An Upside to Parallel Civil and Criminal Investigations? Criminal Authorities May Have to Disclose Exculpatory Information in the Possession of the Civil Agency

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Good facts make good lawyers, but good lawyers need to know where to go to get those facts. More and more frequently, the staff of the Division of Enforcement of the SEC is conducting investigations in coordination with U.S. Attorney’s Offices. The close relationship offers mutual benefits. The SEC brings the subject matter expertise; the USAOs have “tools” that the SEC does not have—e.g., the ability to conduct “covert” operations and to use wire taps. Certainly, the Galleon line of insider trading cases demonstrates the results of the close working relationship.

USAOs are quickly learning, however, that there are certain heightened obligations that accompany parallel investigations. In a criminal proceeding, due process requires that prosecutors produce all material information that is favorable to the defendant. Civil regulatory agencies such as the SEC, however, do not usually have a specific duty to identify favorable evidence. Rather, the SEC’s duty to disclose favorable and unfavorable evidence is governed by the Federal Rules of Civil Procedure.

While the SEC routinely shares incriminating evidence with USAOs, sometimes the staff does not, for whatever reason, share all the evidence it gathers during its investigation. This information may include evidence that is exculpatory or that could be used to impeach a government witness. Moreover, the SEC also may have prepared internal memoranda that contain similar evidence. Such evidence is not in the “possession” of the USAO because the SEC staff did not provide it to the USAO. Is the defendant entitled to that information in a criminal proceeding? Are prosecutors required to search for and produce information in the possession of the SEC?

In United States v. Martoma, ___ F. Supp. 2d ___, No. 12-cr-973 (PGG), 2014 WL 31708 (S.D.N.Y. Jan. 6, 2014), the District Court for the Southern District of New York recently answered “yes” and ruled that prosecutors must produce all exculpatory and impeaching information resulting from a “joint investigation” by the USAO and the SEC, regardless of which agency technically was in possession of the information.

The Government’s Duty to Search for Brady and Giglio Material

It is well accepted that federal criminal prosecutors have “Brady obligations” to disclose material information that is favorable to the accused, either because it is exculpatory or because it is impeaching. See Brady v. Maryland, 373 U.S. 83, 87 (1963) (exculpatory); Giglio v. United States, 405 U.S. 150, 154-55 (1972) (impeaching). The Brady rules are not limited to what prosecutors know or what is in their possession. Rather, Brady and its progeny impose on prosecutors a duty to “learn of” and disclose all favorable, material information “known to the others acting on the government’s behalf in the case, including the police,” Kyles v. Whitley, 514 U.S. 419, 437, 115 S. Ct. 1555 (1995), a group commonly referred to as “the prosecution team.” See January 4, 2010, Memorandum, titled “Guidance for Prosecutors Regarding Criminal Discovery” issued by then–Deputy Attorney General David Ogden, now codified at Section 165 of the United States Attorney’s Criminal Resource Manual (the “Manual”) at www.justice.gov/usao/eousa/foia_reading_room/usam/title9/crm00165.htm.

The application of Brady in SEC civil enforcement actions and administrative proceedings is less clear. The Brady doctrine generally does not apply to SEC civil enforcement actions. See SEC v. Pentagon Capital Mgmt., No. 08-3324, 2010 WL 4608681, at *1 (S.D.N.Y. Nov. 12, 2010) (“In this district, the application of Brady to SEC enforcement actions has been flatly rejected.”); SEC v. Reyes, No. 06-4435, 2007 WL 528718, at *4 (N.D. Cal. Feb. 13, 2007) (denying defendant’s request for exculpatory material under Brady and Giglio because “this is a civil enforcement action, not a criminal prosecution”). At least one court, however, has suggested that the Brady doctrine may apply in SEC civil enforcement actions if a defendant “finds himself defending not only the SEC enforcement action, but also a parallel criminal proceeding” and demonstrates a “substantial need” for the materials. United States v. Gupta, 848 F. Supp. 2d 491, 496 (S.D.N.Y. 2012) (emphasis in original). Currently, though, civil defendants would be hard-pressed to impose such obligations upon the SEC. Id. at 497 (ruling that federal prosecutors had a Brady obligation to disclose materials in the possession of the SEC). Interestingly, while the Brady doctrine has no direct application in administrative proceedings, the SEC has incorporated the Brady doctrine in administrative proceedings by adopting Rule of Practice 230(b)(2), which, according to the SEC, “requires the disclosure of material exculpatory facts not otherwise available to the respondent even when those facts are recited in privileged documents.” In re optionsExpress, Inc., Exchange Act Release No. 70698, 2013 WL 5635987, at *4 & n.15 (Oct. 16, 2013); see also In re John Thomas Capital Mgmt. Grp., LLC, Exchange Act Release No. 3733, 2013 WL 6384275 (Dec. 6, 2013).

So while the SEC may not have an obligation to identify specifically exculpatory and impeaching evidence in federal civil actions, a criminal prosecutor’s duty extends beyond his or her own files. More specifically, a criminal prosecutor’s duty to disclose favorable material in the possession of other agencies arises when the USAO conducts a “joint investigation” with another state or federal agency. See, e.g., Gupta, 848 F. Supp. 2d at 493 (“Where the USAO conducts a ‘joint investigation’ with another state or federal agency, … the prosecutor’s duty extends to reviewing the materials in the possession of that other agency for Brady evidence.”). One historically overlooked member of the “prosecution team” identified in the Manual—and a potential source of the good facts lawyers look for in a criminal proceeding—is the SEC. Martoma is likely to change that.

