“Collateral Consequences”: The Rise of the DPA/NPA Model
The roots of the DOJ’s current thinking on corporate prosecutions trace back to a set of guidelines issued by then-Deputy Attorney General Eric Holder in 1999 on the “Federal Prosecution of Corporations.” The Holder Memo expressly stated that prosecutors should consider, among other factors, “[c]ollateral consequences, including disproportionate harm to shareholders and employees not proven personally culpable,” that may result from the prosecution of corporations. Deputy Attorneys General Larry Thompson and Paul McNulty issued updated guidelines in 2003 and 2006, and the “collateral consequences” principle now is embodied in the United States Attorneys’ Manual.
The severity of the collateral consequences that could result from corporate prosecutions is often illustrated by the speedy demise of accounting giant Arthur Andersen LLP in the aftermath of its indictment for obstruction of justice in 2002. The general thinking has been that, following the collapse of Arthur Andersen, the DOJ has shied away from prosecuting sizable business entities, opting instead to settle for DPAs or NPAs. While these often include strict remedial and compliance measures, or even the imposition of an independent monitor, they do not require the company to enter a formal guilty plea.
There is a wealth of evidence attesting to the increasingly frequent deployment of DPAs and NPAs. Indeed, the former head of the DOJ’s Criminal Division, Assistant Attorney General Lanny Breuer, recently proclaimed in a speech to the New York City Bar Association that “DPAs have become a mainstay of white collar criminal law enforcement,” as they have “the same punitive, deterrent, and rehabilitative effect as a guilty plea,” while also avoiding the potentially prohibitive “collateral consequences” of indictments.
Potential Fissures in the DPA/NPA Model
Although there is no reason to doubt that DPAs and NPAs will continue to form an important part of the DOJ’s enforcement arsenal, there are increasing calls among politicians and public commentators for harsher tactics in the wake of the recent financial crisis.
Moreover, there is subtle but growing evidence that the DOJ may be increasingly inclined to prosecute large corporations. For instance, the number of guilty pleas secured in FCPA cases has climbed in recent years. To name just a few, since 2008, the DOJ has obtained FCPA-related guilty pleas from BAE Systems plc and Siemens AG, as well as from subsidiaries of Tyco International Ltd., Alcatel-Lucent S.A., Panalpina World Transport (Holding) Ltd., Daimler AG, and KBR, Inc.
These FCPA prosecutions bear similarities to the recent UBS and RBS resolutions. Most notably, the overwhelming majority of FCPA guilty pleas have involved foreign firms, and a preponderance have involved convictions of subsidiary companies (as opposed to the parent entity). In his recent address on the issue, former Assistant Attorney General Breuer expressly highlighted several FCPA convictions as evidence of the DOJ’s commitment to pursue criminal prosecutions where the circumstances warrant it, suggesting that the FCPA settlements may have broader precedential value for all types of corporate prosecutions.
Accordingly, there are grounds to surmise that the DOJ may be testing its more guilty-plea-oriented FCPA approach in other arenas, including in the LIBOR cases. If these “test” cases do not produce untenable “collateral consequences,” the DOJ will almost certainly be more inclined to use this approach more broadly.
Significant Consequences of a “New” Prosecutorial Model
Some have claimed that the guilty pleas entered by subsidiary companies in the LIBOR cases are little more than a public relations move by the DOJ, carrying insubstantial practical significance. But, in fact, there would be substantial consequences for large corporations if the DOJ were to insist on formal indictments and convictions, even if only of subsidiary companies. These include:
Loss of licenses. Criminal convictions may entail the automatic loss of business licenses or operating privileges, or forfeiture of the ability to do business with certain government entities. UBS addressed this issue up-front, securing assurances from Japanese regulators before its Japanese subsidiary entered a LIBOR-related guilty plea. Other companies facing possible indictment will have to consider attempting the same tack.
Reputational harm. Although difficult to quantify, guilty pleas carry a greater stigma and likely result in more significant reputational harm than DPAs or NPAs. Accordingly, they threaten greater damage to employee morale and the value of the corporate enterprise.
Tack-on consequences. Guilty pleas lay the groundwork for harsher future sanctions, as the DOJ, civil regulators, and the courts will likely take a more aggressive posture when dealing with “recidivists.” Although the difference between guilty pleas and DPAs may not be as stark, law-enforcement personnel are highly likely to look at a convicted corporation more harshly than they would view a corporation that had entered into a previous NPA. Relatedly, guilty pleas necessarily entail admissions of fact that may be used in tack-on civil litigation. Although DPAs and NPAs frequently involve admissions of fact, they do not always—and knowledgeable defense counsel have sometimes been able to negotiate criminal settlements that exclude detailed factual recitations.
Judicial intervention. Guilty pleas (in federal court) necessarily involve a third party, as a judge must take the plea—which includes ensuring that there are sufficient admissions of fact to make out the offense—and decide upon the appropriate sentence. On the other hand, there is no need for any judicial involvement in the execution and monitoring of an NPA. Moreover, although DPAs require judicial approval, the law does not require that the judge specifically evaluate or pass judgment on the propriety of the penalties or compliance provisions contained in the DPA. Accordingly, guilty pleas afford corporate defendants less ability to affect final outcomes, especially penalty provisions, than do DPAs or NPAs.
Precedential value. Finally, in the event that the DOJ successfully pursues guilty pleas against subsidiary companies without creating substantial collateral consequences, the DOJ may be emboldened to raise the stakes and seek guilty pleas from parent entities as well. Indeed, in the FCPA context, the DOJ already has secured a handful of substantial guilty pleas from large parent companies, including from BAE Systems plc and Siemens AG. Thus, corporate guilty pleas may have the effect of encouraging future corporate indictments and convictions.
In sum, there would be far-reaching consequences if the DOJ were to condition future settlements on guilty pleas by entities within the corporate enterprise. Corporate entities and defense attorneys alike should be on guard for a shift away from the DPA/NPA model that has held sway during the post-Arthur Andersen decade.
Keywords: criminal litigation, LIBOR, guilty pleas, DPA, deferred prosecution agreement, NPA, non-prosecution agreement
Ari D. MacKinnon is an associate with Cleary Gottlieb Steen & Hamilton LLP in New York, New York.