Posted by: evanjdavis | August 10, 2017

COORDINATION WITH U.K. AUTHORITIES SINKS DOJ’S HIGH-PROFILE LIBOR PROSECUTION by Evan J. Davis

In a case that proves even the most-respected judges get reversed, Manhattan district judge Jed Rakoff’s decision to permit an informant’s testimony after the informant read transcripts of the defendants’ U.K. government-compelled testimony, was unanimously reversed by a Second Circuit panel on July 19, 2017.

Immunity comes in two flavors: “direct use” and “derivative use.” Direct use immunity is limited to preventing the government from introducing the immunized statements in its case-in-chief (the government’s part of the case) against the declarant if he goes to trial. Derivative use immunity includes use immunity and is co-extensive with the Fifth Amendment; it prevents the government from using the immunized statements for any purposes, and if they end up going to trial against the declarant they must prove that evidence being introduced didn’t derive from the declarant’s immunized statements. In the United States, forcing someone to testify or give a statement while only giving use immunity is considered “compelling” their testimony for Fifth Amendment purposes. Any compelled statements can’t be used against them in their trials. That’s why in the United States a court or government can only compel testimony – on pain of civil contempt – if they grant derivative use immunity.

Cue “God Save the Queen.”

The Brits appear not to share the U.S.’s enlightened view of immunity. In the U.K. investigation into LIBOR manipulation – rigging a benchmark exchange/interest rate to benefit certain traders – the U.K. government compelled testimony by Anthony Allen and Anthony Conti after giving them only direct use immunity. If prosecuted in the U.K., the prosecutors couldn’t introduce their testimony directly but they could use it for a variety of other purposes, including to develop and track down new evidence.

The U.S. government recognized that this incomplete immunity could prove to be a problem if Allen and Conti were prosecuted in the U.S., so the U.S. interviewed both before they testified under compulsion of use immunity. If the transcripts had never surfaced in the U.S. case, then they would have been irrelevant. But they did surface.

Another target of the U.K. LIBOR investigation, Paul Robson, received “discovery” of the evidence against him, including transcripts of Allen’s and Conti’s testimony compelled subject only to direct use immunity. Robson read the testimony, marked up the transcripts, and then was told the U.K. had dropped its investigation. Turns out this wasn’t good news for Robson, Allen, and Conti, as it just signaled that the U.K. was stepping aside to permit the U.S. to prosecute the three men along with a handful of others.

Robson agreed to plead guilty and cooperate against his co-defendants including Allen and Conti. At that point, the fact that Robson had reviewed their compelled testimony became a ticking time bomb for the U.S. government. It exploded not at trial, but on appeal.

At trial, Allen and Conti moved to dismiss the indictment and reverse the trial conviction based Robson’s trial testimony and on the grand jury having heard Robson’s exclusive (and arguably tainted) accounts of Allen’s and Conti’s actions and statements. Judge Rakoff, a recognized expert in securities cases and one of the most-respected trial judges nationwide, denied the motions and permitted Robson to testify against Allen and Conti. He accepted, among other things, a conclusory statement by Robson that the transcripts hadn’t tainted his testimony.

After Allen and Conti were convicted, they appealed and argued that allowing Robson’s hearsay statements before the grand jury and his trial testimony after his having reviewed and internalizing transcripts of their compelled testimony meant that the government had to prove that all its evidence – including Robson’s trial testimony – had not been derived from the compelled testimony. This so-called Kastigar analysis, named after the Supreme Court decision, is supposed to be very difficult for the government to meet. Allen and Conti complained that Judge Rakoff had accepted at face value the witness’s blanket statements that his testimony hadn’t been affected by the transcripts despite that he couldn’t segregate what he knew before and after reading the transcripts, thereby lowering what is supposed to be a high Kastigar bar.

The Second Circuit, relying on the D.C. Circuit’s analysis in reversing Oliver North’s conviction in the Iran-Contra scandal, reversed the convictions based on the government’s use of Robson’s possibly-tainted testimony in obtaining the indictment. An indictment returned after presentation of involuntary testimony – a federal agent summarized Robson’s possibly-tainted statements to the grand jury – must be dismissed unless the government can prove beyond a reasonable doubt that the grand jury would have indicted without the testimony. Robson’s statements were essential to the indictment, to the extent that he was the sole witness for much of the most-damaging evidence. Although Judge Rakoff was convinced that Robson’s statements weren’t tainted by his having reviewed the defendant’s transcripts, once the Second Circuit decided Robson’s statements were tainted, it was nearly a foregone conclusion that the government couldn’t prove beyond a reasonable doubt that his tainted statements were irrelevant to the grand jury’s decision to indict.

What’s the takeaway? The very same coordination that DOJ touts in its FCPA and tax prosecutions can lead to a poison pill for resulting U.S. prosecutions. Skilled defense counsel will use this holding and the logical underpinnings – including quotations such as that coordination with foreign law enforcement “need not affect the fairness of our trials at home” – to push back against any coordination that directly or indirectly undermines a defendant’s constitutional protections.

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax, and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the USAO’s Criminal Division, and the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white collar criminal investigations. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).


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