Of the Federal Circuit, sitting by designation. *

Of the District of Puerto Rico, sitting by designation. **

United States Court of Appeals

For the First Circuit

No. 07-2532

SECURITIES & EXCHANGE COMMISSION,

Plaintiff-Appellee,

v.

JUSTIN F. FICKEN,

Defendant-Appellant,

and

MARTIN J. DRUFFNER, SKIFTER AJRO, JOHN S. PEFFER,

MARC J. BILOTTI, AND ROBERT E. SHANNON,

Defendants.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Nathaniel M. Gorton, U.S. District Judge]

Before

 Boudin and Dyk, Circuit Judges, *

and Domínguez, District Judge. **

Dominick v. Freda, with whom Jacob H. Stillman and John

W. Avery were on brief, for plaintiff-appellee.

Gary G. Pelletier, for defendant-appellant.

October 20, 2008
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DYK, Circuit Judge. The Securities and Exchange

Commission (“SEC”) filed a civil complaint against defendantappellant Justin F. Ficken (“Ficken”) and others in the United

States District Court for the District of Massachusetts, alleging

violations of 15 U.S.C. § 77q(a), 15 U.S.C. § 78j(b), and 17 C.F.R.

§ 240.10b-5. The SEC alleged that Ficken intentionally concealed

his identity and the identities of his clients while trading shares

of mutual funds, in order to mislead mutual fund companies into

processing trades that they otherwise would not have allowed. The

district court granted the SEC’s motion for summary judgment

against Ficken, finding no genuine issue of material fact as to any

relevant issue, including scienter. SEC v. Druffner, 517 F. Supp.

2d 502 (D. Mass. 2007). We affirm.

I.

The federal securities laws ban fraud and other deceptive

practices in connection with the purchase and sale of securities.

See Securities Act of 1933 § 17(a), 15 U.S.C. § 77q(a) (prohibiting

fraud and material misrepresentations or omissions in the offer or

sale of securities); Securities Exchange Act of 1934 § 10(b), 15

U.S.C. § 78j(b) (prohibiting manipulative or deceptive practices in

violation of SEC regulations in the purchase or sale of

securities); SEC Rule 10b-5, 17 C.F.R. 240.10b-5 (prohibiting fraud

and material misrepresentations or omissions in the purchase or

sale of securities). A misrepresentation is material if there is
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a substantial likelihood that the misrepresentation would affect

the behavior of a reasonable investor. See Basic Inc. v. Levinson,

485 U.S. 224, 231-32 (1988). Proof of scienter is required to

establish violations of § 17(a)(1), § 10(b), or Rule 10b-5, while

negligence is sufficient to establish liability under § 17(a)(2) or

§ 17(a)(3). See Aaron v. SEC, 446 U.S. 680, 694-97 (1980); SEC v.

Fife, 311 F.3d 1, 9-10 (1st Cir. 2002).

Scienter is an intention “to deceive, manipulate, or

defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194, and n.12

(1976). In this circuit, proving scienter requires “a showing of

either conscious intent to defraud or ‘a high degree of

recklessness.’” ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46,

58 (1st Cir. 2008) (quoting Aldridge v. A.T. Cross Corp., 284 F.3d

72, 82 (1st Cir. 2002)). “Recklessness is ‘a highly unreasonable

omission, involving not merely simple, or even inexcusable[]

negligence, but an extreme departure from the standards of ordinary

care, and which presents a danger of misleading buyers or sellers

that is either known to the defendant or is so obvious the actor

must have been aware of it.’” SEC v. Fife, 311 F.3d at 9-10

(quoting Greebel v. FTP Software, 194 F.3d 185, 198 (1st Cir.

1999)).

The question here is whether defendant Ficken’s conduct

as a broker violated the securities laws. Ficken worked as a

broker in a Boston branch office of Prudential Securities, Inc.
See Staff Report to the United States Securities and 1

Exchange Commission, Exemptive Rule Amendments of 2004: The

Independent Chair Condition (April 2005), at 32, available at

http://www.sec.gov/news/studies/indchair.pdf.

