by Andrew M. Levine, Philip Rohlik, and Michael W. Gramer
Like many other complex corporate criminal matters, FCPA matters largely get resolved without meaningful judicial oversight. Although imperfect, such negotiated settlements do provide corporations with a greater degree of predictability and finality. In addition to a monetary penalty, these resolutions often involve the appointment of a compliance monitor, which occurred in more than half of the DOJ’s FCPA resolutions in 2016.[1] The appointment of monitors has attracted controversy over the years, including that monitors are often seen as burdensome and expensive, have the practical effect of extending an investigation, and effectively outsource oversight to a third party. As with negotiated resolutions themselves, typically there has been little judicial involvement in the appointment or oversight of corporate monitors.
On March 22, 2017, the United States District Court of the Northern District of Texas approved a modified plea agreement in United States v. ZTE Corporation[2] (the “ZTEC case”). In the ZTEC case, the modified plea agreement departed significantly from the type of corporate monitorship with which compliance professionals are familiar. By borrowing from the “special master” mechanism in U.S. civil litigation, the court created a quasi-judicial monitorship that may be actively overseen by the court.
The ZTEC Monitorship
On March 22, 2017, ZTE Corporation (“ZTEC”), a Chinese telecommunications equipment company, pleaded guilty pursuant to a plea agreement to conspiracy to violate export laws, obstruction of justice, and making false statements to federal investigators.[3] ZTEC agreed to pay $892 million in fines and forfeitures[4] and agreed to engage an Independent Corporate Monitor (“Monitor”) for up to three years.[5]
In advance of the plea, the U.S. Department of Justice (“DOJ”) filed a fully executed plea agreement in the court on March 7, 2017.[6] Pursuant to this agreement, ZTEC was to propose to the DOJ three qualified candidates to serve as the Monitor,[7] and the DOJ would retain the right “to accept or reject the Monitor candidates … .”[8] The agreement further states that any “disputes between [ZTEC] and the Monitor with respect to a work plan shall be decided by the DOJ.”[9] Finally, any reports prepared by the Monitor would be provided to the Board of the Directors of ZTEC; the DOJ; the U.S. Attorney’s Office for the Northern District of Texas; the Office of Export Enforcement, U.S. Department of Commerce; and the Office of Foreign Assets Control, U.S. Department of the Treasury.[10]
At the March 22 plea, the court chose to adopt a modified plea agreement that revised the terms of the monitorship.[11] The court did not offer any reason for departing from the original plea agreement.[12] The court appointed as monitor James M. Stanton, a former Texas state district court judge and founder of Stanton LLP, a Dallas law firm that focuses on civil litigation.[13] The modified plea agreement states that the “parties agree that the Monitor is a judicial adjunct pursuant to Federal Rule of Civil Procedure 53 . . .,”[14] rather than “an independent third-party,” as in the original attachment.[15] It also provides that the “Court will approve or disapprove the proposed work plan . . . . [And a]ny disputes between [ZTEC] and the Monitor with respect to the work plan shall be decided by the Court.”[16] Finally, the Monitor’s reports are to be filed with the court and ZTEC board of directors, with copies to the DOJ and other government agencies listed in the original plea agreement.[17]
Judicial Involvement in Corporate Resolutions
In complex cases, corporate criminal enforcement can follow the largely consensual process that has evolved in the FCPA arena. After a long period of investigation, in which a company often cooperates, the company and DOJ negotiate a resolution, based on legal theories and facts largely determined by the DOJ. The form of resolution can be a non-prosecution agreement (“NPA”), a deferred prosecution agreement (“DPA”), and/or a guilty plea. In the case of DPAs and plea agreements, the agreement is filed with a court, usually marking the first involvement of a court in the process.[18] The court’s involvement has traditionally been limited in practice, and, in the one appellate decision reviewing a parallel civil process, in law. In the most notable instance in which a U.S. judge took a more active role in reviewing a DPA and rejected a settlement proposed by the United States Securities and Exchange Commission (“SEC”) on the grounds that it was contrary to the public interest, the judge’s decision was reversed on appeal on the basis that the judge did not pay the SEC the appropriate level of deference.[19]
Many commentators have criticized the effective abdication of the judiciary’s oversight role in corporate resolutions.[20] In particular, such negotiated resolutions could be viewed as running contrary to the U.S. system of checks and balances, and sometimes allowing the government to extract large penalties based on novel and often untested legal theories, which might not hold up were a case to go to trial (as arguably suggested by the scarcity of parallel individual actions associated with corporate resolutions). Despite these drawbacks, negotiated resolutions between corporations and the government have become the norm in the FCPA context and elsewhere, in large part due to the regularity and finality they offer corporations.
