Securities Law - Self Incrimination In SEC Investigation

The Fifth Amendment to the U.S. Constitution provides that no person shall be compelled in any criminal case to be a witness against himself. The privilege applies to both criminal and civil cases. (McCarthy v. Arndstein, 266 U.S. 34). The only limitation on this right is that the person claiming the privilege must have reasonable cause to believe that she or he could incur a prosecution or conviction from a response. The Courts have also stated that there can be no adverse inference when the privilege is asserted in a criminal case.

In a civil case, however, there can be significant risks. A 1976 U.S. Supreme Court case (Baxter v. Palmigiano, 425 U.S. 308) held that a prisoner could assert the privilege at a disciplinary hearing, but prison officials could draw an adverse inference. The proceeding was considered civil but could lead to criminal action. The claim was that the prisoner was attempting to encourage other prisoners to disobey prison rules which could lead to a riot.

The Securities and Exchange Commission began to claim that an adverse inference can be made against individuals who claim the privilege. The SEC has a manual for staff use that provides during an investigation the Commission can assert that an adverse inference can be drawn against an individual who asserts the Fifth Amendment privilege.

In a SEC investigation the Commission will inform those about to be interrogated that they do not have to answer questions based on their Constitutional right under the Fifth Amendment. But, the Commission staff does not inform those persons that an adverse inference can be made if the person is to be interrogated claims the privilege. Although the SEC investigation is not criminal in nature, the results can be serious. The SEC investigation could, after a hearing, lead to a civil monetary penalty or an order barring the person from employment in the securities industry
Further, proposed witnesses are not informed that information obtained can be sent to other governmental agencies that administer criminal statues.

Can the government insist that a corporate employer not pay legal fees for employees until there is cooperation with the government? U.S. v. Stein v. Jones, 541 F.3d 130 answers this question in the negative. In Stein, a U.S. Attorney distributed a memorandum which stated:…whether the corporation appears to be protecting its culpable employees and agents and a corporation’s promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government’s investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.

The Second Circuit in the Stein case dismissed indictments against thirteen (13) individuals because those individuals had a Sixth Amendment right to counsel and the action of the employer interfered with the right to counsel protected by the Sixth Amendment. The Stein Court did not consider the Fifth Amendment question.
Individuals faced with the prospect of testifying in a SEC investigation have to carefully consider their options, if he or she cooperates in the hope or expectation that the government agency will accept cooperation and not pursue them further. Even if that occurs and sanctions are not imposed in that investigation, is that the end of the story? If the information is passed on to others such as the U.S. Attorney, a prosecution could result if the conduct violates other laws.

In short, a person called upon to testify in an agency investigation should seek experienced counsel to help guide them through the treacherous path.

Edward X. Clinton, Sr.
Copyright 2010