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THE EFFECT OF N/DPAS IN CORPORATE GOVERNANCE
THE EFFECT OF DEFERRED AND NON-PROSECUTION AGREEMENTS ON CORPORATE GOVERNANCE - EVIDENCE FROM 1993-2013
> * Associate Professor, University of Saint Thomas School of Law (Minneapolis). The authors would like
> * J.D. 2014, University of St. Thomas School of Law; MBA 2008, University of Minnesota.
THE EFFECT OF N/DPAS IN CORPORATE GOVERNANCE
# ABSTRACT
Non- and Deferred Prosecution Agreements (N/DPAs), are controversial because prosecutors, not judges or the legislature, are changing the governance of leading public corporations and entire industries. The evaluation of issues pertaining to the effect of N/DPAs on corporate governance in prior studies is largely based on anecdotal evidence and case studies. To analyze N/DPAs’ corporate governance implications and provide policy makers with guidance, the authors code all publicly available N/DPAs (N=257) from 1993 to 2013, identifying 215 governance categories and subcategories. The authors find evidence that the execution of N/DPAs is associated with significant corporate governance changes. The study evaluates mandated corporate governance changes for entities that executed an N/DPA in the following general categories: (1) Business Changes, (2) Board Changes, (3) Senior Management, (4) Monitoring, (5) Cooperation, (6) Compliance Program, and (7) Waiver of Rights, supplemented by a more in depth analysis of the respective subcategories of governance changes. The authors also code and evaluate preemptive remedial measures, designed by corporations to preempt the execution of an N/DPA or corporate criminal indictment.
**_Keywords:_** _Non Prosecution Agreement, Deferred Prosecution Agreement, Panel Data, Corporate Governance_
**_JEL Classification_ :** G3, K14, K22
THE EFFECT OF N/DPAS IN CORPORATE GOVERNANCE
# TABLE OF CONTENTS
|I. <br>I<br>|NTRODUCTION................................................................................................................................................
4 <br>|
|---|---|
|II. <br>|CORPORATENON-ANDDEFERREDPROSECUTIONAGREEMENTS............................................
11 <br> <br>|
|_1._ <br>|<br>_Historical Background
.............................................................................................................................
12_ <br> <br>|
|_2._ <br>|<br>_Legitimacy Concerns
................................................................................................................................
20_ <br>|
|III. <br>|THEIMPACT OFN/DPAS ONCORPORATEGOVERNANCE..........................................................
23 <br>|
|IV. <br>|DATACOLLECTION ANDCODING.......................................................................................................
25 <br>|
|V. <br>|RESULTS........................................................................................................................................................
26 <br> <br>|
|_1._ <br>|<br>_NDPA Proliferation
..................................................................................................................................
26_ <br> <br>_‐_|
|_2._ <br>|<br>_Pre-‐emptive
Remedial
Measures
........................................................................................................
27_ <br> <br>|
|_3._|<br>_Governance Changes
...............................................................................................................................
31_ <br> <br>|
||a) <br>Business Changes..................................................................................................................................................................
31 <br> <br>|
||b) <br>Board Changes.......................................................................................................................................................................
32 <br> <br>|
||c) <br>Senior Management..............................................................................................................................................................
34 <br> <br>|
||d) <br>Monitoring...............................................................................................................................................................................
35 <br> <br>|
||e) <br>Cooperation.............................................................................................................................................................................
36 <br> <br>|
||f) <br>Compliance Program............................................................................................................................................................
39 <br> <br>|
||g) <br>Waiver of Rights....................................................................................................................................................................
42 <br>|
|VI. <br>|DISCUSSION................................................................................................................................................
47 <br> <br>|
|_1._ <br>|<br>_Summary of Key Findings
......................................................................................................................
47_ <br> <br>|
|_2._ <br>|<br>_Limitations and Future Research
........................................................................................................
47_ <br> <br>|
|VII.|<br>CONCLUSION............................................................................................................................................
47|
THE EFFECT OF N/DPAS IN CORPORATE GOVERNANCE
# **I. Introduction**
The increasing use of Non- and Deferred Prosecution Agreements (N/DPAs),<sup>1</sup> has enabled federal prosecutors to incrementally expand their traditional role and exemplifies a shift in prosecutorial culture from an ex-post focus on punishment to an exante emphasis on compliance.<sup>2</sup> N/DPAs often entail significant corporate governance changes such as mandating new board members or new management, changes in internal controls, updated compliance programs and/or additional self-reporting obligations, among others governance changes.<sup>3</sup> Through the increasing use of N/DPAs, prosecutors are in effect reforming Corporate America by changing the governance of leading public corporations and entire industries. The evaluation of issues pertaining to the effect of N/DPAs on corporate governance in prior studies is largely based on anecdotal evidence and case studies. To assess legitimacy concerns and provide guidance for policy makers, the authors code all publicly available N/DPAs [N=257] and evaluate the impact of N/DPAs on corporate governance from 1993 to 2013.
N/DPAs are contractual arrangements between a corporation and the government and often function as a pretrial diversion method.<sup>4</sup> In the case of both Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs), a corporation enters into an agreement with the government, and the government imposes sanctions, such as fines, restitution, and institutional changes or the government demands additional reporting duties during the term of the N/DPA.<sup>5</sup> If the corporation abides by the agreed upon provisions for the allotted time, it can avoid criminal indictment. In exchange for the sanctions specified in N/DPAs, the government agrees not to prosecute in the case of NPAs or to dismiss filed charged in the case of DPAs.<sup>6</sup>
Several indicia suggest that the use and application of N/DPAs is likely to increase in the next ten years. After introducing N/DPAs in the early 1990s,<sup>7</sup> prosecutors
> 1 _See_ Candace Zierdt & Ellen S. Podgor, _Corporate Deferred Prosecutions Through the Looking Glass of Contract Policing_ , 96 KY. L.J. 1, 4-5 (2008) (internal citations omitted) (A myriad of variables may explain the growth in N/DPAs: “an outgrowth of the establishment of the President's Corporate Fraud Task Force, the revision of the Principles of Federal Prosecution of Business Organizations Memo under Deputy Attorney General Larry Thompson, an increased emphasis on curtailing corporate fraud in a post-Enron world, a desire to avoid collateral consequences of prosecution such as seen in the Arthur Anderson, LLP case, a corporate need to contain possible civil litigation resulting from prosecution, or nothing more than an increased flexing of prosecutorial power.”).
> 2 P.J. Meitl, _Who's the Boss? Prosecutorial Involvement in Corporate America_ , 34 N. KY. L. REV. 1, 2 (2007) (“Corporate governance by its nature is a forward-looking endeavour designed to safeguard and manage the corporation. Prosecutions, on the other hand, are backward-looking as they assign liability or blame for past events.”).
> 3 See infra Part V.
> 4 Benjamin M. Greenblum, Note: _What Happens to a Prosecution Deferred? Judicial Oversight of Corporate Deferred Prosecution Agreements_ , 105 COLUM. L. REV. 1863, 1864 (2005).
> 5 Scott A. Resnik & Keir N. Dougall, _The Rise of Deferred Prosecution Agreements_ , N.Y. L.J., Dec. 18, 2006, at 1.
> 6 _Id._
> 7 Leonard Orland, _The Transformation of Corporate Criminal Law_ , 1 BROOK. J. CORP. FIN. & COM. L. 45, 57 (2006) (“The genesis of the current proliferation of deferred and non-prosecution agreements in corporate criminal law may be traced to two important settlements in the Southern District of New York in the 1990s involving Salomon Brothers and Prudential Securities.”).
THE EFFECT OF N/DPAS IN CORPORATE GOVERNANCE
expanded their application incrementally.<sup>8</sup> While N/DPAs were traditionally the domain of the DOJ, in 2013, the SEC also started issuing DPAs against individuals and corporations.<sup>9</sup> Moreover, the Antitrust Division of the Department of Justice (DOJ) entered its first DPA in 2013.<sup>10</sup> Several factors can help explain the proliferation of N/DPAs: Prosecutors and corporations have strong incentives to enter into N/DPAs and avoid a trial.<sup>11</sup> Once prosecutors have investigated and identified a corporate wrongdoing, they can use N/DPAs to avoid an expensive trial against a sophisticated and well-funded corporate defendant.<sup>12</sup> N/DPAs help prosecutors to impose and enforce monetary penalties,<sup>13</sup> create compliance reform,<sup>14</sup> and force the corporation to fund its own internal investigation.<sup>15</sup> In turn, N/DPAs allow corporations to avoid the collateral consequences often linked to federal indictment,<sup>16</sup> avoid costly litigation, and mitigate
> 8 _See_ GIBSON DUNN, MID-YEAR UPDATE ON CORPORATE DEFERRED PROSECUTION AGREEMENTS (DPAS) AND NON-PROSECUTION AGREEMENTS (NPAS) (2013),
http://www.gibsondunn.com/publications/pages/2013-Mid-Year-Update-Corporate-Deferred-ProsecutionAgreements-and-Non-Prosecution-Agreements.aspx.
> 9 _Baker Botts Partner Bridget Moore on SEC Deferred Prosecution Agreements,_ CORPORATE CRIME REPORTER (Nov. 20, 2013, 6:55 AM), http://www.corporatecrimereporter.com/news/200/baker-bottspartner-bridget-moore-on-sec-deferred-prosecution-agreements; _SEC Negotiates First Individual Deferred Prosecution Agreement_ , CORPORATE CRIME REPORTER (Nov. 12, 2013, 11:58 AM), http://www.corporatecrimereporter.com/news/200/sec-negotiates-first-individual-deferred-prosecution; Gary DiBianco et al., _SEC Announces First Non-Prosecution Agreement in an FCPA Matter_ , SKADDEN.COM (Apr. 26, 2013), https://www.skadden.com/insights/sec-announces-first-non-prosecutionagreement-fcpa-matter.
> 10 _Antitrust Division Enters into First Deferred Prosecution Agreement_ , CADAWALDER.COM (Feb. 27, 2013), http://www.cadwalader.com/resources/clients-friends-memos/antitrust-division-enters-into-firstdeferred-prosecution-agreement.
> 11 David M. Uhlmann, _Deferred Prosecution and Non-Prosecution Agreements and the Erosion of Corporate Criminal Liability_ , 72 MD. L. REV. 1295, 1301 (2013) (“The terms of the agreements are attractive to the government, because they often provide large penalties, far-reaching corporate compliance programs with outside monitors approved by the Department, and promises of cooperation by the companies involved.”); Vikramaditya Khanna & Timothy L. Dickinson, _The Corporate Monitor: The New Corporate Czar?_ , 105 MICH. L. REV. 1713, 1721 (2007) (“Both the government and the firm have strong incentives to settle the case.”).
> 12 Erik Paulsen, _Imposing Limits on Prosecutorial Discretion in Corporate Prosecution Agreements_ , 82 N.Y.U. L. REV. 1434, 1458 (2007) (“[G]overnment prosecutors often have to tangle with well-financed defendants capable of hiring sophisticated law firms that can match government resources.”).
> 13 _See_ F. Joseph Warin & Jason C. Schwartz, _Deferred Prosecution: The Need for Specialized Guidelines for Corporate Defendants_ , 23 J. CORP. L. 121, 126 (1997) (“The United States Attorney also noted that the pre-trial diversion agreement imposed the same sanctions as those which would have resulted from a criminal conviction.” (citing the Prudential Securities 1994 DPA)).
> 14 Christopher J. Christie & Robert M. Hanna, _A Push Down the Road of Good Corporate Citizenship: The Deferred Prosecution Agreement Between the U.S. Attorney for the District of New Jersey and BristolMyers Squibb Co.,_ 43 AM. CRIM. L. REV. 1043, 1049 (2006) (citing the prosecutorial goal of “calibrated reform of a corrupted corporate culture.”).
> 15 Harry First, _Branch Office of the Prosecutor: The New Role of the Corporation in Business Crime Prosecutions_ , 89 N.C. L. REV. 23 (2010).
16 Memorandum from Larry D. Thompson, Deputy Attorney Gen., to Heads of Dep’t Components and U. S. Attorneys, Principles of Federal Prosecution of Business Organizations § IX, 12-13 (Jan. 20, 2003), _available at_ http://federalevidence.com/pdf/Corp_Prosec/Thompson_Memo_1-20-03.pdf [hereinafter Thompson Memo]; Christopher A. Wray & Robert K. Hur, _The Power of the Corporate Charging Decision over Corporate Conduct_ , 116 YALE L.J. POCKET PART 306, 307 (2007) (explaining “collateral consequences--especially the loss of licenses, the prospect of suspension, debarment, or exclusion from
THE EFFECT OF N/DPAS IN CORPORATE GOVERNANCE
risk.<sup>17</sup> In effect, N/DPAs allow corporations to institute new policies and satisfy the demands of prosecutors while addressing concerns about the culpability of their executives.<sup>18</sup>
N/DPAs remain controversial and are the subject of an ongoing legitimacy debate.<sup>19</sup> Judge Jed S. Rakoff most prominently critiqued the use of N/DPAs and the DOJ’s focus on corporate prosecutions as morally and technically suspect, suggesting that the “[T]he failure to prosecute those responsible [for the Great Recession] must be judged one of the more egregious failures of the criminal justice system in many years.”<sup>20</sup> Concurring with Judge Rakoff, Ralph Nader critiqued the use of N/DPAs as a businessfriendly initiative by the DOJ, suggesting that N/DPAs epitomize an “institutionalized double standard biased in favor of large corporations.”<sup>21</sup> Others decry N/DPAs as overly burdensome, the result of significantly unequal bargaining power between the prosecutor and the corporation,<sup>22</sup> citing the potential for prosecutorial abuse,<sup>23</sup> the lack of
federal programs, and analogous administrative effects on the company's core business--loom large, especially for the most regulated corporations.”); Greenblum, _supra_ note 4, at 1863 (citing the “debilitating collateral consequences” of conviction). _But see_ Gabriel Markoff, _Arthur Andersen and the Myth of the Corporate Death Penalty: Corporate Criminal Convictions in the Twenty-First Century_ , 15 U. PA. J. BUS. L. 797, 831 (2013) (arguing and empirically showing that the corporate death sentence of a federal conviction is rare).
> 17 Eugene Illovsky, _Corporate Deferred Prosecution Agreements the Brewing Debate_ , CRIM. JUST., Summer 2006, at 36.
> 18 Orland, _supra_ note 7 at 84–85 (“[T]he corporation routinely abandons attorney-client privilege and agrees not to contradict a detailed statement of culpability that often becomes the blueprint for prosecution of indicted executives. . . . The rehabilitated corporation adopts codes of ethics and compliance programs, reports to and may be managed by outside monitors, files detailed reports to the government, and cooperates with the Justice Department in the prosecution of former senior executives.”)
> 19 _See_ Warin & Schwartz, _supra_ note 13; Uhlmann, _supra_ note 11. These two articles represent one of the earliest critiques and one of the most recent critiques in the N/DPA debate.
> 20 Kara Scannell, _Top Judge Criticises DoJ for not Holding Individuals Accountable_ , FT.COM (Nov. 12, 2013), http://www.ft.com/intl/cms/s/0/db1923d0-4bd2-11e3-8203-00144feabdc0.html#axzz2v7byWaJ8 (prosecuting companies who have “sometimes hundreds of innocent individuals” is morally suspect and prosecutors only charging companies for acts committed by individuals is “technically suspect.”). _Id_ . 21 Letter from Ralph Nader & Robert Weissman to Alberto Gonzales, Attorney Gen. (June 5, 2006), http://www.multinationalmonitor.org/editorsblog/?p=30 (Mr. Nader only cites the Boeing DPA in his letter. Further, Mr. Nader calls out the Bush Administration on the use of N/DPAs, but the practice has not exhibited signs of slowing under the Obama Administration.).
