The Ninth Circuit Decision in United States v. Stringer

The federal securities laws authorize the Securities and Exchange Commission (SEC) to provide the Department of Justice (DOJ) with evidence of violations of the securities laws (See 15 U.S.C.S. ” 77t(b), 788(d) (2009)). Because the SEC often shares ' although as we shall see not always openly ' information with the DOJ and the agencies frequently institute parallel enforcement actions, counsel must be vigilant to avoid the potential pitfalls such parallel proceedings may have for their clients.

United States v Stringer

A recent Ninth Circuit case, United States v Stringer, 521 F3d 1189 (9th Ci 2008), is illustrative of these potential pitfalls.

Stringer arose out of an SEC investigation of, among others, Kenneth Stringer. Unbeknownst to Mr. Stringer, after the SEC commenced its investigation the DOJ told the Commission that he was a target of its criminal investigation and requested access to the SEC's investigative files. The United States Attorney's Office played an active role in the SEC investigation. It met regularly with SEC attorneys. The USAO provided the SEC with guidance on gathering sufficient evidence to secure a criminal conviction in a false statement case, including how to conduct interviews so as to gather necessary testimony. The USAO and the SEC also worked to conceal the criminal investigation from Stringer and other related parties, even going so far as to instruct court clerks to refrain from mentioning the criminal investigation in front of them.

Stringer was subpoenaed to testify in front of the SEC and was given SEC Form 1622, which says that any information given to the SEC may be used in any federal criminal proceeding. When he was deposed by the SEC, Stringer's attorney asked if the SEC was working in conjunction with the USAO. The SEC attorney said that it was the policy of the Commission not to respond to such questions and deflecting further questioning by directing Stringer's attorney to the general language of Form 1662.

Stringer moved to suppress the indictment as a violation of his Fourth and Fifth Amendment rights. Stringer said that by hiding behind the SEC, the DOJ had derailed his ability to adequately defend himself and to assert his constitutional rights. More specifically, Stringer argued that his ignorance of the criminal investigation placed him at an impermissible disadvantage because it, among other things:

• Prevented him from seeking to stay the civil proceedings;
• Deprived him of his Fifth Amendment right against self-incrimination;
• Deprived him of the opportunity to seek immunity from the prosecution; and
• Gave the prosecutor's office discovery that it would not have been entitled to under the Federal Rules of Criminal Procedure.

The District Court agreed. It rejected the prosecution's claim that the SEC and DOJ were conducting permissible parallel proceedings as sanctioned by the U.S. Supreme Court in U.S. v. Kordel, 397 U.S. 1 (1970). Rather than conducting its own investigation, the District Court concluded that the USAO had elected to rely upon the work of the SEC because it “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 rules of criminal discovery would be invoked.” U.S. v. Stringer, 408 F. Supp.2d at 1087-88.

The District Court further held that the SEC affirmatively misrepresented the existence of the criminal investigation. In light of the extent of the involvement of the USAO in the SEC investigation, the District Court said the SEC's response to Stringer's counsel's direct question was both evasive and misleading.

The Ninth Circuit Reverses

The Ninth Circuit reversed the District Court's decision. Form 1662 informed Mr. Stringer that his testimony might be shared with the USAO and advised him that he could refuse to testify pursuant to his Fifth Amendment right against self-incrimination. Mr. Stringer's failure to invoke his Fifth Amendment right, the Ninth Circuit held, constituted a waiver.

The court also rejected Mr. Stringer's claim that the DOJ used the SEC investigation as a pretext to obtain evidence for its criminal prosecution. On this issue, the court found it highly significant that the SEC began its investigation before the DOJ.

More broadly, the Ninth Circuit admonished that the government is entitled to pursue parallel criminal and civil proceedings without running afoul of constitution due process unless it acts in bad faith. And in stark contrast to the District Court, the Ninth Circuit found no evidence that the government acted in bad faith in its parallel proceedings against Mr. Stringer. In the final analysis, the court found that there “was no deceit; rather, at most there was a government decision not to conduct the criminal investigation openly, a decision we hold the government is free to make.” U.S. v. Stringer, 521 F.3d at 1191.

Lessons from Stringer

In light of Stringer, counsel should presume that any testimony or documentary evidence given to the Commission is also being reviewed by the USAO and will be used in the event their client is indicted. This has important implications for how attorneys advise their clients.

To take perhaps the most salient example, invoking the Fifth Amendment privilege in a civil investigation when the defendant believes there is a criminal proceeding requires careful thinking. “In these situations, the defendant faces a double edge sword: he has the choice of being prejudiced in the civil litigation by invoking his Fifth Amendment, right or being prejudiced in the criminal investigation if he chooses to waive that right.” Jody M. Arogeti, How Much Cooperation Between Government Agencies Is Too much? Reconciling United States v. Scrushy, The Corporate Fraud Task Force, and the Nature of Parallel Proceedings, 23 GA. ST. U.L. REV. 427, 444 (2006). Additionally, if the client invokes his Fifth Amendment right to answer some questions but not others, he is subject to a waiver of his Fifth Amendment rights.

