Fifteen weeks have now elapsed and a federal judge in Brooklyn still has not approved December’s landmark money laundering settlement between the Justice Department and HSBC Holdings plc.
The highly unusual delay adds to signs that U.S. District Judge John Gleeson is considering rejecting the Justice Department’s much criticized $1.92 billion deferred prosecution agreement with the London-based bank.
But such a move would create turmoil and uncertainty. The bank could have to prepare for a possible criminal trial and perhaps face the revocation of its charter to do business in the United States.
The HSBC case is a reminder that the use of so-called DPAs remains a still unsettled area of law, with judges continuing to experiment with the extent of their authority to review the agreements.
“There is no Bible out there,” said F. Joseph Warin, head of the white collar defense and investigations practice group at Gibson, Dunn & Crutcher LLP in Washington. “Judges are utilizing a variety of approaches to oversee DPAs.”
No law precisely spells out Gleeson’s powers, analysts and corporate defense attorneys say, or how he should decide whether December’s deferred prosecution agreement is in the public interest — or even if such a finding is required of the judge.
Still, where other judges have effectively rubber-stamped deferred prosecution agreements filed by the Department of Justice, Gleeson has expressed reservations. “There’s been some publicized criticism of this,” Gleeson said at a Dec. 20 hearing.
“I think we don’t exactly know the questions the judge is supposed to be asking,” said Jill E. Fisch, co-director of the Institute for Law and Economics at the University of Pennsylvania Law School.
“Does the judge decide for himself what he thinks is in the public interest?” she asked. “Is this overseeing the process or does he, the judge, get to decide for himself?”
The use of the deferred prosecution agreement — in which the government offers corporate defendants conditional amnesty in exchange for fines, remediation and enhanced compliance — has become widespread only in the last eight years.
Many judges sign off immediately
Only a handful of large banks like HSBC have been the subject of DPAs in major criminal cases. Judges have often signed off on the deferred prosecution agreements on the very day they were filed.
The table below shows the settlement amounts and approval times for deferred prosecution agreements between the Justice Department and large banks in the last four years. The allegations settled included those related to trade sanctions and Bank Secrecy Act violations.
In many cases, judges have approved DPAs simply by granting delays under the Speedy Trial Act (18 USC §§ 3161-3174), which holds that trial must start within 70 days of the date that prosecutors bring charges.
The act holds that, when prosecution is deferred by written agreement so that the defendant may exhibit good conduct, this period “shall be excluded” from that 70-day period. Judges have in many cases held that granting this exclusion constitutes accepting the DPA and done so without examining the agreements’ merits at length or holding hearings.
In the 2009 cases of Credit Suisse and Lloyds TSB Bank plc, both of which were charged with violating the International Emergency Economic Powers Act by banking with Iran, U.S. District Judges Royce C. Lamberth and Ellen S. Huvelle of the District of Columbia both granted such exclusions in formulaic two-page orders issued the same day the DPAs were filed.
In June of last year, U.S. District Judge Paul L. Friedman, also of the District of Columbia, did likewise for a settlement involving ING Bank NV, which admitted violating the Trading With the Enemy Act and International Emergency Economic Powers Act by dealing with Cuba and Iran.
The day before the HSBC settlement was filed last December, the U.S. Attorney’s office in Washington, D.C., also filed a $227 million deferred prosecution agreement over trade sanctions violations by Standard Chartered Bank.
There is no record of any order of approval or of Speedy Trial exclusion from U.S. District Judge James E. Boasberg on the Standard Chartered agreement. (A Justice Department spokesman said the U.S. still considers the agreement to be valid. A bank spokeswoman declined to comment.)
It is not clear what role federal judges have in approving or rejecting deferred prosecution agreements beyond granting such exclusions of time. In a 2009 survey of federal judges by the Government Accountability Office, respondents said they were “generally not involved” in the DPA process.
Deferred prosecution agreements are filed simultaneously with criminal charges and are maintained on a judge’s docket. At the expiration of a settlement, the Justice Department then asks the judge to dismiss the charges if the terms of the DPA have been met by the defendant.
Nine of 12 judges surveyed by the GAO said that, at the outset of the process, they held no hearings to review DPAs or their terms at all, conduct reflecting that of judges Lamberth, Huvelle and Friedman.
But in Gleeson’s district, judges are more familiar with DPAs than elsewhere: the data published in 2009 by the GAO showed that prosecutors in the Eastern District of New York had entered into 11 deferred and non-prosecution agreements. In the District of Columbia, however, there had only been one. (The first corporate DPAs were signed in 1993, according to the GAO.)
And Gleeson, at any rate, has clearly decided to become more engaged than most judges who consider corporate deferred prosecutions. At the Dec. 20 hearing, according to ABC News, he referenced the “publicized criticism” of the settlement and told both HSBC Holdings and the prosecution: “I think you should feel free to address it.”
Both parties submitted briefs justifying the deferred prosecution agreement the following month.
Gleeson also asked both sides whether procedural rules and sentencing guidelines on plea bargains should also apply to the DPA (in which HSBC has pleaded not guilty to all charges – though it can be prosecuted later if it violates the terms of its agreement with the U.S.).
Gleeson specifically referred to Rule 11 of federal criminal procedure, in which judges are precluded from participating in plea negotiations and prosecutors must dismiss some charges in cases where defendants ultimately plead guilty to others. When prosecutors agree not to pursue some charges, Section 6B of the federal sentencing guidelines empowers judges to accept plea agreements if the judge deems that remaining charges adequately reflect the seriousness of the underlying conduct.