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(“PSI”), from October 1999 to September 2003. He purchased and

sold mutual fund shares on behalf of customers. In doing so he

engaged in market timing. “Market timing” is a mutual fund share

trading strategy that “exploit[s] brief discrepancies between the

stock prices used to calculate the shares' value once a day, and

the prices at which those stocks are actually trading in the

interim.” Kircher v. Putnam Funds Trust, 547 U.S. 633, 637 n.4

(2006). The price of mutual fund shares is calculated at the close

of U.S. trading, but in the case of a foreign stock exchange listed

company, the share price calculation uses the latest foreign market

closing prices. Because of time zone differences between the daily

closings of the foreign and U.S. markets on which a mutual fund’s

portfolio of securities trades, someone engaging in market timing

can buy or sell mutual fund shares based on the foreign markets’

closing prices but utilizing information that becomes known after

the foreign markets closed (information that will not be reflected

in the foreign market closing prices until the next day). 

Although market timing is not illegal, mutual fund

companies often prohibit market timing in order to protect longterm shareholders from dilution and other adverse effects caused by

rapid and repeated short-term market timing transactions. When a 1
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mutual fund company that prohibits market timing detects market

timing, the mutual fund company often blocks future trades

utilizing that broker’s so-called financial advisor (“FA”) number

and/or the customer account number used in the market timing trade.

Ficken and other brokers at PSI were assigned FA numbers.

These FA numbers allowed brokers to open customer accounts, execute

trades, and track commissions. Each customer account had an

individual number assigned to it, and each customer account number

had an individual FA number assigned to it. Brokers used a

customer’s account number to submit mutual fund transactions on

behalf of the customer. Ficken had at least seven FA numbers

registered under his name alone or jointly with one or more of the

brokers in his group at PSI, and his group eventually opened over

170 customer accounts for only five customers. Ficken and the

brokers in his group at PSI used these FA numbers and customer

account numbers in trading with over 50 mutual fund companies in

amounts exceeding $1 billion. 

While Ficken worked at PSI, several mutual fund companies

suspected PSI brokers of market timing and consequently blocked

trading under some of Ficken’s FA numbers, customer account

numbers, or both. It is undisputed that after mutual fund

companies blocked Ficken’s FA numbers or customer account numbers,

Ficken then used new FA or customer account numbers, or both, to

trade the companies’ mutual funds.
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The SEC’s theory was that Ficken violated federal

securities laws by utilizing new FA numbers and customer account

numbers to evade mutual fund companies’ restrictions on trading

using existing FA and customer account numbers. Ficken’s defense

was that his use of new customer account numbers and FA numbers was

not intended to mislead mutual fund companies or inaccurately

identify customers and brokers, but was instead done for legitimate

reasons.

Ficken resigned from PSI in 2003 following allegations

that his group of brokers at PSI was involved in improper market

timing activities. On October 1, 2003, he testified in a

proceeding conducted by the SEC as part of its investigation of

PSI. Ficken did not assert his Fifth Amendment privilege against

self-incrimination in the proceeding. On December 17, 2003, Ficken

testified in an investigation proceeding conducted by the National

Association of Securities Dealers (“NASD”). The NASD (now

succeeded by the Financial Industry Regulatory Authority) was a

private self-regulatory organization with regulation and

enforcement authority over securities firms under 15 U.S.C. § 78o-

-3. In the NASD proceeding, Ficken also testified but invoked his

Fifth Amendment privilege against self-incrimination as to certain

questions. In both the SEC and NASD proceedings Ficken sought to

justify his practices as being legitimate, at least under some

circumstances. For example, he testified that he used new FA
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numbers with the permission of the mutual fund companies and that

he used new FA numbers to facilitate the splitting of commissions

with other brokers or to accommodate clients’ “technology” needs.

The SEC filed a civil complaint against Ficken and his

co-defendants in November 2003. The SEC alleged in its amended

complaint that Ficken attempted to evade market timing detection by

using multiple FA numbers and multiple customer account numbers in

order to “conceal [his] own identit[y] and the identities of [his]

clients” and thus to “mislead[] the fund companies to process

transactions they would otherwise have rejected.” Pl. Am. Compl.

