In United States v. Rhodes, a federal district court case arising out of a parallel investigation conducted by the Criminal Division of the United States Attorney’s Office for the Southern District of New York (the “USAO”) and the Securities and Exchange Commission (the “SEC”), the Court recently directed the USAO to furnish a supplemental affidavit to the Court for in camera review, “detailing with specificity, the nature and extent of any and all communications between the SEC and those involved in the criminal investigation of [the defendant]." ¹  The Court’s order stems from allegations made by the defendant that the USAO, in bad faith, took advantage of the civil discovery process in the parallel SEC proceeding to build a criminal case against the defendant in violation of his due process rights.

Factual Background

The USAO secured an indictment against defendant Jason Rhodes in December 2018, charging him with conspiracy, securities fraud, wire fraud and investment adviser fraud in connection with an alleged $19.6 million scheme to defraud investors in the hedge fund Sentinel Growth Fund Management LLC (“Sentinel”).  A few months thereafter, defendant Rhodes filed a motion with the Court, requesting that the USAO produce documents concerning its coordination with the SEC with respect to this criminal proceeding.  Rhodes argued in his motion that he was entitled to this discovery because the circumstances of his indictment strongly suggested that the USAO used the SEC’s civil discovery process to develop the criminal case against him. 

According to Rhodes, those questionable circumstances included the following: (1) the USAO had criminally charged defendant Rhodes’ alleged co-conspirators, but not the defendant himself, almost two years earlier in January 2017; (2) the SEC issued a third-party witness subpoena to the defendant in February 2017 shortly after it instituted civil proceedings against Sentinel and one of the already indicted co-conspirators; (3) the SEC collected voluminous data from Rhodes, including cell phone data and other communications, and turned that data over to the USAO, which the USAO then used to bring charges against Rhodes; and (4) the SEC ended its investigation against the defendant – without charging Rhodes – prior to his arrest in the criminal action.  Taken together, the defendant argued that these circumstances give rise to an inference that the sole purpose of the SEC’s civil subpoena was to assist the USAO in its prosecution of Rhodes.  Opposing the motion, the USAO urged the Court to decline the defendant’s discovery request because Rhodes’ assertions surrounding the USAO’s purported improper coordination with the SEC were purely speculative.  

Analysis  

There is no dispute that the propriety of parallel criminal and civil investigations has long been upheld by the United States Supreme Court.  See United States v. Kordel 397 U.S. 1 (1970).  Provided that the criminal authorities have acted in good faith and with proper procedures, the evidence obtained by a civil regulator during the course of its investigation can be used in connection with a subsequent criminal action.  See id. at 11-12.  Defendants objecting to a prosecutor’s use of evidence collected in a civil action have the burden of establishing that the criminal authorities acted in bad faith.  See, e.g., United States v. Mahaffy, 446 F. Supp. 2d 115, 123 (E.D.N.Y. 2006) (quoting United States v. Teyibo, 877 F. Supp. 846, 855 (S.D.N.Y. 1995)) (“[t]he 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.”).  Bad faith may be shown, inter alia, where the Government has “brought a civil action solely to obtain evidence for its criminal prosecution or has failed to advise the defendant in its civil proceeding that it contemplates his criminal prosecution.”  Kordel, 397 U.S. at 12-13; see also Mahaffy, 446 F. Supp. 2d at 124.   

A motion seeking discovery on the issue of bad faith will only be granted where a defendant can “make a substantial preliminary showing” that the criminal authorities indeed acted in bad faith. United States v. Gel Spice Co., 773 F.3d 427, 432 (2d Cir. 1985).  To do so, a defendant’s moving papers must be “sufficiently definite, specific, detailed, and nonconjectural to enable the court to conclude that contested issues of fact . . . are in question.”  United States v. Watson, 404 F.3d 163, 167 (2d Cir. 2005). 

Mindful of this precedent, the Court in Rhodes observed that the Second Circuit had adopted the “substantial preliminary showing” standard in a case where the criminal authorities had supplied the district court with multiple affidavits outlining “the relationship between the civil and criminal investigations at issue and had submitted documents for the court’s in camera review.”  During the pendency of the defendant’s motion, the Court urged the USAO to submit an affidavit describing the nature of the coordination between the SEC and the USAO regarding the defendant’s criminal prosecution.  Although the USAO submitted an affidavit in response to the Court’s request, the Court concluded that the affidavit was inadequate because it was “conspicuously limited” to the conduct of one Assistant United States Attorney and said “nothing about the knowledge or involvement of others” within the USAO.  Accordingly, the Court held defendant’s motion in abeyance, directing the USAO to submit a more complete submission “detailing, with specificity, the nature and extent of any and all communications between the SEC and those involved in the criminal investigation of Rhodes.”  The Court further directed the USAO to attach copies its substantive communications with the SEC to its submission. 

Implications

Parallel criminal and civil investigations, in today’s complex regulatory and enforcement climate, are more common than ever.  In many cases, as in Rhodes, the criminal authorities first surface long after the civil investigative process is underway.  Parties subject to a civil investigation by a regulator who are even remotely concerned that the investigation could lead to a criminal referral should from the outset seek counsel adept at handling matters both before the civil regulator and the criminal authorities.  Retaining counsel trained at identifying when the criminal authorities may have “crossed the line” and abused the civil discovery process is just one of the ways counsel can preserve the due process rights of an accused.  Our team has a long track record in assisting clients navigate these types of complex issues that undoubtedly arise in parallel civil and criminal proceedings.  If you have any questions or if we can be of assistance in any way, please do not hesitate to reach us.