A corporation’s decision to take certain actions in its internal investigation at the behest, or the specific direction, of the government can have repercussions for the company that reverberate throughout a criminal investigation and prosecution.
Those issues rose to the fore when the U.S. Court of Appeals for the Second Circuit concluded, in United States v. Stein, that actions taken by KPMG at the urging of the government constituted state action and violated the Sixth Amendment. While the U.S. Department of Justice (DOJ) subsequently revised its policies, the government’s most recent pronouncements concerning corporate cooperation reinforce and even enhance the coercive factors that were at the core of that decision: The Yates Memo and subsequent interpretative communications confirm at high volume that companies are required promptly to report and to develop evidence of the wrongdoing of individual employees, and to package that information for the government — or receive no cooperation credit.
As the extent of corporation investigative activity increases, so does the likelihood that cooperation with the government will impact disclosure obligations, and even expose the company to liability based on assertions that the corporation’s actions — whether through the taking of statements, imposition of discipline or termination, or seizure of evidence — are state action and subject to constitutional constraints.
This article discusses decisions addressing the impact of a corporation becoming entwined in governmental actions, including the Second Circuit’s recent decision in Gilman v. Marsh McLennan, 826 F.3d 69 (2d Cir. 2016), and pending motions predicated on the internal investigation that preceded the indictment in United States v. Blumberg, No. 14-cr-00458 (D.N.J.).
Government Coercion and ‘Stein‘
The conduct of the corporation in its investigation will be scrutinized when the defendant presses the argument that the government compelled or coerced the corporation’s actions. If its actions are found to be coerced, the corporation may be considered a “state actor,” and its conduct in the investigation could be unconstitutional and/or lead to the suppression of evidence.
Those were the concepts that were applied in United States v. Stein, and led to the conclusion that KPMG’s cessation of payment of counsel fees constituted a Sixth Amendment violation. Most notably, the Second Circuit affirmed dismissal of the entire indictment, holding that, “but for” the government’s conduct, the company would have paid the defendant’s legal fees. 541 F.3d 130 (2d Cir. 2008).
The Second Circuit articulated that a “nexus of state action exists between a private entity and the state when the state exercises coercive power, is entwined in the management or control of the private actor, or provides the private actor with significant encouragement, either overt or covert, or when the private actor operates as a willful participant in joint activity with the State or its agents, is controlled by an agency of the State, has been delegated a public function by the state, or is entwined with governmental policies.” Id. at 147.
The court concluded that the government’s “unsubtle message” to KPMG regarding its displeasure as to payment of attorney fees, combined with the government’s “overwhelming influence,” led directly to corporate conduct that would not have occurred absent pressure from the government.
The district court in Stein, in a separate decision, also addressed the issue of a violation of the defendant’s Fifth Amendment rights against self-incrimination. United States v. Stein , 440 F. Supp. 2d 315 (S.D.N.Y. 2006). Defendants sought suppression of their statements to internal investigators, arguing that because KPMG conditioned payment of legal fees on their cooperation with the investigation at the governments’ urging, those statements were coerced and so “violated their rights under the Fifth Amendment because KPMG’s actions were attributable to the government.”
The district court confirmed that “it may no longer be doubted that economic coercion to secure a waiver of the privilege against self-incrimination, where it is attributable to the government, violates the Fifth Amendment if the pressure is sufficient to deprive the accused of his free choice to admit, to deny or to refuse to answer.”
As to one particular defendant, the court found that KPMG had coerced statements from him because the company “conditioned payment of legal fees on [the defendant's] cooperation and explicitly threatened to fire him if he did not waive his constitutional rights,” and he “made the statements at the proffer sessions because KPMG threatened to fire him and cut off payment of his legal fees if he did not.” Id. at 331.
Turning then to the issue of whether that conduct constituted state action, the district court found that “the government, both through the Thompson Memorandum and the actions of the USAO, quite deliberately coerced and in any case significantly encouraged KPMG to pressure its employees to surrender their Fifth Amendment rights,” and so KPMG’s actions were attributable to the government. Because it affirmed dismissal of the indictment, the Second Circuit in Stein declined to reach this Fifth Amendment issue. Id. at 135.
The ‘Gilman‘ Decision
The Second Circuit revisited the issue of corporate investigative activity in Gilman v. Marsh McLennan. There, the New York Attorney General had filed a civil complaint against Marsh, alleging fraudulent business practices and antitrust violations. Id. at 72. As part of its investigation, Marsh asked two employees believed to be involved to submit to interviews. Id.
