Are DPAs Morally Suspect?

You know it is going to be a bad day when you are excoriated in public by a sitting federal district judge. It is even worse when the comments of that federal judge make it into one of the most prominent international business dailies around; the UK based Financial Times (FT). Both of the events occurred this week when US District Judge Jed Rakoff spoke to the New York City Bar Association with his thoughts on the use of Deferred Prosecution Agreements (DPAs) by the Department of Justice (DOJ) to resolve criminal matters involving corporations and his speech was reported by Kara Scannell for the FT in an article entitled “Judge says DOJ agreements are ‘morally suspect’”.

As usual Judge Rakoff pulled no punches when he declared that the DOJ’s “Use of deferred prosecution agreements to resolve criminal investigations without holding individuals accountable is technically and morally suspect.” This criticism was levelled as the “DOJ has signaled to leading banks that it will bring civil charges against them for allegedly mis-selling mortgage backed securities in the lead-up to the financial crisis.” Judge Rakoff noted that the DOJ has “not prosecuted any top Wall Street executive in relation to the financial crisis but has struck deals with companies using deferred prosecution agreement over sanction violations and money laundering without charging any individuals.” Judge Rakoff said that if prosecutors can prove a company violated laws “but do not charge individuals then its application is technically suspect.” He then went on to add that it is “morally suspect because a company is made up of sometimes hundreds of innocent employees.” But Judge Rakoff had further criticisms. He charged that DOJ prosecutors no longer have the “experience or resolve” to pursue individuals and that the current DOJ tactic of only going after individuals is “not the best way to proceed.” Pretty strong words, indeed.

This is not the first time that Judge Rakoff leveled charges at regulators for what he believed were practices “which fell short of legal standards.” Indeed, Judge Rakoff was particularly critical about the shift from the criminal prosecution of individuals to the use of DPAs to allow corporations to settle matters as he charged this change “has led to lax and dubious behaviour on the part of prosecutors.” There was much commentary when the Judge “challenged several Securities and Exchange Commission [SEC] deals that allowed companies and individuals to settle civil fraud charges while not admitting or denying wrongdoing.” These comments and court cases (apparently) led the SEC to change its policy and begin to “require admissions in certain cases that were in the public interest.” Scannell’s article concluded by noting that Judge Rakoff’s dismissed the DOJ claims that “it is hard to prove criminal wrong-doing in the packaging of mortgage-backed securities and that charging entities could have a negative effect on the national economy” as simply “excuses”.

The article on Judge Rakoff’s comments indicated that they were only concerning criminal prosecutions against Wall Street executives. But his comments eerily parallel some of the ongoing debate about the use of DPAs in the Foreign Corrupt Practices Act (FCPA) context. The FCPA Professor has consistently criticized both the use of DPAs and lack of individual prosecutions under the FCPA by the DOJ. He has also said that he believes that the DOJ have become “uncomfortable with traditional notions of corporate criminal liability”. Another commentator, David Uhlmann, has agreed with this notion by the FCPA Professor when stating, “This is about a profound ambivalence in parts of the Department about the very notion of corporate criminality.” Yet another commentator, Anthony Barkow, has said that “getting DPAs and NPAs is easy. It’s a lot easier than charging a company.”

Whether they were answering any of these criticisms or not, I think that the DOJ has certainly made clear that it will prosecute individuals who engage in FCPA violation. I agree with Mike Volkov that 2013 may well go down as “Year of the Individual Prosecution” in the FCPA context. Last spring saw prosecutions against individuals from BizJet, BSGR, Willbros and Alstom. This summer there were prosecutions against individuals in the Direct Access Partners (DAP) matter and only this fall was a prosecution against an individual involved in the Maxwell Technology matter. Based on this, at least in the FCPA context, I would have to say that the DOJ has and will continue to prosecute individuals in the context of foreign bribery.

Additionally, in the area of other types of securities fraud cases, the DOJ has very recently shown that it will aggressively pursue companies for criminal sanctions. Recently SAC Capital pled guilty to criminal fraud charges for insider trading and criminal wire fraud. There was a hefty fine of $1.8bn for this conduct.

