Parallel Civil Litigation: The US Perspective

23.1 Introduction

Parallel civil proceedings may precede a criminal investigation, emanate from the announcement of criminal charges or arise during an internal investigation, mainly as a result of a company’s public disclosures about the existence or results of an investigation. These suits, whether brought by the government or a private plaintiff, raise a host of constitutional and privilege issues. For these reasons, and because the rules for discovery are very different in civil and criminal proceedings, advocates representing clients facing simultaneous or successive criminal and civil litigation must make strategic and tactical decisions with full knowledge that each decision may have a material impact on multiple matters.

This chapter surveys the types of parallel civil litigation that clients may face, either by the government or private parties. It goes on to address the differences in criminal and civil discovery that can complicate the management and defence of claims. Finally, this chapter describes the core challenges that arise when a client must manage civil litigation in the United States at the same time as related parallel investigations.

23.2 Parallel civil actions brought by the government

Although the Department of Justice (DOJ) is often associated with enforcement of the criminal laws of the United States – it is the only federal agency that has such jurisdiction – the civil division of the DOJ is also tasked with enforcement of some US civil laws. Additionally, a host of federal agencies and state attorneys general have jurisdiction to bring civil enforcement actions.

The DOJ has strongly encouraged coordination and communication between the criminal and civil divisions of United States Attorneys’ offices.[2] Moreover, the DOJ has in the past pursued multi-jurisdictional investigations with both civil and criminal components. For example, in May 2008, in response to the collapse of the sub-prime mortgage industry, the Mortgage Fraud Task Force was formed, involving the coordination of federal, state and local law enforcement agencies.[3] In 2010, the United States Attorney’s Office for the Southern District of New York (SDNY) announced that a new unit in its Civil Division would focus on civil remedies in connection with complex frauds ‘as a complement to criminal prosecutions for bank, mortgage and other funds’.[4] The SDNY’s announcement specifically cited the lower standard of proof, the availability of treble damages and the deterrent effect of such civil litigation.[5]

These various initiatives have made parallel investigations increasingly more common. Indeed, in many investigations, the criminal authorities may surface long after the civil investigative process is under way. When, on the other hand, parallel proceedings are ongoing and successive, the DOJ will likely seek a stay of the civil proceeding for several reasons, including preventing the defendant from benefiting from broader discovery in the civil case, to protect the integrity of its own investigation, to prevent prior statements by its witnesses from being discoverable in the criminal litigation process and to ensure secrecy of grand jury material. However, deferring civil and administrative actions until the conclusion of a criminal prosecution can be detrimental to the government’s ability to secure financial recoveries. Concurrent parallel proceedings enable government attorneys to pursue civil, administrative and criminal remedies simultaneously.

As corporate misconduct has been a higher DOJ priority in recent years, it has become more likely that the DOJ will use civil and criminal litigation as a two-pronged attack. Criminal prosecutors today are therefore more likely to allow the civil investigation to take the lead. The increased use of civil investigative demands (CIDs), which can compel the production of documents or sworn testimony, has catalysed this trend. CIDs are similar to subpoenas, but can be issued before litigation commences, and the results can be freely shared between those conducting the civil and criminal investigation. By contrast, material obtained through grand jury subpoenas is restricted, and federal prosecutors often cannot share such information with their civil counterparts. For these reasons, criminal prosecutors collaborating with their civil attorney colleagues may choose to lead with CIDs. As a result, companies in receipt of a CID or interacting with an agency investigating civil liability should be mindful that a concurrent criminal investigation may be under way.

23.2.1 Limitations on parallel litigations brought by the government

Courts have long upheld the propriety of parallel investigations.[6] In US v. Kordel,[7] the US Supreme Court held that use of evidence obtained through civil discovery to gain criminal convictions was neither a violation of due process nor a departure from proper standards in the administration of justice. The case involved the government’s use in a criminal prosecution of answers to interrogatories obtained during a prior civil action brought by the Food and Drug Administration (FDA), and the Supreme Court held that the use of civil discovery was permissible because the defendants had been on notice, when they answered the interrogatories, that the FDA was considering a criminal referral. Nonetheless, the Court suggested there could be circumstances of coordination that would amount either to a due process violation or a departure ‘from proper standards in the administration of justice’.

Kordel has been interpreted by the lower courts to mean that criminal prosecutors must act in good faith and employ proper procedures to use evidence obtained by a civil regulator during its investigation. Companies wishing to object to a prosecutor’s use of evidence collected in a civil action have the burden of establishing that criminal authorities acted in bad faith.[8] Whether the government has engaged in ‘bad faith’ is a fact-specific inquiry,[9] and can be shown in several ways, including when the government brings a civil action solely for the purposes of securing evidence for its criminal prosecution or affirmatively conceals or misleads the company as to the existence of a criminal investigation.[10]

In 2005, in United States v. Scrushy,[11] a criminal prosecution of the chief executive officer of HealthSouth, the district court suppressed the defendant’s SEC testimony, causing the dismissal of perjury counts against him. In the course of pretrial proceedings, the defendant learned that the United States Attorney’s Office had played a significant and covert role with respect to his SEC testimony, including (1) asking the SEC to change the city in which the SEC deposition would occur so that the criminal prosecutors could gain venue over a possible perjury charge,[12] (2) feeding questions to the SEC to be asked in the SEC deposition,[13] and (3) directing the SEC to refrain from asking certain questions to conceal the existence of the criminal investigation.[14]

