Second Circuit Finds That HSBC Monitor's Reports Need Not Be Publicly Disclosed

by Shearman & Sterling LLP

On July 12, 2017, the U.S. Court of Appeals for the Second Circuit overturned the district court’s decision to unseal the report of a special monitor charged with supervising HSBC Holdings plc and HSBC Bank, USA, N.A. (together, “HSBC”) pursuant to a deferred prosecution agreement (“DPA”).  In so holding, the Second Circuit provided clarification in the district court’s oversight of DPAs, including the scope of their supervisory authority relating to judicial documents.

By way of background, in December 2012, the United States Attorney’s office for the Eastern District of New York entered into a DPA with HSBC.  The case related to HSBC’s alleged violations of sanctions and money laundering laws; specifically, violations of the Bank Secrecy Act, the International Emergency Economic Powers Act, and the Trading with the Enemy Act.  Under the terms of the DPA, the Government filed charges against HSBC, but agreed to seek dismissal of those charges at the end of a five year term if HSBC complied with its extensive obligations under the DPA.  If HSBC failed to comply with these obligations, then the Government would be entitled to pursue the filed charges.  To assist with the ongoing assessment of HSBC’s compliance with the terms of the DPA, the parties agreed to the appointment of a special monitor, which was tasked with preparing periodic reports relating to HSBC’s compliance.  

Because the Government filed criminal charges in this case, the parties jointly sought a waiver from the provisions of the Speedy Trial Act, which requires that criminal defendants be tried within seventy days of the filing of criminal charges, absent numerous statutory exceptions.  In approving the waiver from the Speedy Trial clock, however, Judge Gleeson of the United States District Court for the Eastern District of New York invoked the court’s “supervisory authority” in also “approving” the DPA, much like judges undertake when accepting guilty pleas.  The court acknowledged the “novelty” of this position, but concluded that it was permitted to invoke its supervisory authority since the Government had filed criminal charges in court.  The court further approved the DPA, subject to its continued monitoring of its terms.  Accordingly, the court directed the parties to submit quarterly reports regarding HSBC’s compliance.  The Government did so, and subsequently — at the court’s instruction — submitted one of the special monitor’s reports to the court.  In the fall of 2015, a member of the public sought public access to this report.  Judge Gleeson found that the report was a “judicial document,” subject to a presumptive right of access by the public.  Both the Government and HSBC appealed this decision, arguing that the district court violated principles of the separation of powers under the Constitution by involving itself in the implementation of the DPA.

The Second Circuit reversed the court’s decision.  In so holding, the Circuit concluded that the district court erred in invoking its supervisory authority to monitor the implementation of the DPA, absent a showing of impropriety.  Because of this infirmity, the Court concluded that the special monitor’s report was not a “judicial document” and therefore not entitled to a presumptive right of access.

The Circuit emphasized that district court’s supervisory authority is one that must be “sparingly exercised,” noting that it often is appropriate to be invoked when there is an impropriety in the administration of justice.  Accordingly, the Circuit made clear that while there can be instances in which a district court should invoke this power in overseeing a DPA — such as if instances of impropriety arise — the district court here erred by invoking such authority based on the possibility that such circumstances could arise.  This reasoning, the Circuit stated, “runs headlong into the presumption of regularity that federal courts are obliged to ascribe to prosecutorial conduct and decision making.”  United States v. HSBC Bank USA, N.A., No. 16-308 at 25 (2d Cir. July 12, 2017).  According to the Circuit, “the district court turned this presumption on its head,” Id., by “invok[ing] its supervisory authority – and encroach[ing] on the Executive’s prerogative – based on the mere theoretical possibility that the prosecutors might one day abdicate those duties.”  Id. at 26.

The Circuit’s opinion offers much needed clarity in the role of the district courts’ oversight of DPAs, which have been increasingly used by prosecutors in recent years in cases against institutions.  And the appointment of special monitors has become almost a standard provision of many high-profile resolutions with institutions in the sanctions and money laundering contexts.  Monitors prepare reports containing highly sensitive information regarding institutions, including its compliance with laws and the strength of its compliance programs, which is no doubt why both parties in this case — the Government and the defendants — appealed the district court’s decision to provide the public with access to the monitor’s report. 

The Circuit’s opinion is especially noteworthy because by limiting the district court’s supervisory authority in this context, it made clear that the Government is not required to provide periodic updates to the district court regarding an institution’s compliance with a DPA.  Of course, the Circuit left open the possibility that district courts can exert vigorous oversight over an entity’s compliance with a DPA, but that will be the exception and not the rule, and unlikely, absent serious improprieties that may arise.

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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