The Hypocrisy of Deferred Prosecution Agreements

January 8, 2014

The new prosecutorial flavor of the month is the Deferred Prosecution Agreement ("DPA"), which, in and of itself, is a useful tool that can preserve limited manpower and financial resources.  On the other hand, who gets blessed with this deferral and who continues to get the shaft poses a perplexing challenge.  If the process of deciding the target of prosecution and of determining when a prosecutor's or a regulator's grace is or is not bestowed were amenable to a mathematical calculation, much would be consistent in the enforcement of our laws. Unfortunately, the calculus of prosecutions is more a creature of human whim and whimsy than the laws of science.  

Two Cases In Point

Let me simply offer you two recent United States Department of Justice press releases. You read the statements and consider the different outcomes. 

In USA v. Martin, a lowly security guard  gets 33 months in federal prison for stealing some $800,000 from bank ATMS. 

In contrast, in USA v. ArthroCare Corporation, a NASDAQ-listed medical device company charged with causing some $800 million in shareholder losses merely writes a check and gets a DPA. No, I'm not going to twist the facts to make a point - in truth, the senior executives at ArthroCare have been charged and are likely headed for trial. 

In the recent USA v. JPMorgan Chase Bank, N.A., however, I'm not sure that any individuals employed by JPM are headed for trial. Odd, isn't it, how different things are when the a financial institution is a victim rather than when the financial institution is a defendant. 

Two DOJ Press Releases

U.S. Attorney's Office
January 07, 2014
Western District of Oklahoma
(405) 553-8700
OKLAHOMA CITY-Maria Estelle Martin, 48, of Lawton, was sentenced today to 33 months in prison for embezzling cash from a credit institution, announced Sanford C. Coats, United States Attorney for the Western District of Oklahoma.
According to court records, Martin worked as an armed security guard for a security company that serviced Lawton-area ATMs for local banks and credit unions. Her duties included replenishing ATMs with cash from the financial institutions' vaults. In late 2011 and early 2012, Martin embezzled cash by taking it from the vaults and keeping it rather than using it to replenish the ATMs. Martin gambled away the stolen money through frequent visits to Lawton-area Indian casinos, where she would sometimes put over $70,000 into a single slot machine.
At today's sentencing, United States District Judge Robin J. Cauthron sentenced Martin to serve 33 months in federal prison. Upon her release from prison, Martin will be on supervised release for five years and will be required to pay $847,942.50 in restitution to the corporate victims of her theft. 
This case was the result of an investigation conducted by the Federal Bureau of Investigation and the Lawton Police Department. The case was prosecuted by Assistant U.S. Attorneys Brandon Hale and Chris M. Stephens.

U.S. Department of Justice
January 07, 2014
Office of Public Affairs
(202) 514-2007/TDD (202) 514-1888
WASHINGTON-ArthroCare Corporation, a medical device manufacturer based in Austin, Texas, that trades on the NASDAQ stock exchange, has agreed to pay a $30 million monetary penalty to resolve charges that senior executives at the company engaged in a securities fraud scheme that resulted in more than $400 million in shareholder losses, announced Acting Assistant Attorney General Mythili Raman of the Justice Department's Criminal Division and U.S. Attorney Robert Pitman of the Western District of Texas.
John Raffle and David Applegate, both former senior vice presidents of ArthroCare, previously pleaded guilty to conspiracy to commit securities and wire fraud in connection with the fraud scheme. ArthroCare's former chief executive officer, Michael Baker, and chief financial officer, Michael Gluk, are scheduled to stand trial on related charges on May 5, 2014. Defendants are presumed innocent unless and until proven guilty at trial.
As part of the agreed-upon resolution, the department today filed a criminal information in the Western District of Texas charging ArthroCare with one count of conspiracy to commit securities fraud and wire fraud. In addition to the monetary penalty, ArthroCare also agreed to cooperate with the department in its continuing investigation and prosecution of individuals responsible for the scheme and to continue to implement an enhanced compliance program and internal controls designed to prevent and detect violations of the federal securities laws and federal laws relating to the company's relationships and transactions with health care providers. ArthroCare had previously entered into a multi-million-dollar settlement agreement with shareholder victims.
In the deferred prosecution agreement, ArthroCare admitted that senior executives of the company inflated ArthroCare's revenue by tens of millions of dollars; concealed the nature and financial significance of ArthroCare's relationship with its largest distributor, DiscoCare Inc., and other distributors; and used a series of sham transactions to manipulate ArthroCare's revenue and earnings as reported to investors. ArthroCare admitted that its executives determined the type and amount of product to be shipped to distributors, notably DiscoCare, based on ArthroCare's need to meet sales forecasts, rather than the distributors' actual orders.
ArthroCare further admitted that these executives and others then caused ArthroCare to "park" millions of dollars worth of ArthroCare's medical devices at its distributors at the end of each relevant quarter so the company could report these shipments as sales in its quarterly and annual filings and so the company would appear to have met or exceeded internal and external earnings forecasts.
According to the information, between December 2005 and December 2008, ArthroCare's shareholders held more than 25 million shares of ArthroCare stock. On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share. The drop in ArthroCare's share price caused an immediate loss in shareholder value of more than $400 million.
This case was investigated by the FBI's Austin Resident Agency. The case is being prosecuted by Deputy Chief Benjamin D. Singer and Trial Attorneys Henry P. Van Dyck and William Chang of the Criminal Division's Fraud Section. Significant assistance was provided by the SEC's Fort Worth, Texas Office.

One Last Point

We tend to think of thieves and thieving as involving someone in a dark alley, coming up to you when you are vulnerable, sticking a gun in your face, and demanding your wallet and cash. In more recent times, fraudsters and frauds have become the stuff of Hollywood movies that tend to portray them as anti-heroes who are screwing the system.  You think anyone is going to make a movie about Maria Estelle Martin? 

In reality, fraud is theft and a fraudster is little different than some junkie with a gun in an alley trying to steal your week's pay. I don't appreciate the distinction between most white and blue collar crime and wish that prosecutors and regulators would stop perpetuating that myth.