In February, yet another high-profile negotiated settlement between a company and a government agency was thrown into doubt after a judge refused to approve the terms reached by the parties. On Feb. 5, U.S. District Court for the District of Columbia Judge Richard Leon refused to approve a motion filed by the Department of Justice and Fokker Services B.V. (‘‘Fokker’’), thereby effectively rejecting the parties proposed deferred prosecution agreement (‘‘DPA’’), because he found the terms of the DPA to be ‘‘anemic.’’1 The parties have appealed his decision and recently requested an expedited review by the U.S. Court of Appeals for the District of Columbia Circuit. This is at least the fifth proposed settlement between the federal government and a corporation that a federal judge has questioned in the last four years. Judge Leon previously initially rejected a Foreign Corrupt Practices Act settlement between the Securities and Exchange Commission and IBM Corp.2 He approved another FCPA settlement between the SEC and Tyco Int’l Ltd., but only after a nine-month delay and the parties agreed to a stringent schedule of compliance reports to be filed directly with the court.3 Judge Leon is not alone in his increasingly aggressive review of government settlement agreements. His Fokker opinion relied in part on a prior ruling by Judge John Gleeson of the U.S. District Court for the Eastern District of New York, which emphasized the courts’ supervisory power to decide whether to approve DPAs. In that case, Judge Gleeson delayed approval of a settlement agreement between the DOJ and HSBC relating to alleged money laundering violations. This newly assertive judicial role in reviewing these agreements arguably began in 2011, when U.S. District Court for the Southern District of New York Judge Jed Rakoff rejected an SEC settlement with Citigroup regarding alleged misrepresentations in structuring and marketing a billion-dollar fund through which investors lost millions of dollars.4 Although an appellate court ultimately reversed Judge Rakoff’s ruling as an abuse of discretion 5, other judges seem undeterred from following his lead. Courts routinely approve parties’ proposed settlement agreements, whether they relate to a simple lawsuit between private parties, or a plea agreement or other negotiated resolution with the government. However, in the above-mentioned cases, judges have been concerned that the corporation was getting off too lightly for the alleged violations. Although each of these corporations were facing millions of dollars in penalties under the agreements they negotiated with the government, the courts wanted more. Judge Leon, for instance, noted that Fokker’s penalties only equaled the profits it allegedly obtained through the sanctions violations. Judge Rakoff objected that Citigroup was not required to admit the truth of the SEC’s allegations and that the affected investors were unlikely to benefit from the proposed settlement. Notably, in part as a result of Judge Rakoff’s criticism, the SEC has changed its policy and now frequently requires corporations to admit liability in settlement agreements, even though the appellate court reversed Judge Rakoff on this point.6 Corporations seeking to settle outstanding investigations with regulators like the DOJ or SEC should beware of the potential implications of this new trend. Government attorneys will be wary of agreeing to settlements that may appear overly generous to the corporation. This string of judicial rejections of settlement agreements threatens the government agencies involved and diminishes their traditional autonomy in negotiated resolutions. In particular, government attorneys may be more likely to adopt the following requirements:
- Demand that the corporation, or a subsidiary, accept a guilty plea rather than a DPA. Unlike corporations, individuals typically are required to plead guilty to resolve criminal liability. Corporations have been given alternative resolutions more frequently because of the argument that a corporate guilty plea can have unintended collateral consequences that harm shareholders and employees. Despite this concern, some judges have suggested corporations are getting off too lightly compared to individuals accused of comparable or less pervasive conduct. The U.S. Attorney General, in response to criticisms of the DOJ’s lack of action during the financial crisis, has also argued that no corporation is ‘‘too big to jail.’’ Notably, several recent large settlements, including the $2.6 billion settlement with Credit Suisse, have involved corporate guilty pleas.
- Demand information facilitating the prosecution of corporate officers and employees. Over the last few years, Congress, commentators and judges have criticized the DOJ for reaching negotiated settlements with corporations without prosecuting any of the individuals responsible for the corporation’s misconduct. In response, senior DOJ officials have emphasized the importance of holding individuals responsible for corporate crimes and demanded that corporations provide inculpatory information regarding current and former employees as a precondition for a favorable corporate settlement.
- Require restitution for victims of the misconduct. One of Judge Rakoff’s objections to the Citigroup settlement agreement was that it did not provide for any remuneration to the investors allegedly impacted by Citigroup’s conduct. Such a requirement could significantly increase the cost of a resolution. In addition, settlements that require admissions of liability can have a similar effect by collaterally estopping the defendant from disputing the allegations in follow-on private litigation, which increases the cost of a comprehensive resolution. However, these recent judicial decisions do hold a silver lining for companies that are looking to leverage the lessons learned from them. Where appropriate, corporate counsel should consider the following options when negotiating with the government:
- Emphasize the advantages of an NPA over a DPA. Unlike a DPA, a non-prosecution agreement (‘‘NPA’’) need not be approved or monitored by a federal court. For the DOJ, this would avoid the potential for judicial disapproval of the negotiated settlement agreement, giving the DOJ certainty and finality on its own terms. For the corporation, an NPA is viewed as less severe than a DPA, and thus the company will benefit from the lower opprobrium that would attach to that type of agreement. It would behoove companies facing a likely DPA to highlight the advantages to both parties of avoiding judicial review of their settlement.
- Demand that mitigating factors be fully and clearly presented in the settlement documents. The statement of facts and other language in a corporate DPA are the result of often vigorous negotiations between the parties, but the government usually insists on certain admissions as a condition of settlement. As a result, it is not unusual for the settlement documents to contain a detailed recitation of stipulated facts even though the government would have been hard-pressed to actually prove them at trial. In light of the fact that courts are increasingly reading the settlement documents and believing the defendant corporation was receiving too favorable a deal, it may be prudent for the parties to include a similarly detailed list of mitigating factors to balance an aggressively written presentation of the government’s case. More even-handed settlement documents would both assist the court in evaluating the reasonableness of the ultimate settlement and demonstrate the corporation’s cooperation and desire to act responsibly.
The legal setting in which corporations are negotiating with U.S. regulators is always evolving. Federal judges’ increasing willingness to second-guess negotiated settlements between the government and corporations is likely to encourage government attorneys to seek even more onerous settlements to ensure that judges do not reject them or criticize the agency in open court. Companies and their counsel should be ready to push back, using the judicial scrutiny to their advantage where possible. 1 United States v. Fokker Servs. B.V., 14-cr-121 (D.D.C. Feb. 5, 2015) (Mem. Op.) at 13. 2 SEC v. Int’l Business Machines Corp., 11-cv-00563 (D.D.C. Dec. 20, 2012). 3 SEC v. Tyco Int’l Ltd., 1:12-cv-01583 (D.D.C. Dec. Sep. 24, 2012). 4 SEC v. Citigroup Global Mkts., Inc., 827 F. Supp. 2d 328 (S.D.N.Y), rev’d 752 F.3d 285 (2d. Cir. 2014). 5 SEC v. Citigroup Global Mkts., Inc., 752 F.3d 285 (2d Cir. 2014). 6 Id. at 295. This article was has been reproduced with permission from Corporate Accountability Report, 13 CARE 17, 04/24/2015. Copyright 2015 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com