The Securities and Exchange Commission may need to reconsider how it coordinates investigations with the Department of Justice in light of a recent decision by a federal judge throwing out criminal securities fraud charges due to the too-cozy relationship between the SEC and DOJ.
Judge Ancer Haggerty of the U.S. District Court in Oregon wrote a blistering opinion last month that the government engaged in “grossly shocking” misconduct when federal prosecutors probing the conduct of executives of a thermal-imaging company, essentially hiding behind an SEC civil investigation of the business and using its evidence without obeying the higher standards of criminal investigations.
In the case, United States v. Stringer, et al. , Haggerty took the rare step of dismissing the criminal indictments against Kenneth Stringer, the former chief executive of FLIR Systems Inc., and Mark Samper, the company’s former chief financial officer. Stringer and Samper had been charged with conspiracy and securities fraud for allegedly engaging in a wide-ranging scheme to inflate company earnings in 1998 and 1999.
Jakoby
Arthur Jakoby, a former SEC attorney and now a partner with Herrick, Feinstein in New York, says that the SEC and DOJ set an impermissible “perjury trap” in the Stringer case. “It’s improper for a U.S. Attorney’s Office, which is a criminal agency, to hide in the shadows and allow a civil agency, the SEC, to do its dirty work for it,” he says.
Jakoby says federal prosecutors acted like “puppeteers; they were using the SEC as their puppet.”
Bornstein
Jeffrey Bornstein, a partner with Kirkpatrick & Lockhart Nicholson Graham in San Francisco, stresses that “there’s nothing wrong with cooperation” between the SEC and DOJ. “There’s nothing even wrong, in my opinion, with joint strategy sessions,” he adds. “Where it crosses the line is where you’re being somehow dishonest—you’re pretending to be doing something for one purpose but your real interest is something else.”
Bornstein says the Stringer case suggests that courts will look closely at parallel SEC and DOJ investigations to make sure that the SEC is not acting as a decoy for federal prosecutors. “You’re not allowed to use the civil case as a stalking horse for the criminal case,” he says. “Nor are you allowed, as a civil attorney [with the SEC], to conduct yourself in a way that’s deceitful, primarily for the purpose of furthering a criminal investigation.”
Strategy To Conceal
The Stringer case began as an SEC investigation of alleged accounting irregularities at FLIR Systems in mid-2000. Shortly after the Commission’s investigation began, an assistant U.S. attorney in Oregon—FLIR’s home state—met with the SEC’s investigating attorney and requested access to the Commission’s investigative files. The SEC provided the criminal prosecutor with notebooks full of documents and the Commission’s analysis of potential charges.
Over the next three months, the SEC met with prosecutors to discuss strategies for obtaining documents and statements from Stringer, Samper and other potential defendants. Although the prosecutor already had determined that the “probability of prosecution [was] very high,” Haggerty wrote in his decision, it was decided that the U.S. Attorney’s Office and FBI would play no visible role in the investigation to “avoid jeopardizing the opportunity to obtain statements from these individuals.”
EXCERPT
The excerpt below is from the opinion and order of Judge Ancer Haggerty in United States v. Stringer:
...The strategy to conceal the criminal investigation from defendants was an abuse of the
investigative process. In Kordel, the Court found there was no abuse in using the civil discovery
process to obtain evidence later used in a criminal proceeding because the case was not one in
which the government "failed to advise the defendant in its civil proceeding that it contemplates
his criminal prosecution . . . nor with any other special circumstances that might suggest the
unconstitutionality or even the impropriety of this criminal prosecution." This case clearly falls
within the scenario contemplated by the Supreme Court as a "violation of due process or a
departure from proper standards in the administration of justice." Kordel, 397 U.S. at 11. In this
case, the government did not advise defendants that it anticipated their criminal prosecution.
Moreover, the USAO intentionally shielded its intentions behind the guise of a civil prosecution,
resorting to subterfuge to maintain the secrecy of its involvement.
Defendants had been identified consistently as "targets" or "subjects," and yet the
government failed to alert them to the possibility of criminal exposure beyond presenting the
standard form that is given to every individual, whether or not a target, prior to testifying. In
light of the active role of the USAO in the SEC investigation, this warning was insufficient...
...In addition, it is a due process violation if government agents make affirmative
misrepresentations as to the nature or existence of parallel proceedings or otherwise use trickery
or deceit. United States v. Robson, 477 F.2d 13, 18 (9th Cir. 1973). Echavarria'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.
...Dismissal of an indictment is warranted if the alleged governmental misconduct is "so
grossly shocking and so outrageous as to violate the universal sense of justice." United States v.
Smith, 924 F.2d 889, 897 (9th Cir. 1991); United States v. Ramirez, 710 F.2d 535, 539 (9th Cir.
