Hopes for More Clarity in Deferred Prosecution Deals

Deferred prosecution agreements were the hip new accessory for companies under investigation during the Bush Administration. Now they may become fashionable on a permanent basis.

Experts say the use of deferred and non-prosecution agreements—which has soared in the last five years—isn’t likely to recede any time soon. Indeed, recent scrutiny of DPAs and NPAs, along with subsequent guidance on how they should be implemented, should give companies and the legal department a welcomed sense of predictability to the process.

Warin

“We’re seeing more predictability in the duration and uniformity of terms, particularly related to issues of cooperation and waiver of attorney-client privilege,” says Joseph Warin, a partner at the law firm Gibson Dunn & Crutcher who also serves as a corporate compliance monitor.

In a DPA, the Justice Department typically files charges against a corporation, but agrees to dismiss them after a specified period so long as the company doesn’t breach the agreement. In exchange, the company usually accepts responsibility for wrongdoing, pays any fines or other restitution, and agrees to take other remedial measures that might be necessary. NPAs are generally less detailed and don’t involve the filing of charges, but otherwise work on the same principles.

DPAs and NPAs have been around for more than 15 years, but only since the 2003 indictment of Enron auditor Arthur Andersen (and its almost immediate subsequent collapse) have they become popular—largely because other companies want to avoid Andersen’s fate.

Since Andersen’s death, use of DPAs and NPAs has jumped from a reported six in 2003 to a stunning 37 in 2007, according to data tracked by Gibson Dunn & Crutcher.

Henning

The numbers dropped to only 17 agreements last year, but, “It’s clear that deferred prosecution agreements are here to stay,” says Peter Henning, a professor at Wayne State University Law School.

That said, two high-profile settlements in 2008 did bring scrutiny from Washington lawmakers and forced the Justice Department to publish new guidance on how DPAs and NPAs should be structured. In one case, a former U.S. attorney general was chosen as a corporate compliance monitor as part of a DPA; in the other, a company agreed to endow an ethics chair at the prosecutor’s alma mater as part of a deal to avoid indictment.

2008 DOJ DPAS

Department of Justice Deferred Prosecution Agreements from 2008:

Allegations

Percent of DPAs

False Claims Act

6%

Accounting Irregularities

12%

Corrupt Sales Practices

6%

Internet Gambling

6%

Immigration Fraud

18%

Money Laundering

12%

FCPA

40%

Source

Gibson, Dunn Alert: Allegations 2008 (Jan. 6, 2009).

Congressional heat from those controversies spurred the Justice Department to publish a series of guidance documents: first the Morford Memo, spelling out the principles federal prosecutors must follow in selecting and using compliance monitors; and then the Filip Memo, revising the department’s policies regarding a corporation’s cooperation and waiver of attorney-client and work-product privilege.

Better Predictability

At least some observers say those developments have helped bring predictability to negotiation of DPA agreements.

Tween

“The atmosphere has changed,” says Doug Tween, a partner with the law firm Baker & McKenzie and a former federal prosecutor. “There’s more clarity.” Tween, who recently helped IFCO Systems negotiate a settlement over immigration violations, says the guidance gave the company “a good sense of some of the remedial actions that the government has looked for in other cases.”

Warin says the slowdown in 2008 may have been partly the result of “more judicious use of DPAs” by prosecutors as they awaited the new guidance and the revisions in the Filip Memo, or it could simply have been the result of “the normal ups-and-downs of corporate investigations and prosecutions.”

Regardless, he and others don’t expect the downturn to continue in 2009.

“I expect to see at least as many DPAs and NPAs in 2009 as there were in 2008,” Warin says.

GREATEST HITS IN 2008

Below are some of the largest deferred- and non-prosecution agreements of 2008, ranked by settlement costs.

Corporation:

Violation:

Penalty:

Milberg Weiss

Kickbacks, Money Laundering

$75 M

Willbros Group

FCPA

$32.3 M

Lawson Products

Mail Fraud

$30 M

IFCO Systems

Immigration

$29.7 M

Sigue Corp.

Money Laundering

$15 M

Flowserve

Wire Fraud & FCPA

$10.5 M

ESI

Wire Fraud (Online Gambling)

$9.1 M

Fine Host

False Claims Act

$7.8 M

American Italian

Pasta

Fraud (Inflated Earnings)

$7.5 M

AB Volvo

Wire Fraud & FCPA

$7 M

Fiat

Wire Fraud & FCPA

$7 M

Source

Gibson, Dunn Alert: Allegations 2008 (Jan. 6, 2009).

In addition to continued strong enforcement, experts say a large number of open investigations—particularly into violations of the Foreign Corrupt Practices Act—are likely to be resolved in the coming year.

McNulty

“I think we will continue to see large numbers of these agreements for two reasons,” says Paul McNulty, former U.S. deputy attorney general and now a partner at Baker & McKenzie. First, enforcement will remain vigorous. Second, businesses are doing more compliance and remediation work to prevent wrongdoing, and are responding to violations with rigorous internal investigations.

“It will be increasingly more difficult for the government to justify criminal charges against companies with strong compliance programs and credible remediation efforts,” McNulty says. “DPAs and NPAs are the logical alternative.”

Warin also notes that most settlements announced before the Filip Memo explicitly allow prosecutors to consider a company’s decision to withhold information based on the attorney-client or the attorney work-product privileges when deciding whether a company is cooperative. No agreements signed after the memo contain that language, which is likely to make DPAs and NPAs all the more attractive to companies looking to settle. And most other provisions—covering points like requiring cooperation or binding successors to the settlement if the company is sold—seem to be adopting uniform language.

Still, Warin and others say more guidance is needed on the circumstances under which a company can get an agreement, which type of agreement it gets, and the terms it must meet.

Dickinson

Timothy Dickinson, a partner in the law firm Paul, Hastings, Janofsky & Walker, says clarity is particularly needed on the differences between DPAs and NPAs.

Justice Department guidance “has been helpful” so far, says Dickinson, who served as a corporate monitor for Monsanto. But companies and their counsel still want a better understanding of how the government will respond to corporate self-policing.

“Companies need to see the benefits they gain by cooperating and implementing, executing, and investing in compliance programs, or the benefits will not be seen to outweigh the costs,” he says.

Likewise, McNulty wants to see more consistency in giving credit to corporations for compliance efforts. Without more uniform and positive recognition by prosecutors of compliance programs, businesses will become less willing to make the necessary sacrifices for having strong compliance, he says.

Dickinson laments the lack of guidance about DPAs and NPAs from other agencies, especially the Securities and Exchange Commission. With guidance from the Justice Department only, he says, “companies can still get dispositions that have conflicting monitor terms,” he says.

In addition, now that companies and prosecutors have several years’ experience with corporate compliance monitors, Dickinson says the current standard terms for monitors should be reviewed to ensure that they meet the “proper balance of what law enforcement is trying to achieve and the intrusion that a monitorship imposes.”