In certain legal (nerd) circles, coining a phrase or term of art is one of the surest ways to achieve immortality – think Tim Wu’s first use of “network neutrality” in a 2003
journal article or Justice Felix Frankfurter’s opinion in Rochin v. California holding that the certain police methods “shock[ed] the conscience.” And soon we may have Seth Levine to thank for the term “Brady Laundering.”
Here, Levine leveled his accusation on behalf of his client, Anthony Blumberg, in the midst of an evidentiary hearing into the relationship between the government and counsel for Blumberg’s former employer, ConvergEx Group, suggesting the former took pains to avoid uncovering Brady material by outsourcing the bulk of the investigative work to the latter. He further argued that ConvergEx achieved “extraordinary cooperation” status as a result of the company working so closely with the government that it effectively became a member of the prosecution team. Thus, ConvergEx also had the obligation to turn over Brady materials within its possession related Blumberg.
The four-day evidentiary hearing, which began on March 12, 2018 and will (hopefully) culminate on May 15, spotlights several important principles that counsel should consider during DOJ or SEC investigations where cooperation credit is sought.
First, a bit of background. Anthony Blumberg is currently the only remaining defendant in a wire and securities fraud prosecution in the District of New Jersey stemming from ConvergEx misleading its customers about the margins of their trades (i.e., spread) from 1997 through 2011. ConvergEx cooperated with the parallel SEC and DOJ investigations, settling all criminal and civil charges for a combined $150 million and a deferred prosecution agreement in 2013. Three ConvergEx employees have also pled guilty to related charges and await sentencing (presumably after they testify against Blumberg).
Blumberg has fought the prosecution zealously. In 2015, presiding U.S. District Court Judge Jose Linares granted in part his motion requesting that the prosecution review SEC investigative files and turn over any Brady material possessed exclusively by the SEC. In the spring of 2016, Blumberg again moved for Brady material, this time from ConvergEx and the law firms that represented the company and its audit committee throughout the investigation. After additional motions and letters regarding subpoenas and the contours of the attorney-client privilege, the instant evidentiary hearing commenced.
- What is the standard to determine whether company counsel effectively become part of the prosecution team for Brady purposes?
In deciding Blumberg’s motion for Brady materials contained in the SEC’s investigative file, Judge Linares applied the standard in United States v. Risha to determine whether the government has cross-jurisdiction constructive knowledge of Brady material. Risha, which was decided in the context of a federal-state partnership, examined:
(1) Whether the party with knowledge of the information is acting on the government’s “behalf” or is under its “control”;
(2) the extent to which state and federal governments are part of a “team,” are participating in a “joint investigation” or are sharing resources; and
(3) whether the entity charged with constructive possession has “ready access” to the evidence.
Other courts have articulated similar tests for “intermingling” of investigative resources or “alignment” – i.e., the investigative or prosecutive agency becomes aligned with the government prosecutor for Brady purposes when it becomes actively involved in the investigation or the prosecution. However, Risha and the other circuit decisions each deal with government actors, and not private counsel hired to for investigative or defense purposes.
Shortly after Risha was decided, another judge in the District of New Jersey hinted that Risha applies to private parties and could extend the government’s Brady obligation if, among other factors, the private actor was cooperating with the prosecutor.
- Should company counsel heed the government’s strategic suggestions during investigation?
It is not uncommon for the government, in order to conserve resources in cases where the alleged criminal conduct has ceased, to allow a company to conduct its own internal investigation before stepping in. In these instances, the government – the assigned FBI agent or AUSA – will check in with company counsel to stay apprised of the investigation’s progress. Unless the statute of limitations or spoliation of evidence becomes a concern, these check-ins are typically brief and informal.
The government appears to have taken a more hands-on role in the ConvergEx investigation. According to Blumberg’s briefs and witness testimony at the evidentiary hearing, counsel for ConvergEx consistently discussed its fact gathering with prosecutors, allegedly “guid[ing] the Government’s prosecution strategy” and proposing a resolution to “prosecute indiv[iduals,] not company.” Perhaps more importantly, Levine stressed that the government “prohibited the company’s attorneys from interviewing clients about the alleged fraud” and potentially learning exculpatory information.
A key fact in favor of establishing the first Risha factor would be the degree of direction that company counsel takes from prosecutors in conducting its internal investigation. If it bears out that DOJ worked so closely with ConvergEx counsel to develop investigation strategy and limited ConvergEx’s ability to conduct its investigation, the first Risha factor will be satisfied.
It is also worth noting that in the lead up to this evidentiary hearing, Judge Linares ordered the government to produce notes and memoranda from attorney proffer meetings for in camera review. Judge Linares was persuaded of the need to review these documents based on the company’s deferred prosecution agreement and correspondence between company counsel and the government.
- The Yates Memorandum remains alive and well.
Levine lamented that ConvergEx was incentivized to scapegoat his client in large part due to the guidance of the 2015 Yates Memorandum. This is not an unfair accusation: DOJ continues to require that corporations provide to DOJ all relevant facts relating to the individuals responsible for the misconduct in order to receive cooperation credit.
Recent comments from Deputy AG Rod Rosenstein suggest that DOJ seeks to carefully calibrate its penalties so as to punish individual wrongdoers instead of company shareholders where possible. Further, Rosenstein stressed that “If [companies] want DOJ to treat a [them] as a victim, [they] should act like a victim who wants to see the perpetrators held accountable.”
All of this makes clear that individual defendants like Blumberg will increasingly become targets by virtue of the extraordinary cooperation that their employers provide to DOJ and other regulators.
Consequently, individuals will not only face the overwhelming resources of DOJ, but also the deep pockets of the corporation during the investigation phase.
With two days of testimony and argument still to come, we will be watching closely for hints at which way Judge Linares might lean. Our hunch, however, is that despite ConvergEx’s extraordinary cooperation and strategizing with the prosecution, Judge Linares may still find that the company’s interests (survival) were independent enough from the government so as not to be fully under the government’s control for purposes of Brady disclosures. Also, imposing Brady obligations on company counsel would significantly change the communication and strategy of internal investigations.
Still, Judge Linares has made clear that the relationship between the government and ConvergEx counsel is of great concern to him. Whatever his decision, it will provide great insight into what the responsibilities of company counsel are when attempting to provide cooperation to prosecutors in a criminal investigation. Stay tuned…
 342 U.S. 165 (1952).
 District of New Jersey, Criminal Docket No. 14-cr-00458.
 Blumberg was CEO of ConvergEx Global Markets Ltd. (“CGM”), ConvergEx Group’s Bermuda-based broker-dealer subsidiary. CGM pled guilty to related charges in 2013 and has been dissolved. Cowen Inc. then purchased ConvergEx in June 2017.
 For those scoring at home: Bracewell LLP, Schulte Roth & Zabel LLP and WilmerHale LLP.
 445 F.3d 298, 304 (3d Cir. 2006).
 United States v. Reyeros, 537 F.3d 270, 281-82 (3d Cir. 2008).
 See, e.g., United States v. Brooks, 966 F.2d 1500, 1503 (D.C. Cir. 1992); United States v. ex rel. Smith v. Fairman, 769 F.2d 386, 391 (7th Cir. 1985).
 United States v. Duronio, No. 02-CV-933 (JAG), 2006 WL 1457936, at **3-4 (D.N.J. May 23, 2006).
 Blumberg Memorandum of Law, February 24, 2016 (14-cr-00458, D.E. 96-1) at 4.
 See Order, June 7, 2016 (14-cr-00458, D.E. 113) at 1-2.