In re Sentinel Financial Instruments

• Citation: 553 F. Supp. 71
• Decision Date: 18 October 1982
• Docket Number: No. M11-188.,M11-188.
• Parties: In re Grand Jury Subpoenas Addressed to SENTINEL FINANCIAL INSTRUMENTS and Wachtell, Lipton, Rosen & Katz.
• Court: U.S. District Court — Southern District of New York

553 F. Supp. 71

In re Grand Jury Subpoenas Addressed to SENTINEL FINANCIAL INSTRUMENTS and Wachtell, Lipton, Rosen & Katz.

No. M11-188.

United States District Court, S.D. New York.

October 18, 1982.

Wachtell, Lipton, Rosen & Katz, New York City, for movants; Bernard W. Nussbaum, Paul Vizcarrondo, Jr., Barry A. Weprin, New York City, of counsel.

John S. Martin, Jr., U.S. Atty. for the S.D.N.Y., New York City, for the government; Charles Carberry, Asst. U.S. Atty., New York City, of counsel.

OPINION

TENNEY, District Judge.

This is a motion under Federal Rule of Criminal Procedure 17(c) by Sentinel Financial Instruments ("SFI") and Michael Senft ("Senft"), a principal of SFI, to quash grand jury subpoenas requiring the production of SFI business documents. The subpoenas were served on SFI and Wachtell, Lipton, Rosen & Katz ("Wachtell, Lipton"), SFI's counsel. The movants claim that Senft is entitled to assert his Fifth Amendment privilege against self-incrimination to immunize SFI's records from production and that the documents in possession of Wachtell, Lipton are protected by the attorney-client privilege.

For the reasons stated below, the motion to quash the subpoenas is denied.

Background

SFI is a limited partnership created pursuant to New York law (N.Y. Partnership Law § 91 (McKinney 1948) (hereinafter N.Y. Partnership Law)). It acts primarily as a broker-dealer in the trading of government securities. The firm is a registered broker-dealer in New York State and employs approximately twenty individuals. SFI and Senft, SFI's sole general partner, are currently targets of a grand jury investigation. As a consequence, SFI and Wachtell, Lipton were served with subpoenas requiring the production of SFI documents. By the present motion they seek to quash the subpoenas. With regard to the subpoena served on SFI, Senft contends that he should be able to assert his Fifth Amendment privilege against self-incrimination to shield the documents from the purview of the grand jury. He argues that, since he controls the management of SFI and owns 98% of the company, it is, in effect, a sole proprietorship. Alternately, he argues that SFI is a small family partnership that may be treated as a sole proprietorship under the relevant case law.

In support of these arguments he points out that SFI consists only of himself and two limited partners, the Jenifer E. Senft Trust and David Senft. Jenifer is Senft's daughter and David is his brother. Senft owns a 98% interest in the losses and profits of the business. Each of the limited partners owns a 1% interest in SFI's profits. By law, their losses are limited to their capital contribution. N.Y. Partnership Law § 106.

The government, on the other hand, contends that SFI is a limited partnership with a separate institutional identity and, therefore, is not entitled to assert the general partner's privilege against self-incrimination.

With regard to the subpoena served on Wachtell, Lipton, the movants argue that the documents in Wachtell, Lipton's possession are protected by the attorney-client privilege. The government, however, contends that the privilege does not apply since the documents are not covered by Senft's personal privilege and, even if they were, the documents in the hands of Wachtell, Lipton were received from a third party thus precluding the application of the attorney-client privilege.

Discussion

The Fifth Amendment privilege against self-incrimination is purely a personal privilege, Bellis v. United States, 417 U.S. 85, 87, 94 S.Ct. 2179, 2182, 40 L.Ed.2d 678 (1974); Couch v. United States, 409 U.S. 322, 328, 93 S.Ct. 611, 615, 34 L.Ed.2d 548 (1972); United States v. White, 322 U.S. 694, 698, 64 S.Ct. 1248, 1251, 88 L.Ed. 1542 (1944), and does not extend to individuals who possess records of an organization in a representative capacity. Bellis, supra, 417 U.S. at 89, 94 S.Ct. at 2183; United States v. White, supra, 322 U.S. at 699-700, 64 S.Ct. at 1251 (1944). Therefore, officers of incorporated or unincorporated associations may not claim the privilege to preclude the production of records pursuant to a grand jury subpoena. Bellis, supra; United States v. White, supra; Wilson v. United States, 221 U.S. 361, 31 S.Ct. 538, 55 L.Ed. 771 (1911); Dreier v. United States, 221 U.S. 394, 31 S.Ct. 550, 55 L.Ed. 784 (1911). Even the smallest of corporations — those consisting of only one shareholder — may not rely on the Fifth Amendment privilege to shield its records from a government investigation. Hair Industry, Ltd. v. United States, 340 F.2d 510 (2d Cir.), cert. denied, 381 U.S. 950, 85 S.Ct. 1804, 14 L.Ed.2d 724 (1965).