Stringer also demonstrates how important it is to ask questions during an investigation. During the SEC investigation, Stringer's attorney asked a series of questions involving cooperation between the SEC and the DOJ during the deposition. The attorney also asked whether or not the SEC was cooperating with any other agencies, and the SEC Staff attorney referenced the SEC 1662 form. The questions asked by Stringer's attorney established a record that the court analyzed to determine whether the SEC was misleading the attorney.

An attorney representing a defendant in an SEC investigation should ask certain questions to establish a record for the best interest of the client. In investigations, the SEC is not required to disclose the extent of their cooperation with the DOJ. Because of these practices of nondisclosure, it is important, however, for the attorney who is representing the accused to establish a record in the deposition by asking specific questions relating to the investigation. For example, the attorney representing the defendant can ask the SEC staff whether or not the staff has initiated discussions with the FBI, the DOJ or any other enforcement agency.

Even though the Ninth Circuit decided that the SEC answered the questions in a permissible fashion, it is nevertheless important to ask questions regardless of the expected outcome because the SEC is forbidden from affirmatively misleading a defendant regarding the extent of involvement of another agency. See U.S. v. Stringer, 521 F.3d at 1198 (“a government official must not affirmatively mislead the subject of a parallel civil and criminal investigation into believing that the investigation is exclusively civil in nature”) (internal quotations omitted). After the deposition, counsel should request a copy of the transcript to correct and supplement the testimony as necessary to protect the client.

Conclusion

Like SEC Form 1662, Stringer can be said to have put us all on notice. When representing clients in SEC actions, attorneys must be mindful of the potential impact their strategy might have upon a future DOJ action arising out of the same transaction. Strategic decisions regarding everything from responding to discovery to the assertion of the Fifth Amendment privilege must be made with Stringer's warning in mind ' anything you say to the SEC can and may well be used by the DOJ against you.

Ralph C. Ferrara is a partner at Dewey & LeBoeuf LLP and former General Counsel of the SEC. Leigh Chapman is recent graduate of Howard University School of Law and served as a Summer Associate with the firm during the Summer of 2008.

The federal securities laws authorize the Securities and Exchange Commission (SEC) to provide the Department of Justice (DOJ) with evidence of violations of the securities laws (See 15 U.S.C.S. ” 77t(b), 788(d) (2009)). Because the SEC often shares ' although as we shall see not always openly ' information with the DOJ and the agencies frequently institute parallel enforcement actions, counsel must be vigilant to avoid the potential pitfalls such parallel proceedings may have for their clients.

United States v Stringer

A recent Ninth Circuit case, United States v Stringer, 521 F3d 1189 (9th Ci 2008), is illustrative of these potential pitfalls.

Stringer arose out of an SEC investigation of, among others, Kenneth Stringer. Unbeknownst to Mr. Stringer, after the SEC commenced its investigation the DOJ told the Commission that he was a target of its criminal investigation and requested access to the SEC's investigative files. The United States Attorney's Office played an active role in the SEC investigation. It met regularly with SEC attorneys. The USAO provided the SEC with guidance on gathering sufficient evidence to secure a criminal conviction in a false statement case, including how to conduct interviews so as to gather necessary testimony. The USAO and the SEC also worked to conceal the criminal investigation from Stringer and other related parties, even going so far as to instruct court clerks to refrain from mentioning the criminal investigation in front of them.

Stringer was subpoenaed to testify in front of the SEC and was given SEC Form 1622, which says that any information given to the SEC may be used in any federal criminal proceeding. When he was deposed by the SEC, Stringer's attorney asked if the SEC was working in conjunction with the USAO. The SEC attorney said that it was the policy of the Commission not to respond to such questions and deflecting further questioning by directing Stringer's attorney to the general language of Form 1662.

Stringer moved to suppress the indictment as a violation of his Fourth and Fifth Amendment rights. Stringer said that by hiding behind the SEC, the DOJ had derailed his ability to adequately defend himself and to assert his constitutional rights. More specifically, Stringer argued that his ignorance of the criminal investigation placed him at an impermissible disadvantage because it, among other things:

• Prevented him from seeking to stay the civil proceedings;
• Deprived him of his Fifth Amendment right against self-incrimination;
• Deprived him of the opportunity to seek immunity from the prosecution; and
• Gave the prosecutor's office discovery that it would not have been entitled to under the Federal Rules of Criminal Procedure.

