Parallel Proceedings: Civil, Administrative/Regulatory, and Criminal

Chilivis Grubman Dalbey & Warner LLP
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Chilivis Grubman Dalbey & Warner LLP
Atlanta, Georgia

The term “parallel proceedings” is shorthand for describing simultaneous civil, administrative, regulatory, or criminal investigations or formal proceedings. Although “prompt investigation of both civil and criminal claims can be necessary to the public interest,” a stay of noncriminal proceedings may be required pending the outcome of criminal proceedings where the noncriminal proceeding threatens to violate the party’s Fifth Amendment privilege against self-incrimination. Securities and Exchange Commission v. Dresser Industries, Inc., 628 F.2d 1368, 1375-76 (D.C. Cir. 1980). When the noncriminal proceeding does move forward, “the separate investigations should be like the side-by-side train tracks that never intersect.” United States v. Scrushy, 366 F.Supp.2d 1134, 1139 (N.D. Ala. 2005). Counsel for parties in parallel proceedings must be ever vigilant to ensure that the civil or administrative investigation is not used as a “Trojan horse for a parallel criminal investigation by gaining the cooperation of an unsuspecting criminal target, who would have otherwise invoked protections against self-incrimination.” Hilder, Philip & Creech, Paul,Texas Medicaid Fraud Control Unit, A Trojan Horse, http://www.hilderlaw.com/publications. See also Sterling Nat. Bank v. A-1 Hotels Intern., Inc., 175 F.Supp.2d 573, 579 (S.D.N.Y. 2001) (noting that where civil and criminal proceedings are conducted concurrently, “there is a special danger that the government can effectively undermine rights that would exist in a criminal investigation by conducting a de facto criminal investigation using nominally civil means”).

Parallel proceedings are challenging because what may be a good strategic move in one forum or setting may be ill-advised in another. When deciding among difficult strategic choices, parallel proceedings require that counsel never lose sight of the client’s priorities.

  • Typically, the first priority is to stay out of prison, i.e., liberty.
  • Retention of a professional license often is high on the list of priorities, if not at the top of the list. Loss of license can be the “economic death penalty.”
  • Preservation of reputation is high on most clients’ list of priorities.
  • Preservation of one’s assets is important, but may not be the highest priority, particularly when compared with loss of liberty.

Priorities need to be discussed with the client and clearly understood. They should guide your advice and your client’s difficult choices.

Take for example the lawyer who represents a physician who is the subject of both a criminal prosecution and either a civil suit or an administrative proceeding before the state medical board or other licensing authority. If the physician is called upon to give a civil deposition or to testify at a board hearing, he or she may be faced with the dilemma of either waiving his or her Fifth Amendment privilege against self-incrimination, or invoking the privilege, which may, and often does, result in an adverse inference being drawn against him or her. See Baxter v. Palmigiano, 425 U.S. 308, 318 (1976) (“The Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them.”).[1] You and your client must discuss the consequences of both options. With regard to the myriad implications of invoking the privilege, you should consider the following:

