Parallel Proceedings And Stays

Parallel proceedings offer certain economies for all parties. They can also cause unfairness. This is particularly true when the government files a criminal case and the SEC files a parallel civil case generating significant publicity and then the U.S. Attorney requests a stay of the SEC case. In this context the ruling in SEC v. Cioffin and Tannin, Case No. 08-CV-2457 (E.D.N.Y. June 19, 2008) denying a stay of an SEC action sought by the USAO who was conducting a parallel criminal investigation is significant.

Both the criminal and civil case are based on allegations of securities fraud by two former Bear Stearns fund managers. The two defendants, Matthew Tannin and Ralph Cioffi, managed the Bear Stearns funds which collapsed in the summer of 2007. The SEC and the Department of Justice brought actions claiming fraudulent conduct by the two men in connection with the collapse of the funds. The two cases were filed just one day apart. U.S. v. Cioffi & Tannin, Case No. 08-CR-415 (E.D.N.Y Filed June 18, 2008).

After the two cases were filed in June, the USAO moved to intervene in the SEC’s case, requesting a stay pending the resolution of the criminal case. The government argued that while the parties in the SEC case will not be prejudiced by a stay and the court will not be inconvenienced, the government will be prejudiced absent a stay. That prejudice will result from the defendants “taking unfair advantage of broad civil discovery rules, to the detriment of the government and its witnesses,” the government argued. Defendants countered that a blanket stay is inappropriate in a case where answers have not been filed and no discovery has been sought. The SEC did not take a position.

The district court permitted the USAO to intervene, but denied its request for a stay. The key question in considering such a motion is prejudice, according to the court. At the same time “[c]ourts are justifiably skeptical of blanket claims of prejudice by the government where – as here – the government is responsible for the simultaneous proceedings in the first place.” Furthermore, while there are limits on criminal discovery, “‘to the extent that the defendants’ discovery requests simply result in the happenstance that in defending themselves against the serious civil charges that another government agency has chosen to file against them they obtain certain ordinary discovery that will also be helpful in the defense of their criminal case, there is no cognizable harm to the government in providing such discovery beyond its desire to maintain a tactical advantage,’” quoting SEC v. Oakford Corp., 181 F.R.D. 269, 272-73 (S.D.N.Y. 1998).

The court went on to hold that without specific discovery requests and specific objections, it could not evaluate the validity and strength of the government’s concerns. Those concerns should be measured in view of three factors: 1) whether broad disclosure may lead to perjury and manufactured evidence; 2) if identification of prospective witnesses may create an opportunity for intimidation; and 3) whether the criminal defendants may unfairly surprise the prosecution with evidence developed through discovery where the Fifth Amendment would effectively block any discovery attempts by the government in the criminal case.

In denying the request for a stay, the court directed that discovery proceed. The USAO will have the opportunity to object to particular discovery requests.

This ruling is similar to the one in SEC v. Reyes, No. C 06-04435 Minute Order (N.D. Ca. Oct. 4, 2006). There, the SEC and the U.S. Attorney’s Office brought high profile option backdating cases against former Brocade Communications chairman Gregory Reyes. The court denied the request of the USAO in the SEC’s civil case for a stay concluding: “it appears to me that when the SEC decides they want to charge people with a violation of securities laws, which they are entitled to do and have a right to do and duty to do, they invite, of course, the defense to respond; and the defendant has the right to respond. … I don’t understand the logic … I don’t really appreciate the fundamental fairness of …” then having the USAO request a stay and denying the defendant in the SEC case an opportunity to respond.”

If these two rulings represent a trend, the government and the SEC may begin to rethink filing simultaneous criminal and civil enforcement actions, particularly in high profile cases.