SEC v. Badian
SEC v. Badian
2009 WL 222783 (S.D.N.Y. 2009)
January 26, 2009
Eaton, Douglas F., United States Magistrate Judge
Summary
Rhino and Bryan Cave LLP failed to take precautions to protect the privilege of the 260 documents they produced to the SEC in August 2003. The SEC's 10/3/08 objections revealed that several of Rhino's privileged documents had been inadvertently produced. DLA Piper LLP also encountered logistical difficulties when attempting to utilize the production and chose not to review it, leading to the court's finding that Rhino had waived any privilege that it might have asserted.
SECURITIES and EXCHANGE COMMISSION, Plaintiff,
v.
Andreas BADIAN, et al., Defendants
v.
Andreas BADIAN, et al., Defendants
No. 06 Civ. 2621(LTS)(DFE)
United States District Court, S.D. New York
January 26, 2009
Eaton, Douglas F., United States Magistrate Judge
MEMORANDUM AND ORDER
*1 1. Pursuant to my 12/19/08 Memorandum and Order, non-party Rhino Advisors, Inc. (“Rhino”) delivered to me the following documents for my in camera review:
a. The 28 documents and attachments numbered 1–19 on pages 1–2 of the 10/28/08 privilege log.
b. RC 000042139,
RC 000042153–42157,
RC 000042164–42168,
RC 000042184,
RC 000042191–42194,
RC 000043720,
RC 000042220,
RC 000042222–42223,
RC 000042226–42230,
RC 000042233–42242,
RC 000042697,
RC 000042702,
RC 000042956–42968,
RC 000043631,
RC 000043897, and
RC 000043632–43637.
2. I have reviewed those documents in camera, and I have re-studied the letters that were sent to me earlier, namely:
a. The 10/20/08 letter from the Securities and Exchange Commission (“SEC”).b. The 10/27/08 letter from Rhino and non-party Robert Charron, Esq.c. The 10/31/08 reply letter from the SEC.d. The 10/31/08 sur-reply letter from Rhino.e. The 12/12/08 joint letter from Rhino and the SEC.
3. Rhino seeks to “claw back” some 260 documents out of some 67,000 documents that it produced to the SEC in August 2003. It claims that the 260 documents were privileged, and were produced inadvertently. The parties agree that a claim of inadvertence is governed by the four factors set forth in Lois Sportswear, U.S.A., Inc. v. Levi Strauss & Co., 104 F.R.D. 103, 105 (S.D.N.Y.1985) (Sweet, J.), and its progeny such as Business Integration Services, Inc. v. AT & T Corp., 251 F.R.D. 121, 129 (S.D.N.Y.2008) (Koeltl, J.). I will discuss those four Lois factors, but first I will set forth the factual background.
4. On June 5, 2002, the SEC authorized a Formal Order of Private Investigation concerning trading in the securities of Sedona Corporation and other issuers, and concerning whether Rhino had violated federal securities laws during the period from 1999 to 2002.
5. On June 17, 2002, the SEC issued an order requiring Rhino to file a sworn statement answering 23 detailed questions pursuant to Section 21(a)(1) of the Securities Exchange Act.
6. Rhino and its officers faced the distinct threat of a civil lawsuit by the SEC and a criminal investigation by the U.S. Attorney's Office.
7. In early 2003, Rhino and its main executive Thomas Badian agreed to a fairly stringent settlement with the SEC. Rhino agreed to make payment of $1,000,000 in civil penalties to the SEC, on a joint and several basis with Thomas Badian. Rhino also agreed to a final judgment of permanent injunction and other equitable relief, which was entered on March 5, 2003 by Judge Richard Owen, who retained jurisdiction to enforce the terms. One of the terms decreed “that Rhino respond fully, accurately and truthfully to the Commission's June 17, 2002 Order.”
8. On May 6, 2003, Rhino filed a 21(a) Report, signed by Robert F. Charron, Esq., giving answers to the 23 questions.
9. The SEC then proceeded to challenge the truthfulness of those answers, raising (at least implicitly) the prospects that the SEC might seek contempt penalties and/or criminal prosecution.
*2 10. On May 30, 2003, in a letter to Rhino's counsel Bryan Cave LLP, the SEC listed deficiencies that it perceived in the answers signed by Mr. Charron.
