There was a time when privately held companies largely avoided scrutiny by the government because they were usually small-scale operations. The explosion of Silicon Valley unicorns worth billions of dollars has changed that dynamic by bringing much greater attention from prosecutors and regulators, as Uber and Theranos have learned.

When dealing with a federal grand jury investigation, a company learns quickly that almost any document can be obtained and that prosecutors have broad authority to look into just about every dark corner of its operations.

Fighting a subpoena is an exercise in futility in most instances because the Supreme Court found in Braswell v. United States that corporations do not have the Fifth Amendment privilege against self-incrimination to block a demand for records. Instead, companies cooperate in the hope that the investigation will go away.

Uber, which at one time had a valuation of almost $70 billion, is being investigated by the United States attorney’s office for the Northern District of California, which covers Silicon Valley, about its use of a software program called Greyball, a use that was first reported by The New York Times in early March. It allowed the company to send what was essentially a fake version of its ride-sharing app to users to help drivers evade law enforcement agencies that were scrutinizing the service for potential violation of local laws.

The federal investigation came to light in a roundabout way through a report about the use of Greyball prepared by the Portland, Ore., Bureau of Transportation that was initiated in response to the Times article. It states that the city was notified “that Uber is the subject of a federal inquiry” by the Justice Department.

The Philadelphia Parking Authority also disclosed that it had been contacted as part of the investigation. It will not be a surprise if other municipalities reveal they have been in contact with the Justice Department about Uber’s use of Greyball.

Uber does not have the same public disclosure obligations that corporations whose shares trade on the stock markets do, which might have resulted in a more detailed — and earlier — revelation of the investigation from the company. At this point, all that can be inferred from the cryptic statements by the authorities in Portland and Philadelphia is that the United States attorney’s office investigation is just getting started as prosecutors begin gathering information.

To be clear, Uber has not been accused of any wrongdoing. Neither Uber nor the Justice Department would comment on the investigation.

This type of investigation usually begins with a grand jury subpoena seeking records and, in some instances, testimony from witnesses with knowledge of the conduct under inquiry. The standard for issuing a subpoena is quite low because the Justice Department does not have to seek approval from a court or even the grand jurors.

There are few limitations on what prosecutors can investigate through a federal grand jury, although the power is not unlimited. In United States v. R. Enterprises, the Supreme Court stated that “grand juries are not licensed to engage in arbitrary fishing expeditions, nor may they select targets of investigation out of malice or an intent to harass.” But as long as the investigation relates to an area governed by federal law, the Justice Department can issue a subpoena — even just to assure itself that there was no violation.

A grand jury subpoena does not provide information about the subject of the investigation, unlike a search warrant application that must identify specific laws that may have been violated. A subpoena issued early in an investigation is likely to be quite broad so that investigators don’t overlook potential avenues that might not be immediately apparent.

It is not clear how the Greyball program might have violated any federal criminal laws, although there are a few possibilities.

The Computer Fraud and Abuse Act defines a “computer” to include “any data storage facility or communications facility,” excluding only such quaint devices as a typewriter or hand-held calculator from its coverage. In United States v. Kramer, a federal appeals court found that use of a cellular telephone that did not even have internet access qualified as a computer under the law.

The computer fraud statute contains a number of additional elements, like causing damage to a computer or unauthorized access, that might not have been violated by downloading the app from Uber.

Prosecutors will have to take a close look at exactly how Greyball might have affected the devices to see if it might rise to a level of a federal crime, but at this preliminary stage it appears to come within the scope of the grand jury’s purview.

Blocking a local law enforcement inquiry could be viewed as an obstruction of justice, but the federal laws on this crime apply only to an “official proceeding” involving a federal court, grand jury, or administrative agency. The Justice Department can get involved in many areas related to state and local governments, but obstructing the work of the local police probably falls outside the jurisdiction of federal prosecutors.

In most white-collar crime investigations, there are two venerable provisions that can be applied to almost any type of deceptive conduct: the mail and wire fraud statutes. They have been used in a number of cases, like the prosecutions of General Motors and Toyota Motors over misstatements about vehicle defects, that are not ordinarily thought of as fraud.

If Uber deceived certain users of its app, or made misleading statements to the local authorities about how it operated to secretly let its drivers avoid them, that could be the start of a fraud case. One major hurdle would be showing that Uber’s use of Greyball constituted a scheme to deprive victims of money or property, another requirement of the fraud statutes.

At this stage, the grand jury can inquire into how Uber designed the program to determine whether it might have resulted in an improper benefit for Uber that can be the basis for a fraud case.

The investigation of Theranos, which was once valued at almost $9 billion, is taking a clearer path as both the Justice Department and the Securities and Exchange Commission are looking at its disclosures to investors. A violation of the securities laws can be prosecuted as a crime and in a civil enforcement proceeding, so the company has to deal with parallel investigations of its conduct.

Like Uber, Theranos is a private company whose shares are not traded on the stock markets. But the primary antifraud provision, Rule 10b-5, applies to the sale of any security, so transactions with private equity investors involving misleading information could be a violation.

Theranos recently settled a securities fraud claim filed by Partner Fund Management accusing it of making a “series of lies” to attract a $96.1 million investment from the firm. The company has also settled actions by Arizona and the Centers for Medicare and Medicaid Services related to its blood-testing service, although it still faces a claim by its former partner Walgreens over a contract to operate testing centers in its stores.

Getting rid of the private litigation and settling with regulators clears out some uncertainty for Theranos, but prosecutors and the Securities and Exchange Commission can continue their investigations. Unlike a private party seeking damages, the government works to vindicate the law, so paying settlements to private litigants and agreeing to regulatory sanctions do not necessarily end the threat of criminal and civil liability.

The old saying is that a prosecutor can get a grand jury to indict a ham sandwich. Whether or not that is true, the Justice Department can certainly investigate just about any culinary concoction as long as there is a chance it violated federal law, including privately held companies worth billions of dollars.

~source

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