> 22 James R. Copland, Manhattan Inst. for Pol’y Res., Civ. Just. Rep. No. 14, _The Shadow Regulatory State: The Rise of Deferred Prosecution Agreements_ 3 (2012), _available at_ http://www.manhattaninstitute.org/html/cjr_14.htm (May 12, 2012) (noting prosecutors have incredible bargaining power to force companies to “implement onerous training and reporting programs, hire senior officials to oversee companies’ ‘compliance’ with prosecutors’ legal interpretations, modify sales-force practices and compensation plans, contract with independent ‘monitors’ empowered to dictate modifications to business practices, and even fire and replace directors or chief executives.”); Illovsky, _supra_ note 17, at [_] (noting the significant power held by prosecutors with DPAs). _See also_ Richard A. Epstein, _The Deferred Prosecution Racket_ , WALL ST. J., Nov. 28, 2006, at A14 (stating prosecutors may be abusing the threat of prosecution to coerce companies to execute DPAs); Brandon L. Garrett, _Structural Reform Prosecution_ , 93 VA. L. REV. 853, 853 (2007) (noting “some indications of [prosecutorial] overreaching, if perhaps not abuse of prosecutorial discretion.”); Paulsen, _supra_ note 12, at 1434 (DPAs “provide prosecutors with a dangerous amount of leverage over the corporations they target, creating a bargaining imbalance and a new threat of abuse.”).
> 23 Epstein, _supra_ note 22 (stating prosecutors may be abusing the threat of prosecution to coerce companies to execute DPAs); Garrett, _supra_ note 22, at 853 (noting “some indications of [prosecutorial] overreaching,
THE EFFECT OF N/DPAS IN CORPORATE GOVERNANCE
governance expertise,<sup>24</sup> and the lack of a proper mandate<sup>25</sup> for the prosecutors who execute N/DPAs. The existing corporate criminal liability in combination with a lack of clear DOJ standards for charging businesses may also lead organizations to adopt unproven compliance programs and create other inefficiencies.<sup>26</sup>
There is some consensus among scholars that N/DPAs exert influence on corporate governance.<sup>27</sup> A key issue pertaining to the impact of N/DPAs in corporate governance is the role of the prosecutors in the expansion of corporate governance via N/DPA. Those favoring the prosecutor’s involvement suggest that prosecutors can promote an ethical corporate culture through enhanced compliance measures in N/DPAs.<sup>28</sup> In this line of thought, the DOJ’s expansionary tendencies in N/DPAs are a
if perhaps not abuse of prosecutorial discretion.”); Paulsen, _supra_ note 12, at 434 (DPAs “provide prosecutors with a dangerous amount of leverage over the corporations they target, creating a bargaining imbalance and a new threat of abuse.”).
> 24 Preet Bharara, _Corporations Cry Uncle and Their Employees Cry Foul: Rethinking Prosecutorial Pressure on Corporate Defendants,_ 44 AM. CRIM. L. REV. 53, 112 (2007) (“prosecutors, who now--often with little or no experience in corporate governance matters--are solely charged with evaluating whether a company's compliance program is adequate.”). Christopher A. Wray & Robert K. Hur, _Corporate Criminal Prosecution in A Post-Enron World: The Thompson Memo in Theory and Practice_ , 43 AM. CRIM. L. REV. 1095, 1185 (2006) (“But the central question before the prosecutor is the degree to which the misconduct is attributable solely to rogue employees, or in some way due to the company's own failed policies, structures, procedures, or incentives. And corporate governance mechanisms properly lie at the very heart of that determination: whether the misconduct was in some way the fault of the business entity itself.”).
> 25 David Hess & Cristie L. Ford, _Corporate Corruption and Reform Undertakings: A New Approach to an Old Problem_ , 41 CORNELL INT'L L.J. 307, 310–11 (2008) (“Prosecutors and enforcers acting on their own have neither the resources nor the mandate to engage in the kind of large-scale, ongoing interventions into corporations' corporate governance, culture, policies, and procedures that would be required to fully address deep-seated corporate cultural pathologies.”); Jennifer Arlen & Marcel Kahan, _Corporate Governance Regulation Through Non-Prosecution_ 41 (April 5, 2011) (unpublished manuscript) (on file with author) (“[Prosecutors] do not have expertise in assessing the optimal system of corporate governance and agency costs generally.”).
> 26 Miriam Hechler Baer, _Insuring Corporate Crime_ , 83 IND. L.J. 1035, 1064 (2008). _See also_ Krawiec, _Cosmetic Compliance and the Failure of Negotiated Governance_ 81 WASH. U. L.Q. 487 (2003) (pointing out that in response to a vague compliance standard with vicious penalties, companies will adopt the “best practice” compliance programs dictated by prosecutors in existing N/DPAs.).
> 27 John C. Coffee, Jr., _Deferred Prosecution: Has It Gone Too Far?_ , NAT'L L.J., July 25, 2005, at 13 (explaining by 2005 deferred prosecution agreements “intruded deeply into corporate governance”); Orland, _supra_ note 7 (finding 54 coded N/DPAs contained corporate governance changes); Barry A. Bohrer & Barbara L. Trencher, _Prosecution Deferred: Exploring the Unintended Consequences and Future of Corporate Cooperation_ , 44 AM. CRIM. L. REV. 1481, 1486 (2007) (“DPAs have also taken on a structural component, often obligating corporations to undertake significant corporate governance reforms such as the addition of “independent” directors, an internal monitor or an ethics officer.”); Orland, _supra_ note 7, at 74 (“Requirements that the corporation change corporate governance organization and responsibility appear with increasing frequency in both DPAs and NPAs.”); Wilson Meeks, _Corporate and White-Collar Crime Enforcement: Should Regulation and Rehabilitation Spell an End to Corporate Criminal Liability?_ , 40 COLUM. J.L. & SOC. PROBS. 77, 100 (2006) (“DPAs often mandate that a corporation adopt institutional reforms and best practice corporate governance, the implementation of which is overseen by the DOJ or a DOJ-appointed monitor.”); Lisa Kern Griffin, _Compelled Cooperation and the New Corporate Criminal Procedure_ , 82 N.Y.U. L. REV. 311, 324 (2007) (“DPAs thus involve prosecutors in ‘corporate-wide behavior modification,’ prescribing what is good corporate governance rather than just prohibiting wrongful conduct.”); Thompson Memo, _supra_ note 16, at [__].
> 28 Ryan D. McConnell et. al., _Plan Now or Pay Later: The Role of Compliance in Criminal Cases_ , 33 HOUS. J. INT'L L. 509, 584–86 (2011) (touting the benefits of an enhanced compliance program. “Companies with reputations for ethical business practices and good corporate governance tend to have
THE EFFECT OF N/DPAS IN CORPORATE GOVERNANCE
mere extension of legally mandated compliance requirements.<sup>29</sup> In fact, corporate governance of the respective entity plays a major role in federal prosecutors’ charging decisions.<sup>30</sup> The increased role of “independent private sector oversight” may help address the increased complexity of corporate crime and dwindling public funds.<sup>31</sup> Given their education and experience as well as their ability to fill a void left by the system,<sup>32</sup> prosecutors may be uniquely qualified to institute corporate governance changes.<sup>33</sup> Others question prosecutors’ possession of the prerequisite experience in assessing and improving corporate governance mechanisms.<sup>34</sup> Because historically corporate
higher stock prices and more satisfied employees. In these and many other regards, a company's decision to act legally and ethically can serve as a catalyst for success.”).
> 29 Miriam Hechler Baer, _Governing Corporate Compliance_ , 50 B.C. L. REV. 949, 951-52 (2009)
(“[C]corporate compliance has evolved ‘into a universal corporate governance activity.’”).
> 30 Thompson Memo, _supra_ note 16; Meitl, _supra_ note 2, at 12–13 (“DPAs then can be seen as an invitation for prosecutors to become an active participant in the corporate governance of a corporation.”); John A. Gallagher, Legislation Is Necessary for Deferred Prosecution of Corporate Crime, 43 SUFFOLK U. L. REV. 447, 470 (2010) (“By emphasizing cooperation and reform, prosecutors commandeer internal investigations and establish their own corporate governance.”); Peter Spivack & Sujit Raman, _Regulating the "New Regulators": Current Trends in Deferred Prosecution Agreements_ , 45 AM. CRIM. L. REV. 159, 161 (2008) (“By focusing more on prospective questions of corporate governance and compliance, and less on the retrospective question of the entity's criminal liability, federal prosecutors have fashioned a new role for themselves in policing, and supervising, corporate America. They have become the New Regulators.”);
> 31 Thomas F. O'Neil III & T. Brendan Kennedy, _Answering to A Higher Authority: Sovereign-Mandated Oversight in the Board Room and the C-Suite_ , 17 FORDHAM J. CORP. & FIN. L. 299, 385 (2012) (“As fiscal pressures continue to mount on federal, state and local agencies in the United States and sovereign entities in other nations, enforcement officials will increasingly turn to independent private sector oversight as a means of ensuring that corporate transgressors are rehabilitated and become compliant and responsible citizens in commerce.”).
32 Meitl, supra note 2, at 3 (arguing prosecutors’ education and experience is sufficient, outside experts are readily available, and most DPA decisions do not require extensive business savvy. In addition, prosecutors are filling “a void left by regulating agencies, boards of directors, and the courts.”). _See_ Christie & Hanna, _supra_ note 14, at 1051–54 (detailing the Bristol Meyer’s Squibb DPA, the federal prosecutor explained, “[o]nce we [the DOJ] decided that the separation of the chairman and CEO's position was advisable, we felt that a meeting with the entire board of directors was necessary. We travelled to a regularly scheduled board meeting in Wilmington, Delaware and engaged in a ninety-minute open exchange with the Board.”); _compare_ Uhlmann, _supra_ note 11, at 1327–28 (“On the one hand, prosecutors are well informed about what makes for an ineffective corporate compliance program, but it does not follow that they have any particular expertise in how to translate that knowledge into an understanding of what constitutes an effective corporate compliance program.”); Arlen & Kahan, _supra_ note 25, at 41 (“Prosecutors may well have special expertise, through the information they learned in investigating the firm and through their general law-enforcement expertise, in assessing the benefits of a mandate in inducing superior policing measures.”);
33 Meitl, supra note 2, at 27 (“Some question the competency of prosecutors to engage in such a foreign field but as this Article has shown, they are in fact qualified to make such decisions. The combination of the education, experience, support staff, and ability to use outside advisors creates a solid framework for the decision-making. As well, the decisions that confront prosecutors are not as foreign as one might guess after closer analysis. In the end, without prosecutorial involvement, there may be a dearth of oversight and enforcement that seems to be increasingly needed.”).
> 34 Bharara, _supra_ note 24, at 112 (“prosecutors, who now--often with little or no experience in corporate governance matters--are solely charged with evaluating whether a company's compliance program is adequate.”). Wray & Hur, _supra_ note 24, at 1185 (“But the central question before the prosecutor is the degree to which the misconduct is attributable solely to rogue employees, or in some way due to the company's own failed policies, structures, procedures, or incentives. And corporate governance
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governance fell under state law,<sup>35</sup> some scholars questioned the DOJ’s authority to expand and police corporate governance<sup>36</sup> without a proper mandate.<sup>37</sup>
Despite the strong indicia of N/DPA’s corporate governance implications, federal prosecutors reshaping the governance of leading public corporations and entire industries, the literature has not comprehensively evaluated the impact of N/DPAs on corporate governance in the United States.<sup>38</sup> Existing studies have identified prosecutorial and other trends, such as the increasing use of N/DPAs,<sup>39</sup> the high usage of N/DPAs in health care and financial industries.<sup>40</sup> Garrett studied the terms in N/DPAs from 2003-2007 with an emphasis on detailing the terms used in N/DPAs, showing an increasing trend of compliance features.<sup>41</sup> Khanna and Dickinson’s study focused on the use of independent monitors, finding an increased usage of monitors, as well as an expansion of the monitors’ powers.<sup>42</sup> Markoff shows that a federal conviction rarely results in significant
mechanisms properly lie at the very heart of that determination: whether the misconduct was in some way the fault of the business entity itself.”).
> 35 John S. Baker, Jr., _Reforming Corporations Through Threats of Federal Prosecution_ , 89 CORNELL L. REV. 310 (2004).
> 36 _Id._ at 323 (“[T]he Sentencing Commission has, without clear statutory authority, abrogated the power to regulate corporate governance.”).
> 37 Hess & Ford, _supra_ note 25, at 310–11 (“Prosecutors and enforcers acting on their own have neither the resources nor the mandate to engage in the kind of large-scale, ongoing interventions into corporations' corporate governance, culture, policies, and procedures that would be required to fully address deep-seated corporate cultural pathologies.”); Arlen & Kahan, _supra_ note 25, at 41 (“[Prosecutors] do not have expertise in assessing the optimal system of corporate governance and agency costs generally.”).
> 38 First, _supra_ note 15; Gibson Dunn, _supra_ note 8; Brandon L. Garrett, _Globalized Corporate Prosecutions_ , 97 VA. L. REV. 1775, 1870 (2011) (“According to the U.S. Sentencing Commission, the number of total federal corporate convictions has averaged 210 per year since 2000. This followed a gradual rise in convictions in the early 1990s when the Commission began collecting data on organizational convictions (but part of that rise may be due to improved data collection during the 1990s.”); Lawrence D. Finder & Ryan D. McConnell, _Devolution of Authority: The Department of Justice's Corporate Charging Policies,_ 51 ST. LOUIS U. L.J. 1, 35 (2006) (analyzing the existence of different provisions in DPA/NPAs through the Holder and Thompson Memos through 2006); McConnell et. al., _supra_ note 28, at 511-14 (analyzing number of DPA/NPAs with compliance requirements and independent monitors in 2008–2010); Orland, _supra_ note 7, at 75 (“Tables I and II reveal a corporate governance change requirement in 12 of the 20 NPAs and 13 of the 24 DPAs. Seven of the 24 DPAs require new management. In cases where senior executives have been indicted, new management boards have been required in 2 of the 8 DPAs and only 2 of the 9 NPAs.”); Garrett, _supra_ note 22, at 936 ( “Federal prosecutors have stepped far outside of their traditional role of obtaining convictions, and, in doing so, seek to reshape the governance of leading corporations, public entities, and ultimately entire industries. This development has gone largely unexamined.”). _But see_ Orland, _supra_ note 7, at 75 (showing through the examination of 54 agreements, that “[r]equirements that the corporation change corporate governance organization and responsibility appear with increasing frequency in both DPAs and NPAs.”).
> 39 JAMES T. O’REILLY ET AL., PUNISHING CORPORATE CRIME: LEGAL PENALTIES FOR CRIMINAL AND REGULATORY VIOLATIONS 132 (2009).
> 40 O’REILLY, ET AL, _supra_ note 39, at 134.
> 41 Garrett, _supra_ note 22, at 936 (“My empirical study describing the DOJ's approach can serve as a foundation for future work investigating those important questions. . . . [P]rosecutors, scholars, and other actors should make sustained efforts to assess its efficacy and delimit its scope. At minimum, such efforts could clarify the relationships between courts, Congress, prosecutors, administrative agencies, and organizations.”).
