How to Make the SEC Disgorge Exculpatory Evidence

Obviously, defense counsel have to ask for the information if they want to get it. As they do in criminal cases, defense counsel should routinely request any information that is exculpatory because it casts doubt on either the defendant's culpability or the credibility of the SEC's evidence. Defense counsel should raise these requests at the initial discovery conferences conducted pursuant to Rules 26(f) and 16(b) of the Federal Rules of Civil Procedure. They should then file sufficiently detailed document requests and interrogatories requesting such information.

In a typical civil suit, the SEC could have a plethora of exculpatory evidence, including:

• witness statements that provide conflicting information about who participated in the acts giving rise to the suit;
• statements from witnesses who initially denied any wrongdoing but changed their stories in exchange for favorable settlement agreements;
• evidence that the SEC initially threatened greater punishments but agreed to lesser penalties when witnesses began to cooperate;
• evidence that the settling, cooperating defendants lessened their financial penalties by submitting financial statements of dubious integrity;
• evidence that the SEC overlooked illegal behavior by its witnesses without disclosing this in writing; and
• SEC staff notes containing inconsistent statements made by fact witnesses during “off-the-record” conversations with the SEC.

As evidence of bias and prior inconsistent statements, this information is both relevant and admissible under Fed. R. Evid. 607 and 613. SEC witnesses who receive a pre-complaint investigative subpoena also get an official form threatening prosecution for perjury and obstruction of justice for withholding documents. If the SEC then overlooks such behavior for one of its “pet” witnesses, that fact might undermine the witness's credibility.

In framing requests and conducting discovery, defense counsel must remain mindful that the SEC will likely resist disclosures and force the court to take up the issue. If the SEC insists on withholding responsive information — particularly staff notes from untranscribed conversations with important witnesses — defense counsel should attempt to obtain an itemized privilege log of the documents not produced. Not only will such a log be useful in a later motion to compel, it will also enable defense counsel to ask witnesses at depositions whether they recall the substance of any listed, conversations with the SEC. If the witness claims he/she does not remember the conversations, the SEC's staff notes become the only record. In one case that we are currently litigating, the SEC's privilege log included SEC attorney notes from over 240 “off-the-record” conversations with witnesses, including 59 with a key witness who claimed no recollection of their contents.

The SEC can hardly raise relevancy objections to such requests. It probably will raise privilege objections, the most likely being work product protection. Work product falls into two categories: “ordinary,” which is available upon a showing of substantial need and an inability to obtain equivalent information elsewhere, and “opinion,” which is afforded greater protection. Initially, one should argue that SEC attorney notes that merely recount or summarize a witness's statements qualify only as “ordinary” work product. See, e.g., SEC v. Thrasher, 1995 U.S. Dist. LEXIS 10775, *41-42 (S.D.N.Y. Aug. 2, 1995) (holding that SEC staff notes consisting of “abbreviation recapitulations, quotations, and summaries” qualified only as ordinary, rather than opinion work product).

The clear relevance of impeachment materials and the witness's failure of memory satisfy the prerequisites for production of ordinary, fact work product. If the court finds, however that the SEC's notes reflect its attorneys' mental impressions and strategies, the notes may qualify as opinion work product and therefore be subject to greater protection. To gain access to such notes may require a different strategy.

Brady and Its Progeny

A second approach to getting work product, including opinion work product, involves invoking the analysis underpinning the landmark criminal case of Brady v. Maryland, 373 U.S. 83 (1963). A successful Brady challenge could pierce the work product and other qualified privileges completely, whether ordinary or opinion in nature.

In Brady, the Supreme Court held that due process requires the government to disclose evidence that is favorable to a criminal defendant if it is material to a determination of guilt. Brady emphasized the special role that prosecutors play in our society — their “chief business is not to achieve victory but to establish justice.” Where prosecutors withhold evidence favorable to the accused, they shape a trial that bears heavily against the defendant and does not comport with basic standards of justice.

Although Brady involved evidence directly relevant to the defendant's guilt, courts have subsequently held that the obligation to turn over exculpatory information extends to impeachment evidence, including prior inconsistent statements and evidence of witness bias. In many federal courts, local rules governing criminal discovery codify this doctrine. For example, in Massachusetts, the government must produce “all information that is material and favorable to the accused” including matters that “cast doubt on the credibility or accuracy of any evidence that the government anticipates offering in its case-in-chief.” This disclosure obligation extends not only to copies or descriptions of inconsistent statements by the government's witnesses, but also any statements by others that contradict those of the testifying witness.

