Securities and Exchange Commission v. Westport Capital Markets, LLC et al

Filing 105

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF SEC'S MOTION IN LIMINE TO PRECLUDE EVIDENCE REGARDING COMPLIANCE CONSULTANT. For the reasons stated in the attached opinion, the SEC's motion in limine to preclude evidence of defendants' reliance on the advice of Regulatory Compliance (Doc. # 79 ) is GRANTED insofar as it precludes defendants' ninth affirmative defense, GRANTED insofar as it seeks to preclude evidence concerning the work and knowledge of Walter Costenbader and Stacy Peters, but otherwise DENIED. It is so ordered. Signed by Judge Jeffrey A. Meyer on 2/27/2020. (Webley, A)

UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
No. 3:17-cv-02064 (JAM)

v.
WESTPORT CAPITAL MARKETS LLC. et
al.,
Defendants.

ORDER GRANTING IN PART AND DENYING IN PART
PLAINTIFF SEC’S MOTION IN LIMINE TO PRECLUDE EVIDENCE
REGARDING COMPLIANCE CONSULTANT
The Securities and Exchange Commission (“SEC”) has sued Westport Capital Markets,
LLC, and its owner and chief executive officer Christopher E. McClure, for violating the
Investment Advisers Act of 1940. Following my ruling on summary judgment, SEC v. Westport
Capital Markets LLC, 408 F. Supp. 3d 93 (D. Conn. 2019) (Doc. #69), the case is soon
proceeding to trial on two counts involving allegations that Westport and McClure defrauded
their clients and willfully made untrue statements in filings with the SEC.
A perennial issue in this case has been defendants’ claimed reliance on the advice of
Regulatory Compliance LLC (“RC”), a “regulatory compliance” consultancy service. The SEC
has now moved in limine to preclude evidence relating to Westport and McClure’s
communications with RC. Doc. #79. For the reasons that follow, I will largely deny the SEC’s
motion.
BACKGROUND
The factual background of this case is described in detail in the Court’s ruling on the
SEC’s motion for summary judgment. See Westport Capital Markets, 408 F. Supp. 3d at 99-103.
As relevant to this motion in limine, for the entire period in which the SEC accuses defendants of

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wrongdoing, Westport had a contract with RC to provide a variety of “compliance services:”
accounting support, compliance advice for Westport as a broker-dealer, and compliance advice
for Westport as a registered investment advisor. See Westport Capital Markets, 408 F. Supp. 3d
at 102.
It is uncontested that RC assisted Westport and McClure in preparing an important
disclosure form, the Forms ADV, that was both filed with the SEC and sent to Westport’s
clients. It is likewise uncontested that these Forms ADV were the closest Westport came to
disclosing its various conflicts of interest to its clients. But the parties fiercely contest the nature
of RC’s assistance in preparing the Forms ADV, whether and to what extent Westport and
McClure actually relied on RC’s advice on the Forms ADV, what advice about disclosures other
than the content of the Forms ADV Westport and McClure solicited or received from RC, and
what Westport disclosed to RC itself about its conflicted investment activities. 1
My summary judgment ruling only briefly discussed Westport and McClure’s claimed
reliance on RC’s advice. I explained that, although “a substantial question exists whether and to
what extent Westport and McClure may rely on their dealings with non-attorneys at Regulatory
Compliance to defend against this SEC action,” it was not necessary for me to resolve the
parties’ legal or factual disputes over the RC advice at that stage as to the remaining counts in
this case because there were sufficient other reasons to deny summary judgment on those counts.
See Westport Capital Markets, 408 F. Supp. 3d at 102-03.

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Voluminous briefing, exhibits, and excerpts of deposition testimony have been supplied, both in dispositive motion
briefing and in the present motion in limine, supporting each party’s view of the available facts. See Docs. #47
(exhibits for SEC’s motion for summary judgment); #58-2 (responsive exhibits from Westport and McClure’s
opposition); #79 (still more exhibits supporting SEC’s motion in limine); #84 (same, opposing the SEC’s motion in
limine).

