# Securities and Exchange Commission v. Navellier & Associates, Inc

> District Court, D. Massachusetts · December 21, 2018

URL: https://www.frixlaw.com/law-library/cases/10197303

## Case

- **Court:** District Court, D. Massachusetts
- **Decided:** December 21, 2018
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10197303

## How later opinions describe it (automated extraction)

- discussing Upjohn, 449 U.S. at 390-392

## Opinion text

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
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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
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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
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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,
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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.’”
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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10197303. Public record. Not legal advice.