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DEFERRED PROSECUTION AGREEMENTSJonathan Fisher QC discusses the extent to which a UK court is likely to interfere with the terms of a proposed deferred prosecution agreement, in the light of Judge Rakoff’s slap down by the New York Appeals Court in SEC v Citigroup.


District Court Judge Rakoff’s compelled approval of the SEC v Citigroup settlement marks the conclusion of extensive litigation, symbolising a defiant surrender by the US courts of supervisory jurisdiction over the terms of prosecution agreements. The UK courts are almost certainly bound to take a different approach.


On 5th August 2014, District Judge Rakoff reluctantly approved a settlement agreement between Citigroup and the Securities Exchange Commission (SEC) (see United States SEC v. Citigroup, Case No. 11-cv-7387 (S.D.N.Y. 2014). In doing so, he was forced to cede supervisory jurisdiction in relation to the terms of the prosecution agreement which he did not want to do. Given that deferred prosecution agreements (DPAs) have recently been introduced into English law in Schedule 17 of the Crime and Courts Act 2013, practitioners will be interested to consider the US experience and whether it is likely to be followed in the UK.

The Citigroup-SEC Litigation

The litigation concerned a prosecution settlement agreement between the SEC and Citigroup. The agreement was entered into pursuant to a complaint, filed by the SEC against Citigroup. In its complaint, the SEC alleged that Citigroup had been negligent, in violation of sections 17(a)(2) and (3) of the Securities Act of 1933, in relation to its role and interest in creating and marketing a $500 million fund, known as Class V Funding III. It was alleged that Citigroup had misrepresented to investors that this fund contained a portfolio of attractive investments which had been selected by an independent adviser. The argument was that in reality Citigroup had exercised control over the selection of assets, and had chosen a number of negatively projected assets, backed by sub-prime mortgages, in which it had taken a short position. The result of this arrangement was that when the value of these assets fell, investors suffered multi-million dollar losses. Meanwhile, Citigroup made around $160 million in profit.

On 28th November 2011, District Judge Rakoff, in a controversial holding, rejected the settlement agreement proposed by the SEC, on the grounds that it was contrary to the public interest. In particular, Judge Rakoff was highly critical of the SEC’s historic willingness to enter into settlement agreements in the absence of any admission or denial of the underlying allegations. He concluded that “[an] application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous...” and expressed his firm belief that “ any case like this that touches on the transparency of financial markets whose gyrations have depressed our economy and debilitated out lives, there is an overriding public interest in knowing the truth.”(see United States SEC v. Citigroup, Case No. 11-cv-7387 (S.D.N.Y. 2014) at page 15).

The SEC appealed Judge Rakoff’s decision to the Second Circuit Appeals Court, which overruled it on the basis that the District Court did not pay the SEC the appropriate level of deference, and that Judge Rakoff misinterpreted the legal standard of review. The appeal court concluded that “ is an abuse of discretion to require, as the District Court did here, that the SEC establish the ‘truth’ of the allegations against a settling party as a condition for approving the consent decrees...” (see United States SEC v. Citigroup 752 F.3d 285 (2d Cir. 2014) at page 26).

When the case was sent back to Judge Rakoff for approval, the Judge did not attempt to conceal his disappointment. He expressed his fear that “... as a result of the Court of appeal’s decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary’s contempt powers will in practice be subject to no meaningful oversight whatsoever.” He concluded that the “...Court has now fixed the menu, leaving this Court with nothing but sour grapes.”(see United States SEC v. Citigroup, Case No. 11-cv-7387 (S.D.N.Y. 2014) at page 3)

While radical, Judge Rakoff’s comments will certainly resonate in the UK. However, any fears in the UK that prosecutors will be able to circumscribe the supervisory jurisdiction of the UK courts are probably ill founded. In oral answers to questions on 20 November 2012 (Column 436) the former Solicitor General Oliver Heald assured members of Parliament that DPAs were “...not an alternative to prosecuting in serious cases...” This position is reflected in Rule 12.3(3)(i) of part 12 of the Criminal Procedure Rules which provides that an application to approve a proposal to enter into an agreement must explain why “...entering into an agreement is likely to be in the interests of justice...”

In addition, the Joint Prosecutors’ Deferred Prosecution Agreements Code of Practice 2013 contemplates exercise of the Court’s supervisory jurisdiction, and its ability to demand that the prosecutor set out clear facts. Rule 6.2 of the Code provides that the parties should “...resolve any factual issues necessary to allow the Court to agree terms of the DPA on a clear, fair and accurate basis...” Furthermore, whilst no English Judge is likely to take as political a stance as Judge Rakoff, precedent suggests that that the English Court will seek to maintain a strong grip on its supervisory jurisdiction.

An illustration of the Court’s reluctance to cede jurisdiction to prosecutors can be seen in the case of R v Innospec Limited [2010] Crim LR 66. Handing down a decision in respect of a guilty plea of conspiracy to corrupt, Lord Justice Thomas was clear in his judgment that sentencing powers lay with the Court, and not with any other body. The approach taken by Lord Justice Thomas in R v Innospec Limited is indicative of the kind of relationship that is likely to develop between the English Court and prosecutors in relation to DPAs. While DPAs will give prosecutors the opportunity to craft appropriate sanctions and conditions, it is likely that the Court will retain its role as ultimate adjudicator of the public interest.

Image Credit

Jonathan Fisher writes recent PLC article on ‘Asse...
The views expressed in this article represent those of the author and not Bright Line Law.


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