The SEC, Subpoenas and Protecting Privilege

Every SEC investigation potentially involves questions about the attorney-client privilege, the work product doctrine and inadvertent waiver. The typical investigation begins with a broad-based request for documents. The proposed time frame for the production is typically circumspect. Not infrequently the production will require the responding party to produce a large quantity of documents which may number in the hundreds of thousands if not the millions of pages. Today many, if not most, of those materials will be electronic. The task of sorting those materials, culling those which are responsive to the subpoena and excluding others protected by the attorney client privilege and the work product doctrine under a tight deadline can be daunting.

What happens if errors are made? Is the privilege waived because in an effort to quickly sort millions of pages of electronic documents privileged materials are produced? The recent decision in SEC v. Welliver, Civil No. 11-CV-3076 (D. Minn. Ruling Oct 26, 2012) provides insight into these questions and a caution to parties responding to Commission subpoenas and to the agency.

The Commission’s action in Weliver centers on a claimed breach of fiduciary by defendants David Welliver and Dblaine Capital, LLC in connection with a loan involving Lazy Deuce Capital, Co. and Sematia Partners LlC. Specifically, Dblaine Fund, advised by Dblaine Capital, obtained a $4 million loan from Lazy Deuce and Sematia Partners in return for agreeing to invest significant mutual fund assets in “alternative investments” recommended by Lazy Deuce. Mr. Welliver controlled Dblaine Capital, a company he founded and for which he has acted as CEO and CIO. That company advises Dblaine Investment Trust, a registered investment company that has multiple funds including Dblaine Fund.

During the course of the litigation the SEC filed a motion requesting that the court find defendants waived their attorney client privilege as to communications involving attorney Wanda Weber. During the pre-complaint investigation the defendants produced a series of e-mails involving communications between Ms. Weber and Mr. Welliver or between Ms. Weber, Mr. Welliver and David Jones, the Chief Compliance Officer of Dblaine Investment Trust. The materials were produced on August 1, 2011, just after the July 28, 2011 deadline set by the subpoena. After the filing of the complaint the defendants produced as part of the discovery e-mails involving the same parties. Some e-mails involving those parties were introduced as exhibits at the deposition of Mr. Jones by the defendants. At the time the defendants had pleaded defenses asserting that they relied on advise from an array of professionals including counsel.

After a change of defense counsel defendants sought to claw-back the attorney client communications, claiming inadvertent production. The defenses were amended, deleting the reliance on counsel. The SEC refused to return the materials, claiming waiver.

The Court granted the Commission’s motion, concluding the defendants had waived privilege as to the produced documents. Since the SEC’s motion assumed that the documents were privileged, the Court treated the question as one of waiver. While neither party cited Rule 502 of the Federal Rules of Evidence, the Court concluded at the outset that its provisions apply. That Rule governs the scope of a waiver when a disclosure is made in a federal proceeding or to a federal agency. It provides that there is only a waiver if: “(1) the waiver is intentional; 2) the disclosed and undisclosed communications or information concern the same subject matter; and 3) they ought in fairness to be considered together.” It goes on to provide that a disclosure is not a waiver if: “(1) the disclosure is inadvertent; 2) the holder of the privilege . . . took reasonable steps to prevent disclosure; and (3) the holder promptly took reasonable steps to rectify the error . . . “

Under Rule 502 the scope of any waiver depends on “whether the waiver of the privilege . . . is intentional or inadvertent,” according to the Court. If the waiver is inadvertent it is limited to the materials produced. The waiver can, however, be broader if that is “made necessary by the intentional and misleading use of privileged or protected communications or information” the Court ruled. That would occur where the disclosing party sought to utilize the material for a tactical advantage. This differs significantly from the common law rule under which the act of disclosure constituted a waiver by subject matter.

Following these principles the Court concluded that there was a waiver of privilege as to the materials produced at the Jones deposition. The disclosure there was clearly intentional. The record here, however, did not support a claim that there should be a subject-matter waiver. Neither party described the context in which the materials were used which might suggest a basis for such a ruling.

The Court also concluded that there had been a waiver as to the materials produced in response to the SEC investigative subpoena and in discovery. Under the Rule the critical point is the reasonableness of the precautions taken, the time taken to rectify the error and the overriding fairness, the same approach utilized in pre-Rule case law in the district.

In this case the Court found that “the record is devoid of any mention of a review conducted, precautions taken, or extensions requested by Defendants in either disclosure.” While the defendants did claim that the disclosures should be excused because of the SEC’s “aggressive and unreasonable timeframe for production” the Court noted that no extension was ever requested and the defendants failed to discuss any procedural steps taken to protect privileged material.

The Court went on to find that many of the same documents were disclosed in each production and the defendants failed to take any steps to promptly rectify the claimed error beyond finally serving a claw-back letter. Under the circumstances, the “interests of fairness and justice would not be served” by relieving the Defendants of the consequences of their actions.

The Court came to a similar conclusion regarding the affirmative defenses. While those defenses were amended to eliminate an express reliance on counsel, those remaining turn on a “knowledge of the law and the legality of their actions . . .” the Court found. Accordingly, the amendments did not preclude the limited waiver of privilege here.

The Court’s ruling in Welliver should serve as a clear caution to counsel representing a subpoena recipient in an SEC investigation as well as to the Commission. While an SEC investigative subpoena requires the prompt production of the responsive non-privileged materials, at the same time counsel must take care to institute the appropriate procedures to protect privileged materials. Those procedures should be reasonably designed to identify and cull out privileged materials. Where appropriate the procedures may require that a reasonable extension of the compliance date be sought. When such a request is made it should be carefully documented along with the reasons and the response of the staff along with each other steps taken to protect privileged materials for use if a claw-back motion becomes necessary.

At the same time Welliver suggests that Commission counsel should carefully consider the time limits imposed by investigative subpoenas. Not permitting sufficient time for counsel to sift out privileged material may be grounds for a later claw-back request if privileged material in inadvertently produced. Being required to give back privileged material may ultimately damage the Commission’s case, particularly if they have been used to develop other evidence or support important claims in the action. In the end, Welliver teaches that Commission counsel, and those responding to SEC investigative subpoenas, proceed not just expeditiously but in a careful manner which ensures that there is sufficient time to protect attorney client and work product material.

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