The future of internal investigations in the US and beyond

Introduction

In a much-anticipated decision in US v Connolly, on May 2, 2019, Chief Judge McMahon of the United States District Court for the Southern District of New York issued an opinion addressing the circumstances under which the government may be deemed to have outsourced its investigative function to outside counsel. The judgment addresses whether outside counsel’s investigative activity while representing clients in connection with governmental investigations may be considered fairly attributable to the government. In the opinion, Judge McMahon opined that the “court is deeply troubled” by the “Government…routinely outsourcing its investigations into complex financial matters to the targets of those investigations.”¹

This judgment has broad implications for outside counsel engaged in internal investigations conducted both within the United States and overseas.

Practically, we are likely to see a more distant relationship between the company’s lawyers and prosecutors during internal investigations so as to avoid any suggestion that a company’s internal investigation is “fairly attributable” to the Government or “compelled” by the Government as this could result in the exclusion of evidence or even the dismissal of an indictment.

Background

In 2018, Gavin Black and Matthew Connolly were convicted of charges in connection with the manipulation of LIBOR rates by an investment bank (the Bank). Black applied to the District Court to vacate his conviction and dismiss the indictment against him on the grounds that the statements given by him during his internal investigation interviews were both “fairly attributable” to the government and “compelled”, thereby violating his constitutional rights against selfincrimination, relying on the principle established by the Supreme Court in Garrity v New Jersey.²

Further, he alleged that the statements were improperly used by the Government in prosecuting him, in violation of his Fifth Amendment right against self-incrimination, as established by the principles set out in Kastigar v United States.³

In 2008, the Commodity Futures Trading Commission (CFTC) opened an investigation into LIBOR manipulation by various banks. On 19 April 2010, the CFTC wrote to the Bank, explaining their expectation that the Bank “cooperate fully” with its investigation and requesting that the Bank “voluntarily conduct by external counsel a full review” of its involvement and “report on an on-going basis the results of that review.” An attached memorandum stated that cooperation credit might be available if, among other things, the Bank “utilize[d] all available means to make employe e testimony or other relevant corporate documents available in a timely manner.”

As a result of the CFTC’s letter, the Bank instructed external counsel to head the Bank’s internal investigation. However, the Court later held that there was nothing “voluntary” about the investigation, given the draconian consequences that would likely ensue if it did not accept the agency’s invitation, the Bank’s only choice was regarding its “level of cooperation” with the Government, “not about whether to cooperate.”

Compelled statement

There was no question in the Court’s mind that Black was compelled to give a statement to the investigating lawyers as part of its investigation. It was the Bank’s policy that employees “must fully cooperate” with internal and external investigations and failure to cooperate would have resulted in the termination of his employment, leaving Black no discretion to speak to the Bank as part of its investigation. Whilst Black was given a standard Upjohn warning at his interviews by company counsel,⁴ he did not have his own personal legal representation.

The Court concluded that the interviews conducted by the Bank were “government-engineered” as: (i) the Bank received instructions regarding who to interview; (ii) the Bank refrained from interviewing Black for the fourth time before obtaining permission from the government; (iii) the Government not only gave permission but instructed an external law firm on the precise manner in which questions should be asked, informing one of the appointed lawyers to “approach [an] interview as if he were a prosecutor”; and (iv) the contents of the interviews were regularly being shared with the Government.

Fairly attributable to the Government

The Court held that the Bank’s internal investigation was “fairly attributable” to the Government, as defined in Garrity. During the five-year internal investigation, it was evident that the Bank and its lawyers coordinated extensively with three U.S. government agencies (CFTC, SEC and DOJ), keeping the government abreast of developments on a regular basis and providing real time updates.

The Government gave considerable direction to the law firm about “what to do and about how to do it”. The Bank’s counsel were effectively acting as Government agents and not as independent counsel. The extent of the co-ordination was vast with “Counsel interacting with [the government] on hundreds if not thousands of occasions.”⁵ Interview summaries were provided to the CFTC and later forwarded to the DOJ. The interview summaries provided the Government with a roadmap of what the prosecutors should expect should they interview Black themselves.