> 42 Kathleen M. Boozang & Simone Handler-Hutchinson, _"Monitoring" Corporate Corruption: DOJ's Use of Deferred Prosecution Agreements in Health Care_ , 35 AM. J.L. & MED. 89, 96–97 (2009).
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repercussions for the respective corporation.<sup>43</sup> Others considered which government divisions produced the most N/DPAs to show the variation in the utilization of N/DPAs.<sup>44</sup> Orland has studied the corporate governance implications of N/DPAs through 2006, before the proliferation of N/DPAs, and concludes that N/DPAs produce “profound changes in the administration of corporate criminal law.”<sup>45</sup> Many authors supplement their empirical findings with references to individual N/DPAs to support arguments.<sup>46</sup> The largest published study to date considered 120 DPAs available through 2008.<sup>47</sup>
This paper fills a gap in the literature by coding and analyzing the corporate governance implications of all publicly available N/DPAs. Our database comprises 257 N/DPAs [N=257] executed in the time period from 1993-2013.<sup>48</sup> To preview results, we show that 85.6% [N=220] of the public N/DPAs from 1993-2013 contained relevant corporate governance changes. 39.3% [N=101] of the public N/DPAs required changes regarding the board of directors. We find mandated corporate governance changes for the respective entities in the following general categories: (1) Business Changes, (2) Board Changes, (3) Senior Management, (4) Remedial Measures, (4) Monitoring, (5) Cooperation, (6) Compliance Program, and (7) Waiver of Rights. To evaluate all 215 sub-categories of governance changes, we summarize and evaluate the most significant subcategories of governance changes. Our findings suggest that the corporate governance provisions in N/DPAs were less evident from 1993-2003, but increased substantially in the past ten years. The findings in this study suggest that N/DPAs play a significant role in corporate governance.
The paper has six parts. After a short introduction in Part I, Part II introduces the basic parameters of N/DPAs, historical developments, and current trends in the application of N/DPAs. Part III evaluates corporate governance implications that are associated with N/DPAs. The authors discuss the debate on N/DPA legitimacy and purpose and analyze the scope and shortcomings of the debate on governance implications and possible improvements via N/DPAs. Part IV introduces the methodology used in this paper by presenting the dataset and coding parameters. Part V discusses the results by first presenting descriptive statistics to summarize the basic features of the database and thereafter evaluating the governance implications of N/DPAs
> 43 Markoff, _supra_ note 16.
> 44 Uhlmann, _supra_ note 11, at 1316-19 (highlighting that the Criminal Division and five district Attorney’s offices accounted for a large portion of total N/DPAs executed.).
> 45 Orland, _supra_ note 7.
> 46 O'Neil & Kennedy, _supra_ note 31, at 328 (“Two recent DPAs [Willbros & Technip] entered in the Southern District of Texas are illustrative of current practices in federal corporate investigations.”); Wray & Hur, _supra_ note 24, at 1141 (showing the Thompson Memo’s effects through 6 DPAs and 2 NPAs); Warin & Schwartz, _supra_ note 13 (citing 4 cases of the earliest N/DPAs).
> 47 O’REILLY, ET AL, _supra_ note 39, at 122, n.17.
> 48 At the time of publication of this article the 257 N/DPAs were publicly available. All 257 N/DPAs were coded for this article. The authors expand Professor Orland’s initial analysis of 54 N/DPAs (through 2006) both quantitatively and qualitatively by identifying the most pertinent N/DPA provisions that affect corporate governance in the United States. Professor Orland considered: year, venue, duration, offenses, individuals charged, fine, restitution, civil penalty, agency settlement, acceptance of responsibility, monitor/examiner, public statements, discharge employees, cooperation, factual statement, hotline, compliance program, new internal controls, waiver of privilege, waiver of SoL/6<sup>th</sup> Amend., new management/board, training program, and self-reporting. Orland, _supra_ note 7. Professor Orland coded 54 agreements, dating from 1993 to 2006.
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in our dataset. Part VI ends with a discussion of key findings and a summary of implications for N/DPA policy, highlighting limitations. The authors suggest that more research will be needed to evaluate the long-term governance implications of N/DPAs.
# **II. Corporate Non- and Deferred Prosecution Agreements**
Non- and deferred prosecution agreements are contractual agreements between the government and a corporate entity that has engaged in some kind of wrongdoing.<sup>49</sup> In both NPAs and DPAs,<sup>50</sup> the respective entity enters into an agreement with the government after the government investigated and affirmed a corporate wrongdoing. In most cases, some form of self-remedying and/or self-reporting of the problem by the affected entity turned out to be insufficient and resulted in a stronger bargaining position for the DOJ which ultimately triggered in the execution of an N/DPA. As part of the agreement, the government may impose sanctions, such as fines, restitution, institutional changes, and additional reporting duties for the term of the agreement.<sup>51</sup> In exchange for the corporation’s acceptance of these sanctions, the government agrees not to prosecute in a non-prosecution agreement or the government agrees to dismiss filed charges in a deferred prosecution agreement.
The avoidance of collateral consequences is the most commonly cited reason for the use of N/DPAs.<sup>52</sup> Since 2002, the total disintegration of Arthur Andersen<sup>53</sup> with the substantial loss of firm value and 28,000 jobs is commonly equated with the term “collateral consequences” of corporate criminal indictment.<sup>54</sup> Conventional wisdom now dictates that corporate criminal indictment is a “corporate death penalty.”<sup>55</sup> Additional
> 49 Greenblum, _supra_ note 4.
> 50 The main factor to differentiate NPAs from DPAs is whether the government files the charges before the agreement. A DPA generally requires judicial approval. _See_ 18 U.S.C §3161(h)(2) (2012) (stating that the time to file an indictment is tolled during “[a]ny 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”); _see also_ Garrett, _supra_ note 22, at 922 (“There is no case law interpreting that provision [18 U.S.C §3161(h)(2)]. There is no commentary on it. Every judge approving a deferred prosecution agreement has done so without any published rulings or modifications to the agreement.”). In the case of an NPA, the government retains the right to bring charges whereas in the case of a DPA the government refuses to dismiss the charges if the corporation does not fulfill its obligations under the agreement. Greenblum, _supra_ note 4, at 1864.
> 51 Resnik & Dougall, _supra_ note 5.
> 52 Garrett, _supra_ note 22, at 879 (“[A]n indictment has such great collateral consequences on the entire entity and also blameless employees, shareholders, consumers, and creditors.”).
> 53 Spivack & Raman, _supra_ note 30, at 165–66 (The indictment of Arthur Anderson “effectively put the eighty-nine-year-old firm out of business and forced tens of thousands of people to find new jobs. It also had a dramatic effect on the accounting industry, by turning the ‘Big 5’ into the ‘Big 4.”) (internal citations omitted). _But see_ Markoff, _supra_ note 16, at 831 (providing empirical evidence that the federal indictment death penalty for corporations is extremely rate.).
> 54 Paulsen, _supra_ note 12, at 1445 (explaining that collateral consequences are “typified by the Arthur Andersen collapse.”).
> 55Markoff, _supra_ note 16, at 811; _see also_ Kathleen F. Brickey, _Andersen's Fall from Grace_ , 81 WASH. U. L.Q. 917, 921 (2003) (“As Andersen's lawyers put it, a criminal indictment would be tantamount to a death sentence for the firm, unfairly imposing punishment before trial.”); Dane C. Ball & Daniel E. Bolia, _Ending A Decade of Federal Prosecutorial Abuse in the Corporate Criminal Charging Decision_ , 9 WYO. L. REV. 229, 248 (2009) (noting that Arthur Andersen’s demise was “death by indictment.”); Bharara, _supra_ note 24, at 73 (describing that corporations “may not be able to survive indictment, much less conviction and sentencing. . . . ‘[s]ince an indicted firm is a dead firm, a decision to defend an indictment is suicide.’”).
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collateral consequences can also include the forfeiture of licenses or privileges like obtaining government contracts because of federal laws.<sup>56</sup>
The literature discusses different objectives and incentives for parties to execute N/DPAs,<sup>57</sup> including the incentives for the corporation to avoid a criminal indictment.<sup>58</sup> Some assert that the government can police and sanction more organizations through the use of N/DPAs<sup>59</sup> which increases efficiency.<sup>60</sup> Others believe that corporate defendants are typically more sophisticated and well capitalized than an individual one, enabling the government to avoid a long, drawn-out fight.<sup>61</sup> The government typically has extraordinary bargaining power at the pre-charging stage, enabling it to extract fines and sanctions similar to those from a criminal conviction<sup>62</sup> without the risk and cost of a trial.<sup>63</sup> Others suggest that the results obtainable via N/DPAs may be beyond the remedies available in the court system because prosecutors and companies can work together in innovative and adjustable ways to address existing problems and improve governance appropriately for the respective corporation.<sup>64</sup>
# _1. Historical Background_
Since the inception of N/DPAs in the context of juvenile offenders and courts’ recognition of N/DPAs in 1914,<sup>65</sup> their use in the corporate context has increased
> 56 _See_ 33 U.S.C. § 1368(a) (2012) (prohibiting federal contracting with any person convicted under the Clean Water Act “until the [EPA] Administrator certifies that the condition giving rise to such conviction has been corrected”); Greenblum, _supra_ note 4, at 1863 (“Corporate offenders are uniquely susceptible to the license forfeiture and ineligibility for government contracts that may be triggered by a conviction.”); Copland, _supra_ note 22, at executive summary (“[B]usinesses in some industries can be debarred from government contracting or denied government licenses upon an indictment or conviction.”)
> 57 Khanna & Dickinson, _supra_ note 11, at 1721 (“Both the government and the firm have strong incentives to settle the case. For the government, corporate crime cases are difficult, complex, and expensive cases to prosecute and tend to use a great deal of resources.”).
> 58 _Id._ (“The avoidance of severe reputational losses may be significant enough to motivate firms and executives to settle.”).
> 59 Garrett, _supra_ note 22, at 855 (“prosecuting large organizations far more often”).
> 60 Uhlmann, _supra_ note 11, at 1324 (noting the usage of DPAs and DPAs: “It is a simple cost-benefit analysis. The benefits are equal or greater than prosecution, and the costs are less.”).
> 61 Khanna & Dickinson, _supra_ note 11, at 1721 (“[C]orporations normally have access to greater resources than the average criminal defendant, which increases the likelihood of a vigorous defense and potential appeals.”).
> 62 Christie & Hanna, _supra_ note 14, at 1043 (DPAs “permit us to achieve more than we could through court-imposed fines or restitution alone. These agreements, with their broad range of reform tools, permit remedies beyond the scope of what a court could achieve after a criminal conviction.”).
> 63 Khanna & Dickinson, _supra_ note 11, at 1721 (“Thus, from the government's perspective, it might be better to obtain something certain through a settlement rather than to take its chances with a lengthy, complex, and expensive trial.”).
> 64 Christie & Hanna, _supra_ note 14, at 1043 (2006) (“[Those terms] permit us to achieve more than we could through court-imposed fines or restitution alone. These agreements, with their broad range of reform tools, permit remedies beyond the scope of what a court could achieve after a criminal conviction.”).
> 65 Greenblum, _supra_ note 4, at 1866; JAMES A. INCIARDI ET AL., DRUG CONTROL AND THE COURTS 25 (1996) (quoting Chicago Judge Jacob Braude referring to the psychological impact of prosecution and conviction on juvenile offenders); Joel Cohen & Jonathan Liebman, _Pretrial Diversion: An Alternative to Full Federal Prosecution?_ , N.Y.L.J., Apr. 6, 1994, at 1; GENNARO F. VITO & DEBORAH G. WILSON, THE AMERICAN JUVENILE JUSTICE SYSTEM 22 (1985).
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exponentially since the 1990s.<sup>66</sup> A core development for the increasing use of N/DPAs in the corporate context was the introduction of Chapter Eight - Sentencing of Organizations - to the Federal Sentencing Guidelines Manual in 1991. The DOJ incorporated Chapter 8 into the federal sentencing guidelines manual as a response to the increase in corporate criminal prosecutions in the 1990s.<sup>67</sup> Chapter Eight was designed to ensure that the sanctions imposed upon organizations and their agents provide adequate deterrence and incentives for organizations to maintain internal mechanisms for detecting, reporting, and preventing criminal conduct.<sup>68</sup>
The first corporate NPA was recorded in 1991,<sup>69</sup> settling allegations of false and unauthorized bids between the DOJ and Salomon Brothers, Inc.<sup>70</sup> The settlement included the DOJ’s civil and anti-trust divisions, the SEC, and the U.S. Attorney for the Southern District of New York. The U.S. Attorney did not seek criminal charges as a result of Salomon’s cooperation with the investigation.<sup>71</sup>
Only three years later, in 1994, the first corporate DPA was executed between Prudential Securities<sup>72</sup> and the U.S. Attorney’s office for the Southern District of New York in 1994.<sup>73</sup> The U.S. Attorney had charged Prudential Securities with securities fraud for misleading investors in the sales of limited partnerships<sup>74</sup> but agreed to enter into the DPA partially because the DPA ensured similar sanctions as a criminal conviction and
> 66 O’REILLY, ET AL, _supra_ note 39, at 132 (noting an average of 2 N/DPAs a year from 1992 to 2002, an average of 11 per year from 2003 to 2006 and about 28 per year from 2006 to 2008).
> 67 Markoff, _supra_ note 16, at 803 (noting that corporate prosecutions were a “minor part of American law” until the 1990s. “[T]he DOJ began to ramp up corporate prosecutions during the 1990s.”);
> 68 U.S. SENTENCING GUIDELINES MANUAL ch. 8, introductory cmt. (1991), _available at_ http://www.ussc.gov/Guidelines/1991_guidelines/1991_manual.cfm [hereinafter Guidelines Manual 1991]. _See_ Ball & Boila, _supra_ note 55 (discussing the history of corporate criminal liability and the changes to DOJ guidance from 1991–2008). Chapter Eight outlined factors for determining corporate culpability: (1) steps taken by organization prior to the offense to prevent and detect criminal conduct, (2) the level and extent of involvement in or tolerance of the offense by certain personnel, and (3) organization’s actions after an offense has been committed. _Id._ at 347. Four factors which call for an increased the punishment: (1) involvement in or tolerance of criminal activity; (2) prior history; (3) violation of an order; and (4) obstruction of justice. _Id._ at 362–64 (§8C2.5 Culpability Score). Mitigating factors included: (1) effective program to prevent and detect violations of law and (2) self-reporting, cooperation, and acceptance of responsibility. _Id._ at 364–65.
> 69 Greenblum, _supra_ note 4, at 1872; Rachel Delaney, Comment, _Congressional Legislation: The Next Step for Corporate Deferred Prosecution Agreements_ , 93 MARQ. L. REV. 875, 878 (2009) (“The first unofficial DPA occurred in 1992 and grew out of the government’s investigation of Salomon Brothers for a securities fraud violation.”). _See also_ Spivack & Raman, _supra_ note 30, at 163–64.
70 Press Release, U.S. Dep't of Justice, Dep’t of Justice and SEC Enter $290 Million Settlement with Salomon Brothers In Treasury Securities Case (May 20, 1992),
http://www.justice.gov/atr/public/press_releases/1992/211182.htm [hereinafter SEC Press Release]. 71 Richard Breeden, Chairman, U.S. Sec. & Exch. Comm'n, Statement at Press Conference Announcing Filing of Complaint Against Salomon Brothers (May 20, 1992). 72 Greenblum, _supra_ note 4, at 1873.
