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Securities & Exchange Commission, Inc. v. Wyly

July 5, 2011

SECURITIES AND EXCHANGE COMMISSION, INC., PLAINTIFF,
v.
SAMUEL WYLY, CHARLES J. WYLY, JR., MICHAEL C. FRENCH, AND LOUIS J. SCHAUFELE III, DEFENDANTS.



The opinion of the court was delivered by: Daniel J. Capra, Special Master

MEMORANDUM OPINION AND ORDER ON DOCUMENTS ASSERTED BY THE WYLYS TO BE PROTECTED BY THE COMMON INTEREST PRIVILEGE--CLOSE TRUSTEES AND KEELEY HENNINGTON

On February 11, 2011, the Securities and Exchange Commission ("SEC") moved to compel production of certain materials that Defendants Sam and Charles Wyly (the "Wylys") have withheld on the basis of attorney-client privilege. The undersigned was appointed by Judge Scheindlin as Special Master to review the Wylys claims that certain of the documents in the privilege logs submitted to the SEC were protected by the "common interest" extension of the attorney-client privilege. See generally United States v. Schwimmer, 892 F.2d 237 (2d Cir. 1981). Familiarity with the allegations in the SEC's complaint against the Wylys and the other Defendants is presumed.

This Memorandum and Order concerns the documents in two privilege logs, submitted to the Special Master for in camera review on April 15, 2011. The Wylys assert a common-interest privilege for communications with: 1) counsel for Keeley Hennington, who served as the Wylys' chief financial officer;*fn1 and 2) counsel for the Trustees of foreign trusts that are a focus of this litigation - specifically Isle of Man Limited, IFG International Trust Company Limited, InterContinental Management Limited and Trident Trust Company Limited (collectively the "Close Trustees" or the "Trustees").

I. Arguments of the Parties and Basic Case Law

The SEC contends that the Wylys have not shown a common legal interest shared with Hennington or the Close Trustees. The basic argument is that none of the alleged common-interest participants had anything to gain by cooperating with the Wylys - only the Wylys stood to gain because the Wylys needed access to documents held by these others. The Wylys argue that these parties had a common legal interest with the Wylys because they stood a risk that they would be swept up in all of the investigations that were going on at the time and could potentially be sued for or charged with aiding and abetting the transactions that were being investigated.

As discussed in the Report and Recommendation on the documents logged by Michael French, the parties do not need to be in exact lock-step of interest in order for the common-interest doctrine to apply to a shared communication. Rather the question is whether the particular communication is shared to further a common legal interest between or among the clients. See Saltzburg, Martin and Capra, Federal Rules of Evidence Manual at 501-29, 30 (9th ed.):

Relationships between clients are often more ambiguous than the extremes of united in interest and completely adverse. Sometimes it will occur that clients share a mutual interest as to one issue (such as discrediting a witness) but are adversarial as to many or all other issues. Most courts have held that the common interest privilege can apply even if the clients are in conflict on some or most points, so long as the communication itself deals with a matter on which the parties have agreed to work toward a mutually beneficial goal. (emphasis added)

On the other hand, the mere fact that communications are made between parties with similar interests is insufficient to trigger the common interest rule. It must be shown by the party claiming the privilege: (1) that all clients and attorneys with access to the communication had in fact agreed upon a joint approach to the matter communicated; and (2) that the information was imparted with the intent to further the common purpose. As the Schwimmer court stated: "Only those communications made in the course of an ongoing common enterprise and intended to further the enterprise are protected." 892 F.2d at 243. Where the parties have not yet agreed to proceed jointly on the matter communicated, the common interest rule will not apply. See, e.g., In re Grand Jury Subpoena: Under Seal, 415 F.3d 333 (4th Cir. 2005) (communications made by corporate agent to corporate counsel were not privileged as to the corporate agent; even if the agent was pursuing a common interest with the corporation, the communications were made before the parties agreed on a common defense).The party asserting the common interest rule bears the burden of showing that there was "an agreement, though not necessarily in writing, embodying a cooperative and common enterprise towards an identical legal strategy." Denney v. Jenkens & Gilchrist, 362 F.Supp.2d 407, 416 (S.D.N.Y. 2004) (quoting Lugosch v. Congel, 219 F.R.D. 220, 237 (N.D.N.Y.2003)).

Most importantly for present purposes, the common-interest doctrine extends the privilege to information-pooling arrangements, but it does not protect communications that are not privileged in the first place. Before a communication can be protected under the common-interest doctrine, "the communication must meet the elements of the attorney-client privilege." Allied Irish Bank v. Bank of America, 252 F.R.D. 163, 171 (S.D.N.Y. 2008). See also HSH Nordbank AG New York Branch v. Swerdlow, 259 F.R.D. 64, 71 (S.D.N.Y. 2009) ("where the underlying communication is not protected by the attorney-client privilege or the attorney work-product doctrine, the common interest doctrine does not apply").

II. Rulings on Logged Items

The Special Master has reviewed the logged items in camera and the written submissions by the parties. The parties on June 29, 2011, orally argued the motion as to all the logged documents submitted to the Special Master. Because there is a need for expedition and a mutual interest in saving resources, the parties have agreed that these rulings will be short and to the point. Also, efforts are made to avoid extensive disclosure of the contents of the logged documents, for the obvious reason that disclosure would defeat the purpose of any valid claim of privilege.*fn2

Document 1 on Wyly Privilege Log for Communications Between Counsel for Hennington and Counsel for the Wylys.

This is a document from Hennington's lawyer to the Wylys' lawyer about developments in the investigation. It is clearly about a legal matter and the only question is whether the Wylys have established a common-interest agreement with Hennington as of the date of the document. Hennington has filed an affidavit attesting to a common interest agreement, as have Wilys counsel. It is true that Hennington might have had an interest in cooperating with the government at the Wilys' expense - but if that were enough defeat a common interest, then there could rarely if ever be an enforceable common interest agreement when there are possible charges against multiple defendants. The document itself indicates that Hennington was cooperating with the Wilys and, together with the affidavits submitted, the Wylys have sufficiently establish that the communications from Hennington's lawyer were pursuant to a common interest arrangement.

Ruling on Document 1: Protected by the common-interest doctrine.

Documents on Privilege Log for Communications Between Counsel for the Wylys and

Counsel for the Close Trustees

Documents 1 and 1.1:

Document 1 is a letter from counsel to the Trustees to counsel for the Wylys. It is not within the common interest because it indicates a substantial dispute over exchanging information, and even articulates an individual interest that the trustees have that is not shared by the Wylys.

Document 1.1 is a letter from local counsel for the Trustees to local counsel for the Wylys, indicating substantial disagreement about disclosure of documents. It is not within the common interest because there is an insufficient showing that the parties have actually agreed about how to implement any common goal.

Ruling on Documents 1 and 1.1: Neither are protected.

Document 2:

This is a letter from local counsel to the Wylys to local counsel for the Trustees. It is rife with dispute. The writer is trying to get the Trustees to see the error of their ways - which might be an admirable goal, but definitely does not indicate that the parties have reached a common-interest agreement.

Ruling on Document 2 Not protected.

Document 3:

This is a letter from local counsel for the Wylys