Lanny A. Breuer, the head of the Justice Department's Criminal Division, last week spoke to the New York City Bar Association, extolling the virtues of deferred and nonprosecution agreements as the new standard for how the Justice Department deals with criminal conduct by corporations.
It is not just corporate investigations that are being concluded with these agreements. They have been used recently with individuals to resolve investigations, like the recent agreement with the cyclist Floyd Landis over possible fraud charges. The Securities and Exchange Commission has also embraced them as a means to wrap up civil securities fraud cases.
But are these agreements all they are cracked up to be as an enforcement tool? Or do they let corporations off too easily? Like anything in the world of white-collar crime, there are good reasons to use them, but questions remain about whether they should be the norm for policing corporate misconduct.
Deferred and nonp rosecution agreements are contracts with the government in which a company (or individual) undertakes specified actions in exchange for charges being dismissed or not filed altogether. The terms usually require payment of a fine, continued cooperation with any investigations or trials and a commitment to enhance internal controls. If the agreement is breached, the agreement typically permits prosecutors to restart the case and use any admissions by the company in the a subsequent proceeding.
A significant advantage to these agreements is that there is no judicial involvement, so the Justice Department does not have to worry about a judge second-guessing its terms or questioning the fairness of the resolution.
Mr. Breuer stated that the growing use of these agreements had meant âunequivocally, far greater accountability for corporate wrongdoing â" and a sea change in corporate compliance efforts.â He pointed to the recent agreement with Barclays over manip ulation of the London interbank offered rate, or Libor, as an example of how companies pay a heavy price when the settle, citing the replacement of the bank's top management.
But a close look at the Barclays settlement does not show the Justice Department being as tough as advertised. The only discussion of the involvement of senior managers is buried in the press release with a bland reference that âmembers of Barclays management directed that Barclays's Dollar Libor submissions be lowered.â
There was no specific mention of the former chief executive, Robert E. Diamond Jr., or the chief operating officer, Jerry del Missier, who lost their positions only after significant pressure from the British Parliament, not the Justice Department.
The promised accountability from the agreements does not always mean companies will be completely reformed. James B. Stewart of The New York Times, in a column in July, discussed multiple settlements by the Swiss bank UBS with the government for violations, including receiving immunity in the Libor investigation, which seem âto have had scant, if any, deterrent effect.â
Deferring charges is nothing new in the criminal justice system. Many drug- and alcohol-related prosecutions of first-time offenders permit the dismissal of a case when the person completes treatment. The juvenile justice system often uses diversion programs to allow offenders to avoid punishment through education and counseling.
The pivotal event in the rise of deferred and nonprosecution agreements in the corporate context was the demise of accounting firm Arthur Andersen, whose conviction for obstruction of justice in 2002 was later reversed by the Supreme Court. Thousands of employees lost their jobs because of conduct in firm's Houston office related to its auditing work on behalf of Enron.
Mr. Breuer acknowledged that he had heard, and responded to, companies bemoaning the potential effects of a criminal prosecution on innocent employees and financial markets â" the specter of Arthur Andersen. He frankly acknowledged that âSometimes â" though, let me stress, not always â" these presentations are compelling.â
Companies facing potential criminal charges know they need to argue that a criminal conviction would be just this side of Armageddon, making sure to highlight the threat of lost jobs and economic turmoil to persuade prosecutors to give a deferred or nonprosecution agreement.
And those arguments certainly seem to work for publicly traded companies. This year, there have been 20 deferred and nonprosecution agreements so far, and over 150 since 2007.
Mr. Breuer is certainly right when he points out that criminal charges are not a very useful means of regulating corporations, so that prosecutors âsometimes had to use a sledgehammer to crack a nut. More often, they just walked away.â
Deferred and nonprosecution agreements al low for a more nuanced approach that extracts a penalty and imposes conditions on a company that are similar to the punishment it would receive from a conviction, but without all of the collateral consequences.
But use of the âsledgehammerâ seems to have largely disappeared, so that a full-scale prosecution of a large corporation is at best a rarity. The banks caught up in the Libor investigation can certainly expect to settle with the Justice Department and other regulators, using the Barclays agreement as the template for resolving the case.
It seems as if we are coming perilously close to cookie-cutter justice in corporate criminal investigations. Everyone by now knows the drill: turn over the results of an internal investigation, highlight how damaging a conviction would be and then offer to pay the fine and put in place an enhanced compliance program. The press release almost writes itself, but it is the rare case in which senior management pays any p rice.
Deferred and nonprosecution agreements are here to stay because they give the Justice Department a means to police corporations while mitigating the full impact of the criminal law. They occupy a middle ground between the sledgehammer of criminal charges and giving a company a free pass. Whether they are the unalloyed good that Mr. Breuer portrayed them as is another question.