1983). The conduct involved in this case meets that standard. The USAO spent years hiding
behind the civil investigation to obtain evidence, avoid criminal discovery rules, and avoid
constitutional protections. In United States v. Rand, the court dismissed the indictment, finding
that the government had "engaged in an obnoxious form of using parallel proceedings." 308
F.Supp. 1231, 1234 (N.D. Ohio 1970). The government "may not bring a parallel civil
proceeding and avail itself of the civil discovery devices to obtain evidence for subsequent
criminal prosecution." United States v. Parrott, 248 F.Supp. 196, 202 (D.D.C. 1965). The facts
in this case are more egregious, as it cannot credibly be claimed that these were parallel
proceedings.
Moreover, defendants Fifth Amendment rights were violated. As defendants were
unaware of the involvement of the USAO, it is "unrealistic to suppose that defendant[s] [would]
be on guard against incriminating [themselves]." Rand, 308 F.Supp. at 1237. As such, "it is
unfair in the extreme to penalize defendant[s] for failure to invoke [their] privilege against selfincrimination. Id.
In view of these findings, to "simply suppress the evidence which the government
obtained by the methods explored above would not be sufficient to remedy the violation of
defendant[s] constitutional rights." Id. at 1238. Accordingly, the indictments are dismissed.
Defendants' statements to the SEC were gathered in violation of defendants' due process
and Fifth Amendment rights. Kordel, 397 U.S. at 12; Robson, 477 F.2d at 18. In the event the
Ninth Circuit Court of Appeals determines that dismissal of the indictment is in error, for the
foregoing reasons, the statements and the evidence obtained from those statements are
suppressed...
Source
Opinion And Order In United States vs. J. Kenneth Stringer, U.S. [Oregon] District Court (Jan. 9, 2006)
The SEC instructed employees not to talk about the federal prosecutor’s involvement in the investigation and agreed to conduct several interviews in Oregon to give the U.S. Attorney’s Office in that state jurisdiction to prosecute there.
Although Stringer and Samper were informed that any information they provided could be used in a criminal proceeding, the Commission was directly asked by Stringer’s attorney whether he was a target of the investigation and was told that the SEC “does not have targets in this investigation.” When asked if the SEC was working with federal prosecutors, the Commission’s attorney did not give a direct response.
Throughout the process, Stringer had his own lawyer. But Samper was represented by FLIR’s attorney, even though FLIR was providing information to the SEC that was damaging to Samper.
In ordering that the indictments—charging Stringer and Samper with 50 counts of conspiracy and securities fraud—be dismissed, Haggerty lambasted the government for engaging in a deliberate strategy “to conceal the criminal investigation from the defendants.”
The judge also said that the government exploited the conflict of interest of Samper’s attorney, who also represented the company, to obtain “information that it might not otherwise have received.”
Prosecutors have indicated they will appeal Haggerty’s ruling to the 9th Circuit Court of Appeals.
On The Radar Screen
Baum
Richard Baum, a partner with the law firm Perkins Coie in Portland, Ore., says the SEC “should have been doing its own investigation—and was—but shouldn’t be put in the position of being the private investigators for criminal prosecutors.”
Although individuals facing an SEC probe should be aware that they may also face criminal charges, “hiding the existence of criminal proceedings is not okay; it’s prosecutorial misconduct,” Baum adds. “I don’t think [the SEC’s conduct here] was typical, but if it is the way things do typically occur, the SEC will have to be more careful.”
One of the lessons of the Stringer case, Baum notes, is that executives must get their own legal counsel when it becomes clear that criminal charges are possible.
“When the SEC indicates that it’s investigating, a company has to make a decision whether it’s going to cooperate or not,” he says. “Cooperation means very full and complete disclosure, a very thorough investigation of your own and turning over everything to the SEC. You can’t half-way cooperate. You have to assume that anything you give the SEC can be used by them or even the criminal prosecutors.” Once a company’s internal investigation has concluded that misdeeds may have happened, he said, implicated individuals should have their own counsel.
Bornstein agrees that the Stringer case sends a message to lawyers who represent corporate defendants to be alert to potential conflicts.
“You have to be very diligent as attorney on those kinds of potential conflicts,” he says. “Maybe waivers are good enough. Maybe they’re not. It depends on how substantive or deep those conflicts might be.”
Another lesson, Bornstein says, is for people to consider to the possibility of criminal charges. “When you’re dealing with the SEC—or any regulatory agency—it’s prudent to be asking, ‘Is there a likelihood of there being some sort of criminal interest?’ When getting advice from a lawyer, [executives] need to be sure that they know what the risks are for criminal prosecution so at least it’s something on their radar screen.”
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