US v. Connolly and the potential pitfalls of cooperation in internal investigations

White Collar Alert

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Under what circumstances is the government deemed to have outsourced its investigative function to corporate counsel so that, for constitutional purposes, counsel's investigative activity is fairly attributable to the government?  On May 2, 2019, Judge Colleen McMahon issued a much-anticipated opinion in U.S. v. Connolly, et al., 16 CR 370 (S.D.N.Y.) that addresses this issue.

While the relief sought by the defendant in this case was ultimately denied, this decision – which we expect to be appealed – may have profound implications for both the government itself and outside counsel engaged to represent clients in connection with governmental investigations.

In 2018, two traders, Matthew Connolly and Gavin Black, were convicted of LIBOR-related misconduct.  In advance of his trial, Black's lawyers sought to suppress statements Black made to Paul Weiss as part of the firm's internal investigation for his employer bank into LIBOR allegations.  The defense asserted that the government had "outsourced substantial portions of the investigation to counsel for the bank, Paul Weiss"; and "supervised and directed Paul Weiss's investigative activities through, inter alia, periodic meetings and calls." 

Black relied on the seminal Supreme Court decision Garrity v. New Jersey, 385 U.S. 493 (1967), in support of his motion. There, the Supreme Court ruled that statements obtained from public employees under threat of termination are inadmissible against them at a criminal trial.  Since Garrity, several courts have extended this rule to private employees where the private employer's actions can be imputed to the government, which Black argued was the case here.  The end result, Black argued, is that his statements were "actually compelled" by the government: admitting them against him at his criminal trial would violate his Fifth Amendment right against self-incrimination and the related doctrine, established in Kastigar v. United States, 406 U.S. 441 (1972), that prosecutors cannot use immunized testimony in a prosecution of a witness.

The government ultimately decided not to introduce Black's statements to Paul Weiss at trial, thus apparently mooting the Garrity issue.  After Black was convicted, however, he moved again for Kastigar relief arising from the government's involvement in the bank's internal investigation under a taint theory, arguing that Paul Weiss relied on his statements to learn about the LIBOR process and develop investigatory leads, thus tainting the subsequent investigation.  The Kastigar theory, as articulated by the court, was that Black's compelled statements to Paul Weiss were "fairly attributable to the Government within the meaning of Garrity" because of the bank's relationship with the government for purposes of the LIBOR investigation.  In pertinent part, Black argued that his prosecution "was predicated on and infected by those statements, such that the indictment against him must be dismissed."

The court recognized the "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," and was "deeply troubled by this issue."  Nonetheless, the court concluded that "a full-bore Garrity hearing" was unwarranted because Black's Kastigar rights were not violated.

Importantly, the court did find that the bank's investigation was "fairly attributable" to the government under Garrity.

The court highlighted a number of facts concerning the investigation in support of its finding that Paul Weiss's actions could be fairly attributable to the government, including:

  • During the period when Paul Weiss conducted the first three (of four) interviews of Black, the government told the bank whom to interview and when.  The bank's first interview of Black was conducted at the behest of the government; it was government engineered.
  • It is plausible – if not likely – that the fruits of Black's initial interview were shared with the government agencies investigating the bank, since the record reflects that Paul Weiss was eager to share information about Black's subsequent two interviews.  Overall, Paul Weiss digested the vast information it collected, highlighted the most important nuggets, and shared a blueprint for what prosecutors should expect should they finally interview Black on their own.
  • The government directed the bank to investigate Black on its behalf and, as the bank's investigation progressed, the government continued to discuss Black by name in meetings with bank investigators.  All of this occurred well before any representative of the government made any effort to speak with Black; that did not occur until the fall of 2013, three and a half years after the bank's "internal" investigation began.
  • When Paul Weiss wanted to interview Black on September 9, 2014, it sought the government's permission to do so.  The government did not simply give permission; it directed an experienced Paul Weiss partner and former Assistant US Attorney for the Southern District of New York on the precise manner in which he should ask his questions.
  • The government did not appear to have interviewed any witnesses from the bank prior to Paul Weiss interviewing them and passing information gleaned from those interviews on to the government, or taken any investigative depositions, or reviewed anything that had not first passed through Paul Weiss's investigation "and been fully digested for the government by the target of the investigation."
  • Black was compelled, upon pain of losing his job, to sit for at least three, and probably four, interviews with Paul Weiss.
  • The bank did not respond to the government's subpoenas by turning over documents without comment, and its employees were not subjected to government or regulatory depositions on notice, at which they were defended by company counsel.
  • During the course of its investigation in which the bank received instruction and direction from the government, there was a massive amount of pressure on the bank given what an indictment would mean for the bank.

Consistent with the foregoing, the court determined that the bank acted in response to, and in accordance with, the government's instruction "to conduct an investigation into a particular matter, to do so in a particular fashion, to interview particular people (including Black), to share its findings with the government on a regular basis, and to carry out governmental investigative demands that were generated by its earlier efforts." The court saw "very little evidence" in the record reflecting "the Government's own independent investigative efforts during the first three years of [the] Bank's "voluntary" investigation."  Bottom line: the court concluded that "Paul Weiss did everything that the Government could, should, and would have done had the Government been doing its own work."  It also found that "the Government outsourced the important developmental stage of its investigation to [the Bank]–the original target of that investigation–and then built its own "investigation" into specific employees, such as Gavin Black, on a very firm foundation constructed for it by the Bank and its lawyers."

Takeaways

Judge McMahon's opinion is a clear warning shot to government lawyers against delegating core investigative functions to outside counsel for targets or subjects of their investigations.  This should drive government agencies to reassess how they interface with outside counsel and promote more active participation by the government in all phases of the investigation.  We may see new policies from criminal and regulatory authorities about how to avoid the issues described in this case.  The limited resources available to certain government agencies suggest this may pose a significant challenge to them in some cases.

From the perspective of outside counsel and their clients, this decision may have significant consequences.  Entities should be aware of this decision and should discuss its potential ramifications early with outside counsel in order to formulate a plan to address these concerns at the initial stages of any internal investigation.

Learn more about the implications of this opinion by contacting any of the authors.