A recent decision by the 9th U.S. Circuit Court of Appeals, United States v. Stringer, gives government lawyers, and prosecutors in particular, significant latitude to conceal the existence of a criminal investigation from individuals and companies who are already embroiled in civil proceedings with the government. In the wake of Stringer, there exists a fine distinction between what government lawyers are allowed to do and say in conducting parallel civil and criminal government investigations, and what may constitute bad faith and deceit that infringes on a criminal target’s constitutional rights.
The Stringer decision shows that government attorneys involved in civil investigations may covertly take direction from, and make strategic and tactical decisions with, prosecutors pursuing a criminal case without being found to have acted in bad faith. In light of the freedom government lawyers have in concealing the existence of a parallel criminal investigation from a civil defendant, where necessary, competent defense counsel must prepare a defense that takes into account the possibility that a criminal investigation exists and that prosecutors have access to evidence gathered by civil investigators.
The Decision
The Stringer case began with a Securities and Exchange Commission investigation of alleged violations of the federal securities laws by three individuals – J. Kenneth Stringer, J. Mark Samper and William N. Martin – and their company, FLIR Systems Inc. Shortly after the SEC opened its investigation, attorneys for the SEC began meeting with personnel from the FBI and the U.S. Attorney’s Office who were already conducting an investigation of the same defendants.
During various meetings, the SEC provided the USAO and FBI with evidence it collected during its investigation, as well as memoranda composed by SEC attorneys detailing their factual and legal analyses. At one meeting, the SEC, USAO and FBI agreed “that the criminal investigation would abate in order to continue receiving statements from defendants and other witnesses through the civil investigation.”
An FBI agent who attended one of these meetings noted: “It was determined that since Stringer has agreed to be interviewed by the SEC, the FBI will make no effort to interview Stringer or other corporate officers at this time so as not to jeopardize the opportunity to obtain statements from these individuals.”
In deciding that the criminal investigation should “abate,” the lead assistant U.S. attorney, or AUSA, observed that criminal investigators would “benefit greatly” from the SEC’s investigation. Several months later, after the SEC demonstrated that it was able to collect evidence that would not have been available in a criminal investigation, an FBI agent noted that “based on the level of cooperation . . . no overt investigation will be conducted by the FBI at this time.”
The SEC, FBI and USAO continued to communicate frequently throughout the course of the SEC’s investigation, exchanging information and discussing strategy. The collaboration was so close that an AUSA advised SEC investigators that he wanted to build a false testimony case and instructed SEC personnel on how to create a record during civil depositions to support such an prosecution. In addition, the SEC and USAO also closely collaborated to conceal the involvement of the USAO and FBI in the investigation.
As part of the SEC’s investigation, the civil defendants, including Stringer, were subpoenaed to testify and were advised that their testimony was mandatory, subject only to the assertion of any legal right or privilege. Stringer and the other defendants were provided with a SEC Form 1662, which is a standard notice provided to all witnesses testifying before the SEC. The notice informed the defendants of their right to counsel and their Fifth Amendment rights, and contained a section entitled “routine uses of information” which described how information gathered by the SEC may be used. Contained within the “routine uses of information” section was a notification that the SEC makes its files available to other governmental agencies, including the USAO, for use in a criminal proceeding.
During Stringer’s testimony before the SEC, his attorney asked a series of questions aimed at determining whether the SEC was working in conjunction with any other federal agencies, such as the USAO or the Department of Justice. In response, the SEC attorney merely directed defense counsel’s attention to the Form 1662 and the “routine uses” of information section, and stated that “it is the agency’s policy not to respond to questions like that.”
The Indictment Dismissed
Stringer and Martin entered into consent decrees with the SEC as a result of the SEC’s investigation. One year later, a grand jury indicted Stringer, Samper and Martin on 50 counts of conspiracy and securities fraud charges. The defendants moved to dismiss the indictment on the grounds that their due process rights were violated because they were not advised that the USAO and the FBI were using the SEC to gather evidence for a criminal prosecution. They further argued that had they been aware of the criminal investigation, they would have asserted their Fifth Amendment rights and would have sought a stay of the civil investigation.
The district court dismissed the indictments against the three defendants after it found that the SEC and USAO improperly conspired to gather evidence and acted in bad faith during a civil investigation initiated by the SEC. In dismissing the indictment and rejecting the government’s argument that the USAO and the SEC were appropriately conducting parallel proceedings, the district court stated:
“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.”
