by Brandon Fox and Natalie K. Orpett

The Second Circuit Court of Appeals has issued an important decision limiting district courts’ authority to supervise Deferred Prosecution Agreements (DPAs), a method companies and the Department of Justice (DOJ) frequently use to resolve criminal investigations.  Under DPAs, companies are charged with – but not convicted of – crimes, so long as they abide by the terms of the agreement.  In United States v. HSBC Bank USA, N.A. (PDF: 248 KB), — F.3d –, 2017 WL 2960618 (2d Cir. July 12, 2017), the companies (collectively, HSBC) and DOJ agreed to a DPA based on HSBC’s alleged failure to prevent money laundering by Mexican drug cartels and violations of sanctions laws.

Under the terms of the DPA, HSBC consented to the appointment of a monitor who was to provide DOJ with periodic reports regarding HSBC’s compliance with the agreement.  After arraignment on the charges, DOJ and HSBC requested that the court grant an exclusion of time under the Speedy Trial Act, which was necessary so that HSBC could fulfill its obligations under the DPA rather than go to trial in 70 days.  As a condition to granting the motion, the district court ordered the parties to file quarterly reports apprising it of significant developments in HSBC’s efforts to comply with the DPA.

In April 2015, at the court’s direction, the government filed the monitor’s first annual report under seal.  Shortly thereafter, an individual, who was not a party to the matter, petitioned the court to unseal the report, claiming it might be relevant to his suit against HSBC before the Consumer Financial Protection Bureau.  Over both parties’ objections, the court granted the motion, concluding that the report was a “judicial record” to which there was a right of public access.  The government and HSBC appealed the decision.

The Second Circuit reversed the district court order on three grounds.  First, it held that a court’s supervision of the DPA encroached on the government’s executive power absent evidence of bad faith.  Second, it held that nothing in the Speedy Trial Act allows the district court to evaluate the substantive merits of a DPA in deciding whether to exclude time.  Third, the Second Circuit held that the monitor’s report was not a judicial document because it is not – at least currently – relevant to a judicial function.

This is the second recent opinion in which an appellate court has found that a district court overstepped its power in attempting to supervise a DPA.  In United States v. Fokker Services B.V. (PDF: 247 KB), 818 F.3d 733 (D.C. Cir. 2016), the D.C. Circuit reversed a district court’s refusal to exclude time based on the court’s belief that the DPA was not an appropriate resolution of the case.  Despite the district court’s determination that the government’s efforts to prosecute were “anemic” and that the underlying conduct was “egregious,” the D.C. Circuit ruled that the district court had overstepped – it did not have the power to deny the motion to exclude time under the Speedy Trial Act simply because it disagreed with the prosecution’s exercise of its charging authority.

Together, the cases show that district courts ordinarily do not have supervisory authority over DPAs during initial proceedings, such as arraignments, or in considering Speedy Trial Act issues.  In addition, the ruling that the monitor’s interim report was not subject to disclosure will be welcomed by companies subject to such monitorships, who rely on the availability of candid and non-public communications about potential improvements to their compliance programs.  As a result, DPAs continue to be a good intermediate resolution for companies under appropriate circumstances.  Had the decisions gone the other way, DPAs would be subjected to greater scrutiny by the courts.  This could have resulted in unsatisfied judges placing more pressure on DOJ to prosecute certain cases.  And the public availability of monitor’s reports would have exposed companies to reputational risk and potentially inhibited the candor of communications between the monitor, the company, and DOJ that DPA agreements are typically designed to encourage.  On the other hand, it also may have given DOJ an incentive to avoid judicial scrutiny by agreeing to more non-prosecution agreements, in which there are no charges filed, in place of DPAs.

Although both opinions are extremely helpful to companies wanting to avoid the risk and expenditure of resources associated with a court’s supervision of DPAs, the Second Circuit’s decision does not go as far as the D.C. Circuit’s.  As a result, HSBC leaves open some questions that the D.C. Circuit had answered favorably for companies.  The most important is whether a district court has supervisory authority at the conclusion of a DPA, when the prosecution files a motion to dismiss the charges under Federal Rule of Criminal Procedure 48(a).  Although the prosecution must seek “leave of the court” to dismiss the charges, the D.C. Circuit, in Fokker, ruled that the district court cannot deny the prosecution’s motion to dismiss simply because of its “view that the defendant should stand trial notwithstanding the prosecution’s desire to dismiss the charges.”  Conversely, in HSBC, the Second Circuit recognized the limited power to deny the prosecution’s motion to dismiss, but left open the question of whether the district court could exercise its supervisory authority in the usual case at the Rule 48(a) motion phase.

The Second Circuit’s decision does not foreclose other avenues for court supervision of DPAs.  For example, the opinion discussed the district court’s inherent authority to supervise a DPA if there is evidence of impropriety, such as bribery of the prosecutors or DOJ showing hostility toward the victims of the crime, or if the court needs to resolve a dispute about whether the DPA was breached.  The Second Circuit also suggested the possibility of the public using the Freedom of Information Act to obtain a monitor’s reports from the government.  Although this is unlikely to be successful while the DPA is pending, it may be a tool the public can use at the conclusion of the case.

Brandon Fox is a partner in Jenner & Block’s Investigations, Compliance and Defense Practice. Natalie K. Orpett is an associate in the Litigation Department at Jenner & Block.

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