On the other hand, an individual, as a sole proprietor, may withhold his business records from a grand jury investigation if he asserts his Fifth Amendment privilege. Bellis, supra, 417 U.S. at 87-88, 94 S.Ct. at 2182; Grand Jury Subpoena Duces Tecum Dated April 23, 1981 Witness v. United States, 657 F.2d 5, 8 n. 1 (2d Cir.1981); United States v. Beattie, 541 F.2d 329, 331 (2d Cir.1976). Indeed, the privilege may be invoked by a sole proprietor of a business without regard to the size or complexity of the business. In re Grand Jury Empanelled March 19, 1980, 680 F.2d 327, 330 (3d Cir.1982); In re Grand Jury Subpoena, 646 F.2d 963, 968-69 (5th Cir. 1981).

Whether a partnership should be treated like a corporation or like a shared sole proprietorship for Fifth Amendment purposes was an unsettled question until the Court decided Bellis v. United States, supra. In Bellis an individual partner of a three member law firm attempted to protect partnership records in his possession from the purview of a grand jury by asserting his privilege against self-incrimination. Bellis v. United States, supra, 417 U.S. at 86, 94 S.Ct. at 2182. He argued that the small firm did not constitute an entity separate from the individual partners. The Court held that where a partnership has "an established institutional identity independent of its individual partners," id. at 95, 94 S.Ct. at 2186, an individual partner may not withhold subpoenaed documents of the partnership that he holds in his representative capacity. Id. at 95-97, 94 S.Ct. at 2186-87. To determine if the partnership had a separate identity, distinct from its individual members, the Court looked to a number of factors. These included the fact that the firm was not an informal or temporary arrangement, had "a bank account in the partnership name, had stationary using the firm name on its letterhead, and in general, held itself out to third parties as an entity with an independent institutional identity." Id. at 96-97, 94 S.Ct. at 2187. The Court also noted that the partnership employed two other attorneys, who were not members of the partnership, that it filed separate partnership returns for federal tax purposes, and that "state law permitted the firm to be sued ... and hold title to property ... in the partnership name, and generally regarded the partnership as a distinct entity for numerous purposes." Id. at 97, 94 S.Ct. at 2187 (citations omitted).

Applying the above criteria, SFI clearly has an established institutional identity separate from its individual partners. SFI is a limited partnership formed under New York state law; it is registered as a broker-dealer doing business in New York. Affidavit in Opposition to Motion to Quash of Kevin McLaughlin, sworn to August 18, 1982 ("McLaughlin Aff.") ¶ 2. In 1980, the firm employed approximately twenty individuals, some of whom were traders, and served about two hundred customers. Id. at ¶¶ 4, 6, 9. It has its own stationery with the firm letterhead. Id. at ¶ 8. The firm maintained two bank accounts, filed partnership income tax returns for 1979 and 1980, id., ¶¶ 7, 12, and had substantial assets. Reply Affidavit of Faith Colish, sworn to August 23, 1982 ¶ 3. In addition, SFI has purchased material under its business name and has received fees from another firm for the use of its space and staff. McLaughlin Aff. at ¶¶ 8, 10. Moreover, Senft and SFI were to be two separate general partners in a new limited partnership that Senft was organizing. Id.

Movants argue that these facts are irrelevant in determining whether the Fifth Amendment privilege is available to Senft and merely divert the Court's attention from precedent squarely supporting their motion. They contend that unless this Court is prepared to overturn United States v. Slutsky, 352 F.Supp. 1105 (S.D.N.Y.1972), the subpoenas must be quashed. Reply Memorandum of Law in Support of the Motion by Sentinel Financial Instruments and Michael M. Senft to Quash Subpoenas ("Reply Memorandum") at 1.

In Slutsky, the government sought to compel the production of business records of a two-man family partnership. The partners, Ben and Jule Slutsky, were brothers who operated a resort known as the Nevele Country Club. United States v. Slutsky, supra, 352 F.Supp. at 1107. The club consisted of a multi-million dollar hotel operation, with a number of employees, that was managed by the Slutskys and their two sons, all of whom lived on the premises. Id.

The court in Slutsky stated that, in determining whether a partnership more closely resembles a sole proprietorship or a corporation, the "focus should be placed on the extent and nature of the ownership group." Id. at 1108. On the facts of that case, the court held that a two-man "family partnership is not so impersonal in the scope of its membership and activities that it can not represent the purely private or personal interests of its constituents." Id. Accordingly, the court found that the defendants' Fifth Amendment privilege against self-incrimination was available and denied the government's motion. Id. at 1109.

The movants, citing the Supreme Court's dictum in United States v. Bellis, supra, that there "might be a different case if the partnership involved a small family partnership," supra, 417 U.S. at 101, 94 S.Ct. at 2189 (citing ...