The U.S. Attorney’s office in San Diego last week announced it had resolved a high-profile fraud case against disgraced cycling star Floyd Landis through an unusual mechanism: a deferred prosecution agreement.
DPAs, as the agreements are known, are usually employed to resolve criminal allegations against corporations, not people. Landis, now age 36, essentially triggered the prosecution after he admitted to lying about his use of performance-enhancing drugs during his career. In 2007, he was stripped of his 2006 Tour de France title. This month he admitted to defrauding almost 2,000 donors to his charity by lying about his use of the illegal drugs.
The use of DPAs to resolve allegations against individuals is still rare, but happening with increasing frequency.
Earlier this summer, the U.S. Attorney’s office in Connecticut resolved one of the highest-profile accounting fraud cases of the last decade when it entered into a DPA with five former executives of General Re, the huge re-insurance company; and American International Group, Inc., the massive insurance concern. But unlike the Landis matter, the DPAs against the insurance executives came only after an appeals court had thrown out their convictions. Instead of a resource-intensive and uncertain attempt to retry the executives, the government chose the DPA route.
DPAs are attractive to individuals for the same reason corporations like them: they resolve uncertainty while avoiding a criminal conviction. The government, meanwhile, gets to declare a measure of victory by imposing fines or penalties, and in the case of corporations, operational reforms. If the defendant complies with the DPA provisions, the charges are dismissed after a period of time.
But DPAs have been criticized in the corporate context for lacking a deterrent effect. Now, some observers question whether the trend is taking root in the individual context as well.
Peter Henning, a professor at Wayne State University School of Law and contributor to the New York Times’ DealBook, cautioned that DPAs shouldn’t replace the traditional criminal process for individual defendants, in which prosecutors file charges or present them to a grand jury, and defendants either fight the charges at trial or plead guilty.
Prosecutors “have to be careful, if they were to do it in a case as a way to resolve it as an initial measure, because then it would become a template for others,” Henning told Main Justice. “It’s very much like first graders. ‘He got to do it, why don’t I?’ I don’t think they want to open up that Pandora’s Box.”
DPAs granted to individuals have mostly been used in fraud cases that have gone through major upheavals during the litigation process, like hung juries or overturned convictions, he said. “This is a way for the Justice Department to announce a victory and move forward,” Henning said.
Henning called the use of such agreements a “face-saving device” for the government. He noted that just six months earlier, the Los Angeles U.S. Attorney’s office had dropped a criminal doping case against Landis’s former cycling teammate Lance Armstrong – a high-profile retreat after some two years of investigation.
Still, the Landis case is likely “enough of an outlier” to keep the Pandora’s Box mostly closed, Henning said. “It may be that prosecutors will go more and more toward this type of resolution, which would be an interesting development,” he added. “He’s not a corporate or Wall Street defendant, so it may be far enough away from the mainstream.”
General Re: both sides declare victory
Other commentators have been critical of the use of DPAs and similar non-prosecution agreements to resolve allegations of corporate wrong-doing, arguing companies see the fines and penalties merely as the cost of doing business. In Foreign Corrupt Practices Act cases, where DPAs are most likely to be used, the Justice Department has been under pressure to charge more individuals with foreign bribery, under the theory that it’s people, not corporations, actually paying the bribes, and if individuals think they face prison time, they are more likely to resist corruption.
In the AIG-General Re case, prosecuted by the U.S. Attorney’s office in Connecticut, the government argued that the defendants colluded to craft a phony transaction to inflate the value of AIG stock by $500 million. The government alleged that the controversial transaction falsely manipulated AIG’s financial statements, increasing its loss reserves figure, which incorrectly signaled the company was performing better than in reality.
The transaction eventually led to the high-profile resignation of Maurice R. Greenberg, AIG’s former chief executive, in 2005.
The five executives — former Gen Re head Ronald Ferguson; chief financial officer Elizabeth Monrad; senior vice president Christopher Garand; assistant general counsel Robert Graham; and AIG vice president Christian Milton – were convicted on fraud charges in 2008. But in August 2011, an appeals court tossed the convictions, citing trial errors by the presiding judge three years earlier.
At that point, prosecutors usually either have to retry the cases or drop them outright. But by negotiating the deferred prosecution agreement, the government got the defendants to admit “that aspects of the… transaction were fraudulent” and that they “should have attempted to stop it from going forward, but instead continued to participate in it.” (Read the five DPAs here.) The defendants agreed to monetary penalties, ranging from $100,000 to $250,000. The Connecticut U.S. Attorney’s office did not return a request for comment.
Attorneys for the five defendants either declined to comment or did not return messages seeking comment. Garand’s attorney, Robert Cleary, portrayed the resolution as a vindication of his client, telling Bloomberg: “As Mr. Garand now looks to restore his good name and claim back his reputation, I would like to thank the Department of Justice for having the professionalism to recognize that this was a fatally flawed prosecution.”
