Alert > Securities / Broker-Dealer / Investment Management / Securities Enforcement and Investigations / Securities Litigation / White Collar Investigations and Enforcement
Introduction
On April 4, 2008, in a closely watched case, the Court of Appeals for the Ninth Circuit issued a decision that highlights a difficult choice corporations and individuals face when deciding whether to cooperate with a government civil investigation. In United States v. Stringer,1 the Ninth Circuit vacated an Oregon federal district court’s dismissal of a criminal indictment against three individual defendants (the “Individual Defendants”) charged with criminal violations of federal securities laws, and reversed the court's order suppressing statements the Individual Defendants made to the Securities and Exchange Commission (“SEC”). The lower court’s ruling had drawn nationwide attention in finding that the government had used “trickery and deceit” in conducting parallel SEC and U.S. Department of Justice investigations, and concluding that the authorities had used the civil investigation solely to facilitate a later criminal prosecution.2 In its comprehensive rejection of the district court’s findings and analysis, the Ninth Circuit affirmed the very broad discretion courts afford the SEC and federal prosecutors in pursuing parallel regulatory and criminal proceedings, and the decision highlights the difficult choices faced by companies and individuals in dealing with such parallel investigations.
SEC Investigation
In June 2000, the SEC commenced a civil investigation into an alleged wide-ranging scheme to inflate the earnings of FLIR Systems, Inc. (“FLIR”) for the years 1998 and 1999. Also in June 2000, the Staff met with the Oregon United States Attorney’s Office (“USAO”) to discuss the possibility of opening a criminal investigation based on the falsification of FLIR’s financial records. The USAO opened a parallel investigation within days of the meeting and sent an Access Letter to the SEC requesting access to the SEC’s non-public investigative files. The SEC granted access and, by October 2000, the SEC gave the USAO documents and a comprehensive memorandum setting forth the SEC’s legal theories and factual analysis. The USAO observed that (1) the evidence collected by the SEC might support criminal wire fraud charges; and (2) the criminal investigation should remain confidential to avoid impeding the Individual Defendants’ cooperation with the SEC investigation. The SEC pursued its investigation, and in September 2002, two of the three Individual Defendants consented to the entry of a civil judgment alleging violations of federal securities laws and agreed to pay penalties, disgorgement and pre-judgment interest.
SEC Steps to Facilitate Criminal Investigation
The USAO enlisted the SEC’s help to facilitate the criminal investigation in several ways. First, the Staff and USAO communicated regularly throughout the SEC’s investigation, exchanged information and discussed strategy. Second, the SEC, with guidance from the USAO, interviewed the Individual Defendants so as to create the best record possible to support false statement cases against them. Third, the SEC, at the request of the USAO, deposed defendants in Oregon so that the Portland office of the USAO would have venue over any false statement case that might arise from the depositions. Fourth, the Staff complied with the USAO’s request to conceal the existence of a criminal investigation from the defendants. Fifth, even though the Staff knew two of the three Individual Defendants were “targets” of the USAO investigation as early as April 2001, during the deposition of one of the Individual Defendants, the SEC Staff attorney carefully responded to counsel’s questions regarding the existence of a criminal prosecution by noting that (a) the SEC did not have targets, (b) SEC Form 1662 (a standard form advisement provided to the witness prior to the deposition) listed the routine potential uses of defendant’s testimony and other materials submitted by defendants, including the sharing of such information with the criminal authorities, and (c) it was within counsel’s discretion to contact the USAO to ask about the existence of a criminal investigation. Sixth, the Staff attorney told the court reporter to refrain from disclosing to the defendant that a criminal investigation was in process. There was no evidence in the opinions of either the Ninth Circuit or the district court that the USAO took any investigative steps to build its case against the Individual Defendants beyond passively reviewing the SEC’s investigative files. In September 2003, a grand jury returned an indictment charging the Individual Defendants with securities, mail and wire fraud.