Interestingly this week the SEC announced that it had entered into its first DPA. In a SEC Press Release, the agency announced that it had entered into a DPA “with a former hedge fund administrator who helped the agency take action against a hedge fund manager who stole investor assets.” This was due to the cooperation by the Administrator; Scott Herckis, even though Herckis aided and abetted the hedge fund at which he worked with securities law violations. The DPA also specified that Herckis “comply with certain prohibitions and undertakings.  Herckis cannot serve as a fund administrator or otherwise provide any services to any hedge fund for a period of five years, and he also cannot associate with any broker, dealer, investment adviser, or registered investment company.” He also had to “disgorge approximately $50,000 in fees he received for serving as the fund administrator.”

What does all of the above mean for the compliance practitioner? I think that when a federal judge says there should be more individual prosecutions in a certain area and his reasons echo noted commentators, it engages the debate. In the FCPA context, the debate centers around the use of DPAs and NPAs (Non-Prosecution Agreements) to settle matters with corporations. I am on record as favoring the continued use of such instruments by prosecutors to help raise compliance generally. Others feel that more individuals should be prosecuted. One thing I can say with certainty is that if you take a DPA/NPA for FCPA violations into Judge Rakoff’s court, you had better be ready to defend it, from both sides – the prosecution and the defense.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

The Bribery Act and DPAs: Transparency is the Key

The debate now ongoing in the UK about whether Deferred Prosecution Agreements (DPA) should be a tool available to prosecutors in the Serious Fraud Office (SFO) and Crown Prosecutors is an important issue that should be well reasoned and thoroughly vetted. However, from where I sit in the US, I believe that the ability to enter into a DPA is a powerful tool that advances the interests of prosecutors, the judiciary and the public. Based on the reasons I will set out below, I believe that the UK should incorporate such a tool into those mechanisms available to the SFO and Crown Prosecutors to resolve cases brought under the Bribery Act.

The key issues that law makers in the UK must resolve is how to incorporate the concept of a DPA into a system which only allows prosecutors the option of bringing criminal charges or declining to do so coupled with a judiciary system that has unfettered discretion to accept or reject any settlement agreement brought before it. In an article entitled “The US Model for Deferred and Non-Prosecution Agreements” Mike Volkov phrases the question as “For UK policy makers, the balance between judicial review and prosecutorial discretion is one which has to be resolved before any new policy can be enacted.”

The primary reason for both the prosecution and a company which violates the Bribery Act entering into a DPA is certainty. The one thing I learned in almost 20 years of trying cases in the US (civil side only) is that nothing is certain when you leave the final decision to an ultimate trier of fact who is not yourself, whether that trier of fact be a jury, judge or arbitrator. The most important thing for a company is certainty and that is even more paramount when a potential criminal conviction looms over its corporate head. Certainty is equally critical for the prosecution. No matter how ‘slam dunk’ the facts are, or appear to be, once a prosecutor turns over the final decision in a case to another trier of fact; the prosecution has also lost certainty in the final decision. Every corporate defendant which goes to trial can and should raise all procedural and factual defenses available to it. No prosecutor can ever be 100% certain that it will win every court ruling or that a guilty conviction will be upheld on appeal.

However, a DPA can bring certainty. For a company certainty in its rights and obligations, for the prosecution the same is true. The key then is how to achieve this certainty through the judicial process where the judicial system has other interests to protect. These interests include the right of judicial review and protection of the public interest. The key is how to reconcile these competing interests.

One of the suggestions in the Bribery Act debate on this issue is to allow a judicial representative to be a part of the negotiations between companies and prosecutors before a final DPA is agreed to by the parties. The judicial representative could provide guidance on what might be acceptable under a final judicial review when the DPA is submitted to a court for acceptance and Entry of Judge. To forestall any claim of conflict of interest, the reviewing court would be a different judge than the judge who provided the guidance in the pre-court review stage.