Landis: balancing objectives
In the more recent Landis case, Peter Mazza, an Assistant U.S. Attorney for the Major Frauds and Special Prosecution Section in the San Diego U.S. Attorney’s office, said in an interview with Main Justice that the DPA allowed prosecutors to “take into consideration a whole host of factors and achieve our primary objective at the same time.”
That primary objective was to get back the $478,354 Landis allegedly obtained through fraud from 1,765 donors to the Floyd Fairness Fund. The DPA allows Landis three years to pay the restitution. Landis’s attorney, Leo Cunningham, did not respond to a request for comment.
“I can’t say one way or the other whether it’s more unusual or less unusual,” Mazza said of using a DPA to resolve the case. “As far as Mr. Landis’s case was concerned, it was an unusual case.” Mazza pointed to the fact that Landis admitted to doping before the prosecution even began.
Mazza said each case is different, but prosecutors have to balance between achieving victories and just outcomes. He said he couldn’t comment specifically about the negotiations that led up to the DPA resolution, but he said prosecutors felt it was the best resolution for the victims of the case.
U.S. Attorney’s manual silent on individuals
The U.S. Attorney’s Criminal Resource Manual – which sets policy guidelines for federal prosecutors – instructs on using DPAs in the corporate context with a 2008 memo from then-Acting Deputy Attorney General Craig S. Morford. The memo (which was updated in 2010) defines a DPA as follows:
“The terms ‘deferred prosecution agreement’ and ‘non- prosecution agreement’ have often been used loosely by prosecutors, defense counsel, courts and commentators. As the terms are used in these Principles, a deferred prosecution agreement is typically predicated upon the filing of a formal charging document by the government, and the agreement is filed with the appropriate court… Clear and consistent use of these terms will enable the Department to more effectively identify and share best practices and to track the use of such agreements.”
In the U.S. Attorney’s Manual, federal prosecutors are advised that DPAs can be a crucial tool to serve justice while at the same time lessening collateral damage.
“Under appropriate circumstances, a deferred prosecution or non-prosecution agreement can help restore the integrity of a company’s operations and preserve the financial viability of a corporation that has engaged in criminal conduct, while preserving the government’s ability to prosecute a recalcitrant corporation that materially breaches the agreement. Such agreements achieve other important objectives as well, like prompt restitution for victims.”
There is no guidance offered for use of DPAs in the individual context.
Frank Quattrone case
It’s unclear how often individual DPAs are negotiated. The Justice Department was unable to provide a tally.
But it’s known that in 2010, the South Carolina U.S. Attorney’s Office resolved its case against WebMD executive Michael A. Singer, who was facing fraud conspiracy charges, through a six-month DPA.
In 2007, four employees of Reliant Energy Services, Inc. resolved their cases with the U.S. Attorney’s office in San Francisco through DPAs. The defendants – Reggie Howard, Lisa Flowers, Jackie Thomas and Kevin Frankeny — had been accused of manipulating power prices during California’s energy crisis in 2000.
And it what may have been the first instance of an individual DPA occurred in 2006.
Technology investment banker Frank Quattrone had been facing obstruction of justice charges since 2003 after prosecutors alleged he encouraged bankers to destroy evidence of an underlying fraud scheme. His high-profile case first resulted in a hung jury. In a second trial, Quattrone was convicted of the charges. But on appeal, the court threw out the conviction based on improper jury instruction. Three years later, in 2006, Quattrone’s case was resolved with a deferred prosecution agreement. in which he did not admit guilt nor did he pay any fines.
Popular with corporations
The DPA as a tool to resolve complex cases is increasingly popular in corporate litigation, according to a recent analysis by lawyers at Gibson, Dunn & Crutcher LLP. In 2000, the government entered into two DPAs or non-prosecution agreements with corporations. In 2010, the government granted 40 such agreements. And now, the number is on pace to “eclipse that number,” said Jeremy Joseph, an associate with Gibson Dunn.
The most frequent use of DPAs and NPAs is within the department’s criminal Fraud Section for resolving corporate Foreign Corrupt Practices Act cases. But they have also been used to settle allegations related to immigration, gambling and the environment.
“These are extremely efficient tools for companies and the Department of Justice to use to resolve matters,” Joseph said. “They tend to protect stakeholders within the company and allow the company to close the door on the investigation and get back to business.”
DPAs came into being as a way of resolving criminal allegations against a company without destroying it. The trigger was accounting firm Arthur Andersen, which collapsed after it was charged with criminal obstruction related to an investigation of energy trader Enron Corp. The criminal charges caused its clients to flee, and the company’s 20,000 employees mostly lost their jobs. The company was convicted, but in 2005, the Supreme Court threw out the conviction, though too late to save the firm.
Correction and clarification: Investment banker Frank Quattrone was not charged with trading initial public offering shares in return for business, as this story originally reported. He was charged with obstruction of justice in a federal investigation into whether traders were demanding excessive commissions from hedge funds in return for providing the funds access to high-demand IPOs. In addition, it should be noted that Quattrone did not admit guilt in agreeing to a deferred prosecution agreement, nor did he pay any fine or submit to any restrictions on his work.