When a Civil Action Becomes Criminal: Practical Considerations in Concurrent Proceedings
One of the more challenging circumstances of civil practice is the development of a parallel criminal proceeding connected in some fashion to an ongoing civil matter. The complexity of the civil matter, and the strategic choices necessary for its successful resolution, grow exponentially with the overlay of criminal liability for a party or one of its principals. The specter of a criminal record, incarceration, fines, assessments, restitution and other penalties such as debarment changeÂ–in most circumstances irreversiblyÂ–how to proceed with the civil matter.
While no two examples of concurrent proceedings are identical, certain issues endemic to the interplay between civil and criminal proceedings arise with regularity. Detailed below are a number of practical considerations based upon the governing law which a practitioner may confront when a civil action becomes criminal.
Is there a duty to report criminal activity discovered during the course of civil proceedings?
It depends. In certain circumstances, clients are obligated to make a criminal referral of suspected criminal conduct. Additionally, counsel may have obligations under the cannon of ethics to do the same.
All financial institutions operating in the United States (including U.S. branches and agencies of foreign banks) are required to make a report of suspicious activity involving:
- Insider abuse involving any amount;
- Violations aggregating $5,000 or more where a suspect can be identified;
- Violations aggregating $25,000 or more regardless of a potential suspect;
- Transactions aggregating $5,000 or more that involve potential money laundering or violations of the Bank Secrecy Act.
See 31 U.S.C. 5301 et seq. (Bank Secrecy Act); 31 C.F.R. Part 103 et seq.
Additionally, Rule 1.6(b) of the Rules of Professional Conduct indicates that a lawyer may reveal information relating to representation of a client to the extent that the lawyer reasonably believes it is necessary to prevent the client from committing an act that the lawyer reasonably believes is likely to result in death, bodily harm or substantial injury to the financial interest or property of another. The comments to Rule 1.6 indicate that a lawyer's decision not to take such preventative action does not violate the Rule; rather that the lawyer has "professional discretion to reveal information in order to prevent such consequences." Such an exercise of discretion requires consideration of such factors as the nature of the lawyer's relationship with the client and with those who might be injured by the client, the lawyer's own involvement in the transaction and factors that may extenuate the conduct in question. Comment to Rule 1.6. "Where practical, the lawyer should seek to persuade the client to take suitable action", and "[in] any case a disclosure adverse to the client's interest should be no greater than the lawyer reasonably believes necessary to the purpose." Id.
Unlike private attorneys, government attorneys who learn of a government employee's previous criminal conduct have a statutory obligation to report such conduct. 28 U.S.C. § 535(b); In re: Grand Jury Subpoena, 112 F.3d 910, 920 (8th Cir.), cert. denied, 117 S. Ct. 2482 (1997). However, private attorneys cannot be required to report and cannot be required to divulge information relating to past criminal activity, even pursuant to the government's subpoena power. In re: Grand Jury Matters, 593 F. Supp. 103 (D.N.H.), affirmed by, 751 F.2d 13 (1st Cir. 1984) (Government not permitted to subpoena criminal defense attorneys regarding details of representation relative to state felony trials where same defendants were being investigated for same acts by Federal grand jury).
Finally, section 4 of the criminal code makes it a felony to conceal knowledge of, and fail to report, a felony cognizable by a court of the United States. See 18 U.S.C. §4. This felony is seldom prosecuted and is most often used as a vehicle for a plea agreement when the parties are looking to plea to a three year felony.
Is the Government empowered to conduct parallel proceedings?
Yes. In United States v. Kordel, 397 U.S. 1 (1970), the Supreme Court stated that "[I]t would stultify enforcement of federal law to require a government agency . . . invariably to choose either to forgo recommendation of a criminal prosecution once it seeks civil relief, or to defer civil proceedings pending the ultimate outcome of a criminal trial."
