Nobody ever wants to end up sitting across the table from federal prosecutors. But if the worst happens, here’s what compliance officers and corporate counselors need to know about how charging decisions are made when corporate wrongdoing occurs, straight from current and former law enforcement officials.
Current and former federal prosecutors speaking at Compliance Week’s annual conference gave compliance officers the inside scoop during a June 4 panel discussion on corporate charging decisions.
While resolution of a dispute always hinges on a company’s particular facts and circumstance, Steven Tyrrell, chief of the fraud section of the Department of Justice’s Criminal Division, said prosecutors consider a set nine factors to determine “where along that lesser spectrum a particular case should be resolved.” Those factors are spelled out in an August 2008 Justice Department memo to U.S. attorneys, formally known as the Principles of Federal Prosecution of Business Organizations.
The worst possible outcome for a corporation is a criminal indictment, as was imposed against Arthur Andersen in 2002 for its role in the Enron scandal. An indictment usually brings a swift demise to a business (Andersen folded within months)—therefore, since that landmark enforcement, the Justice Department has instead tried to steer investigations to end in deferred prosecution agreements (DPAs) or non-prosecution agreements (NPAs).
The revised 2008 guidelines, which evolved over the years from the department’s 1999 Holder Memo, were incorporated for the first time last year into the U.S. attorney’s manual, which makes them binding on all federal prosecutors.
For example, Tyrrell said, “If a company has a strong pre-existing compliance program and is taking remedial measures that seemed measured and appropriate for the particular set of circumstances, that can, in certain instances, mean the difference between an NPA and a DPA.”
Steven Tyrrell, left, of the Justice Department talks shop at Compliance Week 2009. At right is Larry Finder, former U.S. attorney and now partner at Haynes Boone.
Tyrrell said the agreements help the Justice Department achieve the “objectives of sentencing,” such as restitution for victims, specific and general deterrence, and reforms such as improved compliance.
Likewise, Ryan McConnell, an assistant U.S. attorney in Houston, said DPAs and NPAs give prosecutors “a good vehicle … outside the context of a full-blown criminal prosecution to get a company to cooperate and figure out who the wrongdoer is.”
The distinction between deferred and non-prosecution agreements is pivotal: DPAs include the filing of a criminal charge in federal district court; NPAs don’t. Under a DPA, if the company complies with all provisions of the agreement, the criminal charge is later dismissed.
While Tyrrell expects DPAs and NPAs “will continue to be used,” he noted statistical evidence—compiled by McConnell; Larry Finder, a former U.S. attorney and now partner at the law firm Haynes & Boone; and Open Compliance & Ethics Group CEO Scott Mitchell—that showed that the combined number of those agreements dropped from 40 in 2007 to 16 in 2008.
“That trend may continue,” Tyrrell said. “But I don’t think that’s necessarily because of a conscious decision on the part of the department or prosecutors around the country. I think in part it’s due to the fact that companies are doing a much better job policing themselves.”
Parsing Out the Provisions
Finder noted that in recent years, the vast majority of DPAs and NPAs have included reforms to compliance programs, and many required outside compliance monitors. Overall, he said, 77 percent of pretrial agreements from 2006 through 2008 included remedial measures—and at most companies under settlement, compliance officers started reporting directly to the CEO or the board.
Monitors, which Finder described as a “relatively new phenomenon,” were part of 52 percent of the agreements entered in 2006, 40 percent in 2007, and 37 percent in 2008.
