Conversations With... Washington, DC 20036 202.588.0302 Wlf.Org Winter 2016

Washington Legal Foundation Advocate for Freedom and Justice® 2009 Massachusetts Avenue, NW Conversations With... Washington, DC 20036 202.588.0302 wlf.org Winter 2016

Inquiring into the Expanded Use of Deferred- Prosecution and Non-Prosecution Agreements

The Honorable Jay B. Stephens that the government is exercising an The Honorable Larry D. Thompson operational role in managing private business are a few of the concerns In this edition of Washington Legal that can flow from the use of such Foundation’s Conversations With, agreements. The renewed focus on the Chairman of WLF’s Legal Policy the accountability of individuals and a Advisory Board, Jay B. Stephens, company’s cooperation in prosecuting directs a discussion with University its own employees could also affect of Georgia School of Law’s Larry D. the dynamic of negotiating and using The Honorable Jay B. Stephens Thompson on two pre-trial diversion such agreements. Chairman, mechanisms that federal prosecutors WLF Legal Policy Advisory Board frequently utilize in white-collar Finally, remembering that DPAs and Of Counsel, Kirkland & Ellis LLP criminal enforcement. NPAs are rooted and used in the context of a criminal investigation, The federal government’s use of not a civil or administrative action, deferred-prosecution agreements we should assess whether they meet (DPAs) and non-prosecution the purposes of the criminal law agreements (NPAs) related to or unnecessarily contribute to the investigations of business enterprises “overcriminalization” of conduct and has expanded significantly in the decisions in our society. past decade. Such agreements have The Honorable Larry D. Thompson implications for prosecution policy WLF discussed all of these issues and John A. Sibley Chair of Corporate and and the reach of federal enforcement more with Mr. Thompson, the former Business Law, University of Georgia School of Law agencies into business enterprises. Deputy Attorney General of the They also potentially shift the balance United States. Mr. Thompson draws of power between federal prosecutors upon his wealth of experience as a and private parties, particularly by private attorney, a U.S. Attorney, and extending the administrative regulatory general counsel of PepsiCo to discuss authority of enforcement agencies, the evolution and expanded use of by requiring continuing cooperative deferred-prosecution agreements and conduct from private businesses often non-prosecution agreements. through monitors, and by generally defining legal obligations and the Jay Stephens: Larry, can you briefly parameters of the criminal law without describe DPAs and NPAs and explain the oversight of the judiciary. their similarities and differences?

DPAs and NPAs also have a Larry Thompson: In the context significant impact on public and private of a federal criminal investigation, companies, especially where the DPAs and NPAs are similar in that imposition of a monitor is involved. High the Department of Justice requires a costs, continuous external oversight business organization to do certain of business decisions, and a concern things or take certain actions, like INQUIRING INTO THE EXPANDED USE OF DEFERRED-PROSECUTION AND NON-PROSECUTION AGREEMENTS

