United States: Judge Rebukes Government For Outsourcing Internal Investigation Of LIBOR Rigging Scheme

On May 2, 2019, Judge Colleen McMahon of the Southern District of New York ruled that the government effectively outsourced a portion of its ongoing investigation of LIBOR manipulation at one financial institution (the Bank) to that Bank and its legal counsel, implicating constitutional protections, such as the Fifth Amendment right against self-incrimination. In its rebuke of the government, the court held that the absence of any meaningful investigation by the U.S. Department of Justice (DOJ) and other federal agencies effectively federalized an internal probe at the financial institution, which made the actions of the Bank and its counsel, the highly respected firm of Paul Weiss Rifkind Wharton & Garrison LLP (Paul Weiss), “fairly attributable” to the government. This finding is paramount because when third parties act as agents or arms of the government, the same rights and protections attach to the third parties’ conduct, and the result may be the exclusion of evidence and dismissal of indictments. Since the type of internal investigation outlined by the opinion appears, at least on the surface, to be similar to many internal probes instituted after the government opens a matter, it could have broader implications for how such internal investigations, being conducted at the same time that the government is probing a matter, should be handled moving forward.

Background

In May 2016, the DOJ filed an indictment alleging Gavin Campbell Black and Matthew Connolly, former derivatives product traders at the Bank, were part of a scheme to cause the Bank to submit false and fraudulent USD LIBOR submissions to the British Bankers’ Association (BBA). Specifically, Black and Connolly, along with others, attempted to manipulate the benchmark interest rates referenced by derivative products to their advantage by making false and fraudulent USD LIBOR submissions to the BBA for inclusion in the calculation of USD LIBOR.1The scheme caused material misrepresentations to be made to the Banks’ counterparties, who relied on these statements to their detriment.2Following an internal investigation, the Bank entered into a deferred prosecution agreement, agreeing to pay $775 million in penalties to the DOJ.3

Black and Connolly were convicted on October 17, 2018. Black subsequently filed a motion to vacate his conviction and dismiss the indictment under United States v. Kastigar,4on the grounds that statements he made to the Bank’s counsel, Paul Weiss, were both “fairly attributable” to the government and “compelled” in violation of his Fifth Amendment right against self-incrimination.

The Government’s Purported Investigation

On April 19, 2010, the U.S. Commodity Futures Trading Commission (CFTC) sent a letter to the Bank’s general counsel stating that it intended to look into whether the Bank submitted false or misleading LIBOR reports.5The CFTC advised the Bank that it “expect[ed]” the Bank to “cooperate fully” with its investigation, and explained that such cooperation could include the engagement of external counsel.6The Bank expanded its engagement of law firm Paul Weiss to conduct the investigation requested by the CFTC.7Over the next five years, the Bank and counsel coordinated extensively with three government agencies – the Securities and Exchange Commission (SEC), CFTC and DOJ – which were also investigating possible LIBOR manipulation.8

In November 2010, at the direction of the government, the Bank’s outside lawyers interviewed Black.9Black, as a current employee, did not have discretion to refuse to talk to the investigative team because the Bank’s employee policy provides that employees “must fully cooperate” with the handling of internal investigations.10Although the policy did not provide for termination if employees did not comply, Black understood that he had no choice but to meet with the attorneys.11

Between 2010 and 2012, Black met with these attorneys three times.12Although Black was given standard Upjohn Warnings,13Black was not represented by counsel for two of the three interviews14and was not provided with information in advance of the interviews to enable him to prepare for the interviews.15The government, to include the agencies, never interviewed Black.