> 73 Orland, _supra_ note 7, at 59 (“Prudential Securities is the nation's first comprehensive formal federal corporate deferred prosecution agreement.”); Delaney, _supra_ note 69, at 879 (“[T]he Prudential agreement was viewed as rare and unusual because it was one of the first of its kind.”).
> 74 _See_ United States Attorney's Office, Announcement of Filing of Criminal Complaint Against Prudential Securities Incorporated (Oct. 27, 1994, reprinted in Press Releases Issued By United States Attorney, Southern District of New York, 1248 PLI/Corp. 197, 219-23 (2001)). _See also_ Sharon Walsh, _At Prudential, The Fraud Case That Won't Die; Investigation of Partnership Sales Continue Despite Huge Settlement,_ WASH. POST, Feb. 13, 1994, at H1.
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additionally avoided collateral damage resulting from a prosecution, such as harm to employees and investors.<sup>75</sup> The DOJ cited Prudential’s willingness to cooperate,<sup>76</sup> acknowledgement of wrongdoing, the improved compliance program, installation of new management, and restitution payments to investors as a primary reasons to enter into the DPA.<sup>77</sup> The DPA required the appointment of an outside director to serve as an ombudsman in charge of complaints about ethics and compliance and the director’s submission of quarterly compliance reports to the DOJ and Prudential’s board.<sup>78</sup>
The introduction of N/DPAs in Salomon and Prudential and their effect on corporate criminal prosecutions created a lasting controversy and prompted the government to publish a number of memoranda to aid U.S. Attorneys in determining whether to charge corporations or use alternative means for achieving the DOJ’s goals. On June 16, 1999, Deputy Attorney General Eric Holder distributed a memorandum entitled, “Bringing Criminal Charges Against Corporations.”<sup>79</sup> The guidance in the memorandum’s cooperation section was controversial<sup>80</sup> because, among other suggestions, it encouraged prosecutors to consider waiving attorney-client and work product privileges as factors in determining a corporation’s willingness to cooperate.<sup>81</sup> However, the memorandum explicitly noted that the factors were meant as optional guidelines.<sup>82</sup>
Following the Holder Memorandum in 2001, the SEC released a report (the Seaboard Report) declining to pursue an enforcement action against Seaboard,[Inc.] for wrongdoing committed by its subsidiary’s controller.<sup>83</sup> The SEC noted various favorable
75 Letter from Mary Jo White, U.S. Attorney for the Southern Dist. of N.Y., to Scott W. Muller & Carey R. Dunne, Prudential Counsel (Oct. 27, 1994), _available at_
http://www.corporatecrimereporter.com/documents/prudential.pdf [hereinafter White Letter]. 76 Deferred Prosecution Agreement Between the U.S. Attorney's Office for the Southern District of New York and Prudential Securities Inc. (Oct. 27, 1994), _available at_ lib.law.virginia.edu/Garrett/prosecution_agreements/sites/default/files/pdf/prudential.pdf [hereinafter Prudential DPA].
> 77 White Letter, _supra_ note 75; Warin & Schwartz, _supra_ note 13, at 126.
78 Prudential DPA, supra note 76, at 3 (the agreement required a $330 million payment to the SEC for an investor fund).
79 Memorandum from Eric H. Holder, Jr., Deputy Attorney Gen., U.S. Dep't of Justice, to Heads of Dep’t Components and U.S. Attorneys, Bringing Criminal Charges Against Corporations (June 16, 1999), _available at_ http://www.justice.gov/criminal/fraud/documents/reports/1999/charging-corps.pdf [hereinafter Holder Memo]. The memo lists additional factors for prosecutors to consider when deciding to charge a corporation: (1) the nature and seriousness of the crime, (2) the pervasiveness of wrongdoing within the corporation, (3) the corporation’s past history of similar conduct, (4) cooperation and voluntary disclosure, (5) compliance programs established by corporate management to prevent and detect misconduct, (6) restitution and remediation, (7) collateral consequences, and (8) appropriateness of non-criminal alternatives to prosecution. _Id._
> 80 David M. Zornow & Keith D. Krakaur, _On the Brink of a Brave New World: The Death of Privilege in Corporate Criminal Investigations_ , 37 AM. CRIM. L. REV. 147, 147 (2000); Lance Cole, _Corporate Criminal Liability in the 21st Century: A New Era?,_ 45 S. TEX. L. REV. 147, 147 (2003)..
> 81 Holder memo, _supra_ note 79, at VI.A.
> 82 _Id_ . at intro (“These factors are, however, not outcome-determinative and are only guidelines. Federal prosecutors are not required to reference these factors in a particular case, nor are they required to document the weight they accorded to specific factors in reaching their decision.”).
83 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship and Cooperation to Agency Enforcement Decisions, Exchange Act Release No. 44,969, 76 SEC Docket 220 (Oct. 23, 2001) [hereinafter Seaboard Report].
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actions taken by the company, including refusal to invoke attorney-client privilege or work product privilege, firing the controller and two supervisors, reporting the need to restate financial statements, undertaking an internal investigation, providing the SEC with the company’s initial findings, as well as overall good cooperation with the SEC.<sup>84</sup> In considering the pursuit of an enforcement action, the SEC is evaluating various factors with an emphasis on the company’s cooperation with the government, swiftness of the action taken by the company, and the installation of a compliance program.<sup>85</sup>
The DOJ’s Thompson Memorandum updated the factors to be considered by the DOJ when charging a corporation<sup>86</sup> and largely mirrored the SEC’s Seaboard Report.<sup>87</sup> The Thompson Memorandum added another element to the factors considered in the Holder Memorandum: the adequacy of the prosecution of individuals responsible for the corporation’s malfeasance, but contained no guidance on the additional factor.<sup>88</sup> The most significant change in the Thompson Memorandum was its “increased emphasis on and scrutiny of the authenticity of a corporation’s cooperation” and the efficacy of its corporate governance mechanisms.”<sup>89</sup> These mandates in the Thompson Memorandum were intended to address concerns about corporations’ artificial cooperation and fake compliance programs.<sup>90</sup> The Thompson Memorandum did not suggest that the framework was optional,<sup>91</sup> making the factors integral to every prosecution of business crimes.<sup>92</sup>
> 84 Seaboard Report, _supra_ note 83, at 1.
> 85 Seaboard Report, _supra_ note 83, at 2. S _ee_ Christopher A. Wray & Robert K. Hur, _Corporate Criminal Prosecution in A Post-Enron World: The Thompson Memo in Theory and Practice_ , 43 AM. CRIM. L. REV. 1095, 1109 (2006) (“[T]he Report essentially identifies four broad measures of a company's cooperation: (1) self-policing prior to discovery of misconduct (i.e., the existence of effective compliance procedures); (2) thorough review and self-reporting of misconduct upon discovery to regulators; (3) remediation (including dismissing or appropriately disciplining wrongdoers, compensating those adversely affected, and instituting internal controls and procedures to prevent recurrence); and (4) cooperation with law enforcement authorities.”).
> 86 Thompson Memo, _supra_ note 16, at intro (“These revisions draw heavily on the combined efforts of the of the Corporate Fraud Task Force and the Attorney General’s Advisory Committee to put the results of more than three years of experience with the principles into practice.”).
> 87 Wray & Hur, _supra_ note 24, at 1109 (“All of these factors are echoed in the Thompson Memo . . . .”).
> 88 Thompson Memo, _supra_ note 16, II.A. Whereas the other eight factors each contained a paragraph entitled “General Principle” which outlined the factor in more detail followed by a multiple paragraph “Comment,” the new factor did not have a general principle explanation nor a commentary.
> 89 Thompson Memo, _supra_ note 16..
> 90 _Id._ (“The main focus of the revisions is increased emphasis on and scrutiny of the authenticity of a corporation’s cooperation. Too often business organizations, while purporting to cooperate with a Department investigation, in fact take steps to impede the quick and effective exposure of the complete scope of wrongdoing under investigation. . . . The revisions also . . . ensure that [corporate governance mechanisms] are truly effective rather than mere paper programs.”).
> 91 _Cf._ Holder memo, _supra_ note 79, at intro (“These factors are . . . only guidelines. Federal prosecutors are not required to reference these factors in a particular case, nor are they required to document the weight they accorded specific factors in reaching their decision.”).
> 92 _See_ U.S. ATTORNEYS’ MANUAL, TITLE 9: CRIMINAL RESOURCE MANUAL § 162, _available at_ <u>http://www.justice.gov/usao/eousa/foia_reading_room/usam/title9/crm00100.htm</u> (“In conducting an investigation, determining whether to bring charges, and negotiating plea agreements, prosecutors must consider the [nine Thompson Memorandum] factors....” (emphasis added)); Thompson Memo, _supra_ note 16, at intro (“[P]rosecutors and investigators in every matter involving business crimes must assess the merits of seeking the conviction of the business entity itself.”). United States v. Stein, 435 F. Supp. 2d 330,
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Reacting to the Thompson Memorandum’s continuing consideration of corporations’ waiver of attorney-client and work product privileges as factors in determining a corporation’s willingness to cooperate, the American Bar Association (ABA) created a Task Force on the Attorney-Client Privilege in September 2004.<sup>93</sup> Eventually, on May 19, 2004, the U.S. Sentencing Commission amended Chapter Eight of the U.S. Sentencing Guidelines, nullifying the requirement of waiving of attorneyclient and work product privilege for a reduction in culpability score.<sup>94</sup>
The DOJ only half-heartedly reacted to the concerns raised by the ABA with regard to the Thompson Memorandum. On October 21, 2005, Robert D. McCallum, Jr., Acting Deputy Attorney General, issued a memorandum with the subject “Waiver of Corporate Attorney-Client and Work Product Protection.”<sup>95</sup> The McCallum Memo did not replace the Thompson Memorandum; it only supplemented it and did little, if anything, to quell the widespread use of attorney-client and work product privilege waivers in DPAs.<sup>96</sup> The McCallum Memorandum referenced the Thompson Memorandum factor regarding cooperation including waiver of attorney-client and work product protection. To attain uniformity within a district,<sup>97</sup> the McCallum Memorandum directed each district to follow a best practice for “establish[ing] a written waiver review process.”<sup>98</sup>
Eventually, in 2006, political pressure against both the Thompson and McCallum Memos increased substantially.<sup>99</sup> Both the Senate and the House held hearings on the issue of waiving attorney-client privilege.<sup>100</sup> During the hearings, the Coalition to Preserve the Attorney-Client Privilege presented survey findings showing overwhelming
338 (2006) (“Unlike its predecessor [the Holder Memorandum], however, the Thompson Memorandum is binding on all federal prosecutors.”).
> 93 AM. BAR ASSOC., TASK FORCE ON ATTORNEY-CLIENT PRIVILEGE, REPORT TO THE HOUSE OF DELEGATES 3 (2006), http://apps.americanbar.org/buslaw/newsletter/0052/materials/pp4.pdf [hereinafter ABA report].
94 Sentencing Guidelines for United States Courts, 69 Fed. Reg. 28,994, 29,021 (May 19, 2004) (“Waiver of attorney-client privilege and of work product protections is not a prerequisite to a reduction in culpability score . . . unless such waiver is necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization.”).
95 Memorandum from Robert D. McCallum, Jr., Acting Deputy Attorney Gen., to Heads of Dep't
Components and U.S. Attorneys, Waiver of Corporate Attorney-Client and Work Product Protection (Oct. 21, 2005), _available at_ http://federalevidence.com/pdf/Corp_Prosec/McCallum_Memo_10_21_05.pdf [hereinafter McCallum Memo].
> 96 Keith Paul Bishop, _The McNulty Memo-Continuing the Disappointment_ , 10 CHAP. L. REV. 729, 736 (2007).
> 97 _See_ Finder & McConnell, _supra_ note 38, at 29–30 (“The policy was intended to provide some flexibility and autonomy across different offices, but aimed for uniformity within each office.”).
> 98 McCallum Memo, _supra_ note 95.
> 99 _See_ Bishop, _supra_ note 96, at 737; ABA Report, _supra_ note 93, at 3.
> 100 _White Collar Enforcement: Attorney-Client Privilege and Corporate Waivers: Hearing Before the_
_Subcomm. on Crime, Terrorism, and Homeland Security of the Comm. of the Judiciary_ , 109th Cong. 112 (2006), _available at_ http://commdocs.house.gov/committees/judiciary/hju26409.000/hju26409_0f.htm; _The Thompson Memorandum’s Effect on the Right to Counsel in Corporate Investigations: Hearing Before the Comm. of the Judiciary_ , 109th Cong. 835 (2006), _available at_ http://www.gpo.gov/fdsys/pkg/CHRG109shrg34117/pdf/CHRG-109shrg34117.pdf.
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support for the privilege.<sup>101</sup> The ABA and the U.S. Chamber of Commerce also supported the cause.<sup>102</sup> However, the government did not amend its guidance.
Additional pressure for adjustments in DPA practices came from the judiciary. In 2005, KMPG, the auditor of Arthur Andersen, entered into a DPA with the DOJ.<sup>103</sup> Former employees of KMPG brought suit against the DOJ, claiming the DPA contained unconstitutional provisions specifically infringing their Fifth and Sixth Amendment rights.<sup>104</sup> The prosecutor for the DOJ had followed the guidance in the Thompson Memorandum, providing that paying attorneys’ fees was a factor weighing against a corporation’s cooperation.<sup>105</sup> Judge Kaplan of the Southern District of New York held in _U.S. v. Stein_ that the DOJ’s insistence on KPMG’s discontinuance of paying for attorney’s fees of its employees was a breach of those employees’ Fifth and Sixth Amendment rights.<sup>106</sup> In contrast with the Thompson Memorandum, Judge Kaplan opined that paying attorneys’ fees “will not be considered in determining whether KPMG has complied with the DPA.”<sup>107</sup>
In part capitalizing on the mounting political pressure and opposition to government DPA practices, on December 8, 2006, Senator Arlen Specter introduced the “Attorney-Client Privilege Protection Act.”<sup>108</sup> The bill is designed to preserve the attorney-client privilege and work product protections available to corporations. Had the bill passed, it would have restricted the most controversial aspects of the Thompson Memorandum by curtailing the government’s ability to consider waiver of the attorneyclient privilege and work product protections in determining whether a corporation is cooperating with the government.<sup>109</sup>
Four days after the introduction of Senator Specter’s bill, the DOJ released new guidance, in the form of the McNulty Memorandum, which superseded the Thompson and McCallum Memoranda.<sup>110</sup> The McNulty Memo addresses the two largest public concerns: (1) waiving of attorney-client and work product protections and (2) advancing attorneys’ fees.<sup>111</sup> The McNulty Memorandum included the same nine factors from the Thompson Memorandum but softened the DOJ’s stance on the requirement of attorney-
> 101 Am. Chemistry Council et al., _The Decline of the Attorney-Client Privilege in the Corporate Context; Survey Results, in White Collar Enforcement: Attorney-Client Privilege and Corporate Waivers: Hearing Before the Subcomm. on Crime, Terrorism, and Homeland Security of the H. Comm. on the Judiciary_ , 109th Cong. 62 (2006), _available at_
http://www.acc.com/vl/public/Surveys/loader.cfm?csModule=security/getfile&pageid=16306&title=The% 20Decline%20Of%20the%20Attorney-Client%20Privilege%20in%20the%20Corporate%20Context. 102 ABA Report, _supra_ note 93.
