Legislation Proposed To Govern Use Of Deferred Prosecution Agreements, Selection Of Monitors, In Corporate Fraud Investigations.

On January 22, 2008, Representative Frank Pallone, Jr. (D-NJ) introduced legislation in the U.S. House of Representatives that would require the Department of Justice ("DOJ") to meet specific guidelines, and obtain judicial approval, prior to entering into deferred prosecution agreements ("DPA") with corporations under federal criminal investigation. The proposed legislation would effectively eliminate the broad discretion currently enjoyed by the DOJ and U.S. Attorneys' Offices in making and monitoring such agreements.

DPAs have become an increasingly common way to resolve federal investigations of corporations alleged to have engaged in criminal conduct. Such agreements allow corporations to avoid prosecution (and possible conviction) by admitting guilt, paying large fines, adopting remedial measures, cooperating with the investigation and complying with various other conditions over a set period of time. Criminal charges are filed by the government, but actual prosecution is deferred for the term of the agreement. At the end of such period, if the company has complied with all of the conditions of the DPA, the charges are dismissed. Alternatively, the prosecution goes forward. A common component of DPAs is the appointment of an independent outside monitor to oversee the corporation's activities and compliance with the law and DPA during the term of the agreement. Monitors are paid by the corporation under investigation at an agreed upon rate.

According to a recent study, the number of DPAs (or non-prosecution agreements) rose from 5 in 2003 to 35 in 2006. Last year, the DOJ entered into a number of high-profile DPAs, including with Pharmacia & Upjohn Company, LLC (a subsidiary of Pfizer, Inc.), which involved the company paying $15 million and admitting it had illegally promoted Genotropin, a human growth hormone product, for uses not approved by the Food & Drug Administration; Maximus, Inc., which involved the company paying over $30.5 million and admitting it had submitted false Medicaid claims; BP America Inc., which involved the company paying over $300 million and admitting it had engaged in illegal commodities trading; and Ingersoll- Rand Company Limited, which involved the company paying $2.5 million and admitting it had paid kickbacks in connection with the U.N. Oil for Food Program.

Currently, the DOJ and U.S. Attorneys' Offices have broad discretion in determining when to enter into a DPA and in selecting a corporate monitor. These appointments can prove quite lucrative for the monitor, which has led to allegations of favoritism on the part of the DOJ in the individuals it has chosen to serve as monitors. For example, pursuant to a DPA entered into last fall between the U.S. Attorney's Office for the District of New Jersey and Zimmer Holdings, a medical supply company based in Indiana, former Attorney General John Ashcroft's consulting firm was selected through a no-bid process to monitor the company for 18 months. Ashcroft's firm stands to make as much as $52 million from the contract.

Under the new legislation, the Attorney General would be required to issue specific guidelines delineating when DPAs may be entered into. The bill lists factors to be considered in determining whether a DPA is appropriate, including: (1) the potential harm to employees, shareholders or other stakeholders of the corporation; (2) the degree of cooperation by the corporation; (3) any remedial action taken by the corporation; (4) the availability of criminal charges against specific employees of the corporation; and (5) the availability of sufficient alternative punishments or remedial actions. In addition, the new legislation would require judicial review and approval of DPAs by a federal district court judge or a magistrate, "to ensure that the agreement comports with public interest and all applicable laws and legal precedent." H.R. 5086, 110th Cong. § 2(c) (2008). Finally, under the proposed bill, if the DPA required the appointment of a corporate monitor, the monitor would be chosen not by the DOJ, but by a federal district judge or magistrate from a pool of pre-qualified firms with appropriate experience. Monitors would also be paid according to a pre-determined fee schedule set by the federal courts.

While DPAs often contain onerous conditions for the corporations under investigation, they are generally regarded as far preferable to prosecution and possible conviction which can result in, among other things, debarment from federal contracting. It appears that if the new legislation is passed, the strict guidelines and judicial oversight could make it more difficult for corporations under investigation to obtain these types of agreements from federal prosecutors, likely resulting in an increased number of actual prosecutions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr R. Joseph Burby, IV

Powell Goldstein LLP 

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