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The aggressive expansion of white-collar prosecutions to areas regulated by civil enforcement agencies sometimes leads to unintended results — including significant defeats — for prosecutors. In two recent cases trial courts ruled that the Department of Justice and the Securities and Exchange Commission failed to conduct independent investigations. If these decisions are representative of a new trend, the result may impose meaningfully new constraints on white-collar prosecutions. Parallel proceedings, in which the SEC and the Justice Department conduct independent civil and criminal investigations, are a well-established fixture of complex financial fraud cases. Coordination by civil and criminal investigators has been endorsed by statute: 15 U.S.C. §78u(d)(1) authorizes the SEC to transmit the evidence it gathers to the Justice Department. Case law also has condoned coordination, as the D.C. Circuit did in SEC v. Dresser Industries Inc. (1980), a leading case endorsing parallel proceedings absent specific evidence of agency bad faith or malicious governmental tactics. Nevertheless, two district court opinions, from last year’s HealthSouth criminal case in the Northern District of Alabama ( United States v. Scrushy) and from last month in the District of Oregon ( United States v. Stringer), imposed significant sanctions on the government because of findings of improper coordination between civil and criminal agencies. SCRUSHY’S DEPOSITION Many may now associate the HealthSouth criminal case with the acquittal of its former CEO, Richard Scrushy. But before the case went to the jury, U.S. District Judge Karon Bowdre dismissed counts charging Scrushy with perjury before the SEC. She did so based on findings that staff from the SEC and the local U.S. Attorney’s Office improperly colluded together. The collusion in question occurred during the SEC’s civil investigation and eight months before Scrushy’s indictment. On March 14, 2003, the SEC took Scrushy’s deposition in Birmingham, his hometown, rather than at the SEC’s Atlanta office. By that time, HealthSouth had already publicly announced that it had received a grand jury subpoena seeking documents connected to its accounting problems. Before the deposition began, the SEC gave Scrushy and his attorneys its standard Form 1662 (Supplemental Information for Persons Requested to Supply Information Voluntarily or Directed to Supply Information Pursuant to a Commission Subpoena). The form disclosed that the SEC, often and confidentially, makes its files available to prosecutors. The choice of Birmingham for Scrushy’s deposition was not made solely to accommodate Scrushy and his lawyers, although they, too, wanted their client deposed in that venue. Rather, it turned out that two days before Scrushy’s SEC deposition a telephone call (lasting 15 to 20 minutes) took place, involving lawyers and staff from the Birmingham U.S. Attorney’s Office and the SEC’s Atlanta office. The two assistant U.S. attorneys on the line told the SEC’s staff attorney and accountant not to oppose a request from Scrushy’s attorneys to move the deposition from Atlanta to Birmingham. The assistant U.S. attorneys also told them not to suggest the move, so as not to tip off Scrushy’s attorneys to the existence of a criminal investigation. The goal was to establish venue for any perjurious testimony in the Northern District of Alabama, the venue where the indictment was ultimately filed. During the call the assistant U.S. attorneys disclosed, for the first time, to the SEC staff that they were soon to meet with two HealthSouth whistle-blowers who had just come forward. They asked the SEC staff accountant to help them debrief the whistle-blowers. The assistant U.S. attorneys also asked the SEC staff not to question Scrushy about certain accounting topics, including HealthSouth’s income statements or earnings per share. CHARGES DISMISSED Scrushy used this discussion to argue at his criminal trial for the suppression of his SEC testimony and the dismissal of the perjury counts. Judge Bowdre agreed, relying on the principle “that the prosecution may use evidence acquired in a civil action in a subsequent criminal proceeding unless the defendant demonstrates that such use would violate his constitutional rights or depart from the proper administration of criminal justice” (emphasis in original). Judge Bowdre cited three improper aspects of the March 12 telephone call between the SEC and the U.S. Attorney’s Office. First, the SEC staff accountant received explicit directions from the U.S. Attorney’s Office concerning the areas of questioning in order to keep Scrushy in the dark regarding the existence of the criminal investigation. Second, the deposition was moved to Birmingham at the U.S. Attorney’s Office’s request. Third, during the call the SEC learned from the prosecutors that Scrushy personally knew of the HealthSouth fraud, and that revelation led the SEC to ask additional questions that otherwise would not have been asked. But close examination of the foregoing analysis does not necessarily lead one to find government misconduct. For example, Judge Bowdre observed that the venue of the SEC deposition was changed from Atlanta to Birmingham at the behest of the U.S. Attorney’s Office. Yet Scrushy’s attorneys also wanted the deposition to take place in Birmingham, presumably because it was more convenient for their client and, perhaps, because they believed any possible perjury case was less likely