Because Brady's mandated disclosures derive from the Due Process clause of the Fifth Amendment, courts have held that they trump any claims by the government to work product protection. See, e.g., United States v. Goldman, 439 F. Supp. 337, 350 (S.D.N.Y.1977); Castleberry v. Crisp, 414 F. Supp. 945, 953 (N.D.Okla.1976). In fact, the SEC has itself recognized this principle in its Rules of Practice governing enforcement proceedings. After setting forth the types of documents that the Commission need not produce because they qualify as work product, Rule 230(b)(2) provides that “nothing in this paragraph … authorizes the Division of Enforcement in connection with an enforcement or disciplinary proceeding to withhold, contrary to the doctrine of Brady v. Maryland … documents that contain material exculpatory evidence.”

Application of Brady to Civil Prosecutions

Although Brady and its progeny focus on criminal prosecutions, its due-process reasoning applies equally to civil suits in which the government's executive arm seeks to take a person's property and livelihood as punishment for alleged illegal conduct. The Sixth Circuit recognized this principle in Demjanjuk v. Petrovsky, 10 F.3d 338 (6th Cir. 1993). There, the plaintiff — accused of having served as an SS Guard at a concentration camp – sought to vacate an extradition order on the grounds that the government had failed to disclose potentially exculpatory information under Brady. At the plaintiff's extradition hearing — a civil proceeding — the government failed to produce, among other documents, one of its investigator's notes from an interview with a witness that contradicted that witness' deposition testimony. Recognizing that government attorneys have an obligation to work for “justice rather than for a result that favors [their] preconceived ideas of what the outcome of legal proceedings should be,” the court extended Brady's reach to civil extradition proceedings based on proof of alleged criminal activities.

The District of New Mexico made a similar observation in a case involving the Equal Employment and Opportunity Commission, holding that the informer's privilege does not let the EEOC refuse to respond to the defendants' discovery request asking it to identify individuals with relevant knowledge. EEOC v. Los Alamos Constructors, Inc., 382 F. Supp. 1373, 1383 n.5 (D. N.M. 1974). The court noted that some of the individuals might be able to provide testimony helpful to the defendant: “Brady … orders that exculpatory information must be furnished a defendant in a criminal case. A defendant in a civil case brought by the Government should be afforded no less due process of law.”

Possible Efforts by the Government to Stop Discovery

If the government is conducting a parallel criminal prosecution, the Justice Department may move to stay civil discovery on the assumption that a successful criminal prosecution will resolve the civil enforcement action. Defendants willing to challenge such requests for a stay are having increasing success. Judges have been ruling that if the government files a civil suit, it should be prepared to follow through and litigate it. As one judge stated in denying the Government's motion to stay an SEC proceeding: “if someone decides they would like to bring a case in the federal court for whatever reason, then they better be prepared to move the case right along, not bring the case and call for a time-out …” SEC v. Bradstreet, CA 95-11647-WD (D.Mass. Oct. 16, 1995). Courts are far more likely to deny a request to stay civil discovery during the pre-indictment stage, as it is not clear if there ever will be a criminal prosecution. Given the SEC's wide-ranging ability to gather documents and depose witnesses ex parte prior to filing a complaint, defendants should not lightly give up the right to conduct aggressive discovery, even in the grand jury's shadow. Of course, defense counsel must weigh the advantages of civil discovery against the downside of parallel civil proceedings, especially their impact on the right against self-incrimination.

Justice Requires Full Disclosure

The whole underpinning of the SEC's mission to regulate the securities markets is that transparent disclosure in these markets promotes the most rational and fair results. This principle applies equally to the SEC's efforts to enforce the laws and regulations that govern these markets. When it comes to exculpatory information, defense counsel and the courts should insist that the SEC live up to the same disclosure obligations that it imposes on others.

In the post-Enron world, the SEC is ratcheting-up the stakes in many of its cases. With millions of dollars in increased funding and hundreds of additional staff, it is bringing more cases, seeking harsher penalties, and generally litigating more aggressively. If recent press releases are indicative, it is also increasingly coordinating its civil enforcement activities with criminal investigations by the Department of Justice. As one SEC district administrator stated in a recent newspaper interview: “People are looking for heads. And we're going after them.”

