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Since the collapse of Arthur Andersen following its indictment in 2002, the federal government has hesitated at indicting a public corporation. Indeed, despite a host of financial-irregularity cases uncovered in 2004 and 2005, no major public corporation appears to have been indicted for involvement in accounting or financial fraud over this period (with the one arguable exception being the Riggs Bank, which was indicted for violations of the Bank Secrecy Act in January). Instead, the federal government’s new policy is to permit the corporation to enter into a “deferred prosecution agreement.” Since 2003, major public corporations that have accepted this invitation include AIG, America Online, AmSouth Bancorporation, Banco Popular, Canadian Imperial Bank of Commerce, Computer Associates, Merrill Lynch & Co., Monsanto, PNC Financial Services Group and Symbol Technologies. KMPG now looks like a likely candidate to join this list. Thus, this is the newest area where corporate governance meets the law of white-collar crime, and the rules of the road remain uncertain. The U.S. Department of Justice’s new policy was formally codified in a January 2003 DOJ memorandum, titled “Principles of Federal Prosecution of Business Organizations,” but popularly known as the Thompson Memorandum, after Deputy Attorney General Larry D. Thompson, who was its principal architect. It advises federal prosecutors that they may forgo prosecution of a corporation if it acknowledges its responsibility, agrees to cooperate with the government in the prosecution of the responsible individuals and institutes satisfactory preventive and monitoring controls. Typically, the corporation is indicted and required to accept responsibility, pay a fine and/or restitution to victims, cooperate with ongoing investigations of its officers and agents, institute governance reforms, and agree to some form of external monitoring, often by an outside monitor chosen by the prosecutor. If the corporation complies with all of these conditions, the indictment will be dismissed, typically some 18 months to two years later. If the corporation fails to comply, then the prosecutor is free to prosecute its indictment, and the corporation’s written acknowledgment of its responsibility may leave it with no realistic defense. In overview, this approach is considerably tougher than the typical Securities and Exchange Commission settlement agreement in which the corporation neither admits nor denies the SEC’s allegations, but it does spare the corporation the often harsh collateral consequences of a criminal conviction. Terms of these agreements have varied widely That’s the formal structure anyway. In reality, however, the devil is in the details, and the actual terms of these agreements have varied widely, depending in large measure on the negotiating ability of defense counsel and the vulnerability of the corporate defendant. For example, sometimes the corporation can avoid indictment or a full admission of responsibility. Thus, in June 2003, Merrill Lynch & Co. entered into a “non-prosecution agreement” with DOJ relating to its involvement in the “Nigerian barge” transactions with Enron. No criminal charges were filed, and Merrill Lynch only acknowledged that DOJ had developed evidence indicating that its employees “may have violated federal criminal law” and that it “accepts responsibility” for its employees’ conduct-a statement that merely restates the common law rule of respondeat superior. Similarly, most corporations have been required to waive the attorney-client privilege, but others have succeeded in agreeing only to provide specified documents and testimony to establish the admissibility of corporate records. The agreement’s terms are critical here, because disclosure of privileged information to DOJ may waive the privilege as to third parties. If express nonwaiver provisions are negotiated in the agreement, however, the law appears to be changing, and confidentiality may be protected. Compare U.S. v. Bergonzi, 403 F.3d 1048 (9th Cir. 2005), and In re Steinhardt Partners L.P., 9 F.3d 230 (2d Cir. 1993), with In re Natural Gas Commodity Litigation, 2005 U.S. Dist. Lexis 11950 (S.D.N.Y. June 15, 2005). Practices are most rapidly evolving with respect to corporate governance reforms. By now, deferred prosecution agreements have intruded deeply into corporate governance, requiring changes in the composition and structure of the corporation’s board of directors, dismissal of specified officers and employees, replacement of auditors, the establishment of new compliance and ethics programs and even the termination of certain lines of businesses. Although these provisions date back more than a decade, the intrusiveness of prosecutorial interventions into corporate decision-making has recently increased. Here, the recent deferred prosecution agreement between the U.S. attorney for New Jersey and Bristol-Myers Squibb Co. (BMS) sets a new high-water mark. After a three-year investigation of “channel stuffing” and