From pli’s Course Handbook Parallel Proceedings in Securities Cases

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Parallel Proceedings in Securities Cases


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asserting the fifth amendment privilege against self-incriminaton in Parallel proceedngs

Jack Auspitz

Morrison & Foerster LLP

Asserting The Fifth Amendment Privilege

Against Self-Incrimination In

Parallel Proceedings

Jack Auspitz

Morrison & Foerster LLP

I. Asserting the fifth amendment privilege against self-incrimination in parallel proceedings 1

A. Overview 1

B. Who May Invoke the Privilege 2

C. How to Invoke the Privilege 3

D. Benefits of Relying on the Privilege 4

E. Risks of Asserting the Privilege 5

F. Practical Repercussions That Could Result From Assertion Of The Privilege 11

I.Asserting the fifth amendment privilege against self-incrimination in parallel proceedings


1.The Fifth Amendment provides that “[n]o person…shall be compelled in any criminal case to be a witness against himself.” U.S. Const. amend. V.

2.The privilege may be raised in civil as well as criminal proceedings and applies not only at trial, but also during the discovery process.

3.The privilege extends not only to “answers that would in themselves support a conviction under a federal criminal statute” but also to answers “which would furnish a link in the chain of evidence needed to prosecute the claimant…” Hoffman v. United States, 341 U.S. 479, 486 (1951).

4.Unlike criminal cases, reliance on the privilege in civil cases may give rise to an adverse inference against the party claiming its benefits. See Baxter v. Palmigiano, 425 U.S. 308, 318 (1976), infra.

5.“The purpose underlying the allowance of an adverse inference in civil cases is equitable, not punitive, and serves to vitiate the prejudice to the party denied discovery by invocation of the privilege.” Willingham v. County of Albany, No. 04-CV-369 (DRH), 2006 U.S. Dist. LEXIS 46941, at *10-12 (N.D.N.Y. July 12, 2006) (citing United States v. 4003-4005 5th Ave., 55 F.3d 78, 82-83 (2d Cir. 1995)).

B.Who May Invoke the Privilege

1.The privilege against self-incrimination is available only to natural persons, and not to corporations. See United States v. White, 322 U.S. 694, 698-99 (1944).

2.Any witness may refuse to answer questions that might tend to incriminate him or her. See, e.g., Hoffman v. United States, 341 U.S. 479, 486 (1951); United States v. Hubbell, 530 U.S. 27, 37 (2000) (Witness may refuse to answer questions that might lead to incriminating evidence).

3.The privilege is not limited to criminal proceedings, but may be asserted “in any proceeding, civil or criminal, administrative or judicial, investigatory or adjudicatory[.]” Kastigar v. United States, 406 U.S. 441, 444 (1972).

C.How to Invoke the Privilege

1.Invocation of Fifth Amendment right does not excuse a witness from appearing, and the witness cannot assert the Fifth Amendment in blanket fashion. See Doe ex rel. Rudy-Glanzer v. Glanzer, 232 F.3d 1258 (9th Cir. 2000).

2.The Fifth Amendment must be asserted on a “question-by-question basis.” Id. at 1263; see also, In re Grand Jury Subpoena, 739 F.2d 1354, 1359 (8th Cir. 1984) (a witness who is asserting the Fifth Amendment right “must make specific objections in response to specific questions.”) (Citation omitted).

3.“The central standard for the privilege's application has been whether the claimant is confronted by substantial and “real,” and not merely trifling or imaginary, hazards of incrimination.” Marchetti v. United States, 390 U.S. 39, 53 (1968).

4.“[I]t need only be evident from the implications of the question, in the setting in which it is asked, that a responsive answer to the question or an explanation of why it cannot be answered might be dangerous because injurious disclosure could result.” Hoffman v. United States, 341 U.S. 479, 486-487 (1951).

5.To receive Fifth Amendment protection, a compelled communication must be testimonial. Doe v. United States, 487 U.S. 201, 210 (1988) (“in order to be testimonial, an accused's communication must itself, explicitly or implicitly, relate a factual assertion or disclose information.”)

D.Benefits of Relying on the Privilege

1.Testifying may otherwise provide a “roadmap” for prosecution.

2.Providing testimony in an SEC or Congressional investigation may lock defendant into testimony in a criminal case, provide fertile ground for cross-examination and provide material that plaintiffs can use in a complaint or amended complaint.

3.The assertion of the privilege will help to avoid the risk of incurring perjury or obstruction of justice charges. Such charges greatly complicate the defense of a criminal case. Prosecutors argue that evidence of perjury and obstruction show consciousness of guilt of the underlying substantive offenses, and they argue that the substantive charges provide the motive for the perjury and obstruction.