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Nonetheless, I invited the SEC to move at the time of trial “to preclude evidence or for
issuance of limiting instructions to the extent that it is able to show, as a matter of law, that
Westport and McClure were not entitled to rely on guidance they received from Regulatory
Compliance or that Westport and McClure's dealings with Regulatory Compliance are not
otherwise relevant for purposes of the SEC’s claims.” Westport Capital Markets, 408 F. Supp. 3d
at 103 n. 4. The SEC has so moved, Doc. #79, and Westport and McClure have opposed the
SEC’s motion, Doc. #84.
DISCUSSION
The purpose of a motion in limine is to allow the trial court to rule in advance of trial on
the admissibility and relevance of certain forecasted evidence. See Luce v. United States, 469
U.S. 38, 40 n. 2 (1984); Palmieri v. Defaria, 88 F.3d 136, 141 (2d Cir. 1996). The SEC argues
that I should preclude all evidence of Westport and McClure’s communications with RC as
irrelevant and prejudicial, because the evidence does not go to any element of the SEC’s case-inchief or any element of a defense. I will consider each of the SEC’s arguments in turn.
Uncontested portions of the SEC’s motion in limine
The SEC has formally moved to preclude admission of evidence as to Westport and
McClure’s ninth affirmative defense, which reads “Plaintiff’s claims are barred because
Defendants acted in good faith in relying on the advice and counsel of professionals engaged to
ensure regulatory compliance.” Doc. #11 at 11 (Answer). I understand Westport and McClure, in
briefing on this motion and in briefing on summary judgment, to concede that their reliance on
RC does not constitute an affirmative defense (as distinct from an issue concerning the mental
state that the SEC must prove in its case-in-chief). See Doc. #64 at 22 (Westport and McClure’s
PowerPoint presentation used at oral argument on summary judgment motions, declaring
“Reliance on anyone or anything is NOT a formal, affirmative defense”); Doc. #84 at 3
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(Westport and McClure’s briefing on motion in limine, repeating this point); see also United
States v. Scully, 877 F.3d 464, 476 (2d Cir. 2017) (“In a fraud case . . . the advice-of-counsel
defense is not an affirmative defense”). Accordingly, I will grant the SEC’s motion in limine to
the extent it seeks to preclude Westport from advancing reliance on counsel as an affirmative
defense.
Likewise, the SEC has moved to exclude evidence concerning the work and knowledge
of two RC employees who provided accounting support services to Westport in its capacity as a
broker-dealer. The SEC argues that these two people, Walter Costenbader and Stacy Peters, did
not provide compliance advice to Westport and did not communicate about Westport with the
RC employees who did provide compliance advice. See Doc. #79 at 25-27 (SEC’s motion in
limine). Although Westport and McClure have purported to oppose the SEC’s motion in limine
in its entirety, they direct no arguments to the exclusion of this evidence or explain why this
evidence is relevant to their defense. Moreover, I understand Westport and McClure’s defense, at
least as it respects their interactions with RC, to be premised on RC’s provision of compliance
advice, rather than accounting advice. As the SEC explains, it is uncontested that neither
Costenbader or Peters are alleged to have supplied compliance advice. See Docs. #84, #99
(Westport and McClure opposition and surreply).
I agree with the SEC that this information is not relevant to the case; what little probative
value it has is outweighed by its potential to confuse the jury by confusing the issues involved in
Westport and McClure’s reliance on RC. I will accordingly grant the SEC’s motion in limine to
the extent to which it seeks to preclude evidence concerning the work and knowledge of
Costenbader and Peters.

