Law360 (January 7, 2020, 9:17 AM EST) --
In United States v. Connolly, Chief Judge Colleen McMahon, of the U.S. District Court for the Southern District of New York, issued a censorious decision and order that caught the attention of many practitioners last May. In response to the decision, legal news outlets published numerous articles and blogs. The white collar criminal defense world buzzed for months.
The future landscape of internal investigations seemed mired in serious constitutional considerations that impacted a company’s investigation strategy. Company counsel fretted over a choice between pushing back against the government’s involvement in an investigation and running the risk of being viewed as an uncooperative target, or jeopardizing future criminal proceedings against employees.
Yet all of the attention on the rules of engagement with the government likely is misplaced, since the government controls criminal proceedings. Instead, counsel may want to focus on growing ethical pitfalls in internal investigations to ensure they retain a seat at the bar.
To be sure, the fanfare surrounding the Connolly decision was justified. In 2010, the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission opened an investigation into an investment bank’s role in interest rate average manipulation. Shortly thereafter, the bank retained a reputable law firm to respond to the inquiries. The bank cooperated and coordinated extensively with the SEC and CFTC, and eventually with the U.S. Department of Justice. According to counsel, the investigation was “larger by 10 times” than any he had ever been involved with, spanning five years at a cost of $10 million in legal fees.
As a part of the internal investigation, a number of the client’s employees were interviewed under threat of termination, a common tactic that facilitates witness cooperation. The operative employment policies expressly subjected employees to termination unless they fully cooperated with internal and external investigations. Indeed, according to the testimony in Connolly, any employee who did not cooperate would have lost his or her job. Of the many employees interviewed as part of the internal investigation, defendant Gavin Black was interviewed on three occasions from 2011 to 2012, and a fourth and final time in 2014.
Black’s first three witness interviews were quite standard. During each interview, counsel administered a typical Upjohn warning to Black, who did not have a lawyer present throughout the interview process. (Black retained an attorney to represent him during his final interview in 2014.) Moreover, Black did not have any advance information about how or what to prepare; he simply showed up.
Unsurprisingly, Black stated in his declaration challenging his conviction that to refuse an interview would have resulted in his termination, so he felt compelled to submit. Undoubtedly, everyone involved understood the stakes. Thus, the court, in ruling on Black’s post-trial motion, found that, given the government’s close involvement in the internal investigation, Black’s interview under threat of employment termination was tantamount to compelled action by the government. Although such a finding was predictable, the legal implications were significant.
Decades before, in 1967, the U.S. Supreme Court ruled in Garrity v. New Jersey that statements obtained from public employees under threat of termination are inadmissible against them at a criminal trial. Following Garrity, in United States v. Stein, the U.S. Court of Appeals for the Second Circuit stated that, for Fifth Amendment purposes, “‘state action’ includes both conduct by the government and conduct by [a private employer] that is fairly attributable to the government.” Thus, the crux of the issue before the Connolly court in 2019 was whether the internal investigation was fairly attributable to the government. Was the company de facto the government? If the court answered the question in the affirmative, the government may have violated Black’s Fifth Amendment right against self-incrimination.
The court highlighted the vulnerable position of the bank, which had been faced with “a classic ‘Godfather offer’ — one that could not be refused.” The government knew that a guilty plea was simply not an option for the bank since a felony conviction would have caused its “operating subsidiaries to lose key licenses and authorizations in the United States, which would have wreaked substantial regulatory uncertainty overseas.” The government leveraged the bank’s intense desire to obtain cooperation credit and avoid prosecution, to ensure that it cooperated in every conceivable way.
Throughout the course of the massive internal investigation, the government not only requested documents but encouraged the submission of flagged notable documents, evidence, and information that the government might be particularly interested to review. As is often the case, the government also requested, and received, summaries of facts learned from employee interviews. Additionally, counsel running the internal investigation interacted with the government “hundreds, if not thousands of times.” This included roughly 230 phone calls and 30 in-person meetings with government officials. For the final 14 months of the internal investigation, counsel held weekly calls with the government to provide the latest developments and field additional requests.
The internal investigation was very thorough, including nearly 200 interviews of more than 50 of the employees, extraction and review of 158 million electronic documents, and listening to hundreds of thousands of hours of audio tapes. Counsel conveniently distilled this information into a report that summarized the findings and laid out a road map of the case against the various employees. To appease the government, counsel noted “that much (if not most) of the information that will ultimately be used in making charging decisions ... will have come from the Bank’s identification of notable communications and its having brought those communications to the DOJ’s attention.”
When Black challenged his trial conviction and moved to dismiss his indictment on constitutional grounds, the court excoriated the government for effectively outsourcing its investigation to the initial target of the investigation. The court noted the government only reviewed information after it had “first passed through the maw of [private counsel]’s five-year, $10 million investigative machine and been fully digested for the Government by the target of the investigation.”
In other words, the government directed the investigation and reviewed the results. The court concluded that “rather than conduct its own investigation, the government outsourced the important developmental stage [to] ... 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.” Accordingly, the court easily found that the internal investigation was fairly attributable to the government.