Federal statutes which provide for parallel proceedings
While virtually any action can become a concurrent criminal/civil matter, a number of federal statutes expressly provide for such a dual track. These statutes include: the Sherman Act, 15 U.S.C. §§1-3, 15, 15(a) (1988) (antitrust); the Securities Act of 1933, 15 U.S.C. §77t (1988); the Internal Revenue Code, 26 U.S.C. §7201 (1988), and; the Racketeering Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§1961 et seq.
Is the District Court empowered to stay the civil proceedings in favor of the criminal proceedings?
Yes. The Supreme Court has indicated that a district court may stay civil proceedings in favor of a criminal trial "when the interests of justice seem to require such action." Kordel, 397 U.S. at 12, n.27 (1970). Because adverse inferences may be drawn in a civil case from the assertion of Fifth Amendment rights, see Baxter v. Palmigiano, 425 U.S. 308 (1976), the court may stay the civil action until the criminal matter is resolved. See SEC v. Dresser Industries, Inc., 628 F.2d 1368, 1376 (D.C. Cir.), cert. denied, 449 U.S. 993 (1980) ("[A] noncriminal proceeding, if not deferred, might undermine the party's fifth amendment privilege against self-incrimination."); Dienstag v. Bronsen, 49 F.R.D. 327, 329 (S.D.N.Y. 1970) (civil discovery stayed because necessary to protect defendant's Fifth Amendment privilege against self incrimination); United States v. A Certain Parcel of Land, 781 F. Supp. 830, 834 (D.N.H. 1992) (discovery stayed in civil forfeiture action because protective order would not sufficiently protect Fifth Amendment privilege).
In determining whether a stay is appropriate, courts look to the following factors: (1) the private interests of the plaintiff in the civil litigation without a stay; (2) the interests and burdens on the defendant with a stay; (3) the convenience of the courts; (4) interests of non-parties to the civil litigation; and (5) the public's interest. See, e.g., Keating v. OTS, 45 F.3d 322, 324-25 (9th Cir.), cert. denied, 516 U.S. 827 (1995); FSLIC v. Molinaro, 889 F.2d 899, 902-903 (9th Cir. 1989); Golden Quality Ice Cream Co. v. Deerfield Specialty Papers, Inc., 87 F.R.D. 53, 56 (E.D. Pa. 1980).
However, there is no absolute constitutional right to a stay of a civil proceeding pending disposition of a related criminal matter. Arthurs v. Stern, 560 F.2d 477 (1st Cir. 1977), cert. denied, 434 U.S. 1030 (1978); see also In re: Melissa M., 127 N.H. 710, 712 (1986) (citing federal cases). The law recognizes "the principle that protection of the public interest may often require proceedings simultaneously on two fronts, and that it would unduly compromise the public interest to force the government to choose between a civil and criminal course of action." Mainelli v. United States, 611 F. Supp. 606, 615 (D.R.I. 1985); see also United States v. Lot 5, 23 F.3rd 359, 364-65 (11th Cir. 1994), cert. denied, 513 U.S. 1076 (1995); Federal Sav. & Loan Ins. Corp. v. Molinaro, 889 F.2d 899, 902-03 (9th Cir. 1989).
In addition to staying parallel civil proceedings in favor of criminal proceedings, District Courts may also issue protective orders, or require other conditions, to limit discovery between parallel proceedings. In re: Grand Jury Subpoena v. Doe, 103 F.3d 234, 239 (2d Cir. 1996); Andover Data Svs. v. Statistical Tabulating Corp., 876 F.2d 1080, 1083 (2d Cir. 1989); In re: Film Recovery Sys., Inc., 804 F.2d 386, 388, (7th Cir. 1986).
Does a waiver of the attorney client or work product privilege in a federal enforcement proceeding waive the privilege for purposes of subsequent civil proceedings?
