United States: The Fifth Circuit Rules Findings From SEC Civil Investigation Are Admissible Evidence At Trial

Last Updated: September 12 2016
Article by Stephen C. Parker

The Fifth Circuit Court of Appeals appears to have handed white collar defendants a new tool for trial. In United States v. Gluk, — F.3d —-, 2016 WL 4150901 (5th Cir. Aug. 4, 2016), the court held that a little-noticed exception to the hearsay rule allows admission of reports and findings of prior government investigations. Specifically, the Gluk court held that the district court erred when it excluded from trial a prior Securities and Exchange Commission report that exonerated two defendants. The defendants attempted to introduce the report under the "public records" exception to the hearsay rule found in Federal Rule of Evidence 803(8)(iii). Gluk establishes a rule that the defense can introduce exculpatory government reports.

The issue arose during the prosecution of the CEO and CFO of a medical device company, ArthoCare, for securities fraud. They were charged with a conspiracy to commit "channel stuffing." This type of scheme occurs when a company anticipates missing its earnings expectation. To artificially boost income, the company has another company place orders for product with the agreement that the sales will be later reversed. In the meantime, the first company can book the sales as earnings.

When accounting irregularities were discovered, the SEC assigned an investigator to conduct a civil investigation.  The SEC investigator determined that the ArthoCare officers had no knowledge of the scheme and had been deceived by two other employees of a related company. This information was included in a memo from the SEC to the Department of Justice recommending prosecution of two other company employees.

DOJ accepted the case and the two other employees were indicted in federal court. These employees later entered into plea agreements and agreed to testify that the ArthoCare officers were aware of the scheme. At trial, the defense attempted to introduce the SEC report and the findings to show a prior government investigation had exonerated the ArthoCare officers. The district  judge ruled the reports were inadmissible hearsay and that the jury was in a better position to weigh the facts of the case. The jury convicted the officers, who appealed to the Fifth Circuit.

The Fifth Circuit panel that heard the case originally issued a published opinion dealing with the evidentiary issues. See United States v. Gluk, 811 F.3d 738 (5th Cir. 2016). However, the panel granted a petition to rehear and issued the recent Gluk  opinion, vacating the prior decision. The second Gluk decision noted that Federal Rule of Evidence 803(8)(A)(iii) provides that a record or statement of a public office is admissible if it sets out, "in a civil case or against the government in a criminal case, factual findings from a legally authorized investigation; and . . . the opponent does not show that the source of information or other circumstances indicate a lack of trustworthiness." The court ruled that the SEC civil investigation was a "legally authorized investigation" under the rule and thus an exception to the normal hearsay rule.

The government argued that the original investigation was not trustworthy because the investigator did not have all the information that was developed later by DOJ. The court rejected this argument.  It noted that in a prior decision, the Fifth Circuit held that for an official government investigation to be found unreliable, the government had to prove that the issuing agency had disavowed or declined to accept the decision of the lower level employee's findings. The court noted that the SEC had never declined to accept the SEC investigator's report and thus it was a report of the agency that was admissible by the defendant at trial. Moreover, the Fifth Circuit held it was prejudicial to the defendants that the jury was not allowed to consider the SEC report as evidence that that another government investigation had exonerated them. Accordingly, the panel reversed the convictions and remanded the case for a new trial.

In examining the court's latest holding in Gluk, it appears that the public records exception may be one of the most underutilized evidentiary rules. This new opinion could have far-reaching benefits to criminal defendants, particularly in white collar prosecutions. Many of the criminal white collar persecutions brought by DOJ begin as a regulatory matter referred by an administrative agency. Under Gluk, the initial investigator's internal memos and recommendations would become admissible by the defendants at trial unless the investigator's findings had been disavowed or declined to be accepted a high level in the agency. While Gluk was limited to the primary findings of fact, the public documents rule does not limit the admissibility to the ultimate issue of the investigation. Thus the investigator's credibility findings or investigative conclusions in the various aspects of the case would be admissible. Nor does the rule limit admissibility to federal investigations: where a state civil or criminal investigation has occurred, these records too would seem to be admissible.

Additionally, the opinion has a collateral effect on the prosecutor in that any exculpatory evidence must be provided to a defendant prior to trial pursuant to Brady v. Maryland, 373 U.S. 83 (1963). It appears that, at a minimum, Gluk will prove a boon to defense counsel in discovery and at trial. This little-noticed tool should be added to every defense attorney's strategy. It also raises thorny issues for the government to deal with in a prosecution with respect to identifying and obtaining all the relevant investigative reports. Expect the government to fight these motions vigorously; however, in the Fifth Circuit, the decision in Gluk is now established precedent.

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