"We are surrounded by the enemy, low on munitions, suffered heavy casualties, reinforcement impossible…conditions perfect, preparing to attack.” — Anonymous military officer

Civil litigation is expensive, uncertain, and stressful. Multiply those concerns by two when your business is involved in a lawsuit and then learns that there is a parallel criminal investigation underway. Due to today’s highly regulated environment, many
corporate and individual business clients face the compounded problem of parallel proceedings involving civil litigation and criminal investigations over related subject matter. This article provides some practical advice on issues that arise in situations where parallel proceedings have been initiated.

Decades ago, the United States Supreme Court recognized the federal government’s power to conduct parallel proceedings. The government can conduct simultaneous civil and criminal investigations without violating the due process clause so long as it does not act in bad faith.

But while the government may not “affirmatively mislead” potential targets about an investigation being solely civil in nature, only in the most egregious cases will this standard function to suppress evidence or dismiss an indictment at the criminal stage. So in practice, your safest position is to assume that your involvement in a civil investigation may lead to a criminal investigation as well.

Hobson’s choice?

The obvious question might be which matter is more important to you. Prevailing on the lawsuit? Not getting indicted? Both? This may seem obvious. While an adverse
judgment in a civil case may result in damages, an indictment (not necessarily a conviction) may end your business. Need a high profi le example? Consider
the former accounting fi rm Arthur Anderson. Many people recall the indictment of the fi rm but not nearly as many recall the fact the Supreme Court ultimately reversed the fi rm’s criminal conviction. Of course, the decision provided little solace for the accounting fi rm (and thousands of its former employees) because the indictment destroyed the company years before the high court decision came down.

CONFLICTS OF INTEREST

Another factor to consider is the strong possibility that the interests of the business are, or may become, adverse to those of the particular employees involved in the alleged criminal conduct. While it may seem ordinary and appropriate for the business to handle the legal representation of its employees, or even to have the company’s lawyer represent the employees in a joint defense, such joint representation could create a confl ict of interest for company counsel. Best practice would be to retain separate counsel for any such employees.

FIFTH AMENDMENT CONCERNS

Under the Fifth Amendment to the United States Constitution, an individual has a constitutional right against self-incrimination. This constitutional right provides relief for
a person in the midst of civil litigation who also is under criminal investigation. Corporations, however, generally have no Fifth Amendment right against selfincrimination.

In the event that a person exercises the Fifth Amendment right, this act cannot be used as evidence against the person during criminal proceedings. In civil litigation, however, the court has ruled that refusal to answer questions on the basis of the self-incrimination privilege can be relevant evidence from which the jury in a civil case may draw whatever inferences are reasonable under the circumstances. Moreover, the invocation may result in summary judgment or a party being unable to
pursue or defend the civil litigation.

WAIVER OF PRIVILEGE

When a company elects to make a voluntary disclosure to a government agency in order to avoid an indictment, the disclosure generally waives any privilege (including attorney client and work product) in a subsequent civil litigation matter.

Motions to stay civil proceedings Often when civil litigation is pending and a criminal investigation develops, the government or the defendant may seek to stay the civil action pending resolution of the criminal proceeding. The courts have wide discretion in
determining whether or not a stay is appropriate. The courts apply a balancing test of a number of factors: 1. The extent to which the issues in the criminal case overlap with those presented in the civil case; 2. The status of the case, including whether the defendants have been indicted; 3. The private interests of the parties opposing the stay in proceeding expeditiously weighed against the prejudice caused to them by any delay; 4. The interests of and burden on the party seeking the stay; 5. The interests of the courts; and 6. The public interest.

Generally, courts will not allow a litigant to use the liberal civil discovery rules to get around the more restrictive criminal discovery rules in order to obtain evidence to defend against a criminal proceeding. Yet some courts are not as deferential to
the government’s request for stay. In Securities Exchange Commission v. Saad, 229 F.R.D. 90 (S.D.N.Y. 2005), Judge Rakoff denied the government’s motion for stay of discovery in an SEC action fi led simultaneously with a parallel criminal case (criticizing the federal prosecutors seeking a stay after having “closely coordinated with the SEC in bringing simultaneous civil and criminal actions against some hapless
defendant”). Of course, sometimes a stay is preferable for the defendant, who does not want to defend the civil litigation insuffi ciently by refusing to testify on self-incrimination grounds, or have to reveal its criminal defense strategy in the civil proceeding.

The government may also seek an indefi nite stay of the civil action pending resolution of its criminal investigation. Parties in the midst of civil litigation may wonder how long it will take for the government to make a decision. Unfortunately, the statute of limitations on most federal felony offenses is five years. And the hopes are getting a timely and defi nitive answer are not good. The recommended approach if you oppose the stay is to seek a fi xed or reasonable duration for the stay (perhaps, three or four months).

MOTIONS FOR PROTECTIVE ORDERS

If a wholesale stay of the civil action is not appropriate or warranted, the parties may seek relief by way of protective order to preclude their adversary from doing written discovery or depositions on certain subject matters under investigation.

However, unless you can carve out irrelevant and prejudicial topics in discovery that are completely unrelated to the allegations in the civil action, it is unlikely that a court will be amenable to order specifi c topics as “off limits” for discovery. However, if the civil litigants want to avoid a wholesale stay of the proceedings, both sides may be
be able to work together by agreeing to a protective order on certain issues or topics.

CONCLUSION

Parallel proceedings can be double trouble for businesses fi ghting legal battles on two fronts. As a result, it is prudent to obtain legal advice from counsel experienced in both civil and criminal litigation when parallel proceedings are initiated. Fighting your adversary in a civil forum without appreciating the risks and consequences that may arise from the tandem criminal investigation can leave you exposed to signifi cant risk.

Craig S. Denney is counsel at Downey Brand LLP. He is board certifi ed in criminal law by the National Board of Trial Advocacy. He is a former federal prosecutor who represents corporate and individual clients in white collar criminal defense and government regulatory matters in Nevada and California. Elizabeth B. Stallard is an associate at Downey Brand LLP. She is also licensed in Nevada and California and represents clients in litigation and white collar matters.

© 2009 by the Northern Nevada Business Weekly.  Reproduced with permission. All rights reserved.