Two years ago, Federal District Court Judge Ancer Haggerty dismissed a series of criminal indictments against three executives at FLIR Systems, and granted motions to suppress statements the three made to the Securities and Exchange Commission.
The judge also blasted the “egregious behavior of the government” in using a civil SEC probe as cover to gather information for a criminal Justice Department investigation. At the time, critics of heavy-handed prosecutors hailed Haggerty’s decision as long overdue.
Perhaps not. Last month, the Ninth Circuit Court of Appeals overturned Haggerty’s ruling and said the SEC and the Justice Department can freely conduct parallel investigations, so long as both probes are disclosed to the defendants.
Sturc
Legal experts say the decision confirms an unpleasant reality many general counsels have endured for years, and is a reminder to tread carefully when any government prosecutor comes knocking. “It has always been the case that parallel investigations have been permissible if both governmental agencies have a separate purpose,” says John Sturc, a former associate director of enforcement at the SEC and now with the law firm Gibson, Dunn & Crutcher.
The case, United States v. Stringer, stems from the 2004 indictment of Kenneth Stringer, Mark Samper, and William Martin, former top executives of FLIR Systems, on 50 counts of conspiracy and securities fraud for allegedly inflating FLIR’s revenues through a series of bogus revenue recognition and accounting practices.
The three had filed motions to dismiss the indictment, claiming the information was produced in violation of their Fourth and Fifth Amendment rights. They argued that had they known of the possibility of criminal prosecution, they would have tried to stall the civil proceedings and they would not have produced any documents. In addition, Martin would not have provided a Wells Submission.
Haggerty ruled in their favor on three principal reasons, according to an analysis of the case from the law firm Wilmer Hale. He found that prosecutors used the SEC to collect information while hiding the criminal investigation; the SEC’s attempts to hide the criminal probe involved “deceit, trickery, or intentional misrepresentation;” and the government failed to warn the three that once they were the targets of criminal probes, they should have sought private attorneys rather than company counsel.
The appeals court, however, saw things differently. In its decision, the court stated: “The government fully disclosed the possibility that information received in the course of the civil investigation could be used for criminal proceedings … Rather, at most, there was a government decision not to conduct the criminal investigation openly, a decision we hold the government was free to make.”
Kaizer
“Those of us who have been doing this for a while and read the facts were surprised the [district court] was outraged,” says Andrew Kaizer of the law firm of McDermott Will & Emery. “It is not outrageous behavior for both teams to coordinate.” But if the SEC had known of a parallel probe and lied about it, “that probably would have risen to the level of outrageous conduct,” he says.
DUELING COURTS
The following excerpt is from the Ninth Circuit Court of Appeals judgment in United States v. Stringer.
The Supreme Court has held that the government may
conduct parallel civil and criminal investigations without violating the due process clause, so long as it does not act in bad
faith.
… In this case, the district court concluded that the government should have told defendants of the criminal investigation and that it violated the standards laid down in Kordel when it failed to “advise defendants that it anticipated their criminal prosecution.” It held that the government engaged in “trickery and deceit” when the SEC staff attorney instructed court reporters to refrain from mentioning the AUSA’s involvement. When the SEC staff attorney responded to Stringer’s attorney’s question, during Stringer’s deposition, by directing him to the U.S. Attorney, the district court concluded that the SEC attorney “evaded the question.”
In its appeal, the government argues that it had no legal
duty to make any further disclosure of the existence of the
pending criminal investigation. It points to the warnings in
Form 1662 in which the government disclosed the possibility
of criminal prosecution, and it stresses that it did not make any affirmative misrepresentations. It maintains the SEC attorney’s answer was appropriate and truthful.
The defendants argue that the district court properly held
that the use of the evidence obtained by the SEC in a criminal prosecution would violate defendants’ Fifth Amendment privilege against self-incrimination. The defendants were advised that the evidence could be used in a criminal investigation, but defendants did not invoke their Fifth Amendment privilege during the SEC investigation. The government on appeal correctly contends that defendants waived or forfeited their Fifth Amendment right against self-incrimination.
The defendants next contend that the district court properly concluded that the government used the civil investigation solely to obtain evidence for a subsequent criminal
prosecution, in violation of due process. The Supreme Court
in Kordel made it clear that dual investigations must meet the requirements of the Fifth Amendment Due Process Clause.
See 397 U.S. at 11-12. While holding that “[i]t would stultify the enforcement of federal law” to curtail the government’s discretion to conduct dual investigations strategically, the Court suggested that a defendant may be entitled to a remedy where “the [g]overnment has brought a civil action solely to obtain evidence for its criminal prosecution.” In this case, the government argues that it did not violate defendants’ due process rights because the civil investigation was not commenced solely to obtain evidence for a criminal prosecution.
Source
United States vs. Kenneth Stringer Appeals Notice (April 4, 2008).
The appeals court decision seems to turn on the bureaucratically obscure Form 1662. The five-page document is furnished to every witness asked to supply information either voluntarily or by subpoena. It warns that the information provided “may be used against you in any federal, state, local, or foreign administrative, civil, or criminal proceeding brought by the Commission or any other agency.” It also says the witness can refuse to provide information under the Constitution’s Fifth Amendment.
Since the plaintiffs received that Form 1662 warning, “the government fully disclosed the possibility that information received in the course of the civil investigation could be used for criminal proceedings,” the court said.
Knuts
Corporate litigation experts say prosecutors routinely stress the importance of Form 1662, verbally noting its importance to witnesses and demanding that they acknowledge its importance. “It’s not slipped into a package of documents not to be seen again,” stresses Robert Knuts, a partner with the law firm Allen & Overy. “Part of the purpose of the form is to make sure the witnesses get sufficient disclosure of the risks involved.”
Walking the Tightrope
Regardless of what white-collar defendants sign away on Form 1662, lawyers say it is vital for them to be aware of who is investigating them at all times. Most importantly, an SEC probe will only cost you money and possibly your livelihood; a U.S. attorney can send you to prison—and facts from one case can always be used to support the other.
Maffeo
On a more practical level, however, civil cases have a much lower burden of proof than criminal ones. Therefore, in dual investigations, “a federal prosecutor can jump into the seat of a civil attorney and accomplish indirectly what they can’t in a criminal proceeding,” warns Bruce Maffeo of the law firm Meyer, Suozzi, English and Klein.
Invoking the Fifth Amendment (which anyone can do in any trial or pretrial deposition) also carries risks. In criminal cases the jury can’t draw inferences from this decision; in civil cases, they can. So a defendant who exercises Fifth Amendment rights in a Justice Department probe may later find himself looking guilty to the jury in a civil SEC trial.
In addition, some companies have policies that call for an employee to be fired if he doesn’t answer questions. Individuals who work in some regulated businesses, such as those in the securities industry, are automatically fired if they don’t answer questions.
Sturc says the Stringer decision still leaves one ambiguity: a situation in which the SEC is not formally investigating an individual civilly, but the person is not alerted that there is an ongoing criminal case.
Still, most experts agree that the appeals court decision won’t change an individual’s willingness to cooperate with a regulatory probe or affect whether they voluntarily bring information to the SEC. Corporations typically do cooperate, because an indictment often means their death as a business. Individuals, in contrast, “have more incentives to go to court,” Kaizer says.
“Be assured that if you are under investigation by the SEC for fraud, assume there is a criminal interest,” says David Esseks, a partner in the litigation group of Allen & Overy. “Otherwise, you are not taking care of the client well.”
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