The U.S. Court of Appeals for the Second Circuit's Jan. 27 reversal of the convictions of two former Deutsche Bank AG traders accused of rigging Libor in U.S. v. Connolly was rightfully big news in the white collar community.

The win in such a high-profile prosecution was a major success for defense counsel. But will the decision in U.S. v. Connolly have significant consequences for defense strategies in future fraud trials?

It's unlikely, as the Second Circuit's reasoning does not translate into an argument with much jury appeal, although the likelihood of a defendant ultimately prevailing in post-trial motion practice or on appeal has obviously improved.

By way of background, in Connolly, certain Deutsche Bank employees sent in the daily interest rate for Libor calculation. The instructions to each employee were to estimate the interest rate they could get on the market. Interest rate swap traders told employees, depending on their positions, to increase or decrease the estimated interest rate in order to benefit the bank.

All the government's cooperating witnesses testified that they understood this practice was wrong. There was significant testimony and evidence that the estimated interest rate was not in fact the actual interest rate that one would have been quoted on the market. As the government explained in its closing argument, when borrowing money, one would always take the lowest interest rate available.

The Second Circuit reversed, finding that the fact that everyone believed that the practice of estimating market interest rates was wrong and that the estimated interest rates were manipulated did not constitute fraud. Specifically, the Libor instruction to employees was not to estimate the interest rate that they would get on the market but rather to estimate the interest rate that they could get on the market.

Further, the government did not prove that it was impossible to get the estimated interest rate, even if the bankers would not in the normal course of business have necessarily borrowed at that rate.

As the Connolly court noted, there does not have to be a completely false statement for a fraud conviction to stand, but there must at least be a scheme to engage in some form of deception involving "a half-truth, i.e., a 'representation stating the truth so far as it goes' but that is nonetheless misleading because of the 'failure to state additional or qualifying matter.'"[1]

The government failed to prove this element of falsity because there was no single proper interest rate; the Libor instructions leave open the possibility of multiple proper interest rates on a given day.

Assuming it ultimately stands, this ruling will be useful for defendants appealing a conviction or even in post-trial motion practice, where the judge is tasked with applying the law. After this decision, it is likely that the falsity element will be challenged in these contexts more routinely and that the government will have to show that it adduced sufficient evidence of falsity.

In doing this analysis, although Connolly does not actually change the standard for falsity, all parties — including courts — likely will be paying closer attention to this element and ensuring that the government is held to its burden of proof.

When it comes to trial practice though, the decision is less likely to have a major impact. To be sure, Connolly gives defendants powerful ammunition for more favorable jury instructions on the issue of falsity, which may lead to a heightened emphasis to the jury on this issue when defense attorneys generally argue that the government failed to meet its burden of proof.

But it is highly unlikely that failure to prove falsity will ever be the centerpiece of a defense — i.e., the element solely focused on by defense counsel — even in cases where evidence of falsity is weak.

That is because — again, even where evidence of falsity is not strong — this argument has very little jury appeal unless it is also coupled with evidence and argument that the defendant had no bad intentions. That is what most jurors, as members of the community, want or need to conclude before acquitting someone — that the government failed to prove an intent to defraud.

This is why the defense in fraud trials more typically focuses on the intent element, i.e., whether the defendant had the requisite state of mind to deceive. Here, the Second Circuit took it as a given — or at least assumed for purposes of the decision — that there was wrongdoing or dishonorable conduct[2] and perhaps even conduct by the defendants that was "improper, objectionable or even despicable."[3]

Because the defendants' estimates fell within the parameters of the Libor instructions — even for a selfish or nefarious reason — the requisite falsity for a fraud conviction did not exist.

Practically speaking, however, such a finding by an appellate court is a far cry from a jury being able to acquit a defendant motivated by greed, perhaps even acting dishonorably or even despicably, even where falsity could not be proved beyond a reasonable doubt.

That said, of course, calling the element of falsity into question along with the question of intent may be a good strategy, depending on the facts of the case — and should be considered now, after Connolly, more seriously than before because more favorable jury instructions on the issue of falsity are a certain consequence of the decision.

But focusing on falsity alone where the evidence of intent is murky — or worse, where there is clear evidence of bad intent — is unlikely to become a successful strategy before juries. That does not mean that the conviction ultimately will be upheld by the trial or appellate courts, especially after Connolly, but the standard of review is so favorable for the government in those contexts that a reversal can hardly be assured.

While it remains to be seen whether Connolly renders convictions in fraud cases more difficult to achieve, it is quite likely that Connolly will remind prosecutors of the need to have sufficient evidence on this element before making a charging decision, and certainly before trial.

There is no question, however, that the creative path to victory in Connolly is an important reminder for counsel to test the government's proof on all elements, even those that otherwise might be taken for granted in the inevitable quest to show that a defendant did not have bad intent.

Reprinted with permission from the February 11, 2022, issue of Law360. © 2022 Portfolio Media, Inc. All Rights Reserved. 

[1] Connolly at 31 (quoting Restatement (Second) of Torts § 529 (1977)).
[2] (Connolly at 32).
[3] Connolly at 32.

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