U.S. judge imposes own monitor in ZTE plea deal

Traditionally, the Department of Justice has controlled who is named as an independent monitor in corporate criminal cases, either choosing one or holding a veto over whomever the company chose. In the ZTE case, no one suggests any hidden motives on the part of the judge, but it will be interesting to see if any other federal judges follow his lead in similar cases.

The DOJ and ZTE, a telecommunications company headquartered in Shenzhen, China, had struck the original plea deal in the complex criminal case on March 7, and it was signed by both parties. It included Attachment A, involving the appointment and duties of the independent corporate monitor for ZTE.

But U.S. District Judge Ed Kinkeade for the Northern District of Texas, decided to rewrite Attachment A imposing his own monitor. He then convinced both parties to accept his version and sign it before he approved the deal and sentenced ZTE on March 22 in his Dallas courtroom.

No one—not the judge, defendant lawyer Wendy Wysong, the federal prosecutors nor the new monitor, James M. Stanton—would discuss how the process transpired or how unusual it was.

The original attachment begins by giving ZTE Corp. 90 days from the March 22 court date to engage a monitor. It required ZTE to submit to the DOJ the names of three possible monitor candidates, while giving the DOJ the right to accept or reject any candidate.

But Kinkeade's version begins by naming Stanton, a Dallas civil and personal injury lawyer with experience as a special master in court cases as the independent monitor. It goes on to remove a reference to the monitor as “an independent third party” and instead refers to him as “a judicial adjunct.”

In several places in the document, Kinkeade substitutes the court's authority for the DOJ's. For example, a sentence that originally read that any dispute between the company and the monitor would be decided by the DOJ, was changed to say it would be decided by the court.

Throughout the document, when the monitor was required to report something to the company and to the DOJ, he added “and the court.” He said reports were to be filed to the court, with copies to the company and DOJ.

In a section describing the monitor's work plan for reviews, Kinkeade inserted this sentence: “The court will approve or disapprove the proposed work plan for each review.”

Another inserted sentence said either the company or DOJ “may inform the court of any issues concerning the monitorship at any time, and may request a hearing on those matters.”

And Kinkeade added: “All reports, submissions or other materials encompassed by this agreement will be filed under seal and all court proceedings will be conducted in camera.”

Britz, the attorney who has worked under a corporate monitor and with companies that have corporate monitors, said it is highly unusual to name a monitor who doesn't have an expertise or background in the subject area—in this case trade or international commerce.

The other “strange” thing about the monitor choice, Britz said, is “in large cases like this there is a sort of standing pool of people who do these kinds of monitorships. It is rare that someone comes out of left field.” He said he never heard of Stanton. Stanton, however, is known mainly in Dallas area legal circles, and has written several articles for the Texas Lawyer, an ALM publication.

Stanton, who did not return messages seeking comment, founded his own law firm in March 2013 after working in private practice. He also served less than two years as a judge in the 134th Judicial District Court in Dallas County, from early 2009 to late 2010.

His resume shows he has been appointed six times by state district judges to serve as a special master, arbitrator or “umpire” in civil cases. And Kinkeade appointed him once to serve as a special master in a medical products liability case.

In May 2013, he served on a panel with Kinkeade at the Harris Martin MDL Conference in Chicago. The panel's topic was “The Increasing Scope and Role of Special Masters.”

The Usual Protocol for Choosing Monitors

There is a protocol for selecting corporate monitors. It is outlined in the 2008 Morford Memo, authored by then-Acting U.S. Deputy Attorney General Craig Morford, and amended in 2010.

“The selection process must, at a minimum, be designed to: (1) select a highly qualified and respected person or entity based on suitability for the assignment and all of the circumstances; (2) avoid potential and actual conflicts of interests, and (3) otherwise instill public confidence by implementing the steps set forth in this principle,” according to the memo.

It goes on to describe options for selecting a monitor, such as allowing the corporation to select one with the DOJ's consent, or allowing the DOJ to choose the monitor. None of the options involves a judge.

The memo also calls for creation of an ad hoc DOJ committee to consider candidates, with final approval lying with the deputy attorney general.

But Kinkeade's revisions of the plea may not be a bad thing, according to Houston white-collar criminal defense attorney Ryan McConnell, who is a former federal prosecutor in Louisiana and Texas.

Conceding that he's never seen a judge impose a monitor before, McConnell said Kinkeade is well respected by the trial bar and probably chose someone he knew and trusted.

“The plea agreement does not seem to contemplate his involvement,” McConnell said. “But I assume they accepted [Kinkeade's revisions] rather than scuttle the deal.”

The lawyer also defended Kinkeade's involvement by explaining that the case was a guilty plea, and not a deferred or nonprosecution agreement, where the DOJ is in control.

“If it's a guilty plea, it's the judiciary who has the last word,” he explained.

Besides, McConnell said, instead of hiring a big law firm and a monitor with DOJ experience who could charge “an exorbitant amount of money,” Kinkeade chose a smaller firm and a civil lawyer.

“So it will probably end up working out better for the company financially,” McConnell said.

By Sue Reisinger, Corporate Counsel

The Texas judge that recently signed the plea deal in which ZTE Corp. admitted to a conspiracy to sell U.S. surveillance equipment to Iran took what appears to be an unprecedented step: He rewrote the plea agreement to name his own independent corporate monitor, and to substitute his court's authority for that of the U.S. Department of Justice in several instances.

