Securities and Exchange Commission v. Lek Securities Corporation et al
Filing
524
OPINION AND ORDER......For these reasons, the SECs September 13 motion in limine to prohibit the Avalon Defendants from relying on or referring in any way to the Lek Defendants consultations with counsel was granted. (Signed by Judge Denise L. Cote on 11/5/2019) (gr)
Case 1:17-cv-01789-DLC Document 524 Filed 11/05/19 Page 1 of 11
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
SECURITIES AND 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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APPEARANCES
For plaintiff Securities and Exchange
Commission:
David J. Gottesman
Olivia S. Choe
Sarah S. Nilson
U.S. Securities & Exchange Commission
100 F Street NE
Washington, DC 20549
For defendants Vali Management
Partners d/b/a Avalon FA Ltd., Nathan
Fayyer, and Sergey Pustelnik:
James M. Wines
Law Office of James M. Wines
1802 Stirrup Lane
Alexandria, VA 22308
Steven Barentzen
Law Office of Steven Barentzen
17 State Street, Suite 400
New York, NY 10004
17cv1789 (DLC)
OPINION AND ORDER
Case 1:17-cv-01789-DLC Document 524 Filed 11/05/19 Page 2 of 11
DENISE COTE, District Judge:
The Securities and Exchange Commission (“SEC”) moved in
limine to prohibit defendants Avalon FA Ltd, Nathan Fayyer, and
Sergey Pustelnik (the “Avalon Defendants”) and their attorneys
from presenting evidence of, or making any argument concerning,
these defendants’ reliance on any advice of counsel from the
attorneys representing their codefendants Samuel Lek and Lek
Securities Corporation (the “Lek Defendants”).
For the reasons
that follow, the motion was granted at the final pretrial
conference of October 11, 2019.
Background
At a conference of October 27, 2017, which was held to
address discovery issues, including the affirmative defenses
available to the Avalon Defendants, the Court asked the Avalon
Defendants whether they were “relying on an advice-of-counsel
defense or any related defense like that.”
Because counsel was
uncertain, the Avalon Defendants were given two weeks to state
whether they intended to rely on any such defense.
The Avalon
Defendants did not notify the Court or the SEC within two weeks
of the conference, or at any time thereafter, of their intent to
rely on any such defense.
At a March 15, 2018 conference, the Lek Defendants
confirmed that they would not waive the attorney-client
privilege; they explicitly rejected the defense of reliance on
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advice of counsel.
The Lek Defendants also affirmed that they
would “not elicit testimony at trial that they consulted with
counsel and [would] not offer evidence at trial of consultation
with counsel.”
The Lek Defendants and the SEC agreed to accept
an instruction to witnesses at trial that they are not to
volunteer that counsel was consulted at any time unless they are
specifically asked about consultation with counsel by the SEC
attorneys.
Counsel for Avalon was present at the March 15, 2018
conference.
He did not raise then, just as he had not raised
earlier, any intent to rely on an advice-of-counsel defense or
any related defense.
Nor did he object to the instruction
described on the record.
Pursuant to the schedule for motions in limine, the SEC
filed on September 13, 2019 its motion to preclude the Avalon
Defendants from offering evidence of, or referring to, any
reliance on counsel or the presence or involvement of counsel in
the events at issue at trial.
The motion identifies two
examples of ways in which it anticipates that the Avalon
Defendants would seek to introduce evidence of a reliance on the
advice of counsel.
First, the motion refers to the Avalon
Defendants’ anticipated reliance on a letter from counsel for
the Lek Defendants.
The letter was not sent to any of the
Avalon Defendants and none of the Avalon Defendants discussed
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the subject matter of the letter with counsel for the Lek
Defendants.
Second, the motion refers to a representation by
the Lek Defendants that their counsel approved of the trading at
issue in this case. 1
Specifically, the Avalon Defendants assert
that they relied on assurances from the Lek Defendants because
the Lek Defendants’ views as to the legality of the trading at
issue “had been thoroughly reviewed, vetted and approved by
experienced and competent independent outside counsel.”
Discussion
Section 20(a) of the Exchange Act provides for an
affirmative defense of good faith.
