In United States v. Stringer, 2008 WL 901563 (9th Cir. Apr. 4, 2008), the United States Court of Appeals for the Ninth Circuit vacated a final order of the United States District Court for the District of Oregon that had dismissed criminal indictments against three individual defendants.  Those defendants had argued successfully before the district court that their rights had been violated by the Securities & Exchange Commission (“SEC”) when they cooperated voluntarily with an SEC investigation allegedly without knowing that the SEC was working with federal prosecutors on a parallel criminal prosecution.  The Ninth Circuit also vacated the district court’s alternative order suppressing evidence obtained during an SEC civil investigation.  This decision paves the way for reinstatement of criminal charges against the defendants and likely will encourage further cooperation between prosecutors and SEC enforcement personnel to gain strategic and tactical advantages against investigation targets.

The SEC began its investigation of the defendants’ alleged falsification of financial records in June 2000.  Approximately two weeks after the commencement of the SEC investigation, the SEC met with representatives of the United States Attorney’s Office (“USAO”), who decided to commence a separate criminal investigation.  The SEC did not disclose the existence of the criminal investigation to the defendants.

The SEC and USAO coordinated their efforts in the simultaneous investigations.  For example, the SEC turned over to the USAO all documents obtained through the defendants’ cooperation with the SEC investigation.  Further, the SEC received instructions from the USAO on how best to conduct SEC depositions in order to create the “best possible record” to support a potential false statement criminal prosecution.  The SEC also agreed to conduct the interviews in Oregon so that the Portland office of the USAO would have jurisdiction over any false statements case that might arise from statements made during the depositions.

The SEC and USAO also took steps to conceal the existence of the criminal investigation from the defendants.  The USAO decided it would not get involved in the SEC investigation so as not to “impede” it, in light of the fact that the defendants were cooperating with the SEC by, among other things, agreeing not to invoke their Fifth Amendment privilege.  In addition, the SEC went so far as to instruct court reporters at the depositions not to disclose the existence of the criminal investigation to the defendants.  Finally, in response to questioning by an attorney for one of the defendants, an SEC staff attorney refused to disclose whether a simultaneous criminal prosecution was ongoing, and suggested the questions be directed to the “other agencies . . . mentioned” by the defense attorney.

In the criminal case, the district court granted the defendants’ motion to dismiss the indictments on the ground that the government had violated the defendants’ due process rights by deceitfully pursuing simultaneous civil and criminal investigations.  On appeal, the Ninth Circuit disagreed and reversed.  The Court focused on a standard form the SEC gives to all witnesses, including the defendants, in connection with its requests for production of information.  This form disclosed that information obtained during the course of SEC investigations is “often” made available “to other governmental agencies, particularly the United States Attorneys and state prosecutors.  There is a likelihood that information supplied by you will be made available to such agencies where appropriate.”  The form further advised, specifically with regard to the Fifth Amendment right against self-incrimination, that:

Information you give may be used against you in any federal . . . civil or criminal proceeding brought by the Commission or any other agency.  You may refuse, in accordance with the rights guaranteed to you by the Fifth Amendment of the Constitution of the United States, to give any information that may tend to incriminate you or subject you to fine, penalty, or forfeiture.

The SEC also warned defendants at the start of each deposition that “the facts developed in this investigation might constitute violations of . . . criminal laws.”  The Ninth Circuit held that these disclosures by the SEC undermined any assertion that the defendants were deceived regarding the risks that information they were providing voluntarily to the SEC might be used in a parallel criminal proceeding against them.

This decision is of great importance to corporations and their officers, directors and employees who are targeted by a regulatory investigation.  It removes the chilling effect the district court’s decision had on strategic and tactical cooperation between prosecutors and SEC investigators, and emphasizes the need for practitioners to explore thoroughly with targeted clients the risks of criminal liability in weighing the pros and cons of cooperation with the SEC.

For further information, please contact Mark Berube at (212) 332-3820.