Article: October 2017: Second Circuit Immunity Decision Upends Cross-Border Criminal Investigations

The Second Circuit Court of Appeals’ recent decision in United States v. Allen, --- F.3d ----, 2017 WL 3040201 (2d Cir. July 19, 2017) (slip opinion available at https://goo.gl/FkfwNN), which holds that U.S. courts must give both use and derivative use immunity to individuals providing testimony lawfully compelled by a foreign government, will have far-reaching implications for all cross-border criminal investigations. The Allen case has the potential to be a landmark decision that could fundamentally change the relationships between the U.S. Justice Department and its counterparts around the world.

The LIBOR Investigations and Case Against Rabobank Traders
The Allen case involves bankers accused of manipulating the London Interbank Offered Rate (“LIBOR”). LIBOR, an influential benchmark interest rate, is calculated daily based on submissions to a central panel from a select group of banks. The submitting banks provide estimates of how much it costs them to borrow money, and the central panel consolidates the submissions into one rate. Because LIBOR is the basis for numerous other loans—for example, commercial borrowers’ rates are commonly set at LIBOR plus some additional amount depending on their creditworthiness—the rate that the panel selects affects the rates applied to hundreds of trillions of dollars in securities and loans.

Both the U.S. Justice Department and the United Kingdom Financial Conduct Authority (“FCA”) had begun investigating manipulation of LIBOR rates by 2013. The two investigations were coordinated in an effort to maximize compliance with both countries’ evidentiary rules. FCA interviews are compulsory and subject only to a grant of direct use, not derivative use, immunity, and failure to testify as directed exposes a witness to potential imprisonment. Use and derivative use immunity are discussed at greater length below. To safeguard against potential Fifth Amendment concerns, the Justice Department implemented protocols such as interviewing witnesses prior to them giving any compelled testimony and restricting the flow of information between the investigations.

One of the LIBOR panel members was a Dutch bank called Coöperatieve Centrale Raiffeisen‐Boerenleenbank B.A. (“Rabobank”), which came under the scrutiny of both the FCA and the Justice Department. In particular, three traders—Anthony Allen, Anthony Conti, and Paul Robson—came under investigation, with all three giving compelled testimony before the FCA between January and June of 2013. The FCA initiated an enforcement action against Robson that November, and as is customary in such proceedings, it disclosed Allen’s and Conti’s testimony to Robson. Robson reviewed, marked up, and saved copies of both statements. The enforcement action was stayed a few months later, when Robson was indicted in the United States, and by August 2014, he had participated in a proffer session and agreed to cooperate with United States authorities.

Allen and Conti were indicted on October 16, 2014, based in part on evidence the government learned from Robson’s cooperation. Robson did not testify before the grand jury, but an FBI agent who did later confirm that Robson was the sole source of his testimony “that Allen ‘instructed, specifically instructed, LIBOR submitters in London to consider the positions and the requests of Rabobank traders and adjust their submissions for LIBOR and various currencies based on the means of those traders,’ and that ‘Mr. Robson said that sitting near Mr. Conti he was aware that Mr. Conti set U.S. dollar LIBOR rates in which he considered his own positions as appropriate reason or justification for setting the rates.’” Robson, along with two other cooperators, testified for the prosecution at Allen’s and Conti’s trial, at which both were convicted.

The Second Circuit’s Rejection of Any Derivative Use of Allen’s and Conti’s Compelled Testimony
The Second Circuit reversed the convictions on the grounds that Robson’s testimony violated the Fifth Amendment because it was an impermissible “derivative use” of the testimony Allen and Conti had been compelled to give by the FCA. While it has long been true under Second Circuit law that a defendant’s statements obtained overseas by foreign officials could be admitted against the defendant so long as they were made voluntarily (for example, not obtained through torture), the Allen Court distinguished that line of cases and barred the testimony. Specifically, the Second Circuit held that the “the Self‐Incrimination Clause’s prohibition of the use of compelled testimony arises from the text of the Constitution itself, and directly addresses what happens in American courtrooms, . . . [i]ts protections therefore apply in American courtrooms even when the defendant’s testimony was compelled by foreign officials.”

Critically, the prohibition extends not only to using the statements themselves at trial, but to any derivative use of the statements. In other words, the government cannot introduce any evidence at trial that was identified as a result of the compelled testimony. Quoting Kastigar v. United States, 406 U.S. 441, 460–62 (1972), the Court held that:

the government bears “the heavy burden of proving that all of the evidence it proposes to use was derived from legitimate independent sources.” This burden is “not limited to a negation of taint; rather, it imposes on the prosecution the affirmative duty to prove that the evidence it proposes to use is derived from a legitimate source wholly independent of the compelled testimony.”

