Securities and Exchange Commission v. Navellier & Associates, Inc et al
Filing
108
Magistrate Judge Marianne B. Bowler: ORDER entered. MEMORANDUM AND ORDER Re: Defendants' Motion for Reconsideration of December 21, 2018 Order (Docket Entry # 79 ). The motion to reconsider (Docket Entry # 79 ) is DENIED. (Patton, Christine)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
v.
CIVIL ACTION NO.
17-11633-DJC
NAVELLIER & ASSOCIATES, INC.
and LOUIS NAVELLIER,
Defendants.
MEMORANDUM AND ORDER RE:
DEFENDANTS’ MOTION FOR RECONSIDERATION
OF DECEMBER 21, 2018 ORDER
(DOCKET ENTRY # 79)
January 22, 2019
BOWLER, U.S.M.J.
Defendants Navellier & Associates, Inc. (“NAI”) and Louis
Navellier (“Navellier”) (collectively “defendants”) seek
reconsideration and a stay of a December 21, 2018 Order (Docket
Entry # 76) denying attorney-client and work-product protection
to documents in the hands of a third-party consultant, ACA
Compliance Group (“ACA”), pertaining to NAI for the January 2012
to September 2013 time period.
(Docket Entry # 79).
After the
Order issued, the parties agreed to limit the time period to
January through September 2013.
(Docket Entry # 80, p. 16).
Defendants contend the decision is “clearly erroneous and
contrary to the law.”
(Docket Entry # 79).
they argue this court erred primarily by:
More specifically,
(1) not conducting an
in camera review of the withheld documents; and (2)
misinterpreting and incorrectly distinguishing two cases, namely,
In Re Kellogg Brown & Root, Inc., 756 F.3d 754, 757 (D.C. Cir.
2014) (“Kellogg”), and Massachusetts Mutual Life Ins. Co. v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 293 F.R.D. 244, 248
(D. Mass. 2013) (“Mass Mutual”).
(Docket Entry # 80).
Plaintiff Securities and Exchange Commission (“SEC”) submits
that:
(1) defendants do not meet the requisite standard for
reconsideration; (2) this court has no obligation to conduct an
in camera review; and (3) this court properly understood the
Kellogg and Mass Mutual decisions.
(Docket Entry # 89).
The SEC
also disagrees with defendants’ choice-of-law argument that this
court erred by not giving “substantial weight” to “D.C.
authority,” i.e., Kellogg, on the basis that “ACA is a resident
of Washington, D.C.”
(Docket Entry ## 80, n.3) (Docket Entry #
89).
BACKGROUND
As explained in the factual background in the prior
decision,1 NAI retained ACA, an outside consultant, in or around
February 2013 “to conduct a compliance review of NAI’s marketing
materials regarding Vireo AlphaSector strategies, which NAI
1
Familiarity with the facts in the prior decision is
assumed. The following is only a brief summary culled from the
decision and material in the record before this court at that
time.
2
licensed from F-Squared Investments, Inc.”
p. 2).
(Docket Entry # 76,
Having learned about an enforcement action against
another brokerage firm, “Navellier, NAI’s founder and principal,
grew concerned that the SEC ‘would possibly be investigating NAI
and other investment advisor firms that advertised’” and marketed
strategies for exchange traded funds.
(Docket Entry # 76, p. 2).
At his deposition and without referencing counsel, Navellier
testified that he “relied on ACA to give [him] guidance.”2
(Docket Entry # 76, p. 3, with emphasis added) (Docket Entry #
69-2, p. 56).
Navellier also used ACA to restore his credibility
at NAI and influence individuals at NAI who were not respecting
him.
(Docket Entry # 69-2, p. 56) (“I relied on them to,
basically-–I tried to use them to influence other people in my
firm that I had basically lost control over, or weren’t
respecting me . . . I wanted ACA to give me credibility . . ..”).
