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Crossing the Line: Parallel Proceedings or Abuse of the Investigative Process

Problems Inherent with Parallel Proceedings

This is an explanation and discussion about problems that are inherent with parallel proceedings. For more information, or for representation for a criminal matter, contact criminal defense attorney Adam Burke. In United States v. Stringer, the defendants Kenneth Stringer, Mark Samper, and William Martin were charged with fifty counts of conspiracy and securities fraud. The defendants were executives of FLIR Systems, Inc. (“FLIR”). Shortly after the Securities and Exchange Commission (“SEC”) began investigating the defendants, Assistant United States Attorney (“AUSA”) Charles Gorder (“Gorder”) met with an officer from the SEC and requested access to the SEC’s investigative files on the defendants. Gorder also indicated that the United States Attorney’s Office (“USAO”), the Federal Bureau of Investigation (“FBI”), and the Department of Justice (“DOJ”) were all investigating the defendants. The SEC aided these investigations by providing the USAO and the FBI documents it compiled on the defendants.

Following a visit to the defendant’s corporate headquarters, the SEC, FBI, and USAO met to discuss the progress of the investigation. In that meeting, it was decided that criminal investigators would allow the SEC to handle the investigation. Because the defendants were cooperating, “a decision was made not to pursue a parallel grand jury investigation” but to “passively observe the results of the SEC’s work.”

The USAO was actively involved in the SEC investigation. The AUSAs met regularly with SEC officials, they received documents, requested interviews be conducted in Oregon to establish jurisdiction, advised what information was needed for a successful criminal prosecution, and intentionally hid their presence from the defendant’s attorneys. Also, the civil investigators were made aware of the need to suppress the presence of the USAO.

The SEC subpoenaed the defendants and informed them that disclosure of the requested information to the SEC is mandatory, subject to the valid assertion of privilege. The SEC also informed defendants that failure to provide information could result in a court order compelling the information followed by criminal sanctions.

The defendants were given the standard SEC Form 1622. This form is given to all testifying witnesses and notifies them of their right to counsel, their Fifth Amendment rights, and the routine uses of information. These routine uses included a statement that the SEC makes its files available to other governmental agencies, including the USAO. The Form 1662 also notes that any information given to the SEC may be used in any federal criminal proceeding. The defendants asserted that their due process rights were violated because they were not advised that agencies affiliated with the DOJ were using the SEC to gather evidence for a criminal prosecution. In the gathering of evidence for litigations, software like Digital WarRoom might be used for eDiscovery and the acquirement of digital materials that could be of use to the legal proceedings.

The district court in Stringer agreed with the defendants and dismissed their indictments concluding that the parallel proceedings were improper or “not parallel” because the active participation of criminal investigators in the civil proceeding was deliberately hidden from the defendants.

On Appeal, the Ninth Circuit overruled the district court, instead ruling that the SEC withholding knowledge of a parallel criminal proceeding was not affirmatively deceitful and the dismissal of the indictments was unwarranted.

Defendants to civil or regulatory investigations are frequently forced to choose between invoking their Fifth Amendment protection to the detriment of their interest in resolving the civil proceeding or cooperating with the civil investigation at the risk of potential criminal liability. For individuals associated with the NASD or NYSE, one consequence of the subject’s invocation of his Fifth Amendment protection is likely being barred from the securities industry. Regulatory agencies, such as the SEC’s Enforcement Division, consider a defendant’s invocation of the Fifth Amendment to be a factor supporting referring the matter for criminal prosecution.

The problems inherent in parallel proceedings lie in the inevitability of significant risks from any course of action a defendant chooses. The decision of which tactics to use involves a balancing of the risks of either cooperating with or resisting the civil proceeding. The witnesses in regulatory investigations often must make this determination early on, when the full scope and facts of the government’s investigation is not yet apparent.

For example, Stringer’s attorney asked several questions reflecting these concerns. He attempted unsuccessfully to ascertain whether his client was the target of the SEC’s investigation and whether the SEC was working with any other government agencies. Stringer’s attorney’s purpose in asking these questions was to gain information necessary to weigh Stringer’s interest in cooperating and resolving the civil inquiry against the risk of his client potentially incriminating himself by virtue of such cooperation. The court dismissed the indictments in part because the defendants were interviewed by the SEC and provided additional cooperation following the SEC’s evasive answers to these questions.

Civil and criminal proceedings have differing protections such that civil interrogations may have the effect of serving prosecutorial aims while undermining the protections afforded criminal defendants. A prosecutor may gain useful, often inculpatory evidence from disclosures the defendant made during civil discovery or trial.

