United States v. Connolly: District Court Scrutinizes Longtime Corporate Practices for Internal Investigations

This article first summarizes the evolution of internal corporate investigations like the one in Connolly. The article then summarizes the Connolly decision and evaluates its likely impact on the manner in which internal investigations are conducted. Although the government may seek to temper the extent to which it actively guides or intervenes in a corporation’s internal investigation in light of the Connolly decision, the fundamental incentives to conduct thorough investigations and to cooperate fully with the government when corporations’ employees have engaged in suspected misconduct remain unchanged. We thus conclude that Connolly is unlikely to alter the basic dynamics that have led to close cooperation between counsel conducting investigations on behalf of corporations and regulators.

Federal Agency Guidance on Internal Investigations and Its Impact

The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), as well as other regulators, have long maintained public guidance making clear that corporations are eligible for substantially more lenient treatment if they cooperate with government investigations into their employees’ misconduct. The DOJ and SEC encourage, and in many cases demand, that a company’s cooperation take the form of an internal investigation conducted by outside counsel and that the internal investigation include interviews of relevant employees, review of relevant documents, and sharing with the government the facts uncovered and conclusions reached during the investigation. That sharing of information may in turn lead the corporation to consider waiving the protections of the attorney-client privilege and work-product doctrine. By shifting the often extraordinary burden and cost of investigating potential misconduct onto corporations, internal investigations allow regulators to conserve their limited investigative resources.

The SEC’s 2001 Seaboard Report is one of the earliest examples of regulatory guidance for corporate internal investigations. In that report, the SEC announced it would not take action against a public company, whose controller caused it to maintain inaccurate books and records and issue misstated periodic reports, because the company had “pledged and g[iven] complete cooperation to [SEC] staff.” The company “produced the details of its internal investigation, including notes and transcripts of interviews,” and the company “did not invoke the attorney-client privilege, work product protection or other privileges or protections” to shield relevant information from regulators. The Seaboard Report went on to list criteria by which, in future cases, the SEC would evaluate whether, and to what extent, to grant cooperation credit to companies facing investigation, including (1) whether management engaged independent, outside investigators to identify misconduct; (2) whether the company identified evidence “with sufficient precision to facilitate prompt enforcement actions”; (3) whether the company secured the cooperation of its employees with the SEC’s investigation; and (4) whether the company made available to the SEC the results of its review. The report states that companies may “choos[e] not to assert the attorney-client privilege” and other privileges “as a means (where necessary) to provide relevant and sometimes critical information to the Commission staff.” The Seaboard Report remains the touchstone for the SEC’s evaluation of cooperation by a corporation. As recently as May 2018, the codirector of the SEC’s Enforcement Division confirmed its continuing applicability.

The DOJ has likewise issued a series of memoranda containing guidance for internal investigations. The 1999 Holder Memorandum lists criteria for evaluating whether to charge a corporation. Like the SEC, the DOJ will consider a company’s “willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of the corporate attorney-client and work product privileges.” The Holder Memorandum specifies that the DOJ “encourages corporations . . . to conduct internal investigations and to disclose their findings to the appropriate authorities.” In subsequent memoranda, the DOJ has maintained the core principle of encouraging corporations to share the results of an internal investigation—as well as sharing information and access to witnesses—with prosecutors. Recently, in May 2019, the DOJ reaffirmed that companies may earn cooperation credit by disclosing facts “gathered during the entity’s independent investigation . . . including attribution of facts to specific sources rather than a general narrative of facts, and providing timely updates on the organization’s internal investigation into the government’s concerns, including rolling disclosures of relevant information.”

Through those guidance documents, the SEC and DOJ have unambiguously encouraged and given incentives to companies to conduct robust internal investigations and share the results of those investigations with regulators. It is thus no surprise that corporations facing allegations of potential misconduct recognize the strong incentives they have to cooperate fully and proactively with regulators. The result is a set of shared expectations and practices—sometimes express and sometimes implied—among the government, corporations, and their counsel, governing how internal investigations are conducted and what constitutes “cooperation.” It has become commonplace, for example, for corporations to retain outside counsel who maintain open and active lines of communication with the government; to seek the government’s input and approval for interviewing particular witnesses; to provide the government with regular updates on the course of the investigation, new lines of inquiry, and preliminary conclusions; to vet decisions on retaining or terminating employees potentially involved in misconduct in advance with the government; and to provide the government with complete access to relevant documents. It is also common for corporations to consider waiving attorney-client privilege and the work-product doctrine, authorizing outside counsel to share its findings (including evidence and interview notes) that would otherwise be protected from disclosure. Where a corporation and its counsel do not undertake these steps on their own, prosecutors and regulators may suggest that they do so.

For decades, regulators and prosecutors have repeatedly affirmed the importance of full cooperation in public speeches and in announcements of non-prosecution and deferred prosecution that tout the role of extensive cooperation in saving the company from greater sanctions. Sophisticated counsel are well aware that the more thorough and helpful (to the government) the investigation, the better for the corporation. And because cooperation with internal investigations is typically a condition of employment, employees have no realistic opportunity to avoid an interview by corporate counsel if an investigation is under way.