However, I would not advocate such an approach for several reasons. I believe that the judiciary has a different role which is to ensure that laws are followed and administered justly and to safeguard that the public interest is represented in any settlement which results in a DPA. For one judicial representative to assist in the crafting of the DPA and another judicial representative to rule upon the DPA demeans from this role. While not enshrined in a written constitution as in the US, there is a distinction between the prosecution, which is a function of the executive branch and the judiciary, which is a function of the judicial branch. While the UK has a different form of democracy than the US, parliamentary vs. representative democracy, the executive and judicial functions remain separate and distinct. Next, no matter how independent the final reviewing judge is, the fact that another judge assisted in fashioning a DPA would factor into any judicial analysis and usually a reviewing judge respects the rulings and decisions of another judge, at least at the trial court level. This respect would most probably continue in the court review of DPAs negotiated with the help of another member of the bench.

Nevertheless, I still argue that DPAs still should play an important role in the resolution of Bribery Act cases. However, I would not urge early judicial involvement but that the key to certainty is transparency. The transparency comes into play in the crafting of the DPA, which should include a full analysis of the penalty to which the parties agreed to in the DPA. Here guidance might be taken from the US Department of Justice’s (DOJ) approach to list out the factors and the attendant scoring in each DPA. This scoring can go up or down depending on many factors which are now discussed in each DPA. Further the underlying factors and scoring are based upon the US Prosecutors Guidelines which are also publicly available.

It is through this transparency that a court can determine if the law, here the Bribery Act, has been fairly or justly administered. A court can then also use this transparency to ensure that the interests of the British public are also properly taken into account. The fact that the Bribery Act is a new law should not prevent a thorough analysis of such factors. The prosecution can simply do what lawyers are trained to do; review the prior law to provide guidance or look at other similar laws for guidance.

I understand the response that a DPA brought before a court under such a scenario that I have listed above is still open to judicial rejection. However, I believe that most courts will follow precedent, if such precedent is used in a well-reasoned manner and presented logically to a court. As for the argument that such an approach may well lead to higher fines or greatly penalties being levied, I would respond that such higher fines or greater penalties should have then been agreed to in the first place.

A DPA can be, and is, a powerful tool in the arsenal to fight bribery and corruption. The US DOJ has used it successfully, I would argue, for many years, to the benefit of the US public. I would also urge that such a tool become available to the SFO and Crown Prosecutors in their fight against bribery and corruption. However, the maintenance of judicial independence is a key component of any democracy. This judicial independence can continue in a manner consistent with the certainty brought by DPAs and court oversight and approval through transparency.

This article originally appeared in thebriberyact.com.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

Tyson Food’s DPA-Part I: A Lesson in Criminal Penalty Reduction under the FCPA

On February 10, 2011, Tyson Foods announced a settlement of outstanding violations of the Foreign Corrupt Practices Act (FCPA) with the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). As reported by the FCPA Blog, the Tyson Foods agreed to pay a $4 million criminal penalty and $1.2 million in disgorgement and pre-judgment interest to resolve charges related to illegal payments by company representatives to government-employed inspection veterinarians in Mexico and a cover-up of the payments. This settlement had several interesting elements which should be noted by the FCPA practitioner. We will explore these developments in our next two postings. Today’s post will focus on the detailed discussion of the reasons for the settlement and the specifics of the monetary penalty assessed against Tyson Foods.

Initially we would note that in this settlement, the DOJ continues its recent course of action in providing greater specificity in the basis upon which the final settlement was concluded. We applaud the DOJ for this course of action and hope they will continue to do so. By providing such transparency, the DOJ affords greater information on its procedures to the compliance community.

I. The Facts

The fact pattern would seem to be precisely the scenario that the FCPA was designed to prevent. Tyson Food’s Mexican subsidiary, Tyson de Mexico, between the years of 2004 and 2006, paid $90,000 to two publicly-employed veterinarians who inspected its Mexican plants, generating profits for Tyson of $880,000. The payments went directly to the veterinarians and to their wives who were listed on the payroll of Tyson de Mexico. The bribes were intended to keep the veterinarians from disrupting the operations of the meat-production facilities. When these payments were discovered by Tyson Food’s in the US in 2004 and thereafter terminated, Tyson representatives made the same amounts of payments through the creation of fictitious invoices for veterinarian services to the wives of the inspectors to match the amount previously paid to their spouses.

