Connolly Revisited: Striking the Right Balance Between Conducting an Effective Internal Investigation and Serving as the Government’s Alter Ego
White Collar Crime and Internal Investigations Alert 05/08/20 David M. Blank
We are now one year removed from United States v. Connolly, the significant decision that added increased complexities to the already difficult task of managing an effective internal investigation during a complex government fraud inquiry. No. 16-CR-370, 2019 WL 2120523, at *1 (S.D.N.Y. May 2, 2019). Connolly requires corporate counsel to strike a delicate balance between upholding one’s fiduciary duty to the organization, recognizing employees’ rights, fully cooperating with authorities, and staying faithful to ethical obligations. And this balancing act may all occur under the watchful eye of the Department of Justice (DOJ).
The Connolly decision and its aftermath continue to raise important issues that govern how companies, executives, law firms, and the government handle internal investigations. This article highlights the key issues that in-house counsel should consider as they navigate the currents of simultaneous internal and DOJ investigations.
The Connolly Decision
The DOJ’s investigation into the Connolly defendants was born out of the London Inter-Bank Offering Rate (LIBOR) manipulation scandal that rocked the global derivative markets a decade ago. At its core, the LIBOR sets interest rates at which banks offer to lend money to one another and is used as a benchmark for a wide range of financial products, including student loans, mortgages, credit cards, and bonds. The rigging of LIBOR spawned a wave of criminal and civil investigations brought by the DOJ’s Fraud Section and Antitrust Division, the Securities and Exchange Commission, the Commodities and Futures Trading Commission, the New York State Attorney General, and agencies throughout the United Kingdom. Since 2011, governments have levied over $2.5 billion in fines against various institutions involved in the wrongdoing.
One DOJ investigation focused on Deutsche Bank and its subsidiary. Deutsche Bank engaged outside counsel to lead its internal investigation and cooperate with U.S. authorities. As is customary in corporate criminal investigations, Deutsche Bank’s cooperation began before any final resolution. Ultimately Deutsche Bank pleaded guilty to wire fraud and price-fixing under a deferred prosecution agreement, paid a $625 million fine, and agreed to continue to cooperate. DB Group Services, U.K. Limited, the subsidiary, pleaded guilty to wire fraud and paid a $150 million fine.
As part of the internal investigation, Deutsche Bank provided information to the DOJ regarding Matthew Connolly, a trader, and Gavin Campbell Black, a Director on Deutsche Bank's Money Market Derivatives and Pool Trading Desks in London. The information included information identifying Connolly and Black as individuals responsible for the company’s malfeasance. The information led to the indictment of both men for conspiracy and wire fraud for manipulating LIBOR for their own profit. The government alleged 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. A jury convicted both Connolly and Black. After his conviction, Black moved to dismiss the indictment against him, arguing that the Deutsche Bank’s internal investigation violated his Fifth Amendment rights.
As a threshold matter, there is nothing inherently problematic about a company cooperating with law enforcement. Companies often provide authorities with documents and other information learned through the internal investigation that detail the wrongful acts of individuals within an organization. The benefits of early cooperation are significant to both the organization and government, and can potentially result in the avoidance of a criminal conviction or serve to reduce fines and penalties. The United States Sentencing Guidelines, the Justice Manual, and DOJ guidance memoranda all outline the government’s expectations regarding an organization’s ability to benefit from cooperation.
Why is Connolly noteworthy if cooperation is the norm and not the exception? In a word, “outsourcing.” Black argued that the government’s involvement in Deutsche Bank’s internal investigation was so significant that the bank acted at the direction of the federal government. Under Black’s theory, his statements to outside counsel, over the course of four interviews, were unlawfully compelled in violation of his Fifth Amendment right against self-incrimination. Black argued he faced the Hobson’s choice of consenting to be interviewed or termination. Black later learned that: (1) DOJ instructed Deutsche Bank to interview him, including providing specific questions to be asked; (2) Deutsche Bank contemporaneously shared the interview summaries with DOJ; and (3) Deutsche Bank met with DOJ approximately 56 times to discuss the internal investigation in the year prior to the criminal resolution. In short, Black contended that Deutsche Bank was the alter ego of the federal government, entitling him to certain constitutional protections during the internal investigation interviews.
While Black’s arguments were rarely seen in the context of the internal investigation, individuals have successfully availed themselves of Fifth Amendment protections from compulsory statements made in the government sector. In Garrity v. New Jersey, 385 U.S. 493, 496-97 (1967), 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).