The SEC's ever growing prosecutorial assertiveness means that defense counsel in SEC civil actions need to compel the SEC — by negotiation or court motion — to produce impeachment evidence, ie, evidence that directly proves innocence (Brady material) and proof that undermines the evidence supporting the SEC's theory of the case (Giglio material – see Giglio v. United States, 405 U.S. 150 (1972)). Federal prosecutors are required to produce impeachment evidence during a criminal case, but the SEC does not readily produce it in a civil action, even though it is asking courts to impose crippling fines, order disgorgement of ill-gotten gains, and impose lifetime employment bans based upon allegations of fraud. Moreover, SEC civil proceedings often set up a criminal case, with its deposition transcripts becoming the roadmap for conviction. Thus, the same due process that compels disclosure of exculpatory evidence in criminal cases should apply in proceedings initiated by the SEC.

Requesting Exculpatory Information

Obviously, defense counsel have to ask for the information if they want to get it. As they do in criminal cases, defense counsel should routinely request any information that is exculpatory because it casts doubt on either the defendant's culpability or the credibility of the SEC's evidence. Defense counsel should raise these requests at the initial discovery conferences conducted pursuant to Rules 26(f) and 16(b) of the Federal Rules of Civil Procedure. They should then file sufficiently detailed document requests and interrogatories requesting such information.

In a typical civil suit, the SEC could have a plethora of exculpatory evidence, including:

• witness statements that provide conflicting information about who participated in the acts giving rise to the suit;
• statements from witnesses who initially denied any wrongdoing but changed their stories in exchange for favorable settlement agreements;
• evidence that the SEC initially threatened greater punishments but agreed to lesser penalties when witnesses began to cooperate;
• evidence that the settling, cooperating defendants lessened their financial penalties by submitting financial statements of dubious integrity;
• evidence that the SEC overlooked illegal behavior by its witnesses without disclosing this in writing; and
• SEC staff notes containing inconsistent statements made by fact witnesses during “off-the-record” conversations with the SEC.

As evidence of bias and prior inconsistent statements, this information is both relevant and admissible under Fed. R. Evid. 607 and 613. SEC witnesses who receive a pre-complaint investigative subpoena also get an official form threatening prosecution for perjury and obstruction of justice for withholding documents. If the SEC then overlooks such behavior for one of its “pet” witnesses, that fact might undermine the witness's credibility.

In framing requests and conducting discovery, defense counsel must remain mindful that the SEC will likely resist disclosures and force the court to take up the issue. If the SEC insists on withholding responsive information — particularly staff notes from untranscribed conversations with important witnesses — defense counsel should attempt to obtain an itemized privilege log of the documents not produced. Not only will such a log be useful in a later motion to compel, it will also enable defense counsel to ask witnesses at depositions whether they recall the substance of any listed, conversations with the SEC. If the witness claims he/she does not remember the conversations, the SEC's staff notes become the only record. In one case that we are currently litigating, the SEC's privilege log included SEC attorney notes from over 240 “off-the-record” conversations with witnesses, including 59 with a key witness who claimed no recollection of their contents.

The SEC can hardly raise relevancy objections to such requests. It probably will raise privilege objections, the most likely being work product protection. Work product falls into two categories: “ordinary,” which is available upon a showing of substantial need and an inability to obtain equivalent information elsewhere, and “opinion,” which is afforded greater protection. Initially, one should argue that SEC attorney notes that merely recount or summarize a witness's statements qualify only as “ordinary” work product. See, e.g., SEC v. Thrasher, 1995 U.S. Dist. LEXIS 10775, *41-42 (S.D.N.Y. Aug. 2, 1995) (holding that SEC staff notes consisting of “abbreviation recapitulations, quotations, and summaries” qualified only as ordinary, rather than opinion work product).

The clear relevance of impeachment materials and the witness's failure of memory satisfy the prerequisites for production of ordinary, fact work product. If the court finds, however that the SEC's notes reflect its attorneys' mental impressions and strategies, the notes may qualify as opinion work product and therefore be subject to greater protection. To gain access to such notes may require a different strategy.

Brady and Its Progeny

A second approach to getting work product, including opinion work product, involves invoking the analysis underpinning the landmark criminal case of Brady v. Maryland , 373 U.S. 83 (1963). A successful Brady challenge could pierce the work product and other qualified privileges completely, whether ordinary or opinion in nature.

In Brady, the Supreme Court held that due process requires the government to disclose evidence that is favorable to a criminal defendant if it is material to a determination of guilt. Brady emphasized the special role that prosecutors play in our society — their “chief business is not to achieve victory but to establish justice.” Where prosecutors withhold evidence favorable to the accused, they shape a trial that bears heavily against the defendant and does not comport with basic standards of justice.

