SEC v. Blackburn
SEC v. Blackburn
2015 WL 10911438 (E.D. La. 2015)
October 26, 2015
Shushan, Sally, United States Magistrate Judge
Summary
The court granted the SEC's motion to compel Treaty to return a hard drive and any Confidential Documents that were inadvertently produced. The court also ordered that the hard drive and any Confidential Documents must be returned, sequester, or destroyed, and that no one may use or disclose the Confidential Documents for any purpose. This ensures that the Confidential Documents remain confidential and are not used for any purpose other than what was intended.
Securities and Exchange Commission
v.
Ronald L. Blackburn, et al
v.
Ronald L. Blackburn, et al
CIVIL ACTION NO. 15–2451–CJB–SS
Signed October 26, 2015
Counsel
Jennifer Dianne Brandt, Chris Davis, U.S. Securities and Exchange Commission, Fort Worth, TX, for Plaintiff.Henry L. Klein, Henry L. Klein, Attorney at Law, Andrew Lewis Kramer, Andrew L. Kramer, LLC, New Orleans, LA, Jeffrey J. Ansley, Gregory D. Kelminson, Bell Nunnally & Martin, LLP, Dallas, TX, Robert Michael Corn, Law Office of Robert M. Corn, Houston, TX, for Defendants.
Shushan, Sally, United States Magistrate Judge
ORDER
*1 SEC'S MOTION TO COMPEL TREATY ENERGY TO RETURN INADVERTENTLY PRODUCED DOCUMENTS AND FOR PROTECTIVE ORDER (Rec. doc. 100)
GRANTED
The plaintiff, Securities and Exchange Commission (“SEC”), alleges that between 2009 and 2013, the defendants worked in concert to manipulate the trading in the stock of Treaty Energy Corporation (“Treaty”), also a defendant. The SEC seeks injunctive relief, penalties and other relief. Rec. doc. 1. The complaint was filed on December 15, 2014 in the Eastern District of Texas. On July 6, 2015, it was transferred to the Eastern District of Louisiana. Rec. doc. 67.
On August 12, 2015, the motion of Ronald Blackburn, Andrew Reid, Bruce Gwyn and Michael Mulshine for summary judgment was denied. Rec. doc. 86. Their motion to strike was denied. Rec. doc. 96. The motion of Lee Schlesinger to dismiss was granted in part with the requirement that the SEC file an amended complaint. Rec. doc. 91. It was filed. Rec. doc. 97. Samuel Whitley's motion to dismiss for failure to state a claim was denied. Rec. doc. 92. A jury trial is set for October 31, 2016. Rec. doc. 89.
On October 2, 2015, the SEC filed a sealed motion to compel and for protective order. Rec. doc. 100. It seeks an order requiring Treaty to return documents that the SEC contends were inadvertently produced. Treaty filed a sealed opposition. Rec. doc. 104.
SEC's Initial Disclosures
In preparation for the SEC's initial disclosures, each SEC custodian of Treaty case-related emails (SEC attorneys, accountants, and legal assistants) conducted a review of all emails belonging to the custodian to identify privileged emails and/or non-discoverable emails.[1] Brandt Declaration, para. 3. The emails were segregated into subfolders organized by the applicable privilege. Internal emails from were segregated from external or third party emails. Id.
The internal emails include:
[I]nternal communications between SEC attorneys and staff analyzing the case and discussing legal theories, internal attorney/client communications, emails with other law enforcement agencies, and emails attaching and referencing materials exempt from discovery and for which disclosure and content is restricted by the law, such as the Bank Secrecy Act and its regulations ..., and the Dodd–Frank Act, which protects the confidentiality of whistleblowers who provide information to the Commission.
Id. (citation and footnote omitted). After each custodian completed the segregation of the emails, Brandt personally conducted a document by document review of the external non-privileged emails that the SEC intended to produce as part of its initial disclosures. Brandt spot checked the emails that the SEC did not intend to produce. Id. at para. 4.