11. On July 17, 2003, Mr. Charron filed an amended 21(a) Report. He stated that his answers to the 23 questions were “based solely on a review of” “certain documents and records made available to me by Rhino” “because no current Rhino employees were willing to speak with me regarding the substance of my review of this matter.” In a cover letter to the SEC, he stated: “Enclosed please find indexes of all of the documents ..., in either paper form or electronic form, that I reviewed in my capacity as agent for Rhino Advisors, Inc .... in connection with Rhino's response to the [21(a) ] Order ....“ The enclosure included an index of Rhino email files. The SEC asked to see those Rhino email files.
12. On August 6 and 8, 2003, Bryan Cave LLP (as attorneys for Rhino) produced to the SEC 47 boxes of hard copies of “email documents downloaded from Rhino's computer system.” I have been shown no evidence that Rhino or Bryan Cave LLP took any precautions to weed out any possibly privileged documents. Rhino merely notes that Bryan Cave LLP's cover letters included the following statement:
“The production of any document by Rhino is not and shall not be deemed or construed as a waiver of any privilege, right, or objection on the part of Rhino with respect to any such document. In the event that a privileged document is inadvertently produced by Rhino, such production is not and shall not be deemed or construed as a waiver of any privilege, right, or objection on the part of Rhino, and Rhino reserves the right to request the return of any such document.”
13. Rhino and its current counsel have not submitted any declaration from Bryan Cave LLP. However, they say (at page 5 of the 12/12/08 joint letter) that Bryan Cave LLP employed the following “rationale ... when the Inadvertent Production was made”:
“The documents were produced ... with an expectation that Rhino's cooperation and fulfillment of the terms of the settlement would bring an end to the claims asserted by the SEC against Rhino or its employees.”
In other words, Bryan Cave LLP was hoping that the SEC would not bring a contempt proceeding before Judge Owen, and would not press the U.S. Attorney's Office for a criminal prosecution. Rhino's employees were refusing to speak to Mr. Charron regarding the substance of his review. Therefore, Rhino's “cooperation” consisted only of making documents available to Mr. Charron. In an effort to make the SEC perceive Rhino as cooperative, Bryan Cave LLP produced those documents to the SEC. In that context, Bryan Cave LLP did not say that it was withholding any documents on the basis of privilege.
14. Two months later, on October 14, 2003, Bryan Cave LLP supplied the SEC with more documents—two CD Roms of Andreas Badian's emails.
15. On October 15 and November 15, 2003, the U.S. Attorney's Office in this District issued grand jury subpoenas to Rhino for documents. Kronish Lieb Weiner & Hellman LLP (as attorneys for Rhino) delivered the documents to the U.S. Attorney's Office on a DVD on December 24, 2003.
*3 16. On December 3, 2003, the U.S. Attorney's Office filed a criminal complaint against Thomas Badian and Andreas Badian and obtained warrants to arrest them. Andreas was arrested that day, but Thomas had left the United States and he did not return.
17. During the next year, Kroll On Trak (acting on behalf of Rhino) supplied the SEC with 37 CD Roms of Rhino documents in electronic form, on March 4, April 12, and October 14, 2004.
18. On October 21, 2004, the U.S. Attorney's Office dismissed its criminal complaint (03–mj–02355) as to Andreas.
19. On April 4, 2006, the SEC filed the Complaint in the case at bar. On June 7, 2006, DLA Piper LLP filed a notice of appearance as attorneys for Andreas Badian.
20. On October 5, 2007, the SEC served Mr. Charron with a subpoena to produce all of the documents listed on the indexes attached to Mr. Charron's July 17, 2003 cover letter to the SEC.
21. Mr. Charron, through his counsel, sought the assistance of DLA Piper LLP in responding to the subpoena.
22. On April 9, 2008, Mr. Charron notified the SEC that he was withholding some documents and that he and Rhino were asserting the attorney-client privilege and the attorney work product doctrine. DLA Piper LLP prepared the first privilege log, as well as later revisions. On October 3, 2008, the SEC served written objections to the assertions of privilege.
