Recent Ninth Circuit Court Decision Reiterates DOJ and SEC Broad Freedom to Conduct Parallel Criminal and Civil Investigations

April 14, 2008

On April 4, 2008, the United States Court of Appeals for the Ninth Circuit reversed the much-discussed Oregon federal court decision, United States v. Stringer, which had dismissed a criminal indictment due to the government’s violation of the defendant’s due process rights resulting from "egregious" behavior in conducting a parallel civil-criminal investigation. United States v. Stringer, No. 06-30100 (9th Cir. Apr. 4, 2008). 

The Stringer District Court case, United States v. Stringer, 408 F. Supp. 2d 1083 (D. Or. 2006), generated quite a bit of publicity, with many commentators suggesting the case could broadly impact the manner in which the DOJ and the SEC coordinate their investigations. Additionally, some saw the case as signaling that federal courts would become more interventionist in monitoring the behavior of the DOJ and the SEC in the conduct of such parallel criminal and civil investigations. Indeed, the Stringer case was not the first time that the DOJ’s improper manipulation of a SEC deposition has resulted in the dismissal of criminal charges. In United States v. Scrushy, 366 F. Supp. 2d 1134 (N.D. Ala. 2005), it was determined that the DOJ played an important behind-the-scenes role in orchestrating the SEC’s deposition of the defendant, leading the court to suppress his deposition testimony and dismiss the perjury charges against him, concluding that the government had "depart[ed] from the proper administration of justice" by its actions vis-à-vis the SEC deposition. Id. at 1138.

However, even prior to the Ninth Circuit’s opinion, a close examination of the District Court opinion in Stringer suggested that it was merely a bump in the road for coordinated federal criminal-civil investigations and did not spell the death knell for parallel DOJ-SEC investigations or signal an upsurge in judicial supervision of such probes. The Ninth Circuit confirmed that view as correct in reversing the Oregon District Court, as it focused on the fact that the government did not "affirmatively mislead" the subjects that the investigation was purely civil and would not lead to future criminal charges. Though the SEC investigators undoubtedly skirted the question when defense counsel inquired about a criminal investigation, the Ninth Circuit looked only at the fact the SEC made no actual misrepresentations. 

Additionally, the Ninth Circuit afforded significant weight to the fact the SEC provided the subjects with Form 1662, an SEC form that states the SEC “often makes its files available to other governmental agencies, particularly the United States Attorneys and state prosecutors.” Form 1662 continues, stating “[t]here is a likelihood that information supplied by you will be made available to such agencies where appropriate.” With that disclosure, the Ninth Circuit found the SEC did not hide from defendants the possibility, even likelihood, that the DOJ may undertake its own investigation. This may lead the SEC to rely on Form 1662 more and not to provide separate or additional disclosures of parallel investigations.

Although the Scrushy decision remains good law — albeit in that narrow factual setting — the Ninth Circuit’s decision in Stringer gives the SEC and DOJ nearly unchecked ability to conduct undisclosed parallel investigations, particularly if the SEC provided the investigation subjects with Form 1662, so long as neither makes affirmative misrepresentations about the investigations. While the Ninth Circuit notes it was “significant” that the SEC’s civil investigation began prior to the DOJ’s criminal investigation, the court seemed uninterested in the extent to which the investigators coordinated efforts or the fact that both the SEC and DOJ benefited from witness statements and a settlement to which the subjects may not have agreed had they been aware of the ongoing criminal investigation. Indeed, the Ninth Circuit expressed no outrage, or even mild displeasure, with the government’s actions in coordinating their investigation of the Stringer defendants, instead focusing solely in its Form 1662 disclosure and lack of affirmative misrepresentations. 

The Ninth Circuit has therefore conclusively established that the Stringer District Court opinion was not the watershed moment, perhaps indicating that the courts were about to engage in hands-on supervision of parallel criminal-civil investigations, that some in the white collar bar may have desired. The District Court opinion did result in some more minor changes, however — both in terms of how the SEC and DOJ conduct parallel investigations and how defense attorneys counsel their corporate and individual clients — and those are likely to continue regardless of the Ninth Circuit’s reversal of the Stringer District Court opinion.

In light of the opinion, practitioners should always be aware that a possible federal criminal investigation may lie in the wings of an ongoing SEC investigation. Parallel criminal cases are not invariable — at the end of the day, the underlying facts must have some jury appeal with discernable financial "victims" and a palpable monetary benefit to a potential defendant. The present government policy of not disclosing the existence of a parallel criminal investigation and the Ninth Circuit’s willingness to countenance that policy means that counsel will need to consider several issues.

First, for company counsel, a common priority is to resolve matters with the government expeditiously and at the lowest cost. Company counsel will need to be proactive in ascertaining whether there is a parallel criminal investigation and, if so, whether direct dialogue with the prosecutors is warranted.

Second, the potential for a parallel criminal investigation suggests that company and other counsel will need to be conscious of the possibility of conflicts of interest when representing more than one client in the SEC investigation.

Third, counsel for individuals in an SEC investigation will need to be thorough in their advice to clients about whether to testify and about the need to give careful, accurate testimony so as to avoid the "perjury trap" that was one of the apparent objects of the parallel investigations conducted by the respective authorities in the Stringer case.  

The Ninth Circuit’s decision is available online.