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OSRECOVERY, INC. v. ONE GROUPE INTERNATIONAL

May 9, 2003

OSRECOVERY, INC., ET AL., PLAINTIFFS, AGAINST ONE GROUPE INTERNATIONAL, INC., ET AL., DEFENDANTS


The opinion of the court was delivered by: Lewis A. Kaplan, United States District Judge.

MEMORANDUM OPINION

The complaint alleges that defendants, spearheaded by Randy L. Johnson, David C. Reed, and One Groupe International, Inc. ("One Groupe"), perpetrated a massive fraud involving civil RICO and securities law violations. They allegedly conducted "a fraudulent operation fronted by the sale of a non-existent gold-backed currency and . . . fueled by a mammoth `Ponzi' scheme disguised as a guaranteed high-yield investment program."*fn1 This allegedly resulted in investment losses exceeding $250 million. The matter is before this Court on plaintiffs' motion for an order compelling Johnson to answer deposition questions and to produce certain business records over his claim of the Fifth Amendment's privilege against self-incrimination.

I. Facts

A. The Complaint

The plaintiffs in this action include OSRecovery, Inc., a New York corporation that purports to represent the interests of approximately 3,400 individuals who were account holders or investors in the allegedly fraudulent scheme, as well as several individual plaintiffs.

The complaint alleges that defendants Reed and Johnson and a number of entities*fn2 controlled by them carried out a two-level scheme to defraud investors.*fn3 The first level involved the sale to investors, for real currency, of so-called electronic currency, or "e-currency," accounts denominated in "OSGold," the balances in which supposedly were (1) usable to purchase goods and services on the Internet, (2) accessible with a debit card, and (3) freely convertible upon demand into gold. The second level involved the sale to investors, for OSGold, of high-yield investment programs known as "OSOpps," which promised investors returns of thirty percent per month on three-month investments and forty-five percent on twelve-month investments and the guaranteed return of principal on maturity. According to the complaint, OSGold was not gold-backed or convertible into gold, as defendants represented.*fn4 The complaint asserts further that the OSOpps investment programs were simply Ponzi schemes that paid the promised returns for a brief period from capital put up by new investors and then collapsed. In any case, the complaint alleges that the entire operation ceased without explanation, leaving the investors holding the bag.

B. The Disputed Discovery

1. Background

On November 18, 2002, plaintiffs served Johnson with a notice of deposition, which included a request for the production of various documents.*fn5 The expansive request sought twenty-three categories of documents, including corporate records of One Groupe, OSGold, OSOpps, Ecommerce Exchange, Ecurrency Exchange, and Card Accounts.TV, as well as Johnson's personal records. Johnson asserted his privilege against self-incrimination and declined to produce any documents.*fn6

At the deposition, Johnson answered a few preliminary questions.*fn7 He refused, however, to answer most questions on the ground that doing so might incriminate himself.*fn8 After twenty minutes of fruitless inquiry, plaintiffs suspended the deposition.

Plaintiffs now request that the Court order Johnson to produce the responsive corporate records currently in his possession and answer deposition questions not shielded by the Fifth Amendment.*fn9 The Court heard oral argument and has received written submissions from the parties.

2. The Parties' Arguments

Plaintiffs assert that Johnson invoked the Fifth Amendment in a blanket and unsubstantiated manner without genuinely reflecting on whether answering each question might provide the government with evidence for a future prosecution. Johnson counters that his apprehension of criminal proceedings is justifiable and that he reasonably fears that answers would "`furnish a link in the chain of evidence needed to prosecute him' for a crime.'"*fn10 Plaintiffs argue also that Johnson waived his Fifth Amendment privilege with respect to the matters to which he testified in a recent affidavit as well as to relevant impeachment.*fn11 Johnson insists that "[n]o waiver was intended, and none was effected."*fn12

Regarding the corporate documents, plaintiffs assert that Johnson remains an employee or agent of the core defendant companies and therefore cannot invoke the Fifth Amendment to avoid production. Johnson contends that he no longer is a corporate agent so the act of production would be in his personal capacity and that the act itself would constitute compelled self-incriminating testimony. Plaintiffs respond that Johnson's alleged resignation, if it in fact occurred, at best was serendipitous and more likely was designed to frustrate discovery. Either way, plaintiffs argue, allowing Johnson to avoid critical discovery because of his alleged "resignation" would be "unjust."*fn13 Plaintiffs request that this Court at least appoint a custodian to produce all responsive documents currently held by Johnson.*fn14 Johnson characterizes this request as a baseless effort to evade the full force of the Fifth Amendment.*fn15

II. Discussion

The Fifth Amendment provides that "[n]o person . . . shall be compelled in any criminal case to be a witness against himself."*fn16 It applies "in any proceeding, civil or criminal, administrative or judicial, investigatory or adjudicatory . . . [, testimony in which the] witness reasonably believes could be used in a criminal prosecution or could lead to other evidence that might be so used."*fn17

A. Deposition Questions

1. Generally

An individual may invoke the Fifth Amendment to decline to answer a deposition question when the individual has reasonable cause to apprehend that answering the question will provide the government with evidence to fuel a criminal prosecution.*fn18 This Circuit, however, routinely has held that "[t]he danger of self-incrimination must be real, not remote or speculative," and "[w]hen the danger is not readily apparent . . . the burden of establishing its existence rests on the person claiming the privilege."*fn19 Determining whether the privilege is available in given circumstances thus involves essentially a factual inquiry. A judge must determine, "from the implications of the question, in the setting in which it is asked," whether "a responsive answer to the question or an explanation of why it cannot be answered might be dangerous because injurious disclosure could result."*fn20

Criminal prosecution of Johnson is a "real danger"*fn21 and is not too remote or speculative. But that in itself does not justify invocation of the privilege to avoid answering virtually all questions.*fn22 The questions that Johnson has declined to answer fall into two categories: (1) those where the danger of self-incrimination is readily apparent, and (2) those where the danger is less apparent and insufficient as currently identified by Johnson. Johnson need not answer the former questions, but he must answer each of the latter questions unless he articulates a credible basis for invoking the Fifth Amendment.*fn23 Of course, this involves a balancing act because the privilege would not provide much protection if the requisite showing were too demanding.

Further elaboration with respect to these two categories of questions is helpful. In this case, the first category certainly encompasses any question that seeks information related to the alleged fraud. It is readily apparent that Johnson might inculpate himself by answering such a question. Hence, such questions fall squarely within the umbrella of Fifth Amendment protection. For example, Johnson properly invoked the privilege when he declined to answer questions involving his ...


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