Privatized Prosecution: The Outsourcing of White Collar Criminal Investigations to Big Law and Its Fifth Amendment Implications

Gregory Wang

 

U.S. v. Connolly

SDNY Judge McMahon was not exactly pleased with the DOJ despite a wire fraud conviction in U.S. v. Connolly, because they did not quite do what prosecutors are typically supposed to do: develop a prosecution.[1] Instead, the prosecutors had “outsourced” this hard labor to New York law firm Paul Weiss, which had conducted the internal investigation at the defendant’s employer, Deutsche Bank.[2] During the course of the internal investigation, the DOJ directed Paul Weiss attorneys to interview – or rather, “effectively depose employees . . . and then turn over the result[s].”[3] The big problem was that Deutsche Bank did something that the DOJ could not have done—start each interview with a question that went something like: “Would you like to provide self-incriminating evidence, or would you like to lose your job and career?”[4] One could say that that question seems quite “compelling.” The Fifth Amendment would be inclined to agree.[5]

 

The Fifth Amendment’s Problem with Outsourcing

Since the landmark Supreme Court decision in Garrity v. New Jersey,[6] courts have found violations of employee-defendants’ Fifth Amendment rights when two criteria are met: when their private employers—or agents acting on behalf of those employers, as was the case with Deutsche Bank—financially coerce self-incriminating testimony, and when that coercion is “fairly attributable to the government.”[7]

Financial coercion does not always mean an employee declare themself culpable or declare themself bankrupt, although an employer dangling a check in front of an employee who is entitled to and, in that moment, needs it quite badly, is often enough.[8] Courts look to both the “size” and the “substance,” of the pressure,[9] meaning reputational damage and loss of future employment can reach the threshold as well.[10] After all, the defendants in Connolly were preeminent career swaps traders who tried their best to hide from the jury their generous compensations and impressive wealth.[11] The choice must also be an ultimatum: noncooperation “must” or “shall” result in punishment, not “may” or “might.”[12]

Companies prefer not to be indicted.[13] So, they instead seek out the coveted deferred prosecution agreement (“DPA”) with prosecutors in which they usually agree to quietly accept responsibility and cooperate with investigations.[14] Thus, if a DPA is on the table, when the Government says, “Jump!” the company jumps. And when the Government says, “If you want cooperation credit under the Principles of Federal Prosecution of Business Organizations, Title 9 of the DOJ’s Justice Manual,[15] and thereby dodge indictment,[16] you will listen very carefully to these instructions…” the company listens very carefully to those instructions.[17] And the company can be sure that those instructions will continue until the investigation is over: whom, when, and how to question; and where it can forward the evidence.[18]But this is when the Government has gone too far.[19] And the consequences in such cases are severe: a reviewing court may suppress all of the ill-gotten evidence[20] or even dismiss of the indictment altogether,[21] completely defeating the purpose of the Government’s outsourcing arrangement.

 

Why Outsourcing?

If the Government overplaying the outsourcing game means them ultimately letting defendants walk free, why do they continue to risk it? The answer is mission and money. In the wake of Americans’ collective outrage over the Government’s failure to meaningfully prosecute those responsible for the 2008 financial crisis, human beings replaced companies as the DOJ’s prime targets.[22] So now the Government and corporations’ incentives align: help each other point the finger down the chain of command.[23]

Additionally, white collar investigation has become an expensive endeavor. Deutsche Bank’s $10 million investigation in Connolly, for example, was “the most expensive internal investigation in the respective histories of both Deutsche Bank and Paul Weiss.”[24] That’s 5% of the DOJ’s Criminal Division’s entire annual budget.[25]

 

Outsourcing Moving Forward

To continue taking advantage of the cost-savings of outsourcing while protecting employees’ Fifth Amendment rights, the Government and companies should adopt best practices. First, companies should utilize less extreme economic pressures than termination. Instead, they can threaten to cancel bonuses or impose a demotion so that the employee’s livelihood is not at stake. Companies should also clearly indicate to the employee what the incentive is and not equivocate on whether the threat will be carried out. Second, Government agencies should not provide instructions, priorities, or methods for corporations’ internal investigations. When beginning an investigation, the corporation should document its motivation other than its communication with the Government. Third, the Government should not wait too long before conducting its own interviews so that a company’s own internal investigation does not get too “far out in front” of its own.