  1. Will invocation of the privilege endanger your client’s clinical privileges in hospitals where the physician is a member of the medical staff?
    1. Will peer review proceedings be initiated against the physician?
    2. Is the Hospital implicated by the physician’s conduct, e.g., is there a potentialStark or kickback violation?
    3. Will the Hospital enter into a common interest agreement concerning the investigation?
      1. See In re Grand Jury Subpoena, 415 F.3d 333 (4th Cir. 2005) (Common interest agreement between corporation that was subject of SEC investigation and employee who was also subject of that investigation could not serve as basis for employee’s assertion of joint defense privilege against grand jury subpoenas seeking documents related to company’s earlier internal investigation because at the time of the internal investigation, during which employee was interviewed by inside and outside counsel, a common interest agreement was not yet in effect, and the interviews were not for the purpose of formulating a joint defense).
  2. Will invocation of the privilege endanger the physician’s employment?
    1. What are the events of default under his employment contract?
    2. Will his colleagues enter into a common interest-joint defense agreement?
    3. Will the physician’s employer indemnify him?
      1. Do the practice’s bylaws provide for indemnification?
      2. What are the State’s corporate statutory requirements for indemnification/advancement of fees and expenses?
        1. Georgia
          1. O.C.G.A. 14-2-851(a): “Except as otherwise provided in this Code section, a corporation may indemnify an individual who is a party to a proceeding because he or she is or was a director against liability incurred in the proceeding if: (1) Such individual conducted himself or herself in good faith; and (2) Such individual reasonably believed: (A) In the case of conduct in his or her official capacity, that such conduct was in the best interests of the corporation; (B) In all other cases, that such conduct was at least not opposed to the best interests of the corporation; and (C) In the case of any criminal proceeding, that the individual had no reasonable cause to believe such conduct was unlawful.”
          2. O.C.G.A. 14-2-857(a), (d): “A corporation may indemnify and advance expenses … to an officer of the corporation who is a party to a proceeding because he or she is an officer of the corporation: (1) To the same extent as a director; and (2) If he or she is not a director, to such further extent as may be provided by the articles of incorporation, the bylaws, a resolution of the board of directors, or contract” and “may also indemnify and advance expenses to an employee or agent who is not a director to the extent, consistent with public policy, that may be provided by its articles of incorporation, bylaws, general or specific action of its board of directors, or contract.”
          3. O.C.G.A. 14-2-853(a): “A corporation may, before final disposition of a proceeding, advance funds to pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding because he or she is a director if he or she delivers to the corporation: (1) A written affirmation of his or her good faith belief that he or she has met the relevant standard of conduct described in Code Section 14-2-851 or that the proceeding involves conduct for which liability has been eliminated under a provision of the articles of incorporation as authorized by paragraph (4) of subsection (b) of Code Section 14-2-202; and (2) His or her written undertaking to repay any funds advanced if it is ultimately determined that the director is not entitled to indemnification under this part.”
        2. Delaware
          1. 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, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, … against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding 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, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.
          2. 8 Del.C. 145(e): “Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section.”
    4. Do any of his colleagues stand to profit by his elimination as a competitor?
  3. Will invocation of the privilege endanger the physician’s medical license with the State?
    1. Will the State Medical Board initiate an investigation?
    2. What happens if the physician refuses to be interviewed by an investigator with the State Medical Board?
  4. Will invocation of the privilege endanger your client’s eligibility as a provider in managed care groups?
    1. What, if any, due process rights does the physician have under agreements with managed care groups?
  5. Will invocation of the privilege endanger eligibility with Medicare or Medicaid?
    1. Will there be an administrative audit or investigation?
    2. Will administrative subpoenas or civil investigative demands (“CIDs”) be issued?
    3. How long is the potential exclusion from Medicare?
  6. Will invocation of the privilege endanger your client’s malpractice insurance coverage?
    1. Does invocation of the privilege constitute failure to cooperate in the defense?
    2. What exclusions are contained in the physician’s insurance policy that could be implicated?
  7. Will invocation of the privilege result in embarrassing media coverage?
    1. Does anyone have an incentive to leak information to the media?
    2. How will the physician’s patients react?
    3. How will the physician’s referral sources react?
  8. Will the privilege be waived if it is not asserted?
    1. See Minnesota v. Murphy, 465 U.S. 420, 428 (1984) (holding that the privilege is lost if not affirmatively invoked, even where defendant did not make knowing and intelligent waiver).

Equally important are the possible implications of not invoking the privilege. In evaluating these, counsel must ask:

  1. Why does your client insist on testifying, e.g., paranoia that an invocation of the privilege will make the situation worse, anger the other side, or imply guilt?
  2. Can you and your client make an intelligent waiver of the privilege?
    1. Do you and your client have all of the documents and evidence, e.g., witness statements, relevant to his or her involvement in the events in question?
    2. Do you clearly understand what is being investigated?
    3. Do you clearly understand what your client allegedly did?
  3. How broad is the waiver of the privilege (should the physician decide to testify)?
    1. Has the door been opened to future questioning in other settings?
  4. Can the physician’s testimony be used against him or her in the criminal investigation?
  5. Can the physician’s testimony be used against him or her by the Medical Board, Medicare, Medicaid, peer review committees at hospitals, insurance carriers, or managed care groups?
  6. Can the physician agree with the opposing party to make confidential disclosures that will not be disclosed to third parties and that cannot be obtained by third parties?
  7. Is there a common interest privilege?
    1. McKesson Corp. v. Green, 279 Ga. 95 (2005) (when a party discloses materials that are protected by the attorney work-product privilege to a government agency investigating allegations against it, party waives the protection, notwithstanding confidentiality agreement with government agency); See also In re Columbia/HCA Healthcare Corp. Billing Practices Litigation, 293 F.3d 289, 302 (6th Cir. 2002) (client may not selectively waive attorney-client privilege by releasing otherwise privileged documents to government agencies during investigation, but continue to assert privilege as to other parties).
  8. Can a stay be obtained in order to avoid giving a deposition?
  9. Is there any alternative to giving a deposition?
    1. Can an interview be given instead?
    2. Can written questions be answered in lieu of a deposition?
  10. If the deposition does go forward:
    1. Can topics on which criminal exposure might exist be avoided?
    2. Can objections based on relevance be successfully asserted?
    3. Will the testimony be videotaped?
    4. Will the physician waive signature, or will he or she reserve the right to read and sign (to correct his or her testimony after having been afforded thirty days in which to read and study it)?
    5. Are there any other technical, procedural objections that can be used to avoid having to testify on sensitive topics?

Suppose your client were the subject of a civil SEC investigation. Similar questions, as well as many additional questions, arise when the SEC asks him or her to submit to a deposition.

  1. What is your client’s status in the eyes of the SEC?
    1. Is your client likely to receive a request for a “Wells submission”?
      1. During an SEC investigation, the party whose activities are being investigated may receive a notice that the SEC’s Enforcement Division is close to recommending to the full Commission an action against the party. The party may submit a statement, referred to as a “Wells Submission,” that sets forth the party’s “interests and position in regard to the subject matter of the investigation.” 17 C.F.R. 202.5(c) (2007).
    2. Was your client significantly enriched by the conduct under investigation?
    3. Has your client received a “target letter” from the Department of Justice?United States v. Scrushy, 366 F.Supp.2d 1134, 1139 (N.D. Ala. 2005) (stating that “[w]hen a defendant knows that he has been charged with a crime, or that a criminal investigation has targeted him, he can take actions to prevent the providing of information in an administrative or civil proceeding that could later be used against him in the criminal case. When a defendant does not know about the criminal investigation, the danger of prejudice increases”).
  2. What inference will be drawn against your client by the SEC if he or she invokes the privilege against self-incrimination?
  3. Will invocation of the privilege endanger your client’s employment?
    1. Are your client’s attorneys’ fees being advanced pursuant to an “undertaking” under a corporation’s bylaw concerning indemnification?
    2. Does your client have a joint defense/common interest agreement with his or her employer?
    3. Has your client already given his or her employer an interview?
    4. Has the employer initiated an internal investigation?
  4. If your client is a licensed professional, e.g., CPA, stockbroker, or attorney, will invocation of the privilege endanger his or her license?
  5. Can the testimony be used in parallel civil litigation, e.g., class actions or derivative suits?
    1. Do you order the transcript?
      1. If you do not order the transcript, it will not be within your client’s possession should he or she receive a production request in parallel civil litigation.
      2. On the other hand, if you do not order the transcript, your client will not be able to review it before testifying again on the same subject matter, thus increasing the risk of an inadvertent inconsistency.
  6. Can the testimony be used in criminal investigations and prosecutions?
    1. Scrushy, 366 F.Supp.2d at 1140 (affirming district court’s exclusion of defendant’s SEC testimony where record showed that “the Government manipulated the simultaneous investigations for its own purposes, including the transfer of Mr. Scrushy’s deposition into this district for venue purposes”); United States v. Edwards, 526 F.3d 747, 759 n. 36 (11th Cir. 2008) (affirming district court’s denial of defendant’s motion to suppress documents submitted to SEC during its investigation and later obtained by the US Attorney’s Office for use in criminal prosecution where defendant failed to show “that the SEC and the United States Attorney somehow colluded to deny [defendant] his constitutional rights”); United States v. Stringer, 535 F.3d 929 (9th Cir. 2008) (reversing district court’s grant of defendant’s motion to suppress evidence provided by defendants to SEC during civil investigation where it was clear that civil investigation “was not a pretext for the USAO’s criminal investigation of defendants”);United States v. Mahaffey, 446 F.Supp.2d 115, 126 (E.D.N.Y. 2006) (statements defendant made to SEC in earlier civil action were admissible in subsequent criminal proceeding where defendant and his attorney were “well-aware of the USAO’s investigation prior to appearing for questioning in the civil investigation” and nothing in the record showed that the “USAO… manipulated S.E.C. with the intention of misrepresenting its true intentions to the defendants”)
  7. Can the testimony or the invocation of the privilege be used in administrative investigations, e.g., by the NASD?
  8. What leads will the SEC obtain during the deposition that can be developed derivatively?
  9. Does your client possess information that could be valuable to the SEC?
    1. If so, should you attempt to obtain immunity or mitigation in return for your client’s cooperation?