FACTORS TO BE CONSIDERED
The following excerpt from the Justice Department’s “Principles of Federal Prosecution of Business Organizations” lists some factors to be considered when determining whether or not to charge a corporation:
General Principle: Generally, prosecutors apply the same factors in determining
whether to charge a corporation as they do with respect to individuals. Thus, the prosecutor must weigh all of the factors normally considered in the sound exercise of prosecutorial judgment: the sufficiency of the evidence; the likelihood of success at
trial; the probable deterrent, rehabilitative, and other consequences of conviction; and the
adequacy of non-criminal approaches. However, due to the nature of the corporate
“person,” some additional factors are present. In conducting an investigation, determining
whether to bring charges, and negotiating plea or other agreements, prosecutors should consider the following factors in reaching a decision as to the proper treatment of a corporate target:
1. the nature and seriousness of the offense, including the risk of harm to the public,
and applicable policies and priorities, if any, governing the prosecution of
corporations for particular categories of crime;
2. the pervasiveness of wrongdoing within the corporation, including the complicity
in, or the condoning of, the wrongdoing by corporate management;
3. the corporation’s history of similar misconduct, including prior criminal, civil,
and regulatory enforcement actions against it;
4. the corporation’s timely and voluntary disclosure of wrongdoing and its
willingness to cooperate in the investigation of its agents;
5. the existence and effectiveness of the corporation’s pre-existing compliance
program;
6. the corporation’s remedial actions, including any efforts to implement an effective
corporate compliance program or to improve an existing one, to replace
responsible management, to discipline or terminate wrongdoers, to pay restitution,
and to cooperate with the relevant government agencies;
7. collateral consequences, including whether there is disproportionate harm to
shareholders, pension holders, employees, and others not proven personally
culpable, as well as impact on the public arising from the prosecution;
8. the adequacy of the prosecution of individuals responsible for the corporation’s
malfeasance; and
9. the adequacy of remedies such as civil or regulatory enforcement actions.
Source
DoJ Principles of Federal Prosecution of Businesses (August 2008).
The decisive factors in requiring a monitor, Tyrrell said, include the type and gravity of the wrongdoing, the strength of the company’s compliance program before the wrongdoing was discovered, and subsequent remedial measures taken. Agreements that include monitors “tend to be the agreements that involve the more serious dispositions—guilty pleas or DPAs … and typically involve the most egregious conduct,” he noted.
While the revised Justice Department policy now specifically states that cooperation is measured based on a company’s disclosure of facts, not the waiver of attorney-client or work product privilege, some critics have questioned whether companies will still face subtle pressure to do so. Speaking to the issue, Tyrrell reiterated department policy, but pointed out that “events themselves are not privileged.”
“The fact a company … paid a bribe or cooked its books is not privileged,” even though the company may have discovered those facts in the context of a privileged internal investigation, Tyrrell said.
He did acknowledge that “occasionally the facts blur into an area that involves privilege.” For instance, Tyrrell said, a prosecutor interviewing a corporate officer might ask a question like, “What were you thinking when you did X, Y, and Z, and why?”
“Maybe they were thinking what they were thinking because they were referring to counsel and getting advice,” he said. “So there may be a situation where you can’t disclose the facts without waiving privilege, but we try very hard not to ask questions that lead into that area.”
While the decision to self-report wrongdoing must be made carefully based on the specific circumstances, once a decision to self-report has been made, the prosecutors said companies would be wise to act sooner rather than later; disclosing a problem even if an internal investigation is incomplete will never hurt, they stressed.
“The longer you wait, the greater the risk the government will learn about the circumstances through some other means or sources, and the greater the risk that you won’t get as great a credit for voluntarily disclosing,” Tyrrell said.
“It’s a judgment call whether you want to walk in with full knowledge about the nature, extent, and scope [of the wrongdoing] as opposed to just a slice,” he said. “But I don’t know of any case where we’ve penalized a company for not having all the facts the minute they walked through the door.”
Life Under DPA
While the Justice Department doesn’t track data on the origin of all of its cases, Tyrrell said about 25 percent of its current Foreign Corrupt Practices Act investigations resulted from voluntary disclosures. The remainder comes from the department’s reporting hotline, other investigative agencies, competitors, and cooperators.
Asked by attendees for clues, beyond the U.S. Federal Sentencing Guidelines, about what constitutes an effective compliance program from the department’s view, Tyrrell said the public information on NPAs, DPAs, and DoJ press releases on corporate dispositions “spell out some of the key factors that supported the decision that was made in that particular case.”
Finally, Finder refuted a perception by some critics that a company that gets a DPA or NPA somehow got off easy.
“It’s not a walk in the park,” he said. “It’s serious business, and it’s onerous, and if you screw up, you’ve already admitted everything. The consequences can be dire.” And those with a compliance monitor, he added, have a new silent business partner: the federal government, peering over your shoulder.
Meanwhile, Tyrrell said the high-profile cases involving NPAs and DPAs “don’t necessarily reflect the totality of work the department is doing,” since prosecutions involving closely held private companies aren’t disclosed.
“Congress says we’re going too hard on companies and we’re engaging in legal extortion using DPAs and NPAs and monitors, and a New York Times article said we’re being too lenient and letting companies get away with murder. Given those two extremes I think we probably have it exactly right,” he quipped.
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