103 Deferred Prosecution Agreement Between the U.S. Attorney's Office for the Southern District of New York and KPMG LLP (Aug. 26, 2005), _available at_ http://www.usdoj.gov/usao/nys/pressreleases/August05/kpmgdpagmt.pdf.
> 104 _Stein_ , 435 F.Supp.2d 330.
> 105 Thompson Memo, _supra_ note 16.
> 106 _Stein_ , 435 F.Supp.2d 330.
> 107 _Id._ at 382.
> 108 Attorney-Client Privilege Protection Act of 2006, S. 30, 109th Cong. (2006); _See_ Bishop, _supra_ note 96, at 737.
> 109 Ball & Boila, _supra_ note 55, at 253–54.
110 Memorandum from Paul McNulty, Deputy Attorney General, to Heads of Dep't Components and U.S. Attorneys, Principles of Federal Prosecution of Business Organizations (Dec. 12, 2006), _available at_ http://www.justice.gov/dag/speeches/2006/mcnulty_memo.pdf [hereinafter McNulty Memo]. 111 _See_ Bishop, _supra_ note 96, at 738.
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client and work product privilege waivers.<sup>112</sup> The memorandum allowed the waiver of the protections when a “legitimate need for the privileged information” existed.<sup>113</sup> To determine if waiver of privileges and protections was appropriate, the memorandum contained a four-factor test, balancing the policy considerations for the protections against the law enforcement needs of the government.<sup>114</sup> The McNulty Memorandum also expanded the cooperation factor and addressed the payment of attorney fees,<sup>115</sup> reiterating the language highlighted in the Stein case: “Prosecutors generally should not take into account whether a corporation is advancing attorneys’ fees to employees.”<sup>116</sup> The memorandum did not silence the critics of the DOJ’s charging policies.<sup>117</sup>
Most commentators and the bar were dissatisfied.<sup>118</sup> The McNulty Memorandum provided still ample opportunity for prosecutors to use the lack of waiving attorney-client privilege in the cooperation determination<sup>119</sup> and the attorneys’ fees provision had similar shortcomings. Senator Arlen Specter introduced the Attorney-Client Privilege Protection
> 112 _Id._ at 8 (“Waiver of attorney-client and work product protections is not a prerequisite to a finding that a company has cooperated in the government’s investigation. . . . Prosecutors may only request waiver of attorney-client or work product protections when there is a legitimate need for the privileged information to fulfill their law enforcement obligations.”).
> 113 _Id._ at 8.
> 114 _Id._ at 9. The test considered: (1) the likelihood and degree to which the privileged information will benefit the government’s investigation; (2) whether the information sought can be obtained in a timely and complete fashion by using alternative means that do not require waiver; (3) the completeness of the voluntary disclosure already provided; and (4) the collateral consequences to a corporation of a waiver. McNulty Memo, _supra_ note 110, at 9. Depending on the type of privileged information requested, prosecutors needed written authorization from either the Assistant Attorney General or The Deputy Attorney General. McNulty Memo, _supra_ note 110, 9–10. The memo classified information into two categories. Category I information was “purely factual information.” It could include: “copies of key documents, witness statements, or purely factual interview memoranda regarding the underlying misconduct, organization charts created by company counsel, factual chronologies, factual summaries, or reports.” Requests for this information required written authorization from U.S. Attorney and a consultation with the Assistant Attorney General. _Id._ at 9. If Category I information was not sufficient, Category II information could be requested. Category II information included “attorney-client communications or nonfactual attorney work product” for example, “legal advice given to the corporation before, during, and after the underlying misconduct occurred.” Category II information required written authorization from the Deputy Attorney General. _Id._ at 10.
> 115 _Id._ at 7–12 (cooperation); Bishop, _supra_ note 96, at 738 (attorneys’ fees).
116 McNulty Memo, supra note 118, at 11.
> 117 Bishop, _supra_ note 96, at 737–43 (“For example, American Bar Association President Karen Mathis stated that “[t]he Justice Department's new corporate charging guidelines for federal prosecutors fall far short of what is needed to prevent further erosion of fundamental attorney-client privilege, work product, and employee protections during government investigations.”).
> 118 _See_ Bishop, _supra_ note 96; _The McNulty Memorandum's Effect on the Right to Counsel in Corporate Investigations: Hearing before the Subcomm. on Crime, Terrorism, and Homeland Security of the H. Comm. of the Judiciary_ , 110th Cong. 24 (2007), _available at_ http://federalevidence.com/pdf/Corp_Prosec/House_Jud_McNulty_3_07.pdf. _Examining Approaches to Corporate Fraud Prosecutions and the Attorney-Client Privilege Under the McNulty Memo: Hearing Before the S. Comm. on the Judiciary_ , 110th Cong. 280 (2007), _available at_ http://federalevidence.com/pdf/Corp_Prosec/SenJudHearingMcNulty9-07.pdf.
> 119 McNulty Memo, _supra_ note 110 (The lack of waiving protections on factual information (Category I) could still be counted against the corporation’s cooperation. The memo only protected refusals to waive protection on Category II information from being considered against the corporation’s cooperation factor.)
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Act of 2008.<sup>120</sup> The revised version of the bill included most of the items from the prior 2006 bill.<sup>121</sup> It expanded its original scope to all government agencies and covered “enforcement decisions” as well as charging decisions.<sup>122</sup>
Finally, with the release of the Filip Memorandum on August 28, 2008, the DOJ provided its latest installment of guidance for charging corporations.<sup>123</sup> This guidance is unique in that the principles were codified into the United States Attorneys’ Manual.<sup>124</sup> The Filip memorandum recites the same nine factors seen in the Thompson Memorandum<sup>125</sup> but adds two important aspects.<sup>126</sup> It replaces the McNulty attorneyclient waiver rule (including two categories of information) with a single category rule and changes the definition of cooperation.<sup>127</sup> The memorandum defined cooperation as “disclosure of the relevant _facts_ concerning such misconduct”<sup>128</sup> and recognized that only the individuals acting on behalf of a corporation can know facts. The Filip Memorandum acknowledges that organizations that are made aware of misconduct typically conduct an internal investigation, which may include “a process that may confer attorney-client privilege or attorney work product protection.”<sup>129</sup> Moreover, the Filip Memo forbids prosecutors from considering payment of attorneys’ fees for employees as a factor in cooperation.<sup>130</sup>
> 120 Attorney-Client Privilege Protection Act of 2008, S. 3217, 110th Cong. (2008); Ball & Boila, _supra_ note 55, at 257.
> 121 Attorney-Client Privilege Protection Act of 2006, S. 30, 109th Cong. (2006); _see_ Ball & Boila, _supra_ note 55, at 257–58.
122 Attorney-Client Privilege Protection Act of 2008, S. 3217 § 3(b).
123 Memorandum from Mark Filip, Deputy Attorney General, to Heads of Dep't Components and U.S. Attorneys, Principles of Federal Prosecution of Business Organizations (Aug. 28, 2008), _available at_ http://www.justice.gov/dag/readingroom/dag-memo-08282008.pdf [hereinafter Filip Memo]; First, _supra_ note 15, at 56–57; _cf._ Uhlmann, _supra_ note 11, at 1330 (“Justice Department went too far when it amended the Principles of Federal Prosecution for Business Organizations in 2008.”).
> 124 U.S. Dep't of Justice, United States Attorneys' Manual §9-28.000 _et seq_ . (2008), _available at_ http://www.justice.gov/usao/eousa/foia_reading_room/usam/title9/28mcrm.htm; The Filip guidance appears to entail a contradiction. The opening paragraph opines the principles “will be finding on all federal prosecutors within the Department of Justice.” Filip Memo, _supra_ note 123, at intro. On the other hand, the last paragraph concludes the principles, “provide only internal Department of Justice guidance. They are not intended to, do not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in a matter civil or criminal.” Filip Memo, _supra_ note 123, at §9-28.1300. _See_ Ball & Boila, _supra_ note 55, at 259 (leading at least one author to opine, “Thus, the Guidelines are not truly binding.”).
> 125 Filip Memo, _supra_ note 123; _cf._ Thompson Memo, _supra_ note 16.
> 126 Filip Memo, _supra_ note 123; _see_ Susan B. Heyman, _Bottoms-Up: An Alternative Approach for Investigating Corporate Malfeasance_ , 37 AM. J. CRIM. L. 163, 177–78 (2010).
> 127 Filip Memo, _supra_ note 123, at § 9-28.710 (“waiving the attorney-client and work product protections has never been a prerequisite under the Department’s prosecution guidelines for a corporation to be viewed as cooperative.”).
> 128 _Id._ at §9-28.720.
> 129 _See_ Heyman, _supra_ note 126, at 178 (“[T]his focus may prove to be a distinction without a difference.”). _See also_ Mark J. Stein & Joshua A. Levine, _The Filip Memorandum: Does It Go Far Enough?_ , N.Y. L.J., Sept. 11, 2008, at 4. (“Ironically, the Filip Memo may actually lessen the procedural protections that the McNulty Memo offered ... [because] no approvals are required for a prosecutor to seek factual material even where its provision may require a privilege waiver.”); Filip Memo, _supra_ note 123, at §9-28.720.
> 130 Filip Memo _, supra_ note 123, at §9-28.730
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# _2. Legitimacy Concerns_
Several core characteristics often associated with N/DPA have raised legitimacy concerns in the literature. Critics have argued that reformation of corporations is outside the realm of the prosecutor’s office,<sup>131</sup> citing the creation of Sentencing Guidelines as opening the floodgate that allowed prosecutors to reform corporations through prosecution.<sup>132</sup> Many are concerned about prosecutorial abuse<sup>133</sup> and unequal bargaining power.<sup>134</sup> Especially the abovementioned privilege waivers have raised concerns over abuse of prosecutorial discretion and its constitutionality.<sup>135</sup> N/DPAs may also not be subject to the same contract defences as plea agreements.<sup>136</sup> N/DPAs may also create new negative externalities<sup>137</sup> and may undermine the rule of law.<sup>138</sup> Ralph Nader criticized the
> 131 Baker, _supra_ note 35, at 312–13 (“[F]ederal criminal law does not address corporate reform. . . . “Congress’s delegation of power in criminal matters . . . has allowed executive and independent agencies to implement policies that Congress might never approve if it actually voted on them.”)
> 132 Baker, _supra_ note 35, at 313 (“Most importantly, the Supreme Court's decision in Mistretta v. United States, rejecting separation-of-powers challenges to Congress's creation of the Sentencing Commission within the judicial branch and the conferral on it of legislative authority over sentencing, made it possible to reform “corporate culture” through actual and threatened prosecution.”).
> 133 Bharara, _supra_ note 24, at 113 (“Only a narrower, better-fitting corporate liability rule will achieve preferred levels of discretion and respect for the rights and privileges of individual defendants.”).
> 134 _See_ Paulsen, _supra_ note 12, at 1437; Matt Senko, _Prosecutorial Overreaching in Deferred Prosecution Agreements,_ 19 S. CAL. INTERDISC. L.J. 163, 163–64, 180 (2009) (“It is clear that the government takes advantage of an entity's economic necessity to stay in business. It is indeed a Hobson's choice between indictment, which amounts to corporate death, and an inequitable agreement that at least allows the business to subsist.”); Zierdt & Podgor, _supra_ note 1 at 3 (worrying about prosecutorial abuse through privilege waivers, breach provisions, and attorneys’ fees provisions).
> 135 Griffin, _supra_ note 27, at 381–82 (“Deputizing internal investigators, compelling privilege waivers, and constraining individual defendants' legal resources no doubt streamlines investigations. But ‘[i]f the exercise of constitutional rights will thwart the effectiveness of a system of law enforcement, then there is something very wrong with that system.’” (citing Escobedo v. Illinois, 378 U.S. 478, 490 (1964))); Bohrer & Trencher, _supra_ note 27, at 1489-1492 (raising Fifth Amendment concerns for individuals when DPAs include a requirement that a corporation make employees available for interviews); Griffin, _supra_ note 27, at 312–13 (expressing concern about DPAs as a “bypass around corporate employees' Fifth Amendment privilege against self-incrimination”); _Contra_ Mary Beth Buchanan, _Effective Cooperation by Business Organizations and the Impact of Privilege Waivers_ , 39 WAKE FOREST L. REV. 587, 610–11 (2004) (arguing the language in the Thompson Memo focuses on discovering facts not legal advice, that waiving privilege is not a prerequisite for a DPA, and the waiver does not infringe on an individual’s Fifth Amendment rights).
> 136 Zierdt & Podgor, _supra_ note 1, at 3 (highlighting duress and unconscionability as unavailable contract defences in DPAs, because DPAs do not afford judicial oversight).
> 137 _See_ Greenblum, _supra_ note 4, at 1881–82 (highlighting issues of waiving attorney-client privilege, deferring solely to the prosecutor for determining breach, and the imposition of unrelated provisions.”); Joseph G. Block, David L. Feinberg, _Look Before You Leap-DPAS, NPAS, and the Environmental Criminal Case_ , 9 ABA ENVTL. ENFORCEMENT & CRIMES COMMITTEE NEWSL., no. 2, 2008 at 9 (“The great discretion reserved to prosecutors, ample precedent of onerous provisions, and real possibility of substantial collateral consequences can combine to make DPA/NPAs practically as harmful as a guilty plea or a conviction after trial.”); Bohrer & Trencher, _supra_ note 27 (investigating the collateral consequences to the various stakeholders in DPAs).
> 138 Uhlmann, _supra_ note 11 at 1302 (Author argues that use of DPAs “erodes corporate criminal liability and undermines the rule of law. . . . [D]eferred prosecution and non-prosecution agreements limit the punitive and deterrent value of the government's law enforcement efforts and extinguish the societal condemnation that should accompany criminal prosecution.”);
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use of N/DPAs as a double standard,<sup>139</sup> describing N/DPAs as having “mutated into a tool to facilitate corporate criminals’ escape from prosecution, conviction and serious penalty for their criminal acts.”<sup>140</sup> Others see reformation of corporations via N/DPAs as a second choice preference to punishing and deterring bad behavior<sup>141</sup> and suggest the leniency created by N/DPAs may result in suboptimal policy outcomes.<sup>142</sup>
Despite the legitimacy concerns, a majority of the literature acknowledges that N/DPAs serve an important purpose<sup>143</sup> but recognizes that current N/DPA practices require reform as well as increased legislation<sup>144</sup> and judicial oversight.<sup>145</sup> Consistency of DOJ practices including following its own guidance when entering N/DPAs is of
> 139 Nader & Weissman, _supra_ note 21 (“[A] pervasive system of double standards: tough criminal penalties and lifetime stigma for individual street criminals, but second (and third changes) for corporate criminals that promise to do better in the future.”)
> 140 _Id._ ; _Contra_ RUSSELL MOKHIBER, CORP. CRIME REPORTER, CRIME WITHOUT CONVICTION: THE RISE OF DEFERRED AND NON PROSECUTION AGREEMENTS (2005), http://
www.corporatecrimereporter.com/deferredreport.htm (citing a 2002 interview with Joseph Savage, criminal defense attorney (“‘Is there a double standard?’ he asked. ‘Absolutely. And there should be. There can be no crime of a corporation without an individual act. It can never be the other way around – a corporate crime without individuals acting. To me, there is a double standard. There ought to be a double standard.’”)).
