INSIGHT: Judge’s Concerns Over DOJ ‘Outsourcing’ Investigations Could Bring Changes

An influential New York federal judge recently wrote she was deeply troubled by the “routine outsourcing” of investigations by the Department of Justice to companies under investigation.

In United States v. Connolly, U.S. District Judge Colleen McMahon, the chief judge in the Southern District of New York, examined whether DOJ’s coordination with an international bank led to a constitutional violation when the DOJ later indicted two of the bank’s employees.

One of the employees, Gavin Black, argued that the bank and its lawyers acted as de facto government agents who required him to choose between keeping his job and surrendering his Fifth Amendment rights.

The DOJ and defense lawyers across the U.S. are studying McMahon’s concerns, which will likely lead to changes by the DOJ, companies, and outside counsel.

A Twist on a Common Occurrence

It is a scenario that happens almost daily. The government informs a company that it is under investigation. The company cooperates with the government and volunteers to conduct an internal investigation, which is welcomed by the government. The company’s lawyers interview employees about potential misconduct. Employees must cooperate with the investigation or risk losing their jobs. The company reports its findings to the government. The government defers its interviews until the company’s investigation ends. The government brings criminal charges against some of the employees interviewed by company counsel.

In the case before Judge McMahon, there were a few twists. A civil regulator, the Commodity Futures Trading Commission (CFTC), initially asked the bank to undertake the investigation; the bank did not volunteer it. After hearing the initial results of the investigation, the CFTC identified a group of employees for the bank to interview, including Black. The bank did so, and shared the results with the CFTC and later the DOJ. Black was not represented by his own counsel until his fourth interview with the bank’s lawyers.

The unusual features of the case did not end there. At one point, the government told a bank lawyer to approach an interview “as if he were a prosecutor,” and this lawyer gave his “word” that he would. Later in the investigation, the bank asked the government for permission to interview Black, who was still employed by the bank.

Judge McMahon concluded that the bank’s investigation was “fairly attributable” to the government. In other words, she was willing to find that the bank and its lawyers were de facto government agents and that Black’s statements were compelled.

Although Black ultimately lost his bid to dismiss the indictment (the government had not directly or indirectly used any of his statements from the interviews with the bank), Judge McMahon recognized that her decision had far-reaching implications for the government.

Likely Response From the Justice Department

Prosecutors across the Justice Department reacted quickly to the decision. Within days, several denied their offices “direct” corporate internal investigations. If other judges agree with Judge McMahon, it could potentially inhibit DOJ’s ability to prosecute individuals in some corporate cases.

In future cases, therefore, government lawyers are likely to avoid much of the conduct that triggered Judge McMahon’s concerns. They will not instruct companies to interview specific employees. They will not elicit promises that a company lawyer will act “as if he were a prosecutor.” Those changes are easy to make.

But there may be other, more difficult changes. To avoid the appearance of “directing” companies, prosecutors may be less willing to voice their opinions about a company’s investigation. That will create the possibility of more misunderstandings and disagreements between companies and prosecutors. That may also lead to unnecessary expenses if companies explore areas that are not of interest to the government.

To avoid accusations that companies are “carrying water” for the government, prosecutors may want to initiate their own interviews of individuals before companies have concluded their investigations. That would reduce the effectiveness of internal investigations, because employees are less likely to cooperate with their employer if prosecutors are requesting interviews at the same time. If employees do cooperate with companies, it may be more cumbersome and take longer, as employees consult with attorneys at an earlier stage.

And there is another possibility. One senior DOJ prosecutor stated recently that the Fraud Section does not ask companies to attribute statements to interviewees, and only asks for companies to produce the relevant documents and a general summary of the facts. That has not been the DOJ’s past practice, and that policy seems unlikely to last. Vague information from companies is not as useful to the government as detailed information.

The most likely result is that prosecutors will continue to rely upon and scrutinize corporate internal investigations closely. Corporate internal investigations are a source of valuable information for prosecutors. The Justice Department has not spent most of the last decade creating substantial incentives for companies to cooperate, only to walk away from the benefits of cooperation because of critical language in one judicial opinion.

If the DOJ senses that an internal investigation is not being handled appropriately, prosecutors are likely to communicate their disagreement in some fashion. Their comments may not be as blunt as they would have been before Judge McMahon’s opinion, but the government is unlikely to abandon interest in companies’ internal investigations.

Likely Effects on Companies and Outside Counsel

For companies, Judge McMahon’s opinion should not change the calculus. Internal investigations should take a rigorous look at the facts and ask tough questions. They should follow the facts wherever they lead. When cooperating with the government, companies should be forthright concerning what their internal investigations have found. Corporate investigations must be credible.

Companies will continue to make their own employment decisions. If an employee refuses to cooperate with an internal investigation, that should lead to an adverse employment decision in most circumstances. There can be good reasons for employees to remain silent, and the Supreme Court has recognized that the Fifth Amendment is designed to protect the innocent. It is difficult, however, for a company to justify the retention of an employee who refuses to help a company get to the bottom of important issues.

The biggest danger is that some companies and outside counsel may feel the temptation to take things too far, particularly if they sense the government wants certain actions that it cannot request. That already happens in some cases where companies take unfair actions while hoping to impress the government.

For instance, to prove to the government that they really “get it,” some companies and outside counsel focus only on obtaining inculpatory information while ignoring or minimizing exculpatory evidence. Other companies try to condition the payment of attorneys’ fees only if the employee agrees in advance to cooperate with the government and effectively waive their constitutional rights.

But that is what led to Judge McMahon’s opinion: an uneasiness that there was a lack of fairness and balance in DOJ’s “outsourcing” of investigations to companies.

Just as it is not fair for the government to ask a company lawyer to “act as if he were a prosecutor,” companies should work to ensure that their internal investigations are rigorous but fair. Otherwise, federal judges will continue to see unfairness in DOJ’s reliance on internal investigations, and the controversy in this area will not end.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Michael Kelly and Douglas Paul are partners in the Washington, D.C., office of Akerman LLP. They defend companies and individuals in internal investigations, criminal prosecutions, SEC enforcement matters, and civil litigation.