23. In the 10/27/08 letter to me, at page 5, DLA Piper LLP says: “The SEC's [10/3/08] objections also revealed that several of Rhino's privileged documents had been inadvertently produced [in 2003] by Bryan Cave LLP.” It is quite possible that this was the first time that DLA Piper LLP realized that Bryan Cave LLP's 2003 production had included documents that DLA Piper LLP (reviewing them five years later) believed to be privileged. But I see no evidence that Bryan Cave LLP did not realize in 2003 what it was producing to the SEC. In any event, the issue before me is whether Bryan Cave LLP affirmatively took reasonable precautions to make sure that it was not turning over documents that it did not intend to turn over. I shall now discuss the four Lois factors.
24. The first Lois factor is: “[T]he reasonableness of the precautions to prevent inadvertent disclosure” of privileged documents.
25. As I stated above at ¶ 12, I have been shown no evidence that Rhino or Bryan Cave LLP took any precautions to weed out any possibly privileged documents from the August 2003 production to the SEC. No declaration from any employee of Rhino or of Bryan Cave LLP has stated that he or she conducted a privilege review prior to that production. Hence there is no basis for me to conclude that there were precautions, let alone whether they were reasonable. In the 10/27/08 letter, at page 11, DLA Piper LLP asserted that “a privilege review was conducted by Rhino's prior counsel, and the cover letters enclosing the productions demonstrate this fact.” On the contrary, the cover letters do not “demonstrate” that a privilege review was conducted. I have already quoted these cover letters at ¶ 12 above. They did not say that Rhino was withholding any documents on the basis of privilege. The cover letters merely said: “In the event that a privileged document is inadvertently produced by Rhino, such production is not ... a waiver of any privilege ... and Rhino reserves the right to request the return of any such document.” This pushed off any discussion of privilege to a vague future. The cover letters conveyed the impression that Rhino was being broadly cooperative with the SEC, and was not engaging in any debate about privilege, let alone asking the SEC to commit to a “claw-back” agreement.
*4 26. The SEC's 10/31/08 reply, at page 4, said:
[A]lthough [Rhino] asserts that Rhino's counsel conducted a privilege review before producing the documents to the SEC, [Rhino] does not even attempt to describe the precautions that were taken [in 2003] to prevent producing the purportedly privileged documents to the SEC. For example, [Rhino] does not even attempt to [a] claim that a procedure was in place to screen for privilege, [b] explain how the individuals responsible for the screening were properly trained and supervised by an attorney, or [c] [claim] that a review was made by anyone before the documents were actually produced.
27. Rhino submitted a short sur-reply on October 31, 2008, and revisited this subject at page 5 of the 12/12/08 joint letter. But Rhino continued to fail to produce any declaration describing any precautions taken in 2003 by Bryan Cave LLP. Indeed, Rhino said that “the rationale employed” by Bryan Cave LLP in August 2003 was to be broadly cooperative: “The documents were produced ... with an expectation that Rhino's cooperation and fulfillment of the terms of the [March 2003] settlement would bring an end to the claims asserted by the SEC against Rhino or its employees.” (12/12/08 joint letter, p. 5.) It appears that, as of August 2003, the claims being asserted by the SEC included (a) that Rhino had failed to “respond fully, accurately and truthfully to the Commission's June 17, 2002 Order,” and (b) that Rhino and its employees were in contempt of the March 2003 consent decree.
28. I jump ahead to the third Lois factor, which is: “[T]he extent of the disclosure.” Bryan Cave LLP's cover letters dated August 6 and 8, 2003 stated they were enclosing 47 boxes containing hard copies of Rhino emails, with the pages Bates-stamped from 1 to 114,632. Rhino states that those 114,632 pages constituted approximately 67,000 documents. More than four years later, in April 2008, Rhino prepared its first privilege log and claimed that some 3,400 of those documents were privileged, a bit more than 5%. The SEC replied, in essence, that this was a rather large percentage of documents for a claim of inadvertence. More recently, Rhino has reduced its privilege claim; Rhino now asserts privilege as to only 260 of those documents. This is still a significant number of documents.
29. The second Lois factor is: “[T]he time taken to rectify the error.” As Rhino correctly states, the general rule is: “The period after the producing party realizes that privileged information has been disclosed is the relevant period for measuring whether the privilege has been waived.” Aramony v. United Way of America, 969 F.Supp. 226, 237 (S.D.N.Y.1997). The “producing party” was Rhino, and its agent was Bryan Cave LLP.
