In a July 1, 2013 decision of apparent first impression, Eastern District Judge John Gleeson held that district courts have authority to review substantively, and to determine whether to approve or reject, deferred prosecution agreements. In United States v. HSBC Bank USA, N.A. and HSBC Holdings PLC, 12 Cr. 763 (E.D.N.Y. July 1, 2013), he considered such an agreement (the “DPA”) resolving criminal charges against HSBC Bank USA, N.A. (“HSBC”). Concluding that the DPA “accomplishe[d] a great deal” in remedying HSBC’s breaches of federal anti-money laundering and related statutes, Judge Gleeson approved the agreement. Although it is not possible to know whether other district judges will employ the same hands-on approach, the opinion should be consulted by any company considering entering into a deferred prosecution agreement.
HSBC was charged with violations of the Bank Secrecy Act, including failing to maintain an effective anti-money laundering program, and with willfully facilitating financial transactions on behalf of sanctioned entities in violation of the International Emergency Economic Powers Act. The DPA requires HSBC to undertake (or to continue) numerous remedial measures to correct systemic failures, to forfeit $1.26 billion and to admit criminal wrongdoing. The parties presented the DPA as part of their joint request that the Court hold the case in abeyance for the five-year term of the DPA and exclude that time from the otherwise applicable 70-day statutory speedy trial period of 18 U.S.C. § 3161(c). Pursuant to section 3161(h)(2), the period of delay occasioned by a deferred prosecution agreement “for the purpose of allowing the defendant to demonstrate his good conduct” “shall be excluded … in computing the time within which the trial of any offense must commence.” Subsection (h)(2) does not, however, state a standard for exclusion of time. HSBC argued that the “catch-all” provision, subsection (h)(7), which directs exclusion of time if the “interests of justice served by the exclusion outweigh the interests of the defendant and the public in a speedy trial,” should apply.
Judge Gleeson rejected HSBC’s assertion that the standard for determining whether to exclude time during the pendency of a deferred prosecution agreement under section 3161(h)(2) is the ends-of-justice balancing inquiry set forth in section 3161(h)(7). The Court cited Zedner v. United States, 547 U.S. 489, 497-99 (2006), in which the Supreme Court noted that the Speedy Trial Act contains a long and detailed list of specific periods of delay that are to be excluded in computing the time within which trial must start, as well as subsection (h)(7), which “permits a district court to grant a continuance and to exclude the resulting delay if the court, after considering certain factors, makes on-the-record findings that the ends of justice serve by granting the continuance outweigh the public’s and defendant’s interests in a speedy trial.” This interpretation of the statute, Judge Gleeson concluded, makes clear that subsection (h)(7) is not a “catch all provision,” but instead (like the other subsections) applies only to “one specfic type of exclusion – i.e., when the ends of justice served by the exclusion outweigh the best interests of the public.”
Returning to subsection (h)(2), Judge Gleeson noted that its plain language – excluding the period of “delay during which prosecution is deferred by the attorney for the Government pursuant to written agreement with the defendant, with the approval of the court, for the purpose of allowing the defendant to demonstrate his good conduct” – provides for exclusion of delay resulting from such an agreement, but only upon approval of the agreement by the court. As noted, however, the statute is silent on the standard a court should employ when determining whether to grant such approval. Looking to the legislative history, the Court found (and the parties agreed) that this requirement of judicial approval applies, first, to ensuring that the purpose of the deferred prosecution is “truly about diversion and not simply a vehicle for fending off a looming trial date.”
