1994 Decisions

Opinions of the United

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Precedential or Non-Precedential: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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Recommended Citation

"Securites Exchange Commission v. Graystone Nash, Inc. et al." (1994). 1994 Decisions. Paper 33.

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1 

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 
2 

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 
3 

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 
4 

"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 
5 

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] 
6 

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 
7 

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. 
8 

 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." 
9 

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 selfincrimination. 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 
10 

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. 
11 

 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. 
12 

(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-
13 

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. 

 

1Not 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). 
14 

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 
15 

SEC. Before Adams and Ackerly appeared at the hearing, two codefendants, 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, 

 

2The amount of these judgments stand in stark contrast to the 

approximately $60.5 million assessed against Adams and Ackerly. 
16 

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.