The Court concluded that the Government had outsourced the important developmental stage of its investigation to the Bank itself and then built its own investigation on the foundation of the Bank’s investigation. Put simply, the external law firm “did everything that the government could, should and would have done had the government been doing its own work.” The Government did not conduct a substantive parallel investigation, instead, it simply gave directions to the Bank and took the results of their labour, saving itself the trouble of doing its own work. The Government did not interview a Bank employee until late 2013, over three and a half years after they had first opened their investigation and only after they had been provided with interview and investigative summaries by the external lawyers.

Kastigar violation

As per Garrity, Black’s lawyers successfully argued that his testimony in the internal investigation had been effectively compelled by the Government and therefore was not admissible. However, this was a rather hollow victory as the prosecution decided not to rely on Black’s testimony when prosecuting the case. Black’s further appeal, relying on Kastigar, failed as the Government was able to identify an independent source of relevant information other than Black’s interview on which they relied. Given the facts of this case, there was no need for Judge McMahon to decide whether such compelled testimony would taint the entire investigation had the government relied solely on it. This question creates significant uncertainty and further emphasises the need to follow the practical steps, outlined below, when conducting an internal investigation.

Cooperation in investigations

The pressure placed on the Bank by the Government mirrors the current climate in many jurisdictions in which companies are being placed under increasing pressure to cooperate with authorities where there is suspected wrongdoing. This is a well-established principle in the UK, with companies being offered credit for cooperating with reductions in fines and the potential to avoid prosecution entirely by entering into a Deferred Prosecution Agreement (DPA). Further, companies are increasingly being warned that cooperation is more than “simply responding to requests that you are obliged to respond to.”

However, in light of Connolly companies are going to have to carefully consider what and how that cooperation is given so as to balance protecting the integrity of their investigation with obtaining full cooperation credit where desirable.

Given the significant pressures on companies to cooperate, it is therefore unsurprising that the Bank took the decision to co-operate extensively. However, as recognised by Judge McMahon, this judgment has serious implications for future internal investigations. This judgment is not the first time these implications have been highlighted. In US v Stein,⁶ a judgment referenced extensively by Judge McMahon, Judge Kaplan dismissed the indictment of previous employees of an accountancy firm because he deemed statements to be coerced by the government and found that the government’s actions “undermined the proper functioning of the adversary process that the Constitution adopted as the mode of determining guilt or innocence in criminal cases.” This demonstrates how the demand for cooperation is likely to lead to aggressive company-led internal investigations that are difficult to reconcile with the rights of individuals caught in the middle.

In addition, in US v Allen⁷the Court held that it is unconstitutional in US criminal proceedings to use testimony compelled by foreign authorities against the interviewee personally. The court vacated the convictions of two defendants on the basis that the DOJ was unable to demonstrate that the compelled testimony given to the UK’s FCA had not tainted the testimony given by a DOJ witness. With everincreasing cross border investigations, it will be necessary for overseas authorities to be able to show that compelled testimony (which may include internal investigations where the Government has been closely involved) has not been tainted and biased their investigation, therefore undermining its integrity and reliability.

In light of this collection of judgments, it is likely that authorities will want to play a more passive role in receiving information from a cooperating company and ensure they give the appearance that they have not intruded on or directed a company’s investigation. The Government should also not wait for the results of an internal investigation before commencing its own investigation.

Practical considerations for companies

Companies may continue to conduct internal investigations and cooperate with authorities so long as they manage the risks and ensure independence from the Government. There are a number of practical steps a company can consider when conducting such investigations, for example

• Document the fiduciary-duty-based reason for commencing an internal investigation, emphasising that the internal investigation and all subsequent actions are for the benefit of the company and its shareholders, not the authorities.
• Document the scope and priorities of the internal investigation.
• Keep a clear record of any decision to cooperate.
• Ensure interviews of employees cannot be interpreted as applying pressure – proper Upjohn warnings, offer of legal representation.
• providing disclosure and limiting the number of lawyers present at the interview.
• Resist onerous Government requests and attempts by the Government to micromanage corporate investigations.
• Take a written record of reasons for any termination of employment following an employee’s failure to comply with the internal investigation.
• When portraying any steps to demonstrate co-operation, the Government should be reminded that these steps were taken for the benefit of the shareholders, not the benefit of the Government.