Securities & Exchange Commission v. Graystone Nash, Inc. ( 1994 )

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
6-1-1994
Securites Exchange Commission v. Graystone
Nash, Inc. et al.
Precedential or Non-Precedential:
Docket 93-5288
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Recommended Citation
"Securites Exchange Commission v. Graystone Nash, Inc. et al." (1994). 1994 Decisions. Paper 33.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
Nos. 93-5288 & 93-5324
____________
SECURITIES AND EXCHANGE COMMISSION,
Appellee
v.
GRAYSTONE NASH, INC.; THOMAS V. ACKERLY; RICHARD J. ADAMS;
VINCENT R. ACKERLY, JR.; DENNIS M. WILLIAMS;
ROBERT L. ROCK; and SHAWN M. CRANE,
Thomas V. Ackerly and Richard J. Adams, Appellants
____________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
(D.C. No. 91-04327)
___________
Submitted Pursuant To Third Circuit LAR 34.1(a)
January 27, 1994
Before: MANSMANN, NYGAARD, and WEIS, Circuit Judges
Filed June 1, 1994
___________
Arthur M. Schwartzstein, Esquire
Arthur M. Schwartzstein, P. C.
1730 Rhode Island Avenue, N.W., Suite 909
Washington, D.C. 20036
Marc B. Dorfman, Esquire
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W., Suite 825
Washington, D.C. 20036
Attorneys for Richard J. Adams, Appellant
Thomas V. Ackerly, Pro Se
12 Ferncliff Terrace
Glen Ridge, NJ 07028
1
Paul Gonson, Esquire
Solicitor
Jacob H. Stillman, Esquire
Associate General Counsel
Randall W. Quinn, Esquire
Senior Litigation Counsel
Susan B. Mann, Esquire
Senior Counsel
Securities and Exchange Commission
450 Fifth Street, N.W., MS 6-6
Washington, D.C. 20549
Attorneys for Securities and Exchange Commission, Appellee
____________
OPINION OF THE COURT
____________
WEIS, Circuit Judge.
The defendants in this civil proceeding refused to
answer questions during their discovery depositions in reliance
on the right against self-incrimination. In response to a motion
by plaintiff, the district court then barred defendants from
offering any evidence to contest the plaintiff's motion for
summary judgment. We conclude that plaintiff failed to provide
adequate support for such a broad preclusive order. We will thus
remand for further consideration of a remedial order balancing
the equities of the parties.
The Securities and Exchange Commission brought this
suit against the brokerage firm, Graystone Nash, Inc., and six of
its principal corporate officers, including Richard J. Adams and
Thomas V. Ackerly, alleging that they had engaged in a massive
securities fraud operation. The district court granted the SEC's
motion for summary judgment enjoining Adams and Ackerly from
2
further violating securities laws and directing that they
disgorge $60,565,581.
Neither Adams nor Ackerly were formally represented by
counsel either during discovery or in the district court
proceeding. They were deposed by telephone in 1992 on the 10th
and 22nd of June, respectively. The SEC's counsel questioned
them about their roles, remuneration, and decision-making
responsibilities at Graystone, their participation in various
stock transactions, any gains received by them as the result of
trading, and any compensation other than salary they had
received. Both Adams and Ackerly invoked the Fifth Amendment and
refused to answer questions other than those pertaining to their
names, addresses, current employment, and telephone numbers.
On October 23, 1992, the SEC filed a motion for an
order of preclusion against Adams and Ackerly and for the entry
of summary judgment. On December 14, 1992, Adams and Ackerly
filed responses and affidavits in opposition.
Ackerly complained that the SEC had refused to produce
documents that he needed in order to obtain expert testimony for
his defense. He also offered to testify once the parallel
criminal investigation against him by the U.S. Attorney in
Newark, New Jersey had been concluded.
Adams joined in Ackerly's response and, in addition,
asserted that he was not an equity owner of Graystone Nash, had
only received a total salary of approximately $150,000 for the
years of 1986, 1987, and 1988, and that he was never a trader for
the firm. He also asserted that given a day in court, he could
3
"deliver expert testimony to refute the Plaintiff's case" and
challenged in specific detail various statements made in
depositions that the SEC offered in support of its motion for
summary judgment.
The SEC's motion was argued before the district court
on January 25, 1993. Ackerly and Adams appeared without counsel.
