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Defending On All Sides: Common Discovery Perils in Parallel Civil and Criminal Cases

On March 11, 2021, the U.S. District Court for the Eastern District of New York granted a stay in the civil case brought by the Securities and Exchange Commission (“SEC”) against GPB Capital Holdings, LLC (“GPB Capital”), pending resolution of the parallel Department of Justice (“DOJ”) criminal proceeding against the private-equity firm’s founder and associates. In parallel civil and criminal cases, a stay of the civil case is typically granted to protect grand jury secrecy, avoid prejudicing the criminal investigation, and sidestep a host of potential discovery issues. But when no stay is granted, defendants must be wary that discovery does not compromise their due process and Fifth Amendment rights, which individuals have but corporations do not have.

Order to Stay in SEC Civil Action against GPB Capital

On February 4, 2021, the SEC filed a civil fraud suit against GPB Capital and three executives affiliated with the New York private-equity firm: David Gentile, Jeffry Schneider, and Jeffrey Lash. That same day, federal prosecutors unsealed an indictment charging the three individual defendants with running a Ponzi-like $1.8 billion fraud scheme.1 Now, the court has placed the SEC’s civil case on hold after DOJ sought a stay in the SEC case to preserve the secrecy of an ongoing grand jury investigation and to prevent inappropriate discovery of matters in the criminal case.2

In the motion to stay the civil case, DOJ outlined its concerns that the defendants could use discovery in the civil action to circumvent the stricter limits on discovery pursuant to the criminal rules of procedure. DOJ also noted that discovery of the notes of witness interviews, or taking witness depositions, would provide information not otherwise discoverable in the criminal case and shed light on the strategies and progress of the ongoing grand jury investigation.3 The three individual defendants agreed to the request to stay the civil case, and the court granted the stay on consent of all parties.4

Discovery Differences in Civil and Criminal Cases

In a federal civil case, both plaintiffs and defendants may use an array of discovery tools, pursuant to the civil rules of procedure, to obtain information that is relevant and proportional. On the other hand, discovery in a federal criminal case is far more limited. Certain discovery tools like interrogatories and requests for admission are not available in a criminal case. Additionally, witness depositions are only permitted in criminal cases to preserve testimony and upon leave of the court.5 Criminal defendants may only obtain certain specified documents from the government upon request, such as the defendant’s oral and written statements, documents and tangible objects material to the government’s case-in-chief or to prepare the defense, and summaries of any expert witness testimony that the government intends to use.6

Criminal cases also involve a grand jury. The grand jury’s function is to determine whether or not there is probable cause to believe that the defendant has committed the offense. A grand jury proceeding results either in an indictment or a “no-bill.” The prosecutor has the authority to attend and lead the grand jury proceeding; the prosecutor informs the grand jury of the law and presents evidence such as individual testimony or documents. By way of the grand jury, the prosecutor has broad subpoena powers without the need for judicial approval. It follows, then, that parties in a civil case may want access to grand jury materials. However, matters occurring before the grand jury are presumptively secret under Fed. R. Crim. P. Rule 6(e). The only exception to this rule is that grand jury witnesses may disclose the subject matter of their testimony to anyone they choose.

Given the limitations in a criminal case, the variety of discovery tools available in a civil case can be a tremendous advantage to prosecutors, to the detriment of defendants. In the GPB Capital case, the three defendants likely agreed to the stay to prevent the SEC from directly handing over evidence obtained via the SEC investigation to the criminal prosecutors.

Seeking a Stay of the Civil Proceeding

What happened in the GPB Capital case is pretty common. To avoid interfering with the integrity of its own criminal investigation, DOJ commonly intervenes and requests the court to grant a stay of the civil proceeding, pending resolution of the parallel criminal proceeding. For example, on March 12, 2021, DOJ motioned to intervene and stay civil litigation related to its first-ever criminal antitrust “no-poach” case. We recently reported that DOJ charged Surgical Care Affiliates LLC in January 2021 with agreeing with other health care competitors to not solicit each other’s senior-level employees.7

Courts are not required to grant a stay in these circumstances; they have the discretion to determine when the “interests of justice” favor a stay. Courts may consider various nonexclusive factors in deciding whether a stay is warranted, including whether the issues in the civil and criminal case overlap, the status of the criminal case, and the burden on the defendant.8

