// BY SHANI C. DILLOFF & THOMAS F. O’NEIL III

Companies facing federal or state regulatory enforcement or criminal scrutiny soon discover that the ultimate disposition of an investigation will usually be determined not only by the evidentiary analysis or the nature or magnitude of the offense, but also by the corporation’s core values, institutional culture and track record as a corporate citizen. In exercising their discretion, federal prosecutors in particular must assess a company’s demonstrated commitment to legal and regulatory compliance and ethics.

Although the U.S. Department of Justice has long recognized that charging a corporation with criminal violations can effectuate changes in corporate behavior and culture, deter future misconduct and punish malfeasors, the considerations that are unique to a company have led to the negotiation of deferred prosecution agreements. These contracts have achieved the DOJ’s objectives of encouraging voluntary disclosures and unqualified cooperation by companies. They also ensure that organizations are truly committed to the fundamental concepts of self-policing and self-reporting and to best business practices that go beyond legal or regulatory mandates.

BACKGROUND
As the McNulty Memorandum acknowledges, under some circumstances, it is appropriate to grant a company amnesty or immunity. Most federal and some state enforcement authorities, including divisions of DOJ, have developed their own protocols for amnesty applicants. The notion of pretrial diversion or deferral of prosecution is set forth in the U.S. Attorney’s Manual. The decision whether to enter into a non-prosecution agreement is, of course, discretionary. Typically, they are offered when a company’s “timely cooperation appears to be necessary to the public interest and other means of obtaining the desired cooperation are unavailable or would not be effective.” All relevant considerations should be evaluated, including the importance of prosecution to an effective program of law enforcement, the value of cooperation to the investigation or prosecution and the relative culpability in connection with the offenses and criminal activity history. Cases involving large corporations may require multi-district or global agreements, and they must be approved by each affected federal district or the appropriate DOJ official.

Policy directives do not stipulate the inclusion of corporate compliance and governance initiatives, but deferred prosecution agreements have become a preferred catalyst for transforming a company’s culture and revamping its operations. Indeed, as one U.S. attorney recently observed, deferred prosecution agreements seek to correct corporate behavior.

1. COMPUTER ASSOCIATES
In early 2002, Computer Associates (CA) became the subject of a DOJ investigation into improper accounting practices and subsequent misstatements of revenue from January 1, 1998 through September 30, 2000. In reaching the September 24, 2004 deferred prosecution agreement, the U.S. Attorney’s Office for the Eastern District of New York considered the remedial actions that had already been taken by CA, including terminating certain offi cers and employees and appointing new management. Further, CA accepted responsibility for its conduct and acknowledged that, as a result of the conduct of former employees, the company fi led multiple materially false and misleading financial reports with the Securities and Exchange Commission, made other materially false and misleading public statements and omissions and obstructed the government’s investigations.

The CA deferred prosecution agreement provides another example of the trend toward broad concessions on the part of corporations. It:

• Added former SEC Commissioner Laura Unger to the board of directors as well as two new independent directors;
• Retained an independent examiner, with input on the selection of the examiner from the U.S. Attorney’s Office, the SEC and the U.S. District Court for the Eastern District of New York, to monitor and report on governance changes to the U.S. Attorney’s Off ce, the SEC and CA’s Board of Directors;
• Created a compliance committee of the board of directors and required the committee’s report (on CA’s efforts to comply with the agreement and to implement the recommendations of the independent examiner) to be published on CA’s website and in each annual Proxy Statement during the agreement term;
• Established a comprehensive ethics and compliance training program for all CA employees and appointed a chief compliance officer to oversee it;
• Added a performance-based program tied to the establishment and maintenance of high ethical standards as part of the senior executives’ compensation plans;
• Reorganized its finance department, including appointing a corporate controller, a chief accounting officer and a financial controller for CA’s primary business functions; and
• Implemented an improved worldwide financial and enterprise resource planning information technology system to strengthen controls, eliminate errors and enhance CA’s internal audit function.

