Securities and Exchange Commission v. Lek Securities Corporation et al
Filing
149
OPINION AND ORDER.....Avalons November 16, 2017 motion to disqualify the SECs trial attorneys is denied. (Signed by Judge Denise L. Cote on 1/16/2018) (gr)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
SECURITIES & EXCHANGE COMMISSION,
:
:
Plaintiff,:
:
-v:
:
LEK SECURITIES CORPORATION, SAMUEL
:
LEK, VALI MANAGEMENT PARTNERS d/b/a
:
AVALON FA, LTD., NATHAN FAYYER, and
:
SERGEY PUSTELNIK a/k/a SERGE
:
PUSTELNIK,
:
:
Defendants.:
:
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17cv1789(DLC)
OPINION AND ORDER
APPEARANCES
For the plaintiff:
David J. Gottesman
Robert A. Cohen
Olivia S. Choe
Sarah S. Nilson
Securities & Exchange Commission
100 F Street N.E.
Washington, DC 20549
E. Barrett Atwood
Securities & Exchange Commission
44 Montgomery Street, Suite 2800
San Francisco, CA 94104
For the defendant Vali Management Partners d/b/a Avalon FA,
Ltd.:
James M Wines
Law Office of James M Wines
1802 Stirrup Lane
Alexandria, VA 22308
Steven Barentzen
Law Office of Steven Barentzen
375 Park Avenue, Suite 2607
New York, NY 10152
DENISE COTE, District Judge:
On March 10, 2017, the Securities and Exchange Commission
(“SEC”) filed this action against Avalon FA, Ltd. (“Avalon”),
Nathan Fayyer (“Fayyer”) and others for manipulative trading in
violation of federal securities laws.
On November 16, Avalon
moved to disqualify all trial counsel for the SEC from pursuing
this litigation due to their access to privileged communications
between Avalon and its defense counsel.
The privileged
communications were contained in documents that were seized by
federal agents pursuant to a search warrant and later provided
by a federal prosecutor to the SEC.
For the following reasons,
the motion is denied.
BACKGROUND
I. The SEC’s Investigation
Avalon is a day-trading firm incorporated in Seychelles and
headquartered in Kiev, Ukraine, that employs foreign traders to
conduct trades.
Fayyer is its sole disclosed owner.
The SEC
began this investigation of Avalon’s activities in May 2013.
In September 2013, the SEC issued investigative subpoenas to
Avalon and Fayyer for documents relevant to its investigation.
They produced documents pursuant to these subpoenas between
November 2013 and January 2014.
Although Fayyer had identified
the company’s email address to the SEC as avalonfaltd@gmail.com
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(the “Avalon Account”), as would become clear when the SEC later
obtained access to the Avalon Account documents at issue here,
those productions from Fayyer and Avalon omitted many documents
highly relevant to the investigation that then existed in the
Avalon Account.
In August 2015, the United States Attorney’s Office for the
District of New Jersey (“DNJ”) advised the SEC that it had
obtained records from the Avalon Account pursuant to a search
warrant.
The SEC provided the DNJ with a list of search terms
to be used to screen for potentially privileged material (the
“Filter Terms”).
The Filter Terms included the names known to
the SEC of counsel for the targets of the SEC investigation,
including counsel for Avalon and Fayyer, those lawyers’ law firm
names, and those lawyers’ email domain names.
The DNJ advised
the SEC that it had filtered the documents in the Avalon Account
using the Filter Terms, and provided the remaining documents to
the SEC on three discs.
When an SEC attorney opened a disc and
discovered a document that included a Filter Term, the SEC
returned all three discs to the DNJ.
In October 2015, the DNJ made a second production to the
SEC of the Avalon Account documents in .pdf format (“PDF
Production”).
This contained 34,000 documents and was supposed
to have been rescreened by the DNJ using the Filter Terms.
An
SEC attorney again noticed a document containing a Filter Term.
3
The SEC then sent the entire PDF Production to its technology
group to filter for the Filter Terms.
This review identified 52
documents that contained a Filter Term, which were then
segregated as potentially privileged.
The remaining documents
were provided to SEC attorneys as a “Working Database.”
An SEC
filter attorney then reviewed these 52 documents and determined
that 18 documents were not privileged, leaving 34 documents
segregated as potentially privileged.
Preferring to work in native format, the SEC then asked the
DNJ to provide the Avalon Account documents in native format.
