Thursday, January 12, 2006

Coordinated SEC and Criminal Investigations Result in Dismissal of Securities Fraud Indictment

A decision issued by the United States District Court for the District of Oregon on Jan. 9 dismissing securities fraud charges against three defendants for due process violations in the civil investigation is notable because it looks to be part of a growing trend to scrutinize how the SEC and U.S. Attorney's Offices coordinate their investigations.  The decision, United States v. Stringer (opinion below), involves an accounting fraud prosecution of three former officers of FLIR Systems Inc. in which the defendants gave depositions and supplied documents in the SEC investigation and were then indicted on criminal charges based on the information provided.  The defendants asserted that the SEC's failure to disclose the close coordination of its investigation with the U.S. Attorney's Office violated their Fifth Amendment due process right because they agreed to depositions and to provide documents that they otherwise would not have given if they had known prosecutors viewed them as targets of the investigation. 

In dismissing the indictments, U.S. District Judge Ancer Haggerty found that these were not "parallel investigations" but that the Commission essentially conducted a criminal investigation on behalf of the prosecutors to take advantage of the discovery rules available and, more importantly, by sandbagging the defendants into not asserting their Fifth Amendment rights.  The opinion states:

The court concludes that these were not parallel investigations. The USAO identified potential criminal liability and a few targets in the beginning of the investigation, and elected to gather information through the SEC instead of conducting its own investigation. The government was concerned that the presence of a criminal investigation would halt the successful discovery by the SEC, witnesses would be less cooperative and more likely to invoke their constitutional rights, and that the rules of criminal discovery would be invoked. Stringer Ex. 69, at 3 (June 6, 2001) (memorializing a telephone conversation between Echavarria and Garten wherein Garten explains that once there is an indictment "discovery is over. Criminal is totally 1 sided" and that he would then give everything and get nothing). The government was aware that there was no parallel proceeding.

The delay by the USAO was not for the purpose of reviewing evidence gathered by the SEC to make an informed decision as to whether the case warranted prosecution. From the beginning, the USAO consistently held the position that a criminal prosecution was likely. Almost a year after the SEC investigation began and two years before the USAO made its presence known, the USAO reiterated its position that the case would most likely warrant criminal prosecution, yet decided not to conduct a parallel criminal investigation. 

Moreover, the USAO was actively involved in the SEC investigation: meeting regularly, receiving documents, requesting interviews be conducted in Oregon to establish jurisdiction, advising what information was needed for a successful criminal prosecution, specifically instructing on how best to conduct interviews to gather evidence for false statement cases, intentionally hiding its presence from FLIR's attorneys, and repeatedly planning with the SEC as to when it would be best to surface and conduct an overt criminal investigation.

The strategy to conceal the criminal investigation from defendants was an abuse of the investigative process.

Interestingly, the court did not find that the SEC made any direct misstatements to the defendants.  It quoted from one deposition in which the Commission staff member (Echavarria)refused to confirm whether there was a criminal investigation but directed the defendant and his attorney to contact prosecutors directly:

STRINGER'S ATTORNEY: My first question is whether Mr. Stringer is the target of any aspect of the investigation being conducted by the SEC.

ECHAVARRIA: The SEC does not have targets in this investigation.

STRINGER'S ATTORNEY: The other questions I have relate to whether or not, in connection with your investigation, the SEC is working in conjunction with any other department of the United States, such as the U.S. Attorney's Office in any jurisdiction, or the Department of Justice.

ECHAVARRIA: As laid out in the 1662 form, in the "routine use of" section there are routine uses of our investigation, and it is the agency's policy not to respond to questions like that, but instead, to direct you to the other agencies you mentioned.

STRINGER'S ATTORNEY: And which U.S. Attorney's office might I inquire into?

ECHAVARRIA: That would be a matter up to your discretion.

The responses were those that I was taught to give when I was at the SEC, yet here they were insufficient to permit the criminal prosecution to go forward.  One case like this might be an aberration, but the decision in Stringer comes on top of the district court's opinion in U.S. v. Scrushy, 366 F.Supp.2d 1134 (N.D.Ala. 2005), that found a similar pattern of undisclosed SEC/U.S. Attorney coordination resulted in a due process violation and required the suppression of evidence.  In Stringer, the district court went even further by dismissing the entire case, finding that "the USAO intentionally shielded its intentions behind the guise of a civil prosecution, resorting to subterfuge to maintain the secrecy of its involvement." 

A year ago, I would have said a motion alleging a due process violation like that brought in Scrushy or Stringer was doomed because courts permitted coordinated investigations, and that the prosecutors could simply piggyback on the civil agency's inquiry.  Indeed, after Enron, the civil and criminal authorities touted their cooperation through the President's Corporate Fraud Task Force (website here) that includes "an inter-agency group that focuses on maximizing cooperation and joint regulatory and enforcement efforts throughout the federal law enforcement community."  One of the members of the Task Force is the Chairman of the SEC, and these district court decisions may call into question the government's use of coordinated civil and criminal investigations. 

I suspect the Department of Justice will appeal the district court's decision in Stringer because it may view the success of challenges like this to pose too great a threat to its ability to conduct parallel investigations.  Regardless of whether it appeals, this is a development that could have a substantial effect on how the government pursues investigations in areas as diverse as health care, securities/commodities, and environmental that involve civil regulatory agencies with substantial technical expertise not normally available in a U.S. Attorney's Office. (ph -- thanks to a reader in Oregon for sending along the opinion)

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Blogging in Philadelphia at the National Association of Criminal Defense Lawyers (NACDL) is guest blogger Stephanie Martz who serves as the director of NACDL’s white collar crime project. The morning began with Audrey Strauss from Fried Frank in New Yo... [Read More]

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