Securities Regulation Daily Judicial supervision of deferred prosecution agreements sharply limited
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Wednesday, July 12, 2017

Judicial supervision of deferred prosecution agreements sharply limited

By Richard A. Roth, J.D.

When presented with a deferred prosecution agreement (DPA), a federal judge has only the authority to arraign the defendant, determine that the DPA is not an effort to circumvent speedy trial requirements, and adjudicate subsequent disputes, according to the U.S. Court of Appeals for the Second Circuit. There is no inherent judicial authority to supervise DPAs, and that means that a special monitor’s report prepared under an agreement is not a judicial document that is subject to public disclosure (U.S. v. HSBC Bank USA, N.A., July 12, 2017, Katzmann, R.).

The court’s opinion addresses specifically whether the monitor’s agreement was a judicial document; however, the reasoning behind the decision is relevant to judicial authority over any DPA. It should have broad significance given that it is binding on the federal district courts that have jurisdiction over New York City, including Wall Street companies.

DPA terms. HSBC Bank, USA, and HSBC Holdings (HSBC) entered into a DPA with the U.S. government in December 2012 to address charges that HSBC had violated the Bank Secrecy Act by not having an adequate anti-money laundering program and had violated other federal laws by facilitating transactions with various entities that were subject to sanctions. The DPA required HSBC to implement a number of compliance measures and retain an independent monitor to report to the government on HSBC’s compliance. According to the appellate court, those reports were not intended to be public.

If HSBC complied with the DPA for five years, the pending criminal prosecution would be dismissed. Otherwise, the prosecution could be resumed.

The agreement had speedy trial implications. Under ordinary circumstances, a trial must begin with 70 days after a defendant first appears in court. The DPA excluded from that 70-day term any time during which the agreement was in effect, and that exclusion required judicial approval.

Periodic reports ordered. According to the appellate court, the district court judge decided he had the inherent supervisory authority to approve or reject the DPA on its merits in order to protect the integrity of the court. Exercising that authority, he ordered the government and HSBC to file quarterly reports to keep him apprised of the monitor’s conclusions about HSBC’s compliance.

One of those quarterly reports revealed that the monitor had concerns, leading the judge to order that the monitor’s own report should be filed. When an individual, by letter, informed the court that the monitor’s report could be relevant to a complaint he had filed with the Consumer Financial Protection Bureau, the judge decided the report was a judicial document and ordered it to be unsealed in a redacted form.

The government and HSBC appealed, and the individual whose letter prompted the judge’s decision was allowed to intervene to argue for disclosure.

What is a judicial document? HSBC and the government argued that the monitor’s report was not a judicial document. Rather, they asserted, it was an executive document that was to be used by the executive branch of the government in exercising its prosecutorial discretion. Ordering public disclosure of the report was beyond the judge’s authority under the Constitution, they claimed.

The intervenor raised four arguments in favor of the claim that the monitor’s report was relevant to the performance of a judicial function, and therefore was a judicial document. The appellate court ultimately rejected all four.

Inherent supervisory authority. The district court judge was wrong to assert his supervisory authority to monitor the implementation of the DPA, the appellate court began. A district court judge does have inherent supervisory authority, the appellate court agreed, but it is an extraordinary power that must be used with great discretion. The limits on that inherent authority are even greater when the authority might affect the executive branch’s exercise of prosecutorial discretion.

While one could imagine a scenario in which a DPA could be abused in a way that merited judicial intervention, imagination was not enough, the court said. Judges must presume that prosecutors are behaving properly and exercise their inherent power only when there is clear evidence to the contrary.

Speedy Trial Act. Speedy Trial Act provisions requiring the district court judge to approve trial delays that result from DPAs do not allow judges to second-guess prosecutorial discretion, the court then said. Judges are to be "neutral arbiters of the law," not "superprosecutors." The approval required by the Speedy Trial Act only allows a judge to decide at the time the DPA is presented whether the agreement is bona fide.

End of the DPA. If HSBC, in the judgment of the government, complies with the DPA, the charges will be dismissed. However, that does not mean the monitor's report is relevant to a judicial function, the appellate court said. The report might be relevant in the future, but that does not make it relevant now. The fact that the dismissal would be "with leave of court" did not extend the judge’s authority.

Breach of DPA. While a report by the monitor might be relevant to deciding whether HSBC had breached the agreement, it would not necessarily be relevant, the appellate court also said. The government might allege a breach of the DPA based on conduct that was not covered by the report, such as the commission of a new crime.

Trying to predict that the monitor’s report might be relevant to a judicial function in the future was "inherently speculative," the appellate court concluded. That speculation did not allow the report to be treated as a judicial document in advance.

The case is Nos. 16-308(L), 16-353, 16-1068, and 16-1094.

Attorneys: Jenny C. Ellickson, U.S. Department of Justice. Paul D. Clement (Kirkland & Ellis LLP) for HSBC Bank, USA, N.A, and HSBC Holdings, PLC. David A. Schulz (Levine Sullivan Koch & Schulz) for Hubert Dean Moore Jr.

Companies: HSBC Bank, USA, N.A.; HSBC Holdings, plc

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