The Government’s Coordination With Deutsche Bank and Its Legal Counsel

The government and Paul Weiss discussed Black throughout the course of the Bank’s internal investigation. In October 2012, the Bank’s counsel provided the CFTC with “interview summaries” of the interviews it conducted – including the interview of Black – which were then forwarded to the DOJ.16In December 2012, the DOJ met with the Bank’s attorneys to further discuss the investigation, including Black.17According to Black’s attorneys, the government ultimately used this information to question Black during his proffer session, which took place in October 2013 – long after the internal interview of Black had been relayed to the government.18

The Bank and its counsel did not submit its findings until January 2015, when it laid out a road map for a case against the Bank and its employees.19This road map provided extensive overviews of the Bank’s cooperation with the government, including nearly 200 interviews of more than 50 Bank employees, a review of over 100 million documents, and hundreds of thousands of hours of audiotapes.20It was the largest and most expensive internal investigation ever undertaken in the history of the Bank.21

Decision on Black’s Motion: the Garrity Analysis

In the Fall of 2018, Judge McMahon, who oversaw the trial against Black and Connolly, held a hearing outside of the jury’s presence to consider if the statements Black gave to counsel conducting the internal investigation could be used against him at trial.22At the hearing, the judge signaled there was “highly persuasive evidence” concerning the government’s role in an internal investigation of the Bank.23She further opined that it appeared “the CFTC gave Paul Weiss its marching orders,” which created problems for the government “on the state action question.”24

In deciding whether Black’s statements were coerced, the court analyzed Garrity v. New Jersey, in which the U.S. Supreme Court found that statements obtained from police officers and other public employees under threat of termination are not admissible against them in a criminal trial.25The Garrity rule also applies to situations involving a private employer when its actions are fairly attributable to the government. Private conduct is attributed to the government when “there is a sufficiently close nexus between the state and the challenged action.”26

In her May 2, 2019, ruling, Judge McMahon found there was “no question” that Black was compelled to sit for several interviews with Bank counsel, given his job security depended on his cooperation.27She also found Black’s interviews with counsel were not just “fairly attributable” to the prosecutors at the DOJ – they seemed to be government engineered.28Specifically, Judge McMahon noted that the federal agencies investigating the purported scheme “gave considerable direction to the investigating Paul Weiss attorneys, both about what to do and about how to do it.”29This included instruction on whom to interview and the manner in which to conduct the interview. For example, the government directed a Bank-retained attorney to “approach [an employee] interview as if he were a prosecutor.”30With respect to Black’s interview, the court found that, at the very least, the Bank’s “first interview of Black was conducted at the behest of the government.”31

The judge also found that the coordination with the government was extensive and included three different regulatory and enforcement bodies – the SEC, CFTC and DOJ – each of which was investigating the LIBOR scheme. Private counsel’s interactions with these three agencies included 230 phone calls and 30 in-person meetings.32The law firm also provided summaries of each of its interviews to the government, and reported on these interviews on a weekly basis.33The summaries consisted of facts regarding Black’s interviews, including a subjective finding that Black was generally unhelpful.34

Importantly, the judge noted that the government did not engage in any investigative effort on its own, and did nothing to refute Black’s claims that the financial institution and its counsel’s actions were fairly attributable to the government. Ultimately, she concluded that they “did everything that the Government could, should, and would have done had the Government been doing its own work.” Judge McMahon noted this “was no ordinary ‘outside’ investigation,” and that there is little evidence the government conducted its own independent investigation.35

Although she reprimanded the government for its failure to conduct an independent investigation, the judge specifically did not criticize the Bank or Paul Weiss, because the April 2010 letter from the CFTC appeared to be a “‘Godfather offer’—one that could not be refused.”36In other words, it appeared the Bank had little choice but to carry out the government’s marching orders. Despite these findings, the judge did not vacate Black’s conviction, holding that the DOJ did not use Black’s compelled statements in any meaningful way in the case.