accounting irregularities at BMS, the U.S. attorney met with the entire board and negotiated an agreement this June under which BMS agreed to contribute an additional $300 million into a shareholder compensation fund; separate the positions of chief executive officer and board chairman and utilize a “non-executive Chairman”; nominate an additional outside director “acceptable” to the U.S. attorney; appoint a special monitor, Frederick B. Lacey, a retired federal judge, to report quarterly to the U.S. attorney as to BMS’ progress in implementing enhanced internal controls; and endow a chair in business ethics at Seton Hall University School of Law, where coincidentally the U.S. attorney, Christopher J. Christie, received his law degree. The BMS settlement raises an issue in prosecutorial accountability. Should a U.S. attorney exploit his leverage over a corporate defendant to compel it to do good deeds, such as creating a chair at the U.S. attorney’s law school? Nor is this the only or crudest example. In March 2004, the attorney general of Oklahoma signed a deferred prosecution agreement with MCI, the successor to WorldCom, requiring it to increase its employment in Oklahoma by 1,600 people within 10 years as a condition of leniency. Such examples suggest that two closely related dangers arise when the corporation desperately needs to avoid the consequences of a criminal conviction: It becomes vulnerable to the extortionate demands of even well-meaning prosecutors, and prosecutors may be tempted to experiment with corporate governance in ways that exceed their competence or entitlement. Why should we care that a corporation is forced to make a modest $1.5 million donation toward a chair in business ethics at a fine law school? The money was not material to BMS, which had already agreed to pay 300 times that amount in restitution and other penalties to obtain that same deferred prosecution agreement. Instead, the deeper problem lies in the danger that power corrupts and that prosecutors are starting to possess something close to absolute power. To illustrate, consider the following hypothetical: A U.S. attorney, or a prominent state attorney general, uncovers material accounting irregularities at a major U.S. corporation and decides that the board was negligent in failing to detect or prevent the fraud. Discovering that the 12-member board has only two women and one minority group member, the prosecutor demands as a condition of deferred prosecution that the board reconstitute itself to be at least half female and one-third minority group. This has not yet happened, but it could-and soon-in part because prosecutors are often politically active people. To be sure, the harm here cannot be quantified, and the corporation’s board could even be improved. But the shareholders’ right to choose their own directors would here be sacrificed to permit experimentation in corporate governance by a prosecutor who lacks any empirical basis for believing that these reforms will reduce the risk of future recidivism. Goal should be reducing risk of future criminal acts What then is the answer? Reforms that discouraged prosecutors from using deferred prosecution could prove counterproductive because they might only result in more indictments and more severe collateral consequences. But the process by which these agreements are struck needs greater formalization and accountability. The U.S. Attorneys’ Manual should expressly recognize that deferred prosecution agreements do not give the prosecutor a roving commission to do good, and it should mandate that any probationlike conditions be justified as reducing the risk of future criminal behavior by the defendant. Such a clearer statement would give defendants an opportunity for internal appeal and negotiation with DOJ’s Criminal Division. To be sure, some governance conditions may satisfy this test. For example, requiring the use of a new auditor when the existing auditor seemed too close to management is appropriate. Even the U.S. attorney’s insistence in the BMS case on separating the positions of CEO and board chairman may make sense on the facts of that case, where the existing CEO had been in office at the time of the channel stuffing, and uncertainty existed as to his level of knowledge or involvement. Still, mandatory charitable contributions or required levels of in-state employment abuse the prosecutor’s power and do not reduce the risk of future violations. Ultimately, the judicial role in this process needs enhancement. Deferred prosecution resembles probation, but probation conditions are imposed by courts, not prosecutors. If deferred prosecution agreements had to be presented to, and approved by, the courts, as they do today in some districts, the prosecutor’s ability to impose arbitrary terms or conditions unrelated to the causes of the crime would be desirably restrained. John C. Coffee Jr. is the Adolf A. Berle Professor of Law at Columbia Law School and director of its Center on Corporate Governance.

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