Yes, most of the time. As a general rule, when a company chooses to do a voluntary disclosure to a governmental entity in order to avoid a federal enforcement proceeding, that disclosure constitutes a waiver of any privilege in subsequent civil litigation. See In re Steinhardt Partners, C.P., 9 F.3d 230 (2d Cir. 1993); Westinghouse Elec. Corp v. Republic of Phillippines, 951 F.2d 1414, 1425 (3d Cir. 1991); In re Martin Marietta Corp., 856 F.2d 619, 623-24 (4th Cir. 1988), cert. denied, 490 U.S. 1011 (1989); Permian Corp. v. United States, 665 F.2d 1214, 1219-20 (D.C. Cir. 1981). One circuit has held that the disclosure is a waver with regard to that governmental entity alone. In Diversified Industries Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1978) (en banc), the Court held that a corporation's prior disclosure of privileged materials to the SEC constituted a waiver of the privilege only to the SEC. Accordingly, a subsequent discovery demand by a civil litigant for the information was denied. The majority rule, and the assumption under which the disclosing party should operate, is that the disclosure constitutes a subject matter waiver of any applicable privilege in any other proceeding.
Does the "critical self analysis privilege"Â–such as it isÂ–survive a federal subpoena?
The self-evaluative privilege in the employment discrimination context has been recognized within the First Circuit. See O'Connor v. Chrysler Corp., 86 F.R.D. 211 (D. Mass. 1980); Jackson v. Harvard University, 111 F.R.D. 472 (D. Mass. 1986), cert. denied, 498 U.S. 848 (1990); Whittingham v. Amherst College, 164 F.R.D. 124 (D. Mass. 1995).
In O'Connor, Judge Keeton noted the clash of strong countervailing policies: "If subjective materials constituting self critical analysis are subject to disclosure during discovery, this disclosure would tend to have a chilling effect on employers' voluntary compliance with equal employment opportunity laws. On the other hand,. . . plaintiffs must be permitted to obtain information sufficient to enable them to prove employment discrimination where such discrimination exists." Id. at 217. Keeton concluded, however, that "[a] lack of confidentiality almost inevitably will result in some cramping of the investigative process, simply because the incentives for any institution to engage in self-evaluative investigation pale considerably with the knowledge that the results may be used against it." Id. at 217-18.
In O'Connor, Judge Keeton set forth "potential guideposts" for the application of the privilege: (1) materials protected have generally been those prepared for mandatory governmental reports; (2) only subjective evaluative materials have been protected; (3) objective data in those same reports have not been protected; and (4) in sensitivity to plaintiff's need for such materials, courts have denied discovery only where the policy favoring exclusion has clearly outweighed plaintiffs' need." Id. at 217. In Whittingham v. Amherst College, the Massachusetts District Court did away with the requirement that the internal investigation and reports be mandated by the government, and extended the privilege to include voluntary internal investigations. 164 F.R.D. 124, 129-130 (D. Mass. 1995).
More importantly, the self-evaluative privilege has almost never been successfully asserted against a governmental subpoena. See id; FTC v. TRW, Inc., 628 F.2d 207, 210-11 (D.C. Cir. 1980); United States v. Noall, 587 F.2d 123, 126 (2d Cir. 1978), cert. denied, 441 U.S. 923 (1979); Reich v. Hercules, Inc., 857 F. Supp. 367, 371 (D.N.J. 1994); Thomas F. O'Neil & Adam H. Charnes, The Embryonic Self-Evaluative Privilege: A Primer For Health Care Lawyers, 5 Annals Health L. 33 (1996).
Who is entitled to assert the Fifth Amendment privilege against self incrimination
An individual may assert the Fifth Amendment privilege against self incrimination. A corporation has no protection under the Fifth Amendment privilege. See Curcio v. United States, 354 U.S. 118, 122 (1957); United States v. White, 322 U.S. 694 (1944). A recognized exception to this rule is where the only corporate custodian of records may violate his own rights against self-incrimination by responding to questions put to the corporation. Curcio, 354 U.S. 118, 122 (1957). Also, an employee may invoke the privilege if the specter of individual liability exists. In re Corrugated Container Anti-trust Litigation, 609 F.2d 867, 871 (7th Cir. 1979).
How does the assertion of a Fifth Amendment privilege against self incrimination affect a civil action?
