September 1, 2012

Washington Scene: Deferred Prosecutions - Too Big to Prosecute?

By Warren Belmar

While the current Congress and administration will remain in office and on the federal payroll until January of next year, the tenor of the political conventions and the ongoing flood of highly partisan political advertisements guarantee that their attention over the next few months will focus almost exclusively on election campaigns. As a result, critical policy decisions facing the nation will continue to fester unresolved until after the November elections and probably well into next year.

Rather than dwell on and address this topic once again, I would like to call your attention to a Washington scene development that has received scant attention from the press. However, I expect you will be reading about it as the recently commenced federal LIBOR, MF Global/Corzine, and other high-profile investigations are concluded. It is now the common practice of the U.S. Department of Justice to forego conducting actual criminal trials to establish guilt in complex, multimillion-dollar cases in favor of “deferred prosecution” agreements calling for multimillion-dollar payments to the United States to be followed by dismissal of the criminal charges upon completion of compliance with the non-financial terms of the agreement.

Three recent deferred prosecution examples should suffice. In June, United Technologies pled guilty to illegally helping China develop its first military attack helicopter. For this major violation of U.S. arms control laws, it agreed to pay $20.7 million to the DOJ and $55 million to the Department of State, with a possibility of $20 million being suspended in the future. Also in June, ING Bank agreed to pay $619 million for violating U.S. economic sanctions on Cuba and Iran by engaging in and covering up money laundering transactions for certain of its clients. This followed similar deferred prosecution agreements with Credit Suisse Group AG, which paid a fine of $536 million; Lloyds Banking Group PLC, which paid a fine of $350 million; and Barclays PLC, which paid a fine of $298 million. And, in August, Pfizer agreed to pay $60 million to settle bribery charges brought under the Foreign Corrupt Practices Act. As part of the settlement, Pfizer’s HCP subsidiary entered into a deferred prosecution agreement pursuant to which it paid a $15 million fine. This followed a similar case involving Johnson & Johnson, which called for a $70 million payment as part of its deferred prosecution agreement.

To see how extensive the practice has become since its adoption in 2000, simply go to the webpage maintained by Gibson, Dunn & Crutcher LLP, www.gibsondunn.com/search/Pages/EntireSiteSearch.aspx?k=deferred%20 prosecution, for a series of client alerts summarizing all of the deferred prosecution and nonprosecution agreements to date. According to the most recent Gibson Dunn client alert dated July 10, 2012, the 230 reported agreements to date have extracted “a total of $31.6 billion in fines, penalties, forfeitures, and related settlements.”

The Securities and Exchange Commission, when faced with complex civil cases and not-so-complex violations of the securities laws, has long been inclined to pursue settlements. Accordingly, especially in cases deemed “too complex or resource consuming to litigate,” the SEC routinely allows defendants to resolve investigations without admitting or denying the charges at issue. Indeed, while recently seeking court approval of a settlement, the SEC challenged the ruling of a district court judge questioning that practice in the case before him by arguing that requiring admissions could inhibit its ability to secure settlements. Accordingly, it should not be surprising that the SEC is participating with the Department of Justice in entertaining deferred prosecution agreements. The Pfizer settlement previously referred to above is one such example.

The willingness of the Justice Department to resort to corporate fines rather than trials or guilty or nolo contendre pleas to resolve criminal investigations, like the SEC’s procliv- ity for settling civil actions without requiring an admission of the charges, is driven in large part by the collateral consequences of a corporate civil or criminal conviction. This is evidenced by the reaction to the demise of the Arthur Andersen accounting firm after its conviction on federal charges. A mechanism for avoiding arguably inequitable corporate consequences mandated by criminal statutes, however, like the concerns that led to the concept of “too big to fail,” raises the danger of encouraging moral laxness on the part of corporate employees. Accordingly, when resorting to deferred prosecution agreements, it is incumbent on the Department of Justice to not do so routinely, lest it be perceived as adopting a policy of “too big to prosecute.”

As past and present leaders of the Bar, you can offer important insight into this and other subjects. We will be pleased to publish your “Letters to the Editor,” space permitting. Please email me at wbelmar@att.net, and cc ABA Staff Editor Lisa Comforty at lisa. comforty@americanbar.org. We look forward to hearing from you.

Warren Belmar (wbelmar@att.net) serves as managing  director  of Capitol Counsel Group, a firm whose primary mission is to help clients navigate the complex world of today’s regulatory environment.