> 141 Baker, _supra_ note 35, at 312–13 (2004) (“Nevertheless, it is imperative to question the authority of the federal government--through the U.S. Sentencing Commission, the Justice Department, and other federal agencies, individually and collectively--to reform corporations.”).
> 142 Uhlmann, _supra_ note 11; Markoff, _supra_ note 16; Nader & Weissman, _supra_ note 21.
> 143 Christie & Hanna, _supra_ note 14, at 1043–44 (“The Bristol-Myers' deferred prosecution agreement, we believe, achieves the goals of general and specific deterrence, full disclosure to the investing public, carefully targeted reform of a corrupted corporate culture, and restitution to victim shareholders, while minimizing collateral consequences on tens of thousands of Bristol-Myers' law-abiding employees and current shareholders.”).
> 144 Delaney, _supra_ note 69, at 876 (“Legislation can allay the risks inherent in today's deferred prosecution system, such as punishments that do not fit the crime, pressure to waive attorney-client privilege, nonpayment of employee legal fees, and conflicts of interest in the appointment of a federal monitor to oversee implementation of the agreement.”); Gallagher, _supra_ note 30, at 473 (“[T]he Attorney-Client Privilege Protection Act and the Accountability in Deferred Prosecution Act are necessary to protect corporations and individuals from prosecutorial overreaching and ensure aggressive and impartial prosecution.”); Ball & Boila, _supra_ note 55, at, 259–61 (citing that the Guidelines do not carry the force of law, can easily be changed, and do not cover civil issues or other government agencies).
> 145 Coffee, _supra_ note 27, at [_] _;_ Robert J. Ridge & Mackenzie A. Baird, _The Pendulum Swings Back: Revisiting Corporate Criminality and the Rise of Deferred Prosecution Agreements_ , 33 U. DAYTON L. REV. 187, 202-203 (2008) (“Finally, judicial oversight is needed to provide a backstop against abuse of prosecutorial discretion.”); Senko, _supra_ note 134, at 163–64; Greenblum, _supra_ note 4, at 1896 (“Judicial involvement in the corporate deferral process can curb the prosecutorial power that creates these new negative externalities, and it can reshape corporate deferred prosecution into a more effective and accountable mechanism for reforming delinquent corporations.”); Copland, _supra_ note 22, at 13 (“[J]udges should insist that prosecutors make out a minimal factual showing of evidence and should hold hearings to determine the benefits of an agreement’s proposed terms and their potential costs and risks. Judges should also play an active role in the selection of corporate monitors, if any. Finally, judges should tell prosecutors that any allegation of a breach of a DPA must be confirmed by a judicial finding before any consequences may ensue.”); F. Joseph Warin & Andrew S. Boutros, _Deferred Prosecution Agreements: A View from the Trenches and A Proposal for Reform_ , 93 VA. L. REV. IN BRIEF 121, 128 (2007) (“DOJ should surrender to the courts at the pre-indictment stage the determination of whether a corporation has materially breached the terms of a DPA.”); Zierdt & Podgor, _supra_ note 1 at 3 (stating the lack of judicial oversight creates DPAs “without considering theories of duress and unconscionability.”).
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particular concern.<sup>146</sup> Commentators have called for more governmental guidance on N/DPAs.<sup>147</sup> While the U.S. Sentencing Commission created Organizational Guidelines for sentencing in 1991, the proliferation of N/DPAs may have rendered these guidelines less relevant.<sup>148</sup>
Many commentators recommend specific adjustments to current N/DPA practices applied by the DOJ. Some express a desire for greater uniformity in N/DPAs<sup>149</sup> as a method for improving oversight and proposed a formal approval process for N/DPAs, comparable to the McNulty process for privilege waivers.<sup>150</sup> The DOJ’s top-down approach to N/DPAs, focusing on executive pressure to induce employees’ cooperation in return for leniency, could be improved with a bottom-up approach which would provide incentives for individuals to cooperate with the DOJ.<sup>151</sup> The punishment of corporate misconduct via N/DPAs ex post could also be decreased if the DOJ proactively focused
> 146 Finder & McConnell, _supra_ note 38, at 34–35 (“To reduce the number of adverse provisions of a pretrial agreement after fully cooperating and promising future cooperation, companies may request that the pre-trial agreement not include provisions waiving privilege, changes in the company's business, or independent monitors. To this end, companies may argue that the Organizational Guidelines, which provided the legal groundwork for the Thompson Memo, will soon be revised and the 2004 waiver language removed. Accordingly, the DOJ should not request a privilege waiver as a condition of cooperation. As Judge Kaplan noted, the DOJ should be comfortable enough with its case and the evidence it has of criminal activity that it does not need to destroy this important protection. The collateral consequences of such a waiver should be identified and quantified for the U.S. Attorney's Office.”).
> 147 Early critiques of N/DPAs in 1997 suggested the DOJ create specialized N/DPA guidelines _see_ Warin & Schwartz, _supra_ note 13, at 133 (recommending five factors for deciding whether to allow deferral and seven elements that should be included in each DPA). The DOJ did not comply and the call for better guidelines was reiterated eleven years later. Spivack & Raman, _supra_ note 30, at 161–62 (“DOJ leadership should specify the circumstances under which prosecutors can seek corporate pretrial diversion, with particular attention paid to the complex dynamics linking entity liability to individual liability in the criminal context.”); Brandon L. Garrett, _Corporate Confessions_ , 30 CARDOZO L. REV. 917, 946–47 (2008) (“Firms benefit from clear written policies regarding cooperation during investigations. . . . DOJ Guidelines that reward provision of employer warnings would add useful incentives to clarify murky interview dynamics.”); Miriam Hechler Baer, _Corporate Policing and Corporate Governance: What Can We Learn from Hewlett-Packard's Pretexting Scandal?_ , 77 U. CIN. L. REV. 523, 579 (2008) (“On one hand, we have encouraged corporations, who are also private employers, to adopt a police ethic that inevitably includes deception and secrecy. Deceptive policing, in turn, can create distrust, disloyalty, and unpredictability within the firm. At the same time, however, we have advised these same companies that they must adopt internal governance techniques that emphasize transparency and promote a sense of trust and well-being among their various stakeholders, and particularly in their employees.”).
> 148 Peter J. Henning, _The Organizational Guidelines: R.I.P.?_ , 116 YALE L.J. POCKET PART 312, 312 (2007) (“Few companies are willing to risk an indictment, much less a criminal trial, if an alternative exists. And alternatives do exist: deferred and non-prosecution agreements offer corporations the chance to avoid an indictment altogether. That new reality means that the Organizational Guidelines are largely irrelevant.”);
> 149 Ridge & Baird, _supra_ note 145, at 202–03 (“An analysis of recent investigations indicates that corporations satisfying identical cooperation factors have received drastically different treatment, attributable only to the jurisdiction in which the investigations took place.<sup>59</sup> Clearly, the lack of uniformity that the Principles were designed to eliminate persists in the era of deferred prosecutions.”); Warin & Boutros, _supra_ note 145, at 126 (2007) (encouraging the DOJ to provide detailed guidance for “whether a case should be resolved through the vehicle of a guilty plea, a DPA, or an NPA. . . . [and] guidance about appropriate terms to be included in DPAs.”);
> 150 Paulsen, _supra_ note 12, at 1437.
> 151 Heyman, _supra_ note 126, at 209 (“Corporate officials who orchestrate, tolerate, and often reward the wrongdoing should be a significant focus of the government's efforts [bottom up], but current practices focus on the individual employees who participate in the unlawful acts [top-down].”
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on educating corporations about compliance ex ante.<sup>152</sup> Others suggest recasting the role of the independent monitor and instituting integrity-based compliance programs.<sup>153</sup> To determine whether N/DPA reforms are achieved and whether the benefits exceed the cost, some call for increased transparency<sup>154</sup> in the process, from negotiation through the end of a monitorship.<sup>155</sup> Finally, in light of the increasing focus on rehabilitation and compliance, some recommend dissolving corporate criminal liability altogether, making N/DPAs obsolete.<sup>156</sup> The literature is specifically concerned about a broad application of N/DPAs, arguing that N/DPAs should only be used in specialized circumstances,<sup>157</sup> demanding that the independent monitor provision in DPAs should only be used in specific circumstances.<sup>158</sup>
# **III. The Impact of N/DPAs on Corporate Governance**
Anecdotal evidence suggests that N/DPAs exert influence and are changing corporate governance in the United States.<sup>159</sup> Corporate governance issues were
> 152Ellen S. Podgor, _Educating Compliance_ , 46 AM. CRIM. L. REV. 1523, 1533–34 (2009) (“[I]t is important to make certain that individuals and corporate entities work together to assure compliance with the law. This is best effectuated by having the government provide guidance to both the corporation and the individual. It offers a positive approach to achieving compliance as opposed to waiting for the criminal act and then trying to achieve this same result with rehabilitation and deterrence.”).
> 153 Hess & Ford, _supra_ note 25, at 346 (emphasizing that the monitor should have “facilitating and problem-solving roles” and extolling the virtues of an integrity-based compliance system).
> 154 Nader & Weissman, _supra_ note 21.
> 155 Boozang & Handler-Hutchinson, _supra_ note 42, at 99 (encouraging the creation of additional metrics and increased transparency, so scholars can perform an empirical cost-benefit analysis of the structural reforms sought by pre-trial diversion options.).
> 156 Meeks, _supra_ note 27, at 124 (“By dissolving corporate entity criminal liability and instead exclusively dealing with corporate entity misfeasors in the civil system, several of the most pressing problems created by the conflict between these policies and the practicalities of law enforcement would be solved while furthering, and making more accountable, the processes of corporate entity deterrence, prevention, rehabilitation and punishment.”); Senko, _supra_ note 134, at 163–64 (“It also posits that eliminating the concept of respondeat superior from the criminal justice realm is sensible and necessary if the foundations of criminal justice are not to be compromised.”);
> 157 Uhlmann, _supra_ note 11, 1301–02 (“[T]he government does not need the ‘middle ground’ of deferred prosecution and non-prosecution agreements, except for less serious violations where there are no civil or administrative remedies or perhaps in the rare situation where prosecutors can demonstrate that a criminal conviction would cause unacceptable harm to innocent third parties.”); Block & Feinberg, _supra_ note 137, at 9 (“In sum, the agreements should likely be sought only in very limited circumstances: when a declination is unreachable, when a civil or administrative resolution cannot suffice, when the consequences of indictment are ruinous. In those limited circumstances, one might attempt to convince the environmental prosecutor that a DPA/NPA will best serve the interests of justice.”); Markoff, _supra_ note 16, at 834–36 (stating DPAs are only needed in rare instances when a conviction will result in a business failure, as predicted by The Core Business Model); Arlen & Kahan, _supra_ note 25, at 6 (asserting “that only policing agency costs can plausibly justify DPA mandates.”).
> 158 Khanna & Dickinson, _supra_ note 11, at 1714–15.
> 159 Coffee, _supra_ note 27 (explaining by 2005 deferred prosecution agreements “intruded deeply into corporate governance”); Bohrer & Trencher, _supra_ note 27, at 1486 (“DPAs have also taken on a structural component, often obligating corporations to undertake significant corporate governance reforms such as the addition of “independent” directors, an internal monitor or an ethics officer.”); Orland, _supra_ note 7, at 74 (2006) (“Requirements that the corporation change corporate governance organization and responsibility appear with increasing frequency in both DPAs and NPAs.”); Meeks, _supra_ note 27, at 100 (“DPAs often mandate that a corporation adopt institutional reforms and best practice corporate governance, the implementation of which is overseen by the DOJ or a DOJ-appointed monitor.”); Griffin, _supra_ note 27, at
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historically under the purview of ownership and management, but are included in N/DPAs to enable the DOJ to curtail corporate misconduct.<sup>160</sup> Through the increasing use of N/DPAs, federal prosecutors are incrementally expanding their traditional role and have started the reshaping of Corporate America by changing the governance of leading public corporations and entire industries. The Enron scandal is considered by many the key event precipitating government assertion of power to improve corporate governance.<sup>161</sup>
A key issue pertaining to the impact of N/DPAs in corporate governance is the role of the prosecutors in the expansion of corporate governance via N/DPAs. Those favoring the prosecutor’s involvement suggest that prosecutors can promote an ethical corporate culture through enhanced compliance measures in N/DPAs<sup>162</sup> and the DOJ’s expansionary tendencies in N/DPAs are a mere extension of compliance.<sup>163</sup> The Thompson Memorandum explicitly mentioned improvement of corporate governance as a focus of federal prosecutors in the charging decision.<sup>164</sup> The increased role of “independent private sector oversight” may help address the increased complexity of corporate crime and dwindling public funds.<sup>165</sup> Because historically corporate governance fell under state law,<sup>166</sup> some scholars question the DOJ’s authority to expand and police corporate governance without a proper mandate.<sup>167</sup> Others opine that prosecutors may be
324 (“ DPAs thus involve prosecutors in ‘corporate-wide behavior modification,’ prescribing what is good corporate governance rather than just prohibiting wrongful conduct.”). Garrett, _supra_ note 147, at 936 (“Federal prosecutors have stepped far outside of their traditional role of obtaining convictions, and, in doing so, seek to reshape the governance of leading corporations, public entities, and ultimately entire industries. This development has gone largely unexamined.”). 160 Bohrer & Trencher, _supra_ note 27, at 1500.
> 161 Boozang & Handler-Hutchinson, _supra_ note 42, at 89 (“It has become a truism to cite Enron as the new millennium's watershed impetus for government assertion of power to improve corporate governance.”); Garrett, _supra_ note 38, at 1797–98 (The agreements can be broad and intrusive. They reshape corporate governance and often require firms to hire independent monitors with sweeping powers to implement compliance programs and access documents.”).
> 162 McConnell et. al., _supra_ note 28, at 584–86 (touting the benefits of an enhanced compliance program. “Companies with reputations for ethical business practices and good corporate governance tend to have higher stock prices and more satisfied employees. In these and many other regards, a company's decision to act legally and ethically can serve as a catalyst for success.”).
> 163 Hechler Baer, _supra_ note 29, at 951-52 (“[C]corporate compliance has evolved ‘into a universal corporate governance activity.’”).
> 164 Thompson Memo, _supra_ note 16; Meitl, _supra_ note 2, at 12–13 (“DPAs then can be seen as an invitation for prosecutors to become an active participant in the corporate governance of a corporation.”); Gallagher, _supra_ note 30, at 470 (“By emphasizing cooperation and reform, prosecutors commandeer internal investigations and establish their own corporate governance.”); Spivack & Raman, _supra_ note 30, at 161 (“By focusing more on prospective questions of corporate governance and compliance, and less on the retrospective question of the entity's criminal liability, federal prosecutors have fashioned a new role for themselves in policing, and supervising, corporate America. They have become the New Regulators.”);
> 165 O'Neil & Kennedy, _supra_ note 31, at 385 (“As fiscal pressures continue to mount on federal, state and local agencies in the United States and sovereign entities in other nations, enforcement officials will increasingly turn to independent private sector oversight as a means of ensuring that corporate transgressors are rehabilitated and become compliant and responsible citizens in commerce.”).
> 166 Baker, _supra_ note 35, at 323.
