When Is SEC/DOJ Cooperation Impermissible?
20 Corporate Crime Reporter 28(4), July 7, 2006

The Securities and Exchange Commission (SEC) investigates a securities fraud.

The Department of Justice (DOJ) investigates the same securities fraud.

Why not work together?

Until recently, cooperation between the two lead corporate crime agencies in town has been considered permissible.

But now, courts are drawing a line between permissible and impermissible cooperation between the SEC and DOJ.

The line on permissibility is barely perceptible.

But it indeed exists.

In a 1995 case, United States v. Teyibo, the court ruled that the cooperation was permissible.

The court found that in fact a line existed – but that the cooperation did not cross the line – that the government had not pursued its civil investigation "solely" to obtain evidence for its criminal investigation.

And the court found that the SEC had disclosed that it might share the information with other government agencies.

Indeed, such disclosure is boilerplate in SEC Form 1662 – which the SEC liberally hands out to people it questions.

But in the 2005 case of U.S. v. Scrushy, a court ruled that the government did in fact cross the line.

In that case, the court threw out perjury counts against Scrushy, the founder and former CEO of HealthSouth, arguing that the U.S. Attorney in the case requested that the SEC deposition of Scrushy be moved to her jurisdiction and that the SEC refrain from asking certain questions.

Also, in United States v. Stringer, a court earlier this year said that the cooperation was impermissible.

In that case, a defense attorney asked the SEC whether it was working with federal prosecutors on the case. The answer from the SEC attorney – not our policy to respond to such questions.

Keith Krakaur is a partner at Skadden Arps in New York.

He has written an article about this subject for Securities Law 360.

And in an interview with Corporate Crime Reporter last week, Krakaur concludes that the question of whether cooperation between the SEC and federal prosecutors is permissible “is largely linked to disclosure.”

“But in addition to disclosure, Stringer and Scrushy suggest other factors that come into play,” Krakaur said. “Did the U.S. Attorney suggest questions for the SEC to ask? Or are there questions that the U.S. Attorney wants the SEC not to ask? Is the U.S. Attorney calling the SEC and asking them to take testimony in one location as opposed to another for venue purposes? That might be viewed as another indicator as to whether the U.S. Attorney’s office is pulling the strings on how the SEC should conduct its investigation. In short, there are other circumstances that weigh in a court’s decision on whether the government agencies have interacted appropriately.”

(For a complete transcript of the Interview with Krakaur, see 20 Corporate Crime Reporter 28(12), July 10, 2006, print edition only.)


Corporate Crime Reporter
1209 National Press Bldg.
Washington, D.C. 20045