The decision gives corporate defendants subject to a monitor further confidence that internal company information provided to monitors will be protected from disclosure to the public at large.
On July 12, the U.S. Court of Appeals for the Second Circuit issued an important decision regarding the role of federal courts in cases resolved through deferred prosecution agreements (DPAs) — a settlement avenue that the Department of Justice and corporations under investigation have used routinely in recent years. In United States v. HSBC Bank USA, the court held that a written report issued by an independent monitor retained pursuant to a DPA could not be publicly disclosed because it was not relevant to any matter at issue before the district court. The HSBC court articulated a fairly narrow role for district courts in approving cases resolved through DPAs and in exercising oversight over those cases while DPAs are in effect.
Background on DPAs
In recent years, the government and corporate defendants have regularly settled criminal investigations by entering into DPAs. Under these agreements, the government files with the district court a criminal information but defers prosecution on those charges, often in exchange for monetary penalties and remedial measures from the corporate defendant.
Many DPAs also require the corporation to retain an independent monitor — typically an attorney — for an agreed duration of time (often three to five years) to ensure compliance with the provisions of the DPA and federal law. If the corporate defendant satisfies the requirements of the DPA, the government agrees to dismiss with prejudice the criminal charges in the information. If the defendant breaches the DPA — a decision that is often left to the sole discretion of the government — those charges may be pursued as if the DPA never existed.
For DPAs requiring the appointment of a monitor, the agreement typically requires the monitor to regularly provide the government with written reports in order to keep the government apprised of the corporation’s compliance with the DPA. These reports are designated as confidential because they often contain sensitive business information derived from internal company records and interviews of company employees.
In December 2012, HSBC’s U.S. subsidiary and the Department of Justice entered into a five-year DPA, following a four-year investigation into allegations that the bank violated federal money-laundering laws by failing to enact sufficient compliance controls. In addition to a $1.3 billion monetary forfeiture, the agreement called for HSBC to retain a monitor and to remediate the deficiencies in its compliance program. In exchange, the government filed a criminal information for money laundering and related offenses but agreed to defer prosecution on those charges subject to HSBC’s adherence to the DPA.
The government’s filing of the information started the clock under the Speedy Trial Act (STA), which requires a criminal defendant to be tried within 70 days of being charged with a crime. To stop the clock for the period during which the DPA was in effect, the parties filed a motion in the district court to exclude that period from the computation of time under the STA. The STA provides for the exclusion of time “during which prosecution is deferred by 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.” 18 U.S.C. § 3161(h)(2).
Consistent with the principle that the executive branch has the responsibility to decide how federal law is enforced, courts typically grant motions to exclude time as a matter of course, with little to no analysis of, or oversight over, the deal reached between the government and the corporate defendant. The district court in HSBC granted the motion to exclude the time under the STA. In an admittedly “novel” exercise of its supervisory power, however, the court also required the parties to provide quarterly updates about HSBC’s progress under the DPA. The parties did not appeal this decision.
Fast forward to April 2015. In its quarterly update, the government reported on a recent monitor report, which included findings that HSBC’s “progress ha[d] been too slow” and that the bank had a “substantial amount of work” to do in revising its written policies. In response, the court ordered the parties to submit the underlying monitor report. The court initially allowed the government to file the report under seal due to confidentiality concerns and fear that the report would provide a “road map” for criminals who wanted to exploit the weaknesses in HSBC’s money-laundering controls.
In November 2015, a pro se individual filed a letter with the court, contending that the monitor report was relevant to a complaint that he brought against HSBC with the Consumer Financial Protection Bureau. The court construed the letter as a motion to unseal the report, granted the motion, and ordered the parties to submit a redacted version of the report. The parties did so and jointly appealed to the Second Circuit, which reversed the district court’s decision.
Second Circuit’s Analysis
The question before the Second Circuit was whether the monitor report was a “judicial document,” which is presumptively accessible to the public if the document is “relevant to the performance of the judicial function and useful in the judicial process.”
