoring and governance of BMS for two years, and
requires that BMS endow a chair in business ethics at his alma mater, Seton Hall. The monitor is chosen ex ante in the agreement — former federal judge Frederick B. Lacey — and the monitor, who reports directly to Christie, is given the power to “take any steps he believes are necessary to comply with the terms of this agreement.”1 Computer Asociates’ Deferred Prosecution Agreement contains very specific measures regarding the appointment of outside directors and the complete reorganization of its finance department, and while it provides for the appointment of an independent examiner, that examiner’s powers consist mainly of reporting on governance changes to the regulatory authorities.2 Moreover, the examiner (Lee Richards of the firm Richards Spears Kibbe & Orbe LLP) was appointed by the federal judge who signed off on the agreement from a list of mutually acceptable candidates. AOL’s Deferred Prosecution Agreement is much more circumscribed. It specifically provides that “[a]lthough AOL may voluntarily choose to investigate further, no further investigation shall be required as a condition of this agreement,” and moreover, the agreement lists (and limits) the documents that are available to the independent monitor.3

Agreements to lengthy “Statement[s] of Facts” can have collateral effects on civil litigation and debarment proceedings. It is rather remarkable that almost all Deferred Prosecution Agreements contain lengthy “Statement[s] of Fact” to which the target company must agree. These statements are narratives that often read like a prosecutor’s trial brief. One could argue that this merely takes the place of a colloquy in which any individual defendant who pleads guilty would have to engage. But for corporations, the ripple effect of these admissions could be devastating. To the extent outstanding shareholder suits are not resolved in the agreement, public disclosures of wrongdoing could operate as admissions, and the information pertaining to these admissions could very well be discoverable. Moreover,
for companies accused of fraud that is related to government procurement—BMS’s channel-stuffing charges are a prime example 4— the Federal Acquisition Regulations state that only “adequate” evidence of fraud need be present to result in a suspension from government contracting.5 Moreover “flow-down” provisions can prevent other government contractors from doing business with a debarred entity.

Computer Associates’ Agreement foresees that it will settle its pending and future civil suits; it provides for a $225 million restitution fund to “compensate former and current CA shareholders for losses caused by the conduct set forth in the Information and Stipulation of Facts,” and an additional $163 million in stock and cash to compensate shareholders in pending cases. BMS’s agreement was entered into after Consolidated Shareholder Litigation had already been settled. Therefore, the total $839 million in compensation to shareholders provided for in the Deferred Prosecution Agreement and the civil settlement was geared towards claimants who had already agreed to settle as well as those who had opted out of the settlement. KPMG’s agreement makes no reference whatsoever to pending civil
suits—and in fact, KPMG is facing litigation in both Texas and Florida brought by former customers of its tax shelters.6

Of course, if the civil litigants aren’t party to a global settlement with DOJ and the SEC, then the resolution of civil litigation will be provided for in these Agreements, but it will not actually be settled. There would seem to be only one avenue left once companies have agreed to extensive factual admissions — to settle. However, KPMG has chosen instead to offer an in pari delecto defense as to its wealthy tax shelter customers, and has asked for discovery on the issue of what advice they were actually given.7

(2) Monitoring agreements can present unprecedented levels of ongoing prosecutorial oversight. Another troubling trend in Deferred Prosecution Agreements is the role of the monitor, and the prosecutor, in the short-term governance of the targeted corporation. The Deferred Prosecution Agreements for AOL and Computer Associates set forth limited rolls for monitors who are chosen with the mutual consent of the company. AOL’s monitor may have access to all of the information that is turned over to DOJ, analyze the adequacy
and effectiveness of AOL”s internal control measures, including audits, and with specific regard to accounting transactions for advertising; to make recommendations regarding improvements in internal controls; and to report to DOJ semi-annually as to AOL’s adherence to the Agreement. Similarly, Computer Associates’ monitor has reporting and examination duties, but no real input as to governance. KPMG’s monitor, by contrast, has the power to “require any personnel action, including termination,” regarding individuals
“who were engaged in or were responsible (either by act or omission) for the illegal conduct described in the Information.” The monitor is the prosecutor, judge, and jury for these employees — who, it bears noting, are not specifically named in the Information. KPMG’s monitor “shall have the authority to take any other actions that are necessary to effectuate his or her oversight and monitoring responsibilities.” BMS’ agreement is even more detailed in terms of corporate governance and restructuring; it provides for a certain method for appointing outside directors, requires a non-executive Board Chairman, and sets forth terms for a mandatory corporate compliance programs.

