This month’s indictment of two former executives of Bristol-Myers Squibb highlights the government’s increasing use of “deferred prosecution agreements,” under which companies insulate themselves from criminal liability by agreeing to assist in the prosecution of employees.
On the same day that federal prosecutors announced that they were pursuing ex-CFO Frederick Schiff and Richard Lane, who ran Bristol-Myers Squibb’s worldwide medicines group, the company itself avoided indictment by agreeing to some extraordinary steps demanded by the U.S. Attorney’s Office in New Jersey. Those steps included:
Paying $300 million to a shareholder compensation fund (on top of $389 million already agreed to in order to settle shareholder litigation);
Forcing the CEO to relinquish his post;
Appointing a “non-executive chairman” of the board and an additional director “acceptable to” the prosecutor;
Having a monitor report to the prosecutor on the company’s implementation of enhanced internal controls and financial reporting reforms; and
Instituting mandatory training programs.
In return, the government agreed to defer pursuing a criminal complaint filed against Bristol-Myers Squibb, and agreed to drop the criminal matter entirely in two years if the company cooperates fully with authorities.
Savarese
John Savarese, a partner at Wachtell, Lipton, Rosen & Katz in New York, told Compliance Week that the Bristol-Myers Squibb agreement is a “telling reminder” that the government expects a heightened level of cooperation by companies if they wish to stave off prosecution. “There’s no question that in the last two years we’ve seen a substantial uptick in the number of these types of agreements,” says Savarese. “The BMS settlement was striking because it [has] some new features that are unusual in terms of how intrusive they are with respect to the U.S. attorney having an ongoing monitor inside the company and requiring as part of the agreement that the company separate the CEO and chairman of the board roles.”
Thompson Memo Impact
Coffee
John Coffee, a securities law professor at Columbia University, observes that deferred prosecution agreements in corporate misconduct cases have been around since the early 1990s. “The first big one involved Prudential Securities,” he says, noting that companies in the financial services sector and those that depend on government contracts “need to avoid the stigma of a criminal conviction” because it could result in the demise of the company.
In the wake of the Arthur Andersen case, and the thousands of employees who were left jobless after the company’s prosecution, the government has been sensitive to “the risk of putting another large company into failure,” Coffee says. The government’s view was set forth in something that has come to be known as “The Thompson Memo,” essentially concluding that, if a company is willing to cooperate and turn over all relevant evidence, prosecutors should consider dropping criminal charges (see copy of The Thompson Memo in box above, right).
BMS ANNOUNCEMENT
The following is an excerpt from a June 15, 2005, press release titled, "Bristol-Myers Squibb Announces Agreement With the U.S. Attorney's Office in New Jersey":
Bristol-Myers Squibb Company announced today that it has resolved the investigation by the U.S. Attorney's Office in New Jersey relating to wholesaler inventory and various accounting matters, in a Deferred Prosecution Agreement (Agreement) with the government. The government will not pursue its filed criminal complaint if it is satisfied after two years that the company has complied with all of the terms of the Agreement. Under the Agreement, the company will make an additional payment of $300 million to the shareholder fund previously established in connection with the company's settlement with the Securities and Exchange Commission (SEC) announced in August 2004. In connection with the Agreement, the company will record an additional reserve of $249 million in the second quarter.
The company separately announced today that the Board of Directors has elected as non-executive chairman, James D. Robinson III, a director since 1976, following the Board's decision to separate the roles of chairman and chief executive officer and as part of its Agreement with the government. Peter R. Dolan will continue in his role as chief executive officer and as a member of the Board of Directors.
Mr. Dolan said: "The company is very pleased to have reached this resolution with the U.S. Attorney. We are determined that the mistakes of the past not be repeated and that the company's reputation for adhering to the highest standards of ethical business practices be fully restored. The company looks forward to continuing to build on our recent successes, including four new product approvals within the past two and one-half years. I will devote full focus to my CEO duties and leading the company in capitalizing on the multiple opportunities ahead."
Mr. Robinson stated: "The Board is pleased that the company has reached agreement with the New Jersey U.S. Attorney's Office, and is unanimously supportive of Peter Dolan, who has earned our respect and confidence by his dedication, successful track record leading the company during this period of challenge and by developing and driving a very promising strategic plan for the future. I look forward to working with the CEO and my Board colleagues to help further strengthen the company's bright prospects for the future."
