Countrywide Enron

via The Consumerist

The New York Times is reporting that the SEC has instituted a civil suit against Angelo R. Mozilo, David E. Sambol, and Eric P. Sieracki of Countrywide Financial alleging securities fraud and insider trading. The securities fraud aspect stems from alleged conduct whereby the defendants

hid from investors the high-risk nature of the loans the company was making. Countrywide needed to maintain its position as the leading lender in a white-hot mortgage market, the S.E.C. said, and underwrote increasingly dangerous loans, all the while assuring investors that its loans were top quality.

Angry members of the investing public may be disappointed or confused that this is a civil suit rather than a criminal indictment. However, they should not abandon all hope of seeing a criminal referral.

The S.E.C. brought its case against the former Countrywide officials on its own; Justice Department officials did not file criminal charges simultaneously with the commission, as is often the case. But a securities law expert said this did not guarantee that Mr. Mozilo and his former colleagues were clear of being charged by criminal authorities.

"It could mean that the Justice Department does not yet have a case proving the highest standard, beyond a reasonable doubt," said Lewis D. Lowenfels, at Tolins & Lowenfels in New York. "They may want to see what facts come out in the discovery in the S.E.C. case and there might be other people they are interested in. Moreover, the S.E.C. is under so much pressure from Congress, they may want to move quickly and not wait for anybody."

Welcome to the complicated and high stakes world of "Parallel Proceedings." A parallel proceeding is one in which "both civil and criminal cases/investigations proceed at the same time" (USTP Manual 5-13.1). Parallel proceedings are a minefield of ethical and tactical conflicts for in-house counsel and defense lawyers. For example:

"While the company, which has no Fifth Amendment privilege, will produce its documents, the individuals may decline to testify before the grand jury if doing so risks self-incrimination. Kastigar v. United States, 406 U.S. 441 (1972). However, if they rely on the privilege in a civil deposition, they run the risk that a finder of fact, such as a judge or civil jury, may draw adverse inferences against them – and in some circumstances attribute those inferences to another party, including a corporation – from the refusal to answer deposition questions. Baxter v. Palmigiano, 425 U.S. 306 (1976)."

You see, in a civil case, you have to give "discovery" of every scrap of evidence you expect to present in your own defense, including your own testimony. In a criminal case, defendants give very, very little in discovery–fingerprints, voice and handwriting exemplars, DNA, things like that.

Even in a civil case, the 5th Amendment privilege against self incrimination applies, but unlike a criminal case where no adverse inference can be drawn from the defendant’s silence, in a civil case, silence can result in an adverse inference being drawn, and a willful failure to provide discovery can result in losing the case on procedural grounds alone.

Of course, sometimes a crafty defense lawyer can engage in a strategy to make the parallel proceeding work in defendants favor. In the recent case of U.S. v. Cioffi & Tannin, Case No. 08-CR-415 (E.D.N.Y Filed June 18, 2008):

"the USAO moved to intervene in the SEC’s case, requesting a stay pending the resolution of the criminal case. The government argued that while the parties in the SEC case will not be prejudiced by a stay and the court will not be inconvenienced, the government will be prejudiced absent a stay. That prejudice will result from the defendants "taking unfair advantage of broad civil discovery rules, to the detriment of the government and its witnesses," the government argued."

The court found

"‘to the extent that the defendants’ discovery requests simply result in the happenstance that in defending themselves against the serious civil charges that another government agency has chosen to file against them they obtain certain ordinary discovery that will also be helpful in the defense of their criminal case, there is no cognizable harm to the government in providing such discovery beyond its desire to maintain a tactical advantage,’" quoting SEC v. Oakford Corp., 181 F.R.D. 269, 272-73 (S.D.N.Y. 1998).

So, it will be fun to watch and see which side is able to make tactical advantage out of this parallel proceeding scenario. And I hope you non lawyers out there enjoy this little helping of inside baseball.

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