30. In August 2003, Rhino and Bryan Cave LLP had a well-informed idea about what they were producing to the SEC. They realized that Mr. Charron had written to the SEC on July 17, 2003: “Enclosed please find indexes of all of the documents ... that I reviewed ... in connection with Rhino's response to the [21(a) ] Order ....“ The enclosure included an index of Rhino email files. Rhino and Bryan Cave LLP realized that the SEC asked to see those Rhino email files. In August 2003, they produced those email files to the SEC, and nothing extraneous. They produced those email files in hard copy form, with a Bates-stamped number on each page. They knew that those emails had been generated during a time period when Rhino had frequent communications with its attorneys Bryan Cave LLP. Moreover, they knew that Rhino's response to the 21(a) Order had been drafted by Bryan Cave LLP, which then had sent the draft to Mr. Charron, who edited it and made some changes before Rhino filed it on May 6, 2003. (6/12/08 Charron Depo. Tr. 51–52.) However, I have been shown no evidence that Bryan Cave LLP or Mr. Charron or any other agent of Rhino took precautions to check the August 2003 Bryan Cave Production to weed out any documents as to which Rhino might wish to assert privilege.
*5 31. Rhino (and presumably Bryan Cave LLP) realized in December 2003 that a criminal complaint was filed against Thomas Badian and Andreas Badian of Rhino. They realized that Andreas was arrested and, for the next ten months, was facing criminal prosecution. Also, they realized that Andreas had never reached any civil settlement with the SEC. Nevertheless, Rhino and Bryan Cave LLP continued to make no claim that any part of the August 2003 Bryan Cave Production had been protected by any privilege.
32. In April 2006, the SEC filed the case at bar against Andreas Badian and others. In June 2006, DLA Piper LLP filed a notice of appearance as attorneys for Andreas. On October 5, 2007, the SEC served Mr. Charron with a subpoena calling for “All documents ... referenced in the attachment to your letter of July 17, 2003, to [the SEC], attached hereto.” DLA Piper LLP assisted Mr. Charron in responding to the subpoena.
33. DLA Piper LLP states that it took five or six months to respond to the subpoena, because it encountered logistical difficulties. (10/27/08 letter, pp. 3–5.) At footnote 6, DLA Piper LLP says that it began by attempting to utilize the production that had been made by the Kronish firm, because the December 2003 Kronish Production had been made in electronic form; by contrast, the August 2003 Bryan Cave Production had been made in hard copy. However, electronic problems led DLA Piper LLP to give up on the idea of utilizing the Kronish Production. Yet DLA Piper LLP did not turn to the Bryan Cave Production. It appears that DLA Piper LLP chose not to review the Bryan Cave Production at any time during the 12 months after the SEC's October 2007 subpoena. Yet the Bryan Cave Production had been made to the SEC, unlike the Kronish Production (which was made to the U.S. Attorney). And the Bryan Cave Production had been made prior to the Kronish Production.
34. DLA Piper LLP says that the August 2003 Bryan Cave Production had supplied the SEC with “more than 67,000 documents.” (10/27/08 letter, pp. 11, 12, 13.) However, in responding to the SEC's October 2007 subpoena, DLA Piper LLP turned to a smaller group of documents, namely certain “Microsoft Outlook e-mail folders including approximately 40,000 documents.” (10/27/08 letter, p. 3, which calls those the “Charron Documents,” although that label could also be applied to the Bryan Cave Production.) After reviewing those documents, DLA Piper LLP delivered responsive documents (and a privilege log) to the SEC in early April 2008.
35. DLA Piper LLP says: “During the course of DLA Piper's review of the documents and prior to the [June 2008] deposition of Charron, the SEC voiced concerns about the applicability of the attorney-client privilege to the documents reviewed by Charron [in 2003] in connection with the 21(a) Report.” (DLA Piper's 10/21/08 letter to me, p. 1.) “In September 2008, the SEC first voiced specific concerns with the assertion of privilege and then on October 3, 2008 ... the SEC for the first time articulated cogently and in writing its issues with the log ....“ (10/27/08 letter, p. 4.)
*6 36. Despite the many hours spent by DLA Piper LLP during eleven months starting in October 2007, it says that only on October 3, 2008 did DLA Piper realize that several of the documents listed on its April 2008 privilege log had been produced to the SEC in the 2003 Bryan Cave Production. (10/27/08 letter, p. 5.) I am inclined to accept DLA Piper's statement about its belated realization, although I must note that DLA Piper displayed a remarkable lack of interest in the Bryan Cave Production.