Connolly in Context

The Connolly ruling raises an important balancing for the government as well as corporate and defense counsel and, in fact, this is not the first time courts have found the government federalized internal investigations. In U.S. v. Stein, Judge Kaplan dismissed indictments in another corporate fraud prosecution based on violation of defendants’ Sixth Amendment right to counsel because company counsel refused to advance the employees’ legal fees, and such refusal was attributable to the government.37Notably, the Stein Court also found that the government, through company counsel, violated the defendants’ Fifth Amendment rights against self-incrimination because the employees were compelled to give statements to internal investigators or face termination.38

Generally, the government encourages and rewards cooperation. Indeed, the DOJ and other government agencies have issued guidance on what constitutes cooperation worthy of credit. For example, the DOJ has decreed “corporations are required to provide to the [DOJ] all relevant facts about the individuals involved in the alleged misconduct[,]” and companies must identify individuals or employees who were “substantially involved in or responsible for the misconduct” and “identify all wrongdoing by senior officials, including members of senior management or the board of directors.”39Thus, it is understandable that the government would require a certain level of cooperation to reward the cooperator for saving the government time and resources in conducting a more limited investigation and bringing actions. However, Connolly and prior decisions make clear that there is a line in which a third party conducting the investigation becomes an arm of the government.

In fact, the government has on occasion even considered treating corporate internal investigators as its agents or “an arm of the investigating agencies” by invoking 18 U.S.C. § 1512(c)(2), which “makes it a crime to obstruct justice by obstructing an ‘official proceeding,’ which the government has interpreted to mean that a corporate employee who makes misstatements or omissions to corporate internal investigators may violate this statute.”40But when it truly outsources its investigations to private actors, Judge McMahon seems to be making the point that the government cannot do through third parties that which it cannot do itself. Accordingly, constitutional rights and protections attach to outsourced investigations and federalized evidence. For example, the decision may give rise to pretrial disclosure issues under Brady v. Maryland, because it may create a duty to review exculpatory information that may not only be burdensome but complicated.41If a third party truly becomes an arm of the government and provides the government with inculpatory evidence, should it be required to provide the defendant with exculpatory evidence? It becomes even more complicated if the third party conducting the investigation is also corporate counsel for the company hired by management, as contrasted to independent counsel hired by independent members of the Board of Directors.42

Counsel has to be cautious in ensuring there is both formal and real separation between the government and an internal investigation. While communication is important in representing a client dealing with the government, counsel must also take care not to take direction from government actors and must exercise independent judgment in producing internal investigative materials to the government, as those materials are often protected under the attorney work product doctrine and attorney client privilege. Companies need to be aware of and avoid crossing the line into the world where their legal counsel has effectively become an arm or agent of the government rather than their counsel.

Takeaways

Companies would be wise to analyze each scenario in which they learn of potentially problematic or even illegal behavior and decide whether to conduct an internal investigation or an independent investigation. An internal investigation must be just that, internal, and it should be directed by management. If it is an independent investigation, it should be directed by independent board members. Neither should be run by the government, either on paper or in reality. When the evidence is to be shared with the government for cooperation credit, companies may choose to retain separate defense counsel to guide management through that process. This could further help ensure that a company’s actual defense counsel does not effectively become the government.

This ruling may assist counsel conducting investigations in the conversations that inevitably occur with the government regarding the level of government involvement in the investigation and the production of investigative materials. If the government is micromanaging the investigation or “there is a sufficiently close nexus” between the government and the company’s counsel’s action, such that “the action of that latter may be fairly treated as that of the [government] itself[,]”43then the company will be held to the same requirements of affording employees their constitutional rights. Companies should not be penalized by the government for respecting employees’ constitutional rights. It is a careful balance for defense counsel to cooperate with the government without becoming its agent and to zealously defend its client company.

Footnotes

1 U.S. v. Connolly et al., 16-cr-00370-CM (S.D.N.Y. May 31, 3016), Dkt No. 1 at p. 26.

2 Id. at ¶ 27.

3 Id. at ¶ 26.

4 406 U.S. 441 (1972) (prohibiting the “use” and derivative “use” of a defendant’s “compelled testimony,” and permitting a challenge to a conviction when “compelled testimony” was “used” to obtain it).