establishing or modifying a compliance Organizations memo that you issued as program, in exchange for the Department Deputy Attorney General of the United closing the investigation. DPAs typically States in 2003, the DOJ made scarce use of involve actual criminal charges being filed these devices. Was the 2003 memo aimed “The focus of my against the organization but then being at expanding their use? memo [the Thompson stayed and eventually dismissed. memo] was incenting Mr. Thompson: No, not really. And, you corporations and After a period of time, if the organization are correct about the limited use of DPAs fulfills its obligations under the agreement and NPAs, before and even during my tenure business organizations with the Department, NPAs allow a business as Deputy Attorney General. In fact, even to cooperate with the organization to avoid the specter of criminal today some of the litigating divisions of the government as much as charges altogether, but again only after Department use them only sparingly, namely possible. Cooperation the organization has fulfilled its obligations the Antitrust and Environment and Natural was key.” under its agreement with the Department Resources divisions. I do not believe the and at the end of a specified period of time. Principles of Federal Prosecution of Business Also, as Judge Leon’s opinion in the relatively Organizations issued during my tenure even recent U.S. v. Fokker Services B.V. case made mentioned DPAs or NPAs. clear, DPAs require court approval while NPAs do not. The government always retains My memo did refer, for the first time, to the authority to not prosecute a case. [79 F. pretrial diversion for a corporation. Pretrial Supp. 3d 160 (D.D.C. 2015)] diversion has been available for use by prosecutors for a long time. Under pretrial Mr. Stephens: How do DPAs and NPAs differ diversion, in an appropriate case, a matter from a traditional plea-bargain agreement? is diverted or taken out of the criminal system subject to an agreement on certain Mr. Thompson: DPAs and NPAs are terms and conditions with the government. dramatically different. In a plea-bargain The focus of my memo was incenting agreement, the defendant business corporations and business organizations to organization admits to criminal wrongdoing cooperate with the government as much as on the record. A court will typically possible. Cooperation was key. require a high-ranking official to enter an appearance and admit to the organization’s DPAs and NPAs were first discussed in the wrongdoing. This act alone not only results 2008 revision of the Principles because of in tremendous embarrassment, it also the specter of collateral consequences. The leads to sensational publicity and serious Department was appropriately concerned reputational harm. More importantly, with the need to avoid harm to innocent third the collateral consequences of a criminal parties like shareholders and employees conviction for a business organization can as much as possible when a business be devastating, including the possibility of organization is charged with a crime. extinction. A business organization that has been convicted of a crime faces damaging Mr. Stephens: As you note, that memo admissions in civil suits, license suspensions, associated prosecutors’ use of pre-trial government program debarment, and diversion with voluntary cooperation. Did government benefit exclusions. it inspire the type of increased cooperation that DOJ sought from corporations? Do © 2016 Washington Legal Foundation Mr. Stephens: Prior to the Principles such pre-trial diversion mechanisms remain of Federal Prosecution of Business an effective “carrot” for cooperation?

2 Conversations With... Washington Legal Foundation Winter 2016

Mr. Thompson: From the standpoint of a even inappropriately insist on the firing former prosecutor who dealt with many or removal of an employee whose role in white-collar cases, I can tell you that real and the matter under investigation is not fully meaningful cooperation has been sometimes understood by management. Of course, in difficult and many times elusive—despite the the past, privilege waivers were routinely “The coercive effect of obvious benefit to a business organization used as a condition of cooperation in formal prosecutors’ sometimes when it is not criminally charged. I actually pre-trial diversion agreements, DPAs, and leveraging their do not have a full understanding of why this NPAs. tremendous bargaining happens. power under the threat Mr. Stephens: The effectiveness of a Many lawyers have legitimate privilege company’s corporate compliance program of criminal prosecution concerns when attempting to engage and has become a major factor in the use of DPAs in an attempt to cooperate with the government. I have seen and NPAs, and DOJ’s crafting of their terms. secure some type of a few others who were more concerned with Are prosecutors in the best position to judge inappropriate or ill- protecting individuals inside the business what programs are “effective,” and then to conceived cooperation organization and did not understand that prescribe measures in these agreements to is something counsel their professional obligations went to address the shortcomings? the entity and not individual potential should always be aware targets. However, at the end of the day, Mr. Thompson: While it is obviously good of and try to avoid.” authentic and real cooperation, where the that prosecutors insist on an increased focus government understands the facts, is almost on compliance and ethics programs from always a good thing for an organizational organizations with problems, what exactly client. Then, if the situation warrants it, constitutes an effective compliance and counsel should work diligently to negotiate ethics program is often beyond the expertise and structure an appropriate and balanced or core competency of prosecutors. The agreement with the government, whether it Department’s Criminal Division understands be a pre-trial diversion agreement, DPA or this issue and has recently brought on an NPA. individual with expertise in compliance and ethics to help it evaluate these programs. Mr. Stephens: What are the negative ramifications of using pre-trial diversion as However, we must avoid a cookie-cutter an incentive for corporate cooperation? approach to determining what constitutes effective programs. Effective compliance Mr. Thompson: The coercive effect of programs will vary from one industry to prosecutors’ sometimes leveraging their another and by the history and development tremendous bargaining power under the of cultures within organizations. I have found threat of criminal prosecution in an attempt that exemplary cultures within organizations to secure some type of inappropriate or ill- often develop differently. conceived cooperation is something counsel should always be aware of and try to avoid. For example, the Department’s past unthinking position that a Chief Compliance For example, prosecutors might insist on Officer should never report to a General some type of organizational “cooperation” Counsel made no sense. After Sarbanes- that may involve some unnecessary Oxley, it is clear that the General Counsel’s “admissions” or non-contradiction clauses ultimate fiduciary responsibility is to that will be extremely detrimental in the organization and not to the CEO or www.wlf.org collateral civil litigation. Or they might management. Many investigative matters

