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FRIDAY, MAY 30, 2014
VOLUME 251—NO. 103
Expert Analysis
FEDERAL CIVIL ENFORCEMENT
Civil Enforcement Actions:
Whither the Fifth Amendment?
T
he Fifth Amendment’s privilege against
self-incrimination is a crucial protection guaranteed by the Constitution to
prevent the government from forcing
someone to become a witness against
her or himself. But when charged by the government with a quasi-crime, like a violation of the
Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA) or the False Claims
Act, the protection of the Fifth Amendment
becomes much less clear.
This question is increasingly relevant now
because, in place of grand jury indictments, the
Department of Justice has focused more and
more on bringing fraud charges against entities
and individuals through civil complaints alleging violations of FIRREA or the False Claims Act.
To the non-legal observer, these actions
look like criminal actions. The adversary
is a government prosecuting attorney. The
government has the power to conduct expansive, pre-complaint discovery. And the cases
carry brutal repercussions. Simply the filing
of a civil complaint itself can cause careerending reputational damage. The government increasingly demands admissions of
wrongdoing as a settlement prerequisite.
Any liability finding may result in ruinous
financial penalties. And even the promise of
no jail time might prove illusory, since the
government’s decision to proceed in a civil
case offers no guarantee against a subsequent
criminal charge for the same exact conduct
by the same exact prosecutor’s office.
So the incentives to remain silent are strong,
but the repercussions of such a decision can
be significant. There is an absence of case law
on the subject, an unsurprising fact given the
recency of the Justice Department’s increased
reliance on civil fraud enforcement mechanisms.
But more surprising is the fact that there is lit-
RICHARD STRASSBERG is a partner and chair of the white
collar crime and government investigations practice at
Goodwin Procter. WILLIAM HARRINGTON is a partner with
the firm in that practice group. They are based in the New
York office.
By
Richard
Strassberg
And
William
Harrington
tle case law—let alone agreement among the
courts—in analogous scenarios, such as Securities and Exchange Commission investigations.
This creates a dangerous uncertainty for any
attorney trying to advise a client in response
to a FIRREA or a False Claims Act investigative
demand for testimony.
Pre-Complaint Discovery
Government lawyers possess expansive
powers to gather evidence in connection with
civil fraud investigations, much like they do in
grand jury investigations. They have the power
to subpoena documents and take investigative testimony under oath. And that power is
entirely one-sided. There is no reciprocal discovery until a civil complaint is filed. FIRREA
permits the government to seek civil penalties
against any individual or entity that violates a
series of enumerated offenses, including mail
or wire fraud affecting a financial institution. 12
U.S.C. §1833a(c). FIRREA provides extensive precomplaint investigative authority. The Attorney
General may administer oaths and affirmations,
take evidence, and by subpoena, summon witnesses “[f]or the purpose of conducting a civil
investigation in contemplation of a civil proceeding.” 12 U.S.C. §1833a(g)(1)(A)-(C).
The False Claims Act, 31 U.S.C. §3729 et seq.,
offers the Justice Department a similar set of
investigative tools. The act authorizes the government to recover treble losses suffered as a
result of the submission of fraudulent claims for
payment from a broad range of federally funded
sources. 31 U.S.C. §3729. The Attorney General
or his designee may issue a civil investigative
demand “before commencing a civil proceeding
under section 3730(a) or other false claims law”
to obtain documents or information. 31 U.S.C.
§3733(a)(1). The civil investigative demand may
be served upon any legal entity or natural person
in possession of documents or information relevant to a potential violation of a false claims law.
18 U.S.C. §3773(d). A person compelled to testify
has the right to counsel, 31 U.S.C. §3733(h)(7)
(A), and the right to invoke the privilege against
self-incrimination. Id.