The District Court agreed. It rejected the prosecution's claim that the SEC and DOJ were conducting permissible parallel proceedings as sanctioned by the U.S. Supreme Court in U.S. v. Kordel , 397 U.S. 1 (1970). Rather than conducting its own investigation, the District Court concluded that the USAO had elected to rely upon the work of the SEC because it “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 rules of criminal discovery would be invoked.” U.S. v. Stringer , 408 F. Supp.2d at 1087-88.

The District Court further held that the SEC affirmatively misrepresented the existence of the criminal investigation. In light of the extent of the involvement of the USAO in the SEC investigation, the District Court said the SEC's response to Stringer's counsel's direct question was both evasive and misleading.

The Ninth Circuit Reverses

The Ninth Circuit reversed the District Court's decision. Form 1662 informed Mr. Stringer that his testimony might be shared with the USAO and advised him that he could refuse to testify pursuant to his Fifth Amendment right against self-incrimination. Mr. Stringer's failure to invoke his Fifth Amendment right, the Ninth Circuit held, constituted a waiver.

The court also rejected Mr. Stringer's claim that the DOJ used the SEC investigation as a pretext to obtain evidence for its criminal prosecution. On this issue, the court found it highly significant that the SEC began its investigation before the DOJ.

More broadly, the Ninth Circuit admonished that the government is entitled to pursue parallel criminal and civil proceedings without running afoul of constitution due process unless it acts in bad faith. And in stark contrast to the District Court, the Ninth Circuit found no evidence that the government acted in bad faith in its parallel proceedings against Mr. Stringer. In the final analysis, the court found that there “was no deceit; rather, at most there was a government decision not to conduct the criminal investigation openly, a decision we hold the government is free to make.” U.S. v. Stringe r, 521 F.3d at 1191.

Lessons from Stringer

In light of Stringer, counsel should presume that any testimony or documentary evidence given to the Commission is also being reviewed by the USAO and will be used in the event their client is indicted. This has important implications for how attorneys advise their clients.

To take perhaps the most salient example, invoking the Fifth Amendment privilege in a civil investigation when the defendant believes there is a criminal proceeding requires careful thinking. “In these situations, the defendant faces a double edge sword: he has the choice of being prejudiced in the civil litigation by invoking his Fifth Amendment, right or being prejudiced in the criminal investigation if he chooses to waive that right.” Jody M. Arogeti, How Much Cooperation Between Government Agencies Is Too much? Reconciling United States v. Scrushy, The Corporate Fraud Task Force, and the Nature of Parallel Proceedings, 23 GA. ST. U.L. REV. 427, 444 (2006). Additionally, if the client invokes his Fifth Amendment right to answer some questions but not others, he is subject to a waiver of his Fifth Amendment rights.

Stringer also demonstrates how important it is to ask questions during an investigation. During the SEC investigation, Stringer's attorney asked a series of questions involving cooperation between the SEC and the DOJ during the deposition. The attorney also asked whether or not the SEC was cooperating with any other agencies, and the SEC Staff attorney referenced the SEC 1662 form. The questions asked by Stringer's attorney established a record that the court analyzed to determine whether the SEC was misleading the attorney.

An attorney representing a defendant in an SEC investigation should ask certain questions to establish a record for the best interest of the client. In investigations, the SEC is not required to disclose the extent of their cooperation with the DOJ. Because of these practices of nondisclosure, it is important, however, for the attorney who is representing the accused to establish a record in the deposition by asking specific questions relating to the investigation. For example, the attorney representing the defendant can ask the SEC staff whether or not the staff has initiated discussions with the FBI, the DOJ or any other enforcement agency.

Even though the Ninth Circuit decided that the SEC answered the questions in a permissible fashion, it is nevertheless important to ask questions regardless of the expected outcome because the SEC is forbidden from affirmatively misleading a defendant regarding the extent of involvement of another agency. See U.S. v. Stringer , 521 F.3d at 1198 (“a government official must not affirmatively mislead the subject of a parallel civil and criminal investigation into believing that the investigation is exclusively civil in nature”) (internal quotations omitted). After the deposition, counsel should request a copy of the transcript to correct and supplement the testimony as necessary to protect the client.

Conclusion

Like SEC Form 1662, Stringer can be said to have put us all on notice. When representing clients in SEC actions, attorneys must be mindful of the potential impact their strategy might have upon a future DOJ action arising out of the same transaction. Strategic decisions regarding everything from responding to discovery to the assertion of the Fifth Amendment privilege must be made with Stringer's warning in mind ' anything you say to the SEC can and may well be used by the DOJ against you.

Ralph C. Ferrara is a partner at Dewey & LeBoeuf LLP and former General Counsel of the SEC. Leigh Chapman is recent graduate of Howard University School of Law and served as a Summer Associate with the firm during the Summer of 2008.