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Availability of Advice-of-Counsel Defense to Reliance on “Regulatory Consultants”
The SEC argues that, even conceding the facts as stated by Westport and McClure, “good
faith reliance on compliance professionals” should not be recognized as relevant to whether the
defendants acted fraudulently or willfully because the advice was not legal advice rendered by
attorneys, and “the distinction between legal advice, which has traditionally been the basis of a
recognized defense [advice of counsel], and compliance advice given by non-lawyers, which has
not, is meaningful.” Doc. #79 at 3-4. Westport and McClure respond that their communications
with RC are relevant to their state of mind: their reliance on RC is evidence of their lack of intent
to conceal their conflicts of interest, because RC led them to believe, wrongly, that their attempts
to disclose their conflicts of interest were sufficient. Doc. #84 at 11.
I agree with Westport and McClure. The defendants are not barred from advancing
evidence of their consultations with RC simply because RC consultants were not attorneys.
Although there are no cases recognizing an “advice of regulatory professional defense,” it would
be formalist in the extreme to forbid a defendant from putting forward evidence that it had relied
in good faith on persons it thought were experts in the law simply because those persons lacked
law licenses. 2
As Westport and McClure note, there is plentiful caselaw in the tax context that “[g]ood
faith reliance on professional advice” is a defense to tax laws that can be violated only by a

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Westport and the SEC point to only two cases recognizing a “reliance on regulatory professional” defense, both of
which are SEC internal proceedings that accepted it arguendo, applied the advice of counsel test, and rejected it on
the merits. See Matter of Edgar R. Page, SEC Release No. 4400, 2016 WL 3030845, at *6 (May 27, 2016)
(assuming arguendo “that engagement of compliance professionals—as compared to counsel— might under some
circumstances mitigate the egregiousness of a wrongdoer's misconduct,” but concluding that the alleged reliance
was, in fact, not mitigating); In the Matter of the Robare Grp., Ltd., Mark L. Robare, & Jack L. Jones, Jr., SEC
Release No. 4566, 2016 WL 6596009 (Nov. 7, 2016) (“Neither Respondents nor the law judge cite any case
recognizing a defense of reliance on compliance consultants”).
(continued…)

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showing the defendant acted willfully, and even to tax laws that can be violated by negligence.
Addington v. Comm’r, 205 F.3d 54, 58 (2d Cir. 2000) (Sotomayor, J.); accord United States v.
Boyle, 469 U.S. 241, 250 (1985). As the Second Circuit explained in Addington, the touchstone
in examining reliance on advice is the expertise of the expert, and not her licensure. Ibid. 3
Of course, the relative expertise of the advisor is relevant in determining the
reasonableness of reliance on that advice, as is the credibility of one who says they relied on that
advisor in good faith. The adviser in Addington, for example, was a barred lawyer and professor
of tax law at New York University School of Law, but the Second Circuit held it objectively
unreasonable to rely on his tax law advice because he knew nothing about the specific subject
matter to which his advice pertained. Id. at 58-59; see also United States v. Evangelista, 122 F.3d
112, 118 (2d Cir. 1997) (analogizing tax law professional advice defenses to the advice of
counsel defense). But the parties dispute whether RC, or the specific RC personnel allegedly
relied upon, were experts on which it was reasonable to rely. This dispute on a question of fact is
properly an issue for the jury. At this motion in limine stage, the fact that RC’s staff were not
licensed lawyers does not serve as a legally sufficient basis to bar Westport and McClure from
introducing evidence that it relied in good faith on RC’s advice. 4

3

Indeed, even the attorney-client privilege does not necessarily require that the “attorney” be a barred attorney. See
generally 1 Paul Rice, et al, ATTORNEY-CLIENT PRIVILEGE IN THE UNITED STATES § 3:2 (collecting cases).

