Monday, August 28, 2006

Yet Another Deferred Prosecution Agreement - Prudential Equity Group

DOJ issued a transcript today here of Deputy Attorney General Paul J. McNulty's Press Conference regarding  the deferred  prosecution agreement entered into by Prudential Equity Group, a broker-dealer subsidiary of Prudential Financial, Inc.  The agreement calls for Prudential to "pay $600 million in fines, restitution and penalties."  According to McNulty, this settlement is the "largest resolution of a market timing case to date."

When questioned about the agreement including a provision waiving the attorney-client privilege, McNulty answered in part as follows:

"The waiving of attorney-client privileged information is a standard piece of the settlements that the Department of Justice has reached in the past. And as you know, there are many agreements that we've reached in our effort to combat corporate fraud.

"This agreement contains a provision of a similar nature. However, I'd note that in this waiver provision, there are some distinctions made. And it represents the kind of distinctions that the Department of Justice has been prepared and has made and is willing to continue to make as we try to work these out on a case-by-case basis.

"Here we have an agreement that makes a distinction between providing information that the company has that preceded the date on which the discovery and the discontinuance of -- I shouldn't say discovery, necessarily, but the discontinuance of the practices.

"It doesn't include information that the company received after that date from attorneys that might involve strategic planning or other defense-related things, things that to go what might be seen as more of a core of attorney-client communications.

"So this agreement represents an effort to try to make some distinctions in the area of the waiver, not that we have to always make those distinctions, because there may be circumstances where that's not appropriate. But certainly it requires a waiver where that information is a part of the overall cooperation environment.

"And that's the key here. There is every reason for Prudential to be cooperative. This is an agreement involving a different corporate structure really from then until now, which by the way, is why this deferred prosecution agreement is being reached as opposed to a criminal prosecution, because there are some real differences in terms of structure from past to present."

For many, this response will not be satisfactory.  For one, the decision of waiving the attorney-client privilege is being accomplished because a company has basically no bargaining power in making this agreement.  They either fold or face the possible consequences faced by Arthur Andersen, LLP. Yes, he is correct that there is "every reason for Prudential to be cooperative."

Additionally, to say in essence that there are different degrees of the attorney client privilege ignores the strong Supreme Court precedent in this area. Does DOJ not recall the case of Swidler & Berlin v. United States, the case that held that the privilege even extends beyond the death of the client?

Finally, the DOJ has all the cards in the deck. The judiciary is not a part of this deferred prosecution agreement.

In many ways, this deferred prosecution, like so many of these agreements are an excellent way to resolve corporate wrongdoing.  It is especially good to see here that "$270 million will be distributed to harmed mutual funds and their shareholders."  But is it really necessary to go so far in these deferred prosecution agreements to make the company "mini-prosecutors" against individuals within the company?  And is it really valuable to continued trust within the company to have waivers of the attorney-client privilege? Maybe it isn't such a wise move for prosecutors to use shortcuts that circumvent the hard work of investigating the matters themselves.

See Prudential's press release here; Wall Street Jrl here; New York Times here.


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