In addition, under the Agreement, the Honorable Frederick Lacey, a former federal judge, will be appointed as independent Monitor through at least April 2007 to oversee the company's compliance with all of the terms of the Agreement. Judge Lacey has served as an Independent Advisor to the company since June 2003 and pursuant to the SEC settlement since August 2004. Also under the two-year Agreement, the company will maintain and continue to implement remedial measures pursuant to the settlement with the SEC, take certain additional remedial action and continue to cooperate with the U.S. Attorney's Office, including with respect to the ongoing investigation regarding individual current and former employees of the company.
In such cases, Savarese says Department of Justice officials have come to realize, “If you use the most Draconian remedies you can, lots of these companies will not survive.” But the DOJ nevertheless wants to send a message that “individuals made mistakes and intentionally did something wrong—and not just some disembodied corporate entity,” he says. “They’re looking to the corporation to remedy the broader problem through restitution, improved internal controls, management changes … while [looking to employees] in terms of meting out individual responsibility.”
Deferred prosecution agreements are often viewed as a win-win situation for the government because the risk of a criminal trial is avoided and prosecutors often get as much, if not more, relief than a court might order.
Mateja
The government “can get every one of the things [it] could have gotten as a result of the corporate conviction—except the conviction itself,” noted William Mateja, a partner with Fish & Richardson, at a recent seminar sponsored by the Washington Legal Foundation. “On top of that [it] can select who the independent monitor is [and] ... the government can ask for certain employees to be terminated, for the board of directors to be reconstituted—[things it] might not be able [to get] within the court process and [with a] court making the decision.”
Waiving Privileges
But agreements to defer prosecution are not without consequences for corporations, which usually have to agree to certain statements of fact and perhaps even an apology—in addition to paying any penalty and agreeing to other conditions—in order to duck criminal prosecution. Statements made in a deferred prosecution agreement could be used against the company in a subsequent securities suit.
Coffee, at Columbia Law, notes that settlements with the SEC don’t have the same kind of risk because they don’t involve any admission of wrongdoing, but that the DOJ often demands more. That was the case at KPMG, which was forced to express “deep regret” on June 16 in an apparent effort to avoid criminal prosecution over the creation and sale of tax shelters that the government contends cheated the U.S. Treasury out of billions in tax revenue.
In the case of Bristol Myers Squibb, the company settled first with the Securities and Exchange Commission and with private securities plaintiffs before settling with federal prosecutors. “That’s a valid and good technique if you can do it,” says Savarese at Wachtell. “The fact that there was going to be an admission, effectively, as part of the deferred prosecution agreement isn’t going to cause much downside [for BMS]. If you can, try to achieve a global resolution, getting all of your problems resolved at the same time, or at least sequence them as [BMS did] so the consequences are known to you when you enter into it.”
Another downside to deferred prosecution agreements is that companies are usually required to waive attorney-client and attorney work-product privileges as part of their agreement to cooperate with efforts to go after individual employees. As a result, emails and other sensitive documents released to prosecutors could become available to private plaintiffs. “If the government had to subpoena [these documents] it might take years,” says Coffee. By getting them voluntarily, prosecutors “get a roadmap of who is saying what to whom.” And a lot of it is privileged information that wouldn’t be available at all in litigation, he notes.
Although both the DOJ and the SEC have taken the position that companies should be able to limit any waivers of privilege to the government proceedings and that the information should continue to be confidential with respect to third parties, “most federal circuit courts of appeal have flatly rejected that argument,” Savarese says.
Sklaire
Companies contemplating entering into a deferred prosecution agreement should try to negotiate a more limited waiver, Michael Sklaire, of Womble Carlyle Sandridge & Rice in Washington, D.C., told the recent Washington Legal Foundation forum. “[Try to get it] limited to the extent necessary so the government can prosecute the individuals and so you’re not overly disclosing these materials,” he said.
Because of waiver issues, companies should consider whether note-taking and formal written reports are necessary in internal investigations, adds Sklaire. “Always keep your eye on the ball that this information may be disclosed down the line, either to the government as part of [a deferred prosecution] agreement or to civil litigants. Separate factual findings from the legal opinions [so] you can make an argument [later] why these legal opinions should remain privileged.”
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