Deferred Prosecution Agreements and the Individual

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The first SEC deferred-prosecution agreement for an individual raises a couple of issues.  Here is the document itself:  SEC DPA With Herckis

First, a reminder.  A “deferred prosecution agreement” is what its name implies.  It’s an agreement between a company (and now, an individual) that puts off — for good, hopefully — prosecution on the condition that the defendant/respondent complete a certain course of action laid out in the agreement (for example, hiring an independent corporate monitor or auditor who will report to the government).

Second, there is guidance on DPAs in the United States Attorney’s Manual.  Review the 2010 Grindler Memorandum, which is an amendment to the 2008 Morford Memorandum.  The Morford Memorandum focuses on selection criteria for a corporate monitor.  From the introduction:

The Department of Justice’s commitment to deterring and preventing corporate crime remains a high priority. The Principles of Federal Prosecution of Business Organizations set forth guidance to federal prosecutors regarding charges against corporations. A careful consideration of those principles and the facts in a given case may result in a decision to negotiate an agreement to resolve a criminal case against a corporation without a formal conviction—either a deferred prosecution agreement or a non-prosecution agreement. As part of some negotiated corporate agreements, there have been provisions pertaining to an independent corporate monitor. The corporation benefits from expertise in the area of corporate compliance from an independent third party. The corporation, its shareholders, employees and the public at large then benefit from reduced recidivism of corporate crime and the protection of the integrity of the marketplace.

The purpose of this memorandum is to present a series of principles for drafting provisions pertaining to the use of monitors in connection with deferred prosecution and non- prosecution agreements (hereafter referred to collectively as “agreements”) with corporations. Given the varying facts and circumstances of each case—where different industries, corporate size and structure, and other considerations may be at issue—any guidance regarding monitors must be practical and flexible. This guidance is limited to monitors, and does not apply to third parties, whatever their titles, retained to act as receivers, trustees, or perform other functions.

A monitor’s primary responsibility is to assess and monitor a corporation’s compliance with the terms of the agreement specifically designed to address and reduce the risk of recurrence of the corporation’s misconduct, and not to further punitive goals. A monitor should only be used where appropriate given the facts and circumstances of a particular matter. For example, it may be appropriate to use a monitor where a company does not have an effective internal compliance program, or where it needs to establish necessary internal controls. Conversely, in a situation where a company has ceased operations in the area where the criminal misconduct occurred, a monitor may not be necessary.In negotiating agreements with corporations, prosecutors should be mindful of both: (1) the potential benefits that employing a monitor may have for the corporation and the public, and (2) the cost of a monitor and its impact on the operations of a corporation. Prosecutors shall, at a minimum, notify the appropriate United States Attorney or Department Component Head prior to the execution of an agreement that includes a corporate monitor. The appropriate United States Attorney or Department Component Head shall, in turn, provide a copy of the agreement to the Assistant Attorney General for the Criminal Division at a reasonable time after it has been executed. The Assistant Attorney General for the Criminal Division shall maintain a record of all such agreements.

 

Gavel and cash

Third, in general, DPAs are workable ( Podgor, Deferred Prosecution Agreements – Definitely A Plus ) but  they can be wildly expensive for defendants/respondents because the Government has the whip hand, usually (Washington Legal Foundation, Deferred Prosecution and Non-Prosecution Agreements).

 

Monopoly

Fourth, it will be fascinating to watch the development (or not) of DPAs for individuals.  For the Government, of course, the motherlode in an individual’s DPA will be the value of his or her cooperation (in Herckis’s case, for five years).  The Government gets to avoid the risk of trial; locks the individual into an acceptance of responsibility and a statement of facts; and gets his cooperation in “related” proceedings.

 


From our friends at the White Collar Crime Prof Blog

Quick collection of white-collar news from the   White Collar Crime Prof Blog:

Mark Hamblett & Sara Randazzo, The AmLaw Daily, Ex-Kirkland Partner Sentenced to One Year For Tax  Fraud

George J. Terwilliger III, National Law Journal, Walking a Tightrope in White-Collar Investigations

AP, Las Vegas Sun, Ex-Akamai exec barred for 5 years in SEC case; Bob Van Voris, Bloomberg, Ex-Akamai Executive Settles SEC Suit Over Rajaratnam Tips

Nate Raymond, Reuters, Baltimore Sun, U.S. prosecutor cautions against white-collar sentencing revamp

Jennifer Koons, Main Justice, Former Enron Prosecutor Tapped to Head Criminal Division

Zachery Fagenson, Reuters, Ex-Bolivian anti-corruption official denied bail in Miami extortion case



SEC Goes To Bat For Misled Compliance Officer

From The Wall Street Journal Risk & Compliance blog (and Samuel Rubenfeld @srubenfeld):  Good news for corporate compliance officers whose officers or employees lie to them or mislead them:  SEC Stands Up For Compliance Officers 

The Securities and Exchange Commission took the side of compliance officers — after a Colorado-based investment adviser was caught lying to one.

