By Dan Portnov
Last week, the government moved one tiny step closer to being able to “outsource” its criminal investigations to non-DOJ actors. In a post-trial order, Southern District of New York Chief Judge Colleen McMahon excoriated the government for effectively outsourcing its investigation into trader Gavin Black’s Libor rigging to his former employer Deutsche Bank. Nevertheless, Judge McMahon denied Black’s motion for relief under Kastigar v. United States[1] and, in a separate order, affirmed the conviction at trial of Black and his co-defendant and fellow trader Matthew Connolly.[2]
Just what happened here and what does it mean for companies and individuals under DOJ investigation?
The Case and the Decision
Investigation into the rigging of Libor commenced nearly ten years ago, and Deutsche Bank was one of the handful benchmark rate-setting institutions that initially drew scrutiny by the U.S. Commodity Futures Trading Commission (CFTC), the first regulator to open inquiries. (DOJ and foreign regulators would soon follow.)
Deutsche Bank, like all banks swept up in Libor probes, cooperated and hired outside counsel, Paul Weiss, to do an internal investigation while providing weekly updates to the CFTC and DOJ (among others). As part of these weekly updates, DOJ discussed with Paul Weiss lawyers which Deutsche Bank employees to interview and about which documents and communications to inquire. Counsel and Deutsche Bank employees understood that those who did not cooperate with Paul Weiss’ internal investigation should “find new employment.”
Black was interviewed four times as part of Paul Weiss’ investigation. After the third interview, Paul Weiss provided DOJ with a report on Black and a detailed outline for the government to further investigate him. DOJ would later use this report in a proffer session with Black.
Deutsche Bank would ultimately settle all claims with federal and state regulators (and civil plaintiffs) for well over $2 billion in total.
Meanwhile, Black and Connolly were indicted, tried and convicted at trial on charges of wire fraud and conspiracy to commit wire fraud.
After their convictions in early 2019, Black (with Connolly joining) filed a motion to dismiss the indictment under Kastigar. He argued, in part, that the prosecution against him was improperly based on statements that he gave to company counsel during the internal investigation. Under Kastigar and Second Circuit precedent, Black argued that DOJ’s close relationship with and effective guidance of the internal investigation transformed the company and its counsel into the government’s agents.
The court addressed Black’s arguments in two parts. It answered the first question – whether Deutsche Bank and its counsel functioned as DOJ’s agents under the Supreme Court’s Garrity v. New Jersey decision[3]– in the affirmative. That is, Black’s statements to company counsel, made under penalty of termination, constituted compulsion under Fifth Amendment case law.
However, the court then found that, Garrity violation notwithstanding, Black’s compelled statements were not used against him in his prosecution in violation of Kastigar. The court noted that Kastigar provides use and derivative use immunity for compelled statements. It found that Black’s theory of Kastigar violation met the minimal standard to articulate such a violation and thus the government had the burden of affirmatively proving its prosecution was based on independently derived evidence.
In response, the government shouldered its burden. DOJ showed, to the court’s satisfaction, that it did not present any evidence derived from Black’s compelled testimony to the grand jury or at trial. Nor did DOJ use any of Black’s compelled statements in working with other witnesses in preparation for trial. Essentially, the government showed that everything it presented to the grand jury and at Black’s trial was derived from an independent source. For these reasons, the court denied Black’s motion for Kastigar relief.
The Government Gets an Earful
Despite the government’s narrow win, Judge McMahon ripped into the DOJ in her 49-page order.[4] Among the choice quotes:
- “Rather than conduct its own investigation, the government outsourced the important developmental stage of its investigation to Deutsche 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.”
- Judge McMahon was “troubled” by the DOJ’s apparent outsourcing, in which it directed company counsel at one point to question a Deutsche Bank employee “as if [outside counsel] were a prosecutor.”
- “The court places 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.”
- Judge McMahon found it “not just unconvincing, but unworthy” that the government claimed its conduct was necessitated by limited resources and the complexity of the investigation.
- “The court is not concerned with whether the outsourcing of investigations to private parties makes life easier for the government or for the taxpayers; it is concerned with the protection of the defendant’s constitutional right against self-incrimination, and so with the constitutional implications, if any, of such outsourcing. . . That concern trumps the government’s interest in convenience.”
Read more at: https://www.law360.com/whitecollar/articles/1156034/doj-outsourced-deutsche-libor-probe-to-paul-weiss-judge?nl_pk=dcac5b1e-fee2-4742-bcad-7701077045a7&utm_source=newsletter&utm_medium=email&utm_campaign=whitecollar?copied=1
What This Means for Internal Investigations
While much of the press and commentary resulting from this order has focused on the government being taken to task for its outsourcing, Judge McMahon ultimately upheld its practice and the guilty verdict. Until the Second Circuit decides the appeal (Black and Connolly’s lawyers have already promised that there will be one), the close relationship between the DOJ and company counsel in a complex investigation may remain the standard.
Company counsel remain incentivized to listen to and work closely with DOJ attorneys whenever their client stands to gain additional cooperation credit in an investigation. By the time that individuals are tried and appeal their convictions, the ink on the company’s settlement has long dried. Here, we would imagine that Deutsche Bank (or Paul Weiss) could not have cared less if DOJ secured convictions of Black and Connolly, or if these convictions are tossed out on appeal some eighteen months later.
Employees who want to keep their jobs while an internal investigation is pending likewise gain no reprieve from last week’s order. If an employee declines to participate in an internal investigation, he or she can be fired. If he or she participates in a “compelled” interview, they still must wait months or years to learn whether they will be prosecuted individually. Only then, when discovery is made available, might they learn if the government’s investigation violated both Garrity and Kastigar, leading to some relief.
Don’t get us wrong. It is nice to see the government upbraided for taking shortcuts in prosecutions that can land individuals in jail. However, it is cold comfort for individuals when the ultimate result (pending appeal) remains a conviction.
In the meantime, we look forward to seeing what the Second Circuit has to say.
[1] Kastigar is a 1972 Supreme Court decision in which the Court ruled that by granting a witness use and derivative use immunity, the government could compel that witness to testify over their assertion of Fifth Amendment rights against self-incrimination. The Court ruled that transactional immunity (or full immunity from prosecution) was not Constitutionally required. Kastigar rights have since been applied in a variety of contexts, including parallel and cross-border investigations.
[2] The S.D.N.Y. case name and docket are: U.S. v. Connolly et al., 1:16-cr-370 (CM).
[3] We wrote about Garrity v. New Jersey within the context of Office of Inspector General investigations here.
[4] Docket Entry 432 (Filed May 2, 2019).