A Person Cannot Be Compelled to Create or Participate in a Financial Accounting When They Claim the Fifth Amendment Privilege Against Self-Incrimination

Julie Vianale/August 14, 2015

            Sometimes as part of a civil enforcement action, the Government will ask the court for injunctive relief to compel corporate officers to provide a financial accounting for their company.  This typically happens when the Government alleges a Ponzi scheme of some kind. The Government wants the corporate representative to create a document – financial statements of some kind – that explains where the company’s money or other assets came from, and where they all went.

But when a corporate representative personally creates such an accounting, Fifth Amendment concerns arise.  In giving or even participating in a corporate accounting, corporate officers and employees risk giving evidence against themselves which the Government will then use against them in a parallel or later-brought criminal prosecution.

The Fifth Amendment, however, prohibits the Government from obtaining a court-ordered accounting over a valid and timely assertion of the privilege against compelled self-incrimination.

The Fifth Amendment and its Scope

            The Fifth Amendment guarantees that no person “shall be compelled in any criminal case to be a witness against himself.”  U.S. Const. amend. V.  The privilege may be asserted “where the witness has reasonable cause to apprehend danger from a direct answer,” Hoffman v. U.S., 341 U.S. 479, 486 (1951), and may be invoked “in any proceeding, civil or criminal, administrative or judicial, investigatory or adjudicatory.” Kastigar v. U.S., 406 U.S. 441, 445 (1972).

An individual is entitled to assert the Fifth Amendment privilege when he or she can show: “(1) compulsion, (2) a testimonial communication or act, and (3) incrimination.”  United States v. Doe (In re Grand Jury Subpoena Duces Tecum), 670 F.3d 1335, 1341 (11th Cir. 2012) (citing United States v. Ghidoni, 732 F.3d 814, 816 (11th Cir. 1984) (citing United States v. Authement, 607 F.2d 1129, 1131 (5th Cir. 1979)).

The privilege also protects the production of personal documents. Grand Jury Subpoena Dated April 9, 1996 (FGJ 96-02) v. Smith, 87 F.3d 1198, 1200 (11th Cir. 1996). The act of producing documents alone can be sufficiently testimonial to trigger Fifth Amendment protection. See United States v. Hubbell, 530 U.S. 27, 36-37 (2000); In re Grand Jury Subpoena, 670 U.S. at 1342 (citing Fisher v. United States, 425 U.S. 391, 410 (1976) (“The act of producing evidence in response to a subpoena nevertheless has communicative aspects of its own, wholly aside from the contents of the papers produced.”)). [i]

Waiver of the Fifth Amendment Privilege

Once claimed, a waiver of the privilege “is not lightly to be inferred.”  Emspak v. U.S., 349 U.S. 190, 196 (1950); Smith v. U.S., 337 U.S. 137, 150 (1949), and the court “must indulge every presumption against waiver of fundamental constitutional rights.” Emspack at 198. See U.S. v. St. John, 2013 U.S. Dist. LEXIS 14117 at *10 (M.D. Fla. Jan. 31, 2013); Gebhardt v. Saunders (In re Saunders), 2015 Bankr. LEXIS 1329 at *11 (N.D. Ga. Bankr. Ct April 3, 2015).

In Klein v. Harris, the Second Circuit adopted a now widely-used two-prong test to analyze whether a person has waived their Fifth Amendment privilege:

[A] court should only infer a waiver of the fifth amendment’s privilege against self-incrimination from a witness’ prior statements if (1) the witness’ prior statements have created a significant likelihood that the finder of fact will be left with and prone to rely on a distorted view of the truth, and (2) the witness had reason to know that his prior statements would be interpreted as a waiver of the fifth amendment’s privilege against self-incrimination.

Klein v. Harris, 667 F.2d 274, 287 (2d Cir. 1981).

The first prong of the Klein test – avoiding distortion – may only be found in compelling circumstances, namely, where a witness testifies under oath on a particular subject matter, and then invokes the privilege to avoid cross-examination into the subjects of his or her testimony. Id. at 288. With respect to the second prong, a witness only waives the privilege if his or her prior statements were both “testimonial” and “incriminating.” Id. Statements are testimonial, “only if the witness’ prior statements … were voluntarily made under oath in the context of the same proceeding.”  Id. See Gebhardt, 2015 Bankr. LEXIS 1329 at *11 (“A testimonial waiver occurs when a party voluntarily under oath in the same proceeding provides incriminating facts.”) (citing Rogers v. U.S., 340 U.S. 367, 373-74 (1951)).