to be brought in the Northern District of Alabama than in the Northern District of Georgia. The fact that both parties were in agreement on venue weighs against finding misconduct. The court’s opinion also found problematic the absence of disclosures at Scrushy’s SEC deposition of key facts, such as that he was a target in a criminal investigation or that the SEC and the U.S. Attorney’s Office were coordinating their efforts. Yet as to Scrushy being a target, it was no secret to anyone at HealthSouth at the time he was deposed that a criminal investigation related to the same topics of interest to the SEC was under way. The company had publicly disclosed its existence a month earlier. Although that investigation need not have targeted Scrushy, it does not take much imagination to suspect that the ultimate targets in civil and criminal fraud investigations stemming from a disclosed $175 million projected shortfall in earnings would include the key people in a public company’s front office. As to the concern over the absence of disclosure about agency coordination, Scrushy and his lawyers knew at the time of the deposition that such coordination was, at the very least, a possibility. (That’s what SEC Form 1662 says.) Indeed, the attorneys likely had even stronger feelings about the subject, given that HealthSouth had already disclosed before the deposition that it had received a criminal subpoena. In sum, the Scrushy opinion does not paint the most compelling picture of government misconduct, and thus government attorneys were likely to dismiss the ruling as aberrational. But the ruling issued on Jan. 9 in United States v. Stringer suggests that Scrushy may not be that much of an outlier after all. CONCEALING THE INVESTIGATION Stringer was a multidefendant securities fraud prosecution involving allegations of accounting fraud at a public company. In this case the trial court dismissed the entire indictment and suppressed statements the defendants made to the SEC, because of findings that the SEC and the U.S. Attorney’s Office engaged in improper collusion. In Stringer, the defendants moved to dismiss and suppress, arguing that, had they known of the criminal investigation, they would have sought a stay of the SEC proceedings. (The SEC investigation began years before the indictment was returned.) They also would have invoked their constitutional rights against self-incrimination and would not have produced information to the SEC. U.S. District Judge Ancer Haggerty conducted 11 days of hearings on the issue and found, among other things, that the U.S. Attorney’s Office was actively involved in the SEC investigation, that it was an abuse of the investigative process to conceal the criminal investigation from defendants whom the SEC was deposing, and that the concealment of the criminal investigation involved deceit and trickery that warranted the indictment’s dismissal. The decision outlined in detail the ongoing communications between the SEC and the U.S. Attorney’s Office in the years before the indictment as evidence of improper use of the civil process by criminal authorities. In addition, Judge Haggerty raised a new issue for parallel proceedings litigation, singling out the SEC’s error in failing to seek disqualification of defense counsel. The same defense counsel represented both the company (which was cooperating) and a noncooperating individual defendant who was later indicted. Judge Haggerty found that the government took advantage of counsel’s conflict of interest, obtained information it might not have otherwise received, and used that information to add an additional charge to the indictment. The court believed the government should have sought to prevent this joint representation once it became aware of the full extent of the conflict of interest. If that was not enough, Judge Haggerty then ordered the suppression of the defendants’ statements to the SEC, as well as the evidence derived from those statements, just in case his dismissal order is reversed on appeal. RISKY COORDINATION From a defense perspective, Scrushy and Stringer potentially change the rules governing parallel proceedings. Their logic makes joint coordination between government agencies a very risky proposition. It is even riskier if the coordination entails (as it usually does) the sharing of investigative information not derived from the grand jury process, lending out personnel to assist in investigations, and discussing investigative strategies. Not providing explicit notice of criminal investigations to individuals under investigation is also problematic. The opinions do not prohibit interagency cooperation, as long as detailed disclosures are made to potential targets. But investigators invariably resist making such disclosures out of fear of tipping off actual or potential targets. As a result, these decisions may significantly constrain interagency cooperation. Arguably, Scrushy and Stringer are symptomatic of a larger judicial concern over government efforts, on a variety of fronts, to tip the scales of justice in favor of greater prosecutorial power. As government attorneys and prosecutors continue to move aggressively into new venues, we will likely see more judicial opinions echoing the thinking, if not the sentiments, found in these opinions.
David Z. Seide is a counsel at WilmerHale and a former federal prosecutor. The opinions expressed here are not necessarily the opinions of the law firm or of its clients.

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