Corporate Crime Reporter


Off the Hook: Deferred Prosecution Agreements On the Rise

18 Corporate Crime Reporter 48(1), December 13, 2004

Ten major American corporations settled serious criminal charges with deferred prosecution, no prosecution, or de facto no prosecution agreements over the last two years, according to a report issued last week by Corporate Crime Reporter.

According to the report, deferred prosecution, non-prosecution and de facto non-prosecution agreements have been used in the following cases in the past two years: American International Group, Computer Associates, Invision, Merrill Lynch, AmSouth Bancorp, Health South, PNC Financial Services Corporation, Banco Popular de Puerto Rico, Canadian Imperial Bank of Commerce, and MCI.

Bank of New York is currently seeking a similar deal with prosecutors in Brooklyn.

“Companies are getting off the criminal hook with these agreements, which were originally intended for minor street crimes,” said Russell Mokhiber, editor of Corporate Crime Reporter. "Now they are being used in very serious corporate crime cases. If a crime has been committed – and there is little doubt that crimes have been committed by the corporations in these cases – then the companies should plead guilty and pay the penalty. If prosecutors want to impose change on the corporation, they can do this after securing a conviction through probationary orders. Right now, corporate lawyers are teaming up with prosecutors to go after individual executives while the company’s record is wiped clean.”

In a deferred prosecution, the corporation accepts responsibility, agrees not to contest the charges, agrees to cooperate, usually pays a fine and implements changes in corporate structure and governance to prevent future wrongdoing.

If the company abides by the agreement for a period of time – usually two years – then the prosecutors will drop the criminal charges.

In a non-prosecution agreement – like the one secured by Merrill Lynch’s in 2003 with New York Attorney General Eliot Spitzer – prosecutors agree not to bring criminal charges in exchange for corporate fines, cooperation, and a change in corporate structure and governance.

University of Connecticut Law Professor Leonard Orland points to what he calls a third type – the de facto non-cooperation agreement – like in the HealthSouth case.

“More than a dozen former executives of HealthSouth have been indicted and pled guilty,” said Professor Orland.“The former CEO of HealthSouth, Richard Scrushy, is currently under indictment facing trial. HealthSouth has not been indicted. There is no agreement between HealthSouth and the government, no non-prosecution agreement, no deferred prosecution agreement. But it appears likely that the corporation itself will not be indicted.”

Orland believes that the recent surge in these kinds of agreements is the result of the fallout from the prosecution of Arthur Andersen, which was convicted of crimes in 2002 and subsequently went out of business.

“In the last analysis, the messages of the deferred prosecution and non prosecution cases, coupled with the indictment, conviction and corporate death of Andersen is clear,” Orland said. “Corporations faced with serious wrongdoing by corporate executives must promptly accept full responsibility, discipline wrongdoers, institute serious institutional reform and fully cooperate with the government. If they do, they may escape institutional indictment. If they do not, they face the risk of indictment, conviction, and corporate death.”

Orland calls the Andersen case “an instance of failed deferred prosecution.”

“Andersen had a long history of prior misconduct,” Orland said. “Indeed, it was on probation and subject to SEC orders for prior misconduct. None of the other corporations that received deferred prosecution agreements had a prior criminal conviction. And no corporation can escape indictment unless it fully accepts responsibility and cooperates with the government in the prosecution of former corporate executives. Andersen, with a loosely structured leadership, and no one clearly in charge, was not prepared to promptly accept responsibility and cooperate with the government and agree to organizational reform. In the last analysis, that's why Arthur Andersen went down. A corporation cannot receive the benefit of deferred or non-prosecution without acceptance of responsibility.” (See Interview, page 13)

F. Joseph Warin, a partner at Gibson Dunn in Washington, D.C., and author of a law review article on the subject, agrees that the upsurge in these agreements is due to “more awareness at the Department of Justice of the consequences of a conviction against major corporations.”

Warin says that the 2003 Thompson memo – Principles of Federal Prosecution of Business Organizations – “gives a template that leads to deferred agreements.”

And he says that the current head of the criminal division at Justice, James Comey, “has often talked about the collateral consequences of corporate criminal behavior victimizing innocent people.”

Win Swenson, of the Compliance Systems Legal Group, said that while there was a time and place for such deferred prosecution agreements, “there seems to be a bias that convicting the individuals is more important than convicting the company.”

And Warin says that the roadmap to get to the safe harbor of a deferred prosecution agreement is to“give full cooperation, waive the attorney client privilege, isolate the management involved, and ultimately throw them out.”

Prior to the recent spate of agreements, it was rare to see federal prosecutors enter into such agreements with major corporations.

Two stand out: The 1994 case of Prudential Securities, in which the U.S. Attorney, Mary Jo White cut a deferred prosecution deal under which Prudential – accused of fraudulent marketing of limited partnerships – put a former federal judge on the board of directors of Prudential. That judge reported directly to the prosecutor.

And the 1992 de facto non-prosecution agreement between U.S. Attorney Otto Obermaier and Salomon Brothers, in which Salomon paid $290 million to settle allegations of misconduct in connection with the purchase and sale of Treasury notes.

“While the alleged violations were serious, we believe that the combination of punishments is adequate, and there is no need for invoking the criminal process,” Obermaier said at the time. “Salomon’s cooperation has been exemplary. Such actions are virtually unprecedented in my experience.”


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