A recent opinion in United States v. Connolly, No. 16-CR-370, 2019 WL 2120523, at *1 (S.D.N.Y. May 2, 2019), affirms that navigating internal investigations requires careful consideration and deliberate planning, especially during dealings with the Department of Justice (DOJ). The decision and the court's candor raises important issues that will inform how companies, executives, law firms, and the government handle future internal investigations.
The London Inter-Bank Offering Rate (LIBOR) sets interest rates at which banks offer to lend money to one another in capital markets in London. The manipulation of LIBOR spawned a number of criminal and civil cases in the United States and United Kingdom since 2011. It has been investigated by the DOJ's Fraud Section and Antitrust Division, the Securities and Exchange Commission, the Commodities and Future Trading Commission, the New York State Attorney General, and agencies throughout the United Kingdom, yielding over $2.5 billion in fines.
Deutsche Bank AG's London Subsidiary, DB Group Services, U.K. Limited (DBGS), pleaded guilty previously to wire fraud in the U.S. for its LIBOR violation and paid a $150 million fine. Deutsche Bank AG pleaded guilty to wire fraud and price fixing pursuant to a deferred prosecution agreement, paid a $625 million fine, and agreed to cooperate with authorities. Deutsche Bank AG retained a law firm to conduct an internal investigation, which worked closely with U.S. authorities.
During the course of Deutsche Bank AG's internal investigation, certain information was learned about Gavin Campbell Black and provided to the government. Eventually, Black and another executive Deutsche Bank trader, Matthew Connolly, were indicted for conspiracy and wire fraud for manipulating LIBOR for their own profit. According to the indictment, the defendants' scheme caused Deutsche Bank to submit "false and fraudulent USD LIBOR submissions," which had the potential to "benefit their trading positions" at the expense of counterparties to those trades. Defendants Connolly and Black were convicted by a jury at trial.
Compelled Internal Investigation Interview
Post-trial, Black moved for dismissal of his indictment by arguing that his Fifth Amendment rights were violated when he was forced to choose between being fired, or sitting for interviews with attorneys that were conducting the internal investigation, which was being done at the request of the government which was also receiving this information.
In Garrity v. New Jersey, the Supreme Court held that the statements obtained from police officers under threat of employment termination were involuntary and inadmissible against them in a criminal trial. The Court reasoned that subjecting employees to choose between either termination or self-incrimination was unconstitutional. Id. at 500. While Garrity involved the conduct of a government employer, the rule applies equally to private conduct where the actions of a private employer in obtaining statements are "fairly attributable to the government." United States v. Stein, 541 F.3d 130, 152 n.11 (2d Cir. 2008). Private conduct is attributed to the government when "there is a sufficiently close nexus between the state and the challenged action." Blum v. Yaretsky, 457 U.S. 991, 1004 (1982).
Although it ultimately denied Black's motion to dismiss, the court was "deeply troubled" by the issues raised in the case since the law firm that conducted the internal investigation was "de facto the Government for Garrity purposes." Connolly, 2019 WL 2120523, at *1.
Connolly raised important considerations that will likely inform how future internal investigations are handled. Here are five key takeaways:
- Internal investigations should be "internal." In Connolly, the court stated that it placed the word "internal" in quotation marks, because "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." Connolly, 2019 WL 2120523, at *9, n.5. Cooperation and communication with the government can be valuable. However, the corporation's retained attorneys should be at the helm of the internal investigation to avoid allegations of state-directed action. As the acting chief of the Fraud Section recently remarked, "we have done our best to make sure that we do not in any form or fashion direct the company's investigation."
- The path forward remains unclear. Connolly's effects on internal investigation procedures remain unclear. The court observed that "there are profound implications if the Government, as has been suggested elsewhere, is routinely outsourcing its investigations into complex financial matters to the targets of those investigations, who are in a uniquely coercive position vis-à-vis potential targets of criminal activity." Id. Connolly may discourage the government from giving corporate counsel detailed instructions for fear of being accused of directing the investigation. The decision may also spur earlier government involvement—either to conduct interviews before an internal investigation begins or to request that an internal investigation be delayed—to avoid allegations of the type made in Connolly. From the corporate perspective, however, Connolly gives safe harbor and space to operate independently from the government to avoid concerns about state-direction.
- Impact on cooperation credit. Connolly may affect the timing of corporate cooperation and how it is valued. To qualify for a reduction under the U.S. Sentencing Guidelines, "cooperation must be both timely and thorough." Timely cooperation begins when the organization is officially notified of a criminal investigation and thoroughness requires the disclosure of all pertinent, known information. The test is whether the information is sufficient for law enforcement personnel "to identify the nature and extent of the offense and the individual(s) responsible for the criminal conduct." U.S.S.G. § 8C2.5(g), cmt. (n. 13). Policies and actions about disciplining employees who are uncooperative with internal investigations may impact the amount of cooperation credit that is received by the company.
- A "win" for individuals. In Connolly, the court ultimately denied the defendant's motion to dismiss, but it did find that a Garrity violation occurred. Therefore, counsel for individuals, who are interviewed during the course of an internal investigation and subsequently charged, are more likely to argue that the interview was compelled and in violation of the Fifth Amendment if a sufficiently close nexus between the state and the challenged action exists. Employers and attorneys should carefully document what is communicated to interviewees and the circumstances surrounding internal investigation interviews post-Connolly.
- Scope of discovery obligations. In Kyles v. Whitley, the Supreme Court held that the government is required to learn about and disclose exculpatory information that is known to others who are acting on behalf of the government. Under the circumstances in Connolly, this may mean that the law firm, as the de facto government agent, may need to review gathered materials for exculpatory information.