The district court held that the government’s failure to disclose the existence of the criminal investigation, and the prosecutor’s covert involvement in the SEC investigation, constituted a departure from ‘the proper administration of criminal justice’, requiring suppression of the SEC testimony in the criminal case.[15] The district court also criticised the DOJ’s position that its role was proper because ‘it did not outright lie to Mr Scrushy about the existence of the criminal investigation’.[16]

By contrast, in United States v. Stringer, the prosecutors opened a criminal investigation roughly three weeks after the SEC commenced its investigation into civil securities fraud violations against FLIR Systems, Inc and three of its officers.[17] Federal prosecutors elected not to reveal their involvement because FLIR Systems had willingly co-operated with the SEC’s ongoing civil investigation.[18] The prosecutors were substantially involved in the civil investi­gation, including requesting depositions being conducted in their jurisdiction to establish personal jurisdiction for possible criminal charges based on false statements.[19] When counsel for one of the defendants expressly asked whether the DOJ was involved in the investigation, the SEC answered that, as stated in Form 1662, any information provided to the SEC could be used in criminal proceedings.[20] The Ninth Circuit concluded that: (1) the civil investigation was not commenced for an improper purpose; (2) the defendants voluntarily waived their Fifth Amendment right against self-incrimination because they were on notice by Form 1662 that any information they provided to the SEC could be used in criminal proceedings against them; and (3) the government had not made any affirmative misrepresentations.[21]

23.2.2 Global settlements

In the context of parallel civil litigations, a global settlement involves a single agreement among multiple parties regarding a common set of facts. Companies and individuals are well advised to seek global settlements with multiple government regulators, even if such agreements can be painstaking and time-consuming. Negotiating a global resolution requires counsel to obtain agreement from each government entity, both criminal and civil, balancing all the differing interests between the criminal authorities and the civil regulators.

During settlement negotiations with government authorities, companies should be aware of the risk that a settlement, press coverage, documents pertaining to the negotiation (such as a statement of facts in a deferred prosecution agreement or drafts of the settlement) and communications with the relevant authorities may be discoverable by plaintiffs in any parallel civil action.[22] Accordingly, to the extent possible, companies should avoid admitting liability as part of any negotiated settlement with the government. If an admission of liability is required, companies should ensure that it is narrowly tailored. Companies should also consider what they convey during settlement discussions and whether they communicate using means that may be discoverable in future private litigation.

Despite their complexity, global resolutions not only avoid protracted, costly litigation, they also give companies closure regarding the common set of facts, cap liability and allow companies to move forward. Moreover, global resolutions help companies manage public relations, insofar as a single global resolution avoids multiple press releases announcing the outcomes of enforcement actions brought by different government agencies.

23.3 Parallel civil actions brought by private parties

23.3.1 Class action and derivative suits

The two most common types of private actions in relation to internal investigations are class actions and derivative suits. Both types of claims commonly follow a company’s public disclosure of an internal or government investigation, an announcement of enforcement action, or media reports of corporate wrongdoing.

Class actions frequently arise in the securities and antitrust context where misconduct is alleged to have affected markets and large numbers of entities and individuals. Before a class action can proceed, a class must be certified by the court. To do so, the class must satisfy four requirements: (1) numerosity (the class is too numerous for joinder to be practical); (2) commonality (questions of law or fact are common among the entire class); (3) typicality (the class representative’s claim is typical to that of the entire class); and (4) adequacy (representatives of the class fairly and adequately protect the interests of the entire class).[23] If these criteria are satisfied, the action must then fall within one of the following categories: (1) the prosecution of separate actions runs the risk of inconsistent judgments, or adjudication with respect to individual class members would effectively impair the ability of other class members to protect their interests; (2) injunctive or declaratory relief is sought and appropriate; or (3) common questions of fact or law predominate over any individualised ones, such that class treatment is the superior method for adjudication.[24]

The party seeking certification bears the burden of proving that all the prerequisites are satisfied and that the class falls into one of the three categories.[25] The court has discretion to certify a class and a determination by the court is final unless a party can demonstrate abuse of discretion.[26] Although the issue of class certification is unique to this type of litigation, other than the issue of class certification, class action litigation proceeds in much the same way as other civil litigation brought by individual plaintiffs.

A derivative action, by contrast, is a lawsuit initiated by a shareholder on behalf of a corporation to enforce a cause of action. The shareholder typically initiates the claim against a director or an officer for breach of duty owed to the shareholders – such as the duty to manage, the duty of care or the duty of loyalty – and all damages recovered go to the corporation rather than the shareholder who initiated the suit.[27]

A shareholder bringing a derivative action on behalf of the corporation must have standing and must have demanded in writing for the board of directors to take action on behalf of the corporation within 90 days.[28] A shareholder with standing to bring a derivative suit on behalf of the corporation may file the claim before the 90-day period expires if the board rejects the written demand or if waiting the 90 days would result in irreparable harm to the corporation.