> 167 Arlen & Kahan, _supra_ note 25, at 41 (“[Prosecutors] do not have expertise in assessing the optimal system of corporate governance and agency costs generally.”); Hess & Ford, _supra_ note 25, at 310–11 (“Prosecutors and enforcers acting on their own have neither the resources nor the mandate to engage in the kind of large-scale, ongoing interventions into corporations' corporate governance, culture, policies, and
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uniquely qualified to institute corporate governance changes<sup>168</sup> and cite prosecutors’ experience, education, and ability to fill a void left by the system.<sup>169</sup>
The literature’s evaluations of issues pertaining to N/DPAs effect on corporate governance are based on anecdotal evidence, case studies, and conjecture. Given the large number of N/DPAs, however, the real trends and the real impact of N/DPAs are quantifiable and measurable, giving real guidance to policy makers. Some of the key issues that are quantifiable include: whether the N/DPAs change how the board of directors operates or interacts, whether the N/DPAs infringe on board-level decisions about senior management, and whether N/DPAs create additional reporting requirements.
To demonstrate the evolution of N/DPAs and their impact on corporate governance, we evaluate specific corporate governance changes that are required in N/DPAs. More specifically, we identify the following general categories of N/DPA driven governance changes: (1) Business Changes, (2) Board Changes, (3) Senior Management, (4) Remedial Measures, (4) Monitoring, (5) Cooperation, (6) Compliance Program, and (7) Waiver of Rights, supplemented by a more in depth analysis of the respective subcategories of governance changes.
# **IV. Data Collection and Coding**
To investigate the extent of corporate governance changes that can be traced back to executed N/DPAs in the period from 1993 to 2013, we obtained all publicly available N/DPAs and created a database containing basic parameters as a foundation for coding N/DPAs’ corporate governance implications. The authors compiled public N/DPAs from five independent sources. Using NVIVO software, we code all publicly available N/DPAs by uploading PDF versions obtained from the five sources into the software. NVIVO allows highlighting the wording in each N/DPA and assigning the highlighted section to a “node.”
Initially, the authors chose a set of keywords to code into nodes. After coding the first thirty agreements, the authors further refined the nodes, recoded the initial thirty agreements, and then continued with the set of keywords through the entire 257 agreements. The authors coded provisions into 215 different nodes and sub-nodes. The software program allowed the authors to bring up a specific node and see all of the phrases from all of the N/DPAs in one document. This function allowed the authors to further refine the coding pertaining to respective nodes. For example, “board changes” was a single node at first. After working through about thirty agreements, the authors created 16 “sub-nodes” under “board changes.” These sub-nodes identified the types of board changes, such as “independent director,” “committees,” and “reporting” provisions. Upon completion of the coding, either in NVIVO or by hand, the authors translated the
procedures that would be required to fully address deep-seated corporate cultural pathologies.”); Baker, _supra_ note 35, at 323 (“[T]he Sentencing Commission has, without clear statutory authority, abrogated the power to regulate corporate governance.”).
168 Id. (“Some question the competency of prosecutors to engage in such a foreign field but as this Article has shown, they are in fact qualified to make such decisions. The combination of the education, experience, support staff, and ability to use outside advisors creates a solid framework for the decision-making. As well, the decisions that confront prosecutors are not as foreign as one might guess after closer analysis. In the end, without prosecutorial involvement, there may be a dearth of oversight and enforcement that seems to be increasingly needed.”).
> 169 _See supra_ note 32.
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nodes into an Excel coding sheet. This sheet used binary code for the 215 nodes and subnodes as each pertained to the 257 N/DPAs. The coding sheet is available online and upon request.
# **V. Results**
# _1. NDPA Proliferation_
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N/DPAs<br>40<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>1993
2013<br><!-- End of picture text -->
Figure [__]: Total number of N/DPAs executed from 1993-2013.
Figure [__] shows the number of publically available N/DPAs executed between 1993 and 2013.
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Accepts
Responsibility<br>40<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>Accepts
Responsibility
Agreements<br><!-- End of picture text -->
“Accepts Responsibility” was coded for all agreements that had a provision in the N/DPA
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that made reference to the entity accepting responsibility for past wrongful acts. Typical examples include:
-Acceptance of Responsibility: A-B Vol-ve admits, accepts, and acknowledges that it is responsible for the acts of its officers, employees, agents and its wholly-owned subsidiaries, Renault Trucks and VCE, as set forth in the Statement of Facts attached to the Agreement as Appendix A.
-Acceptance of Responsibility: ABN accepts and acknowledges responsibility for its conduct and that of its employees as set forth in the Factual Statement attached hereto as Exhibit A and incorporated herein by reference
# _2. Pre-emptive Remedial Measures_
The
coded
category
of
preemptive
remedial
measures
describes
a
variety
of measures
corporations
institute
to
avoid
corporate
criminal
indictment
and
/
or
the execution
of
an
N/DPA.
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Remedial
Measures<br>40<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>Remedial
Measures
Agreements<br><!-- End of picture text -->
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<!-- Start of picture text -->
Remedial
Measures<br>12<br>10<br>8<br>6<br>4<br>2<br>0<br>Internal
Review
Monitoring
New
Management<br>Personnel
Creations
Reporting
Training<br>Remedial
Measures<br>20<br>15<br>10<br>5<br>0<br>2002
2013<br>Compliance
Cooperation
Disclosure<br>Firing
Employees
Internal
Review
Monitoring<br>New
Management
Personnel
Creations
Reporting<br>Training<br><!-- End of picture text -->
**Remedial Measures** – coded when the agreement mentioned remedial measures as measure taken before the agreement.
- Compliance: Coded when the compliance was instituted before the agreement.
- [2010 agreement] These processes included: ( 1) in December 2003, a Code of Conduct that sets forth expectations for ethical conduct by company employees in their business activities, (2) instituted product development processes intended to strengthen compliance controls; (3) developed and implemented, in December 2008, a Compliance Plan which created an independent review process for the approval of consultancies;
- Pride International undertook, of its own accord, remedial measures, including the enhancement of its FCP A compliance program, and agreed to maintain and enhance, as appropriate, its FCP A compliance program as contemplated
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by this Agreement.
- Cooperating: Coded when the cooperation was acknowledged before the agreement.
- (d) Lazard prepared and provided the United States Attorney and Massachusetts Attorney General with extensive computer and financial analyses of business records and financial data pertinent to the Investigation.
- NeuroMetrix cooperated with the USAO in its investigation, which cooperation included making employees available for interviews and testimony without subpoena; responding promptly to requests for documents by producing hundreds of thousands of pages of documents to the USAO, without subpoena and often within a week to ten days of the request; and conducting and providing certain analyses on company computer databases for data requested by the government;
- Disclosure: Coded when the information was provided to the Government.
- E&Y has provided to this Office a formal review and assessment of its ethics and compliance program.
- (b) Fiat promptly and thoroughly reported all of its findings to the Department
- Firing Employees: Coded when there was a firing or letting go of personnel.
- DS&S has engaged in extensive remediation, including terminating the officers and employees responsible for the corrupt payments;
- (a) terminating or obtaining the resignation of FalconStor officers and employees who were responsible and criminally culpable for the conspiracy to travel in aid of commercial bribery and to violate the securities laws, as set forth in the Complaint;
- Internal review: Coded when there was an internal investigation
- c. In consideration of the action of Flowserve in voluntarily conducting an investigation by outside legal counsel regarding the matters described in the attached Statement of Facts
- As a further Remedial Action, and pursuant to the SEC Settlement, HealthSouth retained a qualified consultant ("Governance Consultant") to perform a review of the adequacy and effectiveness of HealthSouth's corporate governance systems, policies, plans, and practices.
- Monitoring: Coded when the company already increased its monitoring.
- (a) In May 2009, CVS/pharmacy increased its monitoring of PSE sales by reducing the threshold amount of PSE products that can be ordered by the CVS/pharmacy stores,
- E& Y also has improved internal mechanisms designed to ensure that any concerns about business practices can be raised to appropriate levels.
- MoneyGram has implemented a risk-based Agent audit program that takes into account an Agent's location and number of Consumer Fraud Reports.
- New Management: Coded when new management was instituted before the N/DPA.
- ACADEMI LLC replaced all of its executive leadership, including its CEO, coo, and General Counsel
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- (c) appointing new management, including, but not limited to, an Interim Chief Executive Officer, a new Chief Operating and Chief Financial Officer, a new Head of Worldwide Sales, and a new General Counsel.
- WHEREAS, there have been substantial changes in the management and operations of CLSA since the events under investigation took place, including, inter alia a total change `�` f senior management,
- Personnel creation: Coded when a new position was created – before the N/DPA
- AIPC added a General Counsel, a Chief Compliance Officer, and a Director of Internal Audit.
- General Re Corporation has significantly enhanced the review and reporting roles of its Internal Audit Group by implementing the following reforms: (1) appointing a Global Head of lnternal Audit
- (i) creating the position of Ethics and Compliance Officer,
- Reporting: Coded when the company reported information to government officials before the N/DPA.
- DS&S initiated an internal investigation and provided real-time reports and updates of its investigation into the conduct described in the Information and Statement of Facts;
- J&J reported all of its findings to the Department
- Smith & Nephew reported its findings to the Department and the SEC;
- Training:
- In response to the events described above, CVS/pharmacy has implemented a program of enhanced training and compliance regarding PSE sales.
- The Company has also represented that it has developed additional policies and standard operating procedures regarding employee and distributor compliance training programs.
- As a further Remedial Action, and as provided in the SEC Settlement, HealthSouth is providing reasonable training and education to certain of its officers and employees to minimize the possibility of future violations of federal laws.
- New Board
- (a) amending its bylaws to require that, within 30 days of the election of a new board of directors, a special transitional meeting be held to discuss significant issues affecting PARKWAY VILLAGE and to ensure a smooth transition between boards of directors
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# _3. Governance Changes_
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Overview<br>40<br>30<br>20<br>10<br>0<br>Agreements
Board
Changes
Business
Changes<br>Senior
Management
Remedial
Measures
Monitoring<br>Cooperation
Compliance
Program
Waiver
of
Rights<br><!-- End of picture text -->
# a) Business Changes
Examples for “Business Changes” include the following:
- “ACS agrees to refrain from doing any new projects with the Alabama Department of Post-Secondary Education, and any of its subordinate institutions, including serving as a sub-contractor on or receiving income or business indirectly from any new project for that department or its subordinate institutions, for a period of two (2) years from the date of this agreement.”
- “Alpha will construct and launch a new state-of-the-art safety training facility in the Julian, West Virginia area. This facility will include a mine lab of approximately 96,000 square feet in which simulated mine situations and conditions will be presented to certified supervisors and examiners to solve and correct”
- “establish a centralized, analytics-based approach to credit, and develop a more accurate account-aging strategy.”
- “KPMG will cease its private client tax practice by February 28, 2006, and will take on no new clients or engagements in its private client tax practice after the signing of this Agreement”
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<!-- Start of picture text -->
Business
Changes<br>40<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>Business
Changes
Agreements<br><!-- End of picture text -->
# b) Board Changes
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Board
Changes<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>2000
2013<br><!-- End of picture text -->
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<!-- Start of picture text -->
Board
Changes<br>100<br>80<br>60<br>40<br>20<br>0<br>Reporting
Committees<br>Monitoring
Management<br>Independent
Director(s)<br>Board
Changes<br>40<br>30<br>20<br>10<br>0<br>Board
Changes
Agreements<br>Reporting
Committees<br>Monitoring
Independent
Director(s)<br>Management<br><!-- End of picture text -->
- Reporting: Node was coded when a senior official had new reporting duties to the board.
- Example: “ABB will assign responsibility to one or more senior corporate executives of ABB for the implementation and oversight of compliance with policies, standards, and procedures regarding the anti-corruption laws. Such corporate official(s) shall have direct reporting obligations to independent monitoring bodies, such as the Audit Committee of ABB's Board of Directors, and shall have an adequate level of autonomy from management as well as sufficient resources and authority to maintain such autonomy.”
- Committees: Node was coded when a committee was created.
- The establishment of a Compliance Committee of Aibel Group's Board of Directors, as well as of the Boards of Directors of its parent, Aibel Limited, and its Principal Subsidiaries, and their successors. Such Compliance
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Committee shall consist of no less than three members and at all times a majority of the members may not be affiliated with the lead shareholders, one of whom shall chair the Committee.
- Monitoring: Node was coded when the board of directors assumed additional monitoring duties.
- The Company agrees to enhance, support, and maintain its existing training and education programs, including any programs recommended by the Monitor pursuant to paragraph 18, above. The programs, which shall be reviewed and approved by the Company President and CEO, Board of Directors, Senior Vice President and General Counsel and the Monitor, shall be designed to advance and underscore the Company’s commitment to exemplary corporate citizenship, to best practices of effective corporate governance
- Independent Director: Node was coded when an independent director or director(s) were required to be added to the board.
- CA agrees to add new independent directors to its Board of Directors and to undertake corporate governance reforms such that, by December 31, 2005, CA will have:
- Management: Node was coded when management at the highest level was affected.
- The creation of an Office of the Chairman, which includes two new Co-Chief Operating Officers whose responsibilities include supervision of all business areas and departments of NYRA;
# c) Senior Management
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Senior
Management<br>20<br>18<br>16<br>14<br>12<br>10<br>8<br>6<br>4<br>2<br>0<br><!-- End of picture text -->
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**Senior Management** - Senior Management was coded when senior management was tasked with additional work or oversight responsibilities. For example: “ABB will assign responsibility to one or more senior corporate executives of ABB for the implementation and oversight of compliance with policies, standards, and procedures regarding the anticorruption laws.”
# d) Monitoring
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Monitoring<br>40<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>Monitoring
Agreements<br><!-- End of picture text -->
**Monitoring:** Coded when the company was required to monitor something.
- NETeller agrees to monitor regularly the effectiveness of its procedures and controls designed to prevent its services from being used to conduct U.S. Gambling Transactions, and NETeller will revise and update its procedures and controls as necessary to achieve that purpose.
- Noble shall review its anti-corruption compliance standards and procedures, including internal controls, ethics, and compliance programs, no less than annually, and update them as appropriate, taking into account relevant developments in the field and evolving international and industry standards, and update and adapt them as necessary to ensure their continued effectiveness.
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# e) Cooperation
<!-- Start of picture text -->
Cooperation<br>40<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>Cooperation
N/DPAs<br>Cooperation<br>200<br>Access
Facilities<br>Best
Efforts
Testimony<br>150<br>Disclose
Activities<br>100
Documents<br>Knowledgeable
Employees<br>50<br>Identify
Witnesses<br>Authenticity<br>0<br>1993
2013<br>Axis
Title<br><!-- End of picture text -->
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<!-- Start of picture text -->
Cooperation<br>40<br>30<br>20<br>10<br>0<br>Best
Efforts
Testimony
N/DPAs<br>Documents
Access
to
Facilities<br>Knowledgeable
Employees
Identify
Witnesses<br><!-- End of picture text -->
# **Cooperation**
- Access to facilities
- providing reasonable access to Micrus' documents relating to the Subject Matters, and to all directors, officers, employees, agents, salespeople, attorneys and affiliates, whether or not located in the United States, and to Micrus' facilities for that purpose;
- This obligation of truthful disclosure includes an obligation to provide to the Fraud Section access to MONSANTO COMPANY’s facilities, documents, and employees
- Best efforts testimony
- Bixby shall use its best efforts to make available for interviews or testimony, as requested by the government, present or former directors, officers, employees, agents and consultants of Bixby as well as the directors, officers, employees, agents and consultants of contractors and subcontractors.
