Last month, a federal judge in 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.

The court’s decision in U.S. v. Connolly has broad implications for internal investigations and corporate cooperation, but it need not end internal investigations or corporate cooperation as we know them. 

That’s according to an article titled U.S. v. Connolly: “Outsourcing” a Government Investigation — And How to Avoid It.

The article was co-authored by David Massey, a partner at Richards Kibbe & Orbe in New York.

“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,” Massey writes.  “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.”

“White collar practitioners were watching U.S. v. Connolly closely for some time because of its implications,” Massey told Corporate Crime Reporter in an interview last week. “It involved an individual who was prosecuted and convicted in the LIBOR investigations. He was a Deutsche Bank employee named Gavin Black.”

“Gavin Black sat for an interview for an outside law firm for Deutsche Bank sometime ago. His choice was — sit for an interview or look for another job. His lawyers made a motion that the outside firm and Deutsche Bank became so closely intertwined with the government’s investigation that they were essentially acting as an arm of the state.”

“Some of the primary evidence of that came from a letter that the Commodity Futures Trading Commission (CFTC) wrote to the company near the beginning of the investigation requesting a lot of particulars about its investigation. That process went on for some time, including specific directions about who to interview, how to interview.”

“It was significant because corporate investigations are supposed to be separate from the government investigation. If one is found to be too closely directed by the government such that the company is acting as an agent of the government, that has huge implications for corporate cooperation and how internal investigations proceed.”

“This case may be an outlier for a number of reasons, including that CFTC letter. A letter like that probably will never happen again.”

“The letter requested – but the judge found that the letter directed, because there was no real choice for Deutsche Bank – directed outside counsel to conduct a ‘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.’”

“There were additional demands, which the judge summarized as demands requiring the company to regularly report on the investigation, and take direction about what and when to investigate, how to interview people, up to and including a request to a Deutsche Bank lawyer to conduct an interview ‘as if he were a prosecutor.’”

“That single request was one of the most damaging in the facts as described by the judge.”

This ruling didn’t have an impact on Gavin Black’s case.

“That’s right. In the end, the judge found a violation of the Gerrity rule. That essentially means if you interview someone under threat of termination and if it is an act of the state requiring the employee to sit for an interview, then you have violated that individuals Fifth Amendment rights.”

“The judge found that Deutsche Bank’s action in requesting an interview were fairly attributable to the government. It was no different from having the government itself request an interview with one of its own employees. The judge found that violation occurred. But there was no impact on the case. The evidence from the interview was not used at trial, either directly or indirectly. And the government was able to establish on the papers without a hearing that it had independent evidence to support its case.”

“The judge found that every single line of the grand jury testimony that resulted in the indictment came from sources other than Gavin Black’s compelled interview.”

“The judge further found that even if the government had not been able to prove that it pursued its investigation based on entirely independent sources, any error was harmless, largely because the evidence was so overwhelming.”

The whole corporate criminal practice is centered on cooperation. To get leniency, corporations must cooperate with the government. What are the implications for cooperation?

“The government needs to be more careful. The fault was with the government. Everything that the company did with its outside counsel was entirely understandable. The government shouldn’t direct someone to cooperate. It shouldn’t direct how to conduct interviews and direct who to interview and how to interview them. I don’t think the government will be doing that anymore.”

“Even before this case was decided, in our practice, we already saw the government being careful about avoiding giving direction to company counsel or counsel for board committee.”

“The government has put in place guidance in the Foreign Corrupt Practices Act (FCPA) enforcement manual to say that the government may make requests but will not give direction to internal investigations.”

“I don’t think it’s going to change the fundamental dynamic of cooperation. Companies being responsible to their shareholders need to investigate whenever there are indications of wrongdoing. If a company finds out from a government subpoena, or a telephone call, or a knock on the door from an employee saying something may be wrong, they have to investigate. They have to run their internal investigations. Companies and the government are going to be more careful to make sure that that investigation is independent of the government.”

“Many public companies would put a memo in the file saying why they began an internal investigation. You could say – we got a subpoena about a certain topic. We believe we need to investigate whether wrongdoing occurred. In order to protect our shareholders and satisfy our fiduciary duty, we began an internal investigation. That is a decision that the board would make for that reason. The board and management should make a separate decision if they decide to do so to cooperate and not merge those decisions into one.’”

“The decision to investigate should be separate from the decision to cooperate. They each have their own reasons. And the reasons should be based on the board’s fiduciary duty to shareholders and not some kind of duty to the government.”

Won’t the government now just work with signals – yes we want you to do this but we can’t say it?

“I don’t think so. Both the government and company counsel would be averse to operating on that basis. For a company that is cooperating, it is required to report all relevant facts to the government. The key distinction is that the company shouldn’t be taking direction from the government as to how to go about learning all relevant facts.”

Let’s say the government looks at the cooperation and decides it is insufficient. Isn’t that the government directing more investigation?

“I don’t think the judge would find under those facts that the government is directing the investigation. Good corporate cooperation is a healthy dialogue between sophisticated prosecutors and defense counsel. In most cases, each has been on the other side of the table.” 

“The prosecutors should be asking questions about the facts. And the company should be reporting the facts. The company would be telling the government what it is doing in its internal investigation – here is what we are doing and here is what we are finding.”

“It could well be that midway or toward the end of that process, the government could say – I just don’t find your cooperation to be adequate. You haven’t talked to the people most involved in the conduct. That’s not a direction. That’s just a comment. The company should take that under advisement and understand that they should interview those people. That would be a relatively rare case where a company hasn’t thought for itself that it needs to go ahead of interview those people at the center of the issue.”

[For the complete q/a format Interview with David Massey, see 33 Corporate Crime Reporter 24(12), Monday June 17, 2019, print edition only.]