23.3.2 Employment actions

Another common form of civil litigation are actions brought by former employees arising from the underlying conduct being investigated. Employees may bring actions for wrongful termination, although companies engaged in internal investigations often sidestep these types of litigation by allowing the employee to resign rather than be terminated.[29] Where investigations arise from an employee whistleblower, companies should be mindful of special statutory whistleblower protections to avoid claims for breach of the whistleblower’s rights.[30]

Employees may also bring claims based on statements their employer makes regarding that employee’s conduct or character. These claims may be based on allegations of defamation, [31] but also in malicious prosecution. For example, in Ramchandani v. CitiBank Nat’l Ass’n,[32] the plaintiff brought suit against CitiBank National Association, CitiGroup Inc and Citicorp (collectively, Citi) alleging a malicious prosecution claim stemming from Citi’s dis­closure of information about him to the DOJ in an antitrust investigation. After Citi pleaded guilty to a federal antitrust charge that was grounded solely on the alleged misconduct by Rohan Ramchandani, who was employed as a currencies trader. Mr Ramchandani claimed that he was indicted because of Citi’s false statements as part of Citi’s plan to limit the negative consequences of the investigation. The plaintiff further contended that Citi’s outside counsel described him as ‘collateral damage’ from Citi’s guilty plea, because of Citi’s knowledge of Ramchandani’s lack of criminal capability. Although this action is still pending at the time of writing, the court has already denied Citi’s motion to dismiss, determining that such allegations constitute enough to satisfy four elements of a malicious prosecution claim: (1) the initiation of an action by the defendant against the plaintiff, (2) begun with malice, (3) and without probable cause to believe it can succeed (4) that terminates in favour of the plaintiff.[33]

23.3.3 Commercial litigation

Commercial counterparties may claim that the conduct giving rise to a government investigation also breaches terms in an agreement, such as contractual representations by a company that it fully complies with particular laws or that it is not the subject of an active investigation or under threat of investigation.[34]

Similarly, government investigations may also result in the public disclosure of conduct that gives rise to civil tort liability. For example, allegations of corporate misconduct could lead to claims brought by counterparties alleging that the misconduct constitutes fraud, tortious interference with commercial relations, or other unfair or deceptive business practices.[35]

23.3.4 Indemnification, advancement and denial of coverage

Corporate directors and officers are frequently entitled to indemnification and advancement under a company’s by-laws and by state law.[36] Company by-laws typically provide that the company will advance attorneys’ fees and costs to an individual director or officer named as a defendant in a lawsuit asserting claims arising out of his or her service to the company.

Directors and officers are not typically entitled to indemnification where bad faith is proven, including in situations involving admissions of criminal acts or regulatory misconduct.[37] Generally, while actions are pending against an indemnified party, these agreements require the company to advance litigation costs subject to a potential undertaking to repay the amount after such claims are resolved.[38] Nevertheless, disputes may arise between the company and the indemnified party regarding the right to advancement of litigation costs if, for example, the company believes that the party has engaged in bad faith or has unclean hands in availing themselves of that right, including the moving of assets to protect them from repayment during indemnification.[39]

Similarly, in a dispute between an insured and an insurer, the insured may become involved in parallel insurance coverage litigation in addition to the pending investigations and civil litigation. For example, an insurer may seek to deny coverage by attempting to prove that the investigations or civil lawsuits were the result of intentional misconduct by an insured, which may be excluded from coverage. To sidestep such litigation, where coverage may be uncertain, an insured party may seek to negotiate a compromised amount with the insurer to cover its litigation costs.

23.3.5 Private party suits brought on behalf of the government

Some statutes that may be enforced civilly by the government also grant private parties the right to bring an action. Statutory claims that may form the basis of a parallel civil claim include allegations that the defendant engaged in unfair or deceptive business practices,[40] anticompetitive business collusion,[41] the submission of false claims to the government[42] or the making of false statements in commercial advertising.[43]

For example, both the government and private citizens may bring a civil action under the False Claims Act (FCA), which prohibits frauds committed against federal government programmes.[44] A private party brings the action on behalf of the government, effectively stepping into its shoes, and is referred to as a relator or qui tam plaintiff. The government may then decide whether to intervene.

Generally, a relator commences an FCA suit by filing the complaint under seal and providing the government with a copy of the complaint and all material evidence and information the relator possesses. The government then conducts an independent investigation to determine whether to intervene or allow the relator to continue litigating on the government’s behalf. A federal action brought by a private person may only be dismissed if the court and Attorney General give written consent to the dismissal and their reasoning.[45] However, if the government chooses to intervene within 60 days of receiving the complaint, it may elect to dismiss the action, notwithstanding the objections of the person initiating the action, if the person has been notified by the government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.[46] Further, the government may settle the action if the court determines, after a hearing, that the proposed settlement is fair, adequate and reasonable in all the circumstances.[47]

The FCA empowers the DOJ to issue CIDs to conduct depositions, issue interrogatories and make document requests – all before the defendant is served with formal notice of the suit or the unsealing of the qui tam complaint.[48]

The FCA shares elements with criminal statutes, and purported violations implicate potential violations of the criminal laws with the main difference being criminal intent. As a result, it is not uncommon for the DOJ to initiate criminal proceedings based on the same factual allegations underlying qui tam complaints, or for civil FCA actions to arise based on underlying DOJ criminal investigations.

23.4 Discovery differences in civil and criminal cases

In civil cases, both plaintiffs and defendants have access to a wide variety of discovery tools pursuant to the rules of civil procedure and may generally obtain any information that is relevant, provided that the burden of producing the discovery is proportionate to the likelihood that the discovery will be material.[49] By contrast, discovery in a federal criminal case is far more prescriptive. For example, discovery tools available in civil cases such as interrogatories and requests for admission are not available in a criminal case, and witness depositions are only permitted in criminal cases in a narrow set of circumstances.[50]

In fact, federal prosecutors in criminal cases are generally only required to disclose:

  • certain specified documents, available upon the defendant’s request, such as the defendant’s oral and written statements, documents and tangible objects material to the government’s case-in-chief or to prepare the defence, and summaries of any expert witness testimony that the government intends to use;[51]
  • statements of testifying witnesses;[52]
  • evidence or information that tends to be favourable to the defence;[53] and
  • material that may be used to impeach a government witness.[54]

Notably, these discovery obligations only extend to material or information within the criminal prosecutor’s possession or control, meaning there is no obligation to disclose material within the possession of another government agency pursuing an independent parallel civil investigation or litigation.