4.An adverse inference may not be drawn against a defendant in a criminal case due to the defendant’s silence. See, e.g., Mitchell v. United States, 526 U.S. 314, 328 (1999); Griffin v. California, 380 U.S. 609, 615 (1965).

E.Risks of Asserting the Privilege

1.The Adverse Inference

a.An adverse inference may be drawn against a person who has asserted the privilege in civil and administrative cases. See Baxter v. Palmigiano, 425 U.S. 308, 318 (1976) (holding that respondent’s Fifth Amendment rights were not violated where he was advised that he was not required to testify, but that his silence could be held against him); Keating v. Office of Thrift Supervision, 45 F.3d 322, 326 (9th Cir. 1995) cert.denied, 116 S. Ct. 94 (1995) (same); LaSalle Bank Lake View v. Seguban, 54 F.3d 387, 390-91 (7th Cir. 1995) (same).

(i)But, an adverse inference may not be drawn from silence alone, and must be considered as one of several factors. See Lefkowitz v. Cunningham, 431 U.S. 801, 808 n.5 (1977) (stating that “[r]espondent’s silence in Baxter was only one of a number of factors to be considered by the finder of fact in assessing a penalty and was given no more probative value than the facts of the case warranted”); SEC v. Colello, 139 F.3d 674, 678 (9th Cir. 1998) (explaining that “Lefkowitz and Baxter require that there be evidence in addition to the adverse inference to support a court’s ruling”).

b.In light of Baxter, adverse inferences may be drawn from the defendant’s assertion of Fifth Amendment rights only where the privilege was invoked: (1) in a civil proceeding and (2) in response to evidence offered against the person asserting the privilege.

(i)Courts have broadly construed the concept of what constitutes a “civil proceeding.”
(a)See, e.g., United States v. Solano-Godines, 120 F.3d 957, 962 (9th Cir. 1997) (explaining that because “[d]eportation proceedings are civil proceedings,” an immigration judge could draw an adverse inference from defendant’s silence);
(b)Reasonover v. Washington, 60 F. Supp. 2d 937, 960-61 (E.D. Mo. 1999) (permitting adverse inferences to be drawn from defendant’s silence during hearings on petition for writ of habeas corpus, because habeas corpus is a civil proceeding).

c.A negative inference is permissible only where independent evidence exists to corroborate the fact under inquiry; silence in response to an inquiry, in and of itself, is not sufficient. See Doe ex rel. Rudy-Glanzer v. Glanzer, 232 F.3d 1258, 1264 (9th Cir. 2000); Colello, 139 F.3d at 678.

(i)Compare Nat’l Acceptance Co. of Am. v. Bathalter, 705 F.2d 924, 932 (7th Cir. 1983) (concluding that “even in a civil case a judgment imposing liability cannot rest solely upon a privileged refusal to admit or deny at the pleading stage”);
(ii)LaSalle Bank Lake View v. Seguban, 54 F.3d at 390-92 (permitting adverse inference where defendant asserted privilege against self-incrimination in response to statement of material facts submitted in support of summary judgment motion because of evidentiary content of statement of material facts).

2.Special Considerations of Parallel Civil/Criminal Proceedings and Private Civil Actions

a.When the Fifth Amendment has been invoked, defendants facing parallel criminal actions and private civil actions should consider requesting a stay of discovery or stay of the entire civil proceeding pending resolution of the criminal action.

b.Alternatively, the Court in In re CFS-Related Sec. Fraud Litig. proposed “[l]ess drastic methods in lieu of a stay include[ing] sealing answers to interrogatories, sealing answers to depositions, imposing protective orders, imposing a stay for a finite period of time, limiting a stay to a particular subject, or limiting disclosure only to counsel.” 256 F. Supp. 2d 1227, 1240 (N.D. Okla. 2003).

c.Although the court has the power to stay the civil proceedings, it is not constitutionally required to do so in the absence of substantial prejudice to the parties involved.

(i)See In re CFS-Related Sec. Fraud Litig., 256 F. Supp. 2d at 1239-41 (denying motion to stay discovery in civil securities litigation where prejudice to defendant could be avoided by sealing deposition and directing that it not be used outside civil proceeding except in connection with perjury or impeachment);
(ii)Sterling Nat’l Bank v. A-1 Hotels Int’l, Inc., 175 F. Supp. 2d 573, 579-80 (S.D.N.Y. 2001) (declining to stay civil RICO action brought by private plaintiff where there was no suggestion that criminal indictment was imminent, and where civil action had been pending for eight months);
(iii)Hollinger Int'l, Inc. v. Hollinger Inc., Case No. 04 C 98, 2005 U.S. Dist. LEXIS 30420, *34 (N.D. Ill. January 19, 2005) (stay less compelling where the civil case is being pursued by private litigant, and not the government, running parallel civil and criminal proceedings, where there is a risk that the civil case can be used as a “stalking horse” for criminal case.)
(iv)Arden Way Assocs. v. Boesky, 660 F. Supp. 1494, 1500 (S.D.N.Y. 1987) (rejecting defendant’s argument that his assertion of the Fifth Amendment privilege in an answer in a civil case would affect his liability in related criminal proceeding).

