Parallel Proceedings: The End of an Error?

The district court's decision in Scrushy escaped appellate scrutiny when the government dismissed its appeal after Scrushy won acquittals on all remaining counts. But the government's appeal in Stringer let to a Ninth Circuit decision last April that strongly repudiated the reasoning of the district court and Scrushy as well.

The Ninth Circuit Ruling

Initially, the Ninth Circuit panel rejected the district court's view (also expressed in Scrushy, 366 F. Supp.2d at 1139) that the SEC had an affirmative duty to advise the three corporate officers that they were also under criminal investigation. The Court of Appeals stressed that a witness who fails to invoke his privilege against self-incrimination waives it, and declined to hold that the defendants' waivers were ineffective just because they were not told of the U.S. Attorney's 'active involvement.' 521 F.3d at 1197.

The Ninth Circuit emphasized that the standard SEC Form 1662, which is given to all witnesses summoned to appear before the Commission, provides a detailed explanation of a witness's Fifth Amendment rights, warns that any information developed in a witness's SEC deposition can be used against him or her in a criminal proceeding, and further advises that there is 'a likelihood' that the information will be made available to agencies such as the U.S. Attorneys and state prosecutors. In Stringer, the SEC attorney further specifically advised each of the three corporate officers at the beginning of their depositions that 'the facts developed in this investigation might constitute violations of ' criminal laws.' In light of these express warnings, the Ninth Circuit found that defendants had forfeited any claim that the use of their deposition testimony in the criminal proceeding violated the Fifth Amendment.

Improperly Conducted Joint Investigation?

The defendants' assertion that there was an improperly conducted joint investigation fared no better. The panel pointed out under the Supreme Court's seminal decision in United States v. Kordel, 397 U.S. 1, 12-13 (1970), due process is not offended by the conduct of concurrent civil and criminal investigations unless the civil investigation is conducted solely to develop evidence for use in a criminal prosecution. The Court of Appeals in Stringer then squarely rejected the district court's view that the SEC had acted as a mere stalking horse for the criminal prosecutors. Instead, it stressed that 'the SEC's civil investigation was opened first, led to SEC sanctions, and was conducted pursuant to the SEC's own enforcement jurisdiction.'

The Ninth Circuit also rejected the district court's alternative basis for its rulings, namely, that even if the SEC's investigation was a valid civil enforcement proceeding, the government had used 'trickery and deceit' to lull the three corporate officers into appearing for their depositions and waiving their Fifth Amendment rights. Although the panel agreed that government
officials must not 'affirmatively mislead' the subject of an investigation into believing that only civil proceedings are contemplated, it found no such conduct in the record. Rather, the SEC had warned the defendants that their testimony might be used in criminal proceedings and had given only a non-committal response to the single defense attorney who sought to determine whether his client was also facing a criminal investigation. As for the government's admitted determination 'not to conduct the criminal investigation openly,' the Ninth Circuit coolly held that this was a decision 'the government was free to make.'

What's Next

The defendants in Stringer have petitioned for en banc review, and the district judge has filed a letter with the Court of Appeals complaining that the panel failed to address many of his findings of fact or to indicate clearly whether it had rejected them. However, the defendants' bid for en banc review faces some significant obstacles. There was no dissent, and the three judges on the Stringer panel (Mary M. Schroeder, Barry G. Silverman, and Jay S. Bybee) are representative of the Ninth Circuit's ideological spectrum, having been appointed respectively by Presidents Carter, Clinton, and George W. Bush. Moreover, the panel's decision was solidly grounded on the Supreme Court's decision in Kordel and the other leading case on parallel proceedings, SEC v. Dresser Industries, Inc., 628 F.2d 1368 (D.C. Cir. 1980) (en banc).

Assuming the Stringer panel decision stands, it is exceptionally good news for the government. It effectively endorsed broad cooperation and exchanges of information between investigating civil and criminal authorities as long as: 1) the civil investigation is not merely a stalking horse for a criminal probe; and 2) the civil authorities do not affirmatively mislead targets about the likelihood of criminal prosecution. Moreover, it avoids saddling regulatory agencies with an obligation to disclose the existence of pending criminal investigations that may be in an early stage, as was the case in Stringer, or to maintain what amounts to a 'wall of separation' between civil and criminal investigators, like that contemplated by the district court in Scrushy. Absent reconsideration by the Ninth Circuit or review by the Supreme Court, Stringer will encourage even greater cooperation and consultation between federal civil and criminal authorities.