In December 2015, the DNJ re-produced the Avalon Account
documents to the SEC in native format.
The SEC believed that
the DNJ had screened for all the Filter Terms before doing so. 1
Because, unlike the PDF Production, the native file production
treated emails and their attachments as separate records, the
native file production consists of 51,000 records.
attorneys did not read all 51,000 records.
The SEC’s
Instead, the SEC
used targeted searches to locate documents of potential
significance to its investigation.
During their review of the
retrieved documents, no SEC trial attorney saw a document with
the label “attorney-client privilege” or any similar
The SEC’s submissions indicate that it believed the DNJ had
corrected the screening error that had allowed the 52 documents
to slip through the prior screening process.
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formulation, or any that appeared to them to be an email
communication between Fayyer and one of his attorneys.
On October 2, 2017, the SEC produced to all defendants a
copy of the native file production of the Avalon Account
documents in its possession.
On October 26, counsel for Avalon
notified the SEC that an unsigned agreement among the produced
documents might be privileged.
Upon learning for the first time
that the native file production might contain privileged
documents, the SEC contacted the DNJ.
On October 31, the SEC
learned for the first time that although the DNJ had withheld
documents containing the Filter Terms, it had not withheld the
attachments to those documents unless the attachments themselves
also contained Filter Terms.
The SEC promptly shared this
information, as well as a list of the Filter Terms, with defense
counsel.
On November 6, Avalon provided the SEC with a list of
28 potentially privileged documents.
those documents.
The SEC has segregated
The SEC has also identified approximately 330
attachments to emails that contained Filter Terms (the
“Attachments”).
Twenty-five of the 28 potentially privileged
documents identified by Avalon’s counsel are among the 330
Attachments.
The SEC has also segregated all of the
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Attachments. 2
On December 1, Avalon identified four of the 28
potentially privileged documents as documents as to which it was
asserting a privilege.
It is those four documents on which
Avalon’s motion concentrates.
The SEC trial team has now segregated and ceased reviewing
most of the Avalon Account documents that it received from the
DNJ.
On December 15, the Court approved the SEC’s proposed
privilege review process for the Avalon Account documents, over
Avalon’s objection. 3
Pursuant to this process, the only Avalon
Account documents that the SEC has kept for use by its trial
team are email exchanges in which layering, one of the trading
strategies at issue in this case, is discussed.
Avalon and
Fayyer had not produced these email exchanges to the SEC in
response to the subpoenas it issued to Fayyer and Avalon in
September 2013, despite the fact that the emails are within the
scope of the subpoenas.
The defendants have not asserted a
claim of privilege over these emails and Avalon has not
contested the SEC’s decision to retain these email exchanges,
Because the SEC does not have the parent emails for the
Attachments, a privilege review of the Attachments is more
difficult.
2
Under the privilege review protocol, an SEC filter team uses
filter terms to search the documents, segregating potentially
privileged documents until Avalon agrees the document is not
privileged or until the Court rules on any privilege dispute.
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premising its motion to disqualify solely on the SEC’s review of
and/or access to the four documents described below.
II. The Four Documents
One of the four documents was reviewed by an SEC attorney
during her work on this case, before it was identified by
counsel for Avalon as potentially privileged and segregated.
This document is approximately fifteen typed pages of notes
(“Notes”) written in the third person.
The Notes have now been
identified as prepared by Fayyer and sent as an attachment to an
email to his attorney, although neither its authorship nor the
fact it was sent to an attorney is self-evident. 4
sections of the Notes are marked sensitive.
Several
The DNJ production
to the SEC included the Notes, but not the email.
Avalon has submitted the email to which the Notes were
attached to the Court ex parte.
The email indicates that Fayyer
drafted the Notes in order to provide his attorney, Mr. Tom
Sporkin, with a timeline of events relevant to Fayyer’s career
and the creation and operation of Avalon.
The next two documents are tables, entitled “Roster of Key
Individuals” and “Key Entity Descriptions,” both of which are
marked as drafts.
The header on each page reads “Fayyer/Avalon
SEC Testimony” and lists a matter number; the footer on each
At first, Avalon incorrectly identified this document as notes
taken by an attorney based on his interview of Fayyer.
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page reads “Confidential & Privileged, Attorney-Client
Communication, Attorney Work Product.”
The Key Individuals
table lists individuals, and under bullet points describes each
individual’s job and connections to Fayyer and Avalon.
