Never the Twain Shall Meet?

On the Wednesday before Scrushy's deposition, SEC investigators learned from two DOJ attorneys in Birmingham that one current and one former HealthSouth executive had just disclosed a massive, long-term accounting fraud allegedly orchestrated by Scrushy himself. The DOJ attorneys asked if the SEC's lead accountant could attend additional interviews of the two cooperators, scheduled for that Friday afternoon and Saturday in Birmingham. To accommodate the DOJ, the SEC belatedly acquiesced to Scrushy's request that the deposition be moved from Atlanta. (The DOJ lawyers noted that this change in location also meant that “if [Scrushy] lies, then he'll be lying in our district.”) The SEC investigators likewise assented to the DOJ attorneys' preference that they not question Scrushy about certain matters — apparently because the FBI planned to wire up the current HealthSouth executive and have him discuss these issues with Scrushy the following week.

Scrushy's Deposition

Scrushy was accompanied to his deposition at HealthSouth's Birmingham offices by five corporate and personal attorneys, two of whom were nationally known criminal defense counsel. At the deposition, the SEC investigators provided Scrushy with SEC Form 1662, which advised him of the provisions and criminal penalties of 18 U.S.C. '' 1001 (False Statements) and 1621 (Perjury) and specifically alerted him that any information he provided could be used against him in either civil or criminal proceedings.

However, the SEC staff did not advise Scrushy that the two HealthSouth executives were now cooperating with the DOJ, nor that the SEC had agreed to assist with the criminal investigation. During the deposition, the SEC investigators did not question Scrushy about the areas deemed sensitive by the DOJ lawyers, but did ask several questions based on the information received 2 days earlier. One of Scrushy's answers later became the subject of a perjury charge. After the deposition, the SEC's accountant participated in the further interviews of the HealthSouth executives.

Judge Bowdre's Ruling

Judge Bowdre ruled that these facts demonstrated that the government “clearly” departed from “the proper administration of criminal justice.” She reasoned that the civil action and the criminal investigation “improperly merged on March 12, 2003, when the U.S. Attorney's Office called the SEC office, gave the SEC advice or 'preferences' regarding the content of the deposition and its location, and recruited [the SEC's accountant] to participate in the interviews” of the two cooperators in the criminal investigation. 366 F. Supp.2d at 1137.

In her decision, Judge Bowdre acknowledged that Scrushy was not entitled to relief if he gave false answers to questions that related “to a legitimate, parallel investigation.” But the court somewhat surprisingly stated that it “could find no controlling authority” explaining “what distinguishes a legitimate, parallel investigation from an improper one.”

To resolve this question, Judge Bowdre relied primarily on a 40-year-old case cited by the defense, United States v. Parrott, 248 F. Supp. 196, 199 (D.D.C. 1965), which had held that “the Government may not bring a parallel civil proceeding and avail itself of civil discovery devices to obtain evidence for subsequent criminal prosecution.” The court also cited United States v. Handley, 763 F.2d 1401, 1403 (11th Cir. 1985), where the Eleventh Circuit ruled that the use against several Klansmen in a criminal prosecution of depositions previously taken from them during a civil action raised no Fifth Amendment issues because the DOJ “had no advance notice of any of the depositions and no input into their conduct.”

Because the DOJ “had both notice and direct input” concerning Scrushy's deposition, and the SEC accountant had “crossed over to the criminal investigation,” Judge Bowdre concluded that the government had acted improperly. “To be parallel,” she reasoned, “by definition, the separate investigations should be like side-by-side train tracks that never intersect.” The court also held that the SEC should have affirmatively advised Scrushy at his deposition of its contacts with the DOJ over the previous 2 days. Although the U.S. Attorney initially announced that it would appeal Judge Bowdre's ruling, that decision was reassessed after the criminal trial ended with blanket acquittals.

Scrushy and Parrott

Is the Scrushy decision correct, and should anyone look to it in the future as a guide — or warning — about how parallel proceedings should be conducted? The answer is no. The decision went badly off the rails because of its heavy reliance on Parrott, and its apparent failure to review more recent and far more authoritative cases on parallel proceedings.

Parrott was based on the view that a pending criminal matter must be disposed of before taking of civil depositions. 248 F. Supp. at 202. Five years after Parrott, however, the Supreme Court expressly recognized that the public interest in protecting consumers or investors often requires a regulatory agency to proceed promptly with civil enforcement action, while “a rational decision to proceed criminally . . . may have to await consideration of a fuller record … ” United States v. Kordel, 397 U.S. 1, 11 (1970).