Effectively, pre-complaint discovery poses the
same set of problems that criminal attorneys
confront in grand jury investigations. Demands
for testimony or information are often made
at a time when the defense attorneys have a
very limited understanding of the nature of the
investigation. Unlike criminal cases, where Justice Department policy requires that prosecutors inform defense lawyers of their status in the
investigation, lawyers investigating a potential
civil enforcement action have no obligation even
to indicate whether they are targeting a client in
the investigation.
Fifth Amendment protections
do not apply to civil cases, and
the government is permitted
to argue in a civil case that an
individual’s refusal to answer
questions should be taken as
evidence of culpability.
Adverse Inferences
The Fifth Amendment of the Constitution
guarantees an individual’s right to remain silent
without that silence being used against the
individual in a criminal case. But those protections do not apply to civil cases, and the
government is permitted to argue in a civil case
that an individual’s refusal to answer questions
should be taken as evidence of culpability.
FRIDAY, MAY 30, 2014
In Baxter v. Palmigiano, 425 U.S. 308 (1976),
the Supreme Court endorsed the principle that
fact-finders in civil matters may draw “adverse
inferences” against a witness who refuses to
testify, even where the witness faces possible
criminal charges related to the testimony. In Baxter, prison officials charged a California inmate
with “inciting a disturbance and disrupt[ion] of
[prison] operations.” Id. at 312. At a disciplinary board meeting, the inmate elected to remain
silent after being informed that he had the right
to do so, “but that if he remained silent his silence
would be held against him.” Id. He challenged
the disciplinary proceedings, arguing that they
violated his right against self-incrimination.
The Supreme Court rejected his argument,
noting “the prevailing rule that the Fifth Amendment does not forbid adverse inferences against
parties to civil actions when they refuse to testify in response to probative evidence offered
against them.” Id., at 318. The court contrasted
disciplinary proceedings, which “involve the correctional process and important state interests
other than conviction for crime,” with criminal
cases, in which “the State’s sole interest is to
convict.” Id. at 318-19.
In United States v. Ianniello, 824 F.2d 203, 208
(2d Cir. 1987) , the U.S. Court of Appeals for
the Second Circuit concluded that an adverse
inference may be drawn from the assertion
of Fifth Amendment privilege in civil RICO
actions brought by the government, notwithstanding the fact that the case “followed close
on the heels of the criminal convictions of
many of the same defendants.” Id. at 205.
Nor does it matter if pending criminal charges
led the defendant to invoke the right against selfincrimination in civil cases. “[F]ederal courts
have held that the pendency of related criminal
proceedings is irrelevant in determining whether
to draw an adverse inference.” SEC v. Tome, 638
F.Supp. 629, 632 (S.D.N.Y. 1986) (citing Diebold
v. Civil Service Commission, 611 F.2d 697, 701
(8th Cir. 1979) (holding that the fact that the
defendant asserting the privilege in a civil action
had already been indicted “has no bearing on
the constitutional issues involved”); Roberts v.
Taylor, 540 F.2d 540, 542 (1st Cir. 1976) (stating
that the Baxter decision does not “accord leeway” for distinctions between a situation in which
criminal charges are pending and a situation in
which only a possibility of criminal charges are
involved), cert. denied sub nom., Roberts v. Director, Department of Corrections, 429 U.S. 1076, 97
S. Ct. 819, 50 L.Ed. 2d 796 (1977)).
Can Inference Be Reversed?
Because the Justice Department civil fraud
investigations typically occur without any
notice of the specific allegations, clients are
often left in the dark about the nature of the
inquiry, the proof against them, or even their
status as targets. Counsel seeking to protect
against a possible criminal charge may want to
advise a client to assert his or her rights and
refuse to testify in the investigation. Indeed, the
preliminary nature of the investigation means
that it could easily turn criminal, given that
the underlying predicate offenses are typically
criminal fraud violations. But in assessing the
consequences of that advice, it is key to know
whether that decision can be reversed, should
a civil fraud case ultimately be filed, and the
client, at that time, decide to fight the case;
if it can be reversed without the fact-finder
learning of the earlier invocation, then the client will not be handicapped by the effect of
the adverse inference.