Generally, courts will grant a stay when DOJ intervenes and the defendant has been indicted. But, cases do arise where a court denies the motion after the defendant opposes the stay, such as in the high-profile Theranos case in 2019. In the case against Ramesh “Sunny” Balwani, the former president of Theranos, the court denied DOJ’s request to stay discovery in the SEC case due to the late and prejudicial timing of the request and the fact that Balwani himself opposed the stay.9 DOJ unsuccessfully argued that Balwani used subpoenas in the civil case to obtain information irrelevant to the SEC allegations but directly relevant to the criminal indictment. However, the court still allowed DOJ to intervene, meaning that DOJ could oppose subpoenas issued by Balwani to the extent that they were irrelevant to the civil case, but would have to do so on a case-by-case basis.10

Defendants who are facing both civil and criminal proceedings should determine if a stay is strategically advantageous. As demonstrated in the Theranos case, a stay in the civil case, although usually the conventional approach, may not always be the best one for the defendant.

Potential Issues for the Defendant

Had the court denied the motion to stay, or had DOJ chosen not to intervene in the GPB Capital case, the three defendants certainly would have struggled with Fifth Amendment and due process issues. Defendants in this position have to weigh their interests in launching a defense to the civil case with their interests against self-incrimination in the criminal case. When there are concurrent proceedings, counsel must consider many issues, including:

The Fifth Amendment privilege against self-incrimination. The Fifth Amendment protects individuals from being compelled to give testimony that they reasonably believe could provide a link to the chain of evidence needed to prove a crime. An adverse inference of guilt may not be drawn from invocation of the privilege in criminal proceedings; however, adverse inferences may be drawn in civil proceedings. Thus, a defendant must make the difficult choice between the lesser of two evils: (1) asserting the privilege in response to a civil discovery request, triggering an adverse inference of guilt, or (2) cooperating with a civil discovery request and waiving the Fifth Amendment privilege, allowing the government to use the defendant’s civil testimony against himself in the criminal case.11 It presents an inevitable catch-22. Importantly, corporations do not have a Fifth Amendment privilege so if a corporation is also a named defendant, the individual defendant may be called to testify as a 30(b)(6) witness on behalf of the corporation, presenting tricky issues for the individual.

The attorney-client privilege and work product protection. Where a defendant cooperates with the SEC or DOJ for cooperation credit, full cooperation may require disclosure of all relevant facts, which may implicate attorney-client communications or attorney work product. Counsel should be mindful that waiver of these protections during a government investigation could significantly prejudice the defendant in a parallel or later civil proceeding. Counsel should seek to limit disclosure to unprivileged and unprotected facts and conclusions, as well as enter into a confidentiality agreement with the government to preserve the protections, protect against inadvertent disclosure of such documents, or permit the defendant to claw back such documents that are inadvertently produced during the investigation.

Other strategic considerations. If the civil case advances ahead of the criminal prosecution, defendants may be forced to expose their defense strategy to criminal prosecutors, putting defendants at a significant disadvantage in preparing their defenses. This may require counsel to perform the difficult task of weighing which arguments to make in the civil case, potentially at the expense of their positions in the criminal cases. Additionally, potential defense witnesses in the civil case may refuse to testify without a grant of immunity due to Fifth Amendment self-incrimination concerns. All of these issues may impact a defendant’s overall strategic approach 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 Motion to Intervene and Motion to Stay Civil Proceedings by the United States Attorney’s Office for the Eastern 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 Motion to Intervene and Motion to Stay 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’ Motion to Intervene and Stay Civil Proceedings, Dkt. No. 30, Roe v. Surgical Care Affiliates LLC, No. 1:21-cv-00305.

8 Louis Vuitton Malletier S.A. v. Ly USA, Inc., 676 F.3d 83, 99 (2d Cir. 2012); Keating v. Office of Thrift Supervision, 45 F.3d 322, 325 (9th Cir. 1995).

9 Order Granting in Part and Denying in Part Motion to Intervene and Stay Action, Dkt. No. 87, SEC v. Balwani, No. 5:18-cv-01603-EJD.

10 Id.

11 See Louis Vuitton, 676 F.3d at 97-98.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.