Ten years after Kordel, the D.C. Circuit en banc further vitiated Parrott: “In the absence of substantial prejudice to the rights of the parties involved, such parallel proceedings are unobjectionable under our jurisprudence.” SEC v. Dresser Indus., Inc., 628 F.2d 1368, 1374 (D.C. Cir. 1980) (en banc). The Dresser case stressed that the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as the legislative history of the Foreign Corrupt Practices Act, all contemplated that the SEC could and should share information relating to possible criminal offenses with the DOJ “at the earliest stage of any investigation,” and that “close cooperation” between the two agencies should continue thereafter.

Dresser

Dresser — which Scrushy did not even cite — further noted that grand jurors are often guided in complex white-collar investigations “by experts provided by the federal regulatory agencies with experience in the particular subject areas,” whose assistance “promotes the efficiency and rationality of the criminal investigative process.” Therefore, “it would be impractical for us to attempt to screen the agencies from each other when they are investigating the same sort of offense.” Other cases have similarly approved of active cooperation between regulatory agencies or authorities and the DOJ. See, eg, D.L. Cromwell, Inc. v. NASD Regulation, Inc., 279 F.3d 155, 157-58 (2d Cir. 2002); United States v. Mady, 2005 WL 2290712, at *1-*2 (E.D. Mich. Sept. 20, 2005).

According to Dresser, a parallel proceeding is legitimate if conducted in good faith as defined in United States v. LaSalle Nat'l Bank, 437 U.S. 298 (1978). “A bad faith investigation,” says Dresser, “is one conducted solely for criminal enforcement purposes. Where the agency has a legitimate noncriminal purpose for the investigation, it acts in good faith under the LaSalle conception even if it might use the information gained in the investigation for criminal enforcement purposes as well.” Numerous other courts have since followed this “sole purpose” test.

The Scrushy court also failed to recognize that under Kordel, Dresser and their progeny, “substantial prejudice” must be shown to find that the conduct of parallel proceedings violated due process. This most often occurs when government agents induce a defendant to provide incriminating evidence or statements by affirmatively misrepresenting the likelihood of criminal prosecution. To secure dismissal of charges or suppression of evidence, the “defendant must produce clear and convincing evidence that the agents affirmatively mislead him as to the true nature of their investigation” and that “the misinformation was material in his decision to speak with the agents” or provide other evidence. United States v. Serlin, 707 F.2d 953, 956 (7th Cir. 1983). Similar decisions are found in other circuits, and most courts have held that a person who produces information to the IRS or SEC — particularly one represented by experienced counsel — is on notice that anything they produce may be used in a criminal prosecution. See, eg, SEC v. Horowitz & Ullman, 1982 WL 1576, at *8-*9 (N.D. Ga. 1982). Moreover, the warnings in SEC Form 1662 have been deemed sufficient to advise even uncounseled defendants. United States v. Teyibo, 877 F. Supp. 846, 856 (S.D.N.Y. 1995).

Conclusion

So where does the dividing line between proper and improper contacts actually lie? The most fundamental rule is that a regulatory agency, authority, or private plaintiff must have a valid, independent objective of its own for commencing an investigation or litigation. It cannot act solely to develop evidence for criminal prosecution, although that may permissibly be one of its reasons for filing suit. Second, government attorneys or investigators may not affirmatively mislead individuals concerning the likelihood of a criminal prosecution to induce them produce documents, consent to a search, or make incriminating statements. And of course prosecutors must comply with the rules for criminal investigations, especially Federal Criminal Rule 6(e).

But as long as these principles are respected, government agents pursuing parallel proceedings may exchange information and confer with each other to avoid compromising their respective litigation positions — just as railroad tracks sometimes merge and cross before reaching different destinations.

The June 2005 acquittal of HealthSouth founder and Chief Executive Officer Richard M. Scrushy on all charges in a high-profile federal corporate fraud prosecution was widely considered a surprising setback for the Department of Justice (DOJ). But even before the final acquittals in Scrushy, the trial judge's finding that the government's civil and criminal investigations had “improperly merged” resulted in the suppression of Scrushy's SEC deposition and the dismissal of three perjury charges based upon that testimony. United States v. Scrushy , 366 F. Supp.2d 1134, 1137 (N.D.Ala. 2005). Judge Karon Bowdre's decision provides an opportunity to review the law governing the proper conduct of parallel proceedings, and to ask when co-operation between civil enforcement and prosecutorial authorities contravenes those standards.

