Those familiar with the criminal justice system understand that what you see, isn’t always what you get. Many people are charged with crimes, but often some of these people don’t end up with convictions. There are statutes that allow for certain defendants, usually first time offenders, to escape a criminal conviction by successfully completing probation or other conditions set by the court.
On the state-level, typically such resolutions happen when the offender is young, or is alleged to have committed a first-time misdemeanor domestic-violence offense, or is charged with a first-time drug possession offense.
On the federal-level, such resolutions are generally reserved for low-level offenses where the person can make restitution and the prosecutor believes that justice does not require a felony conviction. On the federal-level, such a favorable negotiated outcome is typically not available in complex cases, or civil cases involving securities fraud and bribery – until now.
On May 17, 2011, the Securities and Exchange Commission changed the landscape for white-collar defendants. For the first time, the SEC entered into a deferral agreement with Tenaris, a company that was alleged to have been involved in bribery of Uzbekistan officials to win lucrative contracts in state-owned oil and gas industry.
A deferral agreement is an agreement between the government and the defendant in which the government agrees not to prosecute the defendant (with civil or criminal charges) if he complies with the conditions set by the government for a specific amount of time. The deferral agreement between the SEC and Tenaris is a two year agreement in which Tenaris agreed, among other things, to enhance its policies, procedures, training, and controls to strengthen compliance with anti-corruption practices. Once Tenaris complies with the terms of the agreement, and the two-year term is over, the SEC will refrain from prosecuting the company in a civil action for its violations.
This is the first time the SEC has employed any sort of deferral agreement. According to an article on Law.com, the SEC has been looking for the right case and company for its first deferred prosecution agreement. A spokesperson from the SEC said Tenaris was offered a deferral agreement after Tenaris discovered the bribes and voluntarily reported them to the SEC and the Department of Justice (DOJ), and then continued its cooperation.
These types of agreements allow the government to give offenders a second chance while the government oversees their actions for a probationary period. These agreements promote rehabilitation and seek to avoid lengthy and costly litigation. However, when working with these agreements it is important to understand which government entities are promising not to prosecute and what specifically they are agreeing to let go. In many cases, for example, the SEC may promise not to prosecute an offender on civil charges in exchange for cooperation. However, unless it is specifically stated in the deferral agreement, this does not guarantee that DOJ or other state or federal prosecution officials will honor the deferral agreement and decline to prosecute.
In the Tenaris case, Tenaris not only received a deferral agreement from the SEC that would preclude civil action against them, Tenaris agreed to pay a $3.5 million criminal fine and enter a non-prosecution agreement with the Department of Justice, which will protect them from criminal proceedings.
In short, the SEC’s use of a deferral agreement in the civil arena is encouraging. However, caution must be exercised to ensure that any deferral agreement accounts for all possible adverse consequences, even at the hands of other agencies.