The district judge advised them that they could exercise their
rights under the Fifth Amendment, but that the court had the
right to fashion remedies "[s]uch as to dismiss answers or to
grant the relief of a plaintiff . . . . You understand that."
Ackerly responded, "Only recently, sir. . . . We understand now."
Later in the proceeding, he said, "[W]e were advised by three
former prosecutors that you simply don't give testimony, and we
were really branded with that idea: You simply don't do it." As
to the $60.5 million that the SEC alleges was paid to Graystone,
Ackerly told the court that "Graystone Nash never saw the money.
I certainly never saw the money."
Adams also opposed the SEC's requests and made the
following comments at the hearing:
"[T]hese people [the SEC] have been given six
years' worth of tax returns which clearly
shows I made $50,000 a year . . . . $60
million is ludicrous. . . . I believe I can
bring enough people to make [the SEC] look
wrong and to realize there is no case here. I
can bring expert testimony. I have friends
in this business for 25 years who will
4
testify that as an operations manager, I did
my duty, and that's all. . . . [A]s far as
cooperation, I testified before our governing
body, the [National Association of Securities
Dealers], under oath, and that was submitted
to the Commission, by the way. Also, it
should be noted that I'm the one that
furnished almost 30,000 documents to these
people. So I did cooperate. . . . I didn't
have a share in the company. I had no reason
to do this."
Counsel for the SEC did not comment on these remarks, and the
court concluded the hearing at that point.
A few months later, the court granted the SEC's motion
for preclusion and for summary judgment. In discussing the
request to prevent Adams and Ackerly from presenting evidence in
opposition to summary judgment, the court reviewed decisional law
holding that a party invoking the Fifth Amendment cannot later
attempt to defend with evidence previously withheld from
discovery. In general, prejudice flowing from a Fifth Amendment
plea is borne by the party asserting the privilege.
Continuing along this line, the court concluded that
"[a]llowing [Ackerly and Adams] to come forward at this stage,
after plaintiff has deposed many witnesses and submitted its
arguments and proofs, would load the scales unjustly. Thus, the
Court will not permit defendants to advance exculpatory claims."
The judge continued: "The affidavits of [Ackerly and Adams]
5
contain claims about their respective roles, remuneration and
decision-making authority at Graystone. Because these defendants
previously responded to questions about their employment and
responsibilities at Graystone by asserting their fifth amendment
right . . . the Court will exclude these representations from the
record."
The district court did take into consideration,
however, the defendants' arguments as to the appropriateness of
injunctive relief on a motion for summary judgment. Nevertheless,
the court permanently enjoined Ackerly and Adams from engaging in
future violations of federal securities laws and ordered them to
disgorge $60,565,581 plus prejudgment interest.
I.
The privilege against self-incrimination may be raised
in civil as well as in criminal proceedings and applies not only
at trial, but during the discovery process as well. Unlike the
rule in criminal cases, however, reliance on the Fifth Amendment
in civil cases may give rise to an adverse inference against the
party claiming its benefits. Baxter v. Palmigiano, 425 U.S. 308,
318 (1976). Use of the privilege in a civil case may, therefore,
carry some disadvantages for the party who seeks its protection.
On the other hand, invocation of the Fifth Amendment
poses substantial problems for an adverse party who is deprived
of a source of information that might conceivably be
determinative in a search for the truth. Moreover, because the
privilege may be initially invoked and later waived at a time
when an adverse party can no longer secure the benefits of
6
discovery, the potential for exploitation is apparent. Thus, the
complications that may arise in civil litigation may be divided
into two categories -- the consequences of the privilege when
properly invoked, and the effects when it is abused causing
unfair prejudice to the opposing litigant.
The Supreme Court has cautioned that the Constitution
limits "the imposition of any sanction which makes assertion of
the Fifth Amendment privilege ``costly.'" Spevack v. Klein, 385
U.S. 511, 515 (1967) (quoting Griffin v. California, 380 U.S.
609, 614 (1965)). As an example, Lefkowitz v. Cunningham, 431
U.S. 801, 807-09 (1977), struck down a state statute that
required an officer of a political party to either waive the
Fifth Amendment or forfeit his office. The Court commented: "We
have already rejected the notion that citizens may be forced to
incriminate themselves because it serves a governmental need."
Id. at 808. The threatened loss of a party office with its
prestige and political influence was inherently coercive, id. at
807, and therefore, the statute forcing the officer to choose
between his right to participate in political associations and
the privilege against self-incrimination was unconstitutional.