Separately, the Attorney General told Marsh’s CEO that it would forgo criminal prosecution of Marsh as long as Marsh shared the results of its internal investigation with the Attorney General. Id. The employees refused to be interviewed, and Marsh terminated them “for cause.” Id. at 72-73. They then brought an action to recover lost employment benefits, arguing that Marsh’s interview demand “constitute[d] state action that infringed on their right against self-incrimination.” Id. The Second Circuit rejected their argument as “the legal equivalent of a Hail Mary pass in football,” distinguishing their claim from the facts in Stein.
The Gilman court focused on two aspects of Marsh’s investigation. First, the court concluded that Marsh’s decision to interview the employees arose out of Marsh’s need to conduct an investigation for its own purposes, regardless of any governmental prodding. Id. Second, unlike Stein, the court found that “[t]here [was] no evidence that the AG ‘forced’ Marsh to demand interviews, ‘intervened’ in Marsh’s decisionmaking, ‘steered’ Marsh to request interviews, or ‘supervised’ the interview requests.” Gilman, 826 F.3d at 76. Under these circumstances, Marsh could not be considered a state actor.
Other courts have reached similar conclusions where there is no evidence of significant government coercion. See, e.g., United States v. Balsiger, Civ. No. 07-Cr-57, 2014 U.S. Dist. LEXIS 182681 (E.D. Wis. Feb. 27, 2014) (no state action by corporation where “the government did not demand, threaten, coerce, or even suggest that [the company] terminate the defendants’ employment and cease paying their legal fees” and had independent business reasons for terminating the defendants and refusing to pay their legal fees); United States v. Brooks, 681 F.3d 678 (5th Cir. 2012) (government did not improperly prohibit a corporation from advancing legal fees for one of its employees suspected of, and later indicted on, criminal conduct because the corporation had already made an independent decision to cease paying legal fees).
While the Gilman court readily rejected the defendants’ state action argument, that case may have turned on the absence of evidence of corporate capitulation to government pressure. Gilman did not involve the DOJ and thus the court did not consider, as it did in Stein, the effect of the government’s stated policy requiring corporations to fully and unequivocally share their internal investigative results or risk loss of cooperation credit and potential prosecution. The requisites of the Yates memo will likely result in cases that will include more substantial evidence of government influence over corporate entities that will be far closer to the factors identified in Stein.
The ‘Blumberg‘ Case
Even where government involvement does not rise to the level of compulsion or coercion, if the government is considered to have engaged in a “joint investigation” with the corporation, the government may be required to disclose documents received from, and even its communications with, the corporation. See, e.g., United States v. Risha , 445 F.3d 298, 304 (3d Cir. 2006), cited in United States v. Ferguson, 478 F. Supp. 2d 220, 238-39 (D. Conn. 2007).
One example is the pending criminal prosecution of former ConvergEx Group employees in United States v. Blumberg. In that case, the defense maintains that in the course of ConvergEx’s own investigation, the DOJ: 1) submitted hundreds of requests to the company to produce, review and analyze relevant evidence; 2) delegated to the company the entire review of approximately 175,000 documents and 11,000 audio recordings; and 3) coordinated with the company in conducting interviews of dozens of employees.
The defense also pointed to the DOJ’s description of the company’s cooperation as “extraordinary.” ConvergEx Deferred Prosecution Agreement. According to the defense, these facts demonstrate that the DOJ’s direction of the company’s investigation was so pervasive that the company became a part of the government’s “team,” and so the government’s discovery obligations extend to ConvergEx’s files.
Notably, in response to these arguments, the court has ordered the company’s attorneys to produce to the court all of its internal communications and notes of conversations with the government for an evidentiary hearing.
In assessing a state action argument, Stein, Gilman and other decisions have focused on whether:
1) the corporation’s actions were the result of its own business interest; and
2) the government directed the corporation’s own internal investigation. Now, with the further revision of DOJ policies post-Yates, those issues will again be raised in the context of the continuing coercive impact of DOJ’s policies, the new “all or nothing” standards, and the extent to which corporate cooperation now extends well beyond a company’s self-interest and arises only from the in terrorem effects of a perceived lack of full cooperation.
The government’s expanding demands for cooperation, particularly given the fact that the cooperation must be specifically tailored to facilitate prosecution of individuals, will undoubtedly lead to more individuals pressing the issue of whether the company is acting as an agent of the government and more instances in which — at a minimum — counsel’s communications with the government may be sought and obtained in discovery in the criminal action.
Internal investigators should, therefore, be mindful of the potential disclosure of their communications and consider and even memorialize the corporate interest that supports the company’s cooperation in a criminal investigation.
The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.
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This article also appeared in the New York Law Journal, an ALM sibling publication of this newsletter.