*2 After the final review, [Brandt] ... instructed the legal assistant assigned to the case who was handling the document production to copy onto the hard drives the external, non-privileged emails before they were packaged and sent to all counsel.
Id. at para. 5. Instead of attaching the email files the SEC intended to produce (external non-privileged communications), the legal assistant mistakenly attached the entire email folder containing all emails, including privileged communications. Id. at para. 7. The “mistakenly attached” emails belonged to three custodians: a staff attorney (Samantha Power), a staff accountant, and a paralegal. Id. at para. 8.
On April 21, 2015, the SEC produced to all parties a hard drive containing nearly 59,000 documents (more than 176,000 pages) plus nearly 11,000 emails in native format, including the email folder containing privileged communications and other emails the SEC did not intend to produce. Id. at paras. 2, 7 and 8.
On July 28, 2015, some of the defendants filed their motion for summary judgment. Rec. doc. 74. Attached as exhibit B to the motion is a two page email chain between Samantha Martin, a SEC staff attorney, and Javier Esqueda, an agent for Immigration and Customs Enforcement. Rec. doc. 74 (Exhibit B). The SEC filed its opposition to the motion on August 4, 2015. Rec. doc. 82. Brandt did not focus on Exhibit B immediately. When she prepared the opposition, she was out of town. She noticed that the email would not have been a document the SEC would have intended to produce as part of its initial disclosures. Brandt Declaration, para 6. When she returned to her office on August 10, 2015, she looked for the email in the production and realized that the wrong email file was produced on April 21, 2015. She immediately sent an email to all counsel reporting that she determined that the SEC inadvertently produced the wrong email folder. She had a conference call that day with some of the counsel in the case. A clawback letter was sent to all counsel. Id. at para. 9.
All defendants except Treaty signed the clawback letter and returned it with the April 21, 2015 hard drives. Id. at para. 11. On August 20, 2015, the replacement hard drives were produced. Id. at para. 16.
Arguments of the SEC and Treaty
The SEC contends that, pursuant to Fed. R. Civ. P. 26(b)(5)(B), Treaty is required to return the confidential documents.
If information produced in discovery is subject to a claim of privilege or of protection as trial-preparation material, the party making the claim may notify any party that received the information of the claim and the basis for it. After being notified, a party must promptly return, sequester, or destroy the specified information and any copies it has; must not use or disclose the information until the claim is resolved; must take reasonable steps to retrieve the information if the party disclosed it before being notified; and may promptly present the information to the court under seal for a determination of the claim. The producing party must preserve the information until the claim is resolved.
Id. The SEC contends that it is entitled to the same relief under Rule 4.4(b) of the Louisiana Rules of Professional Conduct.
A lawyer who receives a writing or electronically stored information that, on its face, appears to be subject to the attorney-client privilege or otherwise confidential, under circumstances where it is clear that the writing or electronically stored information was not intended for the receiving lawyer, shall refrain from examining or reading the writing or electronically stored information, promptly notify the sending lawyer, and return the writing or delete the electronically stored information.
*3 Id. The SEC urges that: (1) each category of the confidential documents is privileged or protected; (2) the disclosure of the documents was inadvertent; (3) it did not waive any applicable privilege; and (4) a protective order regarding the confidential documents should be entered. Rec. doc. 100 (Memorandum).
“[A] voluntary disclosure of information which is inconsistent with the confidential nature of the attorney client relationship waives the privilege.” Alldread v. City of Grenada, 988 F.2d 1425, 1434 (5th Cir.1993) (citations omitted). Alldread approved of the use of the five factors identified in Hartford Fire Ins. Co. v. Garvey, 109 F.R.D. 323 (N.D.Cal.1985):
The court analyzed the problem by examining the following elements: (1) the reasonableness of the precautions to prevent inadvertent disclosure; (2) the time taken to rectify the error, (3) the scope of the discovery; (4) the extent of the disclosure; and (5) the overriding issue of fairness.
Id. at 332.