Should other judges adopt the “special master” approach taken by the court in the ZTEC case, judicial involvement could disincentivize companies from entering into negotiated resolutions with the DOJ. The plea agreement in the ZTEC case did not provide any judicial policing of the DOJ’s legal theories (something which arguably could benefit corporate defendants) and removed a significant amount of finality and regularity from the post-resolution process, likely to the detriment of ZTEC. This “worst of both worlds scenario” of judicial oversight arises from the unique burden imposed by corporate monitors.
The Burden of Monitors
Monitorships have long been controversial, largely due to the burden imposed by third parties empowered to involve themselves in every level of a corporation.[21] Moreover, monitors often are appointed at the conclusion of a long investigation and, effectively, extend some parts of that investigation (along with the business disruption associated with it). Monitors are also private experts, often with staff, paid by the company, thereby extending and increasing the legal and professional fees attributable to past conduct.
The potential intrusiveness of a monitor is particularly relevant for foreign companies, like ZTEC. Both in fact and often in law, foreign companies have different corporate governance structures, different corporate cultures, and different legal obligations than their U.S. counterparts.[22] Perhaps in recognition of the friction that can be caused by the learning curve for a U.S. monitor in a foreign corporation, several recent FCPA resolutions involving foreign corporations (Siemens, BAE, Technip, Alcatel Lucent, Bilfinger, Total, and Rolls-Royce) have appointed distinguished foreign lawyers as monitors.[23] Similarly, experienced U.S. practitioners have been appointed to serve in tandem with foreign monitors in recent FCPA resolutions involving Brazil.[24]
Questions Regarding the ZTEC Case
Unlike monitors in FCPA resolutions, the monitor in the ZTEC case is a “judicial adjunct” reporting to the court. This raises questions regarding both the power of the monitor (essentially an officer of the court rather than an independent third party) and public disclosure of the monitor’s work, though the expectation of confidentiality companies had with respect to monitors’ reports was already questionable.[25]
In ZTEC, the court utilized Federal Rule of Civil Procedure 53, which governs the appointment of special masters in civil actions, to sidestep the agreement of the parties in selecting a monitor.[26] Federal Rule 53(e) mandates that a “master must file the report and promptly serve a copy on each party, unless the court orders otherwise.”[27] In ZTEC, the Modified Plea Agreement states that “the Monitor’s reports shall be filed with the Court . . . .”[28] The monitor is also a “judicial adjunct” (as opposed to independent third party), whose work is overseen by the court (not the DOJ). Any report filed with the court therefore will be the work product of a “judicial adjunct,” making it more likely that the reports may be seen as “judicial documents,” which are “relevant to the performance of the judicial function”[29] and, therefore, presumptively public.[30] With the court playing a more substantial role than in traditional corporate monitor relationships, the question of whether or not the document is “relevant to the performance of the judicial function” is arguably a closer one.