Although Brady involved evidence directly relevant to the defendant's guilt, courts have subsequently held that the obligation to turn over exculpatory information extends to impeachment evidence, including prior inconsistent statements and evidence of witness bias. In many federal courts, local rules governing criminal discovery codify this doctrine. For example, in Massachusetts, the government must produce “all information that is material and favorable to the accused” including matters that “cast doubt on the credibility or accuracy of any evidence that the government anticipates offering in its case-in-chief.” This disclosure obligation extends not only to copies or descriptions of inconsistent statements by the government's witnesses, but also any statements by others that contradict those of the testifying witness.

Because Brady's mandated disclosures derive from the Due Process clause of the Fifth Amendment, courts have held that they trump any claims by the government to work product protection. See, e.g., United States v. Goldman , 439 F. Supp. 337, 350 (S.D.N.Y.1977); Castleberry v. Crisp , 414 F. Supp. 945, 953 (N.D.Okla.1976). In fact, the SEC has itself recognized this principle in its Rules of Practice governing enforcement proceedings. After setting forth the types of documents that the Commission need not produce because they qualify as work product, Rule 230(b)(2) provides that “nothing in this paragraph … authorizes the Division of Enforcement in connection with an enforcement or disciplinary proceeding to withhold, contrary to the doctrine of Brady v. Maryland … documents that contain material exculpatory evidence.”

Application of Brady to Civil Prosecutions

Although Brady and its progeny focus on criminal prosecutions, its due-process reasoning applies equally to civil suits in which the government's executive arm seeks to take a person's property and livelihood as punishment for alleged illegal conduct. The Sixth Circuit recognized this principle in Demjanjuk v. Petrovsky , 10 F.3d 338 (6th Cir. 1993). There, the plaintiff — accused of having served as an SS Guard at a concentration camp – sought to vacate an extradition order on the grounds that the government had failed to disclose potentially exculpatory information under Brady. At the plaintiff's extradition hearing — a civil proceeding — the government failed to produce, among other documents, one of its investigator's notes from an interview with a witness that contradicted that witness' deposition testimony. Recognizing that government attorneys have an obligation to work for “justice rather than for a result that favors [their] preconceived ideas of what the outcome of legal proceedings should be,” the court extended Brady's reach to civil extradition proceedings based on proof of alleged criminal activities.

The District of New Mexico made a similar observation in a case involving the Equal Employment and Opportunity Commission, holding that the informer's privilege does not let the EEOC refuse to respond to the defendants' discovery request asking it to identify individuals with relevant knowledge. EEOC v. Los Alamos Constructors, Inc. , 382 F. Supp. 1373, 1383 n.5 (D. N.M. 1974). The court noted that some of the individuals might be able to provide testimony helpful to the defendant: “Brady … orders that exculpatory information must be furnished a defendant in a criminal case. A defendant in a civil case brought by the Government should be afforded no less due process of law.”

Possible Efforts by the Government to Stop Discovery

If the government is conducting a parallel criminal prosecution, the Justice Department may move to stay civil discovery on the assumption that a successful criminal prosecution will resolve the civil enforcement action. Defendants willing to challenge such requests for a stay are having increasing success. Judges have been ruling that if the government files a civil suit, it should be prepared to follow through and litigate it. As one judge stated in denying the Government's motion to stay an SEC proceeding: “if someone decides they would like to bring a case in the federal court for whatever reason, then they better be prepared to move the case right along, not bring the case and call for a time-out …” SEC v. Bradstreet, CA 95-11647-WD (D.Mass. Oct. 16, 1995). Courts are far more likely to deny a request to stay civil discovery during the pre-indictment stage, as it is not clear if there ever will be a criminal prosecution. Given the SEC's wide-ranging ability to gather documents and depose witnesses ex parte prior to filing a complaint, defendants should not lightly give up the right to conduct aggressive discovery, even in the grand jury's shadow. Of course, defense counsel must weigh the advantages of civil discovery against the downside of parallel civil proceedings, especially their impact on the right against self-incrimination.

Justice Requires Full Disclosure

The whole underpinning of the SEC's mission to regulate the securities markets is that transparent disclosure in these markets promotes the most rational and fair results. This principle applies equally to the SEC's efforts to enforce the laws and regulations that govern these markets. When it comes to exculpatory information, defense counsel and the courts should insist that the SEC live up to the same disclosure obligations that it imposes on others.