¶ 3. The SEC also alleged that Ficken “made false statements to

the mutual fund companies by using fictitious names on the customer

accounts” and “made omissions of material fact by failing to

disclose to the fund companies that the numerous accounts” and FA

numbers Ficken used in trading mutual fund shares belonged to the

same brokers and customers whose trading activities “had previously

been blocked” by the mutual fund companies. Id. at ¶ 18. When the

SEC sought to depose Ficken as part of the present proceeding,

Ficken asserted his Fifth Amendment rights and refused to be

deposed.

The SEC moved for summary judgment. The SEC’s motion for

summary judgment pointed out that Ficken was well aware of the
For instance, on August 9, 2001, Hartford Mutual Funds 2

sent Ficken a letter stating,

We have sent you warnings that your

trading behavior violates the policies and

procedures established by The Hartford Mutual

Funds, and we have terminated your exchange

privileges on more than one occasion. Despite

the warnings and terminations, you simply

close one account and open another account.

And, you continue to violate our prohibitions

on market timing.

Therefore, The Hartford Mutual Funds

will, as of September 10th, 2001, no longer

open new accounts with you as broker of record

and will not allow you to effect any trades on

any accounts, new or old, as of that date.

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funds’ policies. The SEC also relied on Ficken’s e-mail 2

communications with customers, which discussed his market timing

and his blocked FA numbers and customer account numbers, to

demonstrate Ficken’s intent to mislead mutual fund companies into

processing trades that he knew would violate the mutual fund

companies’ market timing and excessive trading restrictions. For

instance, on October 30, 2001, Ficken sent an e-mail to one of his

clients stating, “when using Seligman, it is crucial to implement

some sort of fund rotation. They look carefully at accounts hitting

the same funds over and over again.” On February 4, 2002, Ficken

sent an e-mail to the same client stating, “As I look for space

within the Zurich Accounts, I am a bit weary as to which funds have

been previously traded and stopped.” On February 5, 2002, the

client responded by sending Ficken a list of its accounts that had
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been blocked since January 2000. Similarly, on April 12, 2002,

Ficken sent an e-mail to another client recommending a trading

strategy and stating,

[A]ll that I can ask is that it avoid

doing back to back trades on consecutive days.

Often times . . . trading consecutive days

creates log jam, causing the trades to be

manually processed and scrutinised [sic] by

people not to [sic] fond of our trading. . . .

I suggest you do not hit the same fund within

each account. Meaning, try not to trade the

same BlackRock fund within all your accounts

on the same day.

(alternation in original). On April 2, 2003, Ficken sent an e-mail

to another client stating,

[Y]ou need to be somewhat flexible with

regards to how we gain access to the various

Fund Families. Some are far more vigilant than

others - buying the shortest duration Bond

Fund in a large quantity is a dead give-away

as far as market timing. I always try to place

the money in respective Fund Families with the

intent on avoiding losses in Bond positions.

However, sometimes it happens.

(alteration in original). On May 7, 2003, Ficken sent an e-mail to

another client explaining that Ficken was going to sell shares in

a certain account because “American [Funds] finally clipped my last

rep id [FA number].”

In his opposition to the SEC’s motion for summary

judgment, Ficken did not dispute that the SEC had produced

substantial evidence supporting a finding of scienter. Instead,

Ficken argued that testimony he presented in the prior NASD

proceedings raised a genuine issue of material fact regarding his
Q. Okay. Other than compensation break-outs as the 3

reason for all these FA numbers would you have any

other reason to use these - to have as many FA

numbers?

A. Well, again the ALSO number [a type of FA number]

was - was required for the technology purposes. You

know, I - it’s not a number that I ever thought I’d

need other than the fact the CIBC [a bank providing

leverage to some of Ficken’s clients] told me they

needed some sort of technology.

Q. Okay. Other than the ALSO number would you have any

other reason other than compensation to have so

many rep ID numbers [FA numbers]?

A. I don’t think so.

Ficken NASD testimony, p. 46, l. 19 - p. 47, l. 6.

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scienter. In the NASD proceeding, Ficken testified that he used

multiple FA numbers in order to split commissions with different

brokers and to accommodate his clients’ technology needs, such as

their need to gain access to their accounts or to receive

commission discounts. Ficken also claimed that mutual fund 3

companies that previously had blocked one or more of his FA numbers

later encouraged him to acquire a new FA number to conduct

legitimate trades, and that he relied on this encouragement in good

faith when obtaining a new FA number. This encouragement was

conditioned in part on Ficken’s promise to abide by the mutual fund

companies’ market timing policies. Ficken’s opposition also

argued that the SEC did not need to depose Ficken in this

proceeding, because it could “utilize the answers that Ficken

provided in his [prior NASD and SEC] depositions” and that “[t]hese
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depositions provide ample basis for cross-examination at trial.”

