Federal Evidence Review

First Circuit notes open issue whether civil defendant can assert the Fifth Amendment Privilege Against Self-Incrimination to create an unavailability allowing admission of his former testimony under FRE 804(a). However, the circuit resolved the case on other grounds, concluding civil defendant’s former testimony was inadmissible hearsay on summary judgment motion since assertion of the Fifth Amendment privilege deprived the government from the opportunity and similar motive to develop the former testimony, as required under FRE 804(b)(1), in SEC v. Ficken, __ F.3d __ (1st Cir. Oct. 20, 2008) (No. 07-2532)

It is well-settled that a witness who asserts the Fifth Amendment privilege against self-incrimination is “unavailable” under FRE 804(a). See, e.g., United States v. Salerno, 505 U.S. 317, 321 (1992) (“The parties agree that DeMatteis and Bruno were ‘unavailable’ to the defense as witnesses, provided that they properly invoked the Fifth Amendment privilege and refused to testify.”); United States v. Innamorati, 996 F.2d 456 (1st Cir. 1993) (“Thompson's invocation of the Fifth Amendment at trial rendered him ‘unavailable’ for purposes of Rule 804(b)(3).”). Testimony of the “unavailable” witness may be admitted under the unavailable witness hearsay exceptions of FRE 804(b). For example, the former testimony of an unavailable witness may be admitted where the requirements are met for FRE 804(b)(1) (prior testimony of an unavailable witness is admissible “if 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”)).

A distinct question is raised whether a civil defendant who testified in a prior proceeding may be considered “unavailable” by later claiming the Fifth Amendment privilege and seeking to admit the prior testimony? The First Circuit noted this open issue recently but ultimately found it unnecessary to resolve it. Other courts have addressed the issue, as noted in the First Circuit Opinion.

In the case, defendant Ficken was a mutual fund broker who engaged in “market timing” which occurs when “traders of mutual fund shares exploit 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.” Ficken, __ F.3d at __ (quoting Kircher v. Putnam Funds Trust, 547 U.S. 633, 637 n.4 (2006)). The mutual funds blocked some financial accounts (FA) that he controlled from further trading for violating the “market timing” rule. However, he continued trading mutual funds through new financial account or customer accounts. The Securities and Exchange Commission filed a complaint alleging that the defendant “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,” “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 used “belonged to the same brokers and customers whose trading activities ‘had previously been blocked’ by the mutual fund companies.” Ficken, __ F.3d at __ (citation omitted).

The defendant resigned his broker position. Initially, he testified during an SEC investigation proceeding. At a subsequent hearing before the National Association of Securities Dealers, he answered some questions but asserted his Fifth Amendment privilege against self-incrimination on other questions. After the SEC civil action was filed, he declined to be deposed by the SEC, once again asserting his Fifth Amendment privilege. The district court granted the SEC motion for summary judgment, after concluding there was no triable issue, and ordered disgorgement of the commissions in the amount of $494,975 and $94,879 in pre-judgment interest. See SEC v. Druffner, 517 F. Supp. 2d 502 (D. Mass. 2007). In a separate proceeding, the SEC subsequently “barred [Ficken] from association with any broker, dealer, or investment adviser.” In re Ficken, Admin. Proc. File No. 3-12832, Oct. 17, 2008.

On appeal, the defendant claimed there was a genuine issue of material fact on scienter based on his testimony before the SEC and NASD. The circuit affirmed the granting of the summary judgment motion after concluding that the defendant had not “provide[d] any legitimate explanation for the use of duplicative client account numbers.” Ficken, __ F.3d at __. The defendant claimed his prior testimony demonstrated a trial issue, but the circuit concluded the testimony was inadmissible hearsay. The circuit rejected the defendant’s effort to admit his testimony under the former testimony exception under FRE 804(b)(1).

The circuit found “dubious at best” the defendant’s “apparent assumption … that his invocation of his Fifth Amendment privilege in this case made him unavailable for purposes of Rule 804.” Ficken, __ F.3d at __. The circuit distinguished the situation in which another trial witness may assert their Fifth Amendment privilege. Ficken, __ F.3d at __ (citing United States v. Zurosky, 614 F.2d 779, 792 (1st Cir. 1979) (“‘Unavailability,’ as defined in Rule 804, includes the situation where a witness invokes his fifth amendment privilege against self-incrimination.”))] It was entirely a different matter when the defendant creates the unavailability by claiming the Fifth Amendment privilege. The circuit noted that the Second, Fourth and Fifth Circuits had addressed this issue: United States v. Bollin, 264 F.3d 391, 413 (4th Cir. 2001) (“By invoking his Fifth Amendment privilege, [defendant] Bollin made himself unavailable for the purpose of preventing his testimony, and he therefore cannot invoke the exception.”), cert. denied, 534 U.S. 935 (2001), and cert. denied, 535U.S. 989 (2002); United States v. Kimball, 15 F.3d 54, 55-56 (5th Cir. 1994) (“The sponsor of a declarant's former testimony may not create the condition of unavailability and then benefit therefrom. The rule Kimball relies upon was designed to ensure one access to testimony where, by the actions of the opponent, or at least through no fault of the testimony's proponent, a desired witness becomes unavailable. In the instant case, Kimball created his own unavailability by invoking his fifth amendment privilege against self-incrimination.”) (footnotes omitted); United States v. Peterson, 100 F.3d 7, 13 (2d Cir. 1996) (“In general, a person who properly invokes his Fifth Amendment privilege, leaving others powerless to compel his testimony, is considered to be unavailable to others for purposes of Rule 804.… When the defendant invokes his Fifth Amendment privilege, he has made himself unavailable to any other party, but he is not unavailable to himself.”).

The circuit left the open issue for another day. The former testimony hearsay exception did not apply under FRE 804(b)(1) 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.” FRE 804(b)(1). The circuit concluded that “[t]he Fifth Amendment does not authorize a witness to rely on his testimony while shielding himself from further examination by utilizing his Fifth Amendment privilege. 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 reasons Ficken cannot rely on his NASD testimony to raise a genuine issue for summary judgment.” Ficken, __ F.3d at __ (citing Brown v. United States, 356 U.S. 148, 155-56 (1958) (“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.”); see also United States v. Alosa, 14 F.3d 693, 695-96 (1st Cir. 1994) (“[W]hile the courts zealously guard a defendant's Fifth Amendment right not to testify at all, the case law is less protective of a defendant's right to testify selectively, addressing some issues while withholding testimony on others that are related.”)).

In the appropriate case, the First Circuit may have a chance to revisit the open issue. In the meantime, the rationale of other circuits is persuasive that a civil declarant cannot selectively invoke the Fifth Amendment privilege to introduce testimony from a prior proceeding as an “unavailable” witness.