X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
For a company under investigation, it is difficult to imagine that there would be any downside if the government decides not to prosecute. With increasing frequency, however, the package deals offered by federal prosecutors include demands — that the company admit a set of facts and agree not to contradict them in the future — that should give corporate decision makers pause. The Department of Justice’s approach to declining to prosecute corporations has, in the past several years, changed directions. These changes, including demands for noncontradiction clauses, are significant yet largely undocumented in the traditional sources of guidance for department attorneys, the U.S. Attorney’s Manual and policy memorandums from the department’s senior management. Some necessary background: The Justice Department has two ways to formalize an agreement not to prosecute a person or entity: a nonprosecution agreement and a deferred-prosecution agreement. They differ in one primary respect: In a deferred-prosecution agreement a charge is filed (typically in the form of an information, an alternative to an indictment), and the prosecution of the charge is postponed for the period of the agreement, then dismissed. In a nonprosecution agreement, by contrast, no charge is filed, and the former target merely agrees to certain conditions in exchange for the government’s agreement not to pursue charges. In either approach, the company escapes prosecution if it fulfills its obligations for the term of the agreement. The Justice Department generally requires that nonprosecution and deferred-prosecution agreements include a recitation of facts, which — like the factual basis recited in a guilty-plea hearing — both (1) establishes the elements of the offenses the government alleges that the company committed, and (2) acknowledges the company’s acceptance of responsibility. Prosecutors have become increasingly assertive in demanding the inclusion of clauses that deem the future contradiction of the admitted facts by people affiliated with the company (including officers, directors, employees, and agents) to be a breach of the deferred-prosecution agreement. If the company fails to repair this breach by repudiating the contradictory statements, the government is free to prosecute the company. And if the government does so, the company’s admissions mean that a conviction is all but ensured. BEWARE ESTOPPEL Factual statements and accompanying noncontradiction clauses can also heighten the exposure of corporations in other lawsuits. When misconduct has occurred, companies rarely face just a government investigation. Civil litigation — by other federal agencies, state governments, or private class action plaintiffs — arising from the same facts is commonplace. Factual statements attached to government agreements are arguably admissible as the statements of a party opponent in such civil litigation. They may also preclude the company entirely from offering contradictory evidence, either because doing so would breach the agreement (risking renewed prosecution) or because of judicial estoppel. The risk of judicial estoppel barring any contradiction of previous admissions is particularly acute if the company’s statements are made in a deferred-prosecution agreement. Although the difference between nonprosecution and deferred prosecution might seem technical, the existence of filed charges in a deferred prosecution may make all the difference in subsequent lawsuits. Judicial estoppel occurs when a court precludes a party from disputing statements of fact that it made in a prior judicial proceeding to obtain an advantage. A deferred-prosecution agreement most likely satisfies these requirements. The admitted statements induce the government to grant leniency in a criminal prosecution (indisputably a benefit), and the filing of charges and the approval of the court in their deferral provide the judicial context necessary for a future opponent to invoke estoppel. Nevertheless, a deferred-prosecution agreement may represent a good bargain in the final analysis, even if it is encumbered by requirements for making admissions and agreeing not to contradict them. Reaching that conclusion, however, requires a careful and dispassionate appraisal of the costs and benefits of such a deal — even at a time when the tendency may be to view any deal from the government as an offer that cannot be refused. SUBSTANTIAL CONCERNS In addition to the risks to the company entering the agreement, noncontradiction clauses pose challenges for other targets and the criminal justice system itself. Although the government has a legitimate interest in establishing that a company receiving leniency has accepted responsibility for misconduct, noncontradiction clauses raise substantial countervailing concerns. Unlike the factual basis recited in a guilty plea, the factual statements attached to nonprosecution and deferred-prosecution agreements are neither sworn nor subject to question by a disinterested judge. The prosecutor frequently drafts the factual statement, and a company’s willingness to argue over its accuracy depends on the depth of its own factual investigation and the peril it perceives both from its continued prosecution and from collateral civil litigation that might arise from the same conduct. In many cases the incentive to dispute a mistaken or groundless allegation is slim. The government may be rebuffed when the requested admission strikes too close to the defendant’s decision makers. For example, the law firm Milberg, Weiss, Bershad & Shulman recently refused to sign a deferred-prosecution agreement. After negotiations broke down and the firm was indicted, it complained that the government demanded that the firm make “unfounded” accusations against partners in the firm and effectively become the government’s agent. Individuals who remain targets of investigations also have argued that noncontradiction clauses require companies to police their employees’ statements and chill the disclosure of testimony that contradicts the government’s theory of the case. For example, concern about potential witness corruption motivated a defendant in the KPMG tax-fraud prosecution in New York to move to dismiss the indictment against him on the grounds that the noncontradiction clause in KPMG’s deferred-prosecution agreement constituted prosecutorial misconduct. The defendant, Jeffrey Eischeid, argued that the clause coerced KPMG-affiliated witnesses to adhere to the government’s version of the facts regardless of their personal experiences. In United States v. Stein (2006), a case better known for its ruling against the government’s discouraging KPMG from advancing attorney fees, Judge Lewis Kaplan of the Southern District of New York rejected Eischeid’s arguments, noting that the agreement was not binding on individuals. He accepted the government’s assertion that it did not intend to use the agreement to affect the substance of testimony. Kaplan concluded, in essence, that an affiliated person’s contradiction of admitted facts would make a mockery of the justice system, while the danger of witnesses conforming their testimony to the government’s version of events was only speculative. This reasoning strikes many white-collar defense counsel as precisely 180 degrees off the mark. Defense counsel widely believe that this pressure to stick to the approved company position in judicial proceedings has a substantial chilling effect on employees’ frank testimony and their willingness to participate in informal interviews. Noncontradiction clauses may create more problems for prosecutors than they solve. The agreement is evidence of bias when an employee covered by a noncontradiction clause serves as a witness. Even if the witness concurs with the company’s factual admissions, his testimony will be tainted by the prospective penalties the company faces under the agreement if the witness contradicts those admissions. COURTS TO THE RESCUE Prosecutors and judges can and should mitigate these problems. Federal courts are empowered to play an active role in overseeing the content and enforcement of these agreements because of the Justice Department’s increased preference for deferred-prosecution agreements. After filing a criminal information as part of a deferred-prosecution agreement, the government must seek court approval of deferral of the charges to suspend the running of the time limits under the Speedy Trial Act. Courts can and should use this opportunity to review proferred agreements carefully. If necessary, they should demand modifications to ensure that the agreement does not hinder other targets’ ability to obtain evidence in their defense. Reasonable modifications might include limiting the scope of affected persons to only those whose statements are most likely to be viewed as the company’s own or clearly immunizing the company for statements made in the course of litigation. The Justice Department also should provide guidance to prosecutors in the reasonable use of factual statements and noncontradiction clauses. In doing so, the department should consider delegating some aspects of monitoring a company’s compliance to other agencies. The progenitor of corporate deferred-prosecution agreements is the pretrial-diversion process that grew from an experiment early in the 20th century in the Eastern District of New York. Today most jurisdictions with substantial pretrial-diversion programs use the probation office to supervise defendants’ compliance with the terms of pretrial-diversion agreements. This has a double benefit, releasing the U.S. Attorney’s Office from the burden of administering the program and interposing a third party with no interest in the ongoing investigation to decide whether a breach has occurred. Although these existing pretrial-diversion procedures are poorly matched to the deferred prosecution of a corporate defendant (pretrial diversion was designed for routine crimes, such as minor drug offenses), many deferred-prosecution agreements already provide for the implementation of a corporate-integrity program with oversight by a government agency such as the Securities and Exchange Commission or the Department of Health and Human Services. These agencies already monitor the company’s compliance with its obligations not to violate federal law during the term of the agreement and could play a role similar to that of the probation office in pretrial-diversion programs. Like other government demands, such as waiver of attorney-client privilege and withholding payment of attorney fees, the unregulated use of noncontradiction clauses may have unintended consequences that ultimately are corrosive on the criminal justice system. Prosecutors and judges should be circumspect in drafting and enforcing these powerful provisions, and companies should be mindful of the collateral consequences to themselves and their employees before they agree to agree with the government’s version of events.
Ben Vernia is special counsel in the white-collar and investigations practice group of the D.C. office of Covington & Burling.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.