On March 11, 2021, the U.S. District Courtroom for the Japanese District of New York granted a keep within the civil case introduced by the Securities and Trade Fee (“SEC”) towards GPB Capital Holdings, LLC (“GPB Capital”), pending decision of the parallel Division of Justice (“DOJ”) felony continuing towards the private-equity agency’s founder and associates. In parallel civil and felony instances, a keep of the civil case is often granted to guard grand jury secrecy, keep away from prejudicing the felony investigation, and sidestep a bunch of potential discovery points. However when no keep is granted, defendants should be cautious that discovery doesn’t compromise their due course of and Fifth Modification rights, which people have however firms should not have.
Order to Keep in SEC Civil Motion towards GPB Capital
On February 4, 2021, the SEC filed a civil fraud go well with towards GPB Capital and three executives affiliated with the New York private-equity agency: David Gentile, Jeffry Schneider, and Jeffrey Lash. That very same day, federal prosecutors unsealed an indictment charging the three particular person defendants with operating a Ponzi-like $1.8 billion fraud scheme.1 Now, the court docket has positioned the SEC’s civil case on maintain after DOJ sought a keep within the SEC case to protect the secrecy of an ongoing grand jury investigation and to stop inappropriate discovery of issues within the felony case.2
Within the movement to remain the civil case, DOJ outlined its issues that the defendants might use discovery within the civil motion to bypass the stricter limits on discovery pursuant to the felony guidelines of process. DOJ additionally famous that discovery of the notes of witness interviews, or taking witness depositions, would supply info not in any other case discoverable within the felony case and make clear the methods and progress of the continued grand jury investigation.3 The three particular person defendants agreed to the request to remain the civil case, and the court docket granted the keep on consent of all events.4
Discovery Variations in Civil and Felony Instances
In a federal civil case, each plaintiffs and defendants could use an array of discovery instruments, pursuant to the civil guidelines of process, to acquire info that’s related and proportional. Then again, discovery in a federal felony case is much extra restricted. Sure discovery instruments like interrogatories and requests for admission aren’t accessible in a felony case. Moreover, witness depositions are solely permitted in felony instances to protect testimony and upon depart of the court docket.5 Felony defendants could solely acquire sure specified paperwork from the federal government upon request, such because the defendant’s oral and written statements, paperwork and tangible objects materials to the federal government’s case-in-chief or to organize the protection, and summaries of any professional witness testimony that the federal government intends to make use of.6
Felony instances additionally contain a grand jury. The grand jury’s perform is to find out whether or not or not there’s possible trigger to consider that the defendant has dedicated the offense. A grand jury continuing outcomes both in an indictment or a “no-bill.” The prosecutor has the authority to attend and lead the grand jury continuing; the prosecutor informs the grand jury of the legislation and presents proof equivalent to particular person testimony or paperwork. By means of the grand jury, the prosecutor has broad subpoena powers with out the necessity for judicial approval. It follows, then, that events in a civil case might want entry to grand jury supplies. Nonetheless, issues occurring earlier than the grand jury are presumptively secret below Fed. R. Crim. P. Rule 6(e). The one exception to this rule is that grand jury witnesses could disclose the subject material of their testimony to anybody they select.
Given the constraints in a felony case, the number of discovery instruments accessible in a civil case could be a great benefit to prosecutors, to the detriment of defendants. Within the GPB Capital case, the three defendants probably agreed to the keep to stop the SEC from straight handing over proof obtained through the SEC investigation to the felony prosecutors.
Searching for a Keep of the Civil Continuing
What occurred within the GPB Capital case is fairly frequent. To keep away from interfering with the integrity of its personal felony investigation, DOJ generally intervenes and requests the court docket to grant a keep of the civil continuing, pending decision of the parallel felony continuing. For instance, on March 12, 2021, DOJ motioned to intervene and keep civil litigation associated to its first-ever felony antitrust “no-poach” case. We not too long ago reported that DOJ charged Surgical Care Associates LLC in January 2021 with agreeing with different well being care rivals to not solicit one another’s senior-level workers.7
Courts aren’t required to grant a keep in these circumstances; they’ve the discretion to find out when the “pursuits of justice” favor a keep. Courts could contemplate varied nonexclusive elements in deciding whether or not a keep is warranted, together with whether or not the problems within the civil and felony case overlap, the standing of the felony case, and the burden on the defendant.8
Usually, courts will grant a keep when DOJ intervenes and the defendant has been indicted. However, instances do come up the place a court docket denies the movement after the defendant opposes the keep, equivalent to within the high-profile Theranos case in 2019. Within the case towards Ramesh “Sunny” Balwani, the previous president of Theranos, the court docket denied DOJ’s request to remain discovery within the SEC case as a result of late and prejudicial timing of the request and the truth that Balwani himself opposed the keep.9 DOJ unsuccessfully argued that Balwani used subpoenas within the civil case to acquire info irrelevant to the SEC allegations however straight related to the felony indictment. Nonetheless, the court docket nonetheless allowed DOJ to intervene, that means that DOJ might oppose subpoenas issued by Balwani to the extent that they have been irrelevant to the civil case, however would have to take action on a case-by-case foundation.10
Defendants who’re dealing with each civil and felony proceedings ought to decide if a keep is strategically advantageous. As demonstrated within the Theranos case, a keep within the civil case, though often the standard strategy, could not all the time be the very best one for the defendant.
