During the past five years, independent corporate monitors have become almost commonplace. After the 2002 indictment of Arthur Andersen precipitated the accounting firm's demise, the deferred prosecution agreement (DPA) and similar out-of-court resolutions short of indictment became a frequent means of resolving allegations of criminality by a business organization. In 2007 alone, the federal government entered into at least 35 DPAs and similar pretrial agreements. See Lawrence D. Finder & Ryan D. McConnell, Annual Corporate Pre-Trial Agreement Update -- 2007, 22nd National Institute on White Collar Crime (March 2008). An important component of many such agreements was the appointment of a monitor to oversee a company's commitment to overhaul deficient controls, procedures and culture.
Amid this growth, monitorships drew relatively little attention. But the new year has brought a wave of scrutiny that seems destined to reverberate in 2008 and beyond. Legislation has been introduced to address DPAs and the role of monitors. In at least one criminal case, victims of a convicted company have asked the sentencing court to impose a monitor even though the written plea agreement did not call for one. And the U.S. Department of Justice recently conducted its own internal review and issued guidelines governing monitorships. This article will review these recent developments.
Congressional attention to monitorships began in January, when the press reported on a deferred prosecution agreement under which the office of the U.S. Attorney for the District of New Jersey had appointed former Attorney General John Ashcroft as a monitor for Zimmer Holdings Inc., a medical device company. Philip Shenon, "Ashcroft Deal Brings Scrutiny in Justice Dept.," N.Y. Times, Jan. 10, 2008, at A1; Carrie Johnson, "Ex-Officials Benefit from Corporate Cleanup," Wash. Post, Jan. 15, 2008, at A1. On March 11, Ashcroft responded to a House Judiciary subcommittee on commercial and administrative law that questioned him on DPAs generally and the Zimmer monitorship specifically. In his opening remarks, Committee Chairman John Conyers, D-Mich., noted the potential for department politicalization in the current monitor-selection process and pointed to the Zimmer monitorship selection as an example. Ashcroft, however, denied that there was a conflict or even an appearance of conflict from Christie's selection of his firm as the Zimmer monitor. See Philip Shenon, "Ashcroft Defends Contract that U.S. Steered to Him," N.Y. Times, March 12, 2008, at A20.
On Jan. 16, in a joint letter to the comptroller general of the U.S. Government Accountability Office, the chairmen of the Senate and House judiciary committees "request[ed] that you perform an inquiry into the use, award, and implementation of contracts since 2001 to outside lawyers and other professionals retained by companies for monitoring compliance with out-of-court settlement and deferred prosecution agreements reached in criminal investigations between companies and the Department [of Justice]." Letter of Sen. Patrick Leahy, D-Vt., and Rep. John Conyers, D-Mich., to Comptroller General David M. Walker. Such a review is presumably under way, and the Government Accountability Office, known as the investigative arm of Congress, typically issues public findings in the form of a report or testimony.
On Jan. 30, Rep. Frank Pallone, D-N.J., introduced H.R. 5086, a bill that would impose new standards in the realm of DPAs and independent monitors. Section 1 of the bill would require the attorney general to issue guidelines as to when U.S. Attorneys should enter into a DPA. The bill specifies five factors that should be considered by prosecutors, including the potential harm that a DPA might cause to employees and shareholders; the degree of the company's cooperation in the course of the investigation; the company's remedial efforts; and the availability of criminal charges against individuals.
It is of particular note that the bill singles out for consideration the costs to shareholders and employees associated with a DPA. Because the prospect of a corporate indictment is so damaging, the tendency is to view the alternative of a DPA as a display of leniency by the government under almost any circumstances. But there will surely be cases in which the high burdens of a DPA -- in terms of reputational damage, distraction from company business and, of course, the expense associated with a monitor -- will not be justified under all the circumstances even though prosecutors may enjoy the leverage to demand one by threatening indictment.
COMPORTING WITH PUBLIC INTEREST
Section 2 of the bill would require that a U.S. district judge or magistrate judge "review the terms of a deferred prosecution agreement to ensure that the agreement comports with public interest and all applicable laws and legal precedent before authorizing the deferred prosecution agreement to be entered into by the parties." This requirement would not likely alter current practice considerably, since most DPAs are now submitted for court approval. However, it is possible that this provision might provide nonparties who have an interest in the outcome to oppose terms of a DPA that might violate the public interest or violate the law.
Section 3 of the bill deals with monitors specifically. The section would apparently make monitors mandatory for all DPAs by providing that "[a] Federal monitor shall oversee a deferred prosecution agreement." The bill provides that "a Federal monitor shall be appointed by an independent third party (a United States district court judge or a United States magistrate judge) from a pool of pre-qualified firms or individuals (or both)." Many DPAs already have provided for the judicial selection of a monitor from agreed-upon candidates, as the bill would mandate. However, under several DPAs (including the Zimmer example referenced above) the prosecution chose the monitor unilaterally.
Finally, §4 of the bill would provide that "the district court where a deferred prosecution agreement was approved shall determine if the deferred prosecution agreement has been breached." This would mark a change from the terms of several DPAs, which expressly provided that it was for the prosecution to determine whether the corporation had complied with the terms of the DPA. The consequences of a breach are potentially catastrophic, because most DPAs allow prosecution of the corporation with the aid of a full admission by the corporation of criminal violations.