3 INQUIRING INTO THE EXPANDED USE OF DEFERRED-PROSECUTION AND NON-PROSECUTION AGREEMENTS

involve complex legal issues, and it may be program was ineffective simply because it more practical, efficient, and effective for the did not prevent an employee from breaking CCO to report to the GC, of course, as long as the rules. That is simply unrealistic if the the CCO has a high degree of independence company has done everything it should have, “[T]here will inevitably and unfettered access to the CEO and Board. including allocating sufficient resources and be someone who does using best practices, in implementing its not follow the rules. We should focus on the substance of these program. Have you ever seen a city anywhere This is just the nature of programs and relationships and not just the in the world with, say, 25,000 people form. DPAs and NPAs often have provisions without a police force? Non-compliant things. I have to say that for a monitor to be appointed and oversee people will, unfortunately, always be with us. an effective compliance an organization’s compliance with the terms and ethics program is of the agreement. Experienced monitors Mr. Stephens: Can DPAs and NPAs in fact really planning for the can be very helpful in this regard. Also, using be effective tools for achieving corporate inevitable compliance organizations like the Ethics and Compliance compliance without empowering DOJ to act failure. How the Initiative, which has a tremendous amount as an administrative compliance regulator of of knowledge and experience with these the private sector? organization handles programs, can be extremely helpful. that failure will test the Mr. Thompson: Absolutely. When program’s effectiveness.” Mr. Stephens: In using DPAs and NPAs structured and implemented properly, and as an incentive for voluntary corporate without overreaching by prosecutors, DPAs compliance, DOJ tries to avoid chilling self- and NPAs can be powerful tools for achieving reporting. Does the Department consistently effective compliance and ethics programs achieve this delicate balance? within business organizations. Prosecutors will need to rely more on experienced Mr. Thompson: There will always be and knowledgeable compliance and legitimate limitations associated with ethics professionals rather than their own effective compliance and ethics programs. preconceived and often wooden notions as All organizations have people who are to what constitutes an effective program. not that smart or who may be ethically challenged. An organization must work Mr. Stephens: Commentators on pre-trial hard to implement and administer its diversion agreements have described DPAs program. There must be proper training, and NPAs as a “middle ground” between communication, and consistent discipline. declining to prosecute and prosecution. The organization must allocate sufficient That depiction gives rise to two criticisms. resources to the program. The first is that DPAs and NPAs lead to “overcriminalization,” that is, seeking Notwithstanding doing all this, there will criminal sanctions where administrative or inevitably be someone who does not follow civil remedies may be more appropriate. Is the rules. This is just the nature of things. this a valid criticism? I have to say that an effective compliance and ethics program is really planning for Mr. Thompson: This is absolutely a valid the inevitable compliance failure. How the criticism. DPAs and NPAs should never organization handles that failure will test the be used as a substitute for a criminal program’s effectiveness. declination. Professor David Uhlmann of the University of Michigan Law School © 2016 Washington Legal Foundation A DPA involving Hewlett-Packard contained has written an excellent article which a stipulation that the company’s compliance comprehensively details the overuse of DPAs