From the defense perspective, Stringer means that challenges to the conduct of parallel proceedings are unlikely to become a central weapon in defense counsel's arsenal, and extensive evidentiary hearings exploring the overlap between the government's civil and criminal investigations ' like the 11-day hearing in Stringer ' will not become routine. True, defense counsel can still cite Scrushy in motions seeking such discovery. But that poorly reasoned decision ' in which the court made the remarkable statement that it 'could find no controlling authority' explaining how to distinguish 'a legitimate, parallel investigation from an improper one,' 366 F.Supp.2d at 1137, and which failed to cite either Kordel or Dresser Industries ' is an extraordinarily weak reed upon which to base such requests. (For a more detailed critique of Scrushy, see this author's January 2006 article, 'Never the Twain Shall Meet?' in this newsletter: http://www.ljnonline.com/issues/ljn_buscrimes/13_5/news/145814-1.html.)

Conclusion

Stringer establishes that defense counsel confronted with a regulatory investigation must carefully assess the risks of pursuing a head-in-the-sand approach with regard to the existence of a simultaneous criminal inquiry. Stringer does reaffirm that prosecutors cannot give misleading answers in response to questions about the pendency of a criminal investigation, although they may give noncommittal ones (which of course may provide a clue). Defense counsel therefore cannot escape the hard choice between either pursuing direct inquiries with the DOJ about the existence of a criminal investigation ' which runs the risk of alerting the criminal authorities to conduct that is not yet on their radar screens ' or of deciding whether to assert the Fifth Amendment in the civil proceedings while remaining uncertain about the pendency of a parallel criminal inquiry.

Jefferson M. Gray, a member of this newsletter's Board of Editors, is an Assistant U.S. Attorney in the District of Maryland. This article reflects only his individual analysis and conclusions; it does not purport to speak for the Department of Justice or any of its divisions.

Three years ago, two similarly minded district court decisions rocked federal regulatory agencies and the Department of Justice (DOJ) by rejecting longstanding assumptions about the proper conduct of simultaneous civil and criminal investigations, commonly known as 'parallel proceedings.' First, in United States v. Scrushy , 366 F. Supp.2d 1134, 1139 (N.D. Ala. 2005), the court said: 'To be parallel, by definition, the separate investigations should be like side-by-side train tracks that never intersect.' Accordingly, the court dismissed perjury charges arising out of the defendant's testimony in an SEC civil deposition because ' prior to the deposition ' SEC investigators had exchanged information with federal prosecutors, provided them expert assistance, and complied with certain of their requests.

Next, in United States v. Stringer , 408 F. Supp.2d 1083, 1087-88 (D. Or. 2006), another district court dismissed the entire indictment against three defendants in a corporate-fraud case because it found that factually and temporally overlapping investigations conducted by the SEC and the U.S. Attorney's Office in Oregon 'were not parallel proceedings.' The court reasoned that the prosecutors were 'actively involved in the SEC investigation' by meeting regularly with SEC personnel, receiving documents, requesting that depositions be taken in the district to establish venue for possible false statements charges, and advising the SEC investigators on the elements of criminal false statements charges. In the alternative, the Stringer court found that the indictment should be dismissed because the government had 'engaged in deceit and trickery to keep the criminal investigation concealed' when an SEC attorney instructed a court reporter not to mention the DOJ's involvement to defense attorneys and also side-stepped a direct response when one defense attorney asked whether there was a pending criminal investigation.

The combined impact of the district court decisions in Scrushy and Stringer prompted a flurry of written commentaries (including two in this publication) and made parallel proceedings a hot topic at both government training courses and meetings of the white-collar criminal defense bar. For the past two years, it appeared that these twin decisions might herald a future in which government civil and criminal investigators had to deal with each other far more gingerly, if at all, while defense attorneys would eagerly seek to explore all contacts between the government's civil and criminal agencies in any case involving concurrent investigations.

The district court's decision in Scrushy escaped appellate scrutiny when the government dismissed its appeal after Scrushy won acquittals on all remaining counts. But the government's appeal in Stringer let to a Ninth Circuit decision last April that strongly repudiated the reasoning of the district court and Scrushy as well.

The Ninth Circuit Ruling

Initially, the Ninth Circuit panel rejected the district court's view (also expressed in Scrushy, 366 F. Supp.2d at 1139) that the SEC had an affirmative duty to advise the three corporate officers that they were also under criminal investigation. The Court of Appeals stressed that a witness who fails to invoke his privilege against self-incrimination waives it, and declined to hold that the defendants' waivers were ineffective just because they were not told of the U.S. Attorney's 'active involvement.' 521 F.3d at 1197.

The Ninth Circuit emphasized that the standard SEC Form 1662, which is given to all witnesses summoned to appear before the Commission, provides a detailed explanation of a witness's Fifth Amendment rights, warns that any information developed in a witness's SEC deposition can be used against him or her in a criminal proceeding, and further advises that there is 'a likelihood' that the information will be made available to agencies such as the U.S. Attorneys and state prosecutors. In Stringer, the SEC attorney further specifically advised each of the three corporate officers at the beginning of their depositions that 'the facts developed in this investigation might constitute violations of ' criminal laws.' In light of these express warnings, the Ninth Circuit found that defendants had forfeited any claim that the use of their deposition testimony in the criminal proceeding violated the Fifth Amendment.