When asked at his deposition if he ended up “getting someone to
review” NAI “and give a factual opinion of any shortcoming and
exposures,” Navellier responded affirmatively and that he “vented
2
As explained in Cavallaro v. United States, 284 F.3d 236
(1st Cir. 2002), “if the advice sought is the accountant’s rather
than the lawyer’s, no [attorney-client] privilege exists.” Id.
at 247. The record before this court at the time did not
adequately show that NAI’s communications with ACA prior to
October 2013 were made for the purpose of obtaining legal advice
from NAI’s counsel. See id. As such, this principle provides an
alternative basis to deem the privilege inapplicable to the
January through September 2013 communications.
3
to” his attorney3 as well as “some of the New York folks.”
(Docket Entry # 69-2, p. 55) (emphasis added).
On January 29, 2013 near the outset of the engagement, NAI’s
President and Chief Compliance Officer (“NAI’s President”)
“forwarded various marketing materials directly to Ted Eichenlaub
(‘Eichenlaub’), an ACA partner, for review” and invited
Eichenlaub to discuss the items with him or his associate without
any mention of counsel.
Entry # 69-2, p. 15).
(Docket Entry # 76, pp. 2-3) (Docket
Navellier initially contacted Eichenlaub
at the suggestion of another individual, who Navellier describes
as an independent contractor located in New York.
# 69-2, p. 56).
(Docket Entry
Thereafter, ACA performed a mock audit of NAI in
and around July 2013 which did not involve NAI’s attorney.
(Docket Entry # 69-1, ¶ 7)4 (Docket Entry # 76, p. 3) (Docket
Entry # 69-2, p. 56).
“NAI ‘looked pretty good’” in the audit,
according to Navellier.
(Docket Entry # 76, p. 3) (Docket Entry
# 69-2, p. 56).
In addition, at and around the time period that Navellier
engaged ACA’s services, Navellier did not anticipate being sued
“[a]t all” and did not anticipate NAI being sued separate and
3
During the deposition, Navellier’s counsel instructed
Navellier not to testify about his conversations with his
attorney.
4
Reliance on hearsay is permissible in determining whether
a privilege exists. United States v. Frabizio, 459 F.3d 80, 89
n.14 (1st Cir. 2006); Fed. R. Evid. 104(a).
4
apart from conversations with his attorney.
p. 2).
(Docket Entry # 76,
In the end, the SEC did not open an investigation into
NAI until May 2016 and did not serve a subpoena on NAI in
connection with a related investigation until October 2013, after
the time span covered by the purportedly privileged documents.
These as well as other facts in the record satisfied this court
that defendants did not meet their burden to show that the
attorney-client privilege “applie[d] and that it has not been
waived,” Lluberes v. Uncommon Prods., LLC, 663 F.3d 6, 24 (1st
Cir. 2011), or that the documents were made in “anticipation of
litigation” under the work-product doctrine.
Fed. R. Civ. P.
26(b)(3).
DISCUSSION
First and foremost, the standard to merit reconsideration of
an interlocutory decision is difficult to meet.
See Mulero-Abreu
v. Puerto Rico Police Dept., 675 F.3d 88, 95 (1st Cir. 2012).
To
succeed on a motion for reconsideration, “‘the movant must
demonstrate either that newly discovered evidence (not previously
available) has come to light or that the rendering court
committed a manifest error of law.’”
Id.; accord Ellis v. United
States, 313 F.3d 636, 648 (1st Cir. 2002) (reconsideration
“warranted if there has been a material change in controlling
law” or “newly discovered evidence bears on the question”);
Yokozeki v. Carr-Locke, Civil Action No. 13-12587-MBB, 2017 WL
5
2818981, at *1 (D. Mass. June 29, 2017).
The existence of a
manifest injustice also provides a basis for reconsideration.
Ellis v. United States, 313 F.3d at 648.
The manifest injustice
exception “requires a definite and firm conviction that a prior
ruling on a material matter is unreasonable or obviously wrong.”
Id.; Yokozeki, 2017 WL 2818981, at *1.
Here, defendants do not identify newly discovered evidence
unavailable at the time they filed the initial motion to quash.