4 Conversations With... Washington Legal Foundation Winter 2016 and NPAs by the Department. [Uhlmann, But, prosecutors must make principled Deferred Prosecution and Non-Prosecution decisions. The detailed factors laid out in Agreements and the Erosion of Corporate The Principles of Federal Prosecution of Criminal Liability, 72 Md. L. Rev. 1295 (2013)] Business Organizations guide prosecutors Professor Uhlmann quite properly points out as to when a non-criminal alternative to a “[P]rosecutors should that prosecutors should never leverage the case is preferable to criminal charges. If no never leverage the threat of criminal charges to coerce a business criminal charges are warranted, that should threat of criminal organization into entering a DPA or NPA. end the case for prosecutors. charges to coerce a business organization Abusing such leverage is contrary to our Mr. Stephens: You noted earlier that DPAs Rule of Law. If, at the end of the day, a case must be judicially approved. What is DOJ’s into entering a DPA does not warrant criminal prosecution, the position on the extent of judicial oversight or NPA. Abusing such prosecutor should basically put down her required? leverage is contrary to pen. Of course, the government is free to our Rule of Law. If, at pursue non-criminal alternatives like civil Mr. Thompson: In the Fokker Services case I the end of the day, a enforcement under certain circumstances. previously mentioned, Judge Leon describes case does not warrant To do otherwise is classic overcriminalization. the government’s position on judicial Every case, no matter the facts, then oversight as one where the court’s role is criminal prosecution, becomes a criminal case that ends with a “extremely limited.” In another part of his the prosecutor should “notch in the belt” for prosecutors and the opinion, he notes the parties’ positions as basically put down inevitable DPA or NPA. wanting the court to “rubber stamp” the her pen . . . . To do agreement. otherwise is classic Mr. Stephens: On the other hand, some overcriminalization.” argue that DPAs and NPAs improperly focus Mr. Stephens: Recently we have seen an on preventing future wrongdoing rather effort to increase judicial engagement in the meting out punishment. What are your DPA/NPA resolution process. Is this helpful thoughts on that? in counterbalancing DOJ’s effort to extend its reach into the private sector and to define Mr. Thompson: Since 1909, when the the law by administrative decision making? Supreme Court rendered its opinion in the How does DOJ see this development? New York Central Railroad case, the law of the land is that a business organization Mr. Thompson: Given the Department’s can be criminally charged for the acts or position in theFokker case, I do not believe it omissions of its employees or agents within would support much of an increase in judicial the scope of their employment. [N.Y. Central involvement in DPA or NPA negotiations. and Hudson River R.R. Co. v. U.S., 212 U.S. Judicial involvement may—and I stress 481 (1909)] Prosecutors are not free to may—serve to check the Department’s ignore the law of the land. In appropriate sometimes seeming exercise of raw power in situations, it is entirely proper, indeed coercing a party to enter into an agreement. necessary, to reflect society’s condemnation However, judges, by and large, have no more of the offending behavior through criminal business experience than prosecutors. If a charges. Situations involving loss of life, DPA or NPA is appropriate in a given case, I massive environmental calamities, and would favor more private ordering between widespread and adverse economic loss the parties. are ones where criminal prosecution of a business organization should definitely be Mr. Stephens: Would enhanced judicial www.wlf.org considered. oversight of DPAs lead to a wholesale