Id. at 808.
The Court followed a similar rationale in other cases.
In Garrity v. New Jersey, 385 U.S. 493, 500 (1967), Spevack, 385
U.S. at 516, and Lefkowitz v. Turley, 414 U.S. 70, 83-85 (1973),
the Court held that individuals could not be forced to waive
their rights against self-incrimination by threats that their
employment would be forfeited.
7
The Rules of Civil Procedure recognize the need for
exercise of the privilege. Rule 26(b)(5) provides that claims of
privilege may be made to withhold material otherwise subject to
discovery. The procedural rules, therefore, provide no basis for
inflicting sanctions when there is a valid invocation of the
Fifth Amendment. A refusal to respond to discovery in such
circumstances is proper and does not justify the imposition of
penalties. Wehling v. Columbia Broadcasting Sys., 608 F.2d 1084,
1087 (5th Cir. 1979).
It may be seen, therefore, that dismissal of an action
or entry of judgment as a sanction for a valid invocation of the
privilege during discovery is improper. National Acceptance Co.
of America v. Bathalter, 705 F.2d 924, 931-32 (7th Cir. 1983);
Campbell v. Gerrans, 592 F.2d 1054, 1058 (9th Cir. 1979); see
also 8 Charles A. Wright & Arthur R. Miller, Federal Practice and
Procedure, § 2018 (1970 & Supp. 1994). In like vein, a complete
bar to presenting any evidence, from any source, that would in
all practical effect amount to the entry of an adverse judgment,
would be an inappropriate sanction.
The limitations on sanctions, however, do not insulate
a party from all adverse consequences of his plea. The principle
that the invocation of the privilege may not be too "costly" does
not mean that it must be "costless." In Baxter, the Supreme
Court gave an indication of a detriment that would not be too
"costly" when it held that it was permissible to draw "adverse
inferences against parties to civil actions when they refuse to
testify in response to probative evidence offered against them."
8
Baxter, 425 U.S. at 318. The Court pointed out that a
defendant's silence in itself was insufficient to support an
adverse decision, but that such silence in conjunction with other
evidence against the defendant could support that result. Id. at
317-18; see also RAD Servs., Inc. v. Aetna Casualty & Sur. Co.,
808 F.2d 271, 274 (3d Cir. 1986).
An adverse party in a civil case is not prevented from
presenting evidence to the factfinder to support his own position
even in the absence of testimony from the party invoking the
privilege. In Peiffer v. Lebanon Sch. Dist., 848 F.2d 44 (3d
Cir. 1988), for example, a school maintenance employee was
discharged after a hearing at which he invoked the Fifth
Amendment and did not testify. His choice to remain silent did
not prevent the school district from acting on evidence presented
by other witnesses that was adverse to the employee. Id. at 46.
The dilemma of choosing between complete silence and presenting a
defense does not fatally infect the right against compelled self-
incrimination. See Williams v. Florida, 399 U.S. 78, 84 (1970).
In a civil trial, a party's invocation of the privilege
may be proper, but it does not take place in a vacuum; the rights
of the other litigant are entitled to consideration as well. One
of the situations in which that concern comes into play arises
when one party invokes the Fifth Amendment during discovery, but
on the eve of trial changes his mind and decides to waive the
privilege. At that stage, the adverse party -- having conducted
discovery and prepared the case without the benefit of knowing
the content of the privileged matter -- would be placed at a
9
disadvantage. The opportunity to combat the newly available
testimony might no longer exist, a new investigation could be
required, and orderly trial preparation could be disrupted. In
such circumstances, the belated waiver of the privilege could be
unfair.
Gutierrez-Rodriguez v. Cartagena, 882 F.2d 553 (1st
Cir. 1989), refused to permit such abuse. In that case, the
district judge ruled four days before trial that the defendant
would be precluded from testifying because he had earlier refused
to answer questions during discovery. The Court of Appeals
determined that "[a] defendant may not use the fifth amendment to
shield herself from the opposition's inquiries during discovery
only to impale her accusers with surprise testimony at trial."
Id. at 577. For similar reasons, the Courts of Appeals in In re
Edmond, 934 F.2d 1304, 1308-09 (4th Cir. 1991) and United States
v. Parcels of Land, 903 F.2d 36, 43 (1st Cir. 1990), sustained
district court orders striking affidavits opposing summary
judgment after parties had refused to answer questions at
depositions.