The limited nature of discovery in criminal cases demonstrates why some defendants may seek to obtain broader discovery in parallel civil proceedings than they would ordinarily receive, as well as why criminal prosecutors often seek to preclude criminal defendants from doing so by applying for a stay of civil proceedings. Likewise, plaintiffs in parallel civil proceedings may seek to obtain the government’s disclosures to a criminal defendant through civil discovery, as such material is the most effective and expeditious method to prove the misconduct that underlies civil claims of corporate misconduct.[55]

Finally, in parallel proceedings with regulatory agencies (SEC, Federal Deposit Insurance Corporation, Environmental Protection Agency, etc.), or other non-criminal investigative agencies, the relationship between the criminal prosecutors and the other agency can become sufficiently close that the agency becomes part of the prosecution team for discovery purposes. For example, where the prosecutor and the agency conducted a joint investigation or shared resources related to investigating the case, or the agency played an active role in the prosecution, including interviewing witnesses, developing prosecutorial strategy or participating in targeting discussions, courts have found that the agency is part of the prosecution team. This has significant effects on criminal discovery, as it requires criminal prosecutors to disclose to a defendant material and information in the agency’s possession.

23.5 Evidentiary issues

23.5.1 Constitutional considerations

The Fifth Amendment of the US Constitution protects individuals from being compelled to give testimony that they reasonably believe could incriminate them. Under Fifth Amendment jurisprudence, the factfinder may not draw an adverse inference of guilt from the invocation of the privilege in criminal proceedings.[56] However, in civil proceedings, the factfinder may draw an adverse inference against the person invoking the privilege.[57] Thus, a party facing both criminal and civil proceedings often faces a difficult choice between asserting the privilege in response to a civil discovery request, triggering an adverse inference of guilt, or co-operating with a civil discovery request and waiving the Fifth Amendment privilege, allowing the government to use the civil testimony in the criminal case. Importantly, courts have ruled that corporations do not have a Fifth Amendment privilege,[58] so if the corporation is also a named defendant in a civil proceeding, the adverse party may request testimony from a corporate witness,[59] but individuals with sufficient knowledge to testify in such capacity may also have to invoke the Fifth Amendment privilege.

23.5.2 The attorney–client privilege and work-product protection

When a company co-operates with the SEC or DOJ to obtain leniency or a deferred prosecution agreement, there may be significant implications for attorney–client communications or attorney work-product. Because co-operation requires disclosure of all relevant facts, counsel should be mindful that such disclosures may trigger waiver of these protections during a government investigation, including not only privileged communications between attorney and client, but also documents generated by external counsel, such as witness interview memoranda, which may be covered by the attorney work-product privilege.[60]

Federal Rule of Evidence 502 (FRE 502) addresses the basis for which disclosures during discovery may automatically waive discovery-associated privileges. It applies where a party produces documents subject to the work-product doctrine or the attorney–client privilege, and then wishes to regain the right to such privileges.

FRE 502(a) implies an automatic waiver where information is intentionally disclosed to a federal agent.[61] Where disclosure is made in a federal proceeding or in another federal context, and waiver of the attorney–client privilege or the work-product is made, this waiver extends to undisclosed communications or information only if: (1) the waiver is intentional; (2) the disclosed and undisclosed information pertains to the same matter; and (3) fairness dictates the undisclosed and disclosed information should be considered jointly.[62]

FRE 502(d), however, gives courts jurisdiction to protect a party’s privilege under the attorney–client privilege and the work-product doctrine. The rule provides that federal court non-waiver orders relating to federal proceedings bind other federal and state courts, and FRE 502(e) provides that a non-waiver agreement between parties to a federal proceeding binds only the parties, unless the agreement is approved by court order. Counsel may therefore, subject to court approval, seek to enter into a confidentiality agreement with the government to preserve the protections, protect against inadvertent disclosure, or permit the defendant to claw back documents that are inadvertently produced during the investigation.[63] However, FRE 502 ‘does not alter the law regarding waiver of privilege resulting from having acquiesced in the use of otherwise privileged information. . . . and does not provide a basis for the court to enable the parties to agree to a selective waiver of the privilege’.[64] As a result, parties involved in government investigations must be mindful that certain disclosures to the government may expose other information to third parties in subsequent civil litigation.

23.6 Applications for a stay of civil proceedings

When there are parallel proceedings, both the government and the defendant may wish to move for a stay of civil proceedings. To avoid interfering with the integrity of its own criminal prosecution, the DOJ commonly intervenes and requests a stay of the civil proceeding pending resolution of the parallel criminal prosecution. Defendants may also have reasons to seek a stay to avoid either losing the Fifth Amendment privilege against self-incrimination or damaging their prospects in the civil litigation by asserting Fifth Amendment rights. If the civil case advances ahead of the criminal prosecution, defendants may be forced to expose their defence strategy to criminal prosecutors, putting defendants at a significant disadvantage. For these reasons, courts often grant applications for a stay of civil proceedings with consent of the parties.[65]

Courts may grant a stay of parallel civil proceedings, even in the absence of a criminal indictment or an outcome of the grand jury investigation.[66] Although the Federal Rules of Civil Procedure do not expressly provide for a stay, and the US Supreme Court has repeatedly emphasised that a ‘defendant has no constitutional right to a stay simply because a parallel criminal proceeding is in the works’,[67] a court may decide, in its discretion, to stay civil proceedings after balancing different interests and factors.[68] The decision to grant a stay rests in the sound discretion of the trial court as part of its ‘inherent powers’.[69] Even where an application is granted, the court may impose conditions and limitations on the stay, including as to scope and duration. For example, a court may allow discovery to proceed on certain topics, parties or claims. Courts may also enter a stay that expires after a fixed period or upon specific developments, or require the parties to periodically update the court on the status of other proceedings. In general, a party may apply to have a stay lifted at any time.[70]