A somewhat unusual provision is triggered if the U.S. Attorney’s Office determines that CA has breached the agreement. CA must make a presentation to the U.S. Attorney’s Office within a two-week period rebutting any such presumption or preliminary finding. Equally important, the exercise of discretion by the U.S. Attorney’s Office under this provision is not subject to judicial review in any court or tribunal outside the DOJ.

2. BRISTOL-MYERS SQUIBB
The Bristol-Myers Squibb Company (BMS) deferred prosecution agreement was the result of a DOJ investigation into a scheme BMS allegedly undertook in 2000 and 2001 to meet internal and external sales and earnings targets. While the U.S. Attorney’s Office for the District of New Jersey was deciding the course of action to pursue, BMS agreed to undertake various remedial measures and expressed its willingness to expand these efforts. In addition, BMS stated its intention to take responsibility for its actions and to continue to cooperate with the U.S. Attorney’s Office.

In light of BMS’ actions, the U.S. Attorney’s Office agreed to enter into a two-year deferred prosecution agreement with BMS on June 15, 2005. The agreement designated a monitor, former federal judge Frederick B. Lacey, who has the power to “take any steps he believes are necessary to comply with the terms of [the] agreement.” Judge Lacey is authorized to make recommendations regarding the implementation and effectiveness of the compliance functions required under the agreement. If BMS objects to any proposal, the U.S. Attorney’s Office will consider the company’s position and make the final determination.

BMS is required to appoint a nonexecutive board chairman and an additional non-executive director acceptable to the U.S. Attorney’s Office. The non-executive chairman, chief executive officer and general counsel must monitor BMS’ quarterlyconference calls with analysts and participate in preparation sessions for the calls. The training and education program mandated by the agreement must address certain specific topics, such as discovering and recognizing accounting practices that do not conform to Generally Accepted Accounting Principles. BMS must submit a written description of the content and planned implementation of the program to the U.S. Attorney’s Office.

The chief executive officer and chief financial officer must prepare and submit written reports to the non-executive chairman, chief compliance officer and the monitor. The report must include sales and earnings forecasts or projections at the corporate or major business unit level and indicate if whether a quarterly target will not be met, together with a description of steps subsequently taken, if any, to achieve the budget target.

BMS is required to post the agreement on its website. BMS also agreed to endow a chair in business ethics at Seton Hall University, the U.S. Attorney’s alma mater. The BMS deferred prosecution agreement is set to expire on June 15, 2007. As the Wall Street Journal reported, “it is up to [the U.S. Attorney] to pass judgment on Bristol-Myers’ performance under the deal.” In any event, there is no question that the U.S. Attorney’s Office has exerted profound influence on the company. Recent press coverage noted that the monitor, former federal judge Lacey, “pushed the company to fi re former CEO Peter Dolan.” Since then, communications between management and the board of directors apparently have improved.

3. KPMG
In February 2004, the DOJ launched an investigation of certain tax services offered by KPMG from 1996 through 2002. A little over a year later, KPMG issued a public statement taking “full responsibility for the unlawful conduct by former KPMG partners.”

In August 2005, the U.S. Attorney’s Office for the Southern District of New York announced that it had resolved the investigation by way of a deferred prosecution agreement, which requires KPMG to cease operating its private client tax and compensation and benefi ts practices. It also restricts KPMG’s ability to issue opinions on the application of the tax laws to proposed transactions.

KPMG is required to implement and maintain an effective compliance and ethics program. To that end, all KPMG employees were required to receive appropriate training within one year of the date of the agreement. Training must be provided to tax professionals annually and to all other employees no less than every two years. As part of the program, KPMG must ensure that personnel have access to a hotline or other means to anonymously report concerns to the compliance office.

An independent monitor appointed by the U.S. Attorney’s Office has been given broad jurisdiction and oversight authority. The monitor is empowered to take any necessary steps to be fully informed about KPMG’s operations and has the ability to “require any personnel action, including termination” of individuals who were engaged in, or responsible for, the conduct at issue.