Other questions might arise in both contexts. For instance, is your client working with or supplying information to prosecutors or regulators, or perhaps a potential relator in a qui tam action? Or is your client a potential whistleblower? A disgruntled employee? This is just the beginning. At every step, in each parallel proceeding, counsel must be alert to the potential collateral damage or unintended consequences that might result from the selection of a strategic option. It is imperative that you explain these consequences to your client so that your client does not later ask you, “Why didn’t you warn me about that?” With parallel proceedings, collateral consequences require constant vigilance.

You should also be alert to tactical advantages the government may attempt to gain by bringing simultaneous criminal and noncriminal proceedings. The Scrushy case is a helpful reminder of how careful a practitioner must be when representing a client in such circumstances. In Scrushy, the U.S. District Court for the Northern District of Alabama suppressed the SEC deposition testimony of HealthSouth Chairman and CEO Richard Scrushy, citing an impermissible “commingling” of the SEC civil investigation and the Justice Department’s simultaneous criminal inquiry into Scrushy’s role in an alleged financial fraud.Scrushy, 366 F.Supp.2d at 1140.

At an early stage in the SEC’s investigation of HealthSouth, DOJ prosecutors, during a telephone call with the SEC, directed the SEC accountant conducting the SEC’s investigation to ask Scrushy certain questions during his deposition. Id. at 1136-37. Although Scrushy’s deposition had been scheduled to take place on in Atlanta, Georgia, the U.S. Attorney’s office also requested that the location be changed to Birmingham so that if Scrushy failed to tell the truth, “he w[ould] be lying in our district.” Id. at 1135-1136. During the deposition, Scrushy was asked a series of questions based on information the SEC learned during the call with the U.S. Attorney’s Office. Id. at 1137. The SEC accountant testified that, had it not been for the call from the U.S. Attorney’s office, those questions would not have been asked at the deposition. Id. at 1137. The SEC accountant also did not advise Scrushy or his attorneys that DOJ was at the time conducting a criminal investigation into the fraud at HealthSouth. Id. At the conclusion of Scrushy’s deposition, the SEC accountant went directly to the U.S. Attorney’s Office. The district court first found that these circumstances “reflected a serious overlap in those investigations,” and that the “investigations were no longer parallel but were commingled.” Id. at 1137, 1140. Specifically, the court found that the SEC’s civil action and the USAO’s criminal investigation “improperly merged … when the U.S. Attorney’s office called the S.E.C. office, gave the S.E.C. advice or ‘preferences’ regarding the content of the deposition and its location,” and “recruit[ed] [the SEC accountant] to participate in the criminal investigation.” Id. at 1137, 1139. The court further noted that the U.S. Attorney’s office had given the SEC accountant “explicit directions … concerning tailoring his examination of Mr. Scrushy” and had told him to avoid certain questions “to keep Mr. Scrushy in the dark regarding the criminal investigation.” Id. at 1139.