In the federal context, it is well settled that "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." Baxter v. Palmigiano, 425 U.S. 308, 318 (1976) ; United States v. Stelmokas, 100 F.3d 302, 310-11 (3d Cir. 1996), reh'g en banc denied, 1997 U.S. App. LEXIS 1244 (3d Cir. 1997); National Acceptance Co. of Am. v. Batchalter, 705 F.2d 924, 930 (7th Cir. 1983). The admission or denial of such evidence turns on whether its probative value is substantially outweighed by the danger of unfair prejudice under Federal Rule of Evidence 403. See LiButti v. United States, 107 F.3d 110, 121 (2d Cir. 1997).
The Second Circuit has previously approved of the admission of an assertion of the Fifth Amendment in similar circumstances. Brink's, Inc. v. The City of New York, 717 F.2d 700 (2d Cir. 1983). In Brink's, the City discovered that approximately $1 million in parking meter revenue was missing from the amounts collected by Brink's under a contract with the City. A key issue for the claim against Brink's was the extent of defendant's knowledge of thefts of the meter money by its employees. Several Brink's employees had already been convicted or had pleaded guilty to theft and related charges. At trial, the City called them to the stand, knowing that they would invoke the Fifth Amendment. The trial court allowed the testimony to go forward, over Brink's objection, and the Second Circuit affirmed.
The court ruled that the refusal to answer questions upon asserting Fifth Amendment privilege is relevant evidence from which the trier of fact in a civil action may draw whatever inferences are reasonable under the circumstances. 717 F.2d at 710. It engaged in the familiar prejudice versus probative value analysis under F.R.E. 403. Id. On the probative value side, the witnesses' invocation of the privilege in response to questions about their knowledge and participation in the thefts was admissible, due to the high probative value of this evidence. Id. The court found that the employees' knowledge of the thefts was a key issue in allowing the jury to draw an inference regarding Brink's knowledge or negligence. Id.
On the prejudice side, the court observed that prejudice in this context means "inflammatory" evidence, rather than evidence which is merely harmful to the party's position. Id. By ruling that the evidence was admissible, the court concluded that Fifth Amendment assertions, while possibly harmful to a party's position or credibility, are not inflammatory. The court thereby necessarily found that the evidence's probative value outweighed any prejudice.
The refusal of a party to answer or testify on Fifth Amendment grounds should be admitted where the unanswered questions lie close to substantive issues of the case. In East Coast Novelty Co. v. The City of New York, 842 F. Supp. 117 (S.D.N.Y. 1994), a case concerning the seizure of plaintiff's entire inventory of fireworks by the New York City Police Department, the court upheld the finding of a negative inference from plaintiff's invocation of the Fifth Amendment. Establishing that the plaintiff company was a front organization for organized crime was a key element of the City's case. The refusal of the two principals of the plaintiff corporation to answer deposition questions concerning their alleged involvement in organized crime, as well as their alleged violations of state and federal fireworks laws, was considered sufficiently probative ("obviously relevant") that adverse inferences were drawn against them. Id. at 121.
Similarly, in First Interregional Equity Corp. v. Haughton, 1993 U.S. Dist. LEXIS 12813 (S.D.N.Y. 1993), a defendant alleged to have defrauded plaintiff corporation out of several hundred thousand dollars by manipulating the price of certain shares of common stock, refused to answer questions regarding documents linking her to several of the transactions at issue. The court stated that allowing the "invocation of the privilege here as a defense strategy without permitting plaintiffs to draw inferences from the use of the privilege is inappropriate." Id. at *10. "The arguable harshness of the practice is mitigated by the ability of the person invoking the privilege to explain why he did so or to show by other evidence that his response would not have incriminated him." Id. If the refused questions lie at the heart of the matter in dispute, such refusal will generally be considered sufficiently probative for admission of any invocation of the Fifth Amendment.
Finally, when independent corroborative evidence of wrong-doing is shown, the courts usually allow the adverse inference to be drawn from the invocation of the privilege. United States v. Nagelberg, 772 F. Supp. 120, 123 (E.D.N.Y. 1991).
