By Zachary J. Mastren, Esq.
Discussions of corporate ethics violations and criminal investigations invariably bring to mind companies like Enron, Tyco, AIG, and Arthur Andersen. Corporations that engage in criminal or unethical behavior face crippling fines and other court-imposed sanctions that translate to losses for shareholders, result in lost jobs, and even lead to bankruptcy.
Occasionally, corporations are able to pursue pre-trial diversion alternatives intended to “rehabilitate” an organization, rather than rely exclusively on criminal sanctions, in an attempt to deter future violators. Such agreements, commonly referred to as Deferred Prosecution Agreements (“DPA”) and Non-Prosecution Agreements (“NPA”), are entered into between prosecutors and the defendant corporation in lieu of criminal sanctions.
According to Gibson Dunn’s mid-year update, the first half of 2016 produced eleven corporate NPAs and DPAs between the DOJ, SEC and defendant corporations. Nine were NPAs and two were DPAs. These pre-trial agreements are finite in duration, typically 3-4 years, and contain specific mandates with which the corporation must comply. In most cases, the government will select an independent third-party “Monitor” to oversee the corporation’s compliance with the terms of the agreement. The goal of the Monitor is to work constructively with the corporation’s leadership to implement long-lasting positive changes. This may be achieved through the development of a robust compliance and ethics program, creation or revision of corporate policies and procedures, and assessing the corporation’s culture and “tone at the top.” If, at the end of the term, the corporation has successfully fulfilled its obligations under the agreement, the government will not pursue criminal charges.
Privacy Concerns and Monitorship Reports
Annual monitorship reports are often filed with the Court. In United States v. HSBC, whether such reports should be filed under seal or publicly accessible is under appellate review. On June 1, 2015, the U.S. Attorney’s Office for the Eastern District of New York filed under seal with the court its “First Annual Follow-Up Review” report prepared by HSBC’s appointed compliance monitor. In response to a request from a private citizen who filed a complaint against HSBC, the Judge ordered the unsealing of the report subject to redactions provided by HSBC and the government.
The Court considered whether a monitorship report constituted a “judicial document” to which the public would have a constitutional right of access. In concluding that the report was a “judicial document,” the Court reasoned that, because the report became an essential component of the court’s evaluation of HSBC’s compliance with the DPA, it was “critical to the execution” of the court’s duties.
Both HSBC and the government objected to the unsealing of the report, citing the potential chilling effect on HSBC personnel who cooperated with the monitor or the ability of would-be criminals to exploit weaknesses in HSBC’s anti-money laundering and sanctions compliance programs. To address these concerns, the government and HSBC were permitted to submit proposed redactions. Those redactions were ordered and the report remains under seal pending appellate review.
Confidentiality between the monitor and company under review is:
- critical to maintain the relationship between the monitor and company personnel;
- essential to preserve the protections afforded to bank secrecy information; and
- required to prevent use of the disclosed information for civil lawsuits and/or circumvention of internal controls.
We will await the outcome of the 2nd circuit’s appellate review and report back on these important privacy concerns. In the meantime, counsel representing a corporation facing criminal investigation should evaluate the feasibility of entering into such a DPA or NPA. If executed properly, a corporate Monitor can impart long-lasting constructive changes in a once-troubled organization and the corporation avoids a potentially protracted and expensive prosecution – as well as the additional negative consequences that may result.
Zachary J. Mastren serves as counsel to Leech Tishman Fuscaldo & Lampl. Zach currently serves as an investigator on a monitor team appointed to oversee General Motor’s adherence to a deferred prosecution agreement.
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