United States: Inter-Agency Cooperation Not So Compelling? The Implications Of US V Allen

As cross-border enforcement investigations become more prevalent, the decision by the United States Court of Appeal for the Second Circuit in US v Allen, on 19 July last year, to reverse two convictions related to LIBOR manipulation, due to the use of compelled testimony obtained by a foreign agency, raises serious questions regarding inter-agency co-operation going forward.

The Second Circuit held that Fifth Amendment's right against self-incrimination in US criminal proceedings will apply when a foreign power has obtained the compelled testimony in question and that a high burden is placed upon the US government agency in question to prove that such testimony has not been tainted.

In November 2017, the Second Circuit denied the US government's petition for panel rehearing, or alternatively "rehearing en banc". This decision is now a binding precedent in the Second Circuit.

Use of Compelled Testimony

The Fifth Amendment of the US Constitution prohibits the use of a defendant's compelled testimony in criminal proceedings against them. However, as established in Kastigar v United States 406 U.S 441 (1972), the government can compel a witness to testify only if "direct use" and "derivative use" immunity is granted.1

Investigations and Convictions

In November 2015, Anthony Allen and Anthony Conti, employees of Cooperative Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank") were convicted in the US District Court for the Southern District of New York of conspiracy to commit wire fraud and bank fraud, and several counts of wire fraud in relation to the manipulation of the benchmark rate LIBOR.

Both Messrs Allen and Conti, along with other Rabobank employees, were investigated in both the US and UK for their involvement in the setting of LIBOR. During 2013, the Financial Conduct Authority ("FCA") conducted interviews with the various individuals in circumstances where a refusal to testify risked severe penalties under section 165 of the Financial Services and Markets Act 2000. The individuals were granted direct use immunity.

During the LIBOR investigation the Department of Justice implemented safeguards to ensure that the investigation being conducted by the FCA did not taint its own investigation. For example, each body conducting its own interviews with the DoJ interviewing individuals prior to the FCA.

Following the conclusion of the interviews the FCA brought an action against one Rabobank employee, Paul Robson, although this was subsequently stayed for unknown reasons to allow the Department of Justice ("DoJ") to pursue its action. In line with the FCA's procedures, Mr Robson was provided with the evidence against him, which included the compelled testimony of Messer Allen and Conti, and allowed to review that evidence.

During April 2014, Robson was charged with wire fraud in the US. Shortly after the indictment, Mr Robson pleaded guilty and entered into a co-operation agreement with the DoJ. In October 2014, following new information obtained from Robson and presented by the FBI, Messrs Allen and Conti were charged with conspiracy to commit wire fraud and bank fraud along with several counts of wire fraud.

Despite attempts by Messrs Allen and Conti to either dismiss the charges or Mr Robson's evidence from the trial on the grounds that his testimony was based upon his review of their compelled evidence in the FCA investigation, the District Court decided to address such issues following the conclusion of the trial. Mr Robson testified at their trial and Messrs Allen and Conti were found guilty of a total of nineteen charges.

District Court Hearing

A two-day hearing took place in December 2015. It came to light during this hearing that, while reviewing the evidence provided to Mr Robson by the FCA, he had also annotated and made notes on the compelled testimonies of Messrs Allen and Conti. The District Court found that Mr Robson's review of the compelled testimony "did not taint the evidence he later provided, because the Government has shown an independent source for such evidence" citing Mr Robson's personal experience and observations.

Second Circuit Appeal

The appeal to the Second Circuit focused on the issue of "whether testimony given by an individual involuntarily under the legal compulsion of a foreign power may be used against the individual in a criminal case in an American court".

In reversing the District Court's decision, the Court held that:

  • the Fifth Amendment's prohibition on compelled testimony in US criminal proceedings applies even when the testimony has been compelled by a foreign power;
  • in situations where the government makes use of a witness who has been exposed to a defendant's compelled testimony, the burden is placed upon the US government to prove that the compelled testimony "did not shape, alter, or affect the evidence used by the government" as required under Kastigar. It is not sufficient for a witness to issue a denial that their testimony has been tainted in situations where a witness "materially altered" their testimony after being "substantially exposed" to the defendant's compelled testimony.

As such, the Court considered that the government had not discharged its burden and the compelled evidence of Messrs Allen and Conti had been used against them in the criminal proceedings in violation of the Fifth Amendment's right against self-incrimination.

It is common practice for enforcement agencies to obtain testimony through compelled testimony. The Second Circuit was at pains to point out that it was not prescribing how agencies, in the UK or elsewhere, should conduct their investigations.

Decision to Dismiss Petition

Given the potential impact of the Second Circuit's July 2017 decision, the US government filed a petition for the panel to revisit its decision on the basis that it impaired its ability to investigate and pursue convictions. Notably, it highlighted that certain cross-border investigations had not been pursued in light of the Second Circuit's decision.

In November 2017, the Second Circuit denied the petition. There was debate as to whether the US government would take this issue to the Supreme Court. However, according to reports, following two extensions to the deadline to file a request for the Supreme Court to review the decision by 6 April 2018, no request had been filed. Subject to a request for the court to consider a late petition, the decision remains a binding precedent.

Commentary

This decision will have a significant impact upon the how US government agencies interact with their foreign counterparts in cross-border enforcement investigations, as highlighted in its recent petition. As cross-border enforcement investigations become increasingly commonplace in our regulatory landscape, US government agencies will see heightened focus on co-ordination of parallel investigations, arguably more so when the US is looking to prosecute non-US conduct.

As noted by the Second Circuit, despite the fact that the DoJ had implemented procedures to ensure that evidence was not tainted by the parallel investigations, these safeguards were not sufficient in view of the way in which the testimony came before the Court in this case. In light of Allen, regulatory agencies will need to adapt and may seek to collaborate with foreign enforcement agencies at an earlier stage of investigations and agree as to how to proceed with its respective investigations with potential impact on the timing and direction of the investigation.

This decision will provide comfort to individuals involved in cross-border enforcement actions who are compelled to testify that such testimony, either the statements themselves or information derived from such statements, will not be used against them in US criminal proceedings. The decision raises broader questions about the processes that will be used to obtain information in cases with the potential for cross-border regulatory action going forward. It remains to be seen whether the use by regulatory agencies, such as the FCA and SFO, of their wide-ranging powers to interview under powers of compulsion is shaped by the decision.

The impact of this decision is already being seen in the Courts. In the LIBOR manipulation case of US v Connolly, the defendants, Messrs Connolly and Black who are former Deutsche Bank traders, have contested the use of compelled testimony obtained by the FCA during an interview with Mr Black. The hearing is scheduled to take place at the end of April 2018.

The LIBOR convictions continue to gain headlines in the media. The overturning of the convictions of the two former Rabobank employees comes as the Criminal Cases Review Commission in the UK has announced that it is reviewing the convictions of former UBS employee Tom Hayes (serving an 11 year sentence) and former Barclays employee Jonathan Mathew (serving a 4 year sentence). Another individual, Alex Pabon, a former Barclays trader, convicted in the LIBOR manipulation actions had his appeal dismissed by the Court of Appeal in March 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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