Parallel Proceedings Revisited in Brocade: A Question of Fairness

The SEC and DOJ have long coordinated when appropriate because parallel proceedings can maximize resources.  As former SEC Chairman Harvey Pitt noted:  “The SEC has had, and continues to have, a close relationship with its fellow law enforcement agencies.  Indeed, some of the most significant SEC actions over the last several months have been brought in tandem with criminal complaints and indictments.” Harvey L. Pitt, Remarks at the U.S. Department of Justice Corporate Fraud Conference (Sept. 26, 2002).  Many times parallel civil and criminal investigations are also beneficial for the defense.  Frequently, for example, parallel investigations are more efficient and offer the prospect for a coordinated resolution of a matter. 

On the other hand, parallel proceedings may severely prejudice the defense.  In U.S. v. Stringer, 408 F. Supp. 2d 1083 (D. Ore. 2006), appeal docketed, No. 06-30100 (9th Cir. Feb. 27, 2006), the court dismissed a criminal indictment on grounds of government misconduct where securities fraud investigations by the U.S. Attorney’s office and the SEC were not parallel, but had merged.  Although the USAO decided to indict the defendants early on, it decided not to conduct an investigation and instead use the SEC to gather evidence.  The government attorneys concealed the DOJ’s involvement despite defense counsel inquiries concerning a parallel criminal investigation.  On appeal the SEC argues that its standard Form 1662 warnings are sufficient and that staff does not have to disclose the existence of a parallel criminal investigation even when it knows that one is being conducted and defense counsel makes a specific inquiry about the existence of such an investigation.

Fairness questions were also raised in SEC v. HealthSouth, 261 F. Supp. 2d 1298 (D. Ala. 2003).  There, the court denied an SEC motion to freeze assets of former HealthSouth CEO Scrushy.  The court repeatedly expressed concern about the SEC’s tactics where much of the evidence came from a parallel DOJ investigation, yet the SEC refused to make that evidence available to the defense in response to civil discovery requests claiming that it was in the possession of the U.S. Attorney’s office or the FBI. 

Likewise, in U.S. v. Scrushy, 366 F. Supp. 2d 1134 (D. Ala. 2005), the court granted a defense motion to suppress SEC testimony because the USAO and the SEC investigations had merged to where the USAO dictated questions, limited the SEC’s inquiry topics, and determined testimony location for future criminal venue without telling the defendant of the parallel inquiries.   

Now, in SEC v. Reyes, et. al., No. C 06-04435 CRB (N.D. Cal.) a key issue of fairness has been raised stemming from parallel proceedings.  To much fanfare, both agencies announced in a joint press conference the filing civil and criminal charges tied to option backdating.  Quickly, the USAO moved to stay the civil case, sending a message that the SEC did not intend to litigate immediately.  The court denied the motion noting that it is fundamentally unfair to charge persons with violations of the securities laws and then, when they wish to respond, stay the case.  Subsequently, the defense attempted to depose several witnesses, all of whom have taken the Fifth.  In a subsequent motion, the defense moved “to compel deposition testimony, for an evidentiary hearing, and for other appropriate remedies.”  The Defendants argue that the “Silent Eleven,” as they term them, have no fear of prosecution.  The Silent Eleven made proffers to the USAO that were attended by SEC staff and, according to motion papers, at least one witness has letter immunity.  See Motion of Defendants Reyes, Caova and Jesen to Compel Deposition Testimony, dated January 23, 2007.  Not surprisingly, the SEC argued procedure rather than substance, noting that the motion should be denied because it does not have authority to grant immunity, it is appropriate to conduct parallel proceedings, and if the criminal trial proceeds first many of the witnesses now invoking their constitutional right not to testify may, in fact, become available.

While the court denied the motion as premature, the Judge noted he was “sympathetic to Defendants’ argument that SEC and DOJ attorneys have selectively used their power to grant use immunity[,]” but at this point the factual record was inadequate to support the requested remedies. 

The SEC’s arguments in Reyes – as they were in HealthSouth and Stringer – were not doubt accurate, as far as they went.  But the arguments miss the point.  Government prosecutors from the DOJ and the SEC have an obligation of fundamental fairness and cannot skew the playing filed or truncate the rights of defendants in the name of law enforcement.  Such actions undercut the very system government prosecutors are suppose to serve.  These cases serve as a reminder of this crucial point.  Perhaps more importantly, in a post-Enron world where the pendulum has swung far in favor of the prosecution, perhaps these three decisions signal an appropriate swing back toward the middle.