Appeal from a judgment of the District Court for the Southern District of New York, Robert L. Carter, Judge, convicting appellant of violating the record-keeping regulations for stock brokerage firms promulgated by the Securities and Exchange Commission, 17 C.F.R. § 240.17a-3(a), under § 17a of the Securities Exchange Act of 1934, on the ground that the indictment and conviction resulted from a statement that was obtained in violation of the Fifth Amendment privilege against self-incrimination or was involuntary. Affirmed.
Friendly, Timbers and Gurfein, Circuit Judges.
In mid-April 1973 Arthur Levine and Sol Leit, the chairman and president of Weis Securities, Inc. (Weis), a brokerage and investment banking firm which was a member of the New York Stock Exchange (NYSE), notified the Exchange that the firm was in financial difficulty and that there might have been certain "bookkeeping inadequacies" which had resulted in an understatement by as much as $2.5 million of its reported operating losses over the prior several months. Despite the officers' urging that NYSE refrain, at least temporarily, from sending in examiners, NYSE commenced a full investigation on the following day. During the next two weeks, a number of financial irregularities were discovered in Weis' accounts, including an understatement of losses and bank loans. In accordance with its statutory duty, NYSE advised the Securities and Exchange Commission (SEC) of the probable violations of its rules and regulations and began transmitting, on an almost daily basis, reports containing the results of its investigatory activities and contemplated actions.
On May 17, Alan C. Solomon, who as a Weis officer and director was an allied member of NYSE, was summoned to appear before the Department of Member Firms and testify. Article XIV of NYSE's Constitution provided:
Whenever it is adjudged in a proceeding under this Article that a member, allied member or approved person has been required by the Board or any committee, officer or employee of the Exchange authorized thereby . . . to furnish information to or to appear and testify before or to cause any such employee to appear and testify before the Board or any such committee, officer, or employee and has refused or failed to comply with such requirement, such member or allied member may be suspended or expelled and such approved person may have his approval withdrawn.
Accompanied by his then counsel, Solomon appeared and was questioned at some length, first off the record and then on the record. The chief interrogator was Dennis Pape, special counsel to NYSE. According to an affidavit by Solomon, he "was aware of the provisions of Article XIV of the New York Stock Exchange Constitution which empowered the Exchange to suspend me if I refused to cooperate and answer all the questions put to me during the May 17th interrogation." He averred also that "Mr. Pape and his cohorts in the off-the-record discussions which preceded their formal interrogation, also reminded me of the sanction of suspension which would be imposed if I did not testify."*fn1 Under questioning Solomon admitted that he had originated the idea of seeking to create an appearance of a better financial situation for Weis by "taking a position in Pan American convertible bonds 4 1/2's 1986, which were selling at around 52, and misevaluating them as Pan Am's 4 1/2's 1984, which were selling around 80."*fn2
Two days prior to Solomon's testimony before the Department of Member Firms, the SEC entered an order of investigation and on May 16 served a subpoena requiring NYSE to turn over all material developed in its investigation. NYSE immediately submitted depositions already taken; considering the subpoena to be a continuing one, it later furnished Solomon's. On a complaint by the SEC alleging that Weis did not have sufficient capital under the Securities Exchange Act and the implementing rules of the Commission and NYSE and had been filing false financial reports with both bodies in an effort to conceal this, Weis was placed in receivership at the end of May by the District Court for the Southern District of New York. That action was followed in July by an eighteen count indictment, in the same court, of five of Weis' officers and directors, including Solomon.
The indictment charged in part*fn3 a conspiracy to violate and a number of substantive violations of the recordkeeping and reporting regulations promulgated by the SEC under § 17(a) of the Securities Exchange Act, 17 C.F.R. §§ 240.17a-3, 5. Each of the other defendants pleaded guilty to at least one substantive count and three to the conspiracy count as well. After a bench trial on stipulated facts which included a transcript of his deposition before the Department of Member Firms, Solomon was found guilty on one substantive count of creating and maintaining false books and records. With the Government's agreement the other counts were dismissed with prejudice. The judge placed him on a supervised probation program for a year and imposed a $5,000 fine.
