Implications of heightened judicial supervision of corporate criminal settlements


Financier Worldwide Magazine

February 2015 Issue

February 2015 Issue

Corporations facing law enforcement investigations in the US increasingly have found that the successful negotiation of a settlement agreement with the prosecutors is no longer the final step to achieving resolution. Rather, federal judges – whose involvement in the settlement process historically was quite limited – have become far more willing to question, and even to reject, proposed settlements. Those judges have offered a variety of reasons, including that they view the settlement as a ‘sweetheart deal’ for the company or because the settlement does not also involve charges against individuals. As a result, the terms of several recent agreements have become materially more onerous for the corporate defendant in order to respond to criticism from the judge assigned to approve the settlement. In addition, the period of uncertainty while judges consider (often for many months) whether to approve settlements has been an unwelcome development for the companies involved.

The role of judges in the settlement process continues to be hotly debated, both in the US and the UK, where important changes regarding corporate settlements recently have been enacted. In the meantime, companies involved in government investigations should expect this trend to continue and plan accordingly as they approach resolution.

United States

The US Department of Justice (DOJ) utilises deferred prosecution agreements (DPAs) as one method for resolving investigations of corporations that are accused of wrongdoing. As part of a DPA, the DOJ agrees to defer prosecution on criminal charges against a corporate defendant for an agreed-upon period of time in exchange for some combination of a monetary penalty, an admission of wrongdoing and remedial measures. If the corporation complies with its obligations under the DPA, the DOJ will eventually dismiss the criminal charges, thus permitting the corporation to avoid the harsh collateral consequences that follow a criminal conviction.

Courts historically had not played an active role in the DPA process. Rather, the court merely ordered the case stayed during the DPA’s term. In recent years, however, a number of federal judges have questioned such a hands-off approach to DPAs and other similar regulatory settlements. Judges have challenged the argument that settlements are merely private bargains between the parties. Rather, courts have noted that the government – by seeking the court’s imprimatur on a settlement – has opened the door to an assessment by the judge as to whether the settlement is in the public interest. Roughly a dozen US judges have either rejected as insufficient or questioned the adequacy of proposed settlements. These criticisms have arisen in cases involving a wide variety of conducts, including violations of anti-bribery laws, anti-money laundering laws, securities laws, Medicare fraud, and more.

Judges’ criticisms commonly have included the fact that the settlement lacks: (i) a large enough penalty amount – several judges have expressed concerns that companies will begin to view monetary penalties merely as ‘a cost of doing business’; (ii) admissions of wrongdoing by the company; (iii) charges against the individuals responsible for the offence; (iii) sufficient factual detail for the judge to evaluate the agreement; (iv) sufficient remedial obligations for the company; and (v) sufficient reporting to the court, over the term of the DPA, about the company’s compliance with the agreement.

Two recent court decisions in New York illustrate the current state of debate. The first decision was issued by the judge supervising HSBC’s settlement with the DOJ. While eventually accepting the DPA, the court first rejected the argument that it lacked authority to evaluate the terms of, and to supervise the company’s compliance with, the DPA. The second decision was issued by a federal appeals court, which vacated a lower court opinion that had refused to accept a proposed settlement between Citigroup and the US Securities and Exchange Commission (SEC). Both decisions noted that, in general, courts evaluating settlement agreements must provide an appropriate level of deference to the decisions of the DOJ and the SEC as to what cases to prosecute and on what terms to settle. Nonetheless, both decisions made clear that, by seeking the court’s approval for the settlement, the government had invited a role for the court in evaluating the terms of the settlement. So, for example, in the HSBC case, the judge required that the DOJ report to the court, over the five-year life of the DPA, about the bank’s compliance with the terms of the DPA, the progress of the bank’s remedial measures, and any findings by a DOJ-imposed monitor at HSBC.

The precise impact of these and similar court decisions remains to be seen. There are signs that courts may continue to play a robust role. For example, a federal judge in the District of Columbia recently threatened to reject a settlement between the DOJ and Fokker Services BV over alleged violations of Iran sanctions, suggesting it might be “too good a deal”.

