Parallel Investigations: Can They Do That?

© Copyright 2006. All rights reserved, Emergency Envelopes, Volume 2, Issue 1

It seems patently unfair—the government embarks on an investigation of you or your company, and they are literally coming at you from all directions.  Representatives from a civil regulatory agency are using every carrot and stick at their disposal—serving subpoenas, seeking cooperation, enticing you with easy settlements and reduced fines.  But they want information, and a lot of it.  You think of your many well-meaning, but legally unsophisticated, employees who might get themselves unfairly tripped-up by an overzealous government agent looking for advancement.  You consider the power of interpretation and how the most innocent documents or statements, with a little ingenuity, could be inferred to mean anything. 

Meanwhile, federal prosecutors sit back patiently, with confidence that comes from the ability to institute criminal charges.  Or perhaps a criminal investigation has not yet materialized, but it haunts you with every step you take.  As you consider whether to alleviate some of the burden of this multiple-front defense, you wonder:  What are the risks?  Will an effort to cooperate come back to haunt me?  Are we just being squeezed?  Can they really do this?

The answers to these questions, of course, depend on a number of factors. 

Yes, They Can…Maybe

The government’s explicit ability to engage in parallel investigations (independent investigations conducted by federal prosecutors and civil regulatory agencies that relate to the same facts and circumstances) dates back nearly 40 years.  In 1970, in the landmark decision in United States v. Kordel, the Supreme Court invoked the public interest in consumer protection when it endorsed a parallel investigation into misbranding that involved the United States Attorney for the Eastern District of Michigan and the Division of Regulatory Management of the Food and Drug Administration.[1]  The Supreme Court’s public policy concerns set the tone for decades of investigatory activity into alleged or suspected corporate wrongdoing: 

The public interest in protecting consumers throughout the Nation from misbranded drugs requires prompt action by the agency charged with responsibility for administration of the food and drug laws.  But a rational decision whether to proceed criminally against those responsible for the misbranding may have to await consideration of a fuller record than that before the agency at the time of the civil seizure of the offending products.  It would stultify enforcement of federal law to require a governmental agency such as the FDA invariably to choose either to forgo recommendation of a criminal prosecution once it seeks civil relief or to defer civil proceedings pending the ultimate outcome of a criminal trial.[2]

Concerned as it was with the government’s ability to seek justice on behalf of consumers, the Supreme Court established an investigatory capability that has been invoked regularly whenever the government suspects that a company or its employees may be up to something. 

But even from the early days of Kordel, there were limits on what the government could legitimately do.   Specifically, in Kordel, the Supreme Court set forth a series of circumstances that would not survive scrutiny:[3] 

• Situations where the government has brought a civil action solely to obtain evidence for a criminal prosecution;[4]
• Situations where the government has failed to advise a defendant in a civil proceeding that it is contemplating a criminal prosecution;[5]
• Situations where a defendant is unrepresented;[6]
• Situations with the potential for prejudice from adverse pretrial publicity or other unfair injuries;[7] and
• Situations where there are special circumstances that might suggest the unconstitutionality or impropriety of a criminal prosecution.[8]

As the cases that have emerged in Kordel’s wake demonstrate, however, these limits on the government’s ability to conduct parallel investigations are not as clearly identifiable as one might like.  That said, recent case law provides some guidance as to when the government may have gone too far.

When A Parallel Investigation Isn’t A Parallel Investigation

It should be obvious from the label, but it is nonetheless worth noting, that in order to be a parallel investigation, the investigation should in fact, like parallel lines, run side-by-side without intersecting.  This is the seemingly basic point made last year by the District Court for the Northern District of Alabama in a case involving HealthSouth CEO Richard Scrushy.  In that case, it was revealed that the United States Attorney’s Office became “inescapably intertwined with a Securities and Exchange Commission civil investigation into HealthSouth’s accounting practices.” [9]  The intersections of concern were broad and varied, including the United States Attorney’s Office’s significant influence on strategic decisions in the SEC investigation and the active recruitment of an SEC enforcement official to assist with the criminal investigation.[10]  As the facts of this case were revealed, it became clear that the USAO control went so far that it included a request to change the location of a deposition in order that any anticipated perjury charges would be favorably venued vis-à-vis the USAO’s Birmingham office, which was handling the potential criminal charges.[11]

Ultimately, this activity proved unacceptable to the court and a pending motion to suppress testimony was granted.  In so doing, where the court in Kordel expressed concerns with the public policy of consumer protection, the court in Scrushy made a pronouncement that invokes the public policy of individual constitutional rights.  Calling upon the comments of the judge who oversaw a different portion of the HealthSouth litigation, the court asserted:

[B]ecause this is a case where the government has undoubtedly manipulated simultaneous criminal and civil proceedings, both of which it controls, there is a special danger that the government can effectively undermine rights that would exist in a criminal investigation by conducting a de facto criminal investigation using nominally civil means.  In that special situation the risk to individuals’ constitutional rights is arguably magnified.[12]

While a decision like this is unlikely to represent broad shifts in courts’ willingness to scrutinize government investigations, it does nicely illustrate the public policy tensions at work when such investigations do come under scrutiny.  While alleged corporate misconduct may inspire a court to act in what it sees as the interest of the public at large, blatant examples of government over-reaching may remind a court of what is at stake constitutionally.