Rather, they dispute this court’s factual and credibility
findings.
They also fail to show a manifest error of law.
This court
distinguished the Kellogg decision because it did not involve the
presence or use of an outside third party consultant or agent.5
(Docket Entry # 76, p. 7).
As a result, the Kellogg decision did
not implicate the Kovel doctrine.6
(Docket Entry # 76, p. 7).
As explained in the prior decision (Docket Entry # 76, pp. 5-6),
the Kovel doctrine creates an exception to the principle that,
5
The facts also did not give rise to an outside thirdparty agent acting as a functional employee of NAI.
6
See United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)
(Friendly, J.) (“Kovel”). The individuals conducting the
confidential internal investigation at the behest of the in-house
attorneys in Kellogg were Kellogg, Brown & Root, Inc. employees.
See id. at 756-758. To the extent there is any doubt, an
affidavit cited by in the lower court in its decision explains
the internal investigation in detail. United States v.
Halliburton Co., et al., Civil Action No. 1:05-CV-1276(JSG)
(D.D.C. March 6, 2014) (Docket Entry # 150, pp. 3-4, citing
Docket Entry # 139-1).
6
“[g]enerally, disclosing attorney-client communications to a
third party undermines the privilege.”
Cavallaro v. United
States, 284 F.3d at 246–247; see Lluberes v. Uncommon
Productions, LLC, 663 F.3d at 24 (privilege “often said to be
‘waived’ when otherwise privileged communications are disclosed
to a third party”).
As also stated in the decision (Docket Entry
# 76, p. 5), “An exception to this general rule exists for third
parties employed to assist a lawyer in rendering legal advice,”
Cavallaro v. United States, 284 F.3d at 247,7 although the
circumstances “are limited.”
Dahl v. Bain Capital Partners, LLC,
714 F. Supp. 2d 225, 227 (D. Mass. 2010).
Thus, “Kovel requires
that to sustain a privilege an accountant,” i.e., a third party,
“must be ‘necessary, or at least highly useful, for the effective
consultation between the client and the lawyer which the
privilege is designed to permit.’”
Id. at 247-48 (quoting Kovel,
296 F.2d at 922).
Ultimately, this court held that ACA, as a third-party
retained by NAI, “was not ‘“necessary, or at least highly
useful”’ to defendants’ counsel in providing legal advice to
defendants.”
(Docket Entry # 76, p. 8).
As a result, this court
concluded that “the documents sought by the subpoena are not
subject to attorney-client protection.”
7
(Docket Entry # 76, p.
The Cavallaro court did not determine whether “the
attorney or client . . . must hire the accountant in order to
sustain a privilege under Kovel.” Cavallaro v. United States,
284 F.3d at 247.
7
8).
Even eliminating the interpretive role requirement and
restricting the Kovel doctrine to third parties “‘necessary, or
at least highly useful, for the effective consultation between
the client and the lawyer which the privilege is designed to
permit,’” Cavallaro v. United States, 284 F.3d at 247 (quoting
Kovel); see also Lluberes v. Uncommon Prods., LLC, 663 F.3d at
24, the express and implicit factual findings by this court
sufficiently established that ACA was not “necessary, or at least
highly useful to defendants’ counsel in providing legal advice to
defendants.”
(Docket Entry # 76, p. 8) (quoting Cavallaro v.
United States, 284 F.3d at 247-48) (internal quotation marks
omitted)
In seeking reconsideration, defendants rely on the following
language in Kellogg:
communications made by and to non-attorneys serving as
agents of attorneys in internal investigations are routinely
protected by the attorney-client privilege. See FTC v. TRW,
Inc., 628 F.2d 207, 212 (D.C.Cir. 1980); see also 1 Paul R.
Rice, Attorney–Client Privilege in the United States § 7:18,
at 1230–31 (2013) (“If internal investigations are conducted
by agents of the client at the behest of the attorney, they
are protected by the attorney-client privilege to the same
extent as they would be had they been conducted by the
attorney who was consulted.”). So that fact, too, is not a
basis on which to distinguish Upjohn.
