Piling On: The Perils of Interagency Criminal and Civil Investigations

The financial crisis of 2008 was the worst financial meltdown since the Great Depression. Banks and financial institutions were wiped out, like Lehman Brothers and Washington Mutual. So was the life savings of many individuals. The crisis was caused by instability in the financial markets caused by subprime mortgage-backed securities. Banks had lent money to homebuyers with poor credit ratings on seemingly usurious terms. These loans were then chopped up and packaged into different investment vehicles that seemed to be safe and secured. This turned out to be untrue.

The financial meltdown caused Washington to take a number of actions. First, many banks, financial institutions and, most infamously, insurance giant AIG were deemed “too big to fail.” The federal government bailed these companies out to prevent them from going bankrupt. Next, the Treasury Department formed TARP, the Troubled Asset Relief Program. This organization acquired the questionable securities and took action to collect on them. The goal was to stabilize the economy. Finally, in November 2009, President Barack Obama announced the establishment by executive order of an Interagency Financial Fraud Enforcement Task Force. This was created to investigate financial crimes that may have led to the financial meltdown.

The Interagency Financial Fraud Enforcement Task Force

This task force had a fairly ambitious goal. As Attorney General Eric Holder pointed out, “This task force’s mission is not just to hold accountable those who helped bring about the last financial meltdown, but to prevent another meltdown from happening.” The task force brought together prosecutors from the Department of Justice (DOJ) to work hand-in-hand with other agencies. This included the Securities and Exchange Commission (SEC), Housing and Urban Development (HUD) and Treasury, including Internal Revenue Service (IRS) agents.

It is not uncommon for federal agencies to work together when necessary. But this was the first time it was being done in such a formal manner. Furthermore, the task force was asked to work with state and local agencies as well. So, not only was the task force going to involve federal agencies with criminal and civil authority. It was also going to work across jurisdictional lines with state, local and municipal governments.

Dozens of Task Force Investigations Without a Good Track Record

How did it work out? Going solely by the metric of the 2008 financial crisis, not so well. Of the 47 individuals prosecuted worldwide for their role in 2008, only one was successfully convicted in the United States. Kareem Serageldin of Credit Suisse holds the dubious distinction of being the only banker held responsible. Everyone else with any culpability was allowed to walk away, often with his or her job and bonus intact.

So who did the task force end up going after? Generally, it went after small fish and small players, folks who had absolutely nothing to do with 2008. Instead, they had the misfortune of being nabbed by the task force.

Criminal Justice Issues Raised by Interagency Investigations

Aside from the task force’s questionable track record, a bigger issue arises with this type of interagency investigation. Prior to President Obama’s executive order, federal agencies were wary of crossing the line between criminal and civil matters. Criminal justice defendants are afforded a number of constitutional protections that do not always apply to civil investigations. An agency would conduct a civil investigation, and make a referral to the Federal Bureau of Investigation (FBI) if it found any criminal liability. The DOJ would then take charge of the case going forward. With the task force, all of the law enforcement agencies would work together, often blurring constitutional lines.

Fourth Amendment Restrictions

The Fourth Amendment protection against unreasonable searches and seizures poses a major restriction on criminal law offense. This requires law enforcement to obtain a warrant issued by a judge on showing of probably cause. So, if the FBI wants to search your premises, it can only do so with a warrant.

This protection does not extend to civil agencies. For example, if the SEC thinks there is a potential violation of federal securities laws, it can launch an investigation and begin issuing subpoenas to anyone it suspects was involved in the matter. These subpoenas have the force of law and can compel people to provide documentation and even oral testimony before the SEC. However, unlike search warrants, there is no need to show probable cause before a federal judge.

Moreover, if the SEC sues you, the commission will serve you with discovery demands. Under Rule 26 of the Federal Rules of Civil Procedure, you are required to provide open disclosure of all non-privileged facts and documents to the SEC. The types of privilege are limited to things like attorney-client relationships. The result is full and open disclosure to the SEC.

Taking The Fifth

Criminal justice investigations are also subject to Fifth Amendment restrictions against compelled self-incrimination. This is why defendants are read their rights and told that they do not have to answer questions put to them by law enforcement. However, the Fifth Amendment only applies to criminal cases.

In an SEC, HUD or IRS investigation, however, the Fifth Amendment does not apply. While the civil agencies cannot require you to answer their questions, you can suffer legal consequences for your invocation of the Fifth. For example, if you take the Fifth in a civil matter, there is a negative inference placed on your silence. This means that a judge or jury can take silence to mean an admission of civil guilt or liability. This is not the case in criminal trials. Furthermore, if you have a professional license, taking the Fifth in a federal civil investigation could lead to a suspension or loss of this license.

Target Or Subject: Which Are You?

One of the first questions an attorney will ask a federal law enforcement officer who has served his or her client with a subpoena is whether the client is a target or a subject of the investigation. This raises another major difference between criminal and civil investigations.

The DOJ and FBI are required by law to disclose to an individual whether he or she is the target or subject in criminal matters. This is not the case with civil investigations. For example, an SEC investigation is often directed in a general fashion, like a corporation that may be looked at for compliance with securities laws. The officers, directors and employees of the subject corporation do not have to be notified if the SEC is considering holding them liable as well.

The Sharp End of the Spear in Interagency Investigations

The result of being investigated by an interagency task force is that individuals can have their constitutional rights violated or ignored by the operation of the various agencies. If the FBI and DOJ take a back seat to the initial investigation, the SEC, IRS or HUD can then take steps to circumvent these protections. The civil agency can issue subpoenas and collect evidence including incriminating testimony that would be difficult for the FBI to gather. In some cases, the civil agencies can get evidence that wouldn’t be available to the FBI and DOJ. This allows agencies like the SEC to become the sharp edge of the criminal justice spear. This flies in the face of the intent of the Constitution.

In addition, since the civil agencies are not required to name any individuals as targets and subjects, the defense attorneys to these individuals are at a loss as to how to properly respond to subpoenas. Do they answer them, providing documents and testimony, only to leave their clients with potential criminal liability? Or do they counsel their clients to ignore the subpoenas and risk financially ruinous fines and civil penalties?

Caught in the Whipsaw

People who find themselves the subject of a task force investigation feel like they are getting whipsawed. They may receive a subpoena from the SEC, an audit request from the IRS and a grand jury summons at the same time on the same matter. This can deplete a defendant’s resources very quickly. It can also put a defendant in an untenable position. The defendant will have to defend multiple lawsuits and a criminal indictment, where a defense strategy to address one can create legal peril in the other.

The situation may also be getting worse. Under the Obama Administration, the SEC empowered senior attorneys to open investigations and serve subpoenas. Until that time, the SEC had a requirement that all investigations had to be reviewed by the Director of Enforcement and approved by the five-member Commission. The SEC under the Trump Administration restored this procedural check.

However, in February of 2021, the Biden Administration took the dubious step of once more authorizing senior SEC attorneys to commence investigations without the prior approval of the Commission. Now, unelected lawyers can act on behalf of a federal agency without needing the consent of commissioners who have been appointed with the advice and consent of Congress. This means that we are likely to see more investigations under the task force. These will often involve a continued disregard for Constitutional rights of criminal defendants.