                                                                                                                           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Precedential or Non-Precedential: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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                  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