“I've never seen this before,” veteran attorney Benjamin Britz of Hughes Hubbard & Reed in Washington D.C, whose practice focuses on anticorruption and internal investigations, said of the judge's actions.

“Where there is an agreed process between the company and the Justice Department for selection of a monitor—I've never seen it thrown out,” Britz said.

Traditionally, the Department of Justice has controlled who is named as an independent monitor in corporate criminal cases, either choosing one or holding a veto over whomever the company chose. In the ZTE case, no one suggests any hidden motives on the part of the judge, but it will be interesting to see if any other federal judges follow his lead in similar cases.

The DOJ and ZTE, a telecommunications company headquartered in Shenzhen, China, had struck the original plea deal in the complex criminal case on March 7, and it was signed by both parties. It included Attachment A, involving the appointment and duties of the independent corporate monitor for ZTE.

But U.S. District Judge Ed Kinkeade for the Northern District of Texas, decided to rewrite Attachment A imposing his own monitor. He then convinced both parties to accept his version and sign it before he approved the deal and sentenced ZTE on March 22 in his Dallas courtroom.

No one—not the judge, defendant lawyer Wendy Wysong, the federal prosecutors nor the new monitor, James M. Stanton—would discuss how the process transpired or how unusual it was.

The original attachment begins by giving ZTE Corp. 90 days from the March 22 court date to engage a monitor. It required ZTE to submit to the DOJ the names of three possible monitor candidates, while giving the DOJ the right to accept or reject any candidate.

But Kinkeade's version begins by naming Stanton, a Dallas civil and personal injury lawyer with experience as a special master in court cases as the independent monitor. It goes on to remove a reference to the monitor as “an independent third party” and instead refers to him as “a judicial adjunct.”

In several places in the document, Kinkeade substitutes the court's authority for the DOJ's. For example, a sentence that originally read that any dispute between the company and the monitor would be decided by the DOJ, was changed to say it would be decided by the court.

Throughout the document, when the monitor was required to report something to the company and to the DOJ, he added “and the court.” He said reports were to be filed to the court, with copies to the company and DOJ.

In a section describing the monitor's work plan for reviews, Kinkeade inserted this sentence: “The court will approve or disapprove the proposed work plan for each review.”

Another inserted sentence said either the company or DOJ “may inform the court of any issues concerning the monitorship at any time, and may request a hearing on those matters.”

And Kinkeade added: “All reports, submissions or other materials encompassed by this agreement will be filed under seal and all court proceedings will be conducted in camera.”

Britz, the attorney who has worked under a corporate monitor and with companies that have corporate monitors, said it is highly unusual to name a monitor who doesn't have an expertise or background in the subject area—in this case trade or international commerce.

The other “strange” thing about the monitor choice, Britz said, is “in large cases like this there is a sort of standing pool of people who do these kinds of monitorships. It is rare that someone comes out of left field.” He said he never heard of Stanton. Stanton, however, is known mainly in Dallas area legal circles, and has written several articles for the Texas Lawyer, an ALM publication.

Stanton, who did not return messages seeking comment, founded his own law firm in March 2013 after working in private practice. He also served less than two years as a judge in the 134th Judicial District Court in Dallas County, from early 2009 to late 2010.

His resume shows he has been appointed six times by state district judges to serve as a special master, arbitrator or “umpire” in civil cases. And Kinkeade appointed him once to serve as a special master in a medical products liability case.

In May 2013, he served on a panel with Kinkeade at the Harris Martin MDL Conference in Chicago. The panel's topic was “The Increasing Scope and Role of Special Masters.”

The Usual Protocol for Choosing Monitors

There is a protocol for selecting corporate monitors. It is outlined in the 2008 Morford Memo, authored by then-Acting U.S. Deputy Attorney General Craig Morford, and amended in 2010.

“The selection process must, at a minimum, be designed to: (1) select a highly qualified and respected person or entity based on suitability for the assignment and all of the circumstances; (2) avoid potential and actual conflicts of interests, and (3) otherwise instill public confidence by implementing the steps set forth in this principle,” according to the memo.

It goes on to describe options for selecting a monitor, such as allowing the corporation to select one with the DOJ's consent, or allowing the DOJ to choose the monitor. None of the options involves a judge.

The memo also calls for creation of an ad hoc DOJ committee to consider candidates, with final approval lying with the deputy attorney general.

But Kinkeade's revisions of the plea may not be a bad thing, according to Houston white-collar criminal defense attorney Ryan McConnell, who is a former federal prosecutor in Louisiana and Texas.

Conceding that he's never seen a judge impose a monitor before, McConnell said Kinkeade is well respected by the trial bar and probably chose someone he knew and trusted.

“The plea agreement does not seem to contemplate his involvement,” McConnell said. “But I assume they accepted [Kinkeade's revisions] rather than scuttle the deal.”

The lawyer also defended Kinkeade's involvement by explaining that the case was a guilty plea, and not a deferred or nonprosecution agreement, where the DOJ is in control.

“If it's a guilty plea, it's the judiciary who has the last word,” he explained.

Besides, McConnell said, instead of hiring a big law firm and a monitor with DOJ experience who could charge “an exorbitant amount of money,” Kinkeade chose a smaller firm and a civil lawyer.

“So it will probably end up working out better for the company financially,” McConnell said.