Mem. Opp’n Pl.’s Summ. J. Mot. 6.

The district court granted summary judgment for the SEC,

first concluding that the e-mails and other evidence presented by

the SEC showed that Ficken made material misrepresentations with

scienter by using multiple FA numbers and multiple customer account

numbers to deceive mutual fund companies into allowing trades they

otherwise would have rejected. SEC v. Druffner, 517 F. Supp. 2d at

508-09. The district court then concluded that Ficken’s opposition

did not raise a genuine issue as to scienter (1) because the NASD

testimony relied on in the opposition did not address his use of

multiple customer account numbers, and (2) because Ficken’s

“failure to submit to subsequent interrogation” (by claiming his

Fifth Amendment privilege) justified an adverse inference on the

issue of scienter. Id. at 510-11. 

The district court ordered Ficken to disgorge the

commissions he obtained from his fraudulent mutual fund trades,

plus pre-judgment interest, in order to prevent unjust enrichment.

Id. at 511-12. The district court later fixed these amounts at

$494,975 of commissions and $94,879 of pre-judgment interest. The

district court also enjoined Ficken from further violations of the

securities laws because his “violations were flagrant, deliberate

and part of a pattern,” but declined to award civil penalties

because Ficken did not have the means to pay them. Id. at 513.
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Ficken timely appealed. We have jurisdiction pursuant to 28 U.S.C.

§ 1291.

II.

We review the district court’s grant of summary judgment

de novo. Vesprini v. Shaw Contract Flooring Servs., Inc., 315 F.3d

37, 39 n. 1 (1st Cir. 2002). Summary judgment is, of course,

appropriate only where “there is no genuine issue as to any

material fact.” Fed. R. Civ. P. 56(c). A genuine issue of

material fact was recently defined in Enica v. Principi, __ F.3d

__, 2008 WL 4457541, at *5 (1st Cir. 2008). “In the summary

judgment context, ‘genuine’ has been construed to mean ‘that the

evidence about the fact is such that a reasonable jury could

resolve the point in favor of the nonmoving party.’” Id. (quoting

United States v. One Parcel of Real Prop., 960 F.2d 200, 204 (1st

Cir. 1992)). “Similarly, a fact is ‘material’ if it is ‘one that

might affect the outcome of the suit under the governing law.’”

Enica at *5 (quoting Morris v. Gov't Dev. Bank of P.R., 27 F.3d

746, 748 (1st Cir. 1994).

Although it is unusual to grant summary judgment on

scienter, summary judgment on this issue is sometimes appropriate.

“Even in cases where elusive concepts such as motive or intent are

at issue, summary judgment may be appropriate if the nonmoving

party rests merely upon conclusory allegations, improbable

inferences, and unsupported speculation.” Medina-Munoz v. R.J.
Ficken claims that his SEC testimony raised the issue 4

whether he knew his practices were contrary to PSI’s own policies

on market timing, since PSI did not prohibit market timing in non-

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Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990). See also

Vives v. Fajardo, 472 F.3d 19, 21 (1st Cir. 2007) (citing Benoit v.

Tech. Mfg. Corp., 331 F.3d 166, 173 (1st Cir. 2003)); Ayala-Gerena

v. Bristol Myers-Squibb Co., 95 F.3d 86, 95 (1st Cir. 1996). 

Ficken does not dispute that the SEC produced substantial

evidence of Ficken’s scienter. As noted earlier, the SEC presented

e-mail communications between Ficken and his clients indicating

that Ficken fraudulently used duplicative FA numbers and

duplicative customer account numbers to misrepresent his identity

and that of his clients in order to deceive mutual fund companies

into allowing trades that they otherwise would have blocked. This

meets the scienter requirement of § 17(a)(1), § 10(b), and Rule

10b-5, and more than meets the negligence requirement of § 17(a)(2)

and § 17(a)(3).

