Investigation Outsourcing: When Do Companies Become Arms of the State?
V&E Government Investigations Update, May 9, 2019
A recent decision by a district judge in the Southern District of New York demonstrates that when a company’s outside counsel conducts an investigation in connection with a government investigation of the company, the Government’s involvement in shaping, directing and relying upon that investigation will be closely scrutinized.1 If the Government cannot demonstrate that it has not simply “outsourced” its investigative function, the company and its outside counsel may be seen as tools of the Government and arms of the State.
As discussed in a V&E post last October, Gavin Black, a defendant convicted of wire and bank fraud for conduct related to the submission of fraudulent rates to the London Interbank Offer Rate (“LIBOR”)2 during his employment at Deutsche Bank, sought to overturn his conviction by challenging the admission of testimony from Deutsche Bank’s outside counsel regarding statements Black made during an internal investigation conducted at the direction of the Government. Relying on United States v. Kastigar, 406 U.S. 441 (1972) and Garrity v. New Jersey, 385 U.S. 493 (1967), Black argued that his statements to Deutsche Bank’s counsel were inadmissible because they were compelled by his employer who was acting on behalf of the Government.3
On May 2, 2019, Judge Colleen McMahon gave Black a pyrrhic victory. She agreed that his statements made to company’s outside counsel during its investigation were tainted, but she also found that the other evidence against him was so strong that the error did not make a difference. The Court found that Black’s statements to the investigating lawyers were compelled because Black was not represented by counsel at the time of his interview and because Deutsche Bank’s policy required its employees to participate in external and internal investigations in order to keep their jobs.
The Court also found that Deutsche Bank’s outside counsel were effectively acting as government agents, not as independent counsel. Judge McMahon looked closely at the Government’s role in shaping and directing the investigation. The Court noted that the record showed that Deutsche Bank and its outside counsel coordinated extensively with the SEC, the CFTC, and the DOJ when conducting its internal investigation into possible LIBOR manipulation. The Court also found that the Government was kept abreast of developments on a regular basis (pursuant to an express agreement) and that the federal agencies gave considerable direction to the investigation of outside counsel regarding what to do and how to do it. The Government specifically directed that certain witnesses, including Black, be interviewed and then received extensive reports on those interviews from outside counsel. Because of this control and direction by the Government, the Court found that the actions of Deutsche Bank and its outside counsel were fairly attributable to the State.
Judge McMahon was particularly critical of the Government’s failure to show that its investigation of Deutsche Bank consisted of anything beyond directing and relying upon Deutsche Bank’s investigation.
The Court rejected the Government’s policy argument regarding the effect of “curtailing the Government’s ability to encourage cooperation” and stated that the Court was a “court of law, not a court of policy” and therefore was “not concerned with whether the outsourcing of investigations to private parties makes life easier for the Government or for the taxpayers.” Instead, the Court explained, that “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.”
While the result of Judge McMahon’s ruling does not impact Black’s conviction, this ruling serves as a warning to the Government, and companies, and outside counsel conducting investigations related to Government investigations, that Courts will scrutinize investigations to ensure that the Government is not simply outsourcing its investigative role. The reality is that the “outsourcing” practices criticized by Judge McMahon are real and widespread in many other cases, so the Government will have to take additional steps and create a record of those steps, to show that it is doing at least some of its own work.
This decision also presents challenges for companies who commission “independent” investigations to show that they really are independent and not just exercises dictated by the Government. Public companies that make disclosures about “independent” investigations by outside counsel will want to make sure that, if challenged in a shareholder case, for example, they can really show independent decision-making by the company and its outside counsel. Companies undertaking any investigation related to a government investigation should work with counsel to ensure that any company-led investigation can withstand scrutiny and is truly independent so that it is indisputably in the best interest of the company and not just the Government.
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1 Memorandum Decision and Order Denying Gavin Black’s Motion for Kastigar Relief, United States v. Connolly, No. 1:16-cr-00370-CM (S.D.N.Y. May 2, 2019). The court also denied Black’s and his co-defendant’s, Matthew Connolly, motions for acquittal or new trial. Decision and Order Denying Defendants’ Motions for a Judgment of Acquittal or New Trial, United States v. Connolly, No. 1:16-cr-00370-CM (S.D.N.Y. May 2, 2019).
2 LIBOR is the interest rate benchmark at which banks offer to lend money to another bank in the wholesale money markets in London.
3 See also Memorandum of Law in Support of Defendant Gavin Campbell Black’s Motion for Kastigar Relief, United States v. Connolly, No. 1:16-cr-00370-CM (S.D.N.Y. Oct. 10, 2018).