Executive summary

In an important ruling for companies subject to independent compliance monitorships pursuant to deferred prosecution agreements (DPAs), the US Court of Appeals for the Second Circuit held yesterday that the annual report of HSBC’s appointed monitor is not subject to public disclosure. This is an important development for three key reasons:

  • First, maintaining the confidentiality of monitor reports will help facilitate more open and cooperative relationships between monitors and the companies they oversee, which should boost the effectiveness of monitorships.
  • Second, if monitor reports were to be made public, criminals might try to use the information in them to exploit vulnerabilities in banks or companies’ antimoney laundering, antibribery, sanctions, or terrorist financing compliance programs.
  • Third, the Court’s decision provides companies and the government better reliability that the terms they negotiate in DPAs will be respected by US courts. Such predictability is even more critical in a cross-border context when a company is trying to resolve its exposure in multiple jurisdictions as part of a global resolution.

Background

In December 2012, HSBC entered into a five-year DPA with the US Department of Justice (DOJ) relating to alleged violations of US antimoney laundering and sanctions laws. HSBC agreed to the appointment of an independent monitor to assess the Bank’s ongoing compliance with US law and the terms of the DPA. The DPA was filed publicly in the US District Court for the Eastern District of New York, and was subject to limited judicial review. The federal judge who oversaw the case at the time determined that he had ongoing supervisory authority over the DPA and ordered DOJ to file the monitor’s annual report with the court, although under seal.

In November 2015, a litigant who had filed a complaint against HSBC wrote the judge to suggest that the report might be relevant to his lawsuit. The judge construed the letter as a motion to unseal the report. Both HSBC and the government objected, but the judge ordered that the report be unsealed, subject to certain redactions, finding that the report was a “judicial document” relevant to the court’s supervision of the DPA and that the public therefore had a First Amendment right to see it.

The Second Circuit’s decision

The District Judge stayed his order pending appellate review, and DOJ and HSBC immediately appealed. The Second Circuit reversed on three principal grounds:

  1. The district court violated separation of powers principles under Article II, Section 3 of the Constitution. The appeals court ruled that DOJ (as part of the executive branch) is entitled to a presumption of regularity in entering into and executing DPAs and that, in the absence of a showing of impropriety, the judiciary has no supervisory authority over the implementation of a DPA. The Court cited with approval a recent District of Columbia Circuit Court decision, which similarly held that “although charges remain pending on the court’s docket under a DPA, the court plays no role in monitoring the defendant’s compliance with the DPA’s conditions.” Thus, the Second Circuit concluded, a monitor report is not relevant to the performance of the court’s limited judicial function with respect to DPAs, and therefore is not a judicial document subject to public disclosure.
  2. The Speedy Trial Act does not authorize district courts to evaluate the substantive merits of a DPA.
  3. The possibility that a monitor’s report could be relevant to a future judicial proceeding, e.g., in adjudicating a claim of bad faith by the government, does not render the report a judicial document today.

In a separate opinion, Judge Pooler concurred, but called on Congress to consider new legislation to provide for greater judicial oversight of DPAs.

Conclusion

Predictability underlies the key takeaways from the Second Circuit’s decision.

First, a company that enters into a DPA that imposes an independent monitor can have some confidence that it can be transparent with its monitor without undue concern that the unexpected unsealing of the monitor’s reports will end up punishing the company for its openness. Similarly, companies already under monitorships can rest a little easier that their cooperation with their monitors will not be exposed to public inspection.

Second, district courts should not second guess actions that a monitor, a company, and the government agree are reasonable and appropriate in the context of a monitorship.