F.Practical Repercussions That Could Result From Assertion Of The Privilege

1.The tail does not wag the dog. If asserting the privilege substantially helps defend a criminal case, the risks to any civil case become insignificant. Going to jail is worse than paying money.

2.Asserting the privilege against self-incrimination could have a negative impact on the decision-making process of government investigators. For example, the SEC considers an individual’s refusal to testify to be a significant factor in determining whether to bring charges against that person.

3.Taking the Fifth may be untenable for elected officials and other public figures. (Caveat: The lesson of Martha Stewart, who visited too soon with prosecutors, will be remembered for years to come.)

4.Invoking the Fifth Amendment may result in loss of employment, particularly in heavily regulated industries such as the securities industry. See, e.g., NASD Rule 8210.

5.In some cases, terminating an employee based on his or her assertion of the privilege may be unconstitutional. See, e.g., Garrity v. New Jersey, 385 U.S. 493 (1967) (where police officers were questioned in municipal court regarding alleged fixing of traffic tickets, it was unconstitutional to give police officers the choice between self-incrimination and forfeiture of their jobs).1

a.Government - The government may not terminate an employee based on his or her invocation of the privilege if she has been required to surrender her constitutional immunity.

(i)See Lefkowitz v. Cunningham, 431 U.S. 801, 807-09 (1977) (holding state statute unconstitutional where attorney was divested of state political party offices and barred for five years from holding any other party or public office because he appeared before the grand jury and refused to waive immunity from prosecution);
(ii)Arrington v. County of Dallas, 970 F.2d 1441, 1446 (5th Cir. 1992) (holding that firing deputy constables for refusing to answer questions that could be used against them in criminal proceeding violated their Fifth Amendment rights).

b.Private Actors - Purely private actors are not barred from taking action against an employee based on his assertion of the Fifth Amendment privilege. See, e.g., D.L. Cromwell Invs., Inc. v. NASD Regulation, Inc., 279 F.3d 155, 161 (2d Cir. 2002), cert. denied, 123 S. Ct. 580 (2002).

(i)Indeed, many companies will fire individuals who do not cooperate with an internal investigation.

c.Self-regulatory Organizations (“SRO”) - A murkier question is whether SRO’s are considered private actors.

(i)Compare United States v. Solomon, 509 F.2d 863 (2d Cir. 1975) (holding that the New York Stock Exchange is a private actor) and Desiderio v. NASD, 191 F.3d 198, 206 (2d Cir. 1999) (stating that “[t]he NASD is a private actor, not a state actor”)2 with:
(ii)Intercontinental Indus., Inc. v. Am. Stock Exch., 452 F.2d 935, 941 (5th Cir. 1971) (noting that “contrary to numerous court decisions,” the American Stock Exchange’s “intimate involvement” with the SEC brings it within the “purview of the Fifth Amendment controls over governmental due process.”);
(iii)Sparta Surgical Corp. v. NASD, 159 F.3d 1209, 1214 (9th Cir. 1998) (NASD immune from suit because it “performs a variety of regulatory functions that would, in other circumstances, be performed by a government agency”);
(iv)Barbara v. New York Stock Exch., 99 F.3d 49 (2d Cir. 1996) (according absolute immunity to Exchange from a suit for damages arising from allegedly unlawful conduct of an Exchange disciplinary proceeding, because the Exchange performs a variety of regulatory functions that would in other circumstances be performed by a government agency). See also Calif. Pub. Emples.' Ret. Sys. v. N.Y. Stock Exch., Inc. (In re NYSE Specialists Sec. Litig.), 2007 U.S. App. LEXIS 22212 (2d Cir. 2007).

1 One Circuit has recently held that placing a police officer on administrative leave because the officer asserts the privilege—as opposed to terminating him—does not amount to a per se constitutional violation. See Dwan v. City of Boston, 329 F.3d 275, 279-82 (1st Cir. 2003) (holding in part that the individual defendants were entitled to qualified immunity because they did not violate the officer’s constitutional rights when they placed him on administrative leave for asserting the privilege).

2 See also United States v. Stein, 440 F. Supp. 2d 315, 336 (S.D.N.Y. 2006) (“actions by the exchanges in the application of their own regulatory schemes, without more, are not attributable the government. There is state action only where there is “a nexus between the state and the specific conduct” at issue.”(quoting Desiderio, 191 F.3d at 207)) (emphasis in original).

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