Different jurisdictions emphasise varying factors when balancing the interests, but, in general, five balancing factors typically bear on the decisional calculations:

  • the interests of the civil plaintiff in proceeding expeditiously with the civil litigation, including the avoidance of any prejudice to the plaintiff should a delay occur;
  • the hardship to the defendant should the cases proceed in tandem;
  • the convenience of both the civil and criminal courts;
  • the interests of third parties; and
  • the public interests.[71]

In addition to these, some jurisdictions would also consider:

  • the good faith of the litigants;
  • the status of the cases;[72]
  • and the strength of the nexus between the two cases.[73]

In most cases, courts will grant a motion to stay if there is a close relationship between the criminal and civil action.[74] Indeed, the strongest argument for a motion to stay civil proceedings is that a party facing criminal charges is required to defend a civil action involving the same operative facts.[75] Without a stay of proceedings, the close relationship between the two cases might otherwise prejudice one or both of the parties.[76]

Courts are particularly sensitive to undermining a criminal defendant’s Fifth Amendment privilege against self-incrimination and favour a stay where the privilege is threatened. [77] However, the Fifth Amendment privilege can be waived if, for example, a defendant has already provided deposition testimony on substantive issues of the civil case before moving to stay.[78] In such circumstances, a court may deny the motion on the ground that ‘any burden on that defendant’s Fifth Amendment privilege is negligible’.[79]

Courts have granted an application for stay when some witnesses or the defendant are expected to assert their Fifth Amendment rights, finding that invocation of the privilege will render civil discovery largely one-sided.[80] In essence, courts favour a stay where civil discovery would compel the government to produce ‘scores of documents and witness testimony [to the defendant] only to be precluded from gathering reciprocal discovery’.[81]

Courts have found that a motion to stay is improper without a specific showing of prejudice or injustice that cannot be remedied by anything other than a stay of the civil proceeding.[82] Courts also tend to disfavour a government request for a stay when the same branch of government that brought the civil lawsuit is also seeking one.[83]

Defendants facing both civil and criminal proceedings should determine if a stay is strategically advantageous, and while it has been commonplace to regard these motions as routine and granted as a matter of course, in recent years the outcomes have not been so predictable. For instance, in SEC v. Saad,[84] the court denied a government application for a stay of discovery in an SEC enforcement action that had been filed in tandem with a parallel criminal case. In Saad, the government argued that a stay was necessary to prevent the defendants from gaining ‘special advantage’ because of the broader discovery under the civil procedure rules.[85] However, the court rejected that position, finding that it was difficult to credit where ‘the US Attorney’s Office, having closely coordinated with the SEC in bringing simultaneous civil and criminal actions against some hapless defendant, should then wish to be relieved of the consequences that will flow if the two actions proceed simultaneously’.[86] Likewise, in SEC v. O’Neill, the court denied a stay of the SEC’s civil case, finding the government’s request was made for a ‘strategic and tactical consideration that has little to do with the public interest or the interests of the defendants’.[87]

As another example, in the case against Ramesh ‘Sunny’ Balwani, the former president of Theranos, the court denied the DOJ’s request to stay discovery in the SEC case owing to the late and prejudicial timing of the request and the fact that Mr Balwani opposed the stay.[88] The DOJ unsuccessfully argued that Balwani used subpoenas in the civil case to obtain information irrelevant to the SEC allegations but directly relevant to the criminal indictment.[89] However, the court still allowed the DOJ to intervene, meaning that it could oppose subpoenas issued by Balwani to the extent that they were irrelevant to the civil case, but would have to do so case by case.[90]

As a result, companies should not assume that courts grant government applications for stays as a matter of course, and they should assess whether opposing an application for a stay is in their strategic interests.

23.7 Insurance

The costs associated with defending civil litigation and investigative matters can be significant, and identifying any applicable insurance policies and providing timely notice of potential claims under those policies is therefore critical. A company or individual facing parallel investigations and litigation should take steps to ascertain the existence, nature and terms of any potentially applicable insurance policies as early as possible. Key initial questions should relate to:

  • whether the allegations in the regulatory investigation or civil lawsuit give rise to a potential claim covered under the policy;
  • the liability period covered by the policy;
  • whether the alleged misconduct occurred during the coverage period;
  • whether the insurer requires ‘panel counsel’ for certain matters; and
  • the amount of the deductible and policy limit per occurrence and per policy.

Although the terms of the applicable policies should govern this, it is often prudent to notify any potentially implicated insurers of the existence of a potential claim against the policy as early as is practicable, as insurers will often decline to cover costs incurred before notification, and many policies require notification within a certain time before coverage may be declined.

It is not unusual to have parallel government investigations and civil litigation covered under the same insurance policy or tower of policies. In these circumstances, insured parties must consider how best to deploy their resources, especially if there is a risk that there is inadequate insurance to cover the full range of matters that can arise from a single internal investigation.

23.8 Conclusion

Companies must develop a clear, holistic strategy for navigating parallel investigation and litigation. Any proposed action by the company regarding particular litigation requires a considered approach and analysis of the impact that will have on the various litigations. Close coordination is also necessary between the company’s criminal and civil outside counsel to ensure consistency of approach and strategic alignment. Both the civil and criminal defence teams must be responsive to new developments and communicate them effectively to the broader team so that all stakeholders appreciate the risks posed by developments in both the criminal and civil matters.


