SEC v. Badian, 2009 WL 222783 (S.D.N.Y Jan. 26, 2009)
In this case, Rhino Investors, Inc. (“Rhino”), a non-party, sought to claw back approximately 260 documents that it claimed were inadvertently produced in 2003 in the midst of an SEC investigation. The court, applying the four factors set forth in Louis Sportswear, U.S.A., Inc. v. Levi Strauss & Co., 104 F.R.D. 103, 105 (S.D.N.Y. 1985) and its progeny, concluded that Rhino had waived any privilege it may have asserted.
In 2002, Rhino agreed to settlement with the SEC following its investigation into possible securities violations by Rhino. Part of the settlement required Rhino to respond to 23 detailed questions, pursuant to section 21(a) of the Securities Exchange Act. The SEC eventually challenged the truthfulness of the responses which were submitted on behalf of Rhino and signed by attorney Robert Charron.
Amended responses were filed which included an index of the documents reviewed in support of those responses, including email. The SEC asked to see those emails.
On August 6, 2003, Bryan Cave LLP, as attorneys for Rhino, produced 47 boxes of hard copies of “email documents downloaded from Rhino’s computer system.” Accompanying the documents was a letter from Bryan Cave stating that the production “shall not be deemed or construed” as waiver and that in the event that any privileged materials were inadvertently produced, Rhino reserved the right to request their return.
Over the next year, the U.S. Attorney’s office subpoenaed and received documents from Rhino in furtherance of their criminal investigation of Andreas Badian, an employee of Rhino, who was eventually arrested. In late 2004, the U.S. Attorney dismissed the criminal charges against Badian.
In April 2006, the SEC filed the Complaint in the case at bar and DLA Piper LLP entered a notice of appearance as attorneys for Andreas Badian.
In October 2007, the SEC issued a subpoena to Mr. Charron for the production of all documents listed in the indexes he produced in 2003. Mr. Charron sought the assistance of DLA Piper, and in April 2008 notified the SEC that he and Rhino were withholding some documents as privileged. In October 2008, the SEC served written objections to the assertion of privilege on the grounds that any privilege was waived by the documents’ production by Bryan Cave LLP in 2003.
To determine whether the privilege was waived, the court applied the four Louis factors: 1) “The reasonableness of the precautions to prevent inadvertent disclosure” of privileged documents, 2) “The time taken to rectify the error”, 3) “The extent of the disclosure”, and 4) The “over[arching] issue of fairness and the protection of an appropriate privilege which… must be judged against the care or negligence with which the privilege is guarded…”
Addressing the first factor, the court noted the absence of evidence that Rhino or Bryan Cave took any precautions to prevent the production of privileged materials. Although Rhino asserted that such a review took place, they offered no evidence or explanation of that review. Rather, Rhino asserted that the “rationale employed” by Bryan Cave was “to be broadly cooperative” with an expectation that fulfillment of the terms of the settlement would “bring an end to the claims asserted by the SEC against Rhino or its employees.” That was not to be, though, as evidenced by the arrest of Andreas Badian and subsequent filing of the present action. Regardless, the court determined that it had “no basis” to conclude any precaution had been taken, let alone that they were reasonable.
Jumping ahead to the third factor, the extent of the production, the court noted that Rhino originally indicated that as much as 5% of the production was privileged, but then reduced its privilege claim to only 260 documents. As the court observed, however, “this is still a significant number of documents.”
The court then returned to the second factor, the time taken to rectify the error. Despite DLA Piper’s assertions that they acted quickly to rectify the error, the court determined that the “crucial question” was when the producing party realized that privilege information had been disclosed. The court found that Rhino and Bryan Cave realized they were disclosing privileged material at the time of production. Thus, Rhino was “chargeable” with a delay of five years.
Finally, addressing the question of overarching fairness, the court determined there was “no fairness” in precluding the SEC from using any of the documents produced by Bryan Cave. The court declined, however, to extend the waiver beyond the documents actually produced to the SEC.