The appeals court first addressed the district court’s holding that the report was relevant to the district court’s ongoing monitoring of the DPA. The Second Circuit acknowledged that courts possess certain supervisory powers but noted that courts are usually constrained from exercising oversight over the executive branch’s charging decisions, which enjoy a rebuttable presumption of regularity.
According to the appeals court, the district court based its exercise of its supervisory power on “hypothesized scenarios of egregious misconduct,” which the court found was not sufficient to rebut the presumption of regularity. Instead, the Second Circuit required a showing of conduct that “smacks of impropriety.” For example, according to the HSBC court, a district court may be justified in reviewing monitor reports to assess compliance with a DPA if the court received a whistleblower letter alleging “misconduct in the implementation of a DPA.” But because there was no evidence of misconduct with respect to the HSBC DPA, the Second Circuit held that the district court lacked “freestanding supervisory power to monitor the implementation of the DPA.” Accordingly, the monitor report was not a judicial document because the court’s ongoing monitoring of the DPA was not a proper “judicial function.”
The Second Circuit next considered an argument raised by an amicus law professor: that because the STA requires “approval of the court” to exclude time, the district court has the authority to substantively review and monitor the DPA and, therefore, the monitor report was relevant for those purposes. The Second Circuit disagreed with this expansive role of the district court in deciding motions to exclude time under the STA. Instead, it held that the nature of the court’s “approval” was solely to determine whether the DPA is “genuinely intended to allow the defendant to demonstrate his good conduct . . . and does not constitute a disguised effort to circumvent the speedy trial clock.”
The HSBC court supported its view with the principle that the executive branch enjoys the authority to make charging decisions, and, absent an explicit directive from Congress in the STA, courts should not revisit these decisions. Because the monitor report was not relevant to the district court’s STA inquiry, the “judicial document” test was not satisfied. This ruling is consistent with a recent D.C. Circuit decision, in which the court held that the district court exceeded its authority under the STA by refusing to grant a motion to exclude time because it felt the DPA was too lenient on the defendant. United States v. Fokker Services B.V., 818 F.3d 733 (D.C. Cir. 2016). The Fokker court adopted the same interpretation of “approval” as the HSBC court.
Finally, the Second Circuit rejected arguments that the monitor report was relevant to a potential motion filed under Federal Rule of Criminal Procedure 48(a), which pertains to the government’s dismissal of an information by leave of court, or a potential dispute over whether HSBC breached the DPA. Because neither issue was pending before the court, the Second Circuit held that the monitor report was not “relevant” to any existing judicial function. Although the HSBC court speculated that a monitor report “may indeed be relevant” in deciding a Rule 48(a) motion or determining whether HSBC breached the DPA, these scenarios are remote and very likely would be resolved by the parties prior to court intervention.
Judge Pooler concurred with the ruling but wrote separately to encourage Congress to consider enacting statutory language specific to DPAs and nonprosecution agreements that would provide the courts an expanded role. Judge Pooler observed that the provision relied on by DPA parties to exclude time from the STA clock was actually meant to apply to individuals who received the “functional equivalent of a sentence to pretrial probation” — not corporate defendants that agreed to pay monetary penalties, remediate compliance deficiencies, and retain a monitor. The judge acknowledged that DPAs are valuable tools for resolving criminal matters but added that, under the existing legal framework, the prosecution “exercises the core judicial functions of adjudicating guilt and imposing sentence with no meaningful oversight from the courts.”
The Second Circuit’s decision is significant in two respects and provides some clarity on a district court’s role in overseeing DPAs.
First, the court joined the D.C. Circuit in articulating a fairly narrow role for district courts in exercising oversight over cases while DPAs are in effect. Given the weight of authority on these issues, parties to DPAs should consider their appeal rights if the district court goes beyond what the HSBC and Fokker courts permitted in terms of DPA oversight.
Second, the court restricted public access to monitor reports in all but rare scenarios, such as prosecutorial misconduct. This holding should give corporate defendants under monitorships further confidence that internal company information provided to monitors and, in turn, the government will be protected from disclosure to the public at large. Protecting the confidentiality of information provided by companies facilitates open and honest communication between monitors and corporate defendants, which is a key ingredient in the success of monitorships.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.