A deferred prosecution agreement, or DPA, seems to make a lot of sense for a company under investigation by federal prosecutors. Cooperate and the government may not go after you. Don't cooperate and it will. That's what Arthur Andersen learned after the collapse of Enron, a client. Before long the accounting firm, which had turned down an offer of a DPA, was convicted of obstruction of justice. True, the verdict was eventually overturned, but by then Andersen had collapsed. In contrast, another big accounting firm, KPMG, entered into a DPA in 2005 after the government started to look into allegedly abusive tax shelters the firm had been setting up for clients. It turned out that those shelters were illegal, and the government vented its wrath on individuals at the firm who it alleged were responsible for the wrongdoing. Although that case is still pending, several individuals have already entered guilty pleas. Meanwhile, KPMG itself has avoided prosecution.

Why doesn't every company opt for a DPA? Collateral damage. The company must formally admit wrongdoing, which can expose it to financial risk in a civil suit. Equally important, an overzealous prosecutor can do enormous harm to a company and its employees, not to mention its investors. He or she can go public with competitive information, for example, or disclose details of internal investigations that invite lawsuits. The best legal strategy is to be really careful about the terms of the DPA. Remember, these agreements are not usually put together under any kind of court supervision, which leaves the prosecutor with virtually absolute discretion to decree whether you did cooperate— and, if he or she thinks you didn't, to prosecute the company at the end of the investigation anyway. Consider Stolt-Nielsen SA, a holding company involved in transporting liquid chemicals and the like, which entered the equivalent of a DPA with the government's antitrust division in 2003. But after the government had used the information the company provided to secure guilty pleas from various individuals, it terminated its agreement and indicted Stolt-Nielsen in a case that is still pending.

Here are some areas a company's legal department should watch out for:

Privilege Waiver

In the past, prosecutors have generally expected a company seeking leniency to disclose the results of any internal investigation it conducts itself. But this means disclosing whatever your employees told you in the course of your own inquiries, along with any wrongdoing you turned up. The former is likely to chill the full and free candor you'll need from employees; the latter might fall into the parasitic hands of the plaintiffs' bar and be used in a class-action claim. Among the solutions: Make relevant witnesses available for interviews by the government and identify nonprivileged documents that will help the government get to where it wants to go. The company agrees to disclose possibly privileged material in exchange for the government's promise not to share it with any third party.

Independent Monitor

A DPA employs a monitor to oversee and report back to the government the company's compliance with the terms of the agreement. Since this person is on-site, his or her presence can make it tough for executives to go about their daily routine. This is particularly true in DPAs that give the monitor unfettered discretion to identify and remedy conduct totally unrelated to the original case. For example, based on a 2005 DPA involving Bristol-Myers Squibb, the monitor recommended that the board dismiss the CEO, not for conduct relating to the security fraud identified in the DPA but for a wholly unrelated patent dispute. The board did what it had been asked to do. While an open-ended mandate may instill investor confidence in the company's willingness to comply with the government, a legal department might well consider setting limits on the monitor's authority when it is working on the terms of a DPA.

Unrelated Conditions

The company should make sure that the DPA stops short of letting the government set penalties that have absolutely no relationship to an alleged offense. For example, in the same Bristol-Myers Squibb DPA, the drug company agreed to the government's demand that it pay an undisclosed sum to endow a chair in business ethics and corporate governance at Seton Hall University School of Law, the prosecutor's alma mater. Another DPA, involving WorldCom, required the company to add 1,600 workers to its Oklahoma employment rolls by 2014.

Overextended Duration

The guidelines for federal prosecutors limit nonprosecution agreements, such as DPAs, to 18 months. However, several past agreements have lasted much longer, including a 2005 DPA with the Bank of New York, which has a three-year duration. The company should hold the government to its 18-month limit by arguing that any needed internal controls can be effectively implemented and monitored within that time.

Unreviewed Prosecutorial Discretion

DPAs generally permit the prosecutor sole discretion to determine whether the company has kept its part of the bargain. If he thinks it hasn't, he's free to prosecute. To appeal such calls, a company should negotiate a DPA agreement that includes an independent "special master," a third party who can determine whether the company really did fail to cooperate. In addition, basic contract law may allow the company to seek judicial review of a prosecution where the good faith of the prosecutor is in question.

In summary, no board wants to see its company become the next Andersen. But no company should simply sign on the dotted line, no matter how serious the trouble it may be in. Rather, a company entering into a DPA should proactively negotiate with the government by balancing the twin objectives of identifying and preventing wrongful conduct while minimizing any collateral damage to the company and its stakeholders.

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