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Securities and Exchange Commission v. Johnson

December 5, 2007

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
CHARLES JOHNSON, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Gladys Kessler United States District Judge

MEMORANDUM OPINION

Defendants Wakeford, Tuli, and Kennedy have filed Motions to exclude the testimony of R. Geoffrey Layne, James Sholeff, and Jeffrey Anderson. Defendant Benyo has joined in these Motions. Plaintiff SEC has moved for a Protective Order and to quash the deposition of Jeffrey Anderson. Upon consideration of the Motions, Oppositions, Replies, and the entire record herein, the Court concludes, for the following reasons, that the Motions should be denied.

I. FACTUAL BACKGROUND

The SEC alleges that between November 2000 and June 2001, Defendants participated in a scheme to commit securities fraud to improperly inflate PurchasePro's reported revenues and to otherwise misrepresent PurchasePro's business activities for the last quarter of 2000 and first quarter of 2001. The Government brought both criminal and civil cases against the Defendants. This civil case was stayed from November 9, 2005 until March 13, 2007, during which Defendants Wakeford, Tuli, and Benyo were tried and acquitted in the Federal District Court for the Eastern District of Virginia. The charges against Defendant Kennedy were dismissed. A mistrial was declared as to the fifth Defendant, Charles Johnson, Jr. His retrial began October 9, 2007, and is continuing at this very time.

Upon completion of the criminal cases of the four Defendants (Wakeford, Tuli, Kennedy and Benyo), the stay in this civil case was lifted as to them (but not as to Defendant Johnson, Jr.). After their acquittals, the four Defendants were extremely anxious to schedule an early trial in this case in the hope that they would be able clear their names completely and resume normal lives. For that reason, and because of the age of the case, on May 7, 2007, this Court entered a Scheduling Order with very short deadlines. On July 13, 2007, at the request of the SEC, and over the objection of the Defendants, the Court extended discovery for one month until August 30, 2007. Numerous depositions were held during the discovery period, and counsel on all sides worked diligently to complete discovery during that period.

All parties agree that the testimony of the three people who are the subject of the pending Motions (Layne, Sholeff, and Anderson) is very significant. According to the SEC, its case would be "crippled" without the testimony of these individuals because they have "very important knowledge of the facts." SEC Opp. at 25. The SEC has listed all three on its official Witness List filed November 28, 2007. Defendants do not deny or challenge these assertions by the SEC and they, too, have listed all three on their Witness Lists.

Layne, Sholeff, and Anderson (the "Witnesses") are former PurchasePro executives. Each of them pled guilty to specific factual charges and testified at the Benyo criminal trial in late 2006. Layne pled guilty to securities fraud and was sentenced to 57 months incarceration. Pursuant to his plea agreement, his sentence was reduced and discharged after he testified in the Grand Jury and at the criminal trial of Defendants. Sholeff pled guilty to perjury and was sentenced to 15 months incarceration. Because of his cooperation and testimony, his sentence was reduced to four months incarceration and four months home confinement.

The plea agreements of the three Witnesses required them to testify in future proceedings and provided broad protections to them from further prosecution. The three Witnesses also have cooperation agreements with the SEC requiring them to testify, at the request of the SEC, in this case both at trial and by deposition.

On July 31, 2007, Defendant Tuli noticed a deposition for Layne on August 8, 2007 and for Sholeff on August 27, 2007. On August 28, 2007, two days before the close of discovery, Defendant Wakeford noticed a telephonic deposition for Anderson on August 30, 2007. At the depositions of all three Witnesses, each of them asserted their Fifth Amendment rights. Consequently, the depositions were extremely short and of little or no value to Defendants.

Defendants now argue strenuously that the trial testimony of these three Witnesses should be excluded because of the SEC's "intentional delay in seeking immunity [for the Witnesses] (and not enforcing their cooperation agreements)" and its intentional shielding of them "from providing substantive deposition testimony for months" until after discovery had closed and they had provided their testimony in the current criminal trial against PurchasePro CEO Charles Johnson, Jr. Tuli Mot. to Exclude at 2, 1.

II. LEGAL ANALYSIS

A. Defendants' Motions to Exclude

In the seminal case of Securities & Exchange Commission v. Graystone Nash, Inc., the Third Circuit discussed in a thoughtful and much-cited opinion the very issues presented in these Motions, namely, whether to preclude evidence in civil cases where witnesses had relied on their Fifth Amendment privilege against self-incrimination during discovery. SEC v. Graystone Nash, Inc., 25 F.3d 187 (3d Cir. 1994). The Third Circuit briefly summarized the case law and explained that: The privilege against self-incrimination may be raised in civil as well as in criminal proceedings and applies not only at trial, but during the discovery process as well. Unlike the rule in criminal cases, however, reliance on the Fifth Amendment in civil cases may give rise to an adverse inference against the party claiming its benefits. ...


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