Thirteenth Annual Advanced ALI-ABA Course of Study for the
Defense and Government Bars
Thursday-Friday, May 18-19, 2006
Washington, D.C. (L Enfant Plaza Hotel)
Criminal Enforcement of Environmental Laws
The Internal Investigation in the Age of the Thompson Memo
Part I:
The Other Internal Investigation
Part II:
Results: Declinations, Non-Prosecutions, and
Deferred Prosecutions
Barry M. Hartman
Kirkpatrick & Lockhart
Nicholson Graham LLP
1601 K Street, N.W.
Washington, DC 20005-1600
Telephone: 202.778.9338
Facsimile: 202.778.9100
Efax:
202.778.9444
Email:
bhartman@klng.com
Part I
The Other Internal Investigation1
I.
What is the other internal corporate investigation?
Investigators involved in these types of undertakings must, of course, be totally
independent of the organizations engaging them and, as a result, often have little
or no background in or knowledge of the matters given to their charge in the
investigation.
The other internal corporate investigation does not advocate a particular
position and needs to give consideration to both sides of any disputes over the
characterization of particular conduct. The goal must be to develop all the facts
and report upon them in an unbiased and balanced manner.
II.
Why is the other internal corporate investigation important?
It is a sign of the times that we see an ever-increasing utilization of independent
investigations to scrutinize allegations of wrongdoing or questionable conduct
within corporate enterprises. Moreover, companies have come to realize that
nothing less than full disclosure will suffice. Limited disclosure simply doesn t
work
and may make things worse!
Written investigative reports can be effective tools for arguing against culpability
under DOJ s Thompson Memorandum, the SEC s model guidelines for
cooperation and, if worse comes to worse, under federal or state sentencing
guidelines.
These investigations call for the application of the highest standards of
professionalism and the consummate skills of the practicing lawyer. They are
1
Special thanks to Dick Thornburgh, Counsel, Kirkpatrick & Lockhart Nicholson Graham LLP, who
provided substantial input into this outline through his presentation Outline of Remarks on Government
and Internal Corporate Investigations.
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Barry M. Hartman
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designed to permit clients to respond in a proactive manner to suspicions or
allegations of wrongdoing and to monitor the efficacy of their ongoing
compliance initiatives. In this day and age, these have to be among the highest
priorities in the field of corporate governance.
III.
Step 1: Define the engagement
Define who the client is and isn t (the corporation, its board of directors or a
board committee and not particular individuals). Appropriate notice of this status
should be given to all persons interviewed.
Define the scope of the investigation in as precise terms as possible, recognizing
that you may not know the full scope of the problems at the outset.
Designate a primary contact person or persons within the client organization with
whom you can communicate on all matters that arise in the course of your
inquiry.
Commit the client to make available all employees and contractors for interviews
and to provide for the scheduling, facilities and logistics for such interviews.
Commit the client to provide for the retention and production of all books and
records, documents and files, especially internal documents such as phone logs
and records, e-mails and personal notes and memoranda, as well as to provide for
secure storage of same.
Come to a clear understanding as to whether counsel is to be provided to and/or
paid for those employees involved in the investigation.
Ensure that the basis for the investigator s fees and expenses is on an hourly and
cost-reimbursement basis with no incentives or disincentives dependent on
outcome.
Commit to consult on issues of attorney-client or work product privilege and
relations with government investigators.
State whether a written report of findings, conclusions and/or recommendations is
expected.
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IV.
Step 2: Assemble the team
Careful attention should be given to putting together a team of lawyers and other
necessary experts, such as appropriate forensic experts, with the requisite skills to
carry out the inquiry. In particular, make sure that you have available to you a
good IT team to assist in the electronic transfer of documents and in searching
files for relevant material.
May not be sure of direction at the outset nor of the extent of the work involved,
e.g.:
i.
The WorldCom investigation, originally thought to focus on $11
billion in accounting irregularities, eventually concentrated on a
massive breakdown in corporate governance and suspected
wrongdoing by investment bankers and tax advisers.
ii.
In the CBS investigation, what began as an inquiry into the
authentication of documents turned into a wide-ranging
examination of the proper application of journalistic standards.
iii.
In another ongoing environmental investigation, the initial focus
was on what appeared to be recordkeeping issues, but ultimately it
expanded to testing, sampling, analytical and management
practices.
In putting your team together, get the best talent available. Civil litigators may be
inclined to advocate a particular result; former prosecutors may be inclined to
assume the worst.
Recognize that you will generally be calling upon colleagues with full agendas
already, so time commitments must be discussed candidly.
A team leader should be appointed to coordinate and supervise the investigation
and to serve as the overall editor of any written report.
Get the team working as quickly and efficiently as possible.
Set up separate issue teams.
Monitor the process closely and expand or limit assignments as appropriate.