II.        Tyson’s Conduct after Self-Disclosure

As stated in the Deferred Prosecution Agreement (DPA), the DOJ entered into the DPA with Tyson based, in large part, because of the conduct of Tyson Foods after it self-disclosed the matter to the DOJ. The DOJ noted the following factors:

a. Tyson voluntarily disclosed the misconduct described in the Information and Statement of Facts;

b. Tyson conducted a thorough internal investigation of that misconduct;

c. Tyson reported all of its findings to the DOJ;

d. Tyson cooperated in the DOJ’s investigation of this matter;

e. Tyson undertook remedial measures as described in the DPA;

f. Tyson agreed to continue to cooperate with the DOJ in any investigation of the conduct of Tyson and its directors, officers, employees, agents, consultants, subsidiaries, contractors, and subcontractors relating to violations of the FCPA;

g. Tyson cooperated and agreed to continue to cooperate with the SEC in its investigation of the conduct of Tyson and its directors, officers, employees, agents, consultants, subsidiaries, contractors, and subcontractors relating to corrupt payments and related false accounting and internal controls issues.

All of these actions by Tyson make clear that after disclosure, the best course of action that a company can engage in during an enforcement action is full cooperation with the DOJ and SEC. Followed immediately behind this full cooperation, a company should pro-actively institute remedial measures regarding the conduct which led to the FCPA violation; and a full review, assessment and audit of its FCPA compliance program. Companies which wait to be told what the DOJ wants to see in terms of a best practices FCPA compliance program would not be as likely to receive such credit by the DOJ in settlement negotiations regarding the penalty assessment.

III. Assessment of Monetary Penalty

We were very impressed that the DOJ set out in detail the calculation on how the monetary penalty was assessed. We set it out in full below.

6. Payment of Monetary Penalty: The Department and Tyson agree that application of the United States Sentencing Guidelines (“USSG” or “Sentencing Guidelines”) to determine the applicable fine range yields the following analysis:

a. The 2006 USSG are applicable to this matter.

b. Base Offense. Based upon USSG 2Cl.1, the total offense level is 28, calculated as follows:

(a)(2) Base Offense Level— 12

(b)(1) More than one bribe— +2

(b)(2) Value of benefit received more than $400,000— + 14

TOTAL OFFENSE LEVEL— 28

c. Base Fine. Based upon USSG §8C2.4(a)(l) and (d), the base fine is $6,300,000 (the fine indicated in the Offense Level Fine Table ($6,300,000) is used where such number is greater than the pecuniary gain to the organization from the offense ($880,000).

d. Culpability Score. Based upon USSG §§8C2.5, the culpability score is 4, calculated as follows:

(a) Base Culpability Score—5

(b)(1) Organization had 1,000 or more employees and 311individuals within high-level personnel of the organization participated in, condoned, or was willfully ignorant of the offense— +4

(g)(1) The organization, prior to an imminent threat of disclosure or government investigation, within a reasonably prompt time after becoming aware of the offense, reported the offense, fully cooperated, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct.— (negative)-5

e. Calculation of Fine Range.

Base Fine— $6,300,000

Multipliers 0.8— (minimum)/1.6(maximum)

Fine Range— $5,040,000 to $10,080,000.

Tyson agreed to pay a monetary penalty in the amount of $4,000,000. The key for the overall reduction in the criminal penalty paid by Tyson is found in the following: The organization, prior to an imminent threat of disclosure or government investigation, within a reasonably prompt time after becoming aware of the offense, reported the offense, fully cooperated, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct. So the three key points to be derived from this language are:

1. Self-disclosure;
2. Full cooperation; and
3. Recognition and affirmative acceptance of responsibility.

Once again, we applaud the DOJ for setting forth in such full detail these calculations and this information in  Tyson Foods DPA. In tomorrow’s post we will review the best practices in a FCPA compliance program, as suggested by the Tyson Food’s DPA and some additional issues. Until then, Happy Valentine’s Day to all….

For a copy of the Tyson Food’s DPA, click here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011