Among the most daunting challenges facing counsel is whether to advise clients to take the Fifth when the SEC comes knocking.
"The pros and cons are often evenly weighted, but the existence of a parallel criminal investigation militates strongly in favor of taking the Fifth," says Perrie Weiner, international co-chair of DLA Piper's securities litigation group.
Defendants and their counsel, however, don't always have a timely awareness of whether criminal
proceedings are extant. If they are, the danger is that potential criminal targets may be lulled into
giving evidence that will advance the criminal investigation.
Since the Supreme Court's 1912 decision in Standard Sanitary Mfg. Co. v. United States, there's no doubt that civil and criminal investigations can proceed in tandem and in an integrated manner. Still, the government must act in good faith.
"The courts have been clear that the government acts in bad faith if it brings a civil action solely for the purpose of obtaining evidence in a criminal prosecution and does not advise the defendant of the planned use of that evidence in the criminal proceedings," Weiner says. "But we get into shades of gray where the
SEC legitimately begins its own investigation and then brings the DOJ to the party."
What's difficult to determine is the point along the continuum from misstatement to omission where bad faith kicks in. On that issue, the April decision of the 9th Circuit in United States v. Stringer does not bode well for defendants.
In 2005, a Federal District Court in Alabama dismissed perjury counts against Richard Scrushy, the former chairman of Healthsouth Inc., after concluding that SEC and DOJ investigations had "improperly merged" when the U.S. attorneys had directed the SEC where to question Scrushy and what to ask him.
United States v. Scrushy was but one of a number of recent trial decisions that found bad faith in the coordination of civil and criminal investigations. For the most part, these courts leaned to interpreting the facts as reflecting bad faith and trickery rather than appropriate interagency cooperation and understandable government decisions to keep its criminal strategy close to the vest.
Indeed, that's how an Oregon court saw the facts in Stringer. The case originated with an SEC investigation for securities fraud. Soon afterward, the DOJ commenced a criminal investigation. The SEC met with the DOJ and granted access to its files. Afterward, the DOJ decided to keep a low profile, hoping the targets would be more cooperative with the SEC if they remained unaware of the criminal investigation.
As it turned out, the SEC sent the defendants a standard form that advised them of all "routine uses" of their testimony, including sharing information with criminal investigators. At one point, a defense attorney explicitly asked whether the U.S. Attorney's Office was investigating his client. The SEC lawyer, pointing to the standard form, reiterated the SEC's policy not to answer such questions.
When criminal charges were laid, the defendants sought dismissal on the grounds that the civil case was directed by and benefitted the prosecution. The District Court agreed, noting that the DOJ had decided early on to obtain information through the civil proceedings rather than on its own. By being so "actively involved," prosecutors had effectively carried out a criminal investigation in the guise of civil proceedings, offending the defendants' constitutional rights.
"The District Court treated the standard form as a garden variety form, like the fine print on the back of a rental contract, so that signing it didn't amount to a proper waiver of rights," says Doug Jensen, counsel at Chadbourne & Park.
But the Court of Appeal saw it otherwise.
There was nothing in the government's conduct, the 9th Circuit reasoned, that amounted to affirmative misrepresentation or deceit. The fact that the SEC investigation came first demonstrated that the civil proceedings were not merely a pretext for obtaining information for criminal prosecution. And the standard form afforded sufficient notice of a criminal investigation to give the defendants a proper opportunity to invoke the Fifth.
As there was no bad faith, the case could proceed to trial. Not surprisingly, many members of the defense bar are critical of the decision.
"The court should have held prosecutors treading on constitutional rights to a higher standard," Weiner says. "If the defense asks the SEC point blank about whether a parallel criminal investigation exists and the SEC knows of one, it should have an affirmative duty to disclose."
The fact remains, however, that Stringer is no aberration. "Unfortunately, the decision does reflect recent legislative and jurisprudential tendencies to erode litigation rights," Weiner says. "Stringer is in line with the many conservative rulings we've seen and will continue to see where courts' reasoning is often that the end justifies the means."
But there is a chance that the full court will reconsider the case en banc. Indeed, Ancer Haggerty, Chief District Judge for the District of Oregon, who wrote the original decision in Stringer, has employed a seldom used
9th Circuit General Order "respectfully disagreeing with the court's decision."
The General Order is a mechanism by which district judges who believe the appeals court has erred may communicate with the 9th Circuit.
Haggerty complained about the appeal panel's "treatment of [his] findings of fact" and an alleged disregard for the proper standard of review. Instead, he says, the panel "provides its own selective version of the facts."
There's no assurance, of course, that an en banc review will occur, or that the result will change if it does. So if Stringer as it stands remains the law, what's a target to do?
Taking the Fifth
"If I were advising a client about this issue tomorrow, I'd give the same advice I gave one year ago or five years ago," Jensen says. "Assume the worst, be careful when dealing with the SEC because anything you say could be fodder for a criminal case, ask whether there is a parallel investigation or whether they have referred the case to the criminal authorities, and ask specifically whether your client is a target," Jensen says.
What in-house counsel must always bear in mind is that prosecutors' threshold for seeking indictments and getting before grand juries is very low, at times requiring only scanty information.
"As they say, the government can indict a ham sandwich if it wants to," says Richard Walton, counsel at Buchalter Nemer. "And if they get the indictment and charge an individual, that person's life may be over as they know it, even if there's eventually an acquittal."
Which increasingly leaves general counsel with just one advisory option whenever there's a whiff of criminal prosecution in the air--plead the Fifth.