Section 20(a) states,
Every person who, directly or indirectly, controls any
person liable under any provision of this chapter or
of any rule or regulation thereunder shall also be
liable jointly and severally with and to the same
extent as such controlled person to any person to whom
such controlled person is liable (including to the
Commission in any action brought under paragraph (1)
or (3) of section 78u(d) of this title), unless the
controlling person acted in good faith and did not
directly or indirectly induce the act or acts
constituting the violation or cause of action.
15 U.S.C. § 78t(a) (emphasis added).
Under § 20(a), “[o]nce the plaintiff makes out a prima
facie case of § 20 liability, the burden shifts to the defendant
to show that he acted in good faith, and that he did not
directly or indirectly induce the act or acts constituting the
On the eve of trial, the Lek Defendants settled this lawsuit
with the SEC.
1
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violation.”
SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1473
(2d Cir. 1996).
To meet the burden of establishing good faith,
the defendant must prove “that he exercised due care in his
supervision of the violator’s activities in that he ‘maintained
and enforced a reasonable and proper system of supervision and
internal control[s].’”
Id. (citation omitted); see also
Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1576 (9th Cir.
1990) (“A broker-dealer can establish the good faith defense
only by proving that it ‘maintained and enforced a reasonable
and proper system of supervision and internal control.’”); G.A.
Thompson & Co. v. Partridge, 636 F.2d 945, 958 (5th Cir. 1981)
(no good faith defense if defendant “failed to establish,
maintain or diligently enforce a proper system of supervision
and control”).
In G.A. Thompson & Co., the Fifth Circuit
explained that in assessing the existence of good faith by a
control person, the factfinder should ask whether that person
“has done enough to prevent the violation,” which will depend on
“what he could have done under the circumstances.”
636 F.2d at
959.
Unlike § 20(a) of the Exchange Act, Sections 10(b) and
9(a)(2) of the Exchange Act and § 17(a)(1) of the Securities Act
do not provide for an affirmative defense of good faith.
Each
of them, however, requires the plaintiff to prove either
“scienter” (§§ 10(b) and 17(a)(1)) or a “manipulative motive and
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willfulness” (§ 9(a)(2)).
Evidence of a defendant’s state of
mind is also relevant to the jury’s determination of whether the
defendant aided and abetted a primary violation of the
securities laws, where the SEC must show that the defendant
knowingly or recklessly provided substantial assistance to
someone who violated the securities laws.
See § 20(e) of the
Exchange Act, 15 U.S.C. § 78t(e); § 15(b) of the Securities Act,
15 U.S.C. § 77o(b).
The Supreme Court has defined “scienter” as an “intent to
deceive, manipulate or defraud” or “knowing or intentional
misconduct.”
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194
n.12, 197 (1976).
The Second Circuit has held that reckless
conduct -- i.e., “conduct which is highly unreasonable and which
represents an extreme departure from the standards of ordinary
care” -- satisfies the scienter requirement.
SEC v. Obus, 693
F.3d 276, 286 (2d Cir. 2012) (citation omitted).
“Proof of
scienter need not be direct, but may be a matter of inference
from circumstantial evidence.”
Wechsler v. Steinberg, 733 F.2d
1054, 1058 (2d Cir. 1984).
With respect to claims under § 9(a)(2), the statute makes
it unlawful
To effect, alone or with 1 or more other persons, a
series of transactions in any security registered on a
national securities exchange, any security not so
registered, or in connection with any security-based
swap or security-based swap agreement with respect to
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such security creating actual or apparent active
trading in such security, or raising or depressing the
price of such security, for the purpose of inducing
the purchase or sale of such security by others.
15 U.S.C. § 78i(a)(2) (emphasis supplied).
According to the
Second Circuit, § 9(a)(2) is at “the very heart” of the Exchange
Act.
Id. (citation omitted).
It was designed to prevent market
manipulation, and in particular, to “prevent[] an individual
from dominating the market in a stock for the purpose of
conducting a one-sided market at an artificial level for its own
benefit and to the detriment of the investing public.”
Id.
As
with proof of scienter, the requisite purpose “is normally
inferred from the circumstances of the case.”
Id.
An advice of counsel defense “is not an affirmative defense
that defeats liability” if the jury accepts the SEC’s
allegations as true.
(2d Cir. 2017).