Improperly Conducted Joint Investigation?

The defendants' assertion that there was an improperly conducted joint investigation fared no better. The panel pointed out under the Supreme Court's seminal decision in United States v. Kordel , 397 U.S. 1, 12-13 (1970), due process is not offended by the conduct of concurrent civil and criminal investigations unless the civil investigation is conducted solely to develop evidence for use in a criminal prosecution. The Court of Appeals in Stringer then squarely rejected the district court's view that the SEC had acted as a mere stalking horse for the criminal prosecutors. Instead, it stressed that 'the SEC's civil investigation was opened first, led to SEC sanctions, and was conducted pursuant to the SEC's own enforcement jurisdiction.'

The Ninth Circuit also rejected the district court's alternative basis for its rulings, namely, that even if the SEC's investigation was a valid civil enforcement proceeding, the government had used 'trickery and deceit' to lull the three corporate officers into appearing for their depositions and waiving their Fifth Amendment rights. Although the panel agreed that government
officials must not 'affirmatively mislead' the subject of an investigation into believing that only civil proceedings are contemplated, it found no such conduct in the record. Rather, the SEC had warned the defendants that their testimony might be used in criminal proceedings and had given only a non-committal response to the single defense attorney who sought to determine whether his client was also facing a criminal investigation. As for the government's admitted determination 'not to conduct the criminal investigation openly,' the Ninth Circuit coolly held that this was a decision 'the government was free to make.'

What's Next

The defendants in Stringer have petitioned for en banc review, and the district judge has filed a letter with the Court of Appeals complaining that the panel failed to address many of his findings of fact or to indicate clearly whether it had rejected them. However, the defendants' bid for en banc review faces some significant obstacles. There was no dissent, and the three judges on the Stringer panel (Mary M. Schroeder, Barry G. Silverman, and Jay S. Bybee) are representative of the Ninth Circuit's ideological spectrum, having been appointed respectively by Presidents Carter, Clinton, and George W. Bush. Moreover, the panel's decision was solidly grounded on the Supreme Court's decision in Kordel and the other leading case on parallel proceedings, SEC v. Dresser Industries, Inc. , 628 F.2d 1368 (D.C. Cir. 1980) ( en banc ).

Assuming the Stringer panel decision stands, it is exceptionally good news for the government. It effectively endorsed broad cooperation and exchanges of information between investigating civil and criminal authorities as long as: 1) the civil investigation is not merely a stalking horse for a criminal probe; and 2) the civil authorities do not affirmatively mislead targets about the likelihood of criminal prosecution. Moreover, it avoids saddling regulatory agencies with an obligation to disclose the existence of pending criminal investigations that may be in an early stage, as was the case in Stringer, or to maintain what amounts to a 'wall of separation' between civil and criminal investigators, like that contemplated by the district court in Scrushy. Absent reconsideration by the Ninth Circuit or review by the Supreme Court, Stringer will encourage even greater cooperation and consultation between federal civil and criminal authorities.

From the defense perspective, Stringer means that challenges to the conduct of parallel proceedings are unlikely to become a central weapon in defense counsel's arsenal, and extensive evidentiary hearings exploring the overlap between the government's civil and criminal investigations ' like the 11-day hearing in Stringer ' will not become routine. True, defense counsel can still cite Scrushy in motions seeking such discovery. But that poorly reasoned decision ' in which the court made the remarkable statement that it 'could find no controlling authority' explaining how to distinguish 'a legitimate, parallel investigation from an improper one,' 366 F.Supp.2d at 1137, and which failed to cite either Kordel or Dresser Industries ' is an extraordinarily weak reed upon which to base such requests. (For a more detailed critique of Scrushy, see this author's January 2006 article, 'Never the Twain Shall Meet?' in this newsletter: http://www.ljnonline.com/issues/ljn_buscrimes/13_5/news/145814-1.html.)

Conclusion

Stringer establishes that defense counsel confronted with a regulatory investigation must carefully assess the risks of pursuing a head-in-the-sand approach with regard to the existence of a simultaneous criminal inquiry. Stringer does reaffirm that prosecutors cannot give misleading answers in response to questions about the pendency of a criminal investigation, although they may give noncommittal ones (which of course may provide a clue). Defense counsel therefore cannot escape the hard choice between either pursuing direct inquiries with the DOJ about the existence of a criminal investigation ' which runs the risk of alerting the criminal authorities to conduct that is not yet on their radar screens ' or of deciding whether to assert the Fifth Amendment in the civil proceedings while remaining uncertain about the pendency of a parallel criminal inquiry.

Jefferson M. Gray, a member of this newsletter's Board of Editors, is an Assistant U.S. Attorney in the District of Maryland. This article reflects only his individual analysis and conclusions; it does not purport to speak for the Department of Justice or any of its divisions.