Dismissal of Indictment Due to SEC’s Failure to Disclose Pending Criminal Investigation

      

          The SEC has a longstanding policy of refusing to disclose known parallel criminal investigations.   In U.S. v. Stringer, 408 F. Supp. 2d 1083 (D. Oregon 2006), a U.S. District Court dismissed the government’s securities fraud indictment against several former executives of FLIR Systems, Inc., due primarily to the conduct of SEC enforcement attorneys who followed this policy.  Stringer signals that at the beginning of any SEC testimony, defense lawyers should make a record of inquiring about related criminal matters.

In Stringer, the SEC began its investigation of the defendants in mid-2000, and started to share information with the U.S. Attorney’s Office.  While identifying two individuals to the SEC as “targets,” the criminal authorities decided to “lie low,” for the time being, while the SEC took sworn testimony in its investigation. 

          During SEC testimony, the attorney for one of the defendants asked about the existence of a criminal investigation.  Consistent with SEC policy, the SEC lawyer refused to answer, as set forth below:   

[Defendant’s Attorney:  My first question is whether Mr. Stringer is the target of any aspect of the investigation being conducted by the SEC.

[SEC Attorney]:  The SEC does not have targets in this investigation.

[Defendant’s Attorney:  The other questions I have relate to whether or not, in connection with your investigation, the SEC is working in conjunction with any other department of the United States, such as the U.S. Attorney's Office in any jurisdiction, or the Department of Justice.

[SEC Attorney]:  As laid out in the 1662 form, in the "routine use of" section there are routine uses of our investigation, and it is the agency's policy not to respond to questions like that, but instead, to direct you to the other agencies you mentioned.

[Defendant’s] Attorney:  And which U.S. Attorney's office might I inquire into?

[SEC Attorney]:  That would be a matter up to your discretion.

After they were indicted, the defendants argued that their due process rights were violated because they were not advised that the prosecutors and the FBI were using the SEC to gather evidence for a criminal prosecution.

          In dismissing the indictment, the court concluded that although parallel criminal proceedings are generally appropriate, under these circumstances, there was no parallel investigation at all.  Rather, the court stated that there was a deliberate “strategy to conceal the criminal investigation from defendants,” thereby “abus[ing] … the investigative process.”  The court further characterized the SEC attorney’s response to the questions about the existence of a criminal investigation as “evasive and misleading.”

         

          The SEC’s reaction to this fiasco has been surprisingly muted.  In recent SEC testimony, staff members gave an obviously pre-prepared response to my questions about the existence of a criminal investigation.  They stated that, as a matter of policy, they could not answer my questions, but for purpose of representing my client, I should “assume the worst.”  As in other situations, the SEC staff’s refusal to disclose the existence of a criminal investigation could form the basis for challenging any future criminal proceeding.  For this reason, defense attorneys should always question the SEC staff about this issue in a variety of ways, and always “on-the-record,” ensuring transcription.  I suggest the following questions:  (1) Is there a criminal investigation? (2) Is my client a target? (3) What criminal agencies/authorities should I talk to? and (4) If you don’t know the answers to my questions, who would know, and who should I ask?   The SEC’s failure to answer these questions could lay the groundwork for successfully challenging any subsequent indictment.