The district court noted that the USAO had determined from the outset of the civil investigation that the case warranted prosecution and nonetheless refused to make the targets aware of that possibility. The district court concluded that the strategy to conceal the criminal investigation from the targets was an abuse of the investigative process and constituted a “violation of due process or a departure from proper standards in the administration of justice.”
The district court further found that the SEC attorney’s response to the direct inquiry by Stringer’s attorney as to the existence of a criminal investigation was “evasive and misleading, particularly in light of the close association between the USAO and the SEC throughout the investigation and the early identification of Stringer as a criminal target.” Finally, the district court noted that dismissal of the indictments was required because the government’s conduct was “so grossly shocking and so outrageous as to violate the universal sense of justice.”
The 9th Circuit Reverses
The government appealed the dismissal of the indictment and the 9th Circuit reversed, holding that the government did not violate the defendants’ Fifth Amendment rights against self-incrimination by failing to disclose the involvement of the USAO by virtue of the warnings contained on the SEC Form 1662. The court further determined that the government did not violate the defendants’ due process or Fourth Amendment rights because it did not act in bad faith or employ trickery or deceit in concealing the existence of the criminal investigation.
In reversing the district court, the 9th Circuit anchored its decision in the Supreme Court’s holding in United States v. Kordel, which stated the government can conduct parallel civil and criminal investigations without violating the due process clause so long as it does not act in bad faith.
Specifically, the 9th Circuit determined that the defendants had knowingly waived their Fifth Amendment rights because SEC Form 1662 alerted the defendants to the fact that information gathered by the SEC could be used in a criminal proceeding. The court found that the government did not have a legal duty to make further disclosures to the defendants, even in light of the SEC’s awareness of, and collaboration with, the FBI and USAO investigations.
The 9th Circuit also held that none of the actions of the SEC constituted bad faith, deceit or trickery, despite the fact that it closely collaborated and shared its investigative files and analyses with the FBI and USAO, and refused to disclose the existence of the investigation when directly questioned by defense counsel.
The court also found that the government’s behavior was legitimate because the SEC investigation was not commenced “solely to obtain evidence for its criminal prosecution.” The court relied on its impression that the SEC commenced its investigation first, leading to the imposition of civil sanctions, and that its sharing of information with other agencies was expressly authorized by Congress. Importantly, in reaching this conclusion, the 9th Circuit completely ignored the facts that so troubled the district court, namely that the USAO closely collaborated with the SEC, coached SEC attorneys on how to lay the groundwork for the imposition of certain charges, and decided in concert with the FBI to forestall the initiation of a formal criminal investigation because the SEC was cultivating strong evidence that could not otherwise have been obtained during a criminal inquiry.
Troubling Ramifications
The impact of the Stringer decision on how counsel should approach the defense of a civil investigation cannot be overstated. Defense attorneys must be aware that their clients can potentially, and unknowingly, waive their Fifth Amendment rights after they are given minimal notice by civil investigators. Thus, even if a government investigation appears to be merely civil in nature, a defense attorney must anticipate the possibility that the civil attorneys are working with, or taking direction from, prosecutors seeking to build a criminal case. Counsel also must recognize that simply because the existence of criminal investigation is not readily apparent, that does not mean that one is not under way or anticipated.
In addition, the 9th Circuit’s holding that the government did not engage in deceit or trickery in Stringer raises serious concerns about whether a defense attorney can, or should, rely on a government attorney’s representations when asked whether a criminal investigation exists. As evidenced by the SEC’s conduct in Stringer, a government attorney is apparently under no obligation to notify counsel of a concurrent criminal probe or collaboration between another government agency and the DOJ. Counsel should therefore presume in this context that a parallel criminal investigation is underway, notwithstanding contrary indications from the government, and advise their clients accordingly.
The apparent freedom government lawyers have in coordinating parallel civil and criminal investigations as in Stringer should raise serious concerns for defense counsel. The Stringer decision shows that defense counsel should handle the defense of a client subject to a civil investigation as though it were criminal, and strongly consider the extent to which their clients should be cooperating with government lawyers, particularly where the lawyer knows that the client may have criminal exposure. Because the result of Stringer affords government lawyers so much leeway in using evidence collected in a civil investigation to build a criminal case, counsel must be careful not to allow their clients to supply the government with the proverbial rope with which they will ultimately be hung. •
Matthew D. Lee is a former U.S. Department of Justice trial attorney and a partner in the Philadelphia office of Blank Rome. He is a member of the firm’s white-collar, government, and internal investigations practice group and can be reached at [email protected]. Tyler Brody formerly served as an assistant district attorney in the Philadelphia District Attorney’s Office. He is currently an associate in the litigation department of the firm’s Philadelphia office and can be reached at [email protected].
