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In recent months, a number of disturbances have gathered and created what for corporations and their employees amounts to nothing less than the perfect prosecutorial storm. Public outrage over high-profile corporate scandals and the resulting piling on by politicians and prosecutors have created a treacherous environment. As prosecutors have become more aggressive in going after corporate fraud, corporations are increasingly being required to defend themselves simultaneously on several fronts, fending off criminal investigations, regulatory enforcement actions and civil suits based on the same alleged misconduct. While parallel criminal and civil cases had always posed a challenge for the corporation charged with financial fraud, the current environment has increased that challenge exponentially. For one thing, the pace of investigations has accelerated considerably. Today, critical decisions must frequently be made almost immediately upon learning of the government investigation, including whether to initiate an internal investigation, indemnify the legal costs of targeted employees, cooperate with the government and waive the attorney-client privilege. Moreover, if the company makes the “wrong” decision, new policies promulgated by the U.S. Department of Justice (DOJ) and the U.S. Sentencing Commission, which place a premium on cooperation, could result in devastating consequences for a company deemed insufficiently compliant with government requests for cooperation. Regulatory and prosecuting authorities are also restricting the ability of a corporation to coordinate its defense with that of its employees, thereby adversely affecting not only the corporation’s ability to investigate the wrongdoing, but destroying its relationship with the employees. Corporations are now expected to dismiss employees who refuse to cooperate with investigations, even when their refusal is based on the legitimate invocation of the Fifth Amendment privilege against self-incrimination. In highly publicized cases, Tyco, Merrill Lynch and KMPG each fired employees because of the employees’ refusal to submit to questioning by investigators. Lest one think these firms over-reacted, Lucent Technologies was recently fined $25 million for failing to cooperate with a Securities and Exchange Commission (SEC) investigation of the firm. Why? In part because it indemnified its employees who were under investigation for legal fees, fines and penalties. According to its press release, the SEC was particularly put off that after it had reached an agreement in principle to settle the case against Lucent, the company expanded the scope of employees who could be indemnified against the consequences of the enforcement action. Moreover, the SEC noted that the company was not required to indemnify the employees by state law or its corporate charter. Lucent’s actions, according to the SEC, were contrary to the public interest. Whatever one may think of the SEC’s stance in the Lucent case, this much is clear: The standard for what constitutes “cooperation” has been raised to startlingly new heights. The current environment has created an affirmative disincentive for corporations and their employees to coordinate strategy and allocate resources after an investigation has been announced. Thus, it is now vitally important for corporations to have a strategy in place to cope with this new, turbulent environment. The popular outcry that followed the fall of Enron created a political imperative to do “something” to ensure that the sorry episode was not repeated, and that those responsible were punished with sufficient harshness. Responding to that imperative, President Bush created the Corporate Fraud Task Force in 2002. An important product of the task force was a strategy known as “real time enforcement,” pursuant to which complex financial fraud cases, which previously would have taken several years to investigate, were being prosecuted within months of the commencement of the probe. In its first year, the task force was involved in over 320 criminal investigations involving more than 500 individual subjects. Shortly thereafter, Congress passed the Sarbanes-Oxley Act of 2002, a sweeping piece of legislation that includes corporate governance initiatives, new criminal provisions and enhanced penalties. Importantly, the legislation also directed the sentencing commission to review the corporate sentencing guidelines to ensure their ability to meet the objectives of the legislation. In January 2003, DOJ issued revised principles for the prosecution of business organizations, known as the “Thompson Memo,” placing increased emphasis on the authenticity of a corporation’s cooperation with law enforcement. Federal Prosecutions of Business Organizations, Memorandum from Deputy Attorney General Larry Thompson to the U.S. attorneys’ offices (Jan. 20, 2003), www.usdoj.gov/usao/eousa/foia_reading_room/usam/title9/crm00162.htm. In particular, it directed prosecutors to consider the company’s willingness to disclose the complete results of its internal investigation and to waive the attorney-client and work-product privileges. While the Thompson Memo makes clear that waiver of the attorney-client privilege is not a sine qua non of receiving leniency, the requirement has been met with grave concern by the defense bar. More recently, the sentencing commission has issued revised sentencing guidelines for corporations. The proposed guidelines, which will become law in November 2004 absent congressional intervention, not only increase the term of imprisonment for individuals and the fines for corporations convicted, but (like the Thompson Memo) also place a premium on the extent of the corporation’s cooperation with law enforcement. While the Supreme Court’s recent decision in Blakely v. Washington, 2004 WL 1402697 (U.S. June 24, 2004), has called into question