U.S. v. Connolly: “Outsourcing” a Government Investigation — And How to Avoid It

by David B. Massey, James Q. Walker, Lee S. Richards III, Shari A. Brandt, Audrey L. Ingram, Daniel C. Zinman, Arthur Greenspan, and Rachel S. Mechanic

Summary

On May 2, in a widely-watched case, the U.S. District Court for the Southern District of New York found that the government “outsourced” a criminal LIBOR investigation to Deutsche Bank and its outside counsel, and thereby violated defendant Gavin Black’s Fifth Amendment rights when outside counsel interviewed the defendant under threat of termination from his employment.  United States v. Connolly, 16 Cr. 370 (CM), Memorandum Decision and Order Denying Defendant Gavin Black’s Motion for Kastigar Relief, ECF Document 432, slip op. at 19, 29 (May 2, 2019).  But because the DOJ did not use the defendant’s compelled statements at trial and the investigation was not otherwise tainted, the Court found no Kastigar violation and held that, even if there was, any error was harmless.  Connolly, slip op. at 40-41, 43-44.  

The Court’s exposition of the “outsourcing” issue has broad implications for internal investigations and corporate cooperation, but it need not end internal investigations or corporate cooperation as we know them.  By observing some basic precautions as described below, Government enforcement lawyers and corporate defense counsel can avoid similar rulings in the future.  At every stage of an internal investigation, companies should confirm and document that their major decisions are taken to satisfy their obligations to their shareholders to police and remediate their own activity, rather than to satisfy demands made by government lawyers.  The Government, for its part, should avoid instructing companies on the particulars of their internal investigations and not wait for the results of those investigations before beginning their own.  If both sides proceed in this way, internal investigations and corporate cooperation can continue  substantially in the way that they have for two decades. 

Background

In 2010, the CFTC expanded its LIBOR manipulation investigation, initially focused on Barclays and UBS, to Deutsche Bank.  The CFTC directed Deutsche Bank in writing to cooperate by retaining outside counsel to conduct “‘a full review of Deutsche Bank’s U.S. Dollar LIBOR reporting for the relevant time period, and report on an on-going basis the results of that review.’”  Id. at 3 (quoting CFTC letter of April 19, 2010).  The Paul Weiss partner who headed the bank’s internal investigation testified that there was nothing “voluntary” about Deutsche Bank’s decision to investigate and cooperate; the only choice was the “level of cooperation” the bank would provide.  Id. at 4.  Not surprisingly, Deutsche Bank complied with the CFTC’s “demand[]” and “coordinated extensively” with the CFTC, SEC and DOJ, reported to the government regularly on the progress of its investigation, and took “considerable direction … about what to do and how to do it.”  Id. at 4. 

Specifically, pursuant to instructions from the CFTC to interview certain employees, outside counsel interviewed Black three times without counsel or an opportunity for him to prepare.  Id. at 6-8.  Before interviewing Black for a fourth time, Deutsche Bank requested permission of the CFTC.  Id. at 13, 23.  The CFTC directed an outside lawyer for Deutsche Bank to conduct one employee interview “as if he were a prosecutor.”  Id. at 7, 23.  Black was required by Deutsche Bank’s policy, standard among public companies, to sit for the interviews or find other employment.  Id. at 6-7.  During his interviews, Black was given proper Upjohn warnings, and he denied wrongdoing.  Id. at 8, 9.  Outside counsel later met with the government to present an exhaustive summary or “download” of Black’s statements, among others.  Id. at 12.  Outside counsel also “shared a blueprint for what prosecutors should expect should they finally interview Black on their own” by advising them how much detail Black recalled from the documents and how he answered questions.  Id. at 23, 12. 

The government appears to have waited to receive outside counsel’s witness interview “downloads” before it began its own interviews.  Id. at 17-18.  When outside counsel submitted a detailed white paper summarizing its findings, it noted that much, if not most, of the information to be used in charging decisions will have come from the bank’s identification of key communications for the government.  Id. at 14.  The DOJ eventually indicted Black in 2016 for conspiracy and nine counts of wire fraud.  At trial in 2018, he was convicted on two counts.  During the  trial, to avoid a likely adverse ruling, the government opted not to offer evidence of Black’s statements to outside counsel. 

The Court’s Decision

Based on these and other facts, the Court found that the government “outsourced its investigation to Deutsche Bank and its lawyers.”  Id. at 19.  Rather than “conduct a substantive parallel investigation to the ‘internal’ investigation,” the government “simply gave direction to Deutsche Bank/Paul Weiss” and “save[d] itself the trouble of doing its own work.”  Id. at 18.  The Court distinguished an “internal” investigation – one commissioned by a board of directors – from the investigation conducted by Paul Weiss, observing that, despite likely keeping Deutsche Bank’s board abreast of investigation developments, “by no standard known to this Court can the investigation that Paul Weiss conducted be accurately characterized as an ‘internal’ investigation.”  Id. at 18 n.5. 

The Court found that, because the government’s directives included an instruction “to interview Gavin Black” and Black was “compelled, upon pain of losing his job,” to submit to the interview, outside counsel’s interviews of Black were “fairly attributable to the Government.”  Id. at 23, 21, 29; see United States v. Garrity, 385 U.S. 493, 497 (1967) (holding statements obtained from police officers under threat of termination of employment were involuntary and therefore inadmissible at trial); see also U.S. v. Stein, 541 F.3d 130, 152 n.11 (2d Cir. 2008) (extending Garrity to private conduct where the actions of a private employer are “fairly attributable to the government”).

