Avoiding Denial of Access to Exculpatory Evidence in Parallel DOJ and SEC Investigations

The SEC and DOJ often simultaneously investigate the same alleged misconduct. Defendants charged by either agency may demand access to exculpatory materials in the government’s possession. In a criminal prosecution, defendants are constitutionally entitled to access material exculpatory evidence and in SEC cases, the rules of civil procedure guarantee defendants’ access to exculpatory evidence in the agency’s investigative file.

However, the DOJ and SEC may frustrate these entitlements by disclaiming responsibility for evidence possessed by the other agency. In a common scenario, the DOJ and SEC commence simultaneous investigations; the SEC’s investigation proceeds quickly and it files a civil complaint; in response to defendant’s discovery demands, the DOJ indicts them and obtains a stay of the SEC action pending resolution of the criminal case; despite the stay, the SEC continues investigating and passes along incriminating evidence to the DOJ; in response to the defendant’s demand for exculpatory evidence in the SEC’s possession, the prosecutor disclaims any obligation to produce such materials.

Judicial approval of the DOJ’s position in this scenario – which permits prosecutors to use the SEC’s incriminating evidence but does not require production of the SEC’s exculpatory evidence – threatens to undermine defendants’ rights. As Judge Rakoff aptly observed in United States v Gupta, 848 F. Supp. 2d 491, 492 (S.D.N.Y. 2012): “[t]hat separate government agencies having overlapping jurisdiction will cooperate in factual investigation of the same alleged misconduct makes perfect sense; but that they can then disclaim such cooperation to avoid their respective discovery obligations makes no sense at all.”

Yet prosecutors are rarely required to produce exculpatory materials in the sole possession of another agency. Courts deciding if a prosecutor must produce suchevidence focus on “whether the [prosecutor] and the [agency] were engaged in a joint investigation.” United States v Martoma, 990 F. Supp. 2d 458, 460 (S.D.N.Y. 2014). To show that the investigation was “joint”, a defendant must show the prosecutor and the agency worked closely together to prepare the criminal case.

The distinction between “joint” and “parallel” investigations is elusive and is rightly criticised as an unreliable determinant for enforcement of a constitutional right. The DOJ usually knows about the SEC’s simultaneous investigation; indeed, SEC Form 1662 notes that the SEC routinely shares its investigative file with the DOJ. Materials provided by the SEC frequently shape DOJ charging decisions, and the agencies regularly discuss and co-ordinate criminal and civil charges to maximise deterrence. Moreover, exculpatory materials gathered by the agency are unquestionably in the government’s possession. If prosecutors must disclose exculpatory evidence in the hands of police officers, Kyles v Whitley, 514 U.S. 419, 437 (1995), and federal agents, In re Sealed Case No 99-3096 (Brady Obligations), 185 F.3d 887, 896 (D.C. Cir. 1999), why not the SEC?

Courts look to multiple factors in determining if an investigation is “joint”, in which case the DOJ must produce exculpatory materials in the possession of the SEC. See United States v Middendorf, No 18-CR-36, (JPO), 2018 WL 3956494, at *4 (S.D.N.Y. Aug. 17, 2018). Courts chiefly focus on the extent of the SEC’s participation in the prosecution’s witness interviews and are most likely to order disclosure if the DOJ and SEC jointly conducted nearly all witness interviews. Thus, in United States v Gupta, 848 F. Supp. 2d 491 (S.D.N.Y. 2012) – in which the DOJ and SEC jointly interviewed 44 witnesses and the SEC attorney in attendance at each prepared a memorandum summarising portions he deemed relevant – the court ordered production of these memoranda under Brady. Id. at 493.

However, courts are unlikely to order disclosure where the prosecution and agency conduct either no, or minimal, joint interviews. See United States v Collins, 409 F. Supp. 3d 228 (S.D.N.Y. 2019). And courts are unlikely to require disclosure requests unrelated to joint interviews. See United States v Blaszczak, 308 F. Supp. 3d 736, 739 (S.D.N.Y. 2018). The mere fact that the agency supplied documents to the DOJ will also not suffice to trigger disclosure. See United States v Ingarfield, No 20-CR-146 (RA), 2023 WL 3123002, at *4 (S.D.N.Y. Apr. 27, 2023) (the argument that “the SEC was part of a joint investigation with the SDNY because the SEC shared documents with the prosecution team” has been “rightly – and repeatedly – rejected in this district”; see also United States v Tavlin, Criminal No 22-134 (DWF/JFD), 2023 WL 4669558, at *2 (D. Minn. July 20, 2023) (same).

The defendant may attempt to ensure access to exculpatory materials by opposing the prosecutor’s stay motion. If successful, the defendant gains access to the SEC’s investigative file, including exculpatory materials. This approach has certain advantages, but also entails substantial risks.

Courts have credited arguments that staying an SEC case pending resolution of a parallel criminal case would be unfair to the defence. First, a court may decline to impose a stay based on the defendant’s willingness to subject themself to civil deposition. On this ground, the court in SEC v O’Neill, 98 F. Supp. 3d 219 (D. Mass. 2015), denied the government’s stay request and prohibited the defendant from being deposed until after the conclusion of the criminal case. This approach avoided the routinely expressed judicial concern that failing to grant the stay puts the defendant to a “Hobson’s choice”. See Shah, 2022 WL 17551937, at *2.

Second, defendants may argue that a stay is unfair in light of the anxiety, reputational harm, and high costs of civil litigation, which argue in favour of swift resolution. See Shah, 2022 WL 17551937, at *2. Another concern is “the potential loss of evidence”. SEC v Shkreli, No 15-CV-7175 (KAM) (RML), 2016 WL 1122029, at *6 (E.D.N.Y. Mar. 22, 2016).Note that defendants making such arguments risk undermining their credibility if they simultaneously push for delay in the criminal case. See SEC v Javice, No 23-cv-2795 (LJL), 2023 WL 4073797, at *5 (S.D.N.Y. June 20, 2023) (discrediting the argument because defendant “was offered a trial date” in the criminal case “just four months away” but “nonetheless declined”).

Third, a defendant may in appropriate circumstances argue the stay is sought for the improper purpose of blocking access to exculpatory materials. Thus, if the prosecutor and the agency commenced proceedings close in time to each other or shared materials obtained through civil investigation, a defendant may argue that the government has tried to “have its cake and eat it too” by “benefiting from the efficiencies of parallel litigation without bearing the negative consequences”. CFTC v Nowak, No 19-cv-6163, 2020 WL 3050225, at *3 (N.D. Ill. June 8, 2020). Courts have cautioned that “[t]he government is not entitled to insulate its witnesses from discovery or questioning in anticipation of a criminal trial”. SEC v Kanodia, 153 F. Supp. 3d 478, 481 (D. Mass. 2015).

Thus, defendants have options notwithstanding the tendency of most courts to countenance prosecutors’ efforts to hide the exculpatory ball. Defendants facing simultaneous SEC and DOJ proceedings should advocate for full disclosure of all exculpatory evidence, carefully evaluate the potential benefits of opposing DOJ stay motions in this context, and consider, for example, attempting to condition any stay of the SEC case on production of the SEC’s investigative file, so that exculpatory materials do not remain hidden. At the same time, defendants must also evaluate the very serious risks of opposing a stay of civil proceedings because they may have no choice but to invoke the Fifth Amendment at any depositions and potentially in response to document requests, which may give rise to an adverse interest jury instruction.