In Allen, the fundamental question was whether Robson’s review of Allen’s and Conti’s compelled FCA testimony amounted to an impermissible derivative use of the testimony. The government was thus required to prove “at a minimum, that the witness’s review of the compelled testimony did not shape, alter, or affect the evidence used by the government.” The district court conducted a two-day evidentiary hearing after the trial to ascertain whether Robson’s testimony was sufficiently independent of the compelled testimony. Notwithstanding the district court’s determination that Robson’s testimony was not tainted, the Second Circuit reversed that finding. Most persuasive to the Second Circuit was that Robson’s own testimony to the FCA—which he gave prior to reading Allen’s and Conti’s testimony—“omits or contradicts in material parts the testimony Robson later provided indirectly to the grand jury and directly to the petit jury.” Moreover, Robson’s testimony that he was able to “segregate the effects of his exposure” to the transcripts was little more than a “bare, generalized denial of taint,” which for “a witness who has materially altered his testimony after being substantially exposed to a defendant’s compelled testimony is insufficient as a matter of law to sustain the prosecution’s burden of proof under Kastigar that that witness’s testimony was derived from a wholly independent source.”

Allen Represents a Potential Sea Change in the Working Relationships Between the U.S. Justice Department and Foreign Prosecutors That May Compel Testimony
The rule in Allen may have a sweeping effect on multi-jurisdictional criminal investigations. As the Second Circuit noted, such investigations are an increasingly important part of the Justice Department’s work. The Court quoted former Assistant Attorney General Leslie Caldwell, who said in 2016, “[c]ollaboration and coordination among multiple regulators in cross‐border matters is the future of major white collar criminal enforcement.” Indeed, the Court noted that the Justice Department has begun the “embedding of U.S. prosecutors in foreign law enforcement,” including the FCA itself.

Allen thus will apply far beyond LIBOR. As the Justice Department continues to pursue cooperative investigations with other countries, it must be mindful of countries like the United Kingdom, Singapore, Ireland, Canada, and others that compel testimony and take steps to ensure that such testimony is not used even indirectly. In fact, it is conceivable that every cross-border investigation that involves compelled testimony of someone who eventually is charged in the United States could fall under Allen and necessitate a Kastigar hearing to ensure no derivative use of that testimony.

One way that the government might address this is suggested in the Allen decision:

The most effective way to demonstrate that a witness’s testimony was untainted by exposure to a defendant’s immunized testimony is by demonstrating that his or her testimony was unchanged from comparable testimony given before the exposure. Thus, typically, the prosecution can meet its burden by memorializing (or “canning”) the witness’s testimony prior to his or her exposure.

At the same time, Allen itself demonstrates the precariousness of this approach, as the witness’s original testimony was materially inconsistent with his subsequent testimony in the United States. For the Second Circuit, this “actually evidences . . . the taint.” It is also notable that the Allen Court rejected the Justice Department’s attempts to erect a wall between its investigation and the FCA’s investigation. Even though the Justice Department interviewed witnesses before they testified to the FCA, thereby ensuring that they had a legitimate alternate source of investigative leads, and otherwise took steps to prevent using compelled testimony, such measures were undermined by the FCA’s standard procedure of disclosing to targets the evidence against them, including other witnesses’ compelled testimony. This demonstrates the difficulty imposed by Allen and the extent to which the Justice Department is somewhat at the mercy of its foreign counterparts’ practices.

Moreover, even if the Justice Department could prevail on its foreign counterparts not to, for example, show witnesses the transcripts of others’ compelled testimony, it is not clear that this would necessarily solve the problem. Allen has the potential to extend even beyond cases where a cooperator reviews a defendant’s compelled testimony, because Kastigar by its terms requires the government to demonstrate that all the evidence—not just witness testimony—derives from legitimate independent sources. In other words, Allen arguably requires the government to meet its Kastigar burden in every case that involves a joint investigation where the defendant gave compelled testimony. Allen thus represents a potentially significant shift in the weight the Justice Department must carry in such cases. Indeed, as noted in footnote 110 of the Allen decision, the government had taken the position that the Self-Incrimination Clause would not have prevented it from simply introducing the transcripts of Allen’s and Conti’s testimony directly as evidence. If every cross-border investigation conducted with the FCA or countries with similar practices now leads to a Kastigar hearing, it will drain scarce time and resources and thereby raise the stakes for any prosecutor considering pursuing such a case.