Footnotes

[1] Sam Amir Toossi and Farhad Alavi are partners at Akrivis Law Group, PLLC. The co-authors are grateful to Ziad El Oud (associate), Hope Mirski (associate) and Xander Peng (law clerk) for their assistance in the preparation of this chapter. The co-authors are also grateful to David B Hennes and Lisa H Bebchick of Ropes & Gray LLP, and Eugene Ingoglia and Anthony M Mansfield of Allen & Overy LLP, for their contributions to previous editions of this chapter.

[2] Memorandum from the Attorney General to Federal Attorneys (28 July 1997) (instructing all federal attorneys increase the efficiency and reach of the government’s enforcement efforts by developing ‘greater cooperation, coordination and teamwork between the criminal and civil prosecutors who are often conducting parallel investigations of the same offenders and matters’); Memorandum from the Attorney General to Federal Attorneys (30 January 2012) (policy statement from Attorney General ‘to update and further strengthen the Department’s longstanding policy’ to ensure that ‘prosecutors and civil attorneys coordinate together and with agency attorneys in a manner that adequately takes into account the government’s criminal, civil, regulatory and administrative remedies’).

[3] Amir Efrati, ‘Wall Street, Lenders Face Subprime Scrutiny’, Wall St. J. (5 May 2008, 12:01 AM), https://www.wsj.com/articles/SB120994526338266255.

[4] Walter P Loughlin, ‘Parallel Civil and Criminal Proceedings: When the Government Seeks to Coordinate Its Powers in Parallel Proceedings the Emphasis Is Likely to be on the Criminal Side of the Case’, 22 No. 2 PracLit 19, 20 (2011) (citing N.Y. L.J., 31 March 2010 at 1).

[5] Id.

[6] See, e.g., United States v. Kordel, 397 U.S. 1, 10 (1970) (‘It would stultify enforcement of federal law to require a government agency . . . invariably to choose either to forego recommendation of a criminal prosecution once it seeks civil relief, or to defer civil proceedings pending the outcome of a criminal trial.’).

[7] See, generally, id.

[8] See United States. v. Tweel, 550 F.2d 297, 298 (5th Cir. 1997).

[9] Id. at 1.

[10] See United States v. Scrushy, 366 F. Supp. 2d 1134 (N.D. Ala. 2005).

[11] See, generally, id.

[12] Id. at 1138.

[13] Id. at 1139.

[14] Id. at 1138.

[15] Id. at 1139.

[16] Id. at 1139–40.

[17] See, generally, U.S. v. Stringer, 521 F.3d 1189 (9th Cir. 2008).

[18] Id. at 1192 (determining that the investigation should remain confidential).

[19] Id. at 1193.

[20] Id. at 1194.

[21] Id. at 1191, 1195.

[22] Although Federal Rule of Evidence 408 limits the admissibility of evidence pertaining to settlements and their negotiation, such communications and information may still be discoverable. Numerous courts have addressed the availability of a ‘settlement privilege’ to limit discovery of settlement-related documents, reaching different conclusions. Compare Stockman v. Oakcrest Dental Center P.C., 480 F.3d 791 (6th Cir. 2007) (applying settlement privilege) with Morse/Diesel, Inc. v. Fidelity & Deposit Co. of Maryland, 122 F.R.D. 447, 449 (S.D.N.Y. 1988) (declining to recognise settlement privilege).

[23] See Fed. R. Civ. P. 23(a); Zuniga v. Bernalillo Cty., 216 U.S. Dist. LEXIS 147819 (D.N.M. 2916); see also Rex v. Owens, 585 F.2d 432, 435 (10th Cir. 1978).

[24] Fed. R. Civ. P. 23(b).

[25] See Rex, 585 F.2d at 435; see also Albertson’s, Inc. v. Amalgamated Sugar Co., 503 F.2d 459, 463 (10th Cir. 1974); see also Rossin v. Southern Union Gas Co., 472 F.2d 707, 712 (10th Cir. 1973).

[26] See Rex, 585 F.2d at 436; see also Monarch Asphalt Sales Co. v. Wilshire Oil Co., 511 F.2d 1073, 1077 (10th Cir. 1975) (citing Wilcox v. Commerce Bank of Kansas City, 474 F.2d 336, 342–47 (10th Cir. 1973)).

[27] See Fed. R. Civ. P. 23.1(a); see Ross v. Bernhard, 396 U.S. 531, 534–35 (1970); see also Susanna Ripken, ‘Conflicting Ideologies of Group Litigation: Who May Challenge Settlements in Class Actions and Derivative Suits?’, 66 Tenn. L. Rev. 81, at 99.

[28] To satisfy the standing requirement, the shareholder must have owned stocks in the corporation when the cause of action arose and must fairly and adequately represent the interest of the corporation. See Fed. R. Civ. P. 23.1 (b)(3).

[29] See e.g., Ross v. City of Perry, Ga., 2010 WL 3667023 (11th Cir. 2010).

[30] See e.g, Sistek v. Dep’t of Veterans Aff., 955 F.3d 948 (Fed. Cir. 2020).