The protections of the Fifth and Sixth Amendment are more rigorously guarded in criminal cases and the rules of discovery are particularly disparate between the two proceedings. In many civil proceedings, the trier of fact is permitted to draw an adverse inference from a Fifth Amendment invocation. Moreover, in civil proceedings, defendants invoking the Fifth Amendment’s protection are often subsequently precluded from offering up the factual bases of the defenses or denials on the points for which they have claimed the protection.

With such measures as the withholding of attorney’s fee advances and disciplinary action, many corporations put employees under enormous pressure not to invoke this protection. The decision to use the shelter of the Fifth Amendment or another adversarial maneuver against regulatory agency is potentially risky in light its oversight of the defendant’s industry. In Stringer, this consideration was important enough that Stringer testified despite considerable uncertainty surrounding the SEC investigation.

The invocation of the Fifth Amendment also carries with it a number of potentially important advantages. First, it may be used to shield witnesses from revealing information that may be exculpatory but still valuable to building a prosecutor’s case. The advantage of invoking the privilege is that it enables the witnesses to avoid perjury which could provide either evidence of the mens rea element of a substantive criminal charge resulting from the initial proceeding or an independent ground for an indictment. Delaying testimony gives attorneys the opportunity to learn more about the facts and scope of an investigation as well as time to prepare the witness. Whether failing to provide notice of a criminal investigation deprives a defendant of these advantages is a central question raised by the facts in Stringer.

Further problems confront defendants facing concurrent civil and criminal proceedings. The outcome of the civil proceeding is often res judicata on comparable criminal charges, but because of the disparate burdens of proof, exoneration on criminal charges is not binding on further civil or regulatory proceedings. Similarly, the dismissal of an indictment is unlikely to preclude future civil proceedings.

A number of work product and attorney-client privilege problems are also prevalent in the context of parallel proceedings. By sharing documents with the aim of settling a regulatory proceeding, a corporation may be found to have waived its attorney-client privilege or work product privilege with respect to other civil proceedings or investigations. Moreover, corporations may be found to have waived attorney-client or work-product privilege by sharing documents with too many corporate advisors such as outside auditors and accountants.

Cases Defining the Limits of Parallel Investigations

In United States v. Kordel, the defendants were the President and Vice President of Detroit Vital Foods, Inc. In March 1960, the FDA’s Detroit office began investigating the defendants for possible violations of the Food, Drug, and Cosmetic Act. In June of 1960, the USAO for the Eastern District of Michigan began an in rem action against the corporation’s products and filed a libel. In September of 1960, the corporation answered the libel appearing as claimant. In January 1961, the FDA prepared far-reaching civil interrogatories and provided the corporation notice that the agency contemplated a criminal proceeding against them regarding the transactions underlying the civil action.

In April 1961, the corporation, having received but not yet responded to the interrogatories, motioned to extend the time to answer the interrogatories until after the disposition of the contemplated criminal proceeding or alternatively to stay the civil proceeding. The corporation did not raise a claim of Fifth Amendment privilege against compulsory self-incrimination as part of its motion.

In June 1961, the District Court denied the motion having found that the corporation failed to demonstrate that substantial harm would result from responding to the interrogatories. The defendants were subsequently indicted and convicted of violations of the Federal Food, Drug, and Cosmetic Act based on evidence and leads supplied from their interrogatories.

The Court, in Kordel, reversed the Sixth Circuit Court of Appeals and held that parallel proceedings were appropriate and necessary to the effective enforcement of federal law. As a result, the defendant’s convictions were upheld.

In United States v. LaSalle, John Olivero, a special agent with the IRS received an assignment to investigate the tax liability of John Gattuso. Olivero testified that he was to “investigate any possible violations of the Internal Revenue Code.” He requested and received data from the USAO from the Northern District of Illinois, and several other government agencies.

Gattuso acquired rental income from real estate held in trust by LaSalle National Bank as trustee. In order to determine the accuracy of Gattuso’s income reports, Olivero issued two summonses to the bank. The bank refused to produce the materials requested in the summons arguing that Gattuso, as beneficiary, had the exclusive power to produce or withhold the items which the IRS sought.

In November 1975, the United States petitioned the Northern District of Illinois for enforcement of the summons. Olivero testified that when the petition was filed he had not determined whether criminal charges were justified and had not made any recommendation about the case to his supervisors. The District Court and the Seventh Circuit Court of Appeals refused to enforce the summonses based on the fact that the agent’s purpose from the onset was to uncover evidence of criminal conduct. The Supreme Court reversed, holding the summonses should be enforced. The court reasoned that before the IRS refers the matter to the DOJ the civil and criminal elements of tax fraud cases are inseparable and are thus within the congressionally authorized purposes of the IRS’s civil summons authority. If you are a small business that is being audited, then you should consider getting some IRS audit support so that you don’t risk losing your business.

