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

United States District Court, D. Massachusetts

January 22, 2019

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
NAVELLIER & ASSOCIATES, INC. and LOUIS NAVELLIER, Defendants.

          MEMORANDUM AND ORDER RE: DEFENDANTS' MOTION FOR RECONSIDERATION OF DECEMBER 21, 2018 ORDER (DOCKET ENTRY # 79)

          MARIANNE B. BOWLER UNITED STATES MAGISTRATE JUDGE.

         Defendants Navellier & Associates, Inc. (“NAI”) and Louis Navellier (“Navellier”) (collectively “defendants”) seek reconsideration and a stay of a December 21, 2018 Order (Docket Entry # 76) denying attorney-client and work-product protection to 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. (Docket Entry # 79). After the Order issued, the parties agreed to limit the time period to January through September 2013. (Docket Entry # 80, p. 16). Defendants contend the decision is “clearly erroneous and contrary to the law.” (Docket Entry # 79). More specifically, they argue this court erred primarily by: (1) not conducting an in camera review of the withheld documents; and (2) misinterpreting and incorrectly distinguishing two cases, namely, In Re Kellogg Brown & Root, Inc., 756 F.3d 754, 757 (D.C. Cir. 2014) (“Kellogg”), and Massachusetts Mutual Life Ins. Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 293 F.R.D. 244, 248 (D. Mass. 2013) (“Mass Mutual”). (Docket Entry # 80).

         Plaintiff Securities and Exchange Commission (“SEC”) submits that: (1) defendants do not meet the requisite standard for reconsideration; (2) this court has no obligation to conduct an in camera review; and (3) this court properly understood the Kellogg and Mass Mutual decisions. (Docket Entry # 89). The SEC also disagrees with defendants' choice-of-law argument that this court erred by not giving “substantial weight” to “D.C. authority, ” i.e., Kellogg, on the basis that “ACA is a resident of Washington, D.C.” (Docket Entry ## 80, n.3) (Docket Entry # 89).

         BACKGROUND

         As explained in the factual background in the prior decision, [1] NAI retained ACA, an outside consultant, in or around February 2013 “to conduct a compliance review of NAI's marketing materials regarding Vireo AlphaSector strategies, which NAI licensed from F-Squared Investments, Inc.” (Docket Entry # 76, p. 2). Having learned about an enforcement action against another brokerage firm, “Navellier, NAI's founder and principal, grew concerned that the SEC ‘would possibly be investigating NAI and other investment advisor firms that advertised'” and marketed strategies for exchange traded funds. (Docket Entry # 76, p. 2). At his deposition and without referencing counsel, Navellier testified that he “relied on ACA to give [him] guidance.”[2](Docket Entry # 76, p. 3, with emphasis added) (Docket Entry # 69-2, p. 56). Navellier also used ACA to restore his credibility at NAI and influence individuals at NAI who were not respecting him. (Docket Entry # 69-2, p. 56) (“I relied on them to, basically--I tried to use them to influence other people in my firm that I had basically lost control over, or weren't respecting me . . . I wanted ACA to give me credibility . . ..”). When asked at his deposition if he ended up “getting someone to review” NAI “and give a factual opinion of any shortcoming and exposures, ” Navellier responded affirmatively and that he “vented to” his attorney[3] as well as “some of the New York folks.” (Docket Entry # 69-2, p. 55) (emphasis added).

         On January 29, 2013 near the outset of the engagement, NAI's President and Chief Compliance Officer (“NAI's President”) “forwarded various marketing materials directly to Ted Eichenlaub (‘Eichenlaub'), an ACA partner, for review” and invited Eichenlaub to discuss the items with him or his associate without any mention of counsel. (Docket Entry # 76, pp. 2-3) (Docket Entry # 69-2, p. 15). Navellier initially contacted Eichenlaub at the suggestion of another individual, who Navellier describes as an independent contractor located in New York. (Docket Entry # 69-2, p. 56). Thereafter, ACA performed a mock audit of NAI in and around July 2013 which did not involve NAI's attorney. (Docket Entry # 69-1, ¶ 7)[4] (Docket Entry # 76, p. 3) (Docket Entry # 69-2, p. 56). “NAI ‘looked pretty good'” in the audit, according to Navellier. (Docket Entry # 76, p. 3) (Docket Entry # 69-2, p. 56).

