Securities and Exchange Commission v. Navellier & Associates, Inc

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 TO QUASH PLAINTIFF’S SUBPOENA

TO NON-PARTY ACA COMPLIANCE GROUP

AND FOR PROTECTIVE ORDER

(DOCKET ENTRY # 66)

December 21, 2018

BOWLER, U.S.M.J.

Defendants Navellier & Associates, Inc. (“NAI”) and Louis

Navellier (“Navellier”) (collectively “defendants”) move to quash

a subpoena seeking 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 on the basis of

the attorney-client privilege and the work-product doctrine.

(Docket Entry # 66) (Docket Entry # 69-1, ¶ 2) (Docket Entry #

69-2, p. 6). Plaintiff Securities and Exchange Commission

(“SEC”) argues that the attorney-client privilege does not apply

to third-party communications and ACA does not fall under a

limited exception to this rule. (Docket Entry # 69). As to

work-product, the SEC submits that litigation with the SEC was

not anticipated. (Docket Entry # 69). After conducting a

hearing on December 20, 2018, this court took the motion (Docket

Entry # 66) under advisement.

BACKGROUND

In or around February 2013, NAI retained ACA, an outside

consultant, to conduct a compliance review of NAI’s marketing

materials regarding Vireo AlphaSector strategies, which NAI

licensed from F-Squared Investments, Inc. (“F-Squared”). (Docket

Entry # 1, ¶ 16) (Docket Entry # 19, ¶ 16) (Docket Entry # 68-1,

¶¶ 5, 8) (Docket Entry # 69-2, pp. 56, 68). Having recently

learned about a Financial Industry Regulatory Authority, Inc.

(“FINRA”) enforcement action against a brokerage firm for

marketing exchange traded funds (“ETF”), Navellier, NAI’s founder

and principal, grew concerned that the SEC “would possibly be

investigating NAI and other investment advisor firms that

advertised” ETF-based strategies. (Docket Entry # 1, ¶ 14)

(Docket Entry # 19, ¶ 14) (Docket Entry # 68-1, ¶ 6). At and

around the time period that Navellier engaged the services of

ADA, Navellier testified at his deposition that he did not

anticipate being sued “[a]t all” and he did not anticipate NAI

being sued separate and apart from conversations with his

attorney. (Docket Entry # 69-2, pp. 67-68); (Docket Entry # 74,

p. 26) (errata corrections adding “separate and apart” language).

On January 29, 2013 near the outset of the engagement, NAI’s

2

President forwarded various marketing materials directly to Ted

Eichenlaub (“Eichenlaub”), an ACA partner, for review. (Docket

Entry # 69-2, p. 15). In this contemporaneous email, Eichenlaub

invited NAI’s President to follow up with him or his associate to

gain clarity on the issues without any mention of counsel.

Thereafter, ACA performed a mock audit of NAI in 2013 to give

guidance to Navellier. (Docket Entry # 69-2, p. 56). “[T]he

audit was fine” and confirmed that NAI “looked pretty good.”

(Docket Entry # 69-2, p. 56). By affidavit, defendants’ counsel

states that “ACA was retained . . . to assist [him] in providing

legal advice to NAI in anticipation of possible litigation with

the SEC” (Docket Entry # 68-1, ¶¶ 5, 7), which this court

discounts. See Cavallaro v. United States, 284 F.3d 236, 248

(1st Cir. 2002) (reviewing lower court’s decision on privilege

and noting that “Goodman’s statement was made after the fact, in

the midst of litigation, with little support in the

contemporaneous record”).

In September 2013, the SEC’s enforcement division “opened an

investigation into” F-Squared, including its representations

“concerning F-Squared’s AlphaSector strategies.” (Docket Entry #

69-1, ¶ 10). One “month later, the [SEC] subpoenaed NAI for

documents relating to the F-Squared investigation.” (Docket

Entry # 69-1, ¶ 10). The SEC’s enforcement division did not open

an investigation of NAI until more than two years later in May

3

2016. (Docket Entry # 69-1, ¶ 10).

DISCUSSION

A. Attorney-Client Privilege

The contours of the attorney-client privilege under federal

common law are “well honed.” Lluberes v. Uncommon Prods., LLC,

663 F.3d 6, 24 (1st Cir. 2011). The privilege “protects ‘only

those communications that are confidential and are made for the

purpose of seeking or receiving legal advice.’” Id. (quoting In

re Keeper of Records (Grand Jury Subpoena Addressed to XYZ

Corp.), 348 F.3d 16, 22 (1st Cir. 2003)); see also Cavallaro v.