Similarly, the Key Entity Descriptions table lists entities, and
includes bullet points naming each entity’s founder and each
entity’s relationship with Fayyer and Avalon.
Avalon has
identified these documents as tables prepared by Mr. Sporkin.
The metadata indicates they were prepared by his paralegal.
No
SEC trial attorney recalls viewing either table.
The fourth document is an email from Fayyer to Mr. Sporkin
and Heather Jones, an associate of Mr. Sporkin, describing a
2010 loan to Avalon.
At the top of this document is a very
brief reply to Fayyer’s email asking for additional
documentation.
No SEC trial attorney recalls viewing this
document. 5
III. The Motion to Disqualify
In this action, the SEC alleges that Avalon, Fayyer, and
Serge Pustelnik, an associate of Fayyer, (together the “Avalon
Defendants”) engaged in two schemes to manipulate the United
States stock market in violation of Sections 10(b), 17(a)(1),
The SEC attorney principally responsible for the document
review represents that she did not review documents that
appeared to be an attorney-client communication, including
documents marked as such or emails from Fayyer to Mr. Sporkin.
5
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17(a)(3), 9(a)(2), and 20(a) of the Exchange Act of 1934
(“Exchange Act”).
The SEC also alleges that each of the Avalon
Defendants aided and abetted the other defendants’ violations.
The SEC further alleges that two other defendants, Lek
Securities Corporation (“LEK”) and Samuel Lek (together the “Lek
Defendants”), violated Section 17(a)(3) of the Exchange Act,
that LEK violated Section 20(a) of the Exchange Act, and that
the Lek Defendants aided and abetted the violations of the
Avalon Defendants.
After Avalon’s counsel notified the SEC on October 26 that
it may have obtained privileged documents, Avalon moved on
November 16 to disqualify counsel for the SEC.
On December 1,
the Court granted the SEC’s request to allow its filter attorney
to explain the SEC’s privilege review process.
to reconsider the ruling was denied December 1.
Avalon’s request
The motion to
disqualify became fully submitted December 18, with the four
documents on which Avalon bases its motion submitted ex parte
and filed under seal.
DISCUSSION
“The attorney-client privilege is one of the oldest
recognized privileges for confidential communication.”
& Berlin v. United States, 524 U.S. 399, 403 (1998).
Swidler
The
rationale for the privilege is rooted in the English barrister’s
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code of honor, but has evolved over time.
See In re Grand Jury
Investigation, 399 F.3d 527, 531 (2d Cir. 2005).
Today, the
privilege is understood as “encourage[ing] full and frank
communication between attorneys and their clients and thereby
promot[ing] broader public interests in the observance of law
and administration of justice.”
449 U.S. 383, 389 (1981).
Upjohn Co. v. United States,
“In order to balance this protection
of confidentiality with the competing value of public
disclosure, however, courts apply the privilege only where
necessary to achieve its purpose and construe the privilege
narrowly because it renders relevant information
undiscoverable.”
United States v. Mejia, 655 F.3d 126, 132 (2d
Cir. 2011) (citation omitted).
“The authority of federal courts to disqualify attorneys
derives from their inherent power to preserve the integrity of
the adversary process.”
Hempstead Video, Inc. v. Inc. Vill. Of
Valley Stream, 409 F.3d 127, 132 (2d Cir. 2005) (citation
omitted).
“Because the courts must guard against tactical use
of motions to disqualify counsel, they are subject to fairly
strict scrutiny.”
Lamborn v. Dittmer, 873 F.2d 522, 531 (2d
Cir. 1989).
The Second Circuit has adopted a restrained approach, where
“disqualification is called for only where an attorney's conduct
tends to taint the underlying trial.”
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United States v. Prevezon
Holdings Ltd., 839 F.3d 227, 241 (2d Cir. 2016) (citation
omitted).
Thus,
[d]isqualification has been ordered only in essentially two
kinds of cases: (1) where an attorney's conflict of
interests . . . undermines the court's confidence in the
vigor of the attorney's representation of his client, or
more commonly (2) where the attorney is at least
potentially in a position to use privileged information
concerning the other side through prior representation.
Bobal v. Rensselaer Polytechnic Inst., 916 F.2d 759, 764-65 (2d
Cir. 1990) (citation omitted).
Although “decisions on
disqualification motions often benefit from guidance offered by
the American Bar Association (ABA) and state disciplinary rules,
such rules merely provide general guidance and not every
violation of a disciplinary rule will necessarily lead to
disqualification.”