One can argue that the Organizational Sentencing Guidelines set the precedent for this degree of prosecutorial involvement in corporate
governance. In fact, the KPMG agreement specifically refers to the compliance program set forth in the Guidelines. “Organizational probation” under the Guidelines allow a court to enter a supervisory order for a term of up to five years, and may require, among other things, periodic submissions, unannounced examinations of the corporation’s books and records, the development of a compliance program, including training for employees, and the hiring of numerous independent experts.8 When these terms are required elements of Deferred Prosecution Agreements, they essentially put the corporation in receivership, with the prosecutor — not even the regulatory who knows the most about the industry and the entity — acting as receiver.

Terms that govern a firm’s ongoing “cooperation” routinely contain requirements that harm employees. While no one would argue with the notion that responsible employees should be held liable for their criminal acts, and few would argue with the concept that it harms innocent shareholders and employees when an entire corporation is indicted, a difficult problem that has arisen in Deferred Prosecution Agreements stems from the pressure that targeted companies face to appear to be cooperative. KPMG, as noted above, and BMS were both required to provide access to current and, in the case of KPMG, even former employees and partners. Moreover, iIt is safe to say that all Deferred Prosecution Agreements set forth that information that is privileged and is provided to monitors shall not be considered waived as to other parties — but these agreements have not withstood serious tests in litigation.9 The BMS agreement forbids the company from asserting privilege at all. A handful of federal prosecutors have even attempted to introduce terms that forbid sharing information and require withdrawal from joint defense agreements. At least one federal district court has held that the inclusion of such language, and the accompanying facts, constitutes outrageous misconduct justifying dismissal of all charges.10

Notes

1. Bristol-Myers Squibb Deferred Prosecution Agreement, passim, available at www.nacdl.org.

2. Computer Associates’ Deferred Prosecution Agreement, passim, available at www.nacdl.org.

3. United States v. American Online, Inc., Deferred Prosecution Agreement, available on Westlaw at 1492 PLI/Corp 807 (May 2005).

4. “Channel stuffing” is a term that refers to an allegation that a seller of a good has influenced its buyers to buy more than they need in order to boost revenues.

5. See 47 C.F.R. sec. 9.407-2.

6. Lynnley Browning, KPMG Strikes Back On Ex-Clients’ Tax Shelter Suits, New York Times, C1 (August 18, 2005).

7. Id.

8. U.S. Sentencing Guidelines Manual sec. 8D1.4.

9. Only one federal circuit has approved of the concept of selective waiver to government agencies. See Diversified Industries, Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1978). The D.C. Circuit, the Third Circuit, and the Sixth Circuit have come out on the opposite side of the issue. See Permian Corp. v. United States, 665 F.2d 1214 (D.C. Cir. 1981); Westinghouse Elec. Corp. v. Republic of the Philippines, 951 F.2d 1414 (3d Cir. 1991); In re Columbia/HCA Healthcare, 293 F.3d 289 (6th Cir. 2002). But see Cobell v. Norton, 213 F.R.D. 69 (D.D.C. 2003) (finding that documents provided to a monitor are in essence provided pursuant to court order, and therefore, privilege is not waived).

10. United States v. Leung, CR 03-434 FMC, January 6, 2005 (C.D. Cal.).

— Stephanie Martz, NACDL White Collar Crime Project Director
202-872-8600 x227, stephanie@nacdl.org


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