A Plant Grows In Brooklyn: EDNY Judge Scrutinizes Deferred Prosecution Deal

A deferred prosecution agreement (“DPA”) has become a common means of resolving a federal criminal investigation of a company. Under a DPA, criminal charges against the company are filed in court, but prosecution of the case is deferred, while the company takes remedial measures agreed upon with the prosecutor. Everyone expects the charges to be dismissed down the road. Until recently, federal courts have approved these deals with little or no scrutiny.

That state of affairs, which simplified the work of prosecutors, companies and defense counsel, came to an end recently – at least in the Eastern District of New York. Over the opposition of the government as well as the defense, United States District Judge John Gleeson asserted the court’s authority to scrutinize the terms of a DPA closely, determine whether it was in the public interest and, ultimately, to conduct meaningful oversight over compliance with the DPA during the term of the deferral of prosecution. As Judge Gleeson put it, the court would not just be a “potted plant.”

Judge Gleeson’s opinion arose from the government’s investigation and prosecution of global bank HSBC. In December 2012, the government announced a DPA with HSBC to resolve money laundering allegations.  According to the government, HSBC failed to establish an effective anti-money laundering program and undermined its program by cutting resources in order to “increase profits.”

In its court filings, the government wrote that HSBC’s “stunning failures of oversight” made HSBC the “preferred financial institution” for Mexican and Colombian drug cartels, who moved $881 million through the bank over four years. The harsh allegations resulted in criticism that neither the company nor any of its executives would face indictments, which dovetailed with a feeling in some quarters that the government has not been sufficiently aggressive in prosecuting wrongdoing connected with the financial crisis. Although the DPA included the largest monetary penalty ever paid by a bank and a significant overhaul to HSBC’s compliance programs, elected officials and commentators expressed anger that the government had treated some institutions as “too big to jail,” regardless of the seriousness of the alleged misconduct. In an editorial published shortly after the announcement, the New York Times wrote that “[w]hen prosecutors choose not to prosecute to the full extent of the law in a case as egregious as this, the law itself is diminished.”

In December 2012, when the parties appeared in federal court in Brooklyn, Judge John Gleeson, noting this commentary, declined to approve the agreement until the parties explained why the DPA was in the public’s interest. In their responses to Judge Gleeson, both the government and HSBC argued that a court has no “inherent authority over the approval or implementation of the DPA.” The parties argued that, unlike a guilty plea, which requires judicial approval, the decision to enter into a DPA fit squarely within the government’s broad discretion to decide which cases to prosecute and which to dismiss.

On July 1, 2013, Judge Gleeson, though he approved the DPA, rejected the parties’ contention that he lacked authority over the agreement. Acknowledging the court’s lack of authority regarding the government’s charging decisions, the judge observed that, in the case of a DPA, the government files charges in court which remain on the court docket open for a period of time – usually five years – after which the government expects to move to dismiss. Judge Gleeson held that by filing a criminal case which remains open, the parties submit to the court’s supervision.

In a carefully reasoned opinion, Judge Gleeson discussed why judicial oversight of DPAs is critical to the fairness of the justice system. The court, in Judge Gleeson’s view, is essential to determine fairness of an agreement since the defendant “is less likely to raise a purported impropriety with the process. . . given the risk of derailing the deferral of prosecution.” It is the court’s job to be more than a “potted plant” and make sure that the agreement does not “transgress[] the bounds of lawfulness or propriety.” Furthermore, given both parties’ continuing obligations under the agreement, judicial oversight is also required to ensure that both parties comply with the agreement during the five year period in which the case is pending.

While particularly thoughtful and noteworthy, Judge Gleeson’s opinion is not isolated. In January 2013, after the government announced a DPA with a company for overbilling Medicare millions of dollars, Judge Terrence Boyle, a federal judge in North Carolina, questioned the leniency shown to corporations in this and other cases and ordered the parties to explain why the DPA was in the public’s interest as it “[i]t’s very hard for society and for The Court to differentiate between the everyday working Joe and Jane who goes to prison and the corporate giant. . . that gets a slap in the hand and doesn’t miss a beat.” Judge Boyle later approved the agreement, appearing to be persuaded that the DPA would avoid potentially devastating collateral consequences to employees and to the company’s customers, who were primarily underprivileged patients.

Courts have also grown more skeptical, or at least more searching, in their review of settlements of civil enforcement proceedings. In one prominent example, U.S. District Judge Jed Rakoff refused to approve an agreement between the SEC and Citigroup C +0.81%, a decision now on appeal. Other judges have followed Judge Rakoff and closely scrutinized the terms of agreements in government enforcement actions.

The approach taken to DPAs by Judges Gleeson and Boyle should, at a minimum, lead the government and defense counsel to be prepared to justify their agreement if questioned by a court. Further, the scrutiny of DPAs could encourage the government to enter non-prosecution agreements (NPAs) in lieu of DPAs, for, as Judge Gleeson observed, judicial supervision does not apply to non-prosecution agreements; the government has virtually unfettered discretion to choose not to charge at all. What we can say, for sure, is that the government and a corporate defendant can no longer safely take a lack of judicial scrutiny for granted.

 

Topics:  Criminal Prosecution, Deferred Prosecution Agreements, HSBC, Investigations

Published In: General Business Updates, Criminal Law Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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