In short, Deutsche Bank, through its external counsel, did “everything that the Government could, should, and would have done had the Government been doing its own work,” leading the Court to conclude that, “rather than conduct its own investigation, the Government outsourced the important developmental stage of its investigation to Deutsche Bank . . . and then built its own ‘investigation’ into specific employees, such as Gavin Black, on a very firm foundation constructed for it by the Bank and its lawyers.”  Id. at 23-24.

The Court found, however, that although Black’s interview was unconstitutionally compelled in violation of Garrity, Black was not entitled to relief under United States v. Kastigar, 406 U.S. 441, 453 (1972) (prohibiting direct and indirect use of compelled statements of a defendant) because Black’s statements were not used at trial directly or indirectly, and otherwise did not taint the government’s investigation.  Id. at 40-41.  Indeed, the Court noted that the government identified alternative sources other than Black for every line of grand jury testimony.  Id. at 41. 

In any event, the Court found that, even if the government had used Black’s compelled testimony against him in violation of Kastigar, any error was harmless because of the “overwhelming” strength of the evidence against Black that derived from independent sources.  Id. at 44. 

Implications

As the Court noted in its opinion, its ruling will have “implications that extend well beyond this particular case.”  Id. at 29.  Government enforcement lawyers and white collar defense practitioners have been watching and discussing this case and another one in which similar arguments were made, United States v. Blumberg, 14 Cr. 458 (D.N.J.).  In March 2019, as it became clear how seriously the Court was taking the argument’s presented by Black’s counsel, the DOJ reacted by revising its FCPA Corporate Enforcement Policy to say that “the Department will not take any steps to affirmatively direct a company’s internal investigation efforts.”  DOJ, Justice Manual, Section 9-47.120 n.1.

The government and the defense bar should apply the lessons of the Connolly/Black case to internal investigations and corporate cooperation going forward.  Assuming that they do, the basic mechanics of internal investigations and corporate cooperation can continue substantially as they have for the past two decades.  

First and foremost, companies should document the fidudiary-duty-based reasons for commencing an internal investigation – namely, to learn the facts so that it can remediate misconduct for the benefit of shareholders, not for the benefit of the government.  Many public companies now create internal memoranda before beginning internal investigations.  Such memoranda should describe the events that prompted the corporation to consider the need for an investigation and the reasons for starting one.  The existence of a government investigation can be a trigger but should not be the sole reason to begin an internal investigation. 

After the board or other competent authority decides to start an internal investigation, the company should document the scope and priorities of the internal investigation in the form of an action plan describing the steps needed to learn the facts necessary to remediate.  The action plan should be kept separate from any list of requests generated by government lawyers, even if there is overlap in action items.  The action plan should evolve over time and include an list of desired interviewees and categories of documents for review.   

Companies should separately document any decision to cooperate with the government.  The decision whether to cooperate often depends on the initial findings of the internal investigation.  This creates a natural separation between the decision to investigate and the decision to cooperate, and the reasons for each.  If a board decides during the same meeting to launch an internal investigation and cooperate with the authorities, the board resolution and underlying documentation should reflect a separate fiduciary-duty-based analysis of each decision.

Once a company has decided to cooperate, needless to say, the government should refrain from directing counsel to interview particular witnesses and directing how to interview them.  When witnesses are interviewed, proper Upjohn warnings should of course be given, and steps should be taken to avoid the appearance of coercion.  The number of lawyers and compliance personnel conducting the interview should not be excessive.  Companies should consider offering independent counsel to employees at an early stage and sharing relevant documents with their counsel so that they can adequately prepare. 

If a current employee declines to be interviewed and the company decides to fire him or her, the company should make a written record that the reason for the termination is the employee’s failure to comply with the company’s rule requiring employees to cooperate with internal investigations.  (Companies that have only an unwritten policy or practice in this regard should adopt a written rule.)  Similarly, if employee misconduct is discovered and discipline is warranted, the company should document that it is imposing punishment based on its own proportionality assessment. 

And when the company touts this employee discipline and other remediation to the government in a bid for a favorable corporate resolution, it should remind the government that it took remedial steps for the benefit of shareholders and not for the benefit of the government.  Deferred prosecution agreements that describe a company’s cooperation efforts should mention the independent nature of the company’s internal investigation.

If these precautions are taken, the basic elements of internal investigations and corporate cooperation can continue unabated.  Outside counsel can continue to respond to subpoenas, engage in a healthy dialogue with the government, and make presentations describing all relevant facts that they have learned in their internal investigations.  Government lawyers can ask questions about the underlying facts learned and the progress of the independent investigation without directing the defense.  Nothing should prevent defense counsel from telling the government which witnesses it plans to interview and asking the government if it would prefer to have the first opportunity to interview them.  Although the Court criticized this practice in Connolly, it did so in the context of an investigation that was otherwise directed by the Government.  Where internal investigations are sufficiently independent, it should be permissible for companies to defer to a request from the government to “refrain from taking a specific action for a limited period of time,” as contemplated by DOJ’s March 2019 update to the FCPA Corporate Enforcement Policy (Justice Manual Section 9-47.120 n.1), without running afoul of Connolly.

David B. Massey, James Q. Walker, Lee S. Richards III, Shari A. Brandt, Audrey L. Ingram, Daniel C. Zinman, and Arthur Greenspan, are partners and Rachel S. Mechanic is an associate at Richards Kibbe & Orbe LLP.

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