S.E.C. v. Graystone Nash, Inc.

• Decision Date: 27 January 1994
• Docket Number: 93-5324,Nos. 93-5288,s. 93-5288
• Citation: 25 F.3d 187
• Parties: , Fed. Sec. L. Rep. P 98,230, 29 Fed.R.Serv.3d 38 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. . Submitted Pursuant To Third Circuit LAR 34.1(a)
• Court: U.S. Court of Appeals — Third Circuit

Page 187

25 F.3d 187

62 USLW 2800, Fed. Sec. L. Rep. P 98,230,

29 Fed.R.Serv.3d 38

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.

Nos. 93-5288, 93-5324.

United States Court of Appeals, Third Circuit.

Submitted Pursuant To

Third Circuit LAR

34.1(a)

Jan. 27, 1994.

Decided June 1, 1994.

Arthur M. Schwartzstein, Arthur M. Schwartzstein, P.C., Marc B. Dorfman, Freedman, Levy, Kroll & Simonds, Washington, DC, for Richard J. Adams, appellant.

Thomas V. Ackerly, pro se.

Paul Gonson, Sol., Jacob H. Stillman, Associate Gen. Counsel, Randall W. Quinn, Sr. Litigation Counsel, Susan B. Mann, Sr. Counsel, S.E.C., Washington, DC, for S.E.C., appellee.

Before: MANSMANN, NYGAARD, and WEIS, Circuit Judges.

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 further violating securities laws and directing that they disgorge $60,565,581. 820 F.Supp. 863.

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 "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 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] 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, 96 S.Ct. 1551, 1558, 47 L.Ed.2d 810, 821 (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 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, 87 S.Ct. 625, 628, 17 L.Ed.2d 574, 577 (1967) (quoting Griffin v. California, 380 U.S. 609, 614, 85 S.Ct. 1229, 1232-33, 14 L.Ed.2d 106, 110 (1965)). As an example, Lefkowitz v. Cunningham, 431 U.S. 801, 807-09, 97 S.Ct. 2132, 2136-38, 53 L.Ed.2d 1, 8-9 (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, 97 S.Ct. at 2137. The threatened loss of a party office with its prestige and political influence was inherently coercive, id. at 807, 97 S.Ct. at 2136, 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, 97 S.Ct. at 2136-37.

The Court followed a similar rationale in other cases. In Garrity v. New Jersey, 385 U.S. 493, 500, 87 S.Ct. 616, 620, 17 L.Ed.2d 562, 567 (1967), Spevack, 385 U.S. at 516, 87 S.Ct. at 628-29, and Lefkowitz v. Turley, 414 U.S. 70, 83-85, 94 S.Ct. 316, 325-26, 38 L.Ed.2d 274, 285-86 (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.

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...