5 INQUIRING INTO THE EXPANDED USE OF DEFERRED-PROSECUTION AND NON-PROSECUTION AGREEMENTS

reduction in DPAs, or a more selective use The Department has a well-established of them? procedure for dealing with certain individuals under these circumstances which, as you Mr. Thompson: Clearly, a court should note, is pretrial diversion. Pretrial diversion “I do not believe the be concerned with and not approve a would be the appropriate way to deal with Department [of Justice] “sweetheart deal” between the government certain potential defendants. Low-level will ever use DPAs or and a business corporation. However, employees, first-time offenders, individuals NPAs for individuals . . . . enhanced judicial oversight would probably who cooperated with the government and reduce the number of DPAs offered to individuals who simply made a mistake You have either a rogue organizations. Without some overall, could all be candidates for pretrial diversion. employee or wrongdoing concrete framework to follow, I would High-level individuals whose conduct is that was addressed be uncomfortable with too much judicial deliberate and serious and who profit from appropriately through involvement in DPAs. their misconduct should be prosecuted with the organization’s pre- their cases being resolved by trial or plea existing compliance Judges simply do not have the time to agreement. develop as detailed an understanding of program. Every criminal the facts of a complex case as the parties Mr. Stephens: Will the focus on individuals case involving an have. Moreover, a judicial decision in the obviate the appropriateness of using DPAs executive or employee context of a DPA would most likely be almost and NPAs for the enterprise? need not and should unreviewable and would be based, as all such not end with a DPA or decisions are, on a judge’s life experiences, Mr. Thompson: This is an excellent NPA [for the business which may not involve much exposure to or question. If a business organization knowledge of business organizations. has a state-of-the-art compliance and organization].” ethics program and cooperates with the Mr. Stephens: The recently released government under the terms of the Yates Principles of Federal Prosecution of memo, there really should not be a need Business Organizations memo by Deputy to resolve an investigation involving the Attorney General Yates [ the “Yates memo”] organization with a DPA or NPA. You have emphasized prosecution of individuals, either a rogue employee or wrongdoing especially corporate executives. DOJ has that was addressed appropriately through never utilized DPAs and NPAs for individuals. the organization’s pre-existing compliance Will an increased DOJ focus on executives program. Every criminal case involving an change that practice? Should such pre-trial executive or employee need not and should diversion be used with individuals? not end with a DPA or NPA.

Mr. Thompson: I do not believe the Mr. Stephens: What process occurs within Department will ever use DPAs or NPAs for DOJ or U.S. Attorneys’ offices when a DPA or individuals, although I understand that on NPA is being considered and crafted? at least two occasions the SEC has entered into DPAs with individuals. The Yates Mr. Thompson: Quite frankly, the process memorandum focused on, as a condition has not been very transparent or consistent. to receiving cooperation credit, a business Within the Department, the various organization’s identification of all individuals litigating divisions handle DPAs and NPAs involved in wrongdoing regardless of their differently. The process also varies among position and the organization’s providing the U.S. Attorney Offices. The Department © 2016 Washington Legal Foundation the government all relevant facts about the has issued guidance about the selection of individuals’ misconduct. corporate monitors to address criticism that

6 Conversations With... Washington Legal Foundation Winter 2016 the selection process was flawed and riddled Mr. Stephens: What are the short- and with favoritism. long-term impacts of a DPA or an NPA on a company, especially one that is publicly Mr. Stephens: How can in-house and traded? outside counsel most effectively participate “If line prosecutors in decision-making at DOJ or within U.S. Mr. Thompson: Despite the concerns I have are insisting on novel Attorneys’ offices regarding a company’s raised about the overuse of DPAs and NPAs, terms that go beyond DPA or NPA? when appropriately entered into, they can the Department’s have a tremendous positive short- and long- expertise or authority, Mr. Thompson: Counsel involved in term impact on a business organization. negotiating DPAs and NPAs should have In the short term, a company can put an then counsel should a thorough understanding of all the facts embarrassing and distracting matter behind not hesitate to engage of their case and compare their facts with it. In the long term, an effective DPA or supervisory Department other negotiated DPAs and NPAs. Counsel NPA can lead to a well-functioning and or U.S. Attorney Office should focus on DPAs and NPAs entered into principled compliance and ethics system for officials. Attempting by the relevant Department component a business organization. It will facilitate the to use the DPA or NPA and industry-specific DPAs and NPAs. If line cultivation of an organization-wide culture prosecutors are insisting on novel terms that of ethics and compliance. It will even have process as some sort of go beyond the Department’s expertise or the imprimatur of government. All of this ‘backdoor’ regulatory authority, then counsel should not hesitate is good. Especially for public companies, effort is really a form of to engage supervisory Department or U.S. the markets will be reassured that effective abuse of prosecutorial Attorney Office officials. Attempting to use preventative measures have been put into authority.” the DPA or NPA process as some sort of place, and confidence in the organization, its “backdoor” regulatory effort is really a form management, and its board can be restored. of abuse of prosecutorial authority. Mr. Stephens: One more question to Mr. Stephens: In negotiating a DPA or NPA wrap this all up: What trends do you see resolution, what are the considerations in the government’s use of DPAs and NPAs regarding a corporate monitor that must be to resolve complex allegations, and what considered? attitude changes have you seen in companies regarding their use? Mr. Thompson: As I noted, the Department has issued guidance on the selection and use Mr. Thompson: I see two key trends. of monitors. Beyond this, monitor candidates One, DPAs will be used internationally. must be carefully vetted by counsel for Recently, the United Kingdom’s Serious the business organization. A candidate’s Fraud Office announced its first DPA with past relationship with the government, Standard Bank PLC. Second, Congress will the candidate’s experience in undertaking continue to monitor the Department’s use these kinds of assignments, their expressed of DPAs or NPAs to make certain they are or known views on business generally, and used appropriately and are not vehicles their reputations for professionalism and for prosecutorial abuse. I’m especially impartiality all should be considered. I have concerned about overuse of DPAs, lack of heard about unfortunate experiences where standards and the Department mandating the monitor did not work out either for the so-called standards in areas which it lacks government or the private party or even expertise and has absolutely no regulatory both. authority. This reminds me of what Friedrich www.wlf.org Hayek warned against long ago. Hayek

