Alert June 10, 2008

Ninth Circuit Decision Permits Wider Scope for SEC-DOJ Cooperation in Parallel Civil and Criminal Proceedings

In recent years, federal prosecutors and the Securities and Exchange Commission (“SEC”) have come under criticism for their conduct of so-called “parallel” civil and criminal investigations.  In a number of widely-discussed decisions in recent years, federal trial courts have ruled that the United States Department of Justice (“DOJ”) and the SEC had crossed the line of permissible conduct in coordinating their investigations.  Specifically, the courts have criticized conduct that they viewed as being aimed at lulling a potential criminal target into testifying or otherwise providing evidence in a related civil investigation.  Recently, in United States v. Stringer, 521 F.3d 1189 (9th Cir. 2008), the federal Court of Appeals for the Ninth Circuit reversed one of those rulings, holding that there was nothing misleading or deceptive about the government’s conduct.  The Ninth Circuit’s ruling in Stringer is instructive because it reinforces the courts’ traditional acceptance of civil-criminal interagency cooperation and reflects a decidedly lower level of skepticism toward government conduct than has been shown in some recent trial court decisions.  Where the district court in Stringer had found government deceit and trickery, the Court of Appeals found appropriate interagency cooperation and a discretionary government decision to play its criminal cards permissibly close to the vest. The decision in Stringer emphasizes the need for particular caution in responding to SEC supoenas and requests for information where a parallel criminal investigation may be underway

Traditional View - Parallel Proceedings Permissible 

There is a century-long line of precedent holding that civil and criminal investigations may proceed simultaneously and in coordinated fashion.  See, e.g., Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20 (1912).  The Supreme Court has held that requiring governmental agencies to choose either to forego criminal prosecution or to make an immediate choice between criminal or civil proceedings would “stultify enforcement of federal law.”  United States v. Kordel, 397 U.S. 1 (1970).  In the SEC context, the federal securities laws explicitly empower the SEC to investigate possible securities laws violations and “to transmit the fruits of its investigations” to DOJ for criminal proceedings.  SEC v. Dresser Indus., 628 F.2d 1368 (D.C. Cir. 1980).  In Kordel, the Supreme Court indicated that such interagency cooperation is proper in the absence of “a violation of due process or a departure from proper standards in the administration of justice.”  In particular, it is improper for the government to bring a civil action “solely” to obtain evidence for a criminal prosecution.

More Recent Pullback

But more recently, in reviewing a wave of complex securities fraud investigations marked by close coordination between DOJ and the SEC, some courts have shown greater skepticism of the government’s methods.  In the prosecution of the former Chairman of Healthsouth, Inc., the district court suppressed SEC testimony and dismissed the perjury counts of a criminal indictment, finding that the SEC and DOJ investigations had “improperly merged” and that government agents had acted in bad faith, employing “cloak and dagger” techniques.  United States v. Scrushy, 366 F.Supp.2d 11 (N.D. Ala. 2005).  It found that the U.S. Attorney’s Office had, in effect, directed the SEC both as to where to take Scrushy’s testimony and what to ask him, so as to enable DOJ to bring perjury charges in the desired district. 

The District Court Decision in Stringer

Stringer was another case involving close SEC-DOJ coordination, this time in the District of Oregon.  In Stringer, the SEC initiated an informal investigation into the defendants and their company for possible securities fraud violations.  Shortly thereafter, the U.S. Attorney’s Office and the FBI opened a criminal investigation and were granted the usual access to the SEC’s investigative files.  After a meeting with the SEC staff, the criminal investigators decided to maintain a low profile while the SEC continued its work, expecting that the potential criminal targets would be more cooperative with civil investigators if they were not aware that there was an active criminal investigation. 

