August 7, 2012

Deferred Prosecution Agreements, Non-Prosecution Agreements and Monitoring Services

By Len Lyons, Partner and Audra Marino, Senior Manager

Deferred Prosecution Agreements, Non-Prosecution Agreements and Monitoring Services

Over the past ten years, there has been a notable increase in the U.S. Department of Justice (“DOJ”) use of alternative settlement agreements such as Deferred Prosecution Agreements (“DPA”) and Non-Prosecution Agreements (“NPA”).

A DPA is a voluntary alternative to adjudication whereby the prosecutor grants amnesty in exchange for the defendant’s agreement to provide full cooperation in the investigation and to fulfill certain requirements including the payment of fines, implementation of corporate reforms and in some cases, appointment of an independent monitor to oversee compliance. With respect to a DPA, generally the DOJ files criminal charges in court against the corporation but agrees to waive the charges once the corporation meets the terms of the DPA. The terms of a corporate DPA typically includes new or enhanced compliance and reporting measures, an agreement to cooperate with the ongoing investigation, an admission of wrongful conduct, internal reforms and restitution payments. These agreements usually span several years.

An NPA, is similar to a DPA in that the DOJ and corporate defendant enter into an agreement wherein the corporation agrees to cooperate with the government and take remedial actions to correct the wrongdoing.However, no charges are filed against the defendant so long as there is no breach in the agreement. An NPA does not typically require an admission of wrongdoing. In addition, NPAs are generally less detailed than DPAs and do not require a corporate monitor.

The move toward such agreements stemmed from the DOJ’s desire to minimize the unintended consequences and collateral damage of corporate criminal prosecution including the collapse of a company and the related impact on employees, investors, third parties and other corporate stakeholders.Arthur Andersen is the primary example of the widespread destruction resulting from DOJ corporate prosecution and conviction. Arthur Andersen, one of the top 6 accounting firms in the world, was indicted and ultimately convicted on charges of obstruction of justice in 2002.The decision was later overturned by the Supreme Court, but only after the complete collapse of what had been a $9.3 billion (in revenues) corporation with more than 85,000 employees worldwide.

Up until 2008, there was little if any DOJ guidance as to when the use of a DPA/NPA is appropriate, what behavior warrants a DPA verses and an NPA, and what terms and conditions should be included in a DPA/NPA agreement.The year 2008 saw the beginning of what appeared to be some uniformity in the terms and conditions of DPAs.In 2008, there was also increased media attention related to several DPAs, as well as congressional hearing and other legislative activity with respect to DPAs (although no formal legislation).

The Morford Memorandum

In March 2008, the DOJ issued the Morford Memorandum (“Morford Memo”), named for then Acting Deputy Attorney General Greg Morford.The purpose of this memorandum was to provide guidance with respect to the use of corporate monitors in DPA agreements and to address increasing concerns with respect to monitor accountability, oversight, costs and potential favoritism. The Morford Memo provided nine basic principles for federal prosecutors regarding the use of corporate monitors and guidance for drafting monitor related provisions in DPAs. Specifically, the Morford Memo addressed issues such as:

  1. when it is appropriate to appoint a monitor
  2. how to choose a monitor
  3. what is the scope of a monitor’s duties
  4. what is/are the purpose and responsibilities of a monitor

In May 2010, DOJ added a tenth principle to clarify and explain its role in the resolution of disputes between the monitor and the corporation, based upon the facts and circumstances of the case.Gary G. Grinder, the Acting Deputy Attorney General at the time, issued the memo, commonly referred to as the “Grinder Memo”. A corporate monitor should be an independent third party engaged by corporate defendants to examine and evaluate a company’s compliance practices and ensure that the corporation complies with the terms and conditions of the DPA.

Civil Matters

While traditionally, DOJ utilized DPAs and NPAs to resolve allegations of criminal corporate misconduct, in the past few years their usage has expanded into civil matters involving allegations of corporate wrongdoing. In 2010 and 2011, the Securities and Exchange Commission (“SEC”) and DOJ’s Antitrust Division began using settlement agreements.

Specifically, the SEC, which entered into its first NPA in 2010, entered into its first DPA on May 11, 2011.The use of NPAs and DPAs by the SEC is part of new SEC initiatives unveiled in January 2010, designed to encourage greater cooperation with SEC investigations.The SEC intended these new initiatives to encourage prospective witnesses to bring violations to the SEC’s attention and to provide voluntarily evidence and to encourage self-reporting and cooperation by companies. Similar to DOJ cooperation agreements, SEC NPAs and DPAs require improved compliance and reporting measures, agreements to cooperate fully with the investigation and provisions allowing the company not to admit or deny the relevant facts.

The SEC’s implementation of NPAs and DPAs differs from historic practices wherein the SEC resolved enforcement actions by filing consent judgments based on civil complaints in a U.S. District Court or an administrative order instituting proceedings and imposing sanctions. SEC NPAs do not include financial penalties, make no allegations of misconduct and contain no statements of fact.

An SEC DPA may result in remedies similar to those obtained through the SEC’s traditional enforcement actions, including fines and penalties. However, a DPA may help to mitigate potential collateral damage as it circumvents formal civil charges. A DPA allows corporations to remediate and shows a good faith effort on the part of the corporation to be a law-abiding entity.

Traditionally, government entities have predominantly employed NPAs and DPAs in resolving alleged Foreign Corrupt Practices Act (“FCPA”) violations.Many of the NPA/DPA cases also pertain to healthcare related violations such as allegations of Medicare fraud and anti-kickback laws.However, government entities have also used NPAs and DPAs in a myriad of allegations involving antitrust violations, insurance fraud, export control, environmental issues, money laundering, fraud/securities fraud, false statements (ERISA and government contracts), tax shelters and the Internal Emergency Economic Powers Act (“IEEPA”).

In 2011, the DOJ and SEC entered into 29 DPA/NPA agreements, a decrease from a record setting 40 DPAs/NPAs in 2010, but an increase in the average number of agreements in recent years. Given this upward trend, the fact that these agreements have only recently begun to be used in civil matters, continuing fallout from the recent financial crisis, the increasingly complex regulatory environment and the government’s desire to rehabilitate rather than prosecute otherwise sound company, it seems likely that the incidence of NPAs/DPAs will continue to rise in the future.

The following are examples of some potential corporate requirement and/or remediation actions:

  • Verify compliance with terms of a settlement agreement with the SEC and/or DOJ or other regulatory entity
  • Assess systems and performance vs. benchmarks and U.S. Sentencing Guidelines and any other relevant government entity guidance
  • Evaluate modification/enhancements to an entity’s compliance efforts pursuant to a settlement agreement with the SEC/DOJ or other regulatory entity
  • Systemic review and audit of internal controls and practices
  • Develop business guidelines to deter future unethical conduct and malfeasance
  • Examine and evaluate existing program elements, including policies, procedures, documents, training, communications and reporting mechanisms
  • Assess damages and litigation support, including development of models used in negotiations and final settlement discussions with the government or other regulatory entity
  • Valuation review and compliance
  • Interviews and surveys of employees and/or other relevant parties
  • Analysis and benchmarking of data
  • Ensure reporting avenues are available for employees and third parties working on behalf of the monitored organization and that all issues raised are appropriately investigated and resolved
  • Risk Assessment