But Judge Gleeson then went further, rejecting the joint argument of the government and HSBC that the Court “lack[ed] any inherent authority over the approval or implementation of the DPA” itself. The parties argued that the Court’s power was limited to deciding whether to exclude time under the Speedy Trial Act and, at the end of the term of the DPA, whether to dismiss the charges against HSBC. Judge Gleeson disagreed. He noted that the government has absolute discretion to decide not to prosecute, as well as “near-absolute power under Fed. R. Crim. P. 48(a) to extinguish a case that it has brought, subject only to an exception where dismissal is “clearly contrary to manifest public interest.” Here, the government chose neither of these two options, but instead “built into the DPA with HSBC a criminal prosecution that will remain pending (assuming all goes well) for at least five years.” By doing so, Judge Gleeson concluded, the parties “ha[d] chosen to implicate the Court in their resolution of this matter.” And although “[t]here is nothing wrong with that,” neither is a federal criminal case “window dressing” or “the Court, to borrow a famous phrase, a potted plant.” In sum, by “placing a criminal matter on the docket of a federal court” subject to the DPA and ultimate dismissal, rather than the government declining to proceed at all pursuant to a non-prosecution agreement, the parties had effectively made the Court an “instrument[ ] of law enforcement.” By so doing, they subjected the DPA to the legitimate exercise of the Court’s inherent supervisory power, to ensure the DPA does not “so transgress[ ] the bounds of lawfulness or propriety as to warrant judicial intervention to protect the integrity of the Court.” In sum, “approving the exclusion of delay during the deferral of prosecution is not synonymous with approving the deferral of prosecution itself.”
The Court acknowledged that cases involving the supervisory power typically involve challenges by defendants to some asserted impropriety by the government in the federal criminal proceeding. Given that a defendant being offered deferred prosecution “is presented with an opportunity for diversion from the criminal proceeding altogether,” he or she will obviously not have occasion to raise any purported impropriety with the process. Nevertheless, the Court found “it easy to imagine circumstances in which a deferred prosecution agreement, or the implementation of such an agreement, so transgresses the bounds of lawfulness or propriety as to warrant judicial intervention to protect the integrity of the Court.” By way of one example, Judge Gleeson noted that this DPA, like all such agreements, requires HSBC “to continue to cooperate fully with the government in any and all investigations.” And “recent history is replete with instances where the requirements of such cooperation have been alleged and/or held to violate a company’s attorney-client privilege and work product protections, or its employees’ Fifth or Sixth Amendment rights” – citing United States v. Stein, in which Judge Kaplan of the Southern District of New York held that where the government pressured corporate defendant KPMG to use its power over its employees to coerce them to make statements to the government, such coercive tactics were to be imputed to the government. Without attempting to predict whether any situation might arise that would implicate the Court’s supervisory power in the HSBC case, Judge Gleeson concluded that “by placing the DPA on the Court’s radar screen in the form of a pending criminal matter, the parties have submitted to far more judicial authority than they claim exists.”
Recognizing that courts should extend “significant deference … to the Executive Branch in matters pertaining to prosecutorial discretion,” and in light of the “significant, and in some respect extraordinary, measures” imposed upon HSBC, Judge Gleeson had no difficulty approving the DPA. Among other things, the DPA noted that HSBC overhauled its leadership team, took steps to address the lack of accountability over its anti-money laundering and sanctions compliance programs, invested substantial sums in its anti-money laundering program and department staff, and reformed its due diligence and monitoring systems. In addition, the DPA requires a corporate compliance monitor to supervise HSBC’s remedial measures and evaluate its ongoing compliance with applicable statutes during the pendency of the agreement.
Significantly, Judge Gleeson retained supervisory power over the implementation of the DPA. He ordered the parties to file quarterly reports describing “all significant developments,” resolving any “[d]oubts about whether a development is significant … in favor of inclusion,” and indicated he would notify the parties should there be a need for hearings or other court appearances.
As noted, it is impossible to know whether Judge Gleeson’s approach will be adopted by other district judges presented with deferred prosecution agreements. In any event, and particularly in light of the recent judicial decisions scrutinizing settlements between the SEC and corporate defendants, a company contemplating a deferred prosecution agreement would do well to consider whether it will pass muster if scrutinized as in the HSBC decision.
David S. Frankel, Partner in the New York City office of Kramer Levin Naftalis & Frankel LLP, has focused on the defense of white collar criminal prosecutions, SEC, CFTC and FINRA enforcement actions and arbitrations, and other administrative proceedings for 30 years. His recent matters include representation of both individuals and corporations in cases alleging market manipulation, breach of fiduciary duty, false and misleading disclosures, and other improper practices in the securities industry; accounting fraud; and pharmaceutical industry irregularities.