In re Kellogg Brown & Root, Inc., 756 F.3d 754, 758 (D.C. Cir.
2014); (Docket Entry # 80, p. 9).
This court agrees that
attorneys often need and require the assistance of agents to
effectively represent and communicate with clients.
8
See
Cavallaro v. United States, 284 F.3d at 247 (discussing Kovel,
296 F.2d at 921).
Avoiding the extension of the privilege to any
and all agents an attorney (or client) hires, however, Kovel
restricts the privilege to third party agents who, as noted
above, are “‘necessary or at least highly useful, for the
effective consultation between the client and the lawyer which
the privilege is designed to permit.’”
Id. at 247-48.
In fact,
the same treatise quoted above in Kellogg acknowledges the
abundant case law, including Kovel, that imposes the threshold
requirement that such agents must be “‘necessary,’” “‘highly
useful,’” “‘indispensable,’” or “‘required’” to uphold the
privilege.
1 Paul R. Rice, Attorney–Client Privilege in the
United States § 3:4, at 154-158 (2018).
Defendants also point out, correctly, that “the First
Circuit has ‘never actually adopted Kovel . . ..’”
(Docket Entry
# 80, p. 10) (quoting Lluberes v. Uncommon Prods., LLC, 663 F.3d
at 24 n.20).
The abbreviated quotation distorts the import of
the statement which, in full, reads:
We have never actually adopted Kovel, despite its pedigree
and wide acceptance, but have assumed for the sake of
argument that we would do so in the right case. Cavallaro,
284 F.3d at 247 n. 6. At the risk of being overly cautious,
we follow that approach again today.
Lluberes v. Uncommon Prods., LLC, 663 F.3d at 24 n.20 (emphasis
added).
The entire statement therefore indicates that, in the
right case, the First Circuit will adopt Kovel.
Defendants’ contention that this court incorrectly
9
distinguished Mass Mutual is itself incorrect.
As explained in
this court’s decision, Mass Mutual involved an at-issue waiver,
which does not apply to the circumstances of the case at bar.
(Docket Entry # 76, pp. 7-8).
Reconsideration is also inappropriate with respect to the
ruling denying work product protection to the ACA communications.
(Docket Entry # 76, p. 10).
There was no manifest error of law
or other basis to warrant reconsideration.
Defendants simply did
not sufficiently show that the material was prepared in
anticipation of litigation.
(Docket Entry # 76, p. 10).
Defendants therefore fail to meet the requisite standard for
reconsideration relative to their work product claim.
As to in camera review, the record provided a sufficient
basis to assess the attorney-client privilege and the work
product doctrine.
The declarations, deposition transcripts,
emails, and other documents submitted by the parties created a
relatively complete record with sufficient information to gauge
the attorney-client privilege and the work product doctrine.
Although in camera review provides a prudential means to discern
the applicability of a privilege claim, the decision to conduct
an in camera review generally lies within the discretion of this
court.
See Lluberes v. Uncommon Prods., LLC, 663 F.3d at 26-27.
Finally, because jurisdiction is premised on a federal
question, “federal common law provides the rule of decision.”
Coffin v. Bowater, Inc., No. Civ. 03-227-B-C, 2005 WL 1412116, at
*3 (D. Me. June 14, 2005) (citing Fed. R. Evid. 501); accord
10
Davine v. Golub Corp., No. Civ. 3:14-30136-MGM, 2017 WL 517749,
at *2 (D. Mass. Feb. 8, 2017).
As aptly stated by the SEC, this
court therefore “has no reason to prioritize D.C. Circuit law
over the law of this Circuit.”
(Docket Entry # 89, p. 5).
CONCLUSION
In accordance with the foregoing discussion, the motion to
reconsider (Docket Entry # 79) is DENIED.
/s/ Marianne B. Bowler
MARIANNE B. BOWLER
United States Magistrate Judge
11
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