- (d) shall, at SDNY's or DANY's' request, use its best efforts promptly to secure the attendance and truthful statements or testimony of any officer, agent or employee at any meeting or interview or before the grand jury or at any trial or other court proceeding;
- Disclose activities
- (a) shall truthfully and completely disclose all information with respect to the activities of Essie, its officers and employees, and others concerning all matters relating to
- (b) truthfully and completely disclose information with respect to the activities of FARO, its officers and employees, and others concerning all matters about which this Office inquires of it, which information can be used for any purpose, except as otherwise limited in this Agreement;
- Documents
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- identifying, assembling, organizing and producing, in a responsive and prompt manner, all non-privileged, non-attorney work-product documents, information, and other materials (including but not limited to providing reports or analyses of data concerning Respondent's models, credit risk reporting or data systems) to the Commission as requested by the Division's staff, wherever located, in the possession, custody, or control of the Respondent;
- This obligation of truthful disclosure includes the obligation of Fiat, Iveco, CNH Italia, and CNH France to provide to the Department, upon request, any document, record, or other tangible evidence relating to such corrupt payments, books and records, and internal controls about which the Department inquires of Fiat, Iveco, CNH Italia, and CNH France.
- Knowledgeable Employees
- Upon request of the Department, with respect to any issue relevant to its investigation of HealthSouth, HealthSouth shall designate knowledgeable employees, agents or attorneys to provide information and/or materials on HealthSouth's behalf to the Department.
- Upon request of the United States, with respect to any issue relevant to its investigation of fraud involving aircraft parts, MacKenzie shall designate knowledgeable employees, agents or attorneys to provide to the United States the information and materials described in Paragraph 5
- Identify witnesses:
- Cooperation under this paragraph shall include identification of witnesses who, to Reliant's knowledge, may have material information regarding the matters under investigation and/or prosecution
- Cooperation under this paragraph shall include identification of witnesses who, to the knowledge of SCHIAVONE, may have material information regarding the Unlawful Conduct, or records which may have material information regarding the Unlawful Conduct;
- Authenticity:
- (f) Providing testimony, certifications, and other information deemed necessary by the Office or a court to identify or establish the original location, authenticity, or other evidentiary foundation necessary to admit into evidence documents in any criminal or other proceeding as requested by the Office.
- Providing testimony, certifications, and other non-privileged information deemed necessary by the Office or a court to identify or establish the original location, authenticity, or other evidentiary foundation necessary to admit into evidence documents in any criminal or other proceeding relating to compliance with health care laws as requested by the Office;
- Logistical Support
- (b) shall cooperate fully with this Office and the United States Department of Agriculture (the "USDA"); (c) shall, at the Office's request, use its best efforts to assist the Office in any prosecution or investigation arising out of the Covered Conduct by providing logistical, technical, accounting, and any other
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support requested for any meeting, interview, grand jury proceeding, or any trial or other court proceeding;
- assist the Division in any investigation or prosecution arising out of the conduct described in paragraph 5(a), whether by former employees of the Company or any other individual or entity, by providing logistical and technical support for any meeting, interview, grand jury proceeding, or any trial or other court proceeding;
- Criminal Activity
- (c) proactively disclosing to the Office all information concerning any criminal wrongdoing or suspected criminal wrongdoing beyond that specifically addressed in the attached Information, which has not yet been explicitly disclosed to the Office, and which is either currently in Bovis's possession or which may come into its possession in the future, including conduct of the type alleged in the Information;(c) bring to the Government's attention all potentially criminal conduct by LPS or any of its employees that relates to violations of U.S. laws (i) concerning fraud or (ii) concerning mortgage or foreclosure document execution services;
# f) Compliance Program
<!-- Start of picture text -->
Compliance
Program<br>40<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>Compliance
Program
Agreements<br>1993
2013<br><!-- End of picture text -->
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<!-- Start of picture text -->
Compliance
Program<br>40<br>30<br>20<br>10<br>0<br>Financial
and
Books
Agreements<br>Compliance
Code
Corporate
Policy<br>Communication/Training
CCO
Created<br>1993
2013<br><!-- End of picture text -->
# **Compliance Program**
- Reporting: Coded when the company was required to report something.
- Abt Associates agrees that it will notify the Government Administrative Contracting Officer (ACO), presently at US AID, the Director of Procurement for USAID, and the US AID Lead Contact Specialist in writing within 20 calendar days of the discovery of any billing error or adjustment in excess of $100 identified as the result of any management, internal auditing, or third-party audit/CPA review.
- NETeller will retain the Monitor to provide to this Office reports assessing NETeller' s compliance with the NETeller Controls Report (the "Compliance Reports"); (ii) the first of the Compliance Reports will be provided to this Office on or about December 4, 2007, and subsequent reports will be provided at such other time on or before December 4, 2008, as designated by this Office;
- Corporate Compliance Policy: Coded when a “clearly articulated and visible corporate policy” was required.
- DS&S will develop and promulgate a clearly articulated and visible corporate policy against violations of the FCPA and other applicable foreign law counterparts (collectively, the "anti-corruption laws,"), which policy shall be memorialized in a written compliance code.
- Compliance Code: Coded when a compliance code was required.
- Promulgation of a compliance code, standards, and procedures designed to reduce the prospect of violations of the FCPA, other applicable anticorruption laws, and Ingersoll's compliance code.
- Due Diligence: Coded when due diligence was required.
- To the extent that the use of agents and business partners is permitted at all by Lufthansa Technik, it will institute appropriate due diligence and compliance requirements pertaining to the retention and oversight of all agents and business partners by it and its subsidiaries, including:
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- Enforcement: Coded when the company needed an enforcement mechanism. `o` ABB will institute appropriate disciplinary procedures to address, among other things, violations of the anti-corruption laws and ABB's compliance and ethics program by ABB's directors, officers, and employees.
- Financial and Books: Coded when the below statement was required:
- A system of financial and accounting procedures, including a system of internal accounting controls, designed to ensure the maintenance of fair and accurate books, records and accounts.
- Guidance: Coded when the company had to establish an effective system for providing guidance to employees.
- The Company will maintain, or where necessary establish, an effective system for providing guidance and advice to directors, officers, employees, and, where necessary and appropriate, agents and business partners, on complying with the Company’s anti-corruption compliance code, policies, and procedures, including when they need advice on an urgent basis or in any foreign jurisdiction in which the Company operates.
- Compliance policies and procedures: Coded when the company had to promulgate compliance standards and procedures.
- Promulgation of compliance standards and procedures designed to reduce the prospect of violations of the traceability and food laws and HONEY HOLDING's compliance code and appropriate measures to encourage and support the observance of ethics and compliance standards and procedures against traceability violations at all levels of the company.
- Hotline: Coded when a hotline was created.
- (d) The establishment and maintenance of an employee hotline, managed through an outside service, and communication to all IFCO employees of the existence of the hotline and the ability to inform IFCO's Compliance Officer of any suspected violation of law, including the hiring and employment of persons unauthorized to work in the United States;
- CCO: Coded when a Chief Compliance Officer position was created.
- Appoint a senior corporate executive with significant experience with compliance with the FCPA, including its anti-bribery, books and records, and internal controls provisions, as well as other applicable anticorruption laws and regulations (hereinafter “anticorruption laws and regulations”) to serve as Chief Compliance Officer. The Chief Compliance Officer will have reporting obligations directly to the Audit Committee of the Board of Directors.
- Code of ethics: Coded when a code of ethics was implemented. `o` 10. The Company shall adhere to the AdvaMed Code of Ethics on Interactions with Health Care Professionals. The AdvaMed Code can be found at www.advamed.org. The principles set forth in the AdvaMed Code are expressly incorporated as compliance requirements
- 18. The Government acknowledges that FSG and Subsidiaries have drafted a Code of Business Ethics and Conduct, attached hereto as Exhibit
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# g) Waiver of Rights
<!-- Start of picture text -->
Waive
Rights<br>40<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>Waiving
Rights<br>250<br>200<br>150<br>100<br>50<br>0<br>Waiving
6th
Amend
Waiving
SoL
Waiving
Admissibility<br>Waiving
Indictment
Waiving
Venue<br>1993
2013<br><!-- End of picture text -->
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<!-- Start of picture text -->
Waiving
Rights<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>Attorney-‐Client
Waiver
Limited
Waiver<br>Not
Waving
Attorney-‐Client
6th
Amend<br>Statute
of
Limitations
Admissibility<br>Indictment
Venue<br>Disclosure<br><!-- End of picture text -->
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<!-- Start of picture text -->
Waiving
Rights<br>14<br>12<br>10<br>8<br>6<br>4<br>2<br>0<br>Attorney-‐Client
Waiver
Limited
Waiver
Not
Waving
Attorney-‐Client<br><!-- End of picture text -->
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<!-- Start of picture text -->
Waiving
Rights<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>6th
Amend
Statute
of
Limitations
Admissibility<br>Indictment
Venue
Disclosure<br><!-- End of picture text -->
- Waive AC: Coded when the company waived attorney-client privilege `o` Not asserting a claim of attorney-client or work-product privilege as to any documents, information, or testimony requested by the Department or the SEC related to factual internal investigations or contemporaneous advice given to AIG-FP concerning the subject matters. In making production of any such documents, AIG-FP neither expressly nor implicitly waives its right to assert any privilege that is available under Jaw against entities
- Limited privilege waiver: Coded when a limited privilege waiver was requested.
- (c) if requested by the USAOs, negotiate in good faith to attempt to arrive at a limited waiver of the attorney-client privilege and work- product doctrine sufficient to allow the USAOs to be provided with identified materials otherwise withheld under a claim of these protections;
- Not waiving AC: Coded when the company did not waive Attorney-Client Privilege.
- Nothing in this Agreement shall be construed as a waiver by Alpha or Massey of the attorney-client privilege, the attorney work-product doctrine, or any other applicable privilege or protection with respect to documents or records requested by the Government.
- 6<sup>th</sup> : Coded when the company waived its rights to a speedy trial. `o` By entry into this Agreement, ACADEMI LLC and its former affiliates expressly waive all rights to a speedy trial pursuant to the Sixth Amendment of the United States Constitution,
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- SoL: Coded when waived the right to bring a challenge regarding statute of limitations or when the statute of limitations was tolled.
- Adams Thermal further knowingly waives any claim to assert that the prosecution is time barred under the statute of limitations or any other provision.
- The Respondent agrees that the running of any statute of limitations applicable to any action or proceeding against it authorized, instituted, or brought by or on behalf of the Commission arising out of the Investigation (an “Enforcement Action”), including any sanctions or relief that may be imposed therein, is tolled and suspended during the Deferred Period.
- Admissibility: Coded when waived the right to challenge admissibility of information.
- If the United States, pursuant to Paragraph 10 of this Agreement, initiates a prosecution that is deferred by this Agreement against ABN, ABN agrees that it will neither contest the admissibility of the Factual Statement, reports, or any other documents provided by ABN to the United States or the government of the Netherlands, nor contradict in any such proceeding the facts contained within the Factual Statement.
- It is understood that if it is determined that Adelphia has committed any crime after signing this Agreement or has given false, incomplete, or misleading testimony or information, or has otherwise violated any provision of this Agreement, (a) all statements made by Adelphia to this Office, the SEC, or other designated law enforcement agents, and any testimony given by any then current officer, agent or employee of Adelphia before a grand jury or other tribunal, whether prior to or subsequent to the signing of this Agreement, and any leads from such statements or testimony shall be admissible in evidence in any criminal proceeding brought against Adelphia; and (b) Adelphia shall assert no claim under the United States Constitution, any statute, Rule ll (e)(6) of the Federal Rules of Criminal Procedure, Rule 410 of the Federal Rules of Evidence, or any other federal rule that such statements or any leads therefrom should be suppressed.
- Indictment: Coded when waived right to indictment
- Waiver of Rights: Novo knowingly waives its right to indictment on the charges described in Paragraph 2 and contained in the Information
- Disclosure: Coded when the company “consents to any and all disclosures” `o` With respect to any information, testimony, document, record or other tangible evidence provided to the Department of Justice pursuant to this Agreement, AOL consents to any and all disclosures to the SEC and law enforcement entities of such materials as the Department of Justice, in its sole reasonable discretion, deems appropriate in furtherance of its criminal investigation of any individuals related to the subject matters.
- Venue: Coded when waiving venue.
- Further, Friedman’s agrees that such proceeding may be commenced in the Eastern District of New York and Friedman’s hereby waives any right to challenge the venue in the Eastern District of New York.
THE EFFECT OF N/DPAS IN CORPORATE GOVERNANCE
# **VI. Discussion**
_1. Summary of Key Findings_
The terms of N/DPAs and the requirements imposed on corporations that are subject to an N/DPA often require top level governance changes. Governance changes mandated by N/DPAs include (1) Business Changes, (2) Board Changes, (3) Senior Management, (4) Monitoring, (5) Cooperation, (6) Compliance Program, and (7) Waiver of Rights, supplemented by a more in depth analysis of the respective subcategories of governance changes. The authors also code and evaluate preemptive remedial measures, designed by corporations to preempt the execution of an N/DPA.
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# _2. Limitations and Future Research_
It is important to note that the findings in this study can merely highlight general trends and possible implications in corporate governance contributions deriving from the use of N/DPAs. However, the underlying corporate governance problems in US corporations may actually be far more severe. As identified under “preemptive remedial measures” above, most corporations either identify and address governance issues themselves before they become public and/or self-report to the DOJ with help of counsel in cases of serious violations that have not been adequately remedied. The corporate governance trends identified in this study only pertain to corporations that have executed N/DPAs. Given that a disproportionately large number of corporations will identify and address corporate governance shortcomings themselves or self-report to the DOJ, the corporate governance issues and N/DPA trends reported in this paper may simply be the tip of the proverbial iceberg. Future research may be needed to assess the magnitude and significance of possible corporate governance issues in Corporate America.
Despite the magnitude of unidentified corporate governance concerns, the findings in this study seem to suggest that N/DPAs can play a legitimate role in addressing corporate governance concerns. N/DPAs may be an efficient tool in the evolution of corporate governance in the United States. However, future research may be needed to identify the impact of N/DPA measures on corporate governance in U.S. corporations. In particular, it is unclear which N/DPA provisions may be most relevant in the reformation of corporate governance and what industries are particularly susceptible to N/DPA measures and would merit targeting by the DOJ. Future studies could further clarify the application and benefits of N/DPAs by evaluating the impact of N/DPAs on Tobin’s Q, performance measures, industry indices, market capitalization, among other criteria.
# **VII. Conclusion**
The use and application of N/DPAs has proliferated since their inception in the early 1990s. N/DPAs are making significant and controversial contributions to corporate practices, exemplifying a shift in prosecutorial culture from an ex-post focus on punishment to an ex-ante emphasis on compliance. Based on case studies and anecdotal evidence, the literature is largely concerned about the use, application, and legitimacy of
THE EFFECT OF N/DPAS IN CORPORATE GOVERNANCE
N/DPAs. This study provides the first comprehensive empirical evaluation of corporate governance changes mandated in N/DPAs since the early 1990s. We find that corporate governance provisions in N/DPAs significantly increased in the last decade, boosting prosecutors’ influence over corporate governance to unprecedented levels. Additional research is needed to fully evaluate the data made available in this study and its implications.