Ficken argues that testimony he presented in the prior

SEC and NASD proceedings raised a genuine issue of material fact

regarding his scienter. In neither the prior SEC proceeding nor

the NASD proceeding did Ficken provide any legitimate explanation

for the use of duplicative client account numbers. Thus Ficken has

raised no genuine issue of material fact regarding his use of

multiple client account numbers, and the SEC’s evidence of Ficken’s

scienter in this respect is undisputed. However, the parties 4
proprietary mutual funds until January 2003. However, as the SEC

points out, the mutual funds themselves had policies against market

timing, and PSI prohibited market timing in proprietary mutual

funds before January 2003.

Because Ficken did not rely on his testimony in the SEC 5

proceeding in opposing the SEC’s summary judgment motion, we have

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disagree whether the district court’s judgment can be sustained

based only on the undisputed proof of Ficken’s scienter with

respect to his use of the customer account numbers. Ficken argues,

for example, that if his use of the FA numbers were determined to

be legitimate, this would affect the amount of disgorgement. Even

assuming that the measure of disgorgement would be affected, thus

making it necessary to address the FA numbers, Ficken has still

failed to raise a genuine issue as to whether his use of duplicate

FA numbers was legitimate.

To be sure, Ficken’s testimony in the SEC proceeding

might raise a genuine issue as to scienter with respect to the FA

numbers. But Ficken cannot now rely on that testimony. Under both

federal Rule 56(e) and local Rule 56.1, a party opposing summary

judgment must refer to specific parts of the record to raise a

genuine issue of material fact. In opposing the SEC’s motion for

summary judgment in the present proceeding, Ficken did not refer to

specific testimony from the SEC proceeding in order to raise a

genuine issue of material fact. He instead relied on his SEC

testimony only to explain why he did not need to submit to a

deposition by the SEC in the present case. Thus, Ficken’s 5
no occasion to determine whether Ficken’s invocation of the Fifth

Amendment privilege in this proceeding barred his reliance on his

SEC testimony. This approach appears to turn on whether the SEC

proceeding was a “separate proceeding.” See United States v.

Johnson, 488 F.2d 1206, 1210 (1st Cir. 1973) (holding that a former

co-defendant’s guilty plea in a Rule 11 hearing did not waive his

Fifth Amendment privilege as a witness in defendant’s later

separate trial); see also United States v. Parcels of Land, 903

F.2d 36, 43 (1st Cir. 1990) (noting that if the defendant had

testified in one proceeding and then invoked his Fifth Amendment

privilege during a deposition in a separate proceeding, “neither

would have affected the treatment of the other”).

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testimony in the SEC proceeding does not raise a genuine issue of

material fact. 

Ficken also cannot rely on his NASD testimony to raise a

genuine issue as to the FA numbers. In the NASD proceeding, Ficken

invoked the Fifth Amendment or otherwise refused to answer

questions about blocked account numbers, a topic pertinent to

scienter. Ficken’s refusal to answer pertinent questions in the

NASD proceeding bars his reliance on that testimony in opposing

summary judgment.

Federal Rule of Civil Procedure 56(e)(1) states that in

opposing summary judgment, an “affidavit must . . . set out facts

that would be admissible in evidence.” “Hearsay evidence,

inadmissible at trial, cannot be considered on a motion for summary

judgment.” Garside v. Osco Drug, Inc., 895 F.2d 46, 50 (1st Cir.

1990) (finding that “absent a showing of admissibility” an
See generally 30 Wright & Graham, Federal Practice and 6

Procedure: Evidence § 6334 (1997) (“if [prior] testimony contains

inadmissible hearsay, that hearsay cannot be relied upon in

deciding the motion”).

See United States v. Bollin, 264 F.3d 391, 413 (4th Cir. 7

2001), cert. denied, 534 U.S. 935 (2001), and cert. denied, 535

U.S. 989 (2002); United States v. Peterson, 100 F.3d 7, 13-14 (2d

Cir. 1996) (noting that “when a defendant invokes his Fifth

Amendment privilege, he has made himself unavailable to any other

party, but he is not unavailable to himself” and thus that it was

within the district court’s discretion to exclude the defendant’s

prior grand jury testimony when the defendant asserted the

privilege at trial); United States v. Kimball, 15 F.3d 54, 55-56

(5th Cir. 1994), cert. denied, 513 U.S. 999 (1994), (holding that

a defendant cannot create his own unavailability by asserting his

Fifth Amendment privilege and then use this unavailability to

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appellant could not rely on a third party’s description of an

expert’s possible testimony to oppose summary judgment).6

Ficken’s NASD testimony is hearsay and thus would not be

admissible unless it met one of the hearsay exceptions. See Fed.