Potential Points for the Defendant
Had the court docket denied the movement to remain, or had DOJ chosen to not intervene within the GPB Capital case, the three defendants definitely would have struggled with Fifth Modification and due course of points. Defendants on this place need to weigh their pursuits in launching a protection to the civil case with their pursuits towards self-incrimination within the felony case. When there are concurrent proceedings, counsel should contemplate many points, together with:
The Fifth Modification privilege towards self-incrimination. The Fifth Modification protects people from being compelled to present testimony that they fairly consider might present a hyperlink to the chain of proof wanted to show a criminal offense. An opposed inference of guilt might not be drawn from invocation of the privilege in felony proceedings; nonetheless, opposed inferences could also be drawn in civil proceedings. Thus, a defendant should make the tough alternative between the lesser of two evils: (1) asserting the privilege in response to a civil discovery request, triggering an opposed inference of guilt, or (2) cooperating with a civil discovery request and waiving the Fifth Modification privilege, permitting the federal government to make use of the defendant’s civil testimony towards himself within the felony case.11 It presents an inevitable catch-22. Importantly, firms should not have a Fifth Modification privilege so if an organization can also be a named defendant, the person defendant could also be referred to as to testify as a 30(b)(6) witness on behalf of the company, presenting tough points for the person.
The attorney-client privilege and work product safety. The place a defendant cooperates with the SEC or DOJ for cooperation credit score, full cooperation could require disclosure of all related details, which can implicate attorney-client communications or legal professional work product. Counsel needs to be aware that waiver of those protections throughout a authorities investigation might considerably prejudice the defendant in a parallel or later civil continuing. Counsel ought to search to restrict disclosure to unprivileged and unprotected details and conclusions, in addition to enter right into a confidentiality settlement with the federal government to protect the protections, shield towards inadvertent disclosure of such paperwork, or allow the defendant to claw again such paperwork which can be inadvertently produced throughout the investigation.
Different strategic concerns. If the civil case advances forward of the felony prosecution, defendants could also be pressured to show their protection technique to felony prosecutors, placing defendants at a major drawback in getting ready their defenses. This may increasingly require counsel to carry out the tough process of weighing which arguments to make within the civil case, probably on the expense of their positions within the felony instances. Moreover, potential protection witnesses within the civil case could refuse to testify with no grant of immunity as a consequence of Fifth Modification self-incrimination issues. All of those points could impression a defendant’s general strategic strategy to the proceedings.
1 Sealed Indictment as to David Gentile, Jeffry Schneider, Jeffrey Lash, Dkt. No. 1, U.S. v. Gentile et al., No. 1:21-cr-00054-DG-PK; Order to Unseal Indictment, Dkt. No. 5, U.S. v. Gentile et al., No. 1:21-cr-00054-DG-PK.
2 Movement to Intervene and Movement to Keep Civil Proceedings by the US Legal professional’s Workplace for the Japanese District of New York, Dkt. No. 32, SEC v. GPB Capital Holdings, LLC, No. 1:21-cv-00583-MKB-VMS.
3 Id. at 7, 13.
4 Response to Movement to Intervene and Movement to Keep by Defendants, Dkt. No. 34, SEC. v. GPB Capital Holdings, LLC, No. 1:21-cv-00583-MKB-VMS.
5 Fed. R. Crim. P. 15(a)(1).
6 Fed. R. Crim. P. 16(a).
7 United States’ Movement to Intervene and Keep Civil Proceedings, Dkt. No. 30, Roe v. Surgical Care Associates LLC, No. 1:21-cv-00305.
8 Louis Vuitton Malletier S.A. v. Ly USA, Inc., 676 F.3d 83, 99 (2nd Cir. 2012); Keating v. Workplace of Thrift Supervision, 45 F.3d 322, 325 (ninth Cir. 1995).
9 Order Granting in Half and Denying in Half Movement to Intervene and Keep Motion, Dkt. No. 87, SEC v. Balwani, No. 5:18-cv-01603-EJD.
11 See Louis Vuitton, 676 F.3d at 97-98.