By Anne Sherry, J.D.
The U.S. government filed a motion to intervene in the SEC’s civil enforcement action against former Theranos COO Sunny Balwani. The prosecutors argue that the Northern District of California has discretion to stay the civil case in favor of their parallel criminal action against Balwani and Elizabeth Holmes. The public interest favors a stay to prevent Balwani from benefitting from civil discovery in his criminal case, and the parties and court should not be burdened by civil discovery while the criminal case is pending, the government argues (SEC v. Balwani, April 19, 2019).
In a complaint against Balwani, the SEC claimed that he made false and misleading statements about the company’s portable blood analyzer. Balwani allegedly deceived investors by, among other things, making false statements to the media, hosting misleading product demos, and overstating the extent of the company’s relationships with commercial partners and government entities. Balwani also faces criminal charges filed last year.
Civil discovery. The government observes that the SEC complaint does not identify any single investor and (necessarily) does not allege that Balwani criminally defrauded doctors or patients. In contrast, the grand jury indictment alleges that Holmes and Balwani defrauded doctors and patients and that hundreds of patients paid for blood tests and results that were inaccurate, unreliable, and improperly validated.
Balwani’s discovery demands in the civil case seek information that is relevant only to the criminal indictment’s allegations that he defrauded doctors and patients, the government argues. For example, Balwani subpoenaed competitor laboratories for documents showing invalidation or withdrawal of testing results and their contracts with Walgreens and Safeway. He also subpoenaed two women’s health clinics for medical records, communications among doctors and with third parties, presumably including the United States. These latter subpoenas are especially notable, in prosecutors’ view, because the parties appear nowhere in the SEC’s complaint, Balwani’s answer, or the initial disclosures. Instead, they are associated with doctors and patients interviewed by federal investigators and prosecutors in the criminal investigation.
Holmes is not a party to the SEC civil case, but contends that the SEC is part of the government’s prosecution and, therefore, that the government’s obligations under Rule 16, Brady, and Giglio extend to the SEC. Accordingly, when the government learns of documents obtained by the SEC in the course of civil discovery, it obtains them and produces them to Holmes.
Intervention. The government argues that it should be permitted to intervene in the civil case as a matter of right under Federal Rule of Civil Procedure 24(a) because it has an interest in the subject of the case and disposing of the action may impair or impede its enforcement ability. Permissive intervention is also appropriate because the U.S. has a claim that shares common questions of law or fact with that of the SEC. The SEC cannot adequately represent the interest of the criminal authorities.
Stay. The government also argues that a stay is warranted. Far from being prejudiced, the SEC supports a stay of proceedings. When the criminal case proceeds to trial, the SEC and Balwani will benefit from a fully developed record that could obviate or at least limit the need for discovery. A criminal judgment will also streamline the issues for resolution in the civil case by precluding relitigation of key facts.
The United States anticipates two objections from Balwani: that he will be unable to clear his name if the civil case is deferred and that he is unable to take discovery he would otherwise be entitled to. But Balwani himself assumed that the criminal case would be resolved first, so there is no prejudice to his ability to clear his name. As to the second objection, Balwani will be entitled to take whatever remaining discovery is permitted under the civil rules after the criminal case is resolved. The government also emphasizes that Balwani has had “extraordinary” access to civil discovery through his participation in private investor lawsuits.
The case is No. 18-cv-01603.