After a five-year, multi-million dollar investigation by outside counsel, a large financial institution settled allegations of LIBOR manipulation on favorable terms (a deferred prosecution agreement) with the U.S. Department of Justice.  Cooperating through its law firm with three different federal agencies from the very start, the financial institution provided a road map to the Government for the prosecution of individual employees.  In ruling on an individual defendant’s motion, Chief Judge Colleen McMahon found that a regulatory agency had directed the law firm’s investigation and that, as a consequence, the multiple interviews by the law firm of the defendant violated his Fifth Amendment testimonial rights.  Although this violation did not result in dismissal of the case because prosecutors chose not to offer the defendant’s statements made in the law firm’s interviews, the decision fires a warning shot at the Government about how it directs companies and their outside counsel to conduct investigations. 

From the very beginning, the lawyer representing the institution stated that there was nothing voluntary about the internal investigation and that the only choice was about the institution’s “level of cooperation” with the Government.  The Court likened the Government’s request that the institution “conduct a ‘voluntary’ investigation” to “a classic ‘Godfather offer’ – one that could not be refused.”  And for the next five years, the law firm coordinated extensively with the three Government agencies.  

When it came to interviews of the employee who became the defendant, the Government conceded that it expected the outside law firm to interview him and the first interview “was conducted at the behest of the Government.”  Moreover, that defendant did not have discretion to refuse to talk with the investigative team – he could be fired if he did not cooperate.  By the end of the investigation, the defendant’s employer “asked the Government for ‘permission’ to interview its own employee” one last time.  (Emphasis in original.)

All along, the outside law firm continuously updated the Government enforcers and during these sessions, the Government gave the firm “marching orders,” including telling one firm lawyer to “approach [an employee] interview as if he were a prosecutor.”  The law firm’s White Paper to the Government documented the “hundreds if not thousands” of interactions they had with the Government and the “weekly update calls” that afforded the Government an opportunity to “make new requests.”  In contrast to the amount of work conducted by the outside law firm, the Government did not conduct its own parallel investigation, but instead took the results of the law firm’s investigation and saved itself the trouble of doing its own work.  The Court concluded:  “[E]verything I have read suggests that the United States outsourced its investigation to [the company] and its lawyers.”

Under controlling precedent, Garrity v. New Jersey, 385 U.S. 493 (1967), the Court found that the interviews of the defendant conducted by the outside law firm during the internal investigation were “fairly attributable to the Government.”  As the Court found, the outside law firm “did everything that the Government could, should, and would have done had the Government been doing its own work.”  As a result, those interviews violated the defendant’s Fifth Amendment right not to provide testimony that could implicate him in a crime.

The Court then went on to analyze whether the Government actually used the defendant’s compelled statements in the trial.  After an extensive review of the evidence, the Court held that the Government did not use the testimony or leads developed from the testimony in the trial or in pre-trial grand jury testimony.  In doing so, the Court distinguished the facts of United States v. Allen, 864 F.3d 63 (2d Cir. 2017),  in which the Second Circuit did find a violation of the defendants’ rights when the Government used their previously immunized testimony to assist it in its case against them.

Despite not providing relief to the defendant, the Court has thrown a wrench into how the DOJ currently conducts many of its high profile investigations of corporate criminal conduct.  In response to the Government’s argument that the Court's finding “will hamper law enforcement by curtailing the Government’s ability to encourage cooperation, which will prove a bad idea as a matter of policy,” the Court stated that it “is a court of law, not a court of policy” and it is concerned with the protection of the defendant’s constitutional right against self-incrimination. 

The Chief Judge stated:  “The Court is fully aware that this ruling may have implications that extend well beyond this particular case.”  It will be interesting to see whether the DOJ will adjust the way it “directs” internal investigations in the future or whether it will change any of its written policies.  Right now, the DOJ leverages to a high degree corporate internal investigations so that it conserves its limited resources. 

For companies conducting such investigations, the ruling may provide an opportunity to take more control of internal investigations, even when in “cooperation” mode.  This ruling provides a little more leverage to limit unreasonable Government requests in such a situation.

Also, the ruling should have companies considering how much cooperation is appropriate with regulatory agencies.  Typically, a company is prone to be more cooperative with a regulatory agency that oversees its industry, than with those who threaten criminal sanctions.  Here, the regulatory agency directed the investigation then turned the information over to prosecutors at the Department of Justice who brought criminal charges against the company’s employees.  The takeaway is a reminder to companies that any cooperation with a regulatory agency is likely to end up in the hands of criminal prosecutors.

Finally, the Government may embrace part of that finding and try to charge individuals who lie to an outside law firm conducting an internal investigation with violations of the Obstruction of Justice statutes, 18 U.S.C. §§1501 et seq. or the False Statements statute, 18 U.S.C. § 1001.  The theory would be that if the employee knows that the company is cooperating with the Government, and that the lawyers will turn over the result of the interview to the Government, then the employee is essentially making a false statement to a Government agent or obstructing the Government’s investigation.   The Government has proceeded with these theories in the past through plea agreements and charges, but its practice has not been widespread. 

In any event, Chief Judge McMahon’s ruling in this case is sure to make some waves at DOJ.  The extent to which it upsets the boat, is something that we will have to wait to learn.