The Klein waiver test has been used repeatedly in Florida federal courts, see In re Scarfia, 104 B.R. 462, 464 (M.D. Fla. Bankr. 1989), and is consistent with the Eleventh Circuit’s decision in U.S. v. White, 846 F.2d 678, 690 (11th Cir. 1988). White considered whether a person’s civil deposition could be used against them in a later criminal trial, and held that “[a] witness who testifies at any proceeding, instead of asserting his Fifth Amendment rights, loses the privilege.” Id. (citing Minnesota v. Murphy, 465 U.S. 420, 427 (1983); Garner v. U.S., 424 U.S. 648, 654-55 (1976)). See In re Scarfia, 104 B.R. at 464 (“While the concept associated with Klein has not been considered by the Eleventh Circuit Court of Appeals, this Court notes the underlying policy appears to be the same as announced by the Eleventh Circuit in White.”); Gebhardt v. Saunders, 2015 Bankr. LEXIS 1329 at *12 (applying Klein’s two-prong test to waiver challenge).

Preparing a Corporate Accounting Can Be Incriminating

To establish that one’s statements would be incriminating, a person need only show that he or she is the subject of a pending criminal investigation that’s related to conduct alleged in the Government’s civil complaint.

When a person prepares an accounting for filing with the court or for the Government’s use, its creation would be testimonial in nature and incriminating. An act or statement is “testimonial” if it requires the privilege holder to “use the contents of his mind to incriminate himself or lead[s] the Government to evidence that would incriminate him if he complied with the district court’s order.”  U.S. v. Doe (In re Grand Jury Subpoena Duces Tecum), 670 F.3d 1335, 1349 (11th Cir. 2012).  In creating a financial accounting, a corporate officer or employee must necessarily use the “contents of his or her own mind.”

The accounting can be used by the Government against the individual directly, or derivatively, to lead to other evidence against him or her.  Such an accounting is therefore protected by the Fifth Amendment.  Doe, 670 F.3d at 1345.

Only Individuals, not Companies, Possess a Fifth Amendment Privilege

Although corporate defendants do not have a Fifth Amendment privilege, the individual officers, directors, employees, general partners and agents of those corporations surely do. They cannot be personally required to create an accounting for their company over their Fifth Amendment objection.

The Reaction of the Courts

Both the Supreme Court and federal appellate courts, including the Eleventh Circuit, have held that a corporate officer cannot be compelled in his corporate capacity to provide testimony, or the equivalent of testimony, that is self-incriminating.

In U.S. v. Kordel, 397 U.S. 1 (1970), the Supreme Court held a corporate officer was not required to answer interrogatories on behalf of the corporation if the responses would incriminate him. “Without question [the officer] could have invoked his Fifth Amendment privilege against compulsory self-incrimination.” 397 U.S. at 7.  Service of the interrogatories obliged the corporation to appoint an agent who could without fear of self-incrimination furnish whatever responsive information the corporation had.  Id.  If there was no such person, the Court assumed a protective order would be warranted under Rule 26, postponing civil discovery until the criminal case was over. Id.

In Curcio v. U.S., 354 U.S. 118 (1957), the Supreme Court held that, when a corporate officer stated in response to a document subpoena for corporate records that he did not have the records, he could not be compelled to testify about the location of the records or to identify who had possession of them.

On similar facts, and quoting Curcio, the Eleventh Circuit stated, “[t]he government has no right to compel a person to speak the contents of her mind when doing so would incriminate that person.  To do so would be ‘contrary to the spirit and letter of the Fifth Amendment.’”  Grand Jury Subpoena dated April 9, 1996 (FGJ 96-02) v. Smith, 87 F.3d 1198, 1201 (11th Cir. 1996).