United States, 284 F.3d at 248 (setting out classic formulation

in 8 J.H. Wigmore, Evidence § 2292 (McNaughton rev. 1961)). The

privilege does not immunize underlying facts available from

another source just because a client disclosed the facts to an

attorney. See Upjohn Co. v. United States, 449 U.S. 383, 396

(1981); see also Lluberes v. Uncommon Prods., LLC, 663 F.3d at 25

n.22 (factual inquiry by expert unprotected because source of

“‘information is not confidential communications’” and fact that

expert gathered and digested information for “‘attorney to render

legal advice thereon’” does not transform inquiry into

“‘privileged one’”) (quoting treatise). Communications from an

attorney to his client are “‘privileged only if they constitute

legal advice, or tend directly or indirectly to reveal the

substance of a client confidence.’” Lluberes v. Uncommon Prods.,

LLC, 663 F.3d at 24 n.21 (quoting United States v. Defazio, 899

4

F.2d 626, 635 (7th Cir. 1990), in parenthetical). Defendants, as

the parties “invoking the privilege[,] must show both that it

applies and that it has not been waived.” Id. at 24.

Defendants insist that the privilege extends to an outside

consultant such as ACA because NAI hired ACA as part of an

internal company review to assist NAI’s counsel in advising his

clients, NAI and Navellier (Docket Entry # 68-1, ¶ 4), regarding

possible future litigation with the SEC. (Docket Entry ## 68,

74). The SEC disagrees and maintains that disclosure to an

outside party such as ACA does not fall within the narrow

exception to the waiver rule that applies when confidential

communications are disclosed to the outside party. (Docket Entry

# 69).

In general, “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”). “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. “The

circumstances under which the exception applies are limited.”

Dahl v. Bain Capital Partners, LLC, 714 F. Supp. 2d 225, 227 (D.

Mass. 2010). Known as “the Kovel doctrine,” the

third party “must be ‘necessary, or at least highly useful, for

the effective consultation between the client and the lawyer

5

which the privilege is designed to permit.’” Cavallaro v. United

States, 284 F.3d at 247-48 (quoting United States v. Kovel, 296

F.2d 918, 922 (2d Cir. 1961)). Moreover, the “‘necessity’

element means more than just useful.” Id. at 249. Indeed, the

third party’s involvement “must be nearly indispensable or serve

some specialized purpose in facilitating the attorney-client

communications.” Id. Whereas the “agency relationship between

the parties is relevant to” the Kovel exception to the waiver

rule, it is “not dispositive.” Id. at 247 (further noting that a

showing that the third party (Ernst & Young) is an agent of the

attorneys (Hale & Dorr), or the clients (the Cavallaros) “is not

sufficient to sustain the privilege”). Although the “Kovel

exception covers documents created by an outside, third-party

accountant at an attorney’s request for the purpose of advising

and defending the client,” the Cavallaro court makes clear that

the third-party must be necessary to the lawyer in providing

legal advice to the client in the sense of “nearly

indispensable.” Id. at 249 (paraphrasing United States v.

Judson, 322 F.2d 460, 462-63 (9th Cir. 1963), and thereafter

noting necessity element as meaning “more than just useful”).

This court does not dispute that the privilege applies to

internal investigations conducted by company lawyers or non-

lawyer, company employees at the direction of company lawyers to

ensure compliance with the law. See, e.g., In Re Kellogg Brown &

Root, Inc., 756 F.3d 754, 757 (D.C. Cir. 2014) (discussing

Upjohn, 449 U.S. at 390-392). Defendants’ reliance on Kellogg,

6

however, is misplaced because the case did not involve use of an

outside third-party consultant or an issue implicating the Kovel

doctrine. In other words, the existence of a waiver or an

exception to any such waiver was not raised or at issue. Rather,

the Kellogg court rejected the lower court’s reasoning that the

investigation undertaken to determine compliance with regulations

was not done for the purpose of obtaining legal advice. Id. at

758, 760 (a significant purpose “was to obtain or provide legal

advice” and by denying “privilege claim on the ground that the

internal investigation was conducted in order to comply with

regulatory requirements . . . and not just to obtain or provide

legal advice,” the lower court erred). In a somewhat similar

vein, the First Circuit in Lluberes stated it did not reach the

Kovel doctrine as to whether a third-party’s report was necessary

and highly useful to the corporation’s outside counsel because

the report itself did not include client confidences or legal

advice based on those confidences and intended to remain

confidential. Lluberes v. Uncommon Productions, LLC, 663 F.3d at

24.

In addition to Kellogg, other cases cited by defendants are

distinguishable. See Massachusetts Mut. Life Ins. Co. v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 293 F.R.D. 244, 248 (D.

Mass. 2013) (although finding outside consultant’s forensic

review within attorney-client privilege, court did not address

Kovel exception to third-party disclosure waiver, which was not

raised, and instead discussed at-issue waiver applying state

7

law). To the extent a 2001 Southern District of New York case

rejects the position that “third-party consultants come within

the scope of” the attorney-client “privilege only when acting as

conduits or facilitators of attorney-client communications,” In

re Copper Mkt. Antitrust Litig., 200 F.R.D. 213, 219 (S.D.N.Y.