4

The SEC argues that Westport and McClure are categorically precluded from introducing evidence of reliance on
RC’s advice because the contracts between Westport and RC indicated that RC would not render any “legal or
financial advice relating to . . . compliance with securities laws.” Westport Capital Markets, 408 F. Supp. 3d at 107;
see Doc. #79 at 8-10. I do not agree. Although I explained in my summary judgment opinion that these contracts
meant that “no reasonable jury could conclude that Westport and McClure could reasonably have relied on any
advice from the consultant that excuses them from their negligent failure to disclose their conflict of interest arising
from their syndicated offering transactions with their clients,” id. at 108, that Westport and McClure’s reliance on
alleged legal advice from RC was unreasonable does not mean that they did not receive legal advice, or that they did
not rely on it in good faith. It simply means that, as I explained in my summary judgment opinion, even if they relied
on RC’s advice in good faith, they were negligent in doing so on the facts presented there. That the contracts may be
probative of the SEC’s claim that Westport and McClure never actually relied on RC’s advice (because they never
(continued…)

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Satisfactory showing of reliance on advice
The SEC argues that binding Second Circuit precedent precludes evidence of reliance on
the advice of a compliance expert unless Westport and McClure proffer “evidence such that a
reasonable juror could find” that:
1. Before taking action, [Westport and McClure] in good faith
sought the advice of a[ person they believed to be a competent
professional] whom [they] considered competent to advise [them]
on the matter; and
2. [They] consulted this [professional] for the purpose of securing
advice on the lawfulness of [their] possible future conduct; and
3. [They] made a full and accurate report to [that professional] of all
material facts that [they] knew; and
4. [They] then acted strictly in accordance with the advice of this
[professional].
United States v. Scully, 877 F.3d 464, 476-77 (2d Cir. 2017). 5 Granting the SEC’s argument that
the Second Circuit’s caselaw requires a showing as to each of these factors, I nonetheless
conclude that Westport has made a preliminary showing sufficient to allow it to present evidence
about its reliance on RC’s advice. See id. at 464.
As the SEC itself sets out in detail in its motion in limine, there were several
communications between RC and Westport that led to Westport’s use of a disclosure statement
that—even if inadequate as a matter of law, see Westport Capital Markets, 408 F. Supp. 3d 93 at
105—nonetheless gestured at Westport’s many conflicts of interest. This evidence suggests that
Westport sought and received advice on the lawfulness of its disclosures to its clients, advice

agreed to receive it) does not render the contracts determinative of that claim, which ultimately rests on what
McClure and Westport thought they were doing—the ultimate issue at trial.
5

See also United States v. Colasuonno, 697 F.3d 164, 180-81 (2d Cir. 2012); Markowski v. SEC, 34 F.3d 99, 105
(2d Cir. 1994); United States v. Falcone, 544 F.2d 607, 610 n. 6 (2d Cir. 1976); SEC v. Am. Growth Funding II,
LLC, 2018 WL 6322145, at *5 n. 3 (S.D.N.Y. 2018).

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Westport and McClure followed insofar as they included, verbatim, RC’s proposed statement in
its Forms ADV. See Doc. #79 at 13-14. This case does not resemble the facts in United States v.
Evangelista, 122 F.3d 112 (2d Cir. 1997), where the attorney on whom defendants were said to
have relied said under oath that far from giving defendants the advice they claimed to have
received, counsel “gave precisely the opposite advice, and that the Evangelistas simply failed to
follow it.” Id. at 117.
To be sure, evidence that Westport and McClure fully appraised RC of their activities is
controverted in many important respects by evidence provided by the SEC. Likewise, evidence
that Westport and McClure had any good faith basis to rely on RC for legal advice is gainsaid
by, among many other things, the contracts they signed pledging not to rely on RC for legal
advice. But that there is evidence both ways is all the more reason for Westport and McClure’s
evidence to be presented to a jury. I will allow Westport and McClure to introduce evidence at
trial concerning their communications with RC’s compliance personnel.
CONCLUSION
For the foregoing reasons, the SEC’s motion in limine to preclude evidence of Westport
or McClure’s reliance on RC’s advice is GRANTED insofar as it precludes Westport and
McClure’s ninth affirmative defense, GRANTED insofar as it seeks to preclude evidence
concerning the work and knowledge of Walter Costenbader and Stacy Peters, but otherwise
DENIED. It is so ordered.
Dated at New Haven this 27th day of February 2020.
/s/ Jeffrey Alker Meyer
Jeffrey Alker Meyer
United States District Judge

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