In SEC v. Dunlap, the Fourth Circuit sustained Tracy Dunlap’s invocation of the Fifth Amendment to bar his personal preparation of an accounting for both himself and the two companies he controlled.  SEC v. Dunlap, 253 F.3d 768, 770, 772, 774, 776, 778 n. 15 (4th Cir. 2001).     The trial court had issued injunction and contempt orders requiring Dunlap to “testify and produce documents in his personal capacity – as well as on behalf of [his companies,] Elfindepan and Southern Financial.” Id. at 774-775.  On appeal, the Fourth Circuit reversed in part, holding that because the trial court orders required Dunlap “to create and produce a sworn accounting regarding his personal financial transactions and assets, those orders implicate his Fifth Amendment protections.” Id. at 774.The Fourth Circuit held that, “[b]ecause, as even the SEC recognizes, Dunlap possesses a valid Fifth Amendment privilege against production and testimony in his personal capacity,” the contempt order had to be modified and vacated to give effect to Dunlap’s privilege. Id. at 775.

With respect to the accounting for the corporations, Dunlap was cited for contempt for refusing to “cause” Southern Financial to produce the ordered accounting. Id. at 776. The Fourth Circuit held that, in light of Dunlap’s personal Fifth Amendment privilege, the trial court could only require Dunlap “to take appropriate actions within his authority to ensure Southern Financial’s compliance with the Injunction Order and the Contempt Order.” Id.  Consistent with the Fifth Amendment, Dunlap himself could only be lawfully ordered to “secure” an accounting by and on behalf of Southern Financial, id. at 778 n.15, or to “command” others to provide it. Id. at 776. He was not, and could not be, compelled to prepare the accounting personally.

In CFTC v. Garcia, Case No. 15-cv-237-FtM-38CM, 2015 U.S. Dist. LEXIS 69957 (M. D. Fla. May 29, 2015), an action defended by this author, the District Court confirmed that a corporate officer cannot be compelled to personally give or participate in an accounting for his companies over his Fifth Amendment objection.  Id. at *12-*15.

In Garcia, the CFTC sought to compel the defendant to create a detailed account of all of his companies’ “assets and liabilities, electronic devices, and funds … received from and paid to others in connection with commodity futures or forex transactions ….”  Id. at *15.  The District Court held that such an accounting, however, was “undoubtedly testimonial in nature,” and thus “triggered” defendant’s Fifth Amendment privilege. Id. at *13.  The Government had made clear that it would only accept an accounting from the defendant corporate officer himself, not some other third party.  Id. at *18.  The accounting would thus require the defendant himself “to evaluate all of the corporate documents produced and essentially create a new document not only summarizing those documents, but also using the contents of his own mind to communicate other facts requested by the accounting.”  Id. at *13.

In addition, the District Court found there was no waiver of the Fifth Amendment  privilege merely because the corporate officer had produced documents on behalf of his companies to comply with an earlier court order. The District Court held that the corporate officer had complied “in his role as corporate representative of the Corporate Defendants. “  Id. at *17.  He had no choice but to comply with the order or face being held in contempt.  Id.  Under these circumstances and faced with such an choice, compliance with the court’s earlier production order did not constitute a waiver of the Fifth Amendment.  Id. (discussing In re Grand Jury Subpoena Dated April 9, 1996 v. Smith, 87 F.3d 1198, 1201 (11th Cir. 1996)).

Footnote(s):

[i]    In summarizing the principles laid down in two key cases from the Supreme Court on whether an act of production is testimonial – Hubbell and Fisher – the Eleventh Circuit concluded that “an act of production can be testimonial when that act conveys some explicit or implicit statement of fact that certain materials exist, are in the subpoenaed individual’s possession or control, or are authentic.” In re Grand Jury Subpoena, 670 F.3d at 1345.  The Eleventh Circuit stated that “[t]he touchstone of whether an act of production is testimonial is whether the government compels the individual to use ‘the contents of his own mind’ to explicitly or implicitly communicate some statement of fact.” Id. (citing Curcio v. U.S., 354 U.S. 118 (1957)).

In In re Grand Jury Subpoena, the Eleventh Circuit concluded that a witness’ decryption and production of the contents of the hard drives of his computer would constitute a testimonial act of production protected by the Fifth Amendment. 670 F.3d at 1346.  The Court concluded decryption and production of the hard drives would “require the use and contents of Doe’s mind and could not be fairly characterized as a physical act that would be nontestimonial in nature.” Id. According to the Court, the decryption and production “would be tantamount to testimony by Doe of his knowledge of the existence and location of potentially incriminating files; of his possession, control, and access to the encrypted portions of the drives; and of his capacity to decrypt the files.” Id.

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Fifth Amendment Privilege