2001), the expansive reach of the case is contrary to precedent

in this district. See Cavallaro v. United States, 284 F.3d at

246-249; Columbia Data Prod., Inc. v. Autonomy Corp., Civil

Action No. 11-12077-NMG, 2012 WL 6212898, at *1, *7, *14-16 (D.

Mass. Dec. 12, 2012) (denying attorney-client protection to

third-party audit of plaintiff’s licensee conducted under

engagement letter with plaintiff’s attorney “acting on behalf of

CDP” and completed shortly before filing lawsuit for breach of

license agreement); Dahl v. Bain Capital Partners, LLC, 714 F.

Supp. 2d at 227-229. Here, the ACA was not serving an

interpretive role and was not “‘necessary, or at least highly

useful’” to defendants’ counsel in providing legal advice to

defendants. Accordingly, the documents sought by the subpoena

are not subject to attorney-client protection.

B. Work-Product Doctrine

The work product doctrine, codified in Rule 26(b)(3), Fed.

R. Civ. P. (“Rule 26(b)”), “‘protects from disclosure materials

prepared by attorneys in anticipation of litigation.’” American

Civil Liberties Union Foundation, Inc. v. United States Dep’t of

Education, 320 F. Supp. 3d 270, 280–81 (D. Mass. 2018) (quoting

Maine v. U.S. Dep’t of Interior, 298 F.3d 60, 66 (1st Cir. 2002),

8

and omitting internal quotation marks), appeal dismissed, No.

18-1502, 2018 WL 6205442 (1st Cir. Oct. 31, 2018). Under Rule

26(b)(3)(B), “[o]pinion work product reflecting the mental

impressions, conclusions or legal theories of a party’s attorney

or representative receives heightened protection.” Lobel v.

Woodland Golf Club of Auburndale, Civil Action No. 15-13803-FDS,

2016 WL 7410776, at *2 (D. Mass. Dec. 22, 2016) (citing Rule

26(b)(3)(B)). The “doctrine does not extend to ‘materials

assembled in the ordinary course of business, or pursuant to

public requirements unrelated to litigation, or for nonlitigation

purposes,’ even if the materials were prepared by a lawyer and

reflect ‘legal thinking.’” Taghavidinani v. Riverview

Psychiatric Ctr., No. 1:16-CV-208-JDL, 2017 WL 3326754, at *3 (D.

Me. Aug. 3, 2017) (quoting United States v. Textron Inc. &

Subsidiaries, 577 F.3d 21, 30 (1st Cir. 2009), Rule 26, advisory

committee notes).

“Depending on the circumstances, a document can contain

attorney work product, and thus fall within the protection, even

though a person other than an attorney, such as the attorney’s

client or agent, drafts the document.” Blattman v. Scaramellino,

891 F.3d 1, 5 (1st Cir. 2018). Furthermore, unlike the

aforementioned, more restrictive third-party disclosure rules

applicable to the attorney-client privilege, “disclosure of

work-product to a third-party does not necessarily waive the

protection; ‘only disclosing material in a way inconsistent with

keeping it from an adversary waives work product protection.’”

9

Id. (citation omitted). This court therefore reasonably assumes

that transmission of any work product between ACA and defendants’

counsel did not waive the privilege.

Defendants bear the burden to establish that the material

was prepared in anticipation of litigation. See In re Grand Jury

Subpoena, 273 F. Supp. 3d 296, 304 (D. Mass. 2017) (“party

advancing the work-product doctrine bears the burden of

establishing that the protection applies”). “Courts usually

treat the commencement of a governmental investigation as both a

sufficient and a necessary condition to satisfy the ‘anticipation

of litigation’ requirement for the work-product to attach to an

attorney’s files.” Id. at 305. Here, the SEC did not commence

an investigation into NAI until more than two years after the end

date of the time period for documents sought in the subpoena,

September 2013. Navellier’s concern about possible future

litigation with the SEC in 2013 does not make the prospect of

litigation with the SEC anticipated. Accordingly, the work-

product doctrine does not provide protection for the withheld

material.

It is therefore not necessary to address the SEC’s remaining

argument that defendants relied on a defense of good faith.

(Docket Entry # 69, pp. 12-14). Although the subpoenaed material

is not privileged, the time period (January 2012 to September

2013) appears overbroad inasmuch as ACA’s engagement began in or

10

around January 2013. The parties are therefore instructed to

confer with each other in an effort to narrow the time frame.

CONCLUSION

In accordance with the foregoing discussion, the motion to

quash (Docket Entry # 66) is DENIED.

/s/ Marianne B. Bowler

MARIANNE B. BOWLER

United States Magistrate Judge

11