In answering Judge Gleeson’s questions, both the defense and prosecution argued in January that only the Speedy Trial Act governed Gleeson’s review of the DPA precisely because HSBC has not agreed to plead guilty.
Gleeson held a hearing on these matters in February and granted the exclusion of time under the Speedy Trial Act – but he warned that he was not done considering the agreement.
“I erred in the docket entry posted a few minutes ago,” Gleeson said in an entry of Feb. 15.
“The parties’ application to exclude time under the Speedy Trial Act was granted at today’s conference but the court has not yet approved or disapproved the proposed agreement disposing of the case. The application for approval of that agreement has been taken under advisement.”
Gleeson is not the only judge to pose questions about the acceptability of DPAs.
In February, U.S. District Judge Terrence W. Boyle of North Carolina held a hearing on a December DPA between the Justice Department and WakeMed Health and Hospitals, a healthcare company which had agreed to pay $8 million over false Medicare billing.
According to the News & Observer, Boyle has refused to sign off on the settlement so far, citing a litany of concerns — principally whether the agreement is in the public interest — and says any order approving it will contain his own conditions.
Judge Questioned Barclays Bank agreement
When prosecutors in Washington, D.C., in 2010 deferred prosecution against Barclays Bank plc for sanctions violations involving Cuba, Iran, Libya, Sudan and Burma, U.S. District Judge Emmet G. Sullivan said he had never dealt with such an agreement in his 25 years as a judge.
Over three days of hearings, Sullivan peppered lawyers for both sides with far-reaching and sometimes basic questions about the agreement.
“It’s not my job to micromanage what the Department of Justice is doing but I’m just raising a concern,” said Sullivan. “The perception of white-collar crime is that no one treats individuals who commit white-collar crimes seriously.”
“And, you know, it’s proceedings like this that raise concerns in the public’s mind about fairness and justice.”
Sullivan approved the request for exclusion of time under Speedy Trial in two days. But he nevertheless ordered regular status hearings to be kept informed of the agreement’s progress.
The question of fairness is particularly acute for Gleeson, as in a related case he has already pronounced prison sentences for mid-tier individuals convicted of laundering money that may have passed through HSBC.
Colombian Julio Eduardo Chaparro Escobar is due to be sentenced in June for laundering drug money for an organization which made use of the British bank in Mexico. In October, Gleeson sentenced co-defendant Juan Carlos Cuenca Villalba to 4 years in prison and gave Luis Enrique Salazar Figueroa 47 months and Juan Mauricio Ortiz Jiménez 2 and 1/2 years.
Gleeson is at the same time being asked by the Justice Department — indeed by the same Assistant U.S. Attorney, Alexander A. Solomon, who is trying both cases — to cooperate in a conditional offer of amnesty to the bank, which admits to having allowed nearly $1 billion to pass through it in violation of the same money laundering statutes used against the drug defendants.
In Congress, meanwhile, lawmakers of all political stripes have derided the HSBC settlement — referred to in one case as a “get-out-of-jail-free card” — because no executives of the bank were indicted.
Potential reversal of Judge Rakoff looms
So what must Gleeson do now? Outrage over the lack of prosecutions white-collar crime following the global financial crisis is filling the air. Indeed, over in Manhattan, U.S. District Judge Jed S. Rakoff has achieved folk hero status among some for rejecting civil settlements between the Securities and Exchange Commission and big banks.
In November 2011, Rakoff blocked the SEC’s $285 million securities fraud settlement with Citigroup Global Markets Inc., finding that he could not impose sanctions in the case as there was no factual record because Citigroup (unlike HSBC) nether admitted nor denied the allegations against it. (In 2009, he had also blocked an SEC settlement with Bank of America Corp. over bonuses at Merrill Lynch & Co.)
Meanwhile, the 2nd Circuit Court of Appeals, which also hears appeals from Gleeson’s court in Brooklyn, this month strongly differed with Rakoff. In a sign that reversal is likely, the appellate court said, among other findings, that he had failed to show proper deference to the SEC’s policy determination that a settlement was the best outcome it could do with its scare resources. (The $285 million to be paid by Citigroup will go to compensate investors who lost money on a $1 billion collateralized debt obligation tied to the sinking housing market. Citigroup made profits of $160 million on the CDO, the SEC charged.)
The 2nd Circuit not withstanding, the entire fat-cats-are-getting-away-with-it climate of opinion has only intensified with word of the HSBC settlement, which is now on Gleeson’s desk.
And yet, how and what he can decide remains unclear.
For Fisch of the University of Pennsylvania, the Citigroup and HSBC settlements pose the same fundamental problem.
“It’s really the same question: Is there a judicial role when a regulator or a prosecutor settles an enforcement action?” she asked.
“If there is a role, it’s hard to believe that the judge is supposed to be a rubber stamp.”
According to Brandon L. Garrett, professor of law at the University of Virginia and an expert in deferred and non-prosecution agreements, the Speedy Trial Act does give judges the power to review the substance of deferred prosecution agreements.
Given that the government exchanges leniency in return for enhanced compliance from the defendant, judicial oversight is especially important, he said.
“It’s hard to know if the compliance is real if there’s no judge monitoring that,” said Garrett, adding that, if a judge can decide to allow the deferral of a prosecution, the judge can also reverse this decision at any time.
“At any time, the judge could decide no longer to delay the case,” said Garrett. But the deferral provision of the Speedy Trial Act does not say what comes next.
“I’ve repeatedly argued that that provision is not adequate to the task. It doesn’t give judges a lot of guidance,” said Garrett. ”The question is, is this agreement in the public interest?”