This issue is treated differently by New Hampshire Courts however. In Fischer v. Hooper, 143 N.H. 585 (1999), the Court discussed New Hampshire Rule of Evidence 512, which prohibits the jury in both civil and criminal cases from drawing negative inferences from the invocation of the right against self-incrimination. (citing 2 J. Weinstein, et al, Weinstein's Evidence ¶ 513 (1996)). Rule 512(b) requires that civil proceedings before a jury be conducted, to the extent practicable, "so as to facilitate the making of claims of privilege without the knowledge of the jury." The Court held that the trial court erred in requiring the defendant in the civil tort action to invoke his right against self-incrimination in the presence of the jury, and that the court could have dealt with the issue of the defendant's invocation of his Fifth Amendment right without the jury's knowledge, thereby satisfying Rule 512(b). In summary, the Court held that Rule 512 and the Court's previous holding in State v. Bell, 112 N.H. 444, 448 (1972) required trial courts "to take reasonable steps to insure that the jury is unaware that a witness has invoked the privilege against self-incrimination." Id. at 596.
Discovery Issues in Civil and Criminal Proceedings
The scope and nature of permissible discovery in the civil and criminal proceedings differ significantly. See, e.g., Digital Equip. Corp. v. Currie Enters., 142 F.R.D. 8, 13 (D. Mass. 1991) (summarizing differences between civil and criminal discovery). What can be obtained through criminal discovery is much narrower than allowed in civil actions. As a result, parallel civil proceedings may benefit the prosecution. Courts are mindful of this dynamic and will act to prevent circumvention of the limited criminal discovery rules. For example, in Campbell v. Eastland, 307 F.2d 478, 487 (5th Cir. 1962), cert. denied, 517 U.S. 820 (1963), the Court stated "[a] litigant should not be allowed to make use of the liberal discovery procedures applicable to a civil suit as a dodge to avoid the restrictions on criminal discovery and thereby obtain documents he would not otherwise be entitled to for use in his criminal suit." See also United States v. Tison, 780 F.2d 1569, 1572 (11th Cir. 1986) (civil proceeding stayed for three years in order to prevent circumvention of criminal discovery provisions in parallel proceeding); In re Eisenberg, 654 F.2d 1107, 113-14 (5th Cir. 1981) (liberal civil discovery procedures not a back door to information otherwise beyond the reach of criminal discovery rules).
Can an agency of the federal government obtain information from a parallel criminal proceeding for use in its civil action?
There are significant limitations imposed on such activity. The government may not utilize grand jury proceedings to augment its efforts in the civil context. United States v. Proctor & Gamble Co., 356 U.S. 677, 683 (1958) (If the prosecution was using criminal procedures to elicit evidence in a civil case, "it would be flouting the policy of the law."); 2 Sara Sun Beale & William C. Bryson, Grand Jury Law and Practice, 8.03, at 9-12 (1996) (noting that grand jury cannot be used to collect evidence for civil purposes).
Rule 6(e) of the Federal Rules of Criminal Procedure also restricts how prosecutors may share information obtained through grand jury proceedings with other government agencies. The Rule does allow disclosure of grand jury evidence to "an attorney for the government for use in the performance of such attorney's duty." Rule 6(e)(3)(A)(i). The term "attorney for the government" generally includes attorneys for DOJ's Criminal Division, but does not include Civil Division attorneys. United States v. Sells Eng'g, Inc., 463 U.S. 418 (1983). Rule 6(d) further allows disclosure of grand jury evidence to governmental personnel whose assistance is necessary to the criminal investigation, but limits the scope of its use to the criminal investigation at hand. The prosecutor must disclosure the names of any such "other government personnel" to the court prior to disclosure. Rule 6(e)(3)(A)(ii). These limitations were motivated by "the fear that such indirect agency access Â‘will lead to misuse of the grand jury to enforce noncriminal Federal laws,'" without prohibiting the government's use of such information obtained by means of legitimate grand jury proceedings. United States v. Baggot, 463 U.S. 476, 485 (1983) (relying on and discussing legislative history of amendment to Rule 6(e), at S. Rep. No. 95-354, p. 8 (1977)).