Be sure that all are aware of and held to deadlines for task completion.
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Remember to communicate frequently and extensively among the team. Many
issues and facts will have significance for more than one part of the team or line
of inquiry. This kind of exchange will also help to coordinate issues to be
covered in examining a particular witness.
V.
Step 3: Prepare the work plan.
It is vital to work out a means to coordinate with any government authorities, the
board of directors or any special committees created to focus on the problem.
If parallel government investigations are ongoing, deal with the sensitivities of all
involved, particularly in criminal cases where you may, understandably, be denied
access to some individuals who may be targets, suspects or witnesses.
Limit the number of persons who are authorized to interact with government
officials to insure consistency and avoid misunderstanding.
Initial interviews should be set up as soon as possible, even if all relevant
documents have not been gathered. It is important to get a witness story as soon
as practicable in order to obtain the freshest and most unvarnished recollection.
For significant witnesses, it is likely that they will need to be reinterviewed on
more than one occasion.
Always ask for documents in a number of different ways and more than once.
You ll be surprised what shows up.
Maintain the absolute confidentiality of your work. Gossip or press coverage
through leaks can not only compromise integrity of your effort but may tip off
potential witnesses before you have a chance to interview them. Instruct those
whom you interview accordingly.
Try to minimize disruption of the ongoing enterprise consistent with its obligation
to cooperate.
Some debate exists over the manner in which to record testimony from those
interviewed in the course of these investigations. While a transcript or transcribed
taped account may maximize accuracy, my preference is to approach the task in a
more conversational format with one or two notetakers present. Thereafter, notes
of the interviews can be reviewed and cross-checked so that an accurate account
of the interview can be forthcoming. There are pros and cons of having the
witness review.
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While there may be numerous people engaged in the project (for example, in the
WorldCom investigation, we utilized, at one time or another, more than 75
timekeepers), be sure that work product is funneled to no more than one or two
persons in the finalizing of the effort so as to minimize the chances of important
components being overlooked as well as to provide for consistent treatment in the
editing process of any written report(s).
You will already have decided whether a written or oral report on your work is to
be produced. If written, make sure it is expressed in plain and understandable
English. Decipher complicated issues and concepts so that they are
understandable, particularly if accounting and tax issues are implicated. It is also
a good idea to have each section of the report reviewed by team members or
others not involved in that particular aspect for reader friendliness.
VI.
Three principles for execution
Be thorough.
Be fair. Remember that you are neither prosecutor nor defense counsel.
Recognize the significance of your work and its potential impact. People,
including those in executive positions, can lose their jobs (or worse) as a result of
your investigation.
Be correct ( get it right ). Some issues will be easy to handle. Others will
involve difficult judgment calls. If doubt exists on particular points, don t hesitate
to recall individuals for additional interviews. Invite the client (and others as
appropriate) to review your final work product for accuracy so as to avoid factual
errors. Consider having a separate footnoted version of any final written report
that provides support from the investigative record for every statement or fact in
the body of the report.
VII.
Other considerations
Triangulation may be necessary to tighten down on the true factual picture.
E-mails are among the most productive, if not invaluable, sources of information,
second only to testimony itself, and a good check on the accuracy of that
testimony through refreshing recollections or correcting memory lapses.
Occasionally, parties will proffer written summaries or white papers on
particular points, and these should be encouraged. They can provide important
information and provide a useful testing ground for assertions that might
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otherwise appear to be either convincing or dubious at first glance. For important
witnesses, the providing of such additional information should be encouraged.
If witnesses are represented by counsel, don t let them take over or disrupt
interviews. Instead, give them a full opportunity at the end of the interview to
state their case.
If a written final report is to be made public, be sure that an appropriate media
strategy is agreed upon with the client that conforms with any ground rules
established at the outset of the investigation and responsibilities undertaken to
other participants.
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Part II
Results: Declinations, Non-Prosecutions, and Deferred Prosecutions
II.
Introduction
In corporate criminal cases, federal prosecutors have discretion to initiate or
decline prosecution, or may commence pretrial diversion.2 Pretrial diversion is a blanket
term which encompasses both deferred prosecution agreements and non-prosecution
agreements.3 In a deferred prosecution agreement the United States Department of Justice
( DOJ )4 Attorney General/United States Attorney files criminal charges, but agrees to
defer prosecution for a length of time. In return the entity agrees to fully cooperate with
the government, typically pays some kind of fine or restitution, and may be required to
institute specific remedial reforms. The entity must also acknowledge the details of its
misconduct, typically signing a Statement of Facts, which the government may use to
prosecute the company if the company breaches the agreement. If the company complies
with the agreement for the full term, the charges are dismissed.