the continuing viability of the federal sentencing guidelines, sentencing judges are likely to continue to consider a corporation’s cooperation in imposing sentence. Finally, prosecution of white-collar offenses has recently been the subject of intense competition among state and federal prosecutors and regulators. Increasingly, aggressive state prosecutors have achieved high-profile victories and significant fines in cases that have historically been the sole province of federal law enforcement. Not to be outdone, the SEC-whose resources have been significantly increased by Congress in the wake of Enron-is even more aggressive than in the past. Parallel proceedings At the same time, the plaintiffs’ bar has seized the opportunity presented by the current environment to increase the pressure on corporations by aggressively pursuing potential civil claims arising out of the activities being investigated. Thus, a strategic issue is how to handle civil litigation while responding to a criminal/regulatory investigation. A corporation defending against parallel criminal and civil proceedings will want to seek some form of stay in the civil action. In some cases, it may be reasonable to ask for a stay of either the entire civil proceeding or of all discovery; in other cases, and particularly in preindictment situations, it may be more prudent to seek a more limited stay. A defendant involved in both a criminal investigation and civil litigation faces difficult choices: He faces the choice of being prejudiced in the civil litigation if he asserts legitimate Fifth Amendment rights, or being prejudiced in the criminal litigation if those rights are waived. See United States v. Certain Real Property and Premises Known As: 4003-4005 5th Avenue, 55 F.3d 78, 84 & n.6 (2d Cir. 1995). The dilemma recurs with sufficient regularity that a consensus has developed on the principles to be applied by the courts in determining motions to stay civil actions pending criminal investigations. Sterling National Bank v. A-1 Hotels Int’l Inc., 175 F. Supp. 2d 573 (S.D.N.Y. 2001). As a preliminary matter, a litigant is not entitled to a stay as a matter of constitutional law whenever he finds himself facing the dilemmas inherent in pursuing civil litigation while being the subject of a related criminal investigation. In In re Worldcom Inc. Securities Litigation, 2002 WL 31729501, at 3 (S.D.N.Y. Dec. 5, 2002). However, it is well established that the courts have the inherent discretionary power to enter a stay of the civil action when the interests of justice so require. Kashi v. Gratsos, 790 F.2d 1050, 1057 (2d Cir. 1986). In order to prevail on a motion to stay the civil proceeding, the defendant must show undue prejudice or interference with his constitutional rights. Citibank N.A. v. Hakim, 1993 WL 481335, at 1 (S.D.N.Y. Nov. 18, 1993). In exercising its discretion, a court must make a highly fact-bound inquiry into the particular circumstances and competing interests involved in the case, including: the extent to which the issues in the criminal case overlap with those presented in the civil case; the status of the case, including whether the defendants have been indicted; the private interests of the plaintiffs in proceeding expeditiously weighed against the prejudice to plaintiffs caused by the delay; the private interests of, and burden on, the defendants; the interests of the courts; and the public interest. Trustees of the Plumbers and Pipefitters Nat’l Pension Fund v. Transworld Mechanical Inc., 886 F. Supp. 1134, 1139 (S.D.N.Y. 1995). “The most important factor at the threshold is the degree to which the civil issues overlap with the criminal issues” ( Volmar Distributors Inc. v. New York Post Co., 152 F.R.D. 36, 38 (S.D.N.Y. 1993)), since self-incrimination is more likely if there is a significant overlap. Trustees, 886 F. Supp. at 1139. Courts have found there is no need for a stay when there is no overlap between the civil and criminal matters, because there would be no danger of self-incrimination. Id. Similarly, courts are generally loath to stay a civil proceeding when the defendant has not been indicted but is merely under criminal investigation. Hakim, 1993 WL 481335, at 1; see also Volmar, 152 F.R.D. at 39 (the strongest case for granting a stay is when a party under criminal indictment is required to defend a civil proceeding involving the same matter). When a defendant has been indicted, his situation is particularly dangerous, and takes a certain priority, for the risk to his liberty, the importance of safeguarding his constitutional rights, and even the strain on his resources and attention, all weigh in favor of his interest. Sterling Nat’l Bank, 175 F. Supp. at 576-77. However, there is no question that a court has discretion to stay a civil litigation even in favor of a pending investigation that has not ripened into an indictment. This is particularly so when the government is the plaintiff in the civil proceeding. See, e.g., Walsh Securities Inc. v. Cristo Property Mgmt., 7 F. Supp. 2d 523, 527 (D.N.J. 1998) (it is still possible to obtain a stay, even though an indictment or information has not yet been returned, if the government is conducting an active parallel criminal investigation) (quoting Milton Pollack, Parallel Civil and Criminal Proceedings, 129 F.R.D. 201, 204 (1989)). Other interests considered A court will also consider the interests of the plaintiff and the prejudice that may be caused by the delay that will result from the stay. Defendants, on the other hand, will point to the impact of any civil litigation on their Fifth Amendment rights, and in particular, the adverse inference that may be drawn if they choose instead to invoke their Fifth Amendment privilege. See Baxter v. Palmigiano, 425 U.S. 308, 318 (1976) (“The Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify.”). The court’s interest in the efficient resolution of