R. Evid. 801, 802. Federal Rule of Evidence 804(b)(1) provides

that the testimony of an unavailable witness is admissible.

Ficken’s apparent assumption is that his invocation of his Fifth

Amendment privilege in this case made him unavailable for purposes

of Rule 804. This assumption is dubious at best. Although this

circuit has held that a witness invoking his Fifth Amendment

privilege is unavailable under Rule 804, United States v. Zurosky,

614 F.2d 779, 792 (1st Cir. 1979), this likely does not extend to

defendants who create their own unavailability. Other circuits

have specifically held that a defendant does not become unavailable

simply because he asserts his Fifth Amendment privilege.7
introduce his own former testimony).

1 The following exchange occurred: 8

2 Q. I’m going to ask him again to address the question,

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Even if Ficken were considered unavailable, the former

testimony of an unavailable witness is not admissible unless “the

party against whom the testimony is now offered, or, in a civil

action or proceeding, a predecessor in interest, had an opportunity

and similar motive to develop the testimony by direct, cross, or

redirect examination.” Fed. R. Evid. 804(b)(1). For example,

refusal to answer pertinent questions on cross-examination bars the

use of direct testimony. See United States v. Bartelho, 129 F.3d

663, 673 (1st Cir. 1997), cert. denied 525 U.S. 905 (1998) (“A

trial judge may strike a witness's direct testimony if he flatly

refuses to answer cross-examination questions related to the

details of his direct testimony.” (internal quotations omitted)).

Here the NASD proceeding did not involve direct examination by

Ficken’s lawyer followed by cross-examination. Rather, all of

Ficken’s testimony was given in response to NASD questioning. But

this difference is irrelevant. The fact is that the government

(and its predecessor the NASD) did not have the opportunity to

develop Ficken’s initial testimony because he asserted his Fifth

Amendment privilege or otherwise refused to answer questions

regarding blocked customer account numbers, an issue closely

related to Ficken’s use of FA numbers. 

8
1 please.

2 A. [Ficken:] I – I can’t answer that question.

3 . . .

4 Q. Will you allow him to answer any questions

5 regarding blocks at this time?

6 A. [Ficken’s counsel:] No.

7 . . .

8 A. [Ficken’s counsel:] Thank you. And my “no” to that

9 question was based on the phraseology of “at this

10 time.”

11 Ficken NASD testimony, p. 156, l. 1-4; p. 186, l. 8-10, 19-21. The

12 parties appear to assume that the refusal to answer was based on

13 the Fifth Amendment. Whether or not it was based on the Fifth

14 Amendment, Ficken still refused to answer. 

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The Fifth Amendment does not authorize a witness to rely

on his testimony while shielding himself from further examination

by utilizing his Fifth Amendment privilege. As the Supreme Court

held in Brown v. United States, “a witness has the choice, after

weighing the advantage of the privilege against self-incrimination

against the advantage of putting forward his version of the facts

and his reliability as a witness, not to testify at all,” and “[h]e

cannot reasonably claim that the Fifth Amendment gives him not only

this choice but, if he elects to testify, an immunity from

cross-examination on the matters he has himself put in dispute.”

356 U.S. 148, 155-56 (1958). See also United States v. Alosa, 14

F.3d 693, 695-96 (1st Cir. 1994) (criminal defendant not entitled

to testify on one charge but not another). Ficken’s testimony

would not be admissible because his assertion of his Fifth

Amendment privilege or his refusal to answer questions prevented

development of his testimony on closely related issues. For these
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reasons Ficken cannot rely on his NASD testimony to raise a genuine

issue for summary judgment.

Ficken thus has failed to raise a genuine issue of

material fact with respect to either customer account numbers or FA

numbers, and the district court properly granted summary judgment

in favor of the SEC.

III.

For the foregoing reasons, the judgment of the district

court is affirmed.