A non-prosecution agreement is similar to a deferred prosecution agreement
except no charges are filed. The non-prosecution agreement may still contain practically
any combination of monetary penalties and remedial measures. The company is still
required to admit to its conduct, giving the DOJ substantial leverage in prosecuting if the
company violates the agreement.5 Prosecutors choose pretrial diversion over declination
when they want an extra level of security to ensure access to additional information and
to make sure the company s compliance program is working effectively.6
Although not a completely new phenomenon, the use of pretrial diversion in cases
of corporate misconduct has increased since Deputy Attorney General Larry Thompson
issued a memorandum on the Principles of Federal Prosecution of Business
2
USAM § 9-27-200. Although these options are available to all prosecutors, some components have
adopted policies that preclude them from considering some of these options under any circumstances.
3
USAM § 9-22-010.
4
This reference is intended to include both Main Justice , its litigating components and any of the 93
United States Attorneys offices.
5
Christopher A. Wray, Assistant Attorney General, Criminal Division, Remarks to the ABA White Collar
Crime Luncheon, University Club, Washington, DC, February 25, 2005.
6
Interview with F. Joseph Warin, Partner Gibson, Dunn & Crutcher, Washington, DC, 16 Corp. Crime Rep.
13, 15 (Apr. 22, 2002) (F. Joseph Warin has made a mini-specialty out of deferred prosecution
agreements.)
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Organizations (Thompson Memorandum).7 The Thompson Memorandum outlines the
factors prosecutors should consider when determining whether a corporation should be
charged and whether an option sort of prosecution should be considered. Those factors
are:
1.
The nature and seriousness of the offense, including the risk of harm to the
public;
2.
The pervasiveness of wrongdoing within the corporation, including the
role of management;
3.
The corporation's history of similar conduct;
4.
Timely and voluntary disclosure of wrongdoing and willingness to
cooperate in the investigation of its agents, including, if necessary, the
waiver of corporate attorney-client and work product protection;
5.
The existence and adequacy of the corporation's compliance program;
6.
The corporation's remedial actions, including any efforts to implement an
effective corporate compliance program or to improve an existing one, to
replace responsible management, to discipline or terminate wrongdoers, to
pay restitution, and to cooperate with the relevant government agencies;
7.
Collateral consequences, including disproportionate harm to innocent
shareholders, pension holders and employees, as well as the impact on the
public if a prosecution commences;
8.
The adequacy of the prosecution of individuals responsible for the
corporation's malfeasance; and
9.
The adequacy of remedies such as civil or regulatory enforcement actions.
Although none of these factors are surprising, in the sense that, on a case by case
basis they have been considered by prosecutors (and argued by defense counsel) for
decades. However, the Thompson Memorandum puts increased emphasis on the
7
The DOJ initially distributed its policy memorandum on Federal Prosecution of Corporations in 1999.
The Thompson Memorandum is a 2003 revision of that original memorandum. The Thompson
Memorandum bears striking similarity to the 1991 memorandum issued by the DOJ Environment Division,
Factors In Decisions On Criminal Prosecutions For Environmental Violations In The Context Of
Significant Voluntary Compliance Or Disclosure Efforts By The Violator.
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authenticity of a corporation s cooperation and the effectiveness of a corporation s
corporate governance mechanisms.
A number of cases have been reported that appear to reflect the application of
these facts both before and after the Thompson Memorandum was issued. Several are
discussed below.
III.
Cases
A.
Declination Cases
Salomon Brothers
The DOJ and the Securities and Exchange Commission (SEC) investigated
Salomon Brothers (Salomon) for (1) violating the False Claims Act by submitting false
and unauthorized bids and (2) violating the Sherman Act by entering into unlawful
agreements with respect to trading in financing and secondary markets.8 According to
some reports, if Salomon pled guilty or was convicted on those counts, it would have
meant almost certain financial ruin due to the highly regulated environment and
Salomon s dependence on consumer trust.9 However, United States Attorney Otto
Obermaier decided not to pursue criminal charges against Salomon.
Although the Thompson Memorandum had not been issued when Salomon s case
was resolved in 1992, many of the factors set forth in that memorandum were cited to
justify declining prosecution. For example, the United States Attorney s office noted:
Salomon s extensive cooperation, including disclosure of its internal
investigation, waiver of attorney-client privilege, and willingness to
provide needed documents and allow access to employees.
Salomon s extensive management changes and the termination of those
executives who had concealed the violations.
The adequacy of the $290 million penalty obtained through civil
settlement with the SEC which included $100 million towards a victim
compensation fund.
8
DOJ, SEC Enters $290 Million Settlement with Salomon Brothers, U.S. Newswire, May 20, 1992.
F. Joseph Warin & Jason C. Schwartz, Deferred Prosecution: The Need for Specialized Guidelines for
Corporate Defendants, 23 Iowa J. Corp. L. 121, 124 (1997).
