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Wachovia Securities, LLC v. David Neuhauser

April 18, 2011

WACHOVIA SECURITIES, LLC PLAINTIFF,
v.
DAVID NEUHAUSER, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

Wachovia Securities, LLC ("Wachovia") won a judgment for $2,478,418.80 plus interest and attorney's fees against Leon Greenblatt III ("Greenblatt") and other defendants after margin trading by Greenblatt's company went south. See Wachovia Sec., LLC v. Jahelka, 586 F. Supp. 2d 972, 977, 1025 (N.D. Ill. 2008). To collect the judgment, Wachovia issued a citation to discover Greenblatt's assets, which demanded various documents from Greenblatt as well as entities he owns and controls. Greenblatt moved to strike that citation on various grounds (Doc. 543), and then invoked his Fifth Amendment right against self-incrimination to refuse to produce any of the documents sought by Wachovia. According to Greenblatt, the act of responding to the citation-specifically, listing all the entities he owns or is connected with-could incriminate him. For the reasons below, the Court finds Greenblatt cannot invoke his Fifth Amendment right to avoid producing the documents sought by the citation, denies his motion to strike (Doc. 543), and directs him to produce documents in accordance with the Court's instructions.

I. BACKGROUND

In 2000, Loop Corporation opened a margin trading account with Wachovia's predecessor in interest. Wachovia, 586 F. Supp. 2d at 977. In May 2001, the stock in the margin account collapsed, leaving a $1.9 million debt. Id. Wachovia sought, and received, an arbitration award of $2,478,418.10, and sued here to collect it against Loop's owners, including Greenblatt. Id. In its October 2010 opinion following a bench trial, the Court pierced the corporate veil and ordered Greenblatt and his co-defendants to pay the award. Id. at 1025. On January 4, 2010, the Court issued a judgment of $2,478,418.10 plus interest and attorneys fees against Greenblatt. (See Doc. 457.)

On March 17, 2011, Wachovia issued a citation to discover Greenblatt's assets. That citation defines Greenblatt ("you") to include "any entity you control, work with or for, or have a financial interest in (including financial interests through other entities such as [sic] LLC, LLP, family trusts, or [sic] corporation's or any other form of ownership." (See Doc. 551-1 at 7.) The citation seeks a variety of financial records from Greenblatt and entities he is involved with, including tax returns, bank statements, financial statements, deeds, promissory notes, and asset transfer documents. (Id.) It also seeks "[a] list of all entities in which you or any entity you control or have a financial interest in (including interest through other entities such as [sic] LLC, LLP or corporation." (Id.) Greenblatt has moved to strike the citation, asserting that its definitions are vague, it is too broad in scope, and it is unduly burdensome. (See Doc. 543.) Greenblatt has not produced any documents nor sat for his deposition in response to the citation, invoking his Fifth Amendment right not to incriminate himself.

II. DISCUSSION

1. "Act of Production" Doctrine, the "Collective Entity Rule" and the Scope of Fifth Amendment Rights

The Fifth Amendment provides that "no person . . . shall be compelled in any criminal case to be a witness against himself." U.S. Const. amend. V. Though the amendment mentions only criminal cases, the right against self-incrimination may be raised in civil proceedings. See Kastigar v. United States, 406 U.S. 441, 444 (1972). The right extends not only "to answers that would in themselves support a conviction . . . but likewise embraces those which would furnish a link in the chain of evidence needed to prosecute a claimant." Hoffman v. United States, 341 U.S. 479, 486 (1951). The Fifth Amendment's protection, however, "must be confined to instances where the witness has reasonable cause to apprehend danger from a direct answer . . . the witness is not exonerated from answering merely because he declares that in so doing he would incriminate himself." Id. (noting it is for the Court, not Greenblatt, to decide "whether his silence is justified."); see also Ohio v. Reiner, 532 U.S. 17, 21 (2001) (finding "[a] danger of [criminal prosecution that is] imaginary and unsubstantial character will not suffice")