The Martoma Decision

In Martoma, defendant Mathew Martoma was charged with conspiracy to commit securities fraud and with securities fraud for allegedly trading on nonpublic information supplied by two doctors who were participants in a clinical trial of a drug for use in treating Alzheimer’s disease. 2014 WL 31708, at *1. The doctors were Martoma’s alleged co-conspirators. Id. The charges against Martoma were developed through parallel investigations by the USAO and the SEC. In fact, Martoma was charged by the SEC with securities fraud on the same day the USAO announced its charges against Martoma.

When the doctors were initially approached by the USAO, both denied providing nonpublic information to Martoma. United States v. Martoma, No. 12-cr-973 (PGG) (S.D.N.Y. Jan. 6, 2014) [Dkt. No. 183] at 2. After subsequent conversations and meetings with the USAO and the SEC, both doctors admitted to providing information to Martoma, entered into non-prosecution agreements with the USAO, and agreed to settle with the SEC. Id at 3.

Martoma filed a motion to compel Brady material seeking production of exculpatory and impeaching information contained in communications between (1) the USAO and counsel for the doctors and (2) the SEC and counsel for the doctors. Id. at 4. The USAO agreed to produce its conversations with counsel for the doctors under Brady, but argued that Brady did not require production of any information—even if it was exculpatory or impeaching—that was solely in the possession of the SEC. Id. The USAO argued that the SEC was not part of its “prosecution team.”

Judge Gardephe disagreed and ordered the USAO to produce any communications between the SEC and counsel for the doctors that were exculpatory or impeaching. Martoma, 2014 WL 31708, at *3-4. Judge Gardephe’s decision rested on his finding that the USAO and SEC conducted a “joint investigation.” The court reasoned that where the USAO and SEC conduct a “joint investigation,” the USAO’s Brady obligations extend to reviewing and producing favorable information in the possession of the SEC. Id. at *3; see also Gupta, 848 F. Supp. 2d at 493 (holding that USAO had an obligation to review and produce SEC interview notes and memorandum where the two agencies conducted a “joint investigation”); United States v. Rigas, 779 F. Supp. 2d 408, 414 (M.D. Pa. 2011) (same); United States v. Upton, 856 F. Supp. 727, 749-50 (E.D.N.Y. 1994) (summarizing case law); see also United States v. Antone, 603 F.2d 566, 570 (5th Cir. 1979) (holding that USAO was required to produce information from state agency where two agencies conducted a joint investigation).

The USAO cannot withhold Brady material created or obtained as part of a joint investigation merely because such materials were technically “in the possession” of a separate agency. See United States v. Shakur, 543 F. Supp. 1059, 1060 (S.D.N.Y. 1982) (rejecting such argument as both “hypertechnical and unrealistic”). In short, the court concluded that the USAO cannot use a “joint investigation” as a sword and a shield. In the words of Judge Jed Rakoff:

That separate government agencies having overlapping jurisdiction will cooperate in the 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.

Gupta, 848 F. Supp. 2d at 492.

Judge Gardephe identified various factors suggesting that the USAO and the SEC had in fact conducted a “joint investigation”:

  • The USAO and the SEC jointly conducted 20 interviews of 12 witnesses;
  • The SEC provided the USAO with documents it obtained during its investigation;
  • The SEC and the USAO coordinated their efforts in conducting depositions; and
  • The USAO’s criminal complaint expressly acknowledged and incorporated the SEC’s joint fact gathering.

Martoma, 2014 WL 31708, at *3.

The factors identified by Judge Gardephe match those identified in the USAO’s own Manual for determining whether the USAO must produce information from another federal agency:

  • Whether the prosecutor and the agency conducted a joint investigation or shared resources related to investigating the case;
  • Whether the agency played an active role in the prosecution, including conducting arrests or searches, interviewing witnesses, developing prosecutorial strategy, participating in targeting discussions, or otherwise acting as part of the prosecution team;
  • Whether the prosecutor knows of and has access to discoverable information held by the agency;
  • Whether the prosecutor has obtained other information and/or evidence from the agency;
  • The degree to which information gathered by the prosecutor has been shared with the agency;
  • Whether a member of an agency has been made a Special Assistant United States Attorney;
  • The degree to which decisions have been made jointly regarding civil, criminal, or administrative charges; and
  • The degree to which the interests of the parties in parallel proceedings diverge such that information gathered by one party is not relevant to the other party.

Manual at 2.

Because it was “clear[ ]” that the USAO and the SEC were conducting a joint investigation of Martoma, the USAO was obligated under Brady to produce any exculpatory or impeaching information contained in communications between the SEC and counsel for the doctors. Martoma, 2014 WL 31708, at *3.

Martoma makes clear that if the USAO conducts a “joint investigation” with other state or federal agencies, the USAO must produce all Brady information in the possession of the “prosecution team,” including the SEC. Given how close and how often the SEC and the USAO conduct “parallel” investigations, it is likely that federal prosecutors will find themselves reviewing the SEC’s files for Brady and Giglio material on a regular basis.

Topics:  Disclosure Requirements, Investigations, SEC

Published In: Business Torts Updates, Civil Procedure Updates, Criminal Law Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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