7 INQUIRING INTO THE EXPANDED USE OF DEFERRED-PROSECUTION AND NON-PROSECUTION AGREEMENTS

noted that while every law or regulation restricts, to some extent, individual freedom, what we must avoid is the unpredictable application of the law. When government does this, he noted, it “stultifi[es] individual efforts by ad hoc action.”

“I’m especially concerned Mr. Stephens: Larry, thank you for participating in this discussion. about overuse of DPAs, lack of standards and the WLF’s Conversations With provides a forum for leading experts from business, Department [of Justice] government, academia, and the legal profession to discuss current legal policy issues. In these conversations our participants give frank thoughts on a wide range mandating so-called of important contemporary subjects. standards in areas which it lacks expertise and has WLF is a national, non-profit, public-interest law firm and policy center. We publish absolutely no regulatory timely legal studies, engage in innovative litigation, and communicate directly to the authority. This reminds public. To receive information about WLF publications, contact Glenn Lammi, Chief me of what Friedrich Counsel, Legal Studies Division at [email protected]. Hayek warned against ______long ago. Hayek noted ... what we must avoid is the unpredictable The Honorable Jay B. Stephens retired in 2015 from Raytheon Company after serving application of the law.” for nearly 13 years as a member of the company’s senior leadership team, including as Senior Vice President, General Counsel, and Corporate Secretary. Prior to joining Raytheon, Mr. Stephens had a distinguished career in the public and private sectors, serving as Associate Attorney General of the United States (2001-2002); United States Attorney for the District of Columbia (1988-1993); Deputy Counsel to the President of the United States (1986-1988); Deputy General Counsel of Honeywell International; and as a partner in the Washington office of Pillsbury, Madison & Sutro. In January 2016, Mr. Stephens joined Kirkland & Ellis LLP where he serves Of Counsel. He is Chairman of Washington Legal Foundation’s Legal Policy Advisory Board.

The Honorable Larry D. Thompson is the John A. Sibley Chair of Corporate and Business Law at the University of Georgia School of Law. He is a member of Washington Legal Foundation’s Legal Policy Advisory Board. In December 2014, Mr. Thompson retired as senior vice president of government affairs, general counsel, and secretary for PepsiCo. Mr. Thompson previously served as a senior fellow with The Brookings Institution in Washington, DC. His government career includes serving in the U.S. Department of Justice as Deputy Attorney General and leading the department’s National Security Coordination Council. Mr. Thompson was also chosen to head the Corporate Fraud Task Force, where he led, among others, the Justice Department’s Enron investigation. Previously, he was a partner in the Atlanta law firm of King & Spalding, where he practiced in the antitrust and litigation departments. Mr. Thompson also served as the U.S. Attorney for the Northern District of Georgia. In 2009, Ethisphere Magazine recognized Mr. Thompson as “one of the most respected and admired general counsel in business today.” He recently joined Atlanta-based Finch McCranie, LLP as Counsel.