Traficant v. Commissioner, 884 F.2d 258, 265 (6th Cir.
1989), upheld the trial court's order barring the defendant from
introducing evidence on the authenticity of his own statement and
of tape recordings because he had invoked the Fifth Amendment and
had refused to respond to discovery on those points. The Court
of Appeals held, however, that the trial court was incorrect in
preventing the defendant from exploring the contents and
significance of that evidence. Id.
10
A trial court must carefully balance the interests of
the party claiming protection against self-incrimination and the
adversary's entitlement to equitable treatment. Because the
privilege is constitutionally based, the detriment to the party
asserting it should be no more than is necessary to prevent
unfair and unnecessary prejudice to the other side.
The necessary accommodation took place in FTC v. Kitco
of Nevada, Inc., 612 F. Supp. 1282, 1291 (D. Minn. 1985), where
the trial judge admitted the testimony of the defendant even
though he had previously invoked the Fifth Amendment during
discovery. The court decided that a complete ban on defense
testimony was not justified because the plaintiff Federal Trade
Commission had received some information from the defendant about
specific areas of inquiry. Hence, the Commission had not been
unfairly surprised nor prejudiced by the defendant's last-minute
waiver. The agency had been able to thoroughly prepare its case
and was not solely dependent on the defendant for pertinent
information. Id.
In Young Sik Woo v. Glantz, 99 F.R.D. 651 (D.R.I.
1983), the plaintiff moved for summary judgment after the
defendant had invoked the Fifth Amendment. The trial court
observed that "no showing has been made sufficient to identify
the specific facts which the defendant asserts are contested, or
to show that third-party depositions or affidavits are, given
good faith efforts, unavailable to oppose the motion." Id. at
653. The court observed that the defendant may be able "to . . .
rebut his opponent's case without his own testimony." Id.
11
(internal quotation omitted). In the exercise of caution, the
court therefore declined to enter judgment in favor of the
plaintiff, but instead gave the defendant an opportunity to
conduct further discovery in order to secure evidence to oppose
any renewed motion for summary judgment that might later be
brought. Id. at 653-54.
In contrast to those two cases and others using a
similar approach are such decisions as SEC v. Cymaticolor Corp.,
106 F.R.D. 545 (S.D.N.Y. 1985) and SEC v. Benson, 657 F. Supp.
1122 (S.D.N.Y. 1987). In Cymaticolor, the plaintiff SEC sought
an order precluding the defendant from offering into evidence any
matter relating to the factual bases for his denials and defenses
as to which he asserted his Fifth Amendment rights. Cymaticolor,
106 F.R.D. at 549. Rejecting the defendant's contention that
preclusion should be limited to evidence that the SEC had not
received from other sources, the court issued an order in the
terms the plaintiff had requested. Id. at 549-50.
We do not find the Cymaticolor approach satisfactory
because the court there did not perform the careful evaluation
used in Kitco. Benson also seemingly imposed a total preclusion,
although that is not clear from the opinion. See Benson, 657 F.
Supp. at 1129. In any event, the defendant's obstructionary
conduct throughout the litigation might have had a bearing on the
court's ultimate choice of remedies.
II.
This brief survey of caselaw makes it apparent that the
effects that an invocation of the privilege against self-
12
incrimination will have in a civil suit depends to a large extent
on the circumstances of the particular litigation.1 The issue
has been complicated somewhat in this case by the fact that
defendants represented themselves in the district court, although
they had apparently received off-hand advice from lawyers at some
point. The decision to invoke or waive the Fifth Amendment is
not always self-evident, and it requires serious consideration of
the consequences. Counselling by a lawyer familiar with the
ramifications of a particular case and the intricacies of the law
in this area is highly desirable, but here defendants proceeded
without the benefit of such carefully considered advice.
The record raises serious questions about whether
defendants waived their privilege by filing affidavits addressed
to some of the same matters that they had refused to discuss at
their depositions. Some statements made by Ackerly and Adams at
the hearing on the SEC's motion, moreover, indicate that
defendants might have shifted their positions and had instead
decided to waive the privilege.
Another area of inquiry that was not explored at the
hearing was the effect of Adams' sworn statement to the National
Association of Securities Dealers that the SEC had obtained.