9
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The harm that would occur to innocent employees and stockholders if
Salomon were prosecuted.10 Avoiding prosecution allowed Salomon s
6,000 employees to keep their jobs.11
The procedures that Salomon was required to establish to prevent future
misconduct. 12
The fact that individual employees remained under investigation.13
The DOJ declined prosecution of Salomon even though not all of the factors
involved pointed towards prosecutorial leniency, and some actually tilted the balance
toward prosecution. SEC Chairman Richard Breeden emphasized the seriousness and
harm caused by Salomon s actions: Salomon s pattern of submitting false bids created a
risk to the integrity of the government securities market, which is a market on which the
federal government and ultimately all federal taxpayers depend. 14 In addition, the
violations involved upper management, and former top executives acknowledged
concealing the illegalities for months.15
Sequa Corporation
In 1992 through 1993, the DOJ and the Federal Aviation Administration (FAA)
investigated Sequa Corporation (Sequa) for fraud in the manufacture and repair of
airplane engine parts. Again, because of SEC rules governing broker-dealers, if Sequa
had pled guilty or been convicted, its ability to stay in business might have been at issue.
16
Following the investigation, United States Attorney Mary Jo White declined to
prosecute the company.
As with Salomon Brothers, although the Thompson Memorandum had not been
issued when the Sequa case occurred, related factors were cited to justify declining
prosecution. The government noted:
Sequa s immediate cooperation with government investigators.17
10
Id.
Moneyline: Salomon Brothers Concede to Pay Back Investors (CNN Transcript #650, May 20, 1992).
12
Warin & Schwartz, supra note 7, at 124.
13
Id. at 124-125.
14
Stefan Fatsis, Salomon Will Pay $290 Million to Settle Treasury Scandal, Associated Press, May 20,
1992.
15
Id.
16
Supra note 4, at 15.
17
The cooperation factor was cited by the government as a major factor in Sequa s receipt of declination.
David M. Zornow, Should Companies Turn Themselves In? Programs to Address Corporate Criminal
Liability, New York Law Journal, S3 (1994).
11
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Institution of an internal investigation.
Extensive structural, management and policy changes designed to prevent
recurrence of the offense.
The adequacy of Sequa s consent order and $5 million civil settlement
with the FAA.
The importance of avoiding harm to innocent employees, customers, and
suppliers.18
B.
Non-Prosecution Cases
Merrill Lynch
Merrill Lynch was implicated in connection with the Enron Corporation (Enron)
allegations relating to over-reporting of its profits. Merrill Lynch entered into an
agreement with the DOJ, receiving a non-prosecution agreement, and avoided having to
plead guilty to criminal charges.
DOJ and Merrill Lynch were able to reach this agreement because Merrill Lynch:
Cooperated quickly and fully with the government.
Agreed to institute substantial remedial measures, including substantial
internal reforms and the termination of a number of senior officers.
Agreed to accept responsibility and publicly admit its role in the Enron
debacle.
Its cooperation allowed DOJ to move quickly and extensively in the Enron
investigation.
The agreement included several additional requirements. Merrill Lynch was
required to make changes regarding the integrity of client and third party transactions and
have an independent outside monitor oversee its compliance.19 Furthermore, the
agreement forbid Merrill Lynch from engaging in any possibly misleading business deals,
even ostensibly legal ones.
Merrill Lynch had previously settled a civil suit for $80 million. Since this
restitution payment was made, it was apparently a factor in the DOJ decision to impose
no additional monetary penalties on them in the non-prosecution agreement.
18
19
Warin & Schwartz, supra note 7, at 125.
U.S. Appoints a Monitor for Merrill Lynch, N.Y. Times, Oct. 4, 2003, at C4.
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Merrill Lynch received a Non-Prosecution Agreement even though several of the
Thompson Memorandum factors would have weighed against prosecutorial leniency. The
violations harmed the public by misleading investors. The violations were pervasive and
included the involvement of senior executives. A commentator described Merrill Lynch
as having a reckless corporate culture with lax compliance procedures prior to the
mandated reforms.20
Canadian Imperial Bank of Commerce (CIBC)
CIBC was also involved with the Enron situation and was investigated for
allegedly helping Enron mislead its investors over a period of several years.21 Like
Merrill Lynch, CIBC came to an agreement with the DOJ, received a non-prosecution
agreement, and was able to avoid pleading guilty to criminal charges.
Factors cited in support of this resolution included the following:
CIBC agreed to cooperate with the government in the Enron investigation.
CIBC agreed to enact reforms, adopting new policies and procedures.
CIBC agreed to no longer engage in certain business activities.
CIBC accepted responsibility for the criminal conduct of their employees.
CIBC also settled a civil suit for $80 million.
