Overview
A recent ruling issued by Chief Judge Colleen McMahon of the Southern District of New York has brought renewed focus on the government's longstanding practice of using private law firms to help conduct its investigations.[1] In its opinion, the court sharply questioned the government's practice of "outsourcing its investigations into complex financial matters to the targets of those investigations." The opinion, which states that such a practice has "profound implications" and indicates that the court was "deeply troubled by this issue," will likely have a significant impact on how prosecutors and defense counsel approach investigations and cooperation going forward.
Background
Connolly and Black, two former employees of a large bank (the Bank), were convicted on conspiracy and wire fraud charges in connection with their manipulation of the London Interbank Offered Rate (LIBOR) on October 17, 2018.
Black moved to vacate his conviction and dismiss the indictment against him on the theory that his prosecution was predicated on, and fatally tainted by, statements he gave in interviews conducted by outside counsel for the Bank, who were essentially deputized government agents. Under Garrity v. New Jersey,[2] statements made by public employees under threat of termination of employment are involuntary and inadmissible in a criminal trial. This principle also applies where the actions of a private employer are "fairly attributable to the government."[3] Black contended that his statements during the course of an "internal" investigation were under threat of termination and fairly attributable to the government, thereby violating his Fifth Amendment rights against self-incrimination. He also argued that his compelled statements to outside counsel provided the DOJ with a detailed roadmap to help further investigate Black, and were used against him at trial in violation of the Supreme Court's decision in Kastigar v. United States.[4]
The court wholeheartedly agreed with Black that the actions of outside counsel were "fairly attributable" to the government and that Black's statements had been compelled under Garrity. However, the court nonetheless concluded that no Kastigar violation had occurred, because it found that the government had not made direct or indirect use of Black's compelled interview statements in dealing with cooperators or other witnesses, during the grand jury proceedings, or at trial, and that the government had carried its burden to show that evidence it used against Black was derived from sources wholly independent of Black's testimony.
Internal Investigation vs. "Internal" Investigation
In a strong rebuke of the government, the court held that the government had improperly "outsourced" its investigative responsibilities to the outside law firm. The investigation was prompted by a letter from the Commodity Futures Trading Commission (CFTC), requesting that the Bank "cooperate fully" by "voluntarily" engaging outside counsel to conduct a "full review" of its LIBOR practices. The court observed that the threat of indictment placed "substantial pressure" on the Bank to cooperate, and found that the CFTC's request was a "classic 'Godfather offer'—one that could not be refused." The CFTC shared with the DOJ the documents it received as part of the investigation, and outside counsel for the Bank "coordinated extensively" with the government agencies.
Many of the scenes described in the decision will look very familiar to defense counsel and to companies who are cooperating with a government investigation. Outside counsel not only conducted hundreds of interviews, reviewed hundreds of millions of documents, and listened to hundreds of thousands of hours of audio tapes during the course of the five-year investigation, but also "digested the vast information it collected, highlighted the most important nuggets [for the government], and shared a blueprint for what prosecutors should expect" during the course of hundreds of phone calls and dozens of in-person meetings with government officials.
The court also found that the government "gave considerable direction" to outside counsel "about what to do and how to do it," including which employees to interview, and how to interview them. For example, the government directed an outside lawyer to "approach [an employee] interview as if he were a prosecutor." The court observed that outside counsel first interviewed Black himself "at the behest" of the government.
Moreover, the court noted the almost complete absence of any independent investigative activities by the government during the first three years of the investigation. In particular, it noted that the government did not interview anyone at the Bank until three and a half years into the investigation, and only after outside counsel had first interviewed those witnesses and debriefed the government. Indeed, the court concluded the government had not "reviewed anything that had not first passed through the maw of [outside counsel's] five-year, $10 million investigative machine and been fully digested for the government by the target of the investigation." The court concluded the Bank's outside counsel "did everything that the government could, should, and would have done had the government been doing its own work."
In finding that the actions of outside counsel for the Bank "were de facto the government for Garrity purposes," it noted that true "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."
Takeaways
As the court noted, and as anyone who has been through a government investigation well knows, the DOJ and other regulatory agencies commonly make many demands from cooperating companies, including asking for specific interviews, types of documents, or other evidence. This ruling will likely change the way both the DOJ and companies approach these situations.
The court's opinion is a warning to the government not to direct the work of defense counsel. The DOJ often relies on defense counsel to conduct interviews and review documents and then synthesize this information for reports to the government. The DOJ will likely have to take a more passive role to leverage the independent work of defense counsel without risking that it will taint that evidence.
The DOJ also will likely have to begin its own investigative activities earlier, and conduct more of the investigation itself, so that it does not appear to have "outsourced" the investigation to defense counsel and relied solely on their efforts for evidence. This may lead to parallel investigations, which could cause some difficulties as companies work to cooperate with the government and continue their business operations while witnesses are being interviewed by multiple sources.
This ruling provides further ammunition for individual defendants to challenge the government's use (directly or indirectly) of any statements made to corporate counsel during an internal investigation, and to demand that any such statements be disclosed under Brady v. Maryland.[5]
Connolly also provides corporate counsel with a stronger position from which to negotiate the scope of an investigation, as particularly burdensome requests could be viewed as the government attempting to direct the company's internal investigation, the consequences of which could be disastrous for potential future prosecutions of employees of those companies. It will be interesting to see how cooperating companies and the DOJ attempt to walk the line between "full cooperation" and "outsourcing" the investigation altogether.
[1] United States v. Connolly, No. 1:16-CR-00370 (CM), at 2 (S.D.N.Y. May 2, 2019).
[2] Garrity v. New Jersey, 385 U.S. 493 (1967).
[3] United States v. Stein, 541 F.3d 130, 152 n.11 (2d Cir. 2008).
[4] Kastigar v. United States, 406 U.S. 441 (1972).
[5] Brady v. Maryland, 373 U.S. 83 (1963).
