In a recent decision that could have critical implications for corporate internal investigations conducted pursuant to a government agency's request, the Southern District of New York expressed concern with the government's "routine[ ] outsourcing" of investigations to the targets of those investigations seeking cooperation credit. The Court's opinion in United States v. Connolly et al., No. 1:16-cr-00370-CM, slip op., ECF No. 432 (S.D.N.Y. May 2, 2019) noted the corporate target's "uniquely coercive position" over its employees, who may also be potential targets of the investigation. Going forward, Connolly has the potential to profoundly affect the structure and scope of cooperation agreements between the government and the corporate targets of criminal investigations.
The case arises out of a lengthy and complex investigation initiated by the SEC and then the CFTC and the DOJ, into allegations that Deutsche Bank was illegally manipulating the London Inter-bank Offered Rate (LIBOR). In 2010, upon receiving a subpoena from the SEC, Deutsche Bank hired external counsel to respond to the SEC's inquiry. The CFTC then also sent a letter to Deutsche Bank informing the bank that it was looking into LIBOR manipulation at the bank. The CFTC letter "request[ed]" that Deutsche Bank, through "external counsel[,]" conduct an investigation into the matter and "report on an on-going basis the results of that review" to the CFTC. According to the Court, Deutsche Bank was facing "ruin," and therefore, the government's request that the bank conduct a "voluntary investigation" "was a classic 'Godfather offer'—one that could not be refused."
External counsel conducted an investigation, during which they collected and reviewed documents and audio files, and completed hundreds of interviews of Deutsche Bank employees. Throughout the course of its investigation, Deutsche Bank, through external counsel, reported on a regular basis to the government the results of the employee interviews and pointed the government to key documents that the bank collected and produced. Ultimately, Deutsche Bank entered into a deferred prosecution agreement in which the government extolled the benefits of the cooperation the bank provided.
As part of that cooperation, external counsel submitted a "white paper" to the government, summarizing its investigation and outlining the case against the bank and various employees. One of those employees, Gavin Black, was charged with LIBOR manipulation by the U.S. Attorney's Office for the Southern District of New York. External counsel interviewed Black four times during its investigation. After he was convicted, Black filed a motion—called a Kastigar motion—to vacate his conviction because, he argued, his interview statements to external counsel were "fairly attributable" to the government and "compelled," which violated his Fifth Amendment right against self-incrimination under Garrity v. New Jersey, 385 U.S. 493 (1967). Under Kastigar, the government has the burden of proving affirmatively that evidence proposed to be used is derived from a legitimate source, wholly independent of the compelled testimony.
In a 59-page opinion, the Court determined that the government had decided to "save itself the trouble of doing its own work," which "deeply troubled" the Court because Deutsche Bank, through external counsel, was uniquely able to coerce incriminating statements from Black. Indeed, the partner in charge of the investigation told the Court that Deutsche Bank employees had two choices: either cooperate with the investigation or find new employment. Although it declined to hold a hearing, the Court stated on the record before it that it would conclude that the investigation was attributable to the government and that Black's interview statements were compelled under the threat of termination.
A "critically important issue" for the Court was that the government did not appear to be performing its own investigation. Instead, according to the Court, the government was relying on Deutsche Bank's external counsel to do "everything the government could, should, and would have done had the government been doing its own work." The Court expressly stated that it was not persuaded by the government's interest in outsourcing its investigations to conserve resources, noting that "[t]his is a court of law, not a court of policy." Ultimately, however, the Court concluded that Black's Kastigar rights were not violated because his compelled statements were not meaningfully used by the government in its case.
This decision could impact corporate internal investigations going forward. Where companies seek to cooperate with the government, they often require employees to submit to interviews as a condition of continued employment. However, companies subject to criminal investigation should be mindful of the potential pitfalls if they fail to maintain distance and ensure a sufficient record showing independence of their internal investigations. If other district or appellate courts adopt the reasoning in the Connolly opinion, corporate employees charged with criminal offenses could mount Kastigar challenges to their employer's decision to share the details of its internal investigation for purposes of securing cooperation credit with the government.
When corporations receive requests for documents and information from regulatory or prosecutorial agencies, it is often in their interest to cooperate. A core piece of that cooperation involves interviewing employees whose conduct may be at issue. This is important both from the corporation's perspective and from the government's—both entities need to determine to what extent an employee was operating on his/her own accord and whether there was the proper "tone at the top."
In sum, the Connolly case may illustrate a growing concern among the judiciary about the implications of government agencies outsourcing "internal" investigations to the corporate targets of those investigations. As the Court noted, it "place[d] the word 'internal' in quotation marks, because internal investigations are commissioned by boards of directors, with the results reported to boards of directors—not commissioned by the government with regular reports to the government." Corporations and outside counsel—and the government—should be mindful of this distinction and its implications going forward.
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