Nevertheless, the court denied Black’s request to set aside his conviction because the government did not violate his Fifth Amendment right against self-incrimination. As a matter of general principle, any use, direct or indirect, of a defendant’s compelled statements is unconstitutional under the Fifth Amendment. In Connolly, the government, recognizing the looming Fifth Amendment issue, did not introduce any of Black’s interview statements into evidence, nor did the government make indirect use of Black’s statements.
Simply put, Black’s compelled statements were not the “but for” cause of a single item of trial evidence. Rather, “[a]ny investigatory leads that the Government may have derived from Black’s compelled statements to [his employer’s counsel] were independently sourced.” Following the denial of Black’s motion, Judge McMahon sentenced Black to a total term of imprisonment of time served and a three-year term of supervised release (the first nine months’ home confinement), and she imposed a $300,000 fine.
Although the Connolly decision undoubtedly served as a stern warning, it has not turned the world of internal investigations upside down. In short, the sky did not fall.
The portion of the court’s opinion that is most intriguing, and which generated such a great deal of discussion, is largely dicta with no serious precedential value. The court easily could have avoided the lengthy discussion that found the company was de facto the government and simply found that the government did not use Black’s statements against him at trial. Interestingly, the court decided otherwise and emphasized the former to send a clear message: A line exists, and it had been crossed by the government.
The government, however, seems to have deliberately ignored the issue altogether and strategically emphasized that Black’s statements were not used against him at trial. The court was very critical of this strategy and expressed frustration with the government on multiple occasions, stating that the government “has not done much of anything at all” to rebut Black’s contentions. Nevertheless, the government’s strategy demonstrates a deep understanding of the underlying constitutional issue. Startlingly, so long as the government carefully constructs its case and independently sources its evidence, this type of investigative outsourcing will never be grounds to overturn a conviction. The government may lose many battles, but it will always be in a position to win the war.
Although Connolly lacks precedential value, it highlights an important dilemma that many white collar lawyers may continue to face for years to come. Because Connolly tacitly reinforces the government’s ability to outsource investigations, and any perceived resistance to the government jeopardizes the grant of cooperation credit, it is the responsibility of company counsel to ensure the integrity of future internal investigations by adhering to the highest standard of ethical behavior.
In Connolly, seasoned counsel administered a standard Upjohn warning to Black at the beginning of each interview. However, given the court’s decision detailing the effect of the cooperation exacted by the government, counsel in future cases may have to consider revising their standard internal investigation practices to avoid violating ethical obligations.
The Upjohn warning stems from the seminal 1981 U.S. Supreme Court case Upjohn v. United States, in which the Supreme Court held that communications between company counsel and employees of the company are privileged but that the company, not the individual, owns the privilege. Typically, a well-crafted Upjohn warning is able to convey this reality to the employee and still elicit candid statements.
Internal investigation counsel interviewed Black three times over the course of nearly two years. The court noted, “the Government and [counsel] discussed Black, in real time and at least to a limited extent, as the ... internal investigation progressed.” Thus, the Connolly decision suggests that the employer may have effectively waived attorney-client privilege early in the investigation. As such, a standard Upjohn warning conveying to an employee that its employer may waive privilege would be factually inaccurate. Bluntly stated, company counsel who utilize the typical Upjohn warning in an outsourced government investigation could run afoul of ethical requirements, since lawyers are strictly prohibited by American Bar Association Model Rule of Professional Responsibility 4.1 from making a false statement of material fact to a third person.
Additionally, Model Rule 4.3 states that “[i]n dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested.” Moreover, “[t]he lawyer shall not give legal advice to an unrepresented person, other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interests of such a person are or have a reasonable possibility of being in conflict with the interests of the client.”
Similarly, Comment 10 of Model Rule 1.13(f) provides that when an “organization’s interest may be or becomes adverse to those of one or more of its constituents,” the lawyer should advise the constituent of the conflict or potential conflict, “that the lawyer cannot represent such constituent,” and that “such person may wish to obtain independent representation.” At bottom, if company counsel reasonably should know that the interests of an employee are adverse to the company, company counsel must advise the employee to consider obtaining independent representation.
The court’s opinion suggests that counsel could become aware of the adversarial interests of employees before internal investigation interviews. In those situations, counsel has an ethical obligation to provide employees with an enhanced warning regarding the presence of a potential conflict and advise them to consider obtaining independent legal representation.
The use of more explicit pre-interview warnings to employees following the Connolly decision could result in fewer employees cooperating during internal investigations — the same dire predictions were made in the wake of Upjohn itself. Nevertheless, ethical requirements are absolute. Good white collar lawyers will find a way to comply with the ethics rules and also conduct thorough investigations.
The discussion related to government outsourcing of investigations is far from finished. On Nov. 21, 2019, filed a notice of appeal with the district court. Interestingly, Black will present his case to the same court that issued the Stein decision, which found that “‘state action’ includes both conduct by the government and conduct by [a private employer] that is fairly attributable to the government” to apply this holding to the underlying facts of his case.
Regardless of the outcome of the appeal, it remains company counsel’s responsibility to navigate the delicate and difficult world of ethical responsibilities in internal investigations because the government cannot hand out bar cards to company counsel as part of cooperation credit.
Jennifer Z. Belveal is a partner and Matthew E. Sierawski is an associate with Foley & Lardner LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
1] United States v. Connolly, No. 16 CR. 0370 (CM), 2019 WL 2120523, at *8-9 (S.D.N.Y. May 2, 2019).