The district court then observed that whether a parallel investigation is legitimate or improper turns upon the “determining principle” that “the prosecution may use evidence acquired in a civil action in a subsequent criminal proceeding unless the defendant demonstrates that such use would violate his constitutional rights or depart from the proper administration of criminal justice.” Id. at 1138 (citing United States v. Teyibo, 877 F.Supp. 846 (S.D.N.Y. 1995). Noting that the danger of prejudice is much greater where a defendant does not know that he is the target of a criminal investigation, the court found that the government’s failure to advise Scrushy or his attorneys that Scrushy was the target of a criminal investigation and that the deposition had been moved to Birmingham at the U.S. Attorney’s request “cannot be said to be in keeping with the proper administration of justice.” Id. at 1139.

Lawyers representing clients in parallel investigations involving the Justice Department and the SEC Enforcement Division must take special care to ensure that their clients appreciate the extent of that cooperation and the likelihood that information developed by the SEC will be shared with and used by the Department of Justice. You should caution your clients about the possibility that false testimony to the SEC could lead to criminal perjury charges, as well.

Lest you have any doubt about the extent of the cooperation between the SEC and DOJ, Chris Wray, former Assistant Attorney General of the Criminal Division of the Department of Justice, wrote an article in February 2005, in which he said:

Recent investigations and prosecutions of corporate fraud cases have been expedited by the use of … new tools … These innovations include … [b]ringing the collective resources and expertise of federal agencies to bear earlier in an investigation in order to complete the investigation and initiate prosecution more expeditiously. This frequently means using the resources of regulatory agencies, such as the [SEC], to conduct a joint investigation of corporate misconduct from the inception of an investigation, instead of awaiting completion of the SEC proceedings before commencing a criminal investigation …[and] [a]ggressively pursuing civil and regulatory enforcement action, often in proceedings parallel to criminal prosecutions and investigations.

Wray, “Prosecuting Corporate Crimes,” eJournal USA, February 2005.

Because healthcare fraud investigations often involve simultaneous civil and criminal investigations, healthcare attorneys must be particularly mindful of the traps of parallel proceedings and prepared to defend on all fronts. As Holly Pierson, one former AUSA, noted in a recent article, “[t]he tools available to the government for purposes of the civil investigation can have a tremendous impact on the criminal investigation.” Pierson, Here Come the Feds: The Significant Impact of Healthcare Reform on Government Investigations and Enforcement,” The Champion, September/October 2010 at 29. The author points out that, prior to the new Healthcare Reform Law, civil and criminal prosecutors conducted parallel investigations and shared documentary information obtained through Administrative Investigative Demands (“AIDs”). Under the new Healthcare Reform Law, the DOJ now has authority to use Civil Investigative Demands (“CIDs”), which “permit the civil prosecutors to compel both documents and sworn testimony, and then to share this information with criminal prosecutors and counsel for whistleblowers” in qui tam cases. Id. at 30; 31 U.S.C. 3733(a)(1) (2010). Prior to the 2009 amendments to the Fraud Enforcement and Recovery Act (“FERA”), only the Attorney General could issue CIDs in False Claims Act investigations. Pierson at 30. Now, however, the Attorney General has the power to delegate the authority to issue CIDs to the individual U.S. Attorneys, which, one author predicts, “is certain to result in a significant increase in [CIDs’] utilization.” Id. Given the expanded authority CIDs give law enforcement to gather and share evidence, it will be much more difficult for providers and their counsel “to negotiate the already treacherous waters of a parallel civil and criminal investigation.” Id.

As the foregoing illustrates, attorneys representing clients against whom both criminal and noncriminal proceedings have been or may be initiated face a multitude of challenges. With the increasing popularity of such “parallel” proceedings, attorneys must understand and appreciate the significant risks to which their clients can be exposed when defending against a civil action while a criminal investigation is underway, and must be prepared to develop a global defense strategy designed to protect against infringement or violation of their clients’ important constitutional rights.

[1] An adverse inference may not, however, be drawn against a defendant in a criminal case due to the defendant’s refusal to testify. See Mitchell v. United States, 526 U.S. 314, 327-28 (1999) (“The normal rule in a criminal case is that no negative inference from the defendant’s failure to testify is permitted.”).

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(404) 233-4171
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