Major corporations in the United States often cooperate with federal prosecutors to get special treatment – deferred or non prosecution agreements, declinations, reduced sentences.

Antonia Apps

Milbank

New York, New York

Much of that cooperation involves following government direction on conducting corporate internal investigations.

But what if that direction crosses the line into micromanaging?

That was the case presented in U.S. v. Connolly.

District Court Judge Colleen McMahon found that the company’s lawyers were effectively doing the government’s work.

Judge McMahon found that Deutsche Bank, through its external counsel, did “everything that the government could, should, and would have done had the government been doing its own work.”

“Rather than conduct its own investigation, the government outsourced the important developmental stage of its investigation to Deutsche Bank . . . 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,” Judge McMahon wrote.

The Commodity Futures Trading Commission (CFTC) directed the bank to interview certain employees. As a result, the bank’s outside counsel interviewed Black three times without counsel or an opportunity for him to prepare. Before interviewing Black for a fourth time, Deutsche Bank requested permission of the CFTC.

The CFTC directed an outside lawyer for Deutsche Bank to conduct one employee interview “as if he were a prosecutor.”

That kind of micromanaging of the bank’s internal investigation by the CFTC led Judge McMahon to find that the bank was “de facto government.”

Antonia Apps is a former federal prosecutor. Apps is now a partner at Milbank in New York.

“It is true that many companies provide the findings of their internal investigations to the government,” Apps told Corporate Crime Reporter in an interview last month. “That happens whether it is instituted at the request of the government or by the company based on a finding of wrongdoing. It is common for companies to then report on the findings of the investigation.”

“In the years following the credit crisis, there was an unprecedented increase in the number and scope of large internal investigations conducted by companies often at the request of the government. Those companies often then provide the reports of their findings through outside counsel to the government.”

“The Court in this case found that the level of direction by the agencies as to each step of the internal investigation conducted by outside counsel was somewhat extraordinary. The District Court focused on the numerous ways in which the government agencies micromanaged the investigation. And second, it was combined with what the court found to be an absence of investigative steps taken by the government. It will not be every case. I don’t even think it’s the majority of cases where you have this combination of intense direction by the government combined with the government not taking any investigative steps until the end of the investigation.”

“The case is meant to be a warning for the government that it should not conduct the level of direction that appears to have happened in this particular case. There can be a line between the government providing too much direction to outside counsel conducting an investigation and one where the government steps back, takes its hands off the wheel, and allows outside counsel to conduct the investigation and come back and present to the government the key findings of the case in ways that would not cross the line that Judge McMahon identified in the case.”

“It’s an important decision for the government. It was very much a rebuke of the government. The Judge went to some lengths to catalog the various ways in which the agencies got involved in the decisions about who to interview, when to interview them. She even pointed out that on one occasion, one of the agencies directed one of the outside counsel to conduct the interview as he would as a former prosecutor. And the lawyer in the case was a former federal prosecutor. That level of detail is what triggered Judge McMahon’s ruling that the investigation was fairly attributable to the government. And the government needs to take a hard look at this case and make sure they don’t come close to the line.”

“Before this decision came out, the government had in fact amended the Justice Manual to point out that it will not be directing investigations conducted by outside counsel. The Department of Justice is aware of this issue. Since the decision has come down, they have been on record saying we are not directing investigations in the manner that seems to have happened in the Connolly case.”

You use the term direction. Aren’t government direction and corporate cooperation just two sides of the same coin?

“The Court took pains to point out that she was in no way criticizing the actions of the outside counsel in doing what they were doing in response to the request from the government. She pointed out that that was indeed the rational thing to do in order to get cooperation credit. The government needs to take a step back and make sure that they let good outside counsel conduct the investigation that they need to conduct in order to present findings to the government. I don’t think the decision means that there can be no dialogue between the government and outside counsel and the private entity. In fact, it is in the interest of companies as well as the government to have a dialogue early on about what the government may be interested in hearing about.”

“I don’t think that practice is going to change. I don’t think this decision means that that dialogue can’t happen. Nor does it mean that private entities like banks or public companies can’t present their findings in order to earn cooperation credit.”

“The structure that has been in place that provides incentives to companies to cooperate with the government and present the results of their internal investigations remain just the same today as they did before the decision. It’s the manner in which those investigations are directed by the government that was implicated by this decision.”

Doesn’t cooperation mean the company cooperating with the government’s direction?

“Cooperation means doing what the government wants to do. It is rational and entirely the appropriate thing to do for any private company to do exactly what the government says if they want to earn cooperation credit and seek leniency from the government. The government has indicated that they will take that cooperation credit into account, provided certain conditions are met, and may even decline to prosecute if the company cooperates in a sufficient way and self reports and undertakes remedial action. The private parties, the banks are absolutely incentivized to cooperate in any way shape or form in order to achieve that cooperation credit. And the system is set up that way.”

“The decision showed that the government is going to have problematic consequences if it communicates with outside counsel in such a way that it gets involved in the intricacies of who to question or who to interview when. The government can adequately communicate with outside counsel or with a bank as to what topics it wants covered or presented or what issues it wants to hear about, potentially even identifying individuals. But to go the step further that happened in the Connolly case where you are sequencing the individuals, directing whether certain individuals should be interviewed multiple times – it was the manner in which they directed it which put, in the District Court’s view, the case over the line.”

“There is some nuance. Investigations are going to continue just the way they have been going. The company is going to be rational and follow the government’s direction. Although now with this decision, if the government is tending toward this incredibly detailed micromanaging of outside counsel’s internal investigation, outside counsel might have the ability to raise this as an issue with the government. But ultimately, private banks will cooperate and do what the government asks. It is in their interests to do so. As I said, the consequences fall not so much on the private entity, but on the government, if it seeks to bring individual criminal prosecutions down the road.”

“The interesting dynamic in the Connolly case is that a lot of direction seems to have come from the federal regulators – whether the SEC or the CFTC. What is interesting is that those regulators do not suffer the same consequences that the criminal authorities suffer by micromanaging. It will be interesting to see the extent to which the civil regulators look at this decision and alter their behavior. The civil regulators tend to engage in these kinds of detailed discussions more than the criminal authorities. The criminal authorities are attuned to the fact that there could be follow on negative consequences from this kind of micromanaging.”

[For the complete q/a format Interview with Antonia Apps, see 33 Corporate Crime Reporter 22(12), June 3, 2019, print edition only.]