civil actions does not necessarily militate against the granting of a stay. A conviction in the criminal case can contribute significantly to the narrowing of issues in dispute in the overlapping civil case and promote settlement of civil litigation. See Rosenthal v. Giuliani, 2001 WL 121944, at 2 (S.D.N.Y. Feb. 9, 2001) (“[A] stay in the action will streamline later civil discovery since transcripts from the criminal case will be available to the civil parties.”). Generally speaking, a stay of discovery pending resolution of the criminal case clearly serves both the interests of the courts and the public. By proceeding first with the criminal prosecution, the court makes efficient use of judicial time and resources by ensuring that common issues of fact will be resolved and subsequent civil discovery will proceed unobstructed by concerns regarding self-incrimination. See, e.g., In re Ahead by a Length Inc., 78 B.R. at 713. Moreover, the public’s interest in the integrity of the criminal case is entitled to precedence over the civil litigant. See In re Ivan F. Boesky Sec. Litig., 128 F.R.D. 47, 49 (S.D.N.Y. 1989). “[A] trial judge should give substantial weight to [the public interest in law enforcement] in balancing the policy against the right of a civil litigant to a reasonably prompt determination of his civil claims or liabilities.” Campbell v. Eastland, 307 F.2d 478, 487 (5th Cir. 1962). A general stay of the civil proceedings is just one of several procedures available to a defendant caught in the cross- fire. See United States v. Certain Real Property and Premises Known As: 4003-4005 5th Avenue, 55 F.3d 78, 84 & n.6 (2d Cir. 1995). Additional strategies include the imposition of protective orders, sealed interrogatories, a stay for a finite period of time or a stay limited to a specific subject matter. See United States v. Kordel, 397 U.S. 1, 7 (1970) (a protective order may be appropriate when a corporation faces the “troublesome” case in which no corporate employee is available to answer civil discovery without subjecting himself to risk of self-incrimination); United States v. Parcels of Land, 903 F.2d 36, 44 (1st Cir. 1990) (protective order prohibiting use of forfeiture claimant’s deposition transcripts and interrogatories except for perjury and impeachment). Fifth Amendment concerns Corporations do not have Fifth Amendment rights, but the invocation of the right by their employees can gravely harm their employers. In today’s climate, the decision to assert the privilege is especially important for both the corporation and the employee. If the employee asserts the privilege, the corporation may be constrained to dismiss the employee and stop paying his legal fees in order to maintain its eligibility for cooperation consideration. If the employee does not assert the privilege, he and the corporation could face indictment. It is a Hobson’s choice. One court has described the painful decision that these employees face: “[C]orporations speak only through their officers and other upper-level managers. Among the senior management of the corporation defending these civil cases are persons who, together with their corporate employers, face criminal charges, and so it may be anticipated that some of these persons will have Fifth Amendment rights to be reckoned with. The dilemma for such persons is severe because they face serious penalties in the event of a criminal conviction, and because they are not themselves parties to this civil action.” Golden Quality Ice Cream Co. v. Deerfield Specialty Papers Inc., 87 F.R.D. 53, 58 (E.D. Pa. 1980). Other courts have recognized the difficulties faced by corporations when their employees invoke the Fifth Amendment in the face of civil discovery. In Trustees of Plumbers & Pipefitters Nat’l Pension Fund v. Transworld Mechanical Inc., 886 F. Supp. 1134, 1138 (S.D.N.Y. 1995), the court granted a motion to stay discovery in a parallel civil action in favor of the individual defendants and the corporation. The plaintiffs objected to the corporation’s request, arguing that the corporation did not possess a Fifth Amendment right. Rejecting the plaintiffs’ argument, the court reasoned that a stay as to the individual defendants alone could lead to duplicative discovery. 886 F. Supp. at 1114. Other courts have granted stays to corporations on similar grounds. See Volmar, 152 F.R.D. at 41; SEC v. Downe, 1993 WL 22126 at 14. While the stakes of criminal investigations are significantly higher today, a company’s ability to respond has been significantly impaired. When a corporation must defend against criminal and civil proceedings arising out of the same facts, it generally should seek some form of stay in the civil action. Courts are more likely to grant the stay when the motion is made by the prosecutors. In re World Com Securities Litigation, 2002 WL 31729501 (S.D.N.Y. Dec. 5, 2002). Thus, it may be useful to enlist the government’s help in seeking a stay. This will be particularly so where the prosecutor has an interest in preserving the usefulness of cooperating defendants or witnesses. In some cases, it may be reasonable to ask for a stay of either the entire civil proceeding or of all discovery; in other cases, and particularly preindictment situations, it may be more prudent to seek a more limited stay. Because corporations do not possess a Fifth Amendment privilege, courts are more likely to grant stays that bar discovery only of the issues in the civil case that overlap with those in the criminal matter. Stanley A. Twardy Jr. is a former U.S. attorney for Connecticut and Edgardo Ramos is a former assistant U.S. attorney for the Eastern District of New York. Twardy and Ramos are partners in the government investigation practice group of Hartford, Conn.’s Day, Berry & Howard, resident in the Stamford, Conn., and New York offices, respectively, of the firm.

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