Kluber Lubrication North America
The government investigated Kluber Lubrication North America (Kluber) for
violations of the Toxic Substances Control Act (TSCA). Kluber imported certain grease
thickening products which, under the TSCA, were required to be listed on the inventory
of chemical substances maintained by the EPA.22 The law prohibits importing unlisted
products in order to protect workers and the environment from toxic materials.23
20
Kurt Eichenwald, Merrill Reaches Deal with U.S. in Enron Affair, N.Y. Times, Sept. 18, 2003, at A1.
Reuters, CIBC pays $80 million to settle Enron, (Dec. 22, 2003), at
http://www.cnn.com/2003/BUSINESS/12/22/cibc.enron.reut/, (last visited June 10, 2005).
22
Chemical Company to Pay $2.3 Million to Settle Allegations of Import Violations, Daily Environment
Report, No. 247, Dec. 28, 1999, at A1.
23
Id.; New Hampshire Company Will Make $2.3 Million Payment, Environment, Health and Safety Online,
at http://www.ehso.com/prevpollutors1999.php (last accessed 6/14/05).
21
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The government entered into a pretrial diversion agreement24 with Kluber
requiring Kluber to pay $1.3 million to the federal government, $750,000 to resolve a
1998 EPA administrative action, and $250,000 to fund a supplemental environmental
project. Kluber also had to accept responsibility for knowingly violating the TSCA,
submit to an 18 month supervision period, and present an educational program related to
the TSCA to an industry trade association.25
Glenn Boyle, executive vice president of Kluber, indicated that the company did
not realize it was acting improperly and as soon as it did it filed the paperwork on the
imports. It now has procedures in place to address previous deficiencies.26 Mr. Boyle
also tried to downplay the seriousness and pervasiveness of wrongdoing within the
corporation, emphasizing that only about 80 of the company s products out of more
than 500 it sells were the subject of the investigation and in those products the illegally
imported chemicals only made up 6 to 30 percent of the products formulation.27
C.
Deferred Prosecution Cases
Prudential Securities Incorporated
Prudential Securities, Inc. (Prudential) was investigated for securities fraud
relating to the sale of limited partnerships in the oil and gas industry. It was accused of
misleading investors about the tax status and rates of return on their investments.28 After
a thorough investigation, the United States Attorneys office decided that it was in its
interest to defer prosecution.29
The government noted that the following factors influenced its decision to defer
prosecution:
Prudential s restitution payments to investors including greater than $1
billion used to fund and administer legitimate claims.
24
It is unclear at this point whether the agreement was a non-prosecution agreement or a deferred
prosecution agreement. Additional information has been requested from the New Hampshire Probation
Office where the agreement is on file. Until confirmation arrives, it has been treated in this memorandum as
a non-prosecution agreement since nothing appears on the District of New Hampshire docket regarding this
case.
25
New Hampshire Company Will Make $2.3 Million Payment, supra note 55.
26
Id.
27
Id.
28
Warin & Schwartz, supra note 7, at 125; 10/13/1994 Letter from Scott W. Muller and Carey R. Dunne.
29
Prudential Deferred Prosecution Agreement.
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Reformed and enhanced compliance procedures, Prudential actively
worked with all levels of government to resolve past problems.
Extensive cooperation with federal authorities, including complete access
to employees and compliance with every government request for formal or
informal assistance.
Acknowledgement of wrongdoing and apology to past and current clients;
The potential harm to innocent employees and investors that prosecution
would cause.
Management changes and departure from the company of those
individuals responsible for the wrongdoing.
That the same sanctions could be obtained through pre-trial diversion as
through criminal conviction.30
As a result of Prudential s efforts, Prudential received a deferred prosecution
agreement that required:
Payment of an additional $330 million to a victim restitution fund.
Installation of an independent director and retention of an independent law
firm to review regulatory and compliance controls.
Continued cooperation with federal investigators.31
Doyon Drilling, Inc.
The case of Doyon Drilling, Inc. (Doyon) is another example of a deferred
prosecution case involving alleged environmental violations. In 1995, a Doyon employee
blew the whistle on illegal hazardous waste disposal practices that violated the Clean
Water Act and the Oil Pollution Act. It was alleged that Doyon discharged known
carcinogens and other dangerous materials down non-sealed oil wells which allowed for
release of the wastes into the groundwater. Some of the wastes returned to the ground
surface near the wells and potentially affected natural resources.32
Doyon pled guilty to 15 misdemeanors, was fined $1 million, agreed to spend $2
million developing a model environmental compliance program, and agreed to cooperate
with the Department s ongoing investigation of similar practices by other North Slope Oil
Companies. The DOJ deferred prosecution against Doyon on felony charges.
30
Warin & Schwartz, supra note 7, at 126.
Supra note 27.
32
US Department of Justice Hits Doyon Hard, Ala. Forum for Envtl. Resp., Summer 1998, at 7.