[31] See, e.g., Ryniewicz v. Clarivate Analytics, 803 F. App’x 858, 867 (6th Cir. 2020) (unpublished) (terminated employee brought defamation claim against former employer on the basis of ‘certain statements made by representatives of [the former employer] to potential buyers in the context of [the former employer’s] internal investigation [of the plaintiff]’); Mott v. Anheuser-Busch, Inc., 910 F. Supp. 868, 874-78 (N.D.N.Y. 1995) (granting summary judgment in favour of employer on employee defamation claim stemming from employer’s investigation and subsequent reporting of employee’s illegal conduct, and finding that the investigation was conducted in a ‘thorough and responsible manner’ because it was initiated immediately following reports of wrongdoing, included interviews with all relevant parties and an extensive review of books and records, and was undertaken by a team including both inside and external counsel).

[32] Ramchandani v. CitiBank Nat’l Ass’n, 19-cv-09124 (S.D.N.Y.).

[33] Id. at Docket No. 24.

[34] See e.g., In re OCA, Inc., 552 F.3d 413 (5th Cir. 2008); 159 MP Corp. v. Redbridge Bedford, LLC, 2018 N.Y. App. Div. LEXIS 557 at *152, 202 (App. Div. 31 January 2018).

[35] See, e.g., In re Intuniv Antitrust Litig., 2020 WL 4274507, at *4 (D. Mass. 24 July 2020) (private putative class action bringing antitrust claims alleging pharmaceutical companies colluded to harm generic drug manufacturers alongside ‘Department of Justice’s ongoing criminal investigation’); Rio Tinto PLC v. Vale S.A., 2014 WL 7191250, at *1 (S.D.N.Y. 17 December 2014) (fraud claims brought by ‘multinational mining company’ alleging that ‘its principal competitor, entered into a conspiracy . . . to misappropriate . . . mining rights’ amid concurrent federal criminal investigation); A-Valey Engineers, Inc. v. Bd. of Chosen Freeholders of Cty. of Camden, 106 F. Supp. 2d 711, 713 (D.N.J. 2000) (alleging bid-rigging in New Jersey public procurement led to civil lawsuit alleging tortious interference with business opportunities).

[36] See, e.g., 8 Del. C. § 145 (authorising indemnification of corporate officers and directors); N.Y. Bus. Corp. L. § 722 (same).

[37] For instance, under Delaware law, corporations are prohibited from indemnifying officers and directors found to have acted in bad faith. See 8 Del. C. § 145(a) (‘A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action . . . if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation.’ (emphasis added)); see also Creel v. Ecolab, Inc., 2018 WL 5733382, at *5 (Del. Ch. 31 October 2018) (‘to obtain indemnification under Section 145(a), the director, officer, employee, or agent must show [inter alia] that . . . she “acted in good faith”’).

[38] See Homestore, Inc. v. Tafeen, 888 A.2d 204, 212 (Del. 2005) (‘In addition to an express undertaking requirement, corporations may specify by bylaw or contract the terms and conditions upon which present and former corporate officials may receive advancement, e.g., proof of an ability to repay or the posting of a secured bond.’).

[39] Id. at 211, 215.

[40] See, e.g., N.Y. Gen. Bus. Laws § 349; Mass. Gen. Laws ch. 93A § 9.

[41] See 15 U.S.C. § 15 (the Sherman Act).

[42] See 31 U.S.C. § 3730 (the False Claims Act).

[43] See, e.g., N.Y. Gen. Bus. Laws § 350-A (False advertising).

[44] See 31 U.S.C. § 3730.

[45] See 31 U.S.C. § 3730 (b)(1).

[46] See 31 U.S.C. § 3730 (c)(2)(A).

[47] See 31 U.S.C. § 3730 (c)(2)(B).

[48] See 31 U.S.C. § 3733.

[49] Private parties may also seek records produced to a federal agency outside the litigation process through a Freedom of Information Act (FOIA) request. See 5 U.S.C. § 552. Most states have similar, but not identical, public access laws for state regulatory agencies. See, e.g., N.Y. Pub. Off. Law § Ch. 47, art. 6. There are several exemptions to public disclosure, including exemptions for records or information compiled for law enforcement purposes and documents relating to reports prepared by, on behalf of, or for the use of agencies that regulate financial institutions. See 17 C.F.R. § 200.83. Although these FOIA exemptions are supposed to be narrowly construed in favour of disclosure, in practice, it is rare for FOIA requests to be granted during the pendency of an investigation. When a company or an individual is producing documents to the government, they should request confidential treatment under FOIA and request that the government provide notice if it receives a request for information from a third party. This language, however, does not necessarily render the information unavailable for purposes of discovery in civil litigation. See, e.g., Friedman v. Bache Halsey Stuart Shields, Inc., 738 F.2d 1336, 1344 (D.C. Cir. 2009) (‘information unavailable under the FOIA is not necessarily unavailable through discovery’); see also In re Subpoena Duces Tecum, 439 F.3d 740, 753–54 (D.C. Cir. 2006) (‘FOIA’s exceptions to disclosure limit only the right to information conveyed pursuant to that statute and other limitations on the Commission’s authority to publish information . . . [and] do not alter the Commission’s duty to comply with lawful subpoenas after notice to the party whose information is sought’) (citations omitted); Atl. Specialty Ins. Co. v. Midwest Crane Repair, LLC, 2020 WL 5118067, at *3 (D. Kan. 31 August 2020) (‘This is not a FOIA case in which plaintiffs are seeking records directly from OSHA [Occupational Safety and Health Administration]. And even if the OSHA documents were “exempt from disclosure to the general public under FOIA, it does not automatically follow the information is privileged . . . and thus not discoverable in civil litigation”.’ (citation omitted)).

[50] Fed. R. Crim. P. 15; see also U.S. v. Drogoul, 1 F.3d 1546 (11th Cir. 1993).

[51] Fed. R. Crim. P. 16(a)(1)(E).

