Responding to a civil inquiry from the U.S. Securities and Exchange Commission (“SEC”) requires careful judgment, particularly when one knows or suspects the United States Department of Justice (“DOJ”) is conducting a criminal investigation. It has long been the case that when the SEC asks for information, there can be serious consequences from not providing it. Failing to supply information requested in an SEC subpoena may result in criminal sanctions, possibly even imprisonment for a year or more. And there is now pressure even to hand over attorney-client privileged materials (thus waiving the privilege for other purposes), as the SEC considers a waiver of privilege in assessing whether a company or individual has cooperated in the investigation. (See discussion in our Winter 2008 Newsletter.)
A recent Ninth Circuit case, however, confirms that the consequences of providing requested information to the SEC in a civil inquiry could be more serious than expected: the request may actually be coming from the DOJ as part of an undisclosed criminal investigation.
In U.S. v. Stringer, et al., 521 F.3d 1189 (9th Cir. April 4, 2008), the Ninth Circuit Court of Appeals ruled that the DOJ may, without initiating an official criminal investigation, work behind the scenes to shape SEC requests and discovery strategies to garner information that the subject of the SEC request might not voluntarily supply if he or she knew a criminal investigation was underway. The Ninth Circuit held that SEC Form 1662 sufficiently advises the target that by providing the SEC with information, the target is waiving his or her Fifth Amendment right against self-incrimination. Form 1662, a five-page boilerplate form given to companies and individuals in connection with any request for information, states in relevant part that the SEC routinely “makes its files available” to other governmental agencies, that information provided to the SEC “may be used against you” in a criminal proceeding brought by another agency, and that “you may refuse . . . to give any information that may tend to incriminate you.”
According to the Ninth Circuit, however, the SEC is not required to disclose that the DOJ has already initiated a secret criminal investigation against the target or that the DOJ is effectively driving the SEC’s civil discovery actions. In fact, the panel held, the SEC is permitted to “actively conceal” the DOJ’s participation (e.g., evading counsel’s direct questions as to whether the SEC’s requests were being made in conjunction with the DOJ), so long as no “affirmative falsehood” is made. Before the Ninth Circuit panel’s opinion in Stringer, several federal courts around the country had authorized the sharing of information between the SEC and the DOJ in “parallel” investigations, where the target was aware of both proceedings. But until the panel ruling in Stringer, the courts had not endorsed this degree of DOJ “behind the scenes” involvement — providing significant input into SEC discovery strategies, directing the SEC to probe, or not probe, certain areas, and even changing the location of testimony to lay venue in the prosecutor’s district for a potential perjury charge — where the subject did not know that a criminal investigation was in progress.
On May 7, 2008, Chief Judge Ancer L. Haggerty of the District of Oregon, who issued the district court ruling in Stringer, took the unusual step of invoking Ninth Circuit General Order 12.10(b) to provide the Ninth Circuit with a letter outlining the reasons why he “respectfully disagree[s] with the panel’s conclusions.” Judge Haggerty’s letter was attached as an exhibit to Stringer’s May 18, 2008 petition for rehearing en banc. The Ninth Circuit directed the government to respond to the petition for rehearing; a decision on the petition is pending.
Whatever the end result of this controversy, it highlights the fact that the SEC and the DOJ can collaborate, and will continue to collaborate, in unexpected — and sometimes undisclosed — ways. Counsel and clients should discuss the advantages and disadvantages of responses to civil requests to make sure there is no inadvertent waiver of the client’s Fifth Amendment rights that could prejudice the client’s defense in a criminal action.