In United Sates v. Scrushy, Neil Seiden, a senior accountant with the SEC Department of Enforcement had scheduled a deposition with Mr. Scrushy to take place in Atlanta. Two days before the deposition his office received a phone call from the USAO. In March of 2003, the USAO in Birmingham held a conference call with the SEC office in Atlanta. On the phone were Seiden and other officials from the SEC along with two AUSAs and an FBI agent. On the call Martin from the USAO informed the SEC investigators that a massive fraud had been occurring at Health South, the defendant’s company, and that Scrushy allegedly knew about the fraud.

The AUSAs requested the SEC move the deposition to Birmingham so that Seiden could participate in the interviews. Though they may have thought that implementing remote deposition software to do the deposition virtually (read more here) would have been an easier option, they ultimately preferred this to be carried out in person instead, and Birmingham was the desired location. The AUSAs suggested that Scrushy might be more comfortable in his own place of residence and that if he lied he would do so in their (the AUSAs) district. The AUSAs gave Seiden instructions on which subjects to ask about and which to avoid. They also suggested Seiden give Scrushy the opportunity to repeat the previous request to change the deposition to Birmingham rather than Seiden suggesting the move and raising Scrushy’s suspicions about the nature of the investigation.

At the deposition, Seiden did not advise Scrushy or his attorneys of the existence of the criminal investigation. Seiden asked Scrushy a series of questions at his deposition based on information Seiden learned in the conference call. Seiden testified that but for the conference call, these questions would not have been asked. The court, in Scrushy, concluded that the civil and criminal investigations improperly merged when the USAOs called the SEC office to instruct the SEC investigators regarding the content of the deposition and its location.

Analysis: Under what circumstances are parallel proceedings generally permissible?

In Kordel, the court reasoned that reversing the defendant’s convictions would be tantamount to adopting a rule that taking testimony in ordinary civil proceedings would always immunize corporate officers from subsequent criminal prosecution. This analysis suggests that whenever corporate officers give civil testimony, they risk divulging some potentially incriminating information and that absent extraordinary circumstances such a risk is unavoidable. The Court wrote “It would stultify enforcement of federal law to require a government agency such as the FDA to invariably choose to either forego recommendation of a criminal prosecution, once it seeks civil relief, or to defer civil proceedings pending the ultimate outcome of a criminal trial.” The Court thus made separate civil and criminal proceedings regarding the same subject matter permissible regardless of their timing in relation to one another.

In IRS cases, the distinction between proper and improper parallel proceedings is drawn somewhat differently than in Kordel. The Court’s holding in LaSalle established the limits of parallel proceedings with respect to the IRS. The Court held that because of the intertwined civil and criminal elements of tax fraud cases, the distinction between civil and criminal discovery becomes cognizable only after the IRS refers the case to the DOJ for prosecution. Once the DOJ has received the referral, the IRS is no longer permitted to issue civil summonses.

Perhaps the best way to understand the fundamental difference in the Court’s definition of proper parallel proceedings in LaSalle from that in Kordel is to borrow an illustration from Scrushy. In Scrushy, the court analogizes proper parallel proceedings under Kordel to “side-by-side train tracks that never intersect.” In other words, proper parallel proceedings, under Kordel, must be procedurally separate from inception to final disposition.

Extending this analogy to LaSalle, there is initially only one track in the form of an IRS investigation; this track is governed by the rules of civil procedure because at this point the civil and criminal elements of a tax fraud investigation are inseparable. Once the IRS refers the case to the DOJ for prosecution, the procedural consequences are discernible and the policy interests mandate that the “train track” be separated into two separate tracks.

This separation is enforced by the “prophylactic” rule from LaSalle which limits the IRS’ power to issue civil summonses to the investigatory stage preceding the criminal referral. The policy underlying this separation is the Court’s desire to avert the potential expansion of the DOJ’s summons authority. The rule from LaSalle serves this policy by preventing the IRS from providing the DOJ further civil discovery once a criminal indictment appears inevitable.

Analysis: Did the government have knowledge of an active or likely criminal investigation of one or more parties to the proceeding?

The Scrushy court contrasted the facts before it to those of the Eleventh Circuit case of United States v. Handley, 763 F.2d 1401 (11th Cir. 1985). In Handley, testimony was obtained through separate civil cases brought by a private party and was subsequently turned over to the Government to be used in the criminal prosecution of defendants for allegedly participating in the Ku Klux Klan’s disruption of a civil rights march. The Handley court held the testimony was admissible because the Government had neither advance notice nor input into the conduct of the civil actions that supplied the incriminating testimony. The Scrushy court distinguished its facts from those in Handley, pointing out the government had both notice and input into the civil investigation which ultimately targeted Scrushy.

