Civil lawsuits and federal criminal investigations may appear to be unrelated, but in the world of securities litigation, one can lead to the other. A shareholder complaint, a class action, or an SEC enforcement action can attract the attention of federal prosecutors and the Department of Justice (DOJ), resulting in potential criminal liability.
Anyone involved in securities litigation must understand how these situations arise and the steps that can be taken to mitigate risk.
Securities law is unique in that the same conduct can violate civil disclosure laws and criminal fraud statutes. Federal securities laws impose civil obligations to disclose information completely and accurately. A company that misstates its financial condition or an executive who fails to disclose a material transaction can face civil liability through a shareholder complaint, a class action, or an SEC investigation.
However, that same conduct can form the basis of a criminal complaint. What separates civil liability from criminal exposure is not the underlying conduct but the mental state behind it. While the civil matter focuses on whether the disclosure was false or misleading, the criminal action addresses intent and knowledge - whether the person who made it knew it was false, acted with reckless disregard for the truth, and/or intended to deceive investors.
In civil securities litigation, defendants often negotiate settlement terms to limit liability and may accept civil penalties or disgorgement of profits to resolve litigation. But when a civil settlement includes admissions of deception or misconduct, this information can be used to pursue federal criminal charges.
Discovery in civil securities litigation is extensive and often involves testimony, documentary evidence, and factual admissions. Answers given in interrogatories and/or depositions can be incriminating. When the DOJ obtains this information, it can be used to form the basis of a criminal investigation. Sometimes the trigger comes even earlier in the pleadings themselves, where the facts stated in the Complaint are exactly what a federal prosecutor needs to open a criminal investigation.
An auditor who becomes aware that an illegal act may have occurred may be obligated to report it to the SEC. The SEC does not have criminal enforcement authority, but its agents work closely with the DOJ, and the case may be referred to the DOJ for a criminal investigation.
Perhaps the most direct path from civil litigation to criminal exposure runs through whistleblowers. Under the SEC whistleblower statute, established under Dodd-Frank, individuals with knowledge of securities violations can report them internally or directly to the SEC. A whistleblower tip may trigger an SEC investigation, and the SEC may refer the matter to the DOJ when a whistleblower’s complaint suggests criminal activity.
In each of these situations, a civil process identifies facts that point to potential criminal conduct. This is precisely why early intervention and a coordinated strategy are crucial. A response crafted solely with civil liability in mind could overlook important legal protections or inadvertently create the risk of potential criminal liability.
Civil litigation operates on the presumption that the parties will cooperate with discovery by answering interrogatories, appearing for depositions, and producing documents. Criminal defense operates on the opposite presumption: that a person has the right to remain silent rather than provide the government with evidence that could be used against them. When the same conduct has both civil and criminal implications, these two presumptions collide, and the risk to defendants can be enormous.
While the Fifth Amendment privilege against self-incrimination applies in civil litigation, many individuals fail to invoke it, either because they are unaware of the potential for criminal exposure or because refusing to testify carries adverse consequences in the civil case.
Defense counsel navigating this issue often seeks a stay of the civil proceedings until the criminal prosecution is resolved, because requiring that a defendant choose between invoking their Fifth Amendment right and facing civil liability is fundamentally unfair. While courts are reluctant to grant a stay, particularly when no formal charges have yet been filed, a stay can provide critical protection. When a stay is not granted, counsel must take care to evaluate every document turned over and every statement made, analyzing the potential of every response to trigger a criminal investigation and potential liability.
The same conduct that can give rise to a shareholder complaint, a class action, or an SEC enforcement action can also lead to criminal liability. Anyone involved in securities litigation should understand that each discovery response could have criminal implications. Engaging criminal defense counsel early does not mean there is a problem; rather, it is an acknowledgment that the line between civil liability and criminal exposure is thinner than it appears. Protecting yourself is critical from the beginning.
Hope Lefeber is a former enforcement attorney for the United States Securities & Exchange Commission (SEC) and has over three decades of experience as a federal criminal defense attorney. She has been consistently honored as a Pennsylvania Super Lawyer, as one of the Top 100 Trial Lawyers by the National Trial Lawyers Association, and as one of the Top 10 Criminal Defense Attorneys in Pennsylvania by the National Academy of Criminal Defense Attorneys. Ms. Lefeber has represented high-profile clients, published numerous articles, lectured on federal criminal law issues, and appeared on TV News as a legal expert. She represents clients in Philadelphia and its surrounding counties, New York and in federal courts nationwide.
Contact the federal defense law office of Hope Lefeber today. Consultations are free and confidential.
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