 

Earlier this week, the SEC said its own probe found that Carl Johns, an investment adviser in Louisville, Colo., concealed several hundred trades in his personal accounts after failing to report them by altering brokerage statements and other documents. He later created false documents that purported to be pre-trade approvals, and misled his firm’s chief compliance officer in her investigation into the trading.

 

Mr. Johns agreed to pay more than $350,000 and be barred from the securities industry for at least five years, the SEC said. The case is the SEC’s first made under a rule of the Investment Company Act that prohibits misleading and obstructing a chief compliance officer.

 

“Compliance officers should be happy that this case was brought because it will help them fulfill their duties,” said Stephen M. Quinlivan, a shareholder of law firm Leonard Street and Dainard. “If people do lie to them, the SEC’s not going to stand for it.”

 

Mr. Quinlivan said he believes that the SEC has generally stepped up its examinations of investment advisers, particularly when it comes to hedge funds and private equity.

 

If a good compliance officer is being lied to, the SEC “could certainly” bring a similar case, Mr. Quinlivan said.

 

Of course, if you’re a compliance officer and the SEC thinks you’re the one lying or misleading — or just being willingly duped — that’s another problem.


New DOJ Cases From the Financial Crisis? Look For This Criminal/Civil Hybrid

A good summary by Peter Henning, here —   DOJ Financial Crisis Cases?  — about possible future cases arising from the financial crisis and the Government’s use of a FIRREA provision.  In part:

But pursuing criminal cases from the financial crisis gets increasingly difficult, especially against individuals, because unlike a good bottle of wine, evidence does not age well. Memories dim and the chance of finding the “smoking gun” e-mail or recording that can help implicate a defendant in a fraudulent scheme becomes less likely with the passage of time.

Mr. Holder will more likely pursue charges under a civil statute that has become the Justice Department’s favorite tool of late against banks: 12 U.S.C. 1833a. The statute provides for civil penalties for violations “affecting a financial institution” of up to $5.5 million or the amount the defendant gained from the misconduct.

Congress enacted this provision in 1989 during the savings and loan crisis as part of the Financial Institutions Reform, Recovery and Enforcement Act to give prosecutors another tool to pursue cases involving fraud and other misconduct at banks.

The law is a hybrid: it requires prosecutors to establish that criminal conduct occurred while using the lower civil burden of proof to establish the violation. That makes it easier for the Justice Department to make its case and can even allow a court to make a favorable ruling based solely on written evidence without a trial.

Section 1833a contains other favorable measures for the government. The law extended the statute of limitations for a host of banking crimes to 10 years from the usual 5-year period, so the Justice Department faces little time pressure in pursuing cases involving the mortgage market during the lead up to the financial crisis.

The statute only requires that the violation affect a financial institution, a term that has been broadly construed in recent district court decisions. Last week, Judge Jed S. Rakoff of Federal District Court in Manhattan rejected a challenge by Bank of America to a lawsuit involving the sale of faulty mortgages by its Countrywide Financial subsidiary. He found that the financial institution affected by the fraud could be Bank of America itself, so that even a self-inflicted wound could be the basis for pursuing a civil penalty action.

 




A Prosecutorial Campaign In The Media

Mr. Bharara’s comments are measured, but a prosecutorial campaign in the media is always disquieting (as a defendant’s media campaign can be troubling): Prosecutor Hits The Media Trail.  And, although it’s true that “sometimes it’s the case that conduct is so pervasive and there’s so much that shouldn’t be going on that is going on, that the only way that justice can be done is by indicting the entire institution,” very few American businesses — even those with some very bad apples —are actually run as criminal enterprises.  Rather, the threat of a company indictment is often simply a tool to achieve other prosecutorial ends.