United States v. Scully, 877 F.3d 464, 476
Instead, evidence that a defendant relied on
advice from counsel is relevant to the factfinder’s assessment
of whether the defendant acted with fraudulent intent, i.e.,
scienter or manipulative motive.
See id.
A court is only
required to charge a jury on the advice-of-counsel assertion if
there is sufficient evidence in the record to support the
defense.
Id.
The advice-of-counsel defense requires a defendant “to show
that he [1] made a complete disclosure to counsel, [2] sought
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advice as to the legality of his conduct, [3] received advice
that his conduct was legal, and [4] relied on that advice in
good faith.”
Markowski v. SEC, 34 F.3d 99, 105 (2d Cir. 1994).
Similar formulations can be found in Scully, 877 F.3d at 477-48,
and United States v. Colasuonno, 697 F.3d 164, 181 (2d Cir.
2012).
Again, even when there is evidence to support a finding
that these requirements are met, reliance on the advice of
counsel “is not a complete defense, but only one factor for [the
jury’s] consideration.”
Markowski, 34 F.3d at 105.
There are at least three interconnected reasons why the
Avalon Defendants may not refer in any way to the Lek
Defendants’ consultations with counsel or offer evidence
suggesting that there were such consultations, even in an effort
to demonstrate their good faith.
First, the attorney-client
privilege “cannot at once be used as a shield and a sword.”
United States v. Bilzerian, 926 F.2d 1285, 1292 (2d Cir. 1991).
Reliance on the advice of counsel cannot be asserted while
simultaneously denying access to the very advice that formed the
supposed good faith belief that the conduct was legal.
Id.
(finding that, by asserting a good faith defense to securities
fraud, defendant had “assert[ed] a claim that in fairness
requires examination of the protected communications”).
“Accordingly, a party who intends to rely at trial on the advice
of counsel must make a full disclosure during discovery; failure
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to do so constitutes a waiver of the advice-of-counsel defense.”
Arista Records, LLC v. Lime Group LLC, 2011 WL 1642434, at *2
(S.D.N.Y. Apr. 20, 2011) (emphasis omitted) (citation omitted).
The Avalon Defendants were given an opportunity during discovery
to assert whether they intended to rely on an advice-of-counsel
defense or any similar defense.
such defense.
They declined to assert any
Therefore, there was no examination during the
discovery period of how to obtain the discovery necessary to
permit them to assert such a defense at trial.
Second, references to counsel’s communications are not
relevant in the absence of an advice-of-counsel defense and
should be excluded as well pursuant to Rule 403, Fed. R. Evid.
The intimation that counsel has blessed a transaction or
practice without waiver of the attorney-client privilege “would
give the defendant all of the essential benefits of an advice of
counsel defense without having to bear the burden of proving any
of the elements of the defense.”
666, 684 (S.D.N.Y. 2013).
SEC v. Tourre, 950 F. Supp. 2d
Moreover, any probative value of such
references is substantially outweighed by the danger of undue
prejudice to the SEC, which was denied discovery of the
confidential communications, and the risk that such references
will sow confusion and mislead the jury by suggesting that
counsel for the Lek Defendants, fully informed of the Avalon
trading, approved it.
In addition, it will mislead the jury by
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suggesting that the Avalon Defendants did not have an
independent obligation to ensure their own compliance with
federal securities laws.
Third, legal advice given to another does not establish
good faith as a matter of law.
Without knowing what information
the Lek Defendants shared with their attorneys and what those
attorneys said to their clients in the context of privileged
communications, the Avalon Defendants cannot assert that they
relied in good faith on the fact that the Lek Defendants
consulted counsel, much less on the Lek Defendants’ reports of
their supposed communications with their attorneys.
The Avalon
Defendants could have had the necessary access to the
information that the Lek Defendants provided their attorneys and
the advice that those attorneys gave the Lek Defendants only if
both the Avalon and Lek Defendants were jointly represented and
present during the privileged communications.
A defendant
cannot assert good faith or reasonable reliance based on a
third-party’s representation of advice the third party received
through consultations with counsel to which the defendant did
not have access.
Conclusion
For these reasons, the SEC’s September 13 motion in limine
to prohibit the Avalon Defendants from relying on or referring
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in any way to the Lek Defendants’ consultations with counsel was
granted.
Dated:
New York, New York
November 5, 2019
__________________________________
DENISE COTE
United States District Judge
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