Conclusion
The additional judicial oversight involved in the ZTEC monitorship, if adopted by other judges, may give companies some pause when negotiating resolutions with the government. Prior to ZTEC, a monitor typically has been an experienced compliance expert whose professional experience was focused on the type of remediation undertaken by the company subject to the monitorship. By borrowing the special master approach from civil cases, the ZTEC court appointed a very experienced, but generalist, attorney as a judicial adjunct, to be overseen by a judge who, as an Article III judge, is a highly respected and experienced generalist. Although generalist triers of fact are the norm in the U.S. system, the evolution of negotiated resolutions mostly free from judicial oversight has created an exception in the FCPA context, in which the cases are driven, and the law determined, by prosecutors in specialized DOJ and SEC units (and where monitors likewise may have had prior experience in those units). Corporate counsel and practitioners certainly will be watching carefully for additional developments from the ZTEC case, including to see how the civil litigation model of monitorship works in practice.
Footnotes
[1] See e.g., United States v. Teva Pharmaceutical Industries Ltd., Deferred Prosecution Agreement, No. Cr. 20968 FAM (S.D. Fla. Dec. 22, 2016); United States v. Teva LLC, Case No: 16 Cr. 20967 KMW, Plea Agreement (S.D. Fl. Dec 22, 2016) (PDF: 2,692 KB); United States v. Braskem S.A. Case No. 16-CR-644, Plea Agreement at 2-3 (E.D.N.Y. Dec. 21, 2016); United States v. Odebrecht S.A. Case No: 16 Cr. 643, Plea Agreement (E.D.N.Y. Dec. 21, 2016); United States v. Embraer S.A., Case No. 16-cr-06294-JIC, Deferred Prosecution Agreement at 4 (S.D. Fla. Oct. 24, 2016) (PDF: 6,821 KB); United States v. Och-Ziff Capital Management Group LLC, Case No: 16-CR-00516(NGG), Deferred Prosecution Agreement, at 4 (E.D.N.Y. Sept. 29, 2016) (PDF: 17,694 KB); United States v. LATAM Airlines Group S.A. Case No: 16 Cr. 60195 DTHK, Deferred Prosecution Agreement (S.D. Fla. Jul. 25, 2016) (PDF: 2,260 KB); United States v. Olympus Latin America, Inc., Case No: 16-3525 (MF), Deferred Prosecution Agreement (D.N.J. Mar. 3, 2016) (PDF: 534 KB); Letter from the U.S. Dep’t of Justice, Criminal Division, Fraud Section to Mark Rochon, Esq., “Re: United States v. VimpelCom Deferred Prosecution Agreement 16-cr-137 (ER) (PDF: 3,455 KB).
[2] 17 Cr. 0120K (N.D. Tex. 2017).
[3] U.S. Department of Justice, “ZTE Corporation Agrees to Plead Guilty and Pay Over $430.4 Million for Violating U.S. Sanctions by Sending U.S.-Origin Items to Iran.”
[4] Id.
[5] Id.
[6] Plea Agreement, United States v. ZTE Corp., No. 17 Cr. 0120-K (N.D. Tex. Mar. 7, 2017), ECF No. 3 (“ZTEC Plea Agreement”) (PDF: 913 KB).
[7] See ZTEC Plea Agreement at Attachment A at ¶¶ 1-2.
[8] Id. at ¶ 2.
[9] Id. at Attachment A at ¶ 8(a).
[10] See id.
[11] Plea Agreement Supplement, United States v. ZTE Corp., No. 17 Cr. 0120-K (N.D. Tex. Mar. 22, 2017), ECF No. 14 (“ZTEC Modified Plea Agreement”).
[12] Rearraignment Hearing, United States v. ZTE Corp., No. 17 Cr. 0120-K (N.D. Tex. Mar. 22, 2017) (“Here’s what the agreement is as I understand it: It would be a sentence of three years probation on each count, to run concurrently, with an independent corporate compliance monitor appointed by me, by the Court, which is – I have chosen Mr. James Stanton; or if something happens to him or if I choose to change, that would be who it would be, as set out in Attachment A as modified today.”).
[14] Id. at ¶ 6.
[15] ZTEC Plea Agreement at ¶ 6.
