Originally published in Westlaw Journal Volume 26, Issue 8 / May 2012
Federal prosecutors have learned to live with the fact that they will have to produce notes of witness interviews as a consequence of their obligation to disclose exculpatory witness statements. But what about civil lawyers and regulators working alongside the prosecutors? A central organizing principle of parallel investigations has required that civil lawyers and regulators delicately observe certain limits on their interactions with prosecutors. As a result, they have mostly succeeded in walling themselves off from the broader reach of criminal disclosure rules.
However, there is now an important chink in the wall. In a March 26 decision, U.S. District Judge Jed Rakoff granted a discovery motion filed by former Goldman Sachs director Rajat K. Gupta mandating that criminal prosecutors review memoranda written by lawyers for the U.S. Securities and Exchange Commission in order to discharge their dis-closure obligations under Brady v. Maryland, 373 U.S. 83 (1963), and its progeny. See United States v. Gupta, No. 11 Civ. 7566 (JSR), 2012 WL 990830 (S.D.N.Y.). Judge Rakoff's decision is likely to shake up the usual relationship between the Securities and Exchange Commission and the Department of Justice, and it raises tantalizing possibilities for broader discovery in a range of parallel proceedings.
In October 2011 both the U.S. attorney's office for the Southern District of New York and the SEC brought parallel charges against Gupta stemming from a broad insider-trading investigation. In the criminal case, Gupta moved for an order requiring the government to disclose exculpatory material contained in SEC files, effectively extending the federal prosecutor's obligation to disclose exculpatory information to include a review of materials maintained by the SEC.
Federal prosecutors argued that the SEC is not part of the group of lawyers and investigators charged with the criminal prosecution — that is, the Justice Department investigative team — and therefore, the U.S. attorney's office has no obligation to discover SEC-held exculpatory materials. This argument has usually been met with success.
Judge Rakoff rejected the government's position, at least as to notes from joint witness interviews, and ordered the U.S. attorney's office to review SEC attorney memoranda of these interviews for the purpose of disclosing any exculpatory witness statements. Ruling on a similar motion that Gupta filed in the civil case, Judge Rakoff held that Brady material contained in the SEC attorney memoranda must be disclosed, although the work-product doctrine protected the memoranda from any broader disclosure sought by Gupta.
Judge Rakoff upset the traditional refusal by federal prosecutors to obtain and produce SEC attorney work product containing exculpatory witness statements. The persuasive analysis supporting his conclusion also opens up important opportunities for defendants who are caught in the vice grip of parallel civil and criminal cases.
The FBI arrested Gupta Oct. 26, 2011, for feeding inside information about Goldman Sachs and Procter & Gamble transactions to Raj Rajaratnam, founder and former head of Galleon Group. A jury sitting in the Southern District of New York had already convicted Rajaratnam of substantially similar criminal charges in May 2011, and Rajaratnam is now serving an 11-year sentence at a federal facility. See United States v. Rajaratnam, No. 09 Cr. 1184 (RJH), 2011 WL 1796430, verdict form filed (S.D.N.Y. May 11, 2012).
In connection with Gupta's arrest, the U.S. attorney's office unsealed a six-count indictment, charging him with conspiring to commit securities fraud and multiple counts of securities fraud. That day, in a federal complaint filed in the Southern District of New York, the SEC charged Gupta with insider trading. Not surprisingly, the SEC and the U.S. attorney's office charges tracked one another in important aspects, including the nature of the illegal conduct, the time frame of the illegal activity and even some...