District Court Holds That The Pendency Of A Criminal Indictment Is A Prerequisite to Staying Parallel SEC Proceedings
In an earlier post we explored the relatively new SEC policy encouraging cooperation. An individual facing an SEC inquiry and his/her counsel must, of course, consider all of their available options, which in certain circumstances sensibly include not cooperating and not responding to the SEC’s questions at all.
The Fifth Amendment privilege against self-incrimination, which enables a refusal to provide testimony and records to any governmental authority, is naturally available to an individual subject to a civil investigation by the SEC, where the alleged conduct may also drive a parallel or subsequent criminal proceeding. The ways in which the same conduct can readily support both civil and criminal charges was explored in an earlier post on Raj Rajaratnam of Galleon. See Marchetti v. United States, 390 U.S. 39, 53 (1968) (privilege available when invoker “is confronted by substantial and ‘real’ . . . hazards of incriminating); Hoffman v. United States, 341 U.S. 479, 486-87 (1951) (privilege applies where a response constitutes a “link in the chain” of evidence of criminal conduct).
Invoking the privilege carries its own set of issues. See, e.g., SEC Division of Enforcement, Enforcement Manual § 4.1.3 (2011). These include the public perception and reputational consequences of “taking the Fifth,” especially for high profile targets. See Ullmann v. United States, 350 U.S. 422, 426 (1956) (“Too many, even those who should be better advised, view this privilege as a shelter for wrongdoers. They too readily assume that those who invoke it are either guilty of crime or commit perjury in claiming the privilege”). Asserting the privilege may preclude an opportunity to provide mitigating evidence of the kind which could affect the outcome of the SEC proceeding. See, e.g., SEC v. Grossman, 887 F. Supp. 649 (S.D.N.Y. 1995) (precluding evidence about matters as to which the defendant refused to testify, including exculpatory evidence in opposition to summary judgment). Invoking the right to remain silent in a civil deposition may also subject the deponent to a devastating adverse inference or assumption by the fact-finder that the testimony or information withheld would have been unfavorable. Baxter v. Palmigiano, 425 U.S. 308, 316-20 (1976).
One way to avoid the dilemma posed by the Fifth Amendment issue is to seek a stay of the civil proceeding. However, this relief may be unavailable if the criminal prosecution is merely inchoate. A federal court in New York recently refused to stay an SEC proceeding in the face of claimed criminal jeopardy because no indictment had yet been returned, leaving the individual to the Hobson’s choice between invoking or waiving the Fifth Amendment privilege before the government’s criminal investigation was complete and thereby risking prejudice to his defenses in both matters. SEC v. Wheeler, No. 11-cv-6169-CJS (W.D.N.Y. Oct. 7, 2011). Following the decision, the defendant in Wheeler was reported by the Rochester Business Journal to have invoked his Fifth Amendment right and declined to answer the SEC civil suit, preferring, it seems, to face the civil penalties able to be summoned by the SEC, rather than put his head in the criminal noose and risk losing his liberty.
(Edward J. Mullins III, Esq., the author of this entry, is an associate with Fox Rothschild LLP, based in our Roseland, NJ office. His practice concerns litigation in the areas of financial services and corporate governance, including white collar defense and securities)