Treaty contends that there was waiver because: (1) the precautions taken to prevent the disclosure of the documents were not reasonable; (2) the SEC has not reported the number of documents it seeks to clawback; (3) the SEC failed to take any measures to mitigate the damage of the disclosure; and (4) the interests of fairness and justice weigh against the return of the documents. Rec. doc. 104.
Also pertinent to the parties' arguments is Fed. R. Evid. 502(b):
Inadvertent Disclosure. When made in a federal proceeding or to a federal office or agency, the disclosure does not operate as a waiver in a federal or state proceeding if: (1) the disclosure is inadvertent; (2) the holder of the privilege or protection took reasonable steps to prevent disclosure; and (3) the holder promptly took reasonable steps to rectify the error, including (if applicable) following Federal Rule of Civil Procedure 26(b)(5)(B).
Id.
Analysis
Rule 502 Fed. R. Evid. was adopted in 2008. The Advisory Committee Notes report that the rule had two major purposes. The first concerned resolving disputes involving inadvertent disclosure and subject matter waiver. The second concerned the widespread complaint concerning prohibitive litigation costs necessary to protect against waiver of attorney-client privilege or work product. “This concern is especially troubling in cases involving electronic discovery.” Fed. R. Evid. 502 Advisory Committee Notes (Explanatory Note—Revised 11/28/2007). The issues raised by the SEC's motion must be viewed within the context of the production of electronically stored information.
The first issue under Rule 502(b) is whether the disclosure is inadvertent. The Brandt Declaration demonstrates that the disclosure of the internal emails with privileged communications was unintentional and Treaty does not contend otherwise.
The second issue is whether the SEC took reasonable steps to prevent disclosure. Treaty contends that: (1) there were no precautions taken to prevent disclosure; (2) the absence of a privilege log demonstrates the absence of any precautions to prevent disclosure; (3) the apparent size of the inadvertent disclosures weighs in favor of waiver; and (4) during the first 111 days after the production, the SEC took no measures to mitigate the damage of the disclosures.
The Brandt declaration demonstrates that precautions to prevent disclosures were taken. Each SEC custodian reviewed their emails to segregate internal emails from external or third party emails and identify privileged emails. Brandt Declaration, para. 3. Brandt, the SEC's trial attorney, conducted a document by document review of the external non-privileged emails that the SEC intended to produce to make certain that: (1) they did not contain privileged emails; and (2) they were emails that the SEC may use to support its claims. This two stage process demonstrates that reasonable steps were taken to prevent disclosure. But for the mistake by the legal assistant, there would be no issue before the Court.
*4 Initial disclosures require:
[A] copy—or a description by category and location—of all documents, electronically stored information, and tangible things that the disclosing party has in its possession, custody, or control and may use to support its claims or defenses, unless the use would be solely for impeachment;
Rule 26(a)(1)(A)(ii) (emphasis added). Because the initial disclosures are limited to documents that the party may use to support its claims or defenses, a privilege log is not required to be produced with the initial disclosures.
The apparent size or magnitude of the inadvertently disclosed documents does not weigh in favor of waiver. The SEC produced more than 11,000 emails. It was not required to produce the actual copies of the emails. Pursuant to Rule 26(a)(1)(A)(ii), the SEC was only required to provide a description by category and location of the documents. Neither the total size of the SEC's production nor the magnitude of the inadvertent production weigh in favor of waiver.
The fact that the SEC took no action during the first 111 days after the production is of no consequence. The Advisory Committee Notes state:
The rule does not require the producing party to engage in a post-production review to determine whether any protected communication or information has been produced by mistake.
Fed. R. Evid. 502 Advisory Committee Notes (Explanatory Note—Revised 11/28/2007) (“Rule 502 Advisory Note”). The SEC took reasonable steps to prevent disclosure. It satisfies the second element of Rule 502(b).
