CORPORATE CRIME REPORTER
Davis
Polk’s Scott Muller on the Rise of Corporate Deferred Prosecutions
24 Corporate Crime Reporter 37, September 27, 2010
For years, we’ve been looking for the father of corporate deferred prosecutions.
And last week, we found him.
Meet Scott Muller, a partner at Davis Polk in New York.
We asked Muller for an interview on the Foreign Corrupt Practices Act (FCPA) – one of his specialties.
But in preparing for the interview with Muller, we noticed this line from his bio:
“He pioneered the use of the corporate deferred prosecution to resolve a federal criminal investigation.”
How so?
“In 1991, I was representing, with my partner, Carey Dunne, Prudential Securities in a series of cases involving the alleged fraudulent sale of over $3 billion in limited partnerships,” Muller told Corporate Crime Reporter in an interview last week.
“One of those sets of limited partnership deals became the subject of a criminal investigation in the Southern District of New York when Mary Jo White was U.S. Attorney.”
“It became apparent after a lot of discussion with the U.S. Attorney that there was a significant risk that they were going to charge Prudential Securities. And because of the unfortunate history of what had happened to securities firms that had been charged with criminal offenses – EF Hutton being the most prominent example at the time – we were very concerned about what impact it would have on Prudential Securities.”
“In that context, we were trying to come up with a concept of how we could give the U.S. government the relief they were seeking while avoiding a criminal conviction and trying to avoid the collateral consequences that came from it.”
“And literally, while riding in an elevator in my firm, it occurred to me that maybe what we should do for corporations is what, as prosecutors, we had done for individuals – and that is enter into deferred prosecution agreements.”
“And we proposed it to the U.S. Attorney’s office and they accepted it.”
Was Prudential Securities the first major deferred prosecution agreement that you knew of?
“I had never heard of one before. And as far as I’m aware, it’s the first ever.”
So, just by happenstance, we came across the father of the corporate deferred prosecution agreement?
“I guess that’s right.”
Why did deferred prosecution agreements take off post Arthur Andersen?
“They certainly took off in the FCPA context. There were a number of them before Arthur Andersen.”
“The main advantage of a deferred prosecution agreement from the defendant’s point of view, and the reason it was created in the first place, was to avoid a ‘conviction.’”
“There are specific collateral consequences that arise from a conviction, particularly these days with respect to a conviction for bribery.”
“From a company’s point of view, you avoid both the stigma of a conviction and the legal consequences of a conviction as well.”
“From the government’s point of view, the government can achieve all or virtually all of what it would achieve with a court conviction.”
“It can get a monitorship, or whatever other sort of probationary type relief it wants. And it can get a fine or the functional equivalent.”
“There is an issue with respect to corporate deferred prosecutions. The whole process can take place outside of the court system. And there has always been in my mind a theoretical issue – does the executive branch have the authority to enter into contractual arrangements short of actually utilizing the statutes? That’s an issue for another day.”
From a public policy point of view, don’t you think you lose something, you lose the deterrent effect, the stigma, but don’t gain a conviction?
“While it’s true that you don’t gain the conviction, you gain all of the relief and deterrent effect that you would get. And you achieve it in cases that otherwise could not be brought, or if they could be brought, would have to result in trials.”
“One could argue on the other side that the deferred prosecution has resulted in more cases being brought than would have been brought if charging and conviction were the only alternative.”
“That increases the arsenal of tools at the government’s disposal. The government can always, if it wishes, bring a case and insist on conviction. But now it has an alternative short of dropping the case.”
Corporate deferred prosecutions seemed to have the effect of splitting off the executives from the companies. Companies would cooperate and turn on the executives. Is that the way the dynamic played out?
“Yes and no,” Muller said. “I would not tie it to the deferred prosecution agreements.”
“You remember the Salomon Brothers auction rate cases? It was the mid 1980s. As I recall, Warren Buffett had just become a majority shareholder. And Salomon Brothers responded to the allegations of wrongdoing by deciding to conduct an internal investigation and to volunteer the results of that investigation to the U.S. Attorney’s office in the Southern District.”
“As a result of that action, Salomon Brothers was not prosecuted.”
A non prosecution agreement?
“As I recall it, there was not then such a thing as a non prosecution agreement. They were just not prosecuted. My recollection is that the first corporate non prosecution agreement was either just before or just after the Prudential Securities deferred prosecution agreement.”
“In those days, they weren’t regularly entered into. The decision was simply made not to prosecute.”
“But there was a press release out of the Southern District explaining why Salomon was not going to be prosecuted.”
“Prior to Salomon, EF Hutton was prosecuted with over 2,000 counts of mail fraud and had gone down the tubes. So, there was a real concern about prosecuting financial institutions.”
“So, it was no accident that the original non prosecution and deferred prosecution agreements were in the financial area.”
[For
a complete transcript of the Interview with Scott Muller, see 24 Corporate Crime
Reporter 37(12), September 27, 2010, print edition only.]
Corporate
Crime Reporter
1209 National Press Bldg.
Washington, D.C. 20045