White Collar Defense and Compliance : New Jersey White Collar Defense Lawyer & Attorney : Fox Rothschild Law Firm : Criminal Defense, Insider Trading, RICO, Consumer Fraud : New Jersey, New York City

In an earlier post we explored the relatively new SEC policy encouraging cooperation. An individual facing an SEC inquiry and his/her counsel must, of course, consider all of their available options, which in certain circumstances sensibly include not cooperating and not responding to the SEC’s questions at all.

The Fifth Amendment privilege against self-incrimination, which enables a refusal to provide testimony and records to any governmental authority, is naturally available to an individual subject to a civil investigation by the SEC, where the alleged conduct may also drive a parallel or subsequent criminal proceeding. The ways in which the same conduct can readily support both civil and criminal charges was explored in an earlier post on Raj Rajaratnam of Galleon.  See Marchetti v. United States, 390 U.S. 39, 53 (1968) (privilege available when invoker “is confronted by substantial and ‘real’ . . . hazards of incriminating); Hoffman v. United States, 341 U.S. 479, 486-87 (1951) (privilege applies where a response constitutes a “link in the chain” of evidence of criminal conduct).

Invoking the privilege carries its own set of issues. See, e.g., SEC Division of Enforcement, Enforcement Manual § 4.1.3 (2011). These include the public perception and reputational consequences of “taking the Fifth,” especially for high profile targets. See Ullmann v. United States, 350 U.S. 422, 426 (1956) (“Too many, even those who should be better advised, view this privilege as a shelter for wrongdoers. They too readily assume that those who invoke it are either guilty of crime or commit perjury in claiming the privilege”). Asserting the privilege may preclude an opportunity to provide mitigating evidence of the kind which could affect the outcome of the SEC proceeding. See, e.g., SEC v. Grossman, 887 F. Supp. 649 (S.D.N.Y. 1995) (precluding evidence about matters as to which the defendant refused to testify, including exculpatory evidence in opposition to summary judgment). Invoking the right to remain silent in a civil deposition may also subject the deponent to a devastating adverse inference or assumption by the fact-finder that the testimony or information withheld would have been unfavorable. Baxter v. Palmigiano, 425 U.S. 308, 316-20 (1976).

One way to avoid the dilemma posed by the Fifth Amendment issue is to seek a stay of the civil proceeding. However, this relief may be unavailable if the criminal prosecution is merely inchoate. A federal court in New York recently refused to stay an SEC proceeding in the face of claimed criminal jeopardy because no indictment had yet been returned, leaving the individual to the Hobson’s choice between invoking or waiving the Fifth Amendment privilege before the government’s criminal investigation was complete and thereby risking prejudice to his defenses in both matters. SEC v. Wheeler, No. 11-cv-6169-CJS (W.D.N.Y. Oct. 7, 2011).  Following the decision, the defendant in Wheeler was reported by the Rochester Business Journal to have invoked his Fifth Amendment right and declined to answer the SEC civil suit, preferring, it seems, to face the civil penalties able to be summoned by the SEC, rather than put his head in the criminal noose and risk losing his liberty.
 

(Edward J. Mullins III, Esq., the author of this entry, is an associate with Fox Rothschild LLP, based in our Roseland, NJ office. His practice concerns litigation in the areas of financial services and corporate governance, including white collar defense and securities)

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Corporate counsel, whether in-house or outside, often generate a substantial body of analytical material in the course of providing guidance to management. Often, that confidential material must be shared with outside consultants and experts when the subject matter -- such as accounting and tax determinations or intellectual property questions -- requires their input, and those outsiders in turn create their own confidential work product in response. A concern common to these recurring scenarios is whether attorney work product protection is lost when materials are sent to these outsiders and whether the responsively-created material enjoys like protection. A recent District of Columbia court of appeals opinion addressed both questions.

In United States v. Deloitte LLP, 610 F.3d 129 (D.C. Cir. 2010), an action brought to challenge certain IRS adjustments to the returns of partnerships owned by Dow Chemical, the government had moved to compel production of certain materials which the intervenor, Dow, claimed were covered by the work product doctrine. One item was a memorandum prepared by Deloitte, Dow’s outside auditors, to capture a discussion in the course of an audit among Dow employees, Dow’s outside counsel, and Deloitte personnel concerning possible tax litigation over one of the partnerships. The government argued that the Deloitte memo was not work product since it was not prepared by counsel and since it was prepared for an audit, not for litigation.

The court of appeals rejected the government’s arguments. First, it held, the work product doctrine does not turn on who prepared a document, but whether the document -- even if prepared by an independent auditor -- contained the thoughts and impressions of counsel, which the Deloitte memorandum did. Second, as to the purpose for the memo’s creation, the D.C. Circuit adopted the majority rule which focuses on the question whether the document was created “because of” the prospect of litigation (the rule in the First, Second, Third, Fourth, Sixth, Seventh, Eighth, and Ninth Circuits); the proponent of the doctrine need not show that the “primary motivating purpose” of the document’s creation (the rule in the Fifth Circuit) was to anticipate litigation. So, a memorandum prepared in the course of and to assist in an audit did not lose its work product status as long as it was also prepared because of threatened litigation. In this case, a remand was necessary for the district court to determine the memo’s purposes.

The government also contended that as to two other documents, which had been prepared by Dow or its counsel, their tender to Deloitte by Dow constituted a waiver of any work product protection. However, the court of appeals rejected this contention, as well. While established principles provide that the voluntary disclosure of work product to an adversary or a conduit to an adversary does indeed effect a waiver, this disclosure to Dow was not tantamount to disclosure to an adversary, because any future dispute between Dow and Deloitte would not be predicated on the subject matter of the memo, and does not amount to disclosure to an adversary-conduit, since Deloitte was bound by AICPA rules to treat the Dow materials confidentially.

Prudence would suggest that, before any distribution of work product materials to an outside auditor, counsel secure a written representation from the intended recipient that: (i) the recipient disclaims any right or entitlement to rely upon the protected materials in any future litigation (e.g., over fees, accountant malpractice) with the producing entity; and (ii) that the recipient agrees to treat the materials as confidential and to resist any effort by a third party to later compel their production.
 

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