37. DLA Piper says that, after October 3, 2008, it acted quickly to rectify the “error.”
38. However, the crucial question is: When did “the producing party realize [ ] that privileged information ha[d] been disclosed”? Aramony, 969 F.Supp. at 237. The “producing party” was Rhino, and its agent was Bryan Cave LLP. I find that both Rhino and Bryan Cave LLP realized in August 2003 that Rhino was disclosing some information as to which it could have asserted privilege if it had so chosen. In August 2003, Rhino was facing the prospect that the SEC might apply to Judge Owen to hold Rhino and its officers in contempt, and that the SEC might urge the U.S. Attorney to bring a criminal prosecution. Through its agent Bryan Cave LLP, Rhino chose to turn over its email files without stating that it was withholding any portions on the basis of privilege. (Indeed, I have been shown no evidence that Bryan Cave LLP or Rhino made any internal list in 2003 of any documents that they were withholding from the SEC on the basis of privilege.) Therefore, Rhino is chargeable with a delay of five years before it sought to “claw back” some of the Bryan Cave Production.
39. The fourth Lois factor is: The “over[arching] issue of fairness and the protection of an appropriate privilege which ... must be judged against the care or negligence with which the privilege is guarded ....“ I find that Rhino did not act with care in 2003 to guard the privilege it is now asserting. I see no fairness in precluding the SEC from using any document in the Bryan Cave Production to obtain leads or to put questions to Mr. Charron or any other witness. The shoe was on the other foot in S.E.C. v. Cassano, 189 F.R.D. 83, 86 (S.D.N.Y.1999), where the SEC lost an attempt to “claw back” a privileged SEC document; Judge Kaplan wrote:
Although the SEC acted promptly once it determined that the document had been produced, a factor cutting in its favor, the time taken to rectify the error, in all the circumstances, was excessive. There was no excuse for waiting 12 days to find out what the document was.Finally, there are no overarching concerns of fairness dictating a contrary result. While the Commission, to be sure, is entitled to privacy for its deliberative communication with counsel, it has the same obligation to protect the confidentiality of its communications as any private party. There is no reason why its carelessness should be disregarded....
*7 40. Having analyzed the four Lois factors, I conclude that Rhino waived any privilege that it might have asserted as to any portion of the 2003 Bryan Cave Production.
41. It is unnecessary to consider the SEC's alternative argument that some of the documents in the Bryan Cave Production fell within the crime/fraud exception to the attorney-client privilege. On the other hand, I have considered that argument while making my in camera review of the documents listed at ¶ 1 of today's Memorandum and Order. I find that each of these in camera documents is privileged, and I find no reason to invoke the crime/fraud exception as to any of them.
42. On the present record, I do not see a basis to extend a finding of waiver to any document that has not been turned over to the SEC. The SEC's 10/20/08 letter, at page 7, quotes selectively from Tr. 126–029 of Mr. Charron's deposition. But a fair reading of his testimony is as folows:
a. In response to the October 2007 subpoena, he pulled documents which were more extensive than those he actually reviewed in 2003 when he had been preparing his 21(a) Report.b. In 2007, he handed the larger group of documents to his attorneys at Siller Wilk LLP, who apparently turned them over to DLA Piper LLP; DLA Piper LLP subsequently listed some of those documents on the Rhino privilege log.
This does not establish that all the documents on the privilege log were documents that he reviewed in 2003 when he had been preparing his 21(a) report.
43. The SEC's 10/20/08 letter, at page 13, complains about the objections at Tr. 30–40 and 133–35 of Mr. Charron's deposition, which invoked the attorney-client privilege. I do not find fault with those objections, but they did not involve the documents as to which Rhino was asserting a right to “claw back.” I have now rejected that assertion, and therefore I will permit the SEC to question Mr. Charron and others about topics covered by those documents. Unless the parties agree otherwise, I direct the SEC not to resume any questioning of Mr. Charron until the SEC has deposed Andreas Badian. As I told the attorneys in my 11/10/08 telephone conference, the privilege shields attorney-client communications but not the underlying facts. For example, it appears that the SEC has questions about the role of Andreas Badian's father. It will be much more efficient if the SEC will put those questions to Andreas Badian in the first instance, rather than to the attorney Mr. Charron.