There also is a question of whether the government will stop seeking judicial approval for certain settlements. The DOJ has the option of resolving cases via Non-Prosecution Agreements (NPAs), which are similar to DPAs, including in that they commonly contain concessions from the company, a detailed ‘Statement of Facts’ that sets forth the improper conduct and, occasionally, even an unfiled criminal information that the DOJ is ‘prepared to file’ in the event of a breach. Importantly, however, NPAs, unlike DPAs, do not typically involve filings that require court approval. Similarly, other US law enforcement agencies, including the SEC and the Commodity Futures Trading Commission, have the ability to pursue settlements via administrative proceedings, without seeking court approval.

The United Kingdom

The debate in the US has been closely watched in the UK, where DPAs became available to prosecutors for the first time when Schedule 17 of the Crime and Courts Act 2013 went into effect on 24 February 2014.

The UK DPA process is broadly similar to the US version, with the level of judicial involvement being the most important distinction. First, the prosecutor determines that a DPA is appropriate. After negotiations between the parties are under way, but before the DPA is finally agreed, the prosecutor applies to the Crown Court for a declaration that entering into a DPA is likely in the interests of justice and the proposed terms of the DPA are fair, reasonable and proportionate. This preliminary hearing must be held in private, with both parties present. If the court declines to make a declaration, the prosecutor may make a further application. But if the DPA is eventually approved, the reasons why the court originally declined to make the declaration must be published.

After the preliminary hearing, the parties finalise their agreement and the prosecutor applies to the Crown Court for final approval. Although the final hearing may be private, if the court approves the DPA, it must give its reasons in open court.

The Serious Fraud Office has yet to announce its first DPA, but DPAs may be used this year as part of investigations into overseas corruption by major UK companies. The introduction of the DPA in the UK also may signal a first step in efforts to revise the legal standard for establishing corporate criminal liability, which is significantly higher in the UK than in the US. Indeed, the director of the SFO has suggested in recent speeches that in order to provide UK companies with more incentive to enter into DPAs, the legal standard ought to be amended.

Implications of judicial involvement

As a practical matter, a corporate defendant is unlikely to have a choice as to the level of judicial involvement in negotiating and implementing a DPA. Entities that conduct business in both the US and UK generally cannot choose by whom they are prosecuted or whether the relevant law enforcement agency will seek judicial approval for a settlement. And in the US, the level of judicial scrutiny may vary by jurisdiction, and even by the judge assigned to the case. Nonetheless, defendants approaching resolution of law enforcement investigations should be aware of the potential implications associated with different levels of judicial involvement.

One benefit of increased court involvement is the possibility of a judicial counterweight to the prosecutor’s power. For example, in the UK, a prosecutor must apply to the supervising court for a finding that the defendant has breached a DPA; whereas, in the US, the decision regarding declaring a breach is committed to the prosecutor’s sole discretion. Similarly, increased judicial scrutiny might serve to check tendencies by the government to overreach if it knows it will need to justify expansive factual or legal theories to a judge. Further, unlike in the US, an aggrieved party in the UK may be able to challenge in court prosecutorial decisions not to offer a DPA.

A principal drawback of increased judicial involvement is the uncertainty as to whether a DPA ultimately will be approved. That uncertainty is most pronounced in the US, where parties negotiate the terms of the DPA, release them publicly, and then hope for a favourable reaction from the judge. By contrast, parties in the UK at least will have an advanced sense, due to the preliminary approval hearing, as to whether the court is inclined to approve a proposed DPA.

Another downside is the possibility that a judge might insist upon harsher terms as a condition for approving a DPA.

Finally, a supervising court may require greater factual disclosures, both of the historical basis for the DPA and any findings revealed through ongoing monitorship arrangements. Such disclosures may carry negative consequences both to reputation and in follow-on civil litigation. In light of the uncertainty in the US, it would be beneficial for all involved if the DOJ, a judicial conference or a bar group would issue rulemaking or guidance on the role for judges in evaluating such settlements.


Alexander Willscher is a partner at Sullivan & Cromwell LLP. He can be contacted on +1 (212) 558 4104 or by email:

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