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Parallel SEC/DOJ Proceedings Approved in the Ninth Circuit

By dave

Parallel SEC/DOJ Proceedings Approved in the Ninth Circuit

It is a fact of life today that securities law violations are often investigated through parallel proceedings – in other words, independent investigations conducted by civil authorities and federal prosecutors relating to the same facts and circumstances. I can remember the days in the not too distant past (at least it seems not too distant) when it was nearly impossible to get the Justice Department interested in a federal securities law case, but Enron pretty much changed all of that.

Parallel proceedings present significant challenges, because the cooperation that is often so critical to a successful resolution of a civil proceeding brought by the SEC may very well increase a company's (and its officers' and directors') exposure to criminal liability. While it is well settled that the government can conduct parallel proceedings, the latitude with which this can be done and the extent to which the SEC or another civil authority could "covertly" funnel evidence to a prosecutor was called into question a few years ago by the Federal District Court decision in U.S. v. Stringer, (408 F.Supp.2d 1083 (D. Or. Jan. 9, 2006). In that decision, the court found that prosecutors had engaged in misconduct by cloaking an ongoing criminal investigation with an SEC investigation, warranting dismissal of the indictment or suppression of the SEC-gathered evidence.

Recently, the Ninth Circuit reversed the District Court's decision in U.S. v. Stringer, No. 06-30100 (9th Cir., April 4, 2008). The Court of Appeals found that no affirmative deception was involved, principally because the SEC had given each of the defendants a Form 1662 along with the request for evidence. Form 1662 (not to be confused with Form Catch-22) notes that the “Routine Uses of Information” gathered in an investigation include providing the information to state and federal law enforcement, self-regulating entities, foreign authorities, tax authorities, consumer reporting agencies, trustees and receivers, bar associations, and Congress. The form also provides a Fifth Amendment warning.

The Ninth Circuit relied heavily on the language of Form 1662 in finding that the defendants were adequately put on notice as to the potential parallel proceeding. Further, because the Form 1662 included a Fifth Amendment warning, the Court found a waiver of the defendants' right against self-incrimination in the criminal case – given that the Fifth Amendment was not invoked in response to the SEC’s initial investigative request.

The Stringer decision reinforces the wide latitude that the SEC and prosecutors have in conducting their investigations – and highlights the perils of cooperation with the SEC. For more detailed analysis of the decision, take a look at the memos we recently posted in our "White Collar Crime" Practice Area.

Behind the scenes at the SEC, cooperation can also be a consideration when dealing with Corp Fin while an Enforcement investigation of a company is ongoing or contemplated. While Corp Fin is always sensitive to not being considered a "tool" for Enforcement to access information about the company and the conduct in question, it is still possible that information derived from the comment process, things said on conference calls, etc. could ultimately be shared with the Enforcement Division.

IFRS for U.S. Companies: On the Fast Track for Implementation?

Edith Orenstein noted yesterday in the FEI Financial Reporting Blog that an IFRS implementation plan for U.S. companies is moving along much faster than I would have ever expected. The blog notes: "In announcing the formation of the KPMG IFRS Institute, KPMG Chairman & CEO Tim Flynn stated: 'The question about whether the world is going to global standards is no longer ‘if,’ but ‘when.’' Flynn added, 'The Securities and Exchange Commission (SEC) is expected to issue a rule proposal in the next few weeks outlining the manner, timing, and eligibility for some U.S. public companies to transition from U.S. Generally Accepted Accounting Principles (GAAP) to IFRS.'"

Given that the SEC already put out a concept release last Fall, it is likely that the rule proposals will be pretty well developed and there is probably a good chance that final rules will be adopted by this Fall. Perhaps this will give some larger US companies the joy of implementing IFRS and XBRL at the same time!

Farewell to Carol McGee

I want to send a "shout out" to my former Deputy Chief Counsel Carol McGee, who just left the SEC after 10 years in Corp Fin to become a Partner at Alston & Bird LLP. In my time at the SEC, Carol always provided me with truly wise counsel on every imaginable issue. I first met Carol when she was interviewing for a job in Corp Fin, and during the interview we began debating the relative merits of certain twentieth century philosophers – her preference being for Wittgenstein and mine for Sartre. Well, you can just imagine where that went…

- Dave Lynn

Full post as published by The Corporate Counsel.net Blog on April 25, 2008 (boomark / email).