Hempstead Video, Inc., 409 F.3d at 132
(citation omitted).
Finally, the movant “bears the burden of
demonstrating specifically how and as to what issues . . .
prejudice may occur.”
Murray v. Metropolitan Life Ins. Co., 583
F.3d 173, 178 (2d Cir. 2009) (citation omitted).
Applying these principles, Avalon’s motion is denied.
The
SEC’s conduct in connection with the Avalon Account documents
has neither violated the principles that underlie our system’s
respect for the attorney client privilege nor infringed on the
integrity of the judicial process.
Avalon had identified the
Avalon Account as its regular business account.
Nonetheless,
the SEC used caution before receiving the Avalon Account
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documents from the DNJ.
It provided the DNJ with a list of
Filter Terms, and when it spotted a document that had escaped a
filter review, it returned the entire set of documents for rescreening.
This careful approach reflects respect for the
privilege.
As significantly, there is a danger that the motion to
disqualify the entire SEC trial team from an investigation that
has been ongoing since 2013 is tactically motivated.
Avalon has
not shown that it has suffered any prejudice from the SEC’s
possession of the Avalon Account documents.
To the contrary,
among the documents are items that the SEC finds highly relevant
to its claims in this litigation, but that Avalon and Fayyer
failed to produce when required to do so pursuant to
administrative subpoenas, and for which Avalon makes no claim of
privilege.
Moreover, assuming for the purposes of this motion
that the four documents are indeed privileged, it appears that
the SEC trial team has only reviewed one of the four documents,
the Fayyer Notes.
Avalon has not pointed to any statement in
the Notes, however, that is at odds with the positions it has
taken publicly in opposition to the SEC’s litigation or that
reveals any undisclosed litigation strategy or statement harmful
to Avalon.
Even with respect to the other three documents,
Avalon does not indicate how the lists of names of individuals
or entities associated with Avalon would be a disclosure of
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information with which the SEC was not otherwise familiar, or
why the information about the 2010 loan is significant.
Avalon contends that the SEC violated Rule 4.4 of the New
York Rules of Professional Conduct, which provides as follows:
(a) In representing a client, a lawyer shall not
use means that have no substantial purpose other than
to embarrass or harm a third person or use methods of
obtaining evidence that violate the legal rights of
such a person.
(b) A lawyer who receives a document,
electronically stored information, or other writing
relating to the representation of the lawyer’s client
and knows or reasonably should know that it was
inadvertently sent shall promptly notify the sender.
N.Y. Rules of Professional Conduct 4.4 (2017) (“Rule 4.4”)
(emphasis supplied).
Avalon has not shown that the SEC has
violated Rule 4.4.
For instance, the SEC did not “violate [Avalon’s] legal
rights” when it “obtain[ed] evidence” from the DNJ that the DNJ
had in turn obtained through a court-issued search warrant.
Rule 4.4(a).
As described above, when it accepted the DNJ’s
offer of documents obtained from a search of Avalon’s email
account, the SEC took the precaution of preparing a list of
Filter Terms and expected to receive only those documents seized
from the business’s email account that survived the filter.
As for subsection (b), the SEC complied with that rule by
returning the production to the DNJ -- which sent the Avalon
Account documents to the SEC -- as soon as an SEC attorney
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identified a document with a Filter Term.
17-18, 20-24.
See Nilson Decl. ¶¶
As comment 3 explains, the Rule “does not subject
a lawyer to professional discipline for reading and using . . .
information” contained in a document inadvertently sent.
Rule
4.4, cmt. 3.
Finally, Avalon argues that it has been “irreparabl[y]
injur[ed] by the disclosure of Avalon’s and its counsel’s
thoughts, strategies, priorities, theories and impressions” in
the four documents over which it asserts privilege.
As noted
above, however, Avalon has not identified any specific way in
which it is prejudiced by the SEC’s possession of three
documents or by its review of the Notes.
Avalon’s generic
assertion of prejudice is insufficient to demonstrate that its
trial would be tainted by the SEC’s review of the Notes and its
possession, prior to the ongoing privilege review, of the other
three documents.
CONCLUSION
Avalon’s November 16, 2017 motion to disqualify the SEC’s
trial attorneys is denied.
Dated:
New York, New York
January 16, 2018
____________________________
DENISE COTE
United States District Judge
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