Certain courts in the Second
Circuit have been unsympathetic to the argument that
the defendant should be able
to revisit his or her decision
to assert the Fifth in the civil
action, and thereby avoid the
adverse inference, where a
defendant took the Fifth in
investigative interviews.
No case has examined this question in the
FIRREA or False Claims context. An analogue can
be found in SEC investigations, where the SEC
can take testimony under oath prior to initiating
any enforcement proceedings, and can seek to
apply the adverse inference or other remedy in
a subsequently filed proceeding if a defendant
asserts the constitutional right not to testify.
Certain courts in the Second Circuit have
been unsympathetic to the argument that the
defendant should be able to revisit his or her
decision to assert the Fifth in the civil action,
and thereby avoid the adverse inference, where
a defendant took the Fifth in investigative interviews. In SEC v. Cassano, 2000 WL 777930, at *1
(S.D.N.Y. June 19, 2000), the court went even further, precluding the defendants from testifying
at trial because “it seem[ed] apparent that the
assertions of the privilege, whatever other purposes may have motivated them, were actuated
in part by a desire to seek to gain the benefit of
surprising the Commission at trial in the event any
of these defendants now decides to testify.” Id.
Relying in part on Cassano, the District Court
in Connecticut reached a similar conclusion in
SEC v. DiBella, 2007 WL 1395105 (D. Conn. May
8, 2007). In DiBella, the defendant invoked the
privilege four years before the SEC commenced
its lawsuit. Id. at *4. The court concluded that
DiBella’s invocations severely hampered the
SEC’s investigation. Id. at *3. A year into discovery and less than six months before trial, DiBella
waived his privilege, but the court concluded that
the SEC could properly seek an adverse inference
from DiBella’s Fifth Amendment invocation during the investigative stage of the SEC’s action.
Id. Citing its broad discretion to determine the
appropriateness of an adverse inference, the District Court considered multiple factors, including
‘the nature of the proceeding, how and when the
privilege was invoked, and the potential harm for
prejudice to opposing parties.’” Id. at *3.
A case outside the Second Circuit, SEC v. Freiberg, on the other hand, offers support for the
argument that an individual’s assertion of the
privilege against self-incrimination during an
investigation can be reversed without adverse
effects in the event formal adversarial litigation follows. 2007 WL 2692041 (D. Utah 2007).
In Freiberg, the defendant Harvey Carmichael
asserted his Fifth Amendment privilege during
the SEC’s investigation. Id. at *10. Once the SEC
proceeded with an enforcement action, Carmichael answered all of the SEC’s questions during
discovery and at trial. Id. Again noting that the
question is discretionary, the District Court held
that “because Mr. Carmichael responded to all
questions at a later deposition and testified at
the trial, no adverse inference is necessary or
appropriate.” Id. at *10.
Interestingly, in Freiberg, the District Court
evaluated the harm to the adverse party by
looking to the formal adversarial enforcement
action, noting that “[t]here is no indication the
SEC was deprived of a fair proceeding due to
Mr. Carmichael’s assertion of his Fifth Amendment privilege during the investigation.” Id. This
contrasts with the decisions in Cassano and
DiBella, where the courts weighed the harm
to the investigative proceedings as a factor in
favor of an adverse inference.
Conclusion: Perilous Decision
Advising an individual on how to respond
to a demand for testimony during a Justice
Department civil fraud investigation is fraught
with challenges. The decision must be made at
a time when the information imbalance is at its
greatest. And the danger of criminal exposure
may loom large.
Given the present state of the law, no one
can guarantee that a client’s early invocation
of the privilege against self-incrimination will
not be used as the basis for an adverse inference in a subsequent civil case. This uncertainty only adds to the challenging nature of
advising clients in connection with federal
civil investigative actions.
Reprinted with permission from the May 30, 2014 edition of the NEW YORK
LAW JOURNAL © 2014 ALM Media Properties, LLC. All rights reserved. Further
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or [email protected]. # 070-06-14-34