 

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[1] See U.S. v. Connolly, 2019 WL 2120523, at *12 (S.D.N.Y. May 2, 2019).

[2] See id. at *11-12.

[3] Connolly, 2019 WL 2120523, at *12.

[4] See id.

[5] See id. at *14-15.

[6] 385 U.S. 493, 496-97 (1967) (holding that police officers’ Fifth Amendment rights were violated when given the choice between self-incrimination and losing their public jobs).

[7] U.S. v. Stein (Stein II), 440 F.Supp.2d 315, 334 (2d Cir. 2006).

[8] See id. at 330-32 (finding that conditioning cooperation on payment of reasonably relied upon $400,000 worth of attorney’s fees financially coercive when the employee was unemployed and had a net worth was $320,000, a third of which was in residential equity).

[9] U.S. ex rel. Sanney v. Montanye, 500 F.2d 411, 415 (2d Cir. 1974).

[10] Id.

[11] United States’ Reply to Defendants’ Combined Motions in Limine at 29-31, U.S. v. Connolly, No. 16-cr-0370 (S.D.N.Y.), ECF No. 252.

[12] U.S. v. Solomon, 509 F.2d 863, 865 n.4 (1975) (literally distinguishing the NYSE’s policy that an employee “may” be expelled from the statute in Garrity that stated an officer “shall” be fired).

[13] I say this not just to be cute; indictment kills. Consider the conviction of Arthur Anderson in 2002, which destroyed the company and left 85,000 people out of work. Elizabeth K. Ainslie, Indicting Corporations Revisited: Lessons of the Arthur Anderson Prosecution, 43 Am. Crim. L. Rev. 107, 107 (2006). The Supreme Court’s reversal of the conviction, Arthur Anderson LLP v. U.S., 544 U.S. 696, 696-97 (2005), was little comfort to the accounting giant’s corpse, which had been cold for three years by then.

[14] Daniel J. Fetterman & Mark P Goodman, Defending Corporations and Individuals in Government Investigations §6:21 (2020 ed. 2020).

[15] U.S. Dep’t of Just., Just. Manual §9-28.000 et seq.

[16] Id. § 9-28.700 (describing cooperation as a mitigating factor which can result in a different outcome than indictment and prosecution).

[17] See, e.g., U.S. v. Stein (Stein III), 541 F.3d 130, 136 (2d Cir.2008) (finding that a DOJ policy of giving cooperation credit to companies only if they withheld legal fees from suspect employees was essentially giving the Government control over the company’s investigation).

[18] See, e.g., U.S. v. Connolly, 2019 WL 2120523, at *12 (S.D.N.Y. May 2, 2019).

[19] U.S. v. Stein (Stein II), 440 F.Supp.2d 315, 334 (2d Cir. 2006).

[20] See, e.g., id. at 338.

[21] See U.S. v. Allen, 864 F.3d 63, 68 (2d Cir. 2017).

[22] Sara Sun Beale, The Development and Evolution of the U.S. Law of Corporate Criminal Liability and the Yates Memo, 46 Stetson L. Rev. 41, 63 (2016). Although, the vast majority of individual enforcement has been against middle-managers and low-level employees, not executives, which is probably not what the public had in mind. John C. Coffee, Jr., Corporate Crime and Punishment: The Crisis of Underenforcement 38 (2020).

[23] See Jed S. Rakoff, Why the Innocent Plead Guilty and the Guilty go Free: And Other Paradoxes of Our Broken Legal System 98-99 (2021).

[24] U.S. v. Connolly, 2019 WL 2120523, at *14 (S.D.N.Y. 2006).

[25] General Legal Activities, Criminal Divisions, Dep’t of Just., https://www.justice.gov/doj/page/file/1246811/download (last visited Dec. 3, 2020).