[52] Fed. R. Crim. P. 26.2, 18 U.S.C. §3500 (the Jencks Act). Note that these discovery obligations are not triggered until the government witness has actually testified in the criminal proceeding.

[53] Brady v. Maryland, 373 U.S. 83 (1963).

[54] Giglio v. United States, 405 U.S. 150 (1972).

[55] Although parties in a civil case may also want access to grand jury materials, such materials are presumptively secret. See Fed. R. Crim. P. 6(e)(2)(B). The only exception to this rule is that grand jury witnesses may disclose the subject matter of their testimony to anyone they choose. See Fed. R. Crim. P. 6(e) advisory committee’s note to 1944 amendment.

[56] See, generally, Baxter v. Palmigiano, 425 U.S. 308 (1976).

[57] See e.g., SEC v. Colello, 139 F.3d 674 (9th Cir. 1998).

[58] See e.g., Bellis v. U.S., 417 U.S. 85 (1974).

[59] Fed. R. Civ. Pro. 30(b)(6).

[60] The applicable privilege law can vary materially from state to state and even between the federal Circuit Courts of Appeal. In cases involving multiple jurisdictions, it is critical that a company obtain advice on all potentially applicable privilege laws before sharing potentially privileged documents to the government, as the effect of providing a potentially privileged document to the authorities may vary depending on which law governs questions of privilege.

[61] Id.; Fed. R. Evid. 502(a) (citing certain bases for when a waiver extends to an undisclosed communication or information in a federal or state proceeding).

[62] Id.

[63] Id.

[64] See Addendum to Advisory Committee Notes, Statement of Congressional Intent Regarding Rule 502 of the Federal Rules of Evidence. See also Christopher B Mueller and Laird C Kirkpatrick, Federal Evidence § 5:35 (4th ed. 2018) citing Statement of Congressional Intent Regarding Rule 502 of the Federal Rules of Evidence (Cong. Rec. H7818, 8 September 2008) ([Subdivision (d)] ‘does not provide a basis for a court to enable parties to agree to a selective waiver of the privilege, such as to a federal agency conducting an investigation, while preserving the privilege as against other parties seeking the information’).

[65] See, e.g., Deluca v. GPB Auto. Portfolio, LP, 2020 WL 734788 (S.D.N.Y. 2020).

[66] See United States v. Kordel, 397 U.S. 1, 3 (1970) (highlighting the court considered motion to stay prior to institution of criminal action); see also SEC v. Dresser Indus., Inc., 628 F.2d 1368, 1371–74 (D.C. Cir. 1980) (considering the motion to stay prior to the outcome of a grand jury).

[67] Kordel, 397 U.S. at 11 (explaining that the Constitution does not provide parties blanket protection from the perils of contemporaneous criminal and civil proceedings).

[68] Id.

[69] SEC v. Healthsouth Corp., 261 F.Supp.2d 1298, 1327 (N.D. Ala. 2003).

[70] See, e.g., Fed. Trade Comm’n v. Mytel Int’l, Inc., 2022 WL 2101898 (C.D.C.A. 2022).

[71] See, e.g., Fed. Sav. & Loan Ins. Corp. v. Molinaro, 889 F.2d 899, 903 (9th Cir. 1989); see Arden Way Assocs. v. Boesky, 660 F. Supp. 1494, 1496–97 (S.D.N.Y. 1987); see also Keating v. Off. of Thrift Supervision, 45 F.3d 322, 325 (9th Cir. 1995).

[72] Microfinancial, Inc. v. Premier Holidays Intern., Inc., 385 F.3d 72, 78 (1st Cir. 2004).

[73] Doe v. Sipper, 869 F. Supp. 2d 113, 116 (D.D.C. 2012) (citing Walsh Sec., Inc. v. Cristo Prop. Mgmt., Ltd., 7 F. Supp. 2d 523, 528 (D.N.J. 1998) (explaining that a close relationship between the two actions is often viewed as the most significant factor in the balancing test)).

[74] See Dresser, 628 F.2d at 1386.

[75] See id. at 1376.

[76] Id.

[77] Doe, 869 F. Supp. 2d at 116.

[78] See Wirth v. Taylor, 2011 WL 222323 (D. Utah 2011).

[79] Id.

[80] See SEC v. Nicholas, 569 F.Supp.2d 1065, 1070 (S.D. Cal. 2008).

[81] Id.

[82] See e.g., SEC v. Fraser, 2009 WL 1531854, at *3 (D. Ariz. 2009).

[83] See SEC v. Mazzo, 213 WL 81503, at *2 n.3 (C.D. Cal. 2013).

[84] SEC v. Saad, 2005 U.S. Dist. LEXIS 14780 (S.D.N.Y. 2005).

[85] Id. at *7.

[86] For other examples of greater judicial scrutiny of government applications for a stay of civil proceedings, see SEC v. Oakford Corp., 141 F. Supp. 2d 435 (S.D.N.Y. 1998); SEC v. Kornman, 2006 WL 1506954, at *4 (N.D. Tex. May 31, 2006); SEC v. Sandifur, 2006 WL 3692611, at *2–3 (W.D. Wash. Dec. 11, 2006); SEC v. Yuen, 2004 U.S. Dist. LEXIS 11459 (C.D. Cal. 4 October 2006).

[87] SEC v. O’Neill, 98 F.Supp.3d 219, 223 (D.Mass. 2015)

[88] SEC v. Balwani, 2019 WL 2491963 at *1 (S.D. Cal. 14 June 2019).

[89] Id. at *2.

[90] Id. at *1.

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