What these two cases, viewed together, suggest is that the government’s knowledge of a nexus between a civil proceeding and any potential criminal investigation is a threshold question that must be answered before the government’s conduct in those proceedings is challengeable. In other words, the Government will not be held accountable for failing to notify the parties of a potential criminal investigation when the government did not foresee criminal implications arising from the civil proceeding.

Analysis: Did the government have knowledge of an active or likely criminal investigation of one or more parties to the proceeding?

The Scrushy court contrasted the facts before it to those of the Eleventh Circuit case of United States v. Handley, 763 F.2d 1401 (11th Cir. 1985). In Handley, testimony was obtained through separate civil cases brought by a private party and was subsequently turned over to the Government to be used in the criminal prosecution of defendants for allegedly participating in the Ku Klux Klan’s disruption of a civil rights march. The Handley court held the testimony was admissible because the Government had neither advance notice nor input into the conduct of the civil actions that supplied the incriminating testimony. The Scrushy court distinguished its facts from those in Handley, pointing out the government had both notice and input into the civil investigation which ultimately targeted Scrushy.

What these two cases, viewed together, suggest is that the government’s knowledge of a nexus between a civil proceeding and any potential criminal investigation is a threshold question that must be answered before the government’s conduct in those proceedings is challengeable. In other words, the Government will not be held accountable for failing to notify the parties of a potential criminal investigation when the government did not foresee criminal implications arising from the civil proceeding.

Analysis: Did a law enforcement department or agency subject to rules of criminal procedure participate in the civil proceeding?

The language from Kordel that “[w]e do not deal here with a case where the Government has brought a civil action solely to obtain evidence for its criminal prosecution” suggests that the purposes underlying the civil investigation are as important as overt deception. These purposes are generally demonstrated by the active participation of criminal investigators in the civil proceeding.

For example, in United States v. Grunewald, 87 F.2d 531, 534 (1993) the court held that “[a[ government agency may not develop a criminal investigation under the auspices of a civil investigation” and United States v. Rand, 308 F.Supp. 1231, 1234 (N.D.Ohio 1970) held that the Government may not engage in “an obnoxious form of using parallel proceedings.” The Parrot’s court also that the government may not use civil discovery devices for the purpose of a criminal investigation.

The Stringer court acknowledged that he DOJ used the SEC investigation to gather evidence against the defendants, but noted the SEC initiated its investigation before involving the Justice Department. The court concluded that the DOJ’s participation in the SEC investigation was permissible because the government did not initiate the civil investigation solely to build a criminal case.

Analysis: How does the propriety of civil proceedings affect the rights of parties and the probability of certain outcomes?

By impairing their ability to make informed, effective decisions regarding the probability of prosecution, improper parallel proceedings may violate parties’ Fifth Amendment, Sixth Amendment, or due process rights.

The Stringer court quoted United States v. Robson, 477 F.2d 13, 18 (1973) stating that “[i]t is a due process violation if the government makes affirmative misrepresentations as to the nature or existence of parallel proceedings or otherwise use trickery or deceit” and found that counsel for the SEC had misled Stringer into believing he was not a target of a criminal investigation and thus violated his due process rights. Although, the court in Scrushy never addressed with specificity which rights were prejudiced by the government’s abuses, the court discarded the government’s Fifth and Sixth Amendment analysis. The court repeatedly referred to “the improper administration of criminal justice,” and focused instead on what it apparently regarded as due process rights violations.

The Stringer court indicated that the defendant’s Fifth Amendment rights are violated when the civil inquiry carried with it a high probability of an indictment because of facts known to the civil agency and withheld from the defendant. The court wrote that “[g]overnment interference with a defendant’s relationship with his attorney may render the counsel’s assistance so ineffective as to violate the defendant’s Fifth Amendment right to due process of law.” The court in Stringer implied that this same conduct by the government may be a violation of Sixth Amendment rights if the interference results after the indictment is issued.

In many cases, the violation of these rights results in the defendant being unable to accurately assess the risks of testifying in a civil proceeding. Had the defendant had access to a reputed counsel (you can navigate to this website to get an overview of what to expect), then he could have easily conducted all internal investigations and regulatory examinations. This would provide them with the ability to handle complex securities and commodities compliance-related issues without any hassle. As the court in Parrott put it:

When a defendant knows that he has been charged with a crime, or that a criminal investigation has targeted him, he can take actions to prevent the providing of information in an administrative or civil proceeding that could later be used against him in the criminal case. When a defendant does not know about the criminal investigation, the danger of prejudice increases.

