Sunday, April 6, 2008

Commentary on Stringer - Another Blow to SEC Investigations

What does the Ninth Circuit Stringer opinion mean, besides the fact that it reversed the lower court decision (see details here)? Does this decision grant new abilities to the government in conducting parallel proceedings and using that information between the two entities? Here are some of my thoughts?

  • In many ways this is a very narrow decision in that it emphasizes SEC Form 1662 was provided to the witnesses here and that this fact alerted them that information produced by the SEC could be used in a criminal proceeding. Thus, parallel proceedings that do not involve a situation where the accused had been provided with this form could arguably not be covered by this decision. But this is not likely to assist defense counsel as the form appears to be a routine SEC one.
  • The decision is also limited in that it restricts the use of the information to situations when the SEC proceeded prior to the DOJ criminal investigation.  The court finds that when the civil investigation begins first, there is less likelihood of bad faith.  Again, little assistance to the defense here, as it seems likely that most civil investigations precede the criminal matter.
  • The case reminds us that there has not been Supreme Court case-law on the dynamics between parallel proceedings since Kordel in 1970.  This is a well written invitation to the Court to speak clearly on this matter.  And the U.S. Supreme Court should accept this invitation as increased agency enforcement warrants careful scrutiny of what is and what is not permitted by prosecutors who are a part of a parallel investigation.
  • The court using Kordel  states that the government cannot act in bad faith 1) "if it brings a civil action solely for the purpose of obtaining evidence in a criminal prosecution" and 2) "does not advise the defendant of the planned use of evidence in a criminal proceeding." (Stringer, p. 3558) The court does not provide an explicit test to be used to determine when the government acts in bad faith in using a civil parallel proceeding to obtain criminal matter, leaving the question open in cases beyond those with an SEC Form 1662.
  • This case could easily go in the opposite direction in an en banc hearing.  And, absent a Supreme Court voice here, there are a lot of questions that remain open.

But the bottom line here is that the SEC suffers from this ruling, just as they did from the Martha Stewart case.  At first blush it might appear that the DOJ will have increased ability to obtain and use information from a parallel proceeding.   But the truth is more likely to be that those accused of crimes or issued a letter saying that they might be subject to an Indictment, may just refuse to provide information.  This decision, like the Martha Stewart prosecution, may just send the message not to talk with the SEC.  Knowing that information may be the basis of a criminal investigation will mean that investigations may present additional challenges to the SEC.


Addendum - John Wesley Hall's -

Stuart Gittleman, Complinet - Appeals court okays parallel SEC-DoJ investigations

Judicial Opinions | Permalink

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This is a major win for the SEC. Anyone who doesn't know that the SEC shares information with the DOJ and hence cooperates is not living in the real world. I was an SEC enforcement lawyer for 31 years and all defense counsel know that you either take the Fifth or you don't, you either cooperate or you don't. No one cooperates with the SEC who fears they have real criminal liability without use immunity.

Posted by: Robert Fusfeld | Apr 8, 2008 3:09:19 PM

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