Morgenson’s DPA scandal

Larry Ribstein —  8 July 2011

It’s not easy coming up with scandals all the time.  Some days there just isn’t a new scandal to report.  But that space has to get filled somehow. 

The NYT’s Gretchen Morgenson often finds herself in this position.  Her scandal for yesterday, reported as usual with Louise Story (I’ll just start calling them Morgenstory), was about how prosecutors are letting evil banks off with deferred prosecution agreements.  This, they say, “helps explain the dearth of criminal cases despite a raft of inquiries into the financial crisis.”  And:  “This approach, critics maintain, runs the risk of letting companies off too easily.” And “[t]his “outsourcing” of investigations . . . has led to increased coziness between the government and companies, some critics say.” In other words, the banks are getting away with murder. 

“Critics” here means a law professor and former AUSA, who opines for Morgenstory:

If you do not punish crimes, there’s really no reason they won’t happen again. I worry and so do a lot of economists that we have created no disincentives for committing fraud or white-collar crime, in particular in the financial space. The legal representatives will argue that since recoveries can be had by using civil measures, even private litigations, there’s no need to bring criminal measures. I disagree with that very much.

We don’t get to hear why she “disagree[s] with that.”

This is all very puzzling since we do read some pretty good reasons for the DOJ’s approach.  A DOJ spokesperson tells Morgenstory (“defending” the DOJ’s approach) that dpas collect penalties and restitution and get firms to amend their behavior, and “achieve these results without causing the loss of jobs, the loss of pensions and other significant negative consequences to innocent parties who played no role in the criminal conduct, were unaware of it or were unable to prevent it.” This does sound better than putting them out of business like Arthur Andersen (which was vindicated too late by the Supreme Court).  Indeed, that case helped lead the DOJ to reexamine its policies for prosecuting corporate crime. 

Morgenstory have some supposedly damning details about the development of DOJ’s new approach.  The then deputy attorney general, James Comey, “surprised some attendees” at a 2005 private meeting when “he cautioned colleagues to be responsible.”  Morgenstory quote an anonymous attendee as labeling this shocking call for responsibility “a total retrenchment. It was like we were going backwards.”

Here are some of the horrible results of this new leniency, according to Morgenstory:

  • The companies talk to each other and exchange information.  (Hell, that makes them almost like multiple government agencies pursuing the same crime!).  The terrible consequence, according to Morgenstory, “has often been that banks walk into prosecutors’ offices well-prepared to rebut allegations.”  Yikes, we can’t have that.
  • “One assistant United States attorney, who requested anonymity because he is not allowed to speak with the news media, said many inquiries had been tabled because banks had such good answers.” Nor that either.
  • This AUSA says:  “They’ll hire a counsel who is experienced. They often come in and make a presentation: ‘We’ve looked at this and this is how we see it.’ They’re often persuasive.” OMG. We can’t have the government dealing with well-prepared defendants.

Morgenstory let the reader assume that the dpas are a massive get out of jail free card for firms.  But there’s another way to look at them.  As I discuss in my Agents Prosecuting Agents, they are a way of helping the government put individuals in jail whether or not they belong there:

[P]rosecutors can pressure corporate agents through their firms.  Like individual defendants, firms face strong incentives to plead guilty to avoid even worse penalties at trial.  These penalties could include fatal sanctions for firms that must stay clean to continue in business, like those imposed on Arthur Andersen.  Unlike individuals, firms can negotiate for deferred prosecution agreements (DPAs) in which the firm agrees to governance arrangements in order to avoid prosecution.

[FN: See James R. Copland, Regulation by Prosecution: The Problem with Treating Corporations as Criminals, Civ. Just. Rep. No. 13 (December, 2010); Richard A. Epstein, The Deferred Prosecution Racket, WALL St. J., Nov. 28, 2006, at A14.] 

The firm’s ability to get a DPA depends on its cooperation with the prosecution which, in turn, may require the firm to induce its agents to cooperate with investigators.  Accordingly, firms seeking DPAs have strong incentives to deny agents advancement or indemnification of expenses and to waive the attorney–client privilege.

[FN: With respect to privilege waivers, see Michael Seigel, Corporate America Fights Back: The Battle Over Waiver of the Attorney-Client Privilege, Social Science Research Network (March 3, 2010),]  

Employees may find themselves having to talk to corporate attorneys without the protection of an attorney–client privilege.  Given the high defense costs discussed above, indemnification and advancement can mean the difference between a defendant’s ability to mount a defense and having to plead guilty.  These issues surfaced in the KPMG case, in which the government pressured the defendant accounting firm, which faced the possibility of following Arthur Andersen to extinction, to deny its employees advancement and indemnification.

[FN: See Harvey A. Silverglate, Three Felonies a Day:  How the Feds Target the Innocent, 138-52 (Encounter Books, 2009); Sarah Ribstein, A Question of Costs:  Considering Pressure on White-Collar Criminal Defendants, 58 Duke L. J. 857, 870-73 (2009); United States v. Stein, 495 F. Supp. 2d 390 (S.D.N.Y. 2007), aff’d United States v. Stein, 541 F.3d 130 (2d Cir. 2008) (The trial court ruled that the government’s pressure violated defendants’ Fifth and Sixth Amendment rights and dismissed several of the indictments).]

All of this is not to say that Morgenstory don’t report some problems.  One of them is the nice way these very costly proceedings dovetail with the interests of white collar defense bar — one of the more lucrative preserves remaining to Big Law. 

The other is the DOJ’s secrecy about its decision-making.  Morgenstory make it look like DOJ is cloaking a pro-corporate conspiracy.  But DOJ secrecy also hid DOJ’s process of deciding which corporate executives to send up the river in its prosecution spree of in the early 2000s. I discussed a few years ago some questions raised by those decisions.

The “scandal” in the Morgenstory story is, at most, the DOJ cleaning up after the real scandal of excessive criminalization of agency costs, and maybe not even that.  Nevertheless, watch for the followup hearings on the “dpa scandal,” followed by a return to the good old days of excessive prosecutorial behavior.

Larry Ribstein


Professor of Law, University of Illinois College of Law