31
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May of the factors listed in the Thompson Memorandum, appear to have weighed
against prosecutorial leniency. Doyon s violation involved potentially serious harm to
natural resources. It was broad, pervasive, and appeared to be standard operating
procedure, according to the whistleblower s allegations.33 Furthermore, Doyon did not
voluntarily disclose the violation, which likely would never have come to light without
the actions of the whistleblower.
American International Group, Inc.
American International Group, Inc. (AIG) entered into three structured
transactions with PNC which were alleged to have enabled PNC to shift $762 million in
troubled loans from its balance sheet.34 Deferred prosecution was approved based on the
following cited considerations:
The agreement had significant penalties and reforms, enabling DOJ to
send a message while ensuring AIG s compliance with the law.
The agreement minimized the collateral consequences to AIG s employees
and shareholders.
AIG s acceptance of responsibility.
AIG s commitment to cooperating fully.
AIG s agreement to enact reforms.35
AIG received an agreement that required it to:
Pay $80 million in penalties to the United States. Combined with AIG s
agreement with SEC, AIG had to pay $126 million in total penalties.
Cooperate fully in the government s continuing criminal investigation of
the transactions.
Implement a series of reforms addressing the integrity of client and thirdparty transactions including establishing a transaction review committee.
Implement a retrospective review of certain transactions to be conducted
by an independent consultant.
33
Poisoning the Well, Ala. Forum for Envtl. Resp., Jan. 1997, at www.alaskaforum.org/poisoning1.htm.
Joseph V. Treaster, A.I.G. Says its Unit is Focus of Federal Investigation, N.Y. Times, Sept. 30, 2004, at
C11.
35
Press Release, Department of Justice, American International Group, Inc. Enters Into Agreement with the
United States (Nov. 30, 2004).
34
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It is worth noting that AIG received a deferred prosecution agreement from the
DOJ despite the chief executive, Mr. Greenberg, digging in his heels initially regarding
the SEC investigation.
Monsanto Company
Monsanto Company was charged with violating the Foreign Corrupt Practices Act
and making false entries into its books and records. A manager of Monsanto Company
allegedly directed an outside consultant to make a $50,000 bribe to an Indonesian
government official in order to incite him to amend or repeal an environmental impact
statement requirement that blocked Monsanto s cultivation of genetically modified
crops.36 From 1997 to 2002, at least $700,000 in other questionable payments were
allegedly made to various Indonesian government officials.37
Monsanto received a deferred prosecution agreement because of Monsanto s
actions in:
Investigating misconduct.
Voluntarily reporting its findings.
Cooperating in the government s subsequent investigation and
commitment to continue cooperating.
Adopting remedial measures and implementing a compliance and ethics
program designed to detect and prevent future violations.
Committing to maintain and independently review the remedial measures.
Accepting responsibility for the actions of its employees.38
The details of the agreement required Monsanto to:
Pay $1 million in penalties.
Adopt additional specific new policies and procedures relating to the
prevention and detection of corrupt practices.
Maintain a rigorous compliance program.
Retain an independent compliance expert to review the compliance
program and waive the attorney-client privilege and any other protections
with respect to communications between the independent compliance
expert and Monsanto Company.
36
Monsanto Deferred Prosecution Agreement.
Monsanto to Pay $1.5 Million in Penalties, N.Y. Times, Jan. 7, 2005, at C4.
38
Supra note 35.
37
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Cooperate fully with DOJ and with ongoing criminal and SEC civil
investigations: truthfully disclose information, provide documents and
evidence, access to facilities, employees, and non-privileged information
and materials.
Immediately disclose any new information it learns that indicates corrupt
payments were made or offered.39
America Online
America Online (AOL) was charged with aiding and abetting securities fraud in
connection with certain transactions between AOL and PurchasePro.com.40 The trouble
involved a complex deal intended to drive up the apparent revenues of both companies.41
Executives at AOL helped PurchasePro.com report $10 million in false revenue during
the fourth quarter of 2000 and $20 million during the first quarter of 2001.42
The government cited the following factors as reasons it allowed AOL a deferred
prosecution agreement:
AOL s acceptance of responsibility.
Adoption of internal compliance measures and monitoring, including
controls directed specifically to AOL s accounting for advertising
transactions, a revised Standards of Business Conduct policy and Code of
Ethics, and improved employee screening.
Continued commitment to full cooperation.
Agreement to establish a compensation and settlement fund and to pay a
monetary penalty.43
The agreement required AOL to:
Pay $210 million, $60 million as a penalty and $150 million into a
settlement and compensation fund.
Cooperate with the investigation: completely and truthfully disclose
information, provide documents and evidence, make employees, officers,
and directors available for interviews, provide testimony, and make
available to DOJ copies of any internal audit monthly activity report.
