Is Stringer Really Business As Usual for the SEC?

In U.S. v. Stringer, 408 F. Supp. 2d 1083 (D. Or. 2006) the court dismissed a criminal indictment for prosecutorial misconduct which violated the constitutional rights of the defendants. The case stems from an SEC and DOJ investigation in which the SEC proceeded with its investigation in close coordination with the U.S. Attorney’s Office. The USAO refrained from actively investigating choosing rather to rely on information gathered by the SEC although it knew from the outset that criminal prosecution of the defendants was likely.

The government appealed and last week the SEC filed their Amicus brief in the Ninth Circuit. Supporting the government’s request for reversal, the SEC argues in its brief that everything in the case was done in accord with established Commission policies. Specifically, in the SEC investigation the defendants were given the standard Form 1662 listing various rights and routine uses of the information collected and told when they asked about a criminal investigation that standard policy was not comment but the defendants were free to check. As the SEC brief states: “The district court did not point to any actions by Commission staff which were inconsistent with these policies and practices. Indeed, the evidence shows that the Commission staff provided each defendant a copy of Form 1662 prior to their investigative testimony, explaining their rights and the Commission’s procedures concerning sharing information with criminal authorities. . . ” The brief then goes on to argue that it would be a significant burden on the SEC’s enforcement program and its ability to coordinate with other law enforcement authorities if the district court decision is not reversed, presumably because the SEC won’t be able to do what it did here.

The SEC’s brief (available on its web site) however does not mention many of the key the findings made by the district court leaving it to the government to address those. Many of those findings are disturbing however and directly involve the SEC staff. For example, the court found:

1) These were not parallel investigations. Rather the USAO determined at the outset that the defendants would likely be indicted and chose to gather evidence through the SEC. The SEC staff was aware of this.

2) The “USAO intentionally shielded its intentions behind the guise of a civil prosecution, resorting to subterfuge to maintain the secrecy of its involvement.” The SEC staff participated in this.

3) The SEC staff attorney’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.” The SEC staff had acted for the USAO from the beginning.

4) “Here, the government engaged in deceit and trickery to keep the criminal investigation concealed. The government went so far as to instruct court reporters to refrain from mentioning the U.S. Attorney’s involvement . . .” The SEC staff was aware of this.

5) “The USAO spent years hiding behind the civil investigation to obtain evidence, avoid criminal discovery rules, and avoid constitutional protections.”

6) The SEC ignored an obvious conflict of interest in that one attorney represented multiple defendants. The court found that “When an apparent conflict of interest between the defendant and defense counsel comes to the attention of the government, the government is under an obligation to bring the issue to the trial court’s attention and, if necessary, move for disqualification of counsel.”

It is troubling that the SEC fails to even address these issues in its brief. No doubt giving witnesses Form 1662 is standard procedure. No doubt citing Commission policy about not commenting on the existence of criminal proceedings is policy. At the same time the findings here are disturbing since they show the SEC staff plotting from the beginning with the USAO to go beyond not commenting on a criminal investigation or giving witnesses the usual “assume the worst” message to actively ambushing the defendants, ignoring obvious conflicts of interest and facilitating the USAO in gathering evidence it may otherwise not have obtained. Surely this is not standard investigative practice. Indeed, the brief fails to adequately answer even the simple question of why the staff did not tell Stringer’s counsel there was a parallel criminal investigation and then refer him to the USAO for more information — except for the obvious answer which is that the USAO and the SEC staff decided to keep the matter secret.

While there is obvious merit to parallel proceedings for the government and defendants, investigation by ambush should not be permitted. The government — whether it is the USAO or the SEC — has an obligation to be fair and not to resort to tricks, deception and worse. If however the SEC’s brief is right that Stringer represents business as usual, then the SEC should quickly reconsider its procedures and reform its investigative tactics.