         In addition, at and around the time period that Navellier engaged ACA's services, Navellier did not anticipate being sued “[a]t all” and did not anticipate NAI being sued separate and apart from conversations with his attorney. (Docket Entry # 76, p. 2). In the end, the SEC did not open an investigation into NAI until May 2016 and did not serve a subpoena on NAI in connection with a related investigation until October 2013, after the time span covered by the purportedly privileged documents. These as well as other facts in the record satisfied this court that defendants did not meet their burden to show that the attorney-client privilege “applie[d] and that it has not been waived, ” Lluberes v. Uncommon Prods., LLC, 663 F.3d 6, 24 (1st Cir. 2011), or that the documents were made in “anticipation of litigation” under the work-product doctrine. Fed.R.Civ.P. 26(b)(3).

         DISCUSSION

         First and foremost, the standard to merit reconsideration of an interlocutory decision is difficult to meet. See Mulero-Abreu v. Puerto Rico Police Dept., 675 F.3d 88, 95 (1st Cir. 2012). To succeed on a motion for reconsideration, “‘the movant must demonstrate either that newly discovered evidence (not previously available) has come to light or that the rendering court committed a manifest error of law.'” Id.; accord Ellis v. United States, 313 F.3d 636, 648 (1st Cir. 2002) (reconsideration “warranted if there has been a material change in controlling law” or “newly discovered evidence bears on the question”); Yokozeki v. Carr-Locke, Civil Action No. 13-12587-MBB, 2017 WL 2818981, at *1 (D. Mass. June 29, 2017). The existence of a manifest injustice also provides a basis for reconsideration. Ellis v. United States, 313 F.3d at 648. The manifest injustice exception “requires a definite and firm conviction that a prior ruling on a material matter is unreasonable or obviously wrong.” Id.; Yokozeki, 2017 WL 2818981, at *1.

         Here, defendants do not identify newly discovered evidence unavailable at the time they filed the initial motion to quash. Rather, they dispute this court's factual and credibility findings.

         They also fail to show a manifest error of law. This court distinguished the Kellogg decision because it did not involve the presence or use of an outside third party consultant or agent.[5](Docket Entry # 76, p. 7). As a result, the Kellogg decision did not implicate the Kovel doctrine.[6] (Docket Entry # 76, p. 7). As explained in the prior decision (Docket Entry # 76, pp. 5-6), the Kovel doctrine creates an exception to the principle that, “[g]enerally, 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”). As also stated in the decision (Docket Entry # 76, p. 5), “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, [7] although the circumstances “are limited.” Dahl v. Bain Capital Partners, LLC, 714 F.Supp.2d 225, 227 (D. Mass. 2010). Thus, “Kovel requires that to sustain a privilege an accountant, ” i.e., a third party, “must be ‘necessary, or at least highly useful, for the effective consultation between the client and the lawyer which the privilege is designed to permit.'” Id. at 247-48 (quoting Kovel, 296 F.2d at 922).

         Ultimately, this court held that ACA, as a third-party retained by NAI, “was not ‘“necessary, or at least highly useful”' to defendants' counsel in providing legal advice to defendants.” (Docket Entry # 76, p. 8). As a result, this court concluded that “the documents sought by the subpoena are not subject to attorney-client protection.” (Docket Entry # 76, p. 8). Even eliminating the interpretive role requirement and restricting the Kovel doctrine to third parties “‘necessary, or at least highly useful, for the effective consultation between the client and the lawyer which the privilege is designed to permit, '” Cavallaro v. United States, 284 F.3d at 247 (quoting Kovel); see also Lluberes v. Uncommon Prods., LLC, 663 F.3d at 24, the express and implicit factual findings by this court sufficiently established that ACA was not “necessary, or at least highly useful to defendants' counsel in providing legal advice to defendants.” (Docket Entry # 76, p. 8) (quoting Cavallaro v. United States, 284 F.3d at 247-48) (internal quotation marks omitted)

         In seeking reconsideration, defendants rely on the following language in Kellogg:

communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege. See FTC v. TRW, Inc., 628 F.2d 207, 212 (D.C.Cir. 1980); see also 1 Paul R. Rice, Attorney-Client Privilege in the United States § 7:18, at 1230-31 (2013) (“If internal investigations are conducted by agents of the client at the behest of the attorney, they are protected by the attorney-client privilege to the same extent as they would be had ...

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