While the Connolly court found that Deutsche Bank’s internal investigation was “fairly attributable” to the government, the court ultimately dismissed Black’s motion to dismiss because the government did not use his statements at the trial, grand jury, or during the investigation. The court, however, was “deeply troubled” by the conduct of the internal investigation team because they were “de facto the Government for Garrity purposes.” Connolly, 2019 WL 2120523, at *1. It is reasonable to conclude that had the government used Black’s statements at trial or during the grand jury process, the outcome likely may have been different.
Aftermath of Connolly
While initially promising as a cudgel for those indicted after participating in a government-directed internal investigation, the Connolly decision has produced mixed results.
In United States v. Vorley, No. No. 18 CR 00035, 2020 WL 1166185, at *1 (N.D. Ill. Mar. 3, 2020), the defendant was a trader at Deutsche Bank’s precious metals desk and was interviewed numerous times from 2009 to 2015 as part of the bank’s internal investigation to determine whether traders were engaging in spoofing trades. Vorley was notified of his termination in 2014, but “required to attend” an internal investigation interview in 2015, after the DOJ’s Antitrust Division and Commodities Futures Trading Commission began their investigations. See id. at *2.
After being indicted, Vorley claimed that he was compelled, by the United States government, to answer the bank’s questions during the interview and that use of those statements at trial would, therefore, violate his Fifth Amendment privilege against self-incrimination. Id. at *5. The court disagreed and pointed to the fact that Vorley terminated the interview as evidence of his voluntariness. Id. at *6. The court also found that “the mere possibility” that the bank “would take some adverse action with respect to his deferred compensation is not, as a matter of law, sufficient to constitute compulsion within the meaning of the Fifth Amendment.” Id. at *7. For the court, this is what distinguished Garrity: “Garrity—in which the penalty for invoking the privilege was certain—simply does not address situations, like this one, in which there is a less-than-certain risk of a substantial adverse consequence to invoking the Fifth Amendment privilege." Id. at *8. The court held that Vorley’s statements were not compelled as a matter of law.
Vorley’s attempts to use Connolly to persuade the court were ultimately unsuccessful. However, the decision has not discouraged other litigants from making similar arguments. In another corporate fraud prosecution, the defense appears to be using the Connolly decision as leverage to obtain additional discovery or lay the groundwork for a claim similar to Vorley’s. See United States v. Petit, 2020 WL 1308575 (S.D.N.Y.) (requesting an order compelling DOJ to produce all correspondence and presentations between the corporation and its counsel and DOJ/SEC concerning the internal investigation based on evidence that counsel shared evidence and key legal “conclusions” with DOJ).
The Connolly court clearly disapproved of the government’s involvement and influence over Deutsche Bank’s internal investigation. Corporate counsel should work with outside counsel to heed the lessons of Connolly to ensure that internal investigative activities remain independent. There may come a point in time when sharing aspects of the internal investigation with the government becomes necessary, but until that time comes, be mindful of becoming the alter ego of the government in the criminal investigation of your employees.
Here are a few additional 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 typically 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 is both valuable and often necessary during on-going criminal investigations. Organizations seeking cooperation credit need to coordinate with the government at appropriate times. However, in-house counsel should monitor the overall interactions between the internal investigation team and government to avoid even the appearance of acting on behalf of the government. Outside counsel should not be “outsourced” to the government in substance or style.
- Government Wise Up. In Connolly, the court wrote 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 likely discourages the government from giving corporate counsel detailed instructions for fear of being accused of directing the investigation. Connolly and Garrity are primarily government problems, and we expect to see the government take preventative measures to prevent similar risk in future investigations. For corporate counsel, 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.
- Employee Considerations. Connolly also serves as a useful reminder that, in some instances, Upjohn warnings might not be sufficient to protect your employee’s rights. This is particularly true if you have already determined to provide the government with witness specific information in advance of the interview.
- Compulsion. In Vorley, the court dismissed “the mere possibility” that the defendant would suffer “some adverse action” as insufficient compulsion. Claims grounded in less-than-certain risk of a substantial adverse consequence do not rise to the level of Fifth Amendment compulsion despite government involvement. However, corporate counsel should consider the timing of adverse employment action, and its potential impact on the internal investigation and dealings with the government.
- 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. Those discussions may debut in another context, as shown in the Petit case.
For more information on the Connolly or Vorley decisions, Garrity issues, internal investigations, or compliance matters, please contact your Quarles & Brady attorney or:
- David Blank: (202) 780-2643 / [email protected]