39
Id.
AOL Deferred Prosecution Agreement.
41
Saul Hansell, 6 Former Net Executives Indicted in Conspiracy Case, N.Y. Times, Jan. 11, 2005, at C8.
42
Geraldine Fabrikant, Time Warner Settles 2 Cases Over AOL Unit, N.Y. Times, Dec. 16, 2004, at C1.
43
Supra note 39.
40
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Accept and acknowledge responsibility for the conduct of AOL personnel.
Adopt internal compliance measures and cooperate with an independent
monitor who would monitor the control measures, report on their
effectiveness, and make recommendations for any needed improvements
or revisions.
Waive attorney-client privilege for relevant transactions.44
PNC ICLC Corp
PNC ICLC Corp. (PNC) was charged with conspiracy to violate federal securities
laws by fraudulently transferring $762 million in troubled loans and venture capital
investments to off-balance sheet entities. PNC entered into separate agreements with the
SEC, the Federal Reserve, and the Office of the Comptroller of the Currency. The DOJ
agreed to a deferred prosecution based on the following circumstances:
PNC s exceptional and extensive remedial actions, 45 including:
o
Adding new board members.
o
Adopting a Statement of Principles and strengthened Code of
Ethics.
o
Requiring all 24,000 employees to complete ethics training.
o
Adopting new policies and procedures for corporate governance,
risk management and regulatory relations.
o
Creating management committees to address the risks associated
with significant transactions, products, services, and capital
commitments.
PNC s willingness to acknowledge responsibility for its wrongdoing.46
Continue to cooperate in the criminal investigation.
Demonstrate its future good conduct and full compliance with securities
laws and generally accepted accounting principles.
Establish a restitution fund.47
In particular, the deferred prosecution agreement required PNC to:
44
Press Release, Department of Justice, America Online Charged With Aiding and Abetting Securities
Fraud; Prosecution Deferred for Two Years (Dec. 15, 2004), Id.
45
PNC ICLC Deferred Prosecution Agreement.
46
Press Release, Department of Justice, PNC ICLC Corp. Enters Into Deferred Prosecution Agreement
With the United States (June 2, 2003).
47
Supra note 44.
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Pay $90 million to a victim restitution fund, and $25 million as penalties
to the US Treasury.
Cooperate fully during the term of the agreement: completely and
truthfully disclosing all information, providing documents or other
evidence, not asserting a claim of attorney-client or work product privilege
concerning the conduct at issue, and making employees and officers
available to provide information or testify.
Continue to comply with all of PNC s agreements with other federal
agencies.48
Computer Associates
Computer Associates (CA) was charged with committing securities fraud and
obstructing justice. CA as alleged to have filed materially false and misleading financial
reports and other documents with the SEC and to have made materially false and
misleading public statements and omissions. It was also alleged that CA obstructed
justice in the criminal and SEC investigations.49 Numerous CA executives, officers, and
employees were alleged to be engaged in a widespread practice of artificially extending
months, and backdating documents to match, in order to report higher revenues in certain
quarters.50 Further, it was alleged that CA falsely reported hundreds of millions of dollars
of revenue, that CA s misrepresentations were relied upon, and that the investing public
was misled.51
Finally, it was reported that when the US Attorney s Office, the FBI, and the SEC
began their investigations, certain CA officers and executives, now no longer with CA,
denied any wrongdoing and conspired to hide the illegal practices, knowing that their
false statements and concealment of material information would impede the government
investigations and obstruct justice.52
Notwithstanding these allegations, no voluntary disclosure, and initial obstruction
of justice, the government agreed to a deferred prosecution agreement, citing CA s:
Remedial actions taken to date.
Issuance of $163 million in cash and stock to compensate present and
former shareholders in connection with 4 class action settlements.
48
Id.
Computer Associates Deferred Prosecution Agreement.
50
Computer Associates Deferred Prosecution Agreement, Statement of Facts.
51
Id.
52
Id.
49
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Termination of the officers and employees who were responsible for the
improper accounting, inaccurate financial reporting, and obstruction of
justice.
Termination of officers and employees who refused to cooperate with
CA s internal investigation or took steps to obstruct or impede the
investigation.
Appointment of new management.
Sharing of internal investigation results, including documents that might
otherwise have been withheld under the attorney-client privilege and work
product doctrine.
The deferred prosecution agreement required CA to:
Accept and acknowledge full responsibility.
Pay $225 million in additional restitution to compensate former and
current CA shareholders.
Continue to cooperate completely by truthfully disclosing all information,
providing documents and evidence, not asserting any claims of attorneyclient privilege or work product doctrine, making officers and employees
available for interviews or testimony, providing information and
testimony, and providing active assistance.