It may turn out that this legislative proposal, rather than becoming law in some form or other, served more as a catalyst for the Department of Justice to issue its recent written guidance to U.S. Attorneys regarding DPAs and monitorships. Appearing before the House Judiciary Committee on Feb. 7, Attorney General Michael Mukasey said: "[T]he increasing phenomenon of monitors is something that we noticed well before there came to be publicity about it and [we] have been looking into it. We've asked the Attorney General's Advisory Committee, which is a group of United States attorneys from around the country who can gather information from United States attorneys about the prevalence of the phenomenon, and whether there is a way of coming up with best practices or guidelines."
As a result, on March 7, acting Deputy Attorney General Craig Morford issued Department of Justice guidelines regarding the selection and use of independent monitors. With respect to selection of monitors, the guidelines provide that each U.S. Attorney's Office will create a standing committee to consider monitor candidates, and the government is forbidden to choose monitors unilaterally. The guidelines express a preference for consideration of a pool of at least three qualified candidates in any given case, and they require approval of a monitor by the office of the deputy attorney general. The guidelines stress the independence of a monitor, who must be free to consult with both the government and the corporation without acting as an agent or employee of either party. Moreover, prosecutors are instructed to obtain a commitment from the corporation that it will not hire or be affiliated with the monitor for at least one year from termination of the monitorship.
The new guidelines further provide that "the monitor's responsibilities should be no broader than necessary to address and reduce the recurrence of the corporation's misconduct." In particular, "[t]he monitor's mandate is not to investigate historical misconduct." Finally, the guidelines set forth principles relating to the duration of a monitorship. The guidelines favor allowing the government discretion to extend the duration of a monitor's term when the corporation has failed to satisfy its obligations. Conversely, the guidelines say that in most cases an agreement should provide for early termination if the corporation can demonstrate that the need for a monitor has been eliminated by changed circumstances, such as a purchase of the corporation by an entity with an effective compliance program.
As these developments unfolded in Washington, a corporate criminal prosecution in Houston provided a novel context for evaluating the appropriate judicial role in the appointment of an independent monitor. Late in 2007, BP Products North America Inc. entered into an agreement to plead guilty to a violation of the Clean Air Act arising from an explosion and fire at its Texas City, Texas, refinery. See U.S. v. BP Products North America Inc., No. 07-CR-434 (S.D. Texas Nov. 20, 2007). The terms of the plea agreement included a substantial fine, a period of probation during which the company would honor a separate agreement with the Occupational Safety and Health Administration, and continuing cooperation with the government inquiry. The plea agreement was executed pursuant to Fed. R. Crim. P. 11(c)(1)(C), which allows the court either to accept the sentence agreed upon by the parties in the plea agreement or to reject the plea proposal altogether.
Some victims who were injured or lost relatives in the explosion filed an application in the Southern District of Texas seeking leave to intervene and oppose the acceptance of the plea agreement. The victims enumerated several objections, including the absence of any provision in the plea agreement allowing for the appointment of an independent monitor. They argued: "[T]he most obvious probationary safety measure that the court should consider is a Court-Appointed Environmental Monitor who would ensure that BP is truly complying with environmental laws. ... At the very least, the Court should reject the proposed Plea because it precludes the Court from even considering whether to undertake this reasonable measure to ensure that the Texas City Plant is safe." Victims' Joint Reply Memorandum in Opposition to Proposed Rule 11(c)(1)(C) Plea Agreement, at 4.
The government contended that there was no authority for the court to impose a monitor. However, the victims cited the "open-ended" statutory authority to impose appropriate conditions of probation under 18 U.S.C. 3563(b), which provides in relevant part: "The court may provide, as further conditions of a sentence of probation to the extent such conditions are reasonably related to [statutory sentencing factors] . . . that the defendant ... satisfy such other conditions as the court may impose." Interestingly, the victims argued that the court was authorized under Fed. R. Crim. P. 11 to reject the plea agreement for "not being in the public interest" -- a "public interest" analysis similar to the standard for judicial approval of DPAs in the proposed legislation described above.
The victims additionally argued for rejection of the plea agreement on the ground that the prosecution had failed to consult with them about the proposed plea agreement pursuant to the Crime Victims' Rights Act, 18 U.S.C. 3771. The victims cited Department of Justice regulations implementing the act, which provide: "Federal prosecutors should be available to consult with victims about major case decisions, such as dismissals, ... plea negotiations, and pretrial diversions." See U.S. Dept. of Justice, Attorney General Guidelines for Victim and Witness Assistance at 29 (May 2005). In short, the victims want a say in whether the public interest would be served by a court-appointed monitor, even though the government is not requesting one.
As this article goes to print, the district court has rejected the Crime Victims' Rights Act claims, but has not yet addressed the victims' remaining attacks on the plea agreement, including the demand for a monitor. The victims have filed a mandamus petition in the 5th U.S. Circuit Court of Appeals for relief under the Crime Victims' Rights Act.
Monitorships have become institutionalized as an important part of the process by which allegations of corporate criminal conduct are resolved. But the mechanics of the monitoring function are being scrutinized from new perspectives that at once emphasize the costs of having a monitor and the costs of failing to have one. Only one thing is reasonably certain: The role of the independent corporate monitor will continue to evolve in light of enhanced scrutiny.
Christopher J. Gunther is a partner in the white-collar crime group at New York-based Skadden, Arps, Slate, Meagher & Flom. Robert M. Pollak is an associate in the group.