The SEC's Investigation

The SEC's investigation of Scrushy commenced in the fall of 2002 and originally focused on possible violations of insider trading rules. In February 2003, the FBI announced it was opening a similar criminal inquiry. The SEC noticed Scrushy's deposition for Friday, March 14, 2003, at its Atlanta District Office, although Scrushy's attorneys subsequently asked that the deposition be moved to Birmingham.

On the Wednesday before Scrushy's deposition, SEC investigators learned from two DOJ attorneys in Birmingham that one current and one former HealthSouth executive had just disclosed a massive, long-term accounting fraud allegedly orchestrated by Scrushy himself. The DOJ attorneys asked if the SEC's lead accountant could attend additional interviews of the two cooperators, scheduled for that Friday afternoon and Saturday in Birmingham. To accommodate the DOJ, the SEC belatedly acquiesced to Scrushy's request that the deposition be moved from Atlanta. (The DOJ lawyers noted that this change in location also meant that “if [Scrushy] lies, then he'll be lying in our district.”) The SEC investigators likewise assented to the DOJ attorneys' preference that they not question Scrushy about certain matters — apparently because the FBI planned to wire up the current HealthSouth executive and have him discuss these issues with Scrushy the following week.

Scrushy's Deposition

Scrushy was accompanied to his deposition at HealthSouth's Birmingham offices by five corporate and personal attorneys, two of whom were nationally known criminal defense counsel. At the deposition, the SEC investigators provided Scrushy with SEC Form 1662, which advised him of the provisions and criminal penalties of 18 U.S.C. '' 1001 (False Statements) and 1621 (Perjury) and specifically alerted him that any information he provided could be used against him in either civil or criminal proceedings.

However, the SEC staff did not advise Scrushy that the two HealthSouth executives were now cooperating with the DOJ, nor that the SEC had agreed to assist with the criminal investigation. During the deposition, the SEC investigators did not question Scrushy about the areas deemed sensitive by the DOJ lawyers, but did ask several questions based on the information received 2 days earlier. One of Scrushy's answers later became the subject of a perjury charge. After the deposition, the SEC's accountant participated in the further interviews of the HealthSouth executives.

Judge Bowdre's Ruling

Judge Bowdre ruled that these facts demonstrated that the government “clearly” departed from “the proper administration of criminal justice.” She reasoned that the civil action and the criminal investigation “improperly merged on March 12, 2003, when the U.S. Attorney's Office called the SEC office, gave the SEC advice or 'preferences' regarding the content of the deposition and its location, and recruited [the SEC's accountant] to participate in the interviews” of the two cooperators in the criminal investigation. 366 F. Supp.2d at 1137.

In her decision, Judge Bowdre acknowledged that Scrushy was not entitled to relief if he gave false answers to questions that related “to a legitimate, parallel investigation.” But the court somewhat surprisingly stated that it “could find no controlling authority” explaining “what distinguishes a legitimate, parallel investigation from an improper one.”

To resolve this question, Judge Bowdre relied primarily on a 40-year-old case cited by the defense, United States v. Parrott , 248 F. Supp. 196, 199 (D.D.C. 1965), which had held that “the Government may not bring a parallel civil proceeding and avail itself of civil discovery devices to obtain evidence for subsequent criminal prosecution.” The court also cited United States v. Handley , 763 F.2d 1401, 1403 (11th Cir. 1985), where the Eleventh Circuit ruled that the use against several Klansmen in a criminal prosecution of depositions previously taken from them during a civil action raised no Fifth Amendment issues because the DOJ “had no advance notice of any of the depositions and no input into their conduct.”

Because the DOJ “had both notice and direct input” concerning Scrushy's deposition, and the SEC accountant had “crossed over to the criminal investigation,” Judge Bowdre concluded that the government had acted improperly. “To be parallel,” she reasoned, “by definition, the separate investigations should be like side-by-side train tracks that never intersect.” The court also held that the SEC should have affirmatively advised Scrushy at his deposition of its contacts with the DOJ over the previous 2 days. Although the U.S. Attorney initially announced that it would appeal Judge Bowdre's ruling, that decision was reassessed after the criminal trial ended with blanket acquittals.