If the subject of a civil investigation is informed accurately about the nature of the civil proceeding he may use the information regarding such a proceeding to assess the probability of a resulting criminal indictment.

For example, based on SEC data, the odds of the subject of an enforcement proceeding becoming a defendant in a criminal proceeding in 2004 were about 47%. However, based on U.S. Attorney’s data, the odds of the subject of an enforcement proceeding becoming a defendant (as an SEC referral) in a criminal proceeding were only about 8%. This discrepancy is likely based on other DOJ agencies such as the FBI making the additional referrals to the USAO. The conclusion these statistics suggest is that if the SEC discloses truthfully that no other outside agency is involved in an enforcement investigation the odds of prosecution are automatically reduced from 47 percent to 8 percent. Thus, being advised accurately of the status of an investigation enables the defendant to make the most informed decision regarding the risks of testifying or invoking the Fifth Amendment privilege.

Analysis: What remedies are appropriate where a parties rights are violated or in danger of being violated?

Practitioners faced with parallel proceedings have a number of remedies including but not limited to the suppression of evidence gathered in the civil proceeding, the dismissal of the criminal indictment, and the staying of civil discovery or other proceedings.

1. Motions to Dismiss Criminal Indictment or Suppress Civil Testimony

Stringer is an example of a court granting a motion to dismiss the criminal indictment where it determines the government breached the defendant’s constitutional rights by using civil discovery to obtain criminal evidence. The court justified its dismissal citing United States v. Tweel, 550 F.2d 297, 300 (5th Cir.1977), holding that a dismissal of the criminal indictment is warranted if the government engaged in deceit, trickery, or intentional misrepresentation. Scrushy, is an example of a court granting a motion to suppress civil testimony where the court determined the government violated the defendants’ due process rights.

2. Stays of Civil Proceeding

One remedy to a court’s finding that the government acted in bad faith or that a defendant’s rights have otherwise been substantially prejudiced is to stay the civil proceeding. The effect of the stay is to afford the defendant the same protection as criminal defendant’s not involved parallel proceedings. Following the criminal proceeding, the defendant’s position with respect to the resumed civil proceeding is somewhat more exposed because discovery from the criminal proceeding will subsequently be available to civil litigants or regulators.

A court’s determination of whether or not to grant a stay will result from the consideration of several factors including commonality of issues; the timing of the motion; and the public interest. The Supreme Court has held that the movant for a stay must show hardship or inequity would result from the civil proceeding. A court will typically apply a balancing test involving five factors:

(i) the interest of the plaintiff in proceeding expeditiously with the civil action and the prejudice to the plaintiff in delay;

(ii) the burden on the defendants;

(iii) the convenience of the courts;

(iv) the interests of persons not parties to the civil litigation; and

(v) the public interest.

However, many Circuits have greatly curtailed the benefit to a defendant in securing a protective order. In the case of In re Grand Jury Subpoena Served on Meserve, Mumper & Hughes, 62 F.3d 1222, 1226 (C.A.9 (Cal.),1995), the defendant appealed a district court’s denial of his motion to quash a grand jury subpoena, which ordered him to produce documents sealed by a protective order in an earlier, settled civil litigation. The court adopted the per se rule of the Fourth and Eleventh Circuits holding that protective orders cannot shield discovery from grand jury subpoenas.

3. Partial Stays

Courts will often find a stay to be more palatable when its scope is reduced. Many issues that arise in a civil proceeding may be resolved without the need to disclose evidence relevant to a criminal prosecution. Frequently dispositive issues, such as class certification and jurisdiction may be resolved early on, without addressing the merits of the claim.

Conclusion

Absent special circumstances, the government generally may pursue concurrent criminal and civil proceedings, with special rules for the IRS. Knowledge on the part of the civil administrator of an imminent or ongoing criminal investigation is dispositive of the legitimacy of parallel proceedings.

For parallel proceedings to be permissible the civil administrator must provide specific notice of such an investigation to affected parties.

Departments and agencies subject to rules of criminal procedure may cooperate with but must not participate in the civil proceeding for the proceeding to be permissible. By impairing their ability to make informed, effective decisions regarding the probability of prosecution, improper parallel proceedings may violate parties’ Fifth Amendment, Sixth Amendment, or Due Process rights.

When these rights have been impaired such remedies as the dismissal of the indictment, the suppression of civil testimony, and stays of civil proceedings are available.

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