In deciding whether to draw an adverse inference in Commission administrative proceedings, an administrative law judge must consider "the nature of the proceeding, how and when the privilege was invoked, and the potential harm or prejudice to" the Division. And because a respondent may invoke the Fifth Amendment to "hinder" a proceeding, the Commission has cautioned its administrative law judges to "be especially alert to the danger that the litigant might have invoked the privilege primarily to . . . gain an unfair strategic advantage over opposing parties."Having observed the Division's examination of Carnahan and considered the Division's submission, I determine that it is appropriate to draw adverse inferences based on Carnahan's refusal to answer the Division's questions, although I reserve decision on whether an adverse inference is appropriate or necessary for each specific question until I review the parties' post-hearing briefs. First, Carnahan invoked the Fifth Amendment privilege as to all questions without regard to the question or whether there was any possible risk that answering the question might tend to incriminate him. He thus refused to answer background questions about his education and foundational questions such as whether he recalled another witness's testimony, remembered that a document had been previously discussed, or could see what was written in a particular document. Invoking as to all questions, especially as to background and general questions, is improper and tends to show that Carnahan did not fear incrimination but was instead invoking strategically.Second, Carnahan testified previously-both during the Division's investigation and in a previous hearing before my predecessor-without invoking his Fifth Amendment privilege. Carnahan's decision to invoke the Fifth Amendment during the hearing, without warning and after not previously invoking, particularly in light of his refusal to answer simple, nonincriminating questions, further suggests that he invoked strategically to hinder the Division.Third, because he previously testified without invoking, the Division had no reason to suspect he would do so at the hearing. It thus had no reason to believe it would need to call other witnesses in order to admit evidence or offer testimony it expected to present through Carnahan. Carnahan's strategic invocation at the last minute thus unfairly prejudiced his opponent. Not drawing an adverse inference would invite gamesmanship.The Division's motion is granted. I will draw adverse inferences based on Carnahan's refusal to testify, subject to the Division identify . . .
In May 2016, the SEC charged Jaclin and Imran Husain of Santa Monica, California with running the shell factory scheme. As alleged in the SEC's November 2016 amended complaint Husain and Jaclin created nine shell companies and sold seven using essentially the same pattern. Husain and Jaclin filed registration statements for initial public offerings, falsely claiming that a particular business plan would be implemented and that private investors had already purchased shares of the companies' stocks. Deliberately omitted from the registration statements was any mention of Husain's control of the company. Husain and Jaclin filed quarterly and annual reports, signed by a puppet CEO, which repeated many of the false and misleading statements in the registration statements. The SEC previously issued stop orders and suspended the registration statements of the last two created companies - Counseling International and Comp Services - before investors could be harmed and the companies could be sold.On May 18, 2017, a federal grand jury returned an indictment against Jaclin on charges related to the shell factory scheme and with obstruction of justice of two SEC investigations.
[K]abra, through LaunchByte.io, LLC, told investors they could make double-digit returns in a matter of months with no risk by providing Kabra with short-term infusions of cash to be invested in one or more startup companies that Launchbyte purportedly had an ownership interest in. In fact, these "investment" opportunities were fabrications, the SEC alleges; upon receiving investor funds, Kabra diverted them almost immediately to his own use-in one instance, to pay for a boat Kabra had agreed to purchase, and, in other instances, to pay back earlier investors in Ponzi-like distributions. The SEC alleges that Kabra repeatedly lied to investors to keep them from discovering his fraud.