Scrushy and Parrott

Is the Scrushy decision correct, and should anyone look to it in the future as a guide — or warning — about how parallel proceedings should be conducted? The answer is no. The decision went badly off the rails because of its heavy reliance on Parrott, and its apparent failure to review more recent and far more authoritative cases on parallel proceedings.

Parrott was based on the view that a pending criminal matter must be disposed of before taking of civil depositions. 248 F. Supp. at 202. Five years after Parrott , however, the Supreme Court expressly recognized that the public interest in protecting consumers or investors often requires a regulatory agency to proceed promptly with civil enforcement action, while “a rational decision to proceed criminally . . . may have to await consideration of a fuller record … ” United States v. Kordel , 397 U.S. 1, 11 (1970).

Ten years after Kordel, the D.C. Circuit en banc further vitiated Parrott : “In the absence of substantial prejudice to the rights of the parties involved, such parallel proceedings are unobjectionable under our jurisprudence.” SEC v. Dresser Indus., Inc. , 628 F.2d 1368, 1374 (D.C. Cir. 1980) (en banc). The Dresser case stressed that the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as the legislative history of the Foreign Corrupt Practices Act, all contemplated that the SEC could and should share information relating to possible criminal offenses with the DOJ “at the earliest stage of any investigation,” and that “close cooperation” between the two agencies should continue thereafter.

Dresser

Dresser — which Scrushy did not even cite — further noted that grand jurors are often guided in complex white-collar investigations “by experts provided by the federal regulatory agencies with experience in the particular subject areas,” whose assistance “promotes the efficiency and rationality of the criminal investigative process.” Therefore, “it would be impractical for us to attempt to screen the agencies from each other when they are investigating the same sort of offense.” Other cases have similarly approved of active cooperation between regulatory agencies or authorities and the DOJ. See, eg, D.L. Cromwell, Inc. v. NASD Regulation, Inc. , 279 F.3d 155, 157-58 (2d Cir. 2002); United States v. Mady, 2005 WL 2290712, at *1-*2 (E.D. Mich. Sept. 20, 2005).

According to Dresser , a parallel proceeding is legitimate if conducted in good faith as defined in United States v. LaSalle Nat'l Bank , 437 U.S. 298 (1978). “A bad faith investigation,” says Dresser, “is one conducted solely for criminal enforcement purposes. Where the agency has a legitimate noncriminal purpose for the investigation, it acts in good faith under the LaSalle conception even if it might use the information gained in the investigation for criminal enforcement purposes as well.” Numerous other courts have since followed this “sole purpose” test.

The Scrushy court also failed to recognize that under Kordel, Dresser and their progeny, “substantial prejudice” must be shown to find that the conduct of parallel proceedings violated due process. This most often occurs when government agents induce a defendant to provide incriminating evidence or statements by affirmatively misrepresenting the likelihood of criminal prosecution. To secure dismissal of charges or suppression of evidence, the “defendant must produce clear and convincing evidence that the agents affirmatively mislead him as to the true nature of their investigation” and that “the misinformation was material in his decision to speak with the agents” or provide other evidence. United States v. Serlin , 707 F.2d 953, 956 (7th Cir. 1983). Similar decisions are found in other circuits, and most courts have held that a person who produces information to the IRS or SEC — particularly one represented by experienced counsel — is on notice that anything they produce may be used in a criminal prosecution. See, eg, SEC v. Horowitz & Ullman, 1982 WL 1576, at *8-*9 (N.D. Ga. 1982). Moreover, the warnings in SEC Form 1662 have been deemed sufficient to advise even uncounseled defendants. United States v. Teyibo , 877 F. Supp. 846, 856 (S.D.N.Y. 1995).

Conclusion

So where does the dividing line between proper and improper contacts actually lie? The most fundamental rule is that a regulatory agency, authority, or private plaintiff must have a valid, independent objective of its own for commencing an investigation or litigation. It cannot act solely to develop evidence for criminal prosecution, although that may permissibly be one of its reasons for filing suit. Second, government attorneys or investigators may not affirmatively mislead individuals concerning the likelihood of a criminal prosecution to induce them produce documents, consent to a search, or make incriminating statements. And of course prosecutors must comply with the rules for criminal investigations, especially Federal Criminal Rule 6(e).

But as long as these principles are respected, government agents pursuing parallel proceedings may exchange information and confer with each other to avoid compromising their respective litigation positions — just as railroad tracks sometimes merge and cross before reaching different destinations.