Deferred Prosecution Agreements Increase Exposure To Civil Liability

Businesses facing the threat of indictment have become increasingly willing to enter deferred prosecution agreements with the government. In a deferred prosecution agreement, a business entity agrees to admit its wrongdoing and enact reform policies in exchange for a promise by the Justice Department not to seek an indictment as long as the business lives up to its agreement.

Though these agreements reduce the risk of criminal liability, two recent decisions from New York’s Commercial Division indicate how deferred prosecution agreements can increase a firm’s exposure to civil liability. In Shalam v. KPMG LLP, No. 112732/05, 2006 N.Y. Misc. LEXIS 2380 (Sup. Ct. Sept. 8, 2006) and Williams v. Sidley Austin Brown & Wood, L.L.P., No. 60080/05, 2006 N.Y. Misc. LEXIS 2581 (Sup. Ct. Sept. 22, 2006), plaintiffs alleged that accounting firm KPMG colluded with the law firm Sidley Austin Brown & Wood, and others, to dupe wealthy investors into participating in tax shelter transactions that