Of course, if Greenblatt were required to disclose to the Court exactly why an answer would incriminate him, he would "surrender the very protection which the privilege is designed to guarantee." Hoffman, 341 U.S. at 486-87. On the other hand, Greenblatt must "tender some credible reason why a response would pose a real danger of incrimination, not a remote and speculative possibility." Martin-Trigona v. Gouletas, 634 F.2d 354, 360 (7th Cir. 1980) (citing Zicarelli v. N.J. State Com'n of Investigation, 406 U.S. 472, 478 (1972) and finding there must be a "nexus" between the well-founded fear of prosecution and the information requested in a citation to discover assets); see also Bear Stearns & Co., Inc. v. Wyler, 182 F. Supp. 2d 679, 684 (N.D. Ill. 2002) (finding "[t]he court does not require a showing that there is a pending criminal investigation . . . but there must be some explanation, some set of facts, that would lead the court to the conclusion" that the party invoking the privilege has a reasonable fear of prosecution).

Greenblatt's refusal to produce documents in response to the citation implicates three sub-doctrines of self-incrimination caselaw. The first, "the act of production" doctrine, recognizes that an individual may be required to produce business and financial documents containing incriminating facts or beliefs because creating those documents is not "compelled" within the meaning of the privilege. See Fisher v. United States, 425 U.S. 391, 409-410 (1976). In Fisher, IRS investigators sought an accountant's work papers used to prepare the returns of a taxpayer under investigation. See Fisher, 425 U.S. at 394. The Supreme Court found that because the documents at issue had been voluntarily prepared prior to being subpoenaed, they could not "contain compelled testimonial evidence." Id. at 397, 409-410; see also Hubbell v. United States, 530 U.S. 27, 35-36 (2000) (noting that proposition is "settled" and finding a subpoena respondent "could not avoid compliance with the subpoena . . . merely because the demanded documents contained incriminating evidence, whether written by others or voluntarily prepared by himself.").

The act of production doctrine also holds that the act of producing documents has a compelled and testimonial character that, in certain circumstances, could be self-incriminating. See id. at 36-37 (distinguishing the question of "[w]hether the constitutional privilege protects . . . the act of production itself" from the "question whether the unprotected contents of the documents themselves are incriminating.") In Hubbell, the respondent had previously pled guilty to charges of mail fraud and tax evasion in connection with the Whitewater investigation, and was required, under his plea agreement, to provide complete and accurate information related to the investigation. Id. at 30. The Government subpoenaed various records to see if he kept that promise. Id. at 30-31. The Supreme Court found that the act of production itself "may certainly communicate information about the existence, custody and authenticity of the documents" requested. Id. at 37. Because the subpoena directly implicated whether the respondent had met the requirements of his pleas agreement, "the testimonial aspect of respondent's act of producing subpoenaed documents was the first step in a chain of evidence that led to [his] prosecution." Id. at 42. In short, the act of production doctrine holds, "[a]lthough the contents of a document may not be privileged, the act of producing the documents may be." See United States v. Doe, 465 U.S. 605, 612 (1984).

Under the second doctrine, the "collective entity" rule, corporations, LLCs and other collective entities have no Fifth Amendment rights and cannot invoke the privilege against self-incrimination. See Braswell v. United States, 487 U.S. 99, 102 (1988) ("it is well established that such artificial entities are not protected by the Fifth Amendment"). Consequently, a custodian of corporate records cannot refuse to produce those documents, even if those documents would incriminate him or her. Id. at 110, 116-17; see also United States v. Ins. Consultants of Knox, Inc., 187 F.3d 755, 759 (7th Cir. 1999) (same). Similarly, the act of production doctrine does not extend to a corporate custodian, because the custodian's "act of production is not deemed a personal act, but rather an act of the corporation." Braswell, 487 U.S. at 110. "Any claim of Fifth Amendment privilege asserted by the agent would be tantamount to a claim of privilege by the corporation -- which of course possesses no such privilege." Id.

Finally, the right against self-incrimination does not extend to an individual's documents that are required to be kept as part of a regulatory scheme. See Shapiro v. United States, 335 U.S. 1, 17 (1948) (finding no Fifth Amendment protection for "records required by law to be kept in order that there may be suitable information of transactions which are the appropriate subjects of governmental regulation and the enforcement of restrictions validly established") (internal citation omitted); Ins. ...


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