Stringer: The USAO And SEC Win, Law Enforcement Loses

In U.S. v. Stringer, No. 06-30100 (April 4, 2008), the Ninth Circuit Court of Appeals vacated the dismissal of a criminal indictment. The district court had dismissed the case based on the misconduct of the U.S. Attorney’s Office (“USAO”) and the SEC. That court concluded that the USAO and SEC violated the constitutional rights of defendants by merging their investigations and concealing the criminal inquiry behind the SEC civil investigation which was used to collect evidence for the USAO. U.S. v. Stringer, 408 F. Supp. 2d 1083 (D. Or. 2006).

The Court of Appeals disagreed, concluding that “the government fully disclosed the possibility that information received in the course of the civil investigation could be used for criminal proceedings [by furnishing standard warnings on Form 1662]. There was no deceit; rather, at most, there was a government decision not to conduct the criminal investigation openly … and nothing in the government’s actual conduct of those investigations amounted to deceit or an affirmative misrepresentation justifying the rare sanction of dismissal … .”

The Court’s ruling is based on the following key factual findings.

• At the outset of its inquiry, the SEC notified the U.S. Attorney’s Office.

• Very early in the inquiries, the USAO identified two of its three targets and decided not to “surface,” as they called it, during the SEC investigation;

• The SEC and the USAO decided that it would “impede” the cooperation of the potential defendants with the SEC if the existence of the criminal investigation became known;

• The SEC, according to the Court of Appeals, “facilitated the criminal investigation in a number of ways. The SEC offered to conduct the interviews of defendants so as to create ‘the best possible record’ in support of ‘false statement cases’ against them, and the AUSA instructed the SEC Staff Attorney on how best to do that. The AUSA asked the relevant SEC office, located in Los Angeles, to take the depositions in Oregon so that the Portland Office of the USAO would have venue over any false statements cases that might arise from the depositions, and the SEC did so.”

• During the testimony of Mr. Stringer, his counsel asked the SEC about any involvement by the USAO – they SEC cited Form 1662.

• About one year before any criminal indictment, the SEC settled with two defendants

Since the SEC did not make any affirmative misrepresentation and furnished standard Form 1662, which notes that a criminal reference may be made, the Court concluded that the government’s conduct did not violate the defendants’ constitutional rights.

What the Court did not discuss is the fact that both the SEC and USAO carefully implemented a plan to obtain evidence and a settlement they might not have otherwise obtained and to increase the potential criminal charges. The facts detailed by the Court of Appeals make it clear that the SEC and DOJ carefully planned and merged their joint investigations to make sure that the defendants continued to cooperate with the SEC. Both the SEC and USAO believed that if the criminal investigation “surfaced,” that is became know to the defendants, that fact would impede cooperation. Stated differently, if the defendants knew about the criminal investigation, they would invoke their constitutional right not to testify and might not settle in the view of the SEC and USAO.

By not disclosing that the criminal investigation was on-going, that the defendants were targets and that the SEC was a front for the criminal prosecutors, the SEC and USAO obtained what they could not otherwise obtain: witness statements; a settlement; and enhanced criminal charges to increase the probability that the government could win the criminal case.

The Supreme Court has long made it clear that the government cannot obtain indirectly what it is prohibited from obtaining directly. The Ninth Circuit, however, side-stepped this issue by relying on Form 1662, a multiple page document the SEC routinely hands out to all witnesses which states that there may be a criminal reference. That form should not be a substitute for truth and candor by government prosecutors – particularly where the admitted facts demonstrate that they planned to obtain by indirection what they could not obtain if they told the truth.

The USAO and the SEC won this case in the Court of Appeals. The Court accepted almost without question the arguments made in the SEC’s amicus brief about Form 1662. The irony is that while in Stringer the SEC and USAO crafted tactics to obtain testimony from the defendants, in the end that is precisely what they will lose. In view of Stringer and the increasing trend toward criminalization, prudent defense counsel in the future will have little choice but to advise witnesses to invoke their constitutional rights. This unfortunately will deprive the SEC of information it may need for its investigation while depriving witnesses of an opportunity to explain critical events.

More importantly however is the overall detrimental impact tactics such as those blessed by Stringer will have on law enforcement. The law cannot be enforced with the kind of tactics used here. The SEC is well aware of this. In corporate governance cases, it frequently talks about “tone at the top,” meaning that compliance, lawful conduct and ethical actions in the market place come from the top or those in charge. So too with law enforcement. Respect for the law begins with those who enforce it. If those who enforce the law do not act in good faith in accord with basic legal principles and follow the highest ethical standards, including a basic respect for the rights of citizens, they cannot effectively enforce it.

The USAO and the SEC won in Stringer. Before that win turns into a loss however, it is time for the SEC to revise its policies on criminal referrals. Form 1662 is simply not enough. If the SEC has made a criminal reference absent exigent circumstances there is no reason it cannot tell witnesses rather that relying on a standard form which effectively communicates nothing.