Make corporate reforms including adding two new independent directors,
establish a compliance committee and a disclosure committee, establish
enhanced corporate governance procedures, new comprehensive records
management policies and procedures, an ethics and compliance training
program, establish an independent chief compliance officer, reorganize the
finance and internal audit departments, and ensure the improvement and
effectiveness of communications with government agencies.53
Work with an independent examiner.
Aid in the government s prosecution of ex-CEO Sanjay Kumar and former
head of worldwide sales, Stephen Richards.
Help get ex-employees who benefited from the company s $3.3 billion
fraud to disgorge their ill-gotten gains.54
53
Supra note 48.
Ex-CA CEO Sanjay Kumar s Looking at Doing 100 Years, LinuxWorld, at
http://www.linuxworld.com/read/46452_p.htm.
54
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Ashland, Inc.
On May 16, 1997, a massive explosion occurred at Ashland s St. Paul Park
refinery. Workers were pumping hydrocarbons into the refinery s sewer system for
treatment when emissions from an open manhole started a fire. Shortly after that fire was
extinguished, a fireball consisting of liquid hydrocarbon erupted from the manhole,
enveloping several company firefighters and injuring one seriously.55
According to prosecutors, the open manhole violated the Environmental
Protection Agency s (EPA) New Source Performance Standards (NSPS) for petroleum
wastewater systems. The NSPS requires closed sewer lines and tightly sealed manhole
covers in order to prevent the release of hazardous substances.56 In addition, it was
alleged that Ashland had falsely certified to the Minnesota Pollution Control Agency that
it was in compliance with NSPS. According to the prosecutors, the manhole had been left
open for years in order to accommodate a pipe running from the refinery s crude oil unit
exchanger to the sewer.57
Ashland pled guilty to two misdemeanors, negligent endangerment under the
Clean Air Act and submitting a false certification to environmental regulators. The U.S.
Attorney s Office for the District of Minnesota and the Environmental Crimes Section of
the DOJ agreed to defer prosecution on a felony charge of violating the NSPS of the
Clean Air Act.58
The terms imposed at sentencing in accordance with the plea agreement and
deferred prosecution agreement required Ashland to:
Make improvements to its sewer system at an estimated cost of $4 million
and invest an additional $50,000 in the refinery s emergency response
team. 59
Pay a $1.5 million criminal fine, $3.5 million in restitution to the most
seriously injured employee and $10,000 to five less severely injured
55
United States v. Ashland, Inc., Criminal No. 02-CR-152 (JEL), Plea Agreement and Sentencing
Stipulations, (D. Minn. Filed May 13, 2002), at 3.
56
Oil Company Sentenced for 1997 Explosion; Final Restitution Totals More Than $9 Million, Daily
Environment Report, No. 248, Dec. 27, 2002, at A11.
57
Mike Ferullo, Oil Company to Pay $7 Million in Fines, Restitution for Violations from Refinery Fire,
Daily Environment Report, No. 93, May 14, 2002, at A1.
58
Press Release, Department of Justice, Ashland, Inc. Pleads Guilty to Endangering Employees Under the
Clean Air Act (May 13, 2002); United States v. Ashland, Inc., Criminal No. 02-CR-152 (01) (JMR), Plea
Hearing, (D. Minn. May 13, 2002), at 32.
59
Oil Company Sentenced for 1997 Explosion; Final Restitution Totals More Than $9 Million, Daily
Environment Report, No. 248, Dec. 27, 2002, at A11.
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employees, $3.9 million to the National Park Foundation, and $150,000 to
the local fire departments who responded to the fire.60
Sponsor a workshop on NSPS at an industry conference. 61
Acknowledge its guilt publicly by taking out full-page notices in two
major St. Paul-Minneapolis newspapers.62
Fully cooperate during the current and any future environmental
investigations or audits.63
The government and Ashland were able to come to an agreement deferring
prosecution on the most serious charge even considering the seriousness of the offense
and the harm caused. EPA Assistant Administrator for Enforcement John Peter Suarez
emphasized the serious threat posed to human health when environmental crimes are
committed as exemplified in this case.64 Thom Heffelginger, the U.S. Attorney for
Minnesota, focused on the tremendous personal cost resulting from Ashland s violation
which harmed not only the environment but also Ashland s employees and their
families.65 Both Mr. Suarez and Mr. Heffelginger expressed the belief that the resolution
of this case would send a message to companies regarding the importance of complying
with environmental laws.
60
Id.
Id.
62
Id.
63
United States v. Ashland, Inc., Criminal No. 02-CR-152 (01) (JMR), Conditions of Probation, (D. Minn.
Filed Mar. 05, 2003).
64
Press Release, Department of Justice, Ashland Sentenced to Pay $7 Million and Placed on Probation as a
Result of 1997 Refinery Sewer Fire, (Dec. 24, 2002).
65
Id.
61
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