Court Decisions
The Individual Defendants filed motions to dismiss the indictment, or in the alternative, to suppress statements they made to the SEC. The district court concluded that the government used the auspices of a civil investigation to develop a criminal prosecution in violation of the Individual Defendants’ Fifth Amendment Due Process rights. Alternatively, the district court concluded that the government used “deceit, trickery, or intentional misrepresentation” to conceal the criminal investigation from the Individual Defendants to take advantage of civil discovery rules for the benefit of a later criminal prosecution. As a result, the district court suppressed statements the Individual Defendants made to the SEC, finding that they did not voluntarily waive their privilege against self-incrimination. The district court also suggested that documents and other information the Individual Defendants provided to the SEC were obtained through what amounted to an unreasonable search under the Fourth Amendment because the SEC misled the Individual Defendants regarding the existence of a criminal investigation.
The Ninth Circuit comprehensively rejected the district court’s findings and reasoning, finding no violations of the Individual Defendants’ due process rights. The Ninth Circuit vacated the dismissal of the indictment, and reversed the ruling suppressing the evidence the Individual Defendants provided to the SEC.
The Ninth Circuit concluded that there was a bona fide parallel investigation because the SEC’s civil investigation was opened first, led to SEC sanctions and was conducted pursuant to the SEC’s civil enforcement jurisdiction. In addition, the Ninth Circuit concluded that the SEC’s conduct was permissible because Congress has expressly authorized the SEC to share information with the Department of Justice to facilitate the investigation and prosecution of crimes.3 The court approvingly cited authority “emphatically up[holding] the propriety of such parallel investigations.”
The Ninth Circuit also concluded that the Individual Defendants received sufficient notice of their due process rights because SEC Form 1662 “alerts SEC investigative witnesses that the information can be used in a criminal proceeding” and “the government’s request for information could be refused pursuant to the Fifth Amendment’s protection against compelled self incrimination.” Moreover, the Staff attorney advised the Individual Defendants (in the presence of counsel) of their rights against self-incrimination prior to their testimony. Under these circumstances, the court found, "the possibility of criminal investigation should have been well known to both the defendants and their counsel." Accordingly, the Individual Defendants’ decision to testify in the civil investigation was voluntary and intelligent, and was not based on any affirmative misrepresentation by the government.
Conclusion
United States v. Stringer highlights that a criminal prosecution may be lurking behind every civil enforcement investigation, and confirms that the courts set a high threshold for proving that the government improperly used a civil investigation to advance a criminal prosecution. Given the emphasis on getting “credit” for cooperating in government investigations, Stringer reflects the dilemma facing corporate and individual defendants. To avoid the government drawing an adverse inference in the civil investigation, a defendant may cooperate to get “credit” and reduce its civil exposure. At the same time, however, the defendant’s criminal exposure may well increase. Consequently, corporate and individual defendants (and their counsel) need to plan comprehensively from the start whenever the prospect of parallel civil and criminal proceedings exists, and carefully coordinate a strategy to obtain the best outcome in each arena while minimizing the client’s exposure.
For assistance, please contact the following lawyers:
Dale E. Barnes, Co-chair, Securities Litigation
dale.barnes@bingham.com, 415.393.2522
Jordan D. Hershman, Co-chair, Securities Litigation
jordan.hershman@bingham.com, 617.951.8455
Roger P. Joseph, Practice Group Leader, Investment Management; Co-chair, Securities Area
roger.joseph@bingham.com, 617.951.8247
Neal E. Sullivan, Practice Group Leader, Broker-Dealer; Co-chair, Securities Area
neal.sullivan@bingham.com, 202.373.6159
1 2008 WL 901563 (9th Cir. 2008).
2 United States v. Stringer, 408 F.Supp.2d 1083 (D. Oregon 2006).
3 See 15 U.S.C. §§ 77t(b), 78u(d).
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