1
Not surprisingly, this topic has generated interesting academic
commentary. See, e.g., Frances S. Fendler, Waive the Fifth or
Lose the Case: Total Preclusion Orders and the Civil Defendant's
Dilemma, 39 Syracuse L. Rev. 1161 (1988); Elkan Abramowitz & Jed
S. Rakoff, The Fifth Amendment Privilege in Civil Litigation:
Assertion, Waiver, and Consequences, in Crim. L. & Urb. Probs:
White Collar Crim. Prac. 1985 (PLI Litig. & Admin. Practice
Course Handbook Series No. C4-4169, 1985); Robert Heidt, The
Conjurer's Circle -- The Fifth Amendment Privilege in Civil
Cases, 91 Yale L.J. 1062 (1982).
13
Whether that material constituted a waiver or whether it was a
factor counselling a limitation on the SEC's request for total
preclusion was not discussed. The thousands of documents that
Adams asserted he had turned over to the SEC might also have had
some relevance in determining the appropriate scope of
preclusion, assuming that to be a proper remedy in the
circumstances.
There is a lack of support in the record for the SEC's
contention that it suffered prejudice because of the defendants'
belated attempts to present evidence on their own behalf. The
SEC asserts that the defendants' introduction of evidence at that
late stage was unfair because it would delay action on the SEC's
motion for summary judgment. This contention lacks substance. It
was the SEC itself that had set the time table by filing its
motion for preclusion simultaneously with a request for summary
judgment. The SEC's motion was apparently the first indication
given to defendants that they might be unable to present any kind
of defense or that a trial on the merits might not be held. If
the SEC had wished to avail itself of a claim of prejudice --
asserting that defendants had "sandbagged" the agency at the
eleventh hour -- the appropriateness of a preclusion order should
have been resolved before the motion for summary judgment was
filed.
Moreover, any allegation that the SEC was surprised by
suddenly being confronted with new and unexpected evidence must
be received with some caution. As noted earlier, Ackerly and
Adams were but two of seven defendants who had been sued by the
14
SEC. Before Adams and Ackerly appeared at the hearing, two co-
defendants, Shawn M. Crane and Robert L. Rock, had entered into
consent judgments for the disgorgement of $60,663.15 and
$279,074.00, respectively,2 and had agreed to testify at any
evidentiary proceeding requested by the SEC. In addition, the
SEC had already taken the depositions of several individuals
whose testimony was cited by the district court in support of
summary judgment.
The SEC possessed substantial evidence in addition to
the material that Adams asserted he had made available. It is
apparent that the government had devoted substantial resources to
expose the fraudulent security arrangements and to proceed
against those responsible. Therefore, this appears to be a far
cry from a case where invocation of the privilege prevented the
opposing party from obtaining the evidence it needed to prevail
in the litigation.
Nothing presently in the record persuades us that the
SEC would have been unable to present a strong case even if Adams
and Ackerly had been permitted to testify if they chose. The
severe remedy of barring defendants from presenting any evidence
from third parties was even less necessary. The preclusion
sanction did not "level the playing field," but tilted it
strongly in favor of the SEC. Courts must bear in mind that when
the government is a party in a civil case and also controls the
decision as to whether criminal proceedings will be initiated,
2
The amount of these judgments stand in stark contrast to the
approximately $60.5 million assessed against Adams and Ackerly.
15
special consideration must be given to the plight of the party
asserting the Fifth Amendment.
Although we believe the remedy here went beyond that
which was equitable under the circumstances, we recognize the
burden that pro se representation imposes upon extremely busy
district judges. Obviously, the failure of Adams and Ackerly to
present proper legal arguments in response to the motion for
preclusion did not alert the district judge in this case to the
factors that should be considered in directing an appropriate
remedy.
We should not be understood as holding that, in the
circumstances of this case, no remedial measures should be
imposed. Those steps, however, should be those that are
necessary to prevent a party from being unduly prejudiced and to
allow for reimbursement of any additional sums a party actually
incurred as a direct result of its opposition's invocation of the
privilege. It is not always possible or necessary that such
adjustments be computed precisely, but some rough justice
evaluations would be in order.
The imposition of an appropriate remedy is within the
discretion of the trial court. When significant factors are not
weighed in making that determination, however, we must remand so
that a proper evaluation may be reached.
The judgment in this case was based upon a record that
was deficient because of an inappropriate order of preclusion.
The judgment, therefore, will be reversed, and the case will be
remanded for further proceedings consistent with this opinion.
16