The sole point on appeal is the use, both before the grand jury and at trial, of Solomon's self-incriminating testimony to the Department of Member Firms, allegedly in violation of Garrity v. New Jersey, 385 U.S. 493, 17 L. Ed. 2d 562, 87 S. Ct. 616 (1967). The complete deposition containing his admissions had been presented to the grand jury and constituted an important basis for the indictment. Solomon's present counsel moved to dismiss the indictment and to suppress use of the testimony or any of its fruits at trial. The judge denied the motion both before and again after an evidentiary hearing. After the conviction he denied a motion for reargument based on the rationale of this court's opinion in United States ex rel. Sanney v. Montanye, 500 F.2d 411 (2 Cir. 1974). Reiterating these contentions, Solomon again claims that the indictment should have been dismissed since the allegedly tainted testimony is claimed to have been the only evidence before the grand jury on the count on which he was convicted; alternatively he seeks a reversal and remand for a hearing to determine whether the Government possesses sufficient evidence not derived directly or derivatively through investigation from the deposition testimony to justify a retrial, see generally Kastigar v. United States, 406 U.S. 441, 32 L. Ed. 2d 212, 92 S. Ct. 1653 (1972); Zicarelli v. New Jersey State Commission of Investigation, 406 U.S. 472, 32 L. Ed. 2d 234, 92 S. Ct. 1670 (1972); Standards for Exclusion in Immunity Cases after Kastigar and Zicarelli, 82 Yale L.J. 171 (1972). We do not reach the question of remedy since we find no taint.
The United States suggests, in an elaborate footnote to its brief, that we could affirm without reaching the question whether interrogation by NYSE is to be deemed governmental action. The most appealing basis asserted is the lack of any evidence that Solomon claimed his privilege against self-incrimination. Even when the inquiry is by a body having power to compel testimony, the rule is "that when an ordinary witness is on the stand and an incriminating fact, relevant to the issue, is desired to be proved through him, the question may be asked, and it is for him then to say, in terms which the court may reasonably be expected to understand to be a claim of privilege, that he will exercise the option given him by the law", 8 Wigmore, Evidence § 2268 at 402 (McNaughton rev. 1961) (emphasis in original); per contra with respect to the accused in a criminal case, id. at 406. The former principle, which governs a witness before a grand jury, id. at 403 n.2, O'Connell v. United States, 40 F.2d 201, 205 (2 Cir. 1930), cert. pet. dis. per stip. of counsel, 296 U.S. 667, 51 S. Ct. 658, 75 L. Ed. 1472 (1936); United States v. Cefalu, 338 F.2d 582, 584 (7 Cir. 1964), or a Congressional investigating committee, Hutcheson v. United States, 369 U.S. 599, 619, 8 L. Ed. 2d 137, 82 S. Ct. 1005 (1962), would seem clearly applicable here. When Solomon appeared before the Department of Member Firms he was a subject of investigation for possible future NYSE discliplinary proceedings, not a person accused of crime.
The first problem with taking this smooth road to affirmance is that except for a possible ground of distinction noted below the same reasoning would have led to a result in Garrity opposite to that reached by the Supreme Court. There the New Jersey Deputy Attorney General had advised the defendants, who at the time were still only unindicted witnesses, of the privilege, but had added that this was "limited to the extent that you as a police officer once sworn and asked questions pertaining to your office and your conduct therein, if you refuse to answer, you may then be subject to a proceeding to have you removed from the department."*fn4 State v. Naglee, 44 N.J. 209, 212, 207 A.2d 689, 693 (1965) (emphasis deleted); the officers then proceeded to answer without protest. Although the State's brief before the Supreme Court did not argue the point that appellants had not claimed their privilege, the Court was surely aware of the usual necessity for this in the case of an ordinary witness. Insofar as the decision rested on a violation of the privilege, the Court evidently considered an exception to that principle to be required when invocation of the privilege was clogged by certain forfeiture of office and pension rights and permanent disability from future state employment. The instant case arguably differs on this score in that Article XIV of the NYSE allows more latitude with respect to the certainty and dimension of the consequences triggered by a refusal to testify than did the New Jersey statute. Article XIV is addressed to all kinds of refusals; conceivably the Exchange would not impose suspension, at least of long duration, or expulsion, on a witness who based a refusal to answer on a not implausible, although erroneous, claim of self-incrimination.*fn5 Furthermore it is not clear whether Garrity rests on violation of the privilege or on the basis that the statements "were involuntary as a matter of fact", or on both. See 385 U.S. at 501 (Harlan, J., dissenting).*fn6 Insofar as it rests on the involuntary nature of the statements, a view strengthened by the opinion's heavy reliance on Union Pacific R.R. v. Public Service ...