5 Connolly, Dkt No. 432 at p. 3.

6 Id.

7 Id. at p. 4.

8 Id.

9 Id. at p. 6.

10 Id. (emphasis in original).

11 Id. at p. 7.

12 Id. at pp. 7-8.

13 An Upjohn Warning is a disclosure to a company employee that legal representation is not extended to them, but rather covers the company only. These warnings are typically issued during an ongoing internal investigation. See Upjohn v. United States, 449 U.S. 383 (1981).

14 Connolly, Dkt No. 432 at p. 8.

15 Id. at p. 8.

16 Id. at p. 11.

17 Id. at pp. 11-12.

18 Id. at pp. 11-12.

19 Id. at 13.

20 Id.

21 Id. at 16.

22 Stewart Bishop, Deutsche Libor Trial Judge Eyes Internal Paul Weiss Probe, Law360 (October 2, 2018), available at https://www.law360.com/articles/1088786.

23 Stewart Bishop, Gov’t Role In Paul Weiss Probe Puts Deutsche Trial At Risk, Law360 (October 5, 2018), available at https://www.law360.com/articles/1089994/gov-t-role-in-paul-weiss-probe-puts-deutsche-trial-at-risk.

24 Id.

25 Connolly, Dkt. No. 432 at pp. 20-21.

26 Blum v. Yaretsky, 457 U.S. 991, 1004 (1982).

27 Id.

28 Id. at p. 22.

29 Id. at p. 4.

30 Id. at p. 7.

31 Id. at p. 6.

32 Id. at pp. 4, 14.

33 Id. at pp. 11, 15.

34 Id. at pp. 12-13.

35 Id. at p. 24.

36 Id. at pp. 26-27.

37 U.S. v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006), aff’d, 541 F.3d 130 (2d Cir. 2008).

38 Id. at 328. The Second Circuit affirmed the district court’s dismissal of the indictment based on the Sixth Amendment violation, so it did not rule on the suppression of statements based on a Fifth Amendment violation as moot. Stein, 541 F.3d at 136 n.2.

39 Memorandum from Sally Yates, “Re: Individual Accountability for Corporate Wrongdoing,” (Sept. 9, 2015), available at https://www.justice.gov/archives/dag/file/769036/download; Deputy Attorney General Rod J. Rosenstein Delivers Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act, Department of Justice, (Nov. 29, 2018), available at https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0.

40 Abbe David Lowell and Christopher D. Man, Federalizing Corporate Internal Investigations and the Erosion of Employees’ Fifth Amendment Rights, 40 Ann. Rev. Crim. Proc. iii (2011) (citing United States v. Ring, 628 F. Supp. 2d 195, 219-20 (D.D.C. 2009) (refusing to dismiss obstruction of justice charge); United States v. Singleton, 2006 WL 1984467, at *4-5 (S.D. Tex. July 14, 2006) (same)); United States v. Kumar, 2006 U.S. Dist. LEXIS 96142, at *13-15 (E.D.N.Y. Feb. 21, 2006) (same)).

41 373 U.S. 83 (1963).

42 See generally, Harvey Pitt and Teresa Goody, Corporate Internal Investigations: When, Why, by Whom and How? (discussing the difference between an internal investigation and an independent investigation), available at https://m.acc.com/chapters/nyc/upload/Harvey-Pitt-Teresa-M-Goody-Corporate-Internal-Investigations-When-Why-By-Whom-And-How-Teneo-Insights.pdf.

43 Jackson v. Metro. Edison Co., 419 U.S. 345, 351 (1974). The Second Circuit explained, A nexus of state action exists between a private entity and the state when the state exercises coercive power, is entwined in the management or control of the private actor or provides the private actor with significant encouragement, either overt or covert, or when the private actor operates as a willful participant in joint activity with the State or its agents, is controlled by an agency of the State, has been delegated a public function by the state, or is entwined with governmental policies. Stein, 541 F.3d at 147 (quoting Flagg v. Yonkers Say. & Loan Ass’n, 396 F.3d 178, 187 (2d Cir. 2005) (emphasis in Stein).

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