Purported Parallel Investigations Gone Awry

Once the government has commingled its criminal and civil efforts, further problems can develop.  In one recent case, United States of America v. Stringer, the District Court for the District of Oregon found “trickery and deceit” in the government’s use of a purported parallel investigation into alleged conspiracy and securities fraud.[13]  In short, in this case the government went so far as to conceal the existence of an active criminal investigation, even in the face of the defendant’s inquiries as to whether the civil investigators were 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.”[14]  

In Stringer, the government’s use of deception and vagaries to conceal what was by all accounts an active and intentional criminal investigative effort sparked the ire of the court.  Harkening back to both the exceptions left open from Kordel and the constitutional policy considerations raised in Scrushy, the court dismissed the criminal indictment that stemmed from the investigation and in so doing announced:

The strategy to conceal the criminal investigation from defendants was an abuse of the investigative process.  In Kordel, the Court found there was no abuse in using the civil discovery process to obtain evidence later used in a criminal proceeding because the case was not one in which the government “failed to advise the defendant in its civil proceeding that it contemplates his criminal prosecution . . . nor with any other special circumstances that might suggest the unconstitutionality or even the impropriety of this criminal prosecution.”  This case clearly falls within the scenario contemplated by the Supreme Court as a “violation of due process or a departure from proper standards in the administration of justice.”  In this case, the government did not advise defendants that it anticipated their criminal prosecution.  Moreover, the USAO intentionally shielded its intentions behind the guise of a civil prosecution, resorting to subterfuge to maintain the secrecy of its involvement.[15]

While this decision has inspired quite a bit of hopeful contemplation in the white collar criminal defense bar, like the Scrushy decision, it probably says more about the competing interests involved when we ask courts to balance concerns about alleged corporate wrongdoing against individual constitutional rights.  Importantly, while Scrushy and Stringer may not signal a new era in terms of the judiciary’s broad commitment to constitutional rights and due process, there are lessons to be drawn from what the courts have recently articulated.

What It All Means

While opportunities to vindicate improperly conducted parallel investigations remain remote possibilities, some important practice tips emerge from both the historic context of these kinds of investigations and recent district court decisions.  Importantly, how a company or individual interacts with the government in the context of potential or purported parallel investigations may determine whether or not potential government misconduct is even uncovered, let alone challenged. 

Those who find themselves facing something that looks like it might involve civil and criminal investigative activity should embrace three broad pieces of advice:

1. Ask questions.  If we learn anything at all from the Stringer decision, it is that an inquiry posed to the government as to their intentions and other potential investigative activity will either empower you with the truth or lay the groundwork to challenge improper activity.  The alternative can only prove highly problematic: you did not know that the criminal investigation was lurking in the shadows, but because you never pressed the civil investigators, you have lost some ability to credibly argue that you were concerned about potential criminal implications and would have acted differently if the government had been forthcoming.

2. Know all the players.  If an alleged civil investigation is being influenced by an active or potential criminal investigation, that reality will be understandably difficult to uncover.  Still, anything that can be established about not only who is openly engaged in the investigation, but who might be involved behind the scenes, will prove invaluable in both assessing potential risks and challenging the investigators on suspected wrongdoing.  You might investigate, for example, the background of those with whom you are interacting — did that person formerly work in another government agency where they might have established relationships with prosecutors?  Are there signs, as there were in Scrushy, that the civil investigators’ purported charges and their strategic decisions are not entirely in line with one another?

3. Seek Discovery.  Many times, the civil discovery process will enable you to learn about the criminal investigation.  If, for instance, you suspect that civil investigators might be sharing information with a criminal counterpart (or vice versa), you might consider serving formal discovery regarding that suspicion.  This puts the government in the position of either being forthcoming, or defending its unwillingness in court.  Either outcome will increase your leverage and/or your ability to assess the degree to which you are comfortable with your level of knowledge about the government’s investigative activities.

Conclusion

The government’s ability to engage in a parallel investigation can pose a frightening prospect for individuals and businesses.  The courage to press the investigators on legitimate questions regarding the investigation and a little intellectual curiosity about who is involved and their apparent motives will go a long way toward taking back a little leverage in a situation that can appear incredibly one-sided.