During the two-year-long SEC investigation, SEC lawyers regularly shared information and discussed strategy with DOJ lawyers, though the grand jury had yet to begin taking testimony.  The U.S. Attorney’s Office advised SEC staff of its interest in false testimony cases and explained how best to create the record for such cases.  SEC staff from Los Angeles conducted interviews in Oregon, so that the District of Oregon would be an appropriate venue for any criminal false statement case filed.  Among other steps taken to preserve secrecy of the criminal investigation, SEC lawyers asked court stenographers at the Oregon interviews not to mention the U.S. Attorney’s involvement in the case.

Along with subpoenas to testify, SEC staff also sent the defendants Form 1662, a standard SEC form that, among other things, advises witnesses of all “routine uses” of their testimony (including the sharing of information with criminal prosecutors) and of their Fifth Amendment right to refuse to testify.  During SEC testimony, one of the defendants’ attorneys explicitly asked whether his client was being investigated by other governmental agencies “such as the U.S. Attorney’s Office in any jurisdiction.”  The staff attorney responded by pointing to the “routine uses of information” section of Form 1662 and by stating the SEC enforcement staff’s policy not to answer such questions.

After the SEC brought charges, the U.S. Attorney’s Office obtained a criminal indictment of Stringer and the other defendants arising from the same conduct.  The defendants moved to dismiss the indictment, claiming that their due process rights had been violated because the SEC investigation had essentially served as a wolf in sheep’s clothing – i.e., while nominally a civil case, it had been directed by and served the criminal prosecutors.  The district court agreed, finding that although the SEC’s investigation began before DOJ was involved, the U.S. Attorney’s Office had identified potential targets early in the investigation and in effect decided to gather information through the SEC instead of conducting its own investigation.  The court found that the U.S. Attorney’s Office was “actively involved” with the SEC investigation and held that the government violated the defendants’ due process rights by conducting a criminal investigation in the guise of a civil investigation.  More significantly, the court found that the government had engaged in “deceit and trickery” in order to conceal the criminal investigation.  The court focused on the government’s instruction to court reporters to avoid mentioning a criminal investigation and the SEC lawyers’ unwillingness to acknowledge the known criminal investigation as “evasive and misleading” in light of the close cooperation between DOJ and the SEC.  The trial court thus dismissed the indictments.

 The Ninth Circuit Decision

On appeal, the Ninth Circuit vacated the dismissal and reinstated the charges for trial.  Adopting the more deferential approach to parallel SEC/DOJ proceedings traditionally taken by the federal courts, it held that nothing in the actual conduct of the SEC and US Attorney’s Office amounted to affirmative misrepresentation or deceit.  It found that while the SEC might have violated a defendant’s Fifth Amendment privilege against self-incrimination had it provided no warnings about the risks of self-incrimination, the SEC Form 1662 provided ample notice of the possibility of a criminal investigation and the defendants’ ability to invoke their Fifth Amendment rights.  Further, the SEC had expressly warned the defendants at the beginning of each person’s testimony that the facts developed in its investigation might constitute criminal violations.  The defendants had thus waived their right against self-incrimination by choosing to testify.  The court concluded that the government never gave the defendants false information concerning the existence of a criminal investigation.  The court also held the government had not brought a civil action solely for the purpose of obtaining evidence for criminal prosecution – the SEC had commenced its investigation before the U.S. Attorney’s Office became involved and in the end brought civil charges against the defendants.  Thus the court found no “bad faith” on the part of the government.  

Stringer's Implications

In sum, the Ninth Circuit’s ruling in Stringer is a reminder that the close coordination of criminal and civil investigations is commonplace and presumptively permissible.  Courts are most likely to dismiss indictments or exclude evidence only where there is evidence of government deception or bad faith or where the civil investigation is truly a subterfuge for a criminal investigation.  Therefore, in circumstances where the facts may allow for the possibility of a criminal investigation, a person or company responding to a subpoena or request for information from a government agency such as the SEC should carefully consider whether a related criminal investigation might be underway, and make decisions as to whether to testify or provide information with that consideration in mind.