The third element is whether the SEC promptly took reasonable steps to rectify the error. “[T]he rule does require the producing party to follow up on any obvious indications that a protected communication or information has been produced inadvertently.” Rule 502 Advisory Note “The single most important factor under Rule 502(b) is that prompt steps to retrieve the inadvertently produced privileged documents must be taken once discovery of that production has been made.” Edna Selan Epstein, The Attorney–Client Privilege and the Work-Product Doctrine, A.B.A., Sec. of Lit. (Supplement to 5th Ed. 2012), p. 109.
Exhibit B (the email string between the SEC staff attorney and the Immigration and Customs Enforcement agent) to defendants' motion for summary judgment (Rec. doc. 74) triggered Brandt's examination of the SEC production. The SEC's opposition was not due until August 4, 2015. Brandt was out of town when she prepared the opposition. On her return to her office on August 10, 2015, she examined the email production and realized the wrong email file was produced. She acted immediately on August 10 to clawback the production. Brandt Declaration, para. 9. The SEC promptly took reasonable steps to rectify the error.
Treaty argues that the overriding interests of fairness and justice demonstrate waiver. It urges where there is wide dissemination of the inadvertent production, fairness dictates a finding of waiver. See S.E.C. v. Cassano, 189 F.R.D. 83, 86 (S.D.N.Y.1999). It contends that unfairness is demonstrated because: (1) the SEC did not raise the issue for four months; (2) during this time the documents were in possession of counsel for defendants; (3) some were used as exhibits with a motion for summary judgment filed in the record; (4) the SEC has not provided a privilege log so only it knows what documents it will withhold as privileged; and (5) the SEC does not claim that the safety or privacy of a witness is compromised by the inadvertent production.
*5 The fact that the SEC did not raise the issue for nearly four months is not material. It is not required to engage in post-production review. Once it determined that the wrong emails were produced, it acted immediately to claw them back.
The documents were in the possession of counsel for defendants during this period. If waiver followed from the opposing party's possession of the inadvertent production, there would always be waiver with inadvertent production.
The record indicates that only one two page email string was in the public record. Considering the thousands of emails produced, there would be unfairness to the SEC if the public disclosure of one email string caused waiver.
The privilege log issue has been addressed. If the SEC is served with requests for production and the documents inadvertently produced are responsive to the requests for production, the SEC is required to provide a privilege log for such documents.
The issue of whether the inadvertently produced documents violated the privacy of a witness was considered in Cassano, a 1992 decision. Rule 502(b) was adopted in 2008. It does not require consideration of whether the inadvertent production violated the privacy of a witness.
Because there was no waiver under Rule 502(b) and the S.E.C. complied with Rule 26(b)(5)(B), its motion to compel will be granted.
IT IS ORDERED that:
1. The SEC's motion to compel Treaty to return inadvertently produced documents and for protective order (Rec. doc. 100) is GRANTED.
2. Within five (5) working days of the entry of this order, Treaty shall: (a) return to the SEC the hard drive produced on April 21, 2015; (b) return, sequester, or destroy any copies it has of the Confidential Documents;[2]and (c) take reasonable steps to retrieve any Confidential Documents it disseminated to any person.
3. Within five (5) working days of receiving actual or constructive notice of this Order, any person who has received the Confidential Documents or any document contained therein shall: (a) return, sequester, or destroy any copies it has of the Confidential Documents; and (b) take reasonable steps to retrieve any Confidential Documents it disseminated to any person.
4. Neither Treaty nor any person who has received the Confidential Documents or any document contained therein shall use or disclose the Confidential Documents for any purpose at any time.
5. Any person who receives actual or constructive notice of this Order shall maintain the confidentiality of the Confidential Documents.
6. The deadline for an appeal of this order is five (5) working days from its entry. The order shall be suspended during its appeal.
Footnotes
In support of the motion to compel, the SEC submitted the declaration of Jennifer D. Brandt, the trial attorney. The declaration is dated September 28, 2015. Hereafter it is referred to as the “Brandt Declaration” It is found as item number 3 in the Appendix accompanying the motion to compel.
The term Confidential Documents is defined on page 1 of the SEC's memorandum in support of its motion to compel.