“Pleading the Fifth” is one of the most commonly known phrases in our legal system, and the right against self-incrimination is one of the Constitution’s most meaningful protections. That said, in the corporate fraud context, exercising that right often entails risks and costs that may outweigh the potential benefits. As such, companies—particularly those that contract with the federal government—and their senior executives should be aware of the limits and potential high costs of exercising the right against self-incrimination in corporate fraud investigations and actions.

The Fifth Amendment to the Constitution provides that no person “shall be compelled in any criminal case to be a witness against himself.” Over time, courts have placed significant limitations on the privilege. For example, a corporation has no constitutional privilege against self-incrimination and cannot contest a subpoena on the ground that the Fifth Amendment protects its documents from discovery. Braswell v. United States, 487 U.S. 99 (1988). The Supreme Court has stated unequivocally that “[t]he constitutional privilege against self-incrimination is essentially a personal one, applying only to natural individuals.” United States v. White, 322 U.S. 694, 698 (1944). Because the privilege is personal, a corporate officer or director may not invoke the privilege on behalf of a corporation and may not withhold documents or testimony for a corporate entity. Accordingly, the government can force a corporation to produce incriminating documents through its agents. Indeed, the U.S. Supreme Court has declared, “an individual cannot rely upon the privilege to avoid producing the records of a collective entity which are in his possession in a representative capacity, even if these records might incriminate him personally.” Bellis v. United States, 417 U.S. 85, 88 (1974).

Despite the prohibition on corporations and their document custodians exercising the right against self-incrimination, employees of a corporation still retain their individual constitutional rights against compelled testimony. An individual may assert the privilege in response to a direct line of questioning or, in some cases, a request for specific evidence. In addition, there may be circumstances where the target of a white-collar investigation may be tempted to do that to shut down lines of inquiry and protect key evidence from disclosure. For corporate fraud claims, however, the costs of pleading the Fifth often outweigh the benefits and assessing the relevant risks can be a fraught calculus. This is especially the case in an environment where the U.S. Department of Justice is actively encouraging parallel white-collar investigations that marshal and coordinate the resources of criminal, civil, and U.S. Securities and Exchange Commission (SEC) prosecutors. Under these circumstances, corporations and their executives under criminal investigation are also often exposed to potentially ruinous False Claims Act (FCA) and SEC suits, as well as administrative remedies and potential private actions, all related to the same core conduct.

Pleading the Fifth in the corporate fraud context may decrease exposure to criminal remedies while simultaneously unleashing a parade of legal hazards, and the decision on whether to exercise that right often involves choosing between bad and worse options.

First, exercising the right against self-incrimination can lead to an adverse inference in a civil case and in practice a defendant’s or a key witness’s silence and the negative connotations associated with it can be an insurmountable obstacle to overcome in defending against civil claims. In addition, those civil claims can take the form of a False Claims Act action, SEC suit, or private tort, securities or breach of contract action. If a witness invokes the privilege against self-incrimination, the court may draw an adverse inference from the witness’s silence — an inference that if the witness had answered, the response would have been unfavorable to the witness. Baxter v. Palmigiano, 425 U.S. 308, 318 (1976). More specifically, that negative inference may support a finding that a witness acted with the requisite scienter required for liability in a fraud action. United States v. Mount Sinai Hosp., 256 F. Supp. 3d 443, 451 (S.D.N.Y. 2017). Of particular concern for corporate entities, “adverse inferences drawn against the individual defendants may also be drawn against the corporate defendant because the individual defendants were acting in the scope of their employment when they engaged in the conduct they refused to testify about.” S.E.C. v. Monterosso, 746 F.Supp.2d 1253, 1263 (S.D. Fla. 2010). Although invocation of the Fifth Amendment cannot be the sole basis for an entry of summary judgment in the plaintiff’s favor, the adverse inference restricts a defendant’s ability to respond to a lawsuit. See, e.g., State Farm Mut. Auto. Ins. Co. v. Filenger, 362 F. Supp. 3d 1246, 1255 (S.D. Fla. 2018) (“This adverse inference is not the sole basis for Plaintiffs’ case, rather there is a strong documentary record indicating that Defendants operated the Clinics without proper licensing, that Plaintiffs paid Defendants substantial sums for unlawful treatments from these clinics, and that there are also substantial outstanding bills from Defendants.”).

Second, and of particular note for government contractors and healthcare providers, if key individuals plead the Fifth it can lead to harsh contractual and administrative remedies, including barring the individuals’ employer from transacting with the federal government in certain instances. Several FAR requirements, program rules and contractual provisions require government contractors to cooperate with agency audits and law enforcement investigations (see, e.g., FAR § 3.502-2) and failure to do so can trigger contractual remedies or administrative actions, including potential suspension or debarment. See, e.g., 24 CFR § 25.6. In other words, if a company’s employee pleads the Fifth, the government can temporarily or permanently exclude that company from transacting with the federal government for failing to cooperate with a government investigation.

While some of the potential outcomes described above represent worst case-scenarios, the key takeaway is that in the corporate fraud context, pleading the Fifth is rarely a freebie and more often than not, it entails increased exposure on several fronts. Those costs usually outweigh the potential benefits for corporations, even if not for their senior executives in the prosecutorial crosshairs.

If you have questions about the ramifications of invoking the constitutional privilege against self-incrimination, please contact a member of the McGuireWoods’ Government Investigations & White Collar Litigation or Healthcare Departments for additional information.

About McGuireWoods’ Government Investigations & White Collar Litigation Department
McGuireWoods’ Government Investigations & White Collar Litigation Department is a nationally recognized team of nearly 60 attorneys representing Fortune 100 and other companies and individuals in the full range of civil and criminal investigations and enforcement matters, including litigation and action under the False Claims Act. Our False Claims Act team includes former federal prosecutors, and experienced civil and white collar criminal litigators with experience in this unique area of law. We also tap attorneys from the firm’s other practice groups and our subsidiary McGuireWoods Consulting LLC. Strategically centered in Washington, D.C., our Government Investigations & White Collar Litigation Department has been honored as a Law360 Practice Group of the Year and earned the trust of international companies and individuals through our representation in some of the most notable enforcement matters over the past decade.

About McGuireWoods’ Healthcare Department
With more than 60 experienced, industry-focused lawyers, our national Healthcare Department is consistently ranked as one of the top U.S. healthcare practices. Our healthcare attorneys have the knowledge and experience that healthcare providers and insurers need to achieve compliance with federal and state-specific regulatory requirements. Our group advises clients on a full range of regulatory and policy issues enforced by the U.S. Government. Clients have recognized the value of our depth in regulatory, litigation and transactional matters, noting our “great commercial awareness” and have described us as “very skilled,” “extremely knowledgeable, practical and accessible.” Our healthcare group and individual lawyers from across the country are recognized by Chambers USABest Lawyers in AmericaLegal Elite and Super Lawyers as among the top legal providers in the nation.