[16] ZTEC Modified Plea Agreement at ¶ 8(a).
[17] Id.
[18] See Brandon L. Garrett, Structural Reform Prosecution, 93 Va. L. Rev. 853. 919-22; see also United States v. Saena Tech. Corp., 2015 WL 6406266 (D.D.C. Oct. 21, 2015) (seeking court approval of DPA); United States v. Fokker Servs. B.V., 79 F. Supp. 3d 160 (D.D.C. Feb. 5, 2015) (same); United States v. HSBC Bank USA, NA, 2013 WL 3306161 (E.D.N.Y. July 1, 2013) (same).
[19] SEC v. Citigroup Global Markets, Inc.,752 F.3d 285 (2d Cir. 2012).
[20] See Matthew E. Fishbein, “Why Individuals Aren’t Prosecuted for Conduct Companies Admit,” New York Law Journal, Vol. 252, No. 56 (September 19, 2014); Brandon L. Garrett, Structural Reform Prosecution, 93 Va. L. Rev. 853, 920-21 (2007); David M. Uhlmann, Deferred Prosecution and Non-Prosecution Agreements and the Erosion of Corporate Criminal Liability, 72 Md. L. Rev. 1295, 1326 (2013).
[21] See, e.g., Christopher M. Matthews, Eye on the Monitors–Apple’s Protest Puts Spotlight on Thorn in Corporate Sides, Wall St. J., Jan. 21, 2014, at B5; Steven M. Davidoff, In Corporate Monitor, a Well-Paying Job but Unknown Results, N.Y. Times, Apr. 16, 2014, at B7; Vikramaditya Khanna & Timothy L. Dickinson, The Corporate Monitor: The New Corporate Czar, 105 Mich. L. Rev. 1713, 1742-43 (2007).
[22] For example, such compliants were raised in connection with former FBI Director Louis Freeh’s monitorship at Daimler Benz. See Spiegel Online, “Daimler Upset with Over-Eager America Oversight.”
[23] See Global Investigations Review, “FCPA Monitorships: Counsel Dataset,” (Siemens: Dr. Theo Waigel of Gibson Dunn & Crutcher; BAE: David Gold of Herbert Smith; Technip: Jean Francois Theodore; Alcatel: Laurent Cohen Tanugi; Bilfinger: Mark Livschitz; and Total: Philippe Legrez).
[24] Following the Odebecht and Braskem global settlement with the DOJ and Brazilian prosecutors, it was reported that the DOJ had appointed a U.S. lawyer (and former head of the DOJ’s FCPA unit) as U.S. monitor. See Global Investigations Review, “DOJ pick Odebrecht and Embraer monitors”. The U.S. and Brazilian monitors will jointly request information and simultaneously present information to the DOJ and Brazilian prosecutors. See Global Investigations Review, “US and Brazil agree local Odebrecht monitors”.
[25] See for example, United States v. HSBC Bank USA, N.A., No. 12-CR-763 (JG), 2016 WL 347670, at *7 (E.D.N.Y. Jan. 28, 2016), motion to certify appeal denied, No. 12-CR-00763, 2016 WL 2593925 (E.D.N.Y. May 4, 2016). The court also invited the parties to submit briefing on additional redactions to the report. Id.
[26] Modified Plea Agreement, United States v. ZTE Corp., No. 17 Cr. 0120-K (N.D. Tex. Mar. 31, 2017), ECF No. 14 at 3.
[27] Fed. R. Civ. P. 53(e).
[28] ZTEC Modified Plea Agreement at ¶ 8(a).
[29] Id. (quoting United States v. Amodeo, 44 F.3d 141, 145 (2d Cir. 1995)).
[30] See Lugosch v. Pyramid Co. of Onondaga, 435 F.3d 110, 119 (2d Cir. 2006).
Andrew M. Levine is a partner in the New York office. Philip Rohlik is a counsel in the Shanghai office. Michael W. Gramer is an associate in the New York office.
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