The deferred prosecution option

A series of fatal accidents caused by defective automobiles has both Canada and the US scrambling for options for legal action.

In September, US federal prosecutors agreed to settle a criminal probe into General Motors for concealing an ignition switch defect linked to at least 124 deaths and 275 injuries, according to lawyers in charge of a fund established by GM to compensate victims. “Under the deal, General Motors agreed to pay US$900 million as part of a deferred prosecution agreement [DPA], but no GM executives will be prosecuted for covering up the deadly defect,” the Wall Street Journal reported.

The GM deal, however, would not have happened in Canada, which does not allow DPAs, although momentum is building to adopt them.
    
As part of the DPA, any charges would be dismissed if GM complied with oversight and other terms for a period of three years. “The company acknowledged that some of its employees knew about the problem for more than a decade, but no cars were recalled until early last year,” CNBC reported. “GM hired former federal prosecutor Anton Valukas to investigate the matter, and he found no wrongdoing on the part of top executives. Instead, he blamed the problem on a bureaucratic corporate culture that hid problems and failed to take action.”

The settlement caps a two-year probe that tainted GM’s reputation and transformed the Detroit-based automaker’s relationship with the federal government, which had bailed it out during the 2008 financial crisis, The Globe and Mail reported.

The Department of Justice’s (DOJ) deal with GM was bitterly criticized by consumer advocate groups and by the families who suffered the loss of a loved one because of the faulty switch. “GM killed over 100 people by knowingly putting a defective ignition switch into over one million vehicles,” Clarence Ditlow, head of the Center for Automotive Safety, told CNBC. “Today, thanks to its lobbyists, GM officials walk off scot-free while its customers are six feet under.”

One of the most vocal critics of the negotiated settlement was Laura Christian (in photo) of Maryland, whose 16-year-old daughter, Amber Rose, died in July 2005 after her new Chevrolet Cobalt crashed and the airbags failed to deploy because of the defect. The tragedy was heightened for Christian because she had just recently reconnected with her daughter, whom she had given up for adoption as an infant. Paramedics said her daughter would have survived, the New York Daily News reported, if the devices had worked properly.

Several US politicians also railed against the deal. “Democratic Senators Richard Blumenthal of Connecticut and Edward Markey of Massachusetts called the agreement ‘extremely disappointing,’ and said victims deserved ‘individual criminal accountability, as well as a larger monetary penalty,’ ” the Globe said. “[US Attorney Preet] Bharara did not rule out charging individual GM employees, but said there are ‘legal and factual’ challenges to prosecuting them. ‘The law does not always let us do what we wish we could do.’ ”

The DOJ likely chose to charge GM with wire fraud, CNBC speculated, “because the company used electronic communications to interact with the government’s National Highway Traffic Safety Administration, the agency that it is required by law to notify when it finds out about a safety defect. In May 2014, NHTSA levied a record civil penalty of US$35 million against GM. It said the company violated federal law when it failed to notify the government of safety-related defects within five days of learning about them. NHTSA said GM also failed to respond in a timely manner to the government’s requests for information during its investigation of the defective switches.”

The GM settlement was by no means a precedent. In 2014, Toyota agreed to pay US$1.2 billion to settle a DOJ investigation, admitting that it hid information about defects that caused Toyota and Lexus vehicles to accelerate unexpectedly and resulted in injuries and deaths. Eric Holder, the attorney general at the time, said the penalty was the largest of its kind imposed on an auto company. The four-year criminal investigation focused on whether Toyota promptly reported the problems related to unintended acceleration, according to the Daily Record.

“The company admitted to misleading consumers and regulators by assuring them that it had adequately addressed an acceleration problem stemming from ill-fitting floor mats — which attracted widespread publicity in 2009 following a car crash in San Diego that killed a family of four — through a limited safety recall of certain models,” the Record said. “Toyota knew at the time that it had not recalled other models susceptible to the same problem and also took steps to conceal from regulators a separate acceleration problem related to a faulty pedal, according to the DOJ.”

“In other words, Toyota confronted a public safety emergency as if it were a simple public relations problem,” Holder said at a news conference. “According to a statement of facts filed in the case, an exasperated Toyota employee was said to have remarked at one point, ‘Idiots! Someone will go to jail if lies are repeatedly told. I can’t support this,’” the newspaper said.

As in the GM case, a DPA was negotiated that could allow company executives to avoid prosecution. Criminal charges were laid in the case but prosecutors said they’d dismiss the charges in three years if Toyota complied with the terms of the settlement. An independent monitor was established to review policies, practices and procedures at the company.

As Canada continues to grapple with judicial initiatives to deal with fraud and white-collar crime, there is an impetus, in some quarters, to allow regulators to enter into DPAs with corporations that are found to have committed fraud, corruption and other related transgressions.

One of the strongest proponents of DPAs is SNC-Lavalin Group Inc., which is embroiled in fraud and corruption charges. In February, the company issued a news release that not only confirmed its intent to defend itself against the charges but also chastised the Canadian government for not being willing to enter into a DPA.

It claimed that companies facing corruption allegations in the US and Britain “benefit from a different approach that has been effectively used in the public interest to resolve similar matters while balancing accountability and securing the employment, economic and other benefits of businesses.”

“These deals, often announced with the fanfare of a full-blown conviction, allow prosecutors to extract multimillion-dollar fines from companies facing bribery allegations,” the Globe reported. “But they spare the firms a further reputation-damaging trial or an actual guilty plea that could see them fall afoul of policies that ban convicted firms from bidding on government contracts. Essentially, prosecutors agree not to pursue charges against the company, provided the firm has cooperated and brought in new measures to stop any future corruption.”

The newspaper cited France’s giant Alstom SA, which pleaded guilty in 2014 to resolve charges related to a widespread scheme involving tens of millions of dollars in bribes in countries around the world, including Indonesia, Saudi Arabia, Egypt and the Bahamas. It agreed to pay US$772 million after two of its US-based subsidiaries, Alstom Power Inc. and Alstom Grid Inc., were able to make DPAs with the DOJ.

The rationale behind DPAs is that while the company accepts a financial penalty, often harsh, it is able to continue functioning, which means that employees and shareholders, likely innocent of any wrongdoing, are not punished for the transgressions of the firm. On the other hand, it exonerates senior executives or other transgressors from serving jail time for their malfeasance.

One of the strongest opponents of DPAs is Mike Koehler, a law professor at Southern Illinois University. He writes a blog on anticorruption issues and questions the practice of extracting huge fines without ever having to prove a case in court. He told the Globe that Lavalin’s statement about US and British practices was surprising: “It’s basically like a child being punished and the child saying ‘Well, gee, Johnny’s parents do things a little bit differently, why can’t I benefit from that?’ ”

Canada, he says, is right to reject DPAs. “Lavalin should be grateful, and not pout, that Canadian authorities will have to prove the facts and legal theories alleged in the enforcement action. In the US, the [Foreign Corrupt Practices Act] enforcement agencies are rarely put in the position of having to prove anything in a corporate FCPA enforcement action. Rather, the DOJ [or SEC] occupy the position of prosecutor, judge and jury all at the same time and use resolution vehicles such as non-prosecution and deferred prosecution agreements or administrative settlements — all of which are not subjected to any meaningful judicial scrutiny.”

It’s unclear at the moment whether Canada will adopt the DPA option, but there is no doubt that if corporations commit serious fraud the consequences will come crashing down on them, one way or another.

About the Author

David Malamed


David Malamed, CPA, CA•IFA, CPA (Ill.), CCF, CFE, CFI, is a partner in forensic accounting at Grant Thornton LLP in Toronto.

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