The Connolly Decision

In Connolly, the defendant, a former Deutsche Bank employee, moved to vacate his criminal conviction for LIBOR manipulation on the grounds that his statements to Deutsche Bank’s outside counsel were, effectively, coerced by the government. The defendant relied on a line of cases holding that statements that are “both the product of coercion and attributable to the government” may be suppressed under the Fifth Amendment. Under those cases, the defendant argued, his statements to outside counsel should be suppressed because they were coerced by Deutsche Bank, which acted as an arm of the government.

In evaluating the Fifth Amendment claim, the court described an investigation that, in its view, was essentially “outsourced” by the federal government to Deutsche Bank. The court pointed to facts demonstrating the government’s control over the investigation and the defendant’s inability to resist complying with the company’s cooperation efforts. The court observed that regulators had formally notified Deutsche Bank that they “expected” it to “voluntarily conduct by external counsel a full review” of the LIBOR-related misconduct, including making employee testimony available to the regulators, and that they expected Deutsche Bank to “report on an on-going basis the results of that review to [regulators].” The court characterized the ensuing “voluntary” investigation as having been “demanded (not requested) by [regulators].” Outside counsel’s own statements supported that conclusion. The partner leading the investigation stated that there was nothing “voluntary” about the investigation at all: “[G]iven the draconian consequences that would likely ensue if it did not accept the agency’s invitation [to investigate],” Deutsche Bank essentially had no choice but to cooperate fully with regulators.

The court further concluded that the defendant was powerless to resist cooperating with Deutsche Bank’s internal investigation—an investigation that was demanded and directed by federal regulators. The court highlighted that the interview of the defendant was specifically directed by the government. In fact, Deutsche Bank did not interview the defendant until it had received permission from the government to do so. Moreover, Deutsche Bank policy required employees to cooperate fully with internal investigations. And in this case specifically, Deutsche Bank actively encouraged its employees to cooperate with regulators.

On those facts, the court found that Deutsche Bank had coordinated its investigation “for five years” with federal regulators, including through hundreds of phone calls and 30 in-person meetings. In the end, Deutsche Bank submitted a report to the government summarizing its findings and laying out a “roadmap of the case against Deutsche Bank and various individuals who worked for the Bank.” Meanwhile, the court concluded that during the pendency of Deutsche Bank’s investigation, the government conducted essentially no investigation of its own, relying instead on Deutsche Bank to do the work for the regulators.

Judge McMahon concluded that Deutsche Bank’s private conduct could be attributed to the government because there was “a substantial economic threat” facing Deutsche Bank if it did not agree to the government’s cooperation requests. The court concluded that the defendant had been coerced into providing testimony to Deutsche Bank’s outside counsel and thus, effectively, coerced into providing testimony to the government in violation of the Fifth Amendment. The court specifically declined to endorse the government’s policy argument that reaching that conclusion would “hamper law enforcement by curtailing the Government’s ability to encourage cooperation,” noting that a federal court is “a court of law, not a court of policy.”

Despite those conclusions, the court declined to vacate the defendant’s conviction. The court held that the government did not “make direct or indirect use” at trial of the defendant’s compelled statements and that, therefore, no Fifth Amendment violation had occurred.

The Future after Connolly

Connolly has attracted widespread attention among white-collar practitioners and regulators. And with good reason. The decision marks the first time that a court has held that when a corporation works closely with regulators while conducting an internal investigation into suspected misconduct—an everyday occurrence—the corporation is effectively acting as an agent of the government for purposes of the criminal law.

The decision may well affect the government’s willingness to insert itself into the day-to-day decision making of counsel conducting a corporate investigation. While the degree of the government’s involvement in the investigation at issue in Connolly may have been at the far end of the spectrum, the court’s decision puts the government on notice that it must be mindful that extensive involvement in and management of internal investigations risks serious, unintended ramifications for eventual criminal prosecutions. Moreover, Judge McMahon’s pointed criticism of the government “outsourcing” its investigation to Deutsche Bank may prompt the government to take some investigative steps—such as conducting key interviews—earlier in an investigation than it would otherwise.

While the decision is certainly a dramatic salvo from a high-profile court, there is little reason to believe Connolly will alter the fundamental contours of corporate investigations. As a practical matter, the reality that the government has far fewer resources than private corporations do will inevitably limit Connolly’s impact.

The incentives for corporations faced with an allegation of misconduct remain the same. Corporations remain motivated, for reasons of good corporate governance and management, to proactively investigate and uncover misconduct, including through witness interviews. And, if a corporation uncovers misconduct, the corporation gains little by protecting the perpetrators but stands to gain much by improving its own position vis-à-vis regulators through cooperation.

Regulators’ incentives also remain unchanged. They rely on thorough internal investigations to compensate for their own constrained resources. And they continue to hold extreme leverage over corporations. Criminal prosecutors maintain the power to indict—the equivalent of a corporate death sentence. And, even without the power to indict, other regulators hold power over companies because—as Deutsche Bank’s counsel put it in their investigative report—a company “cannot operate in its core business except with the blessing of its regulators.”

Of course, Connolly is the first decision of its kind. It is not inconceivable that another court will find other investigations “fairly attributable” to the government. Nor is it inconceivable that the government might revisit the guidance it has provided in light of the structure of incentives it has created and the effects it has spawned. Until then, though, many corporate investigations, like the one in Connolly, will remain “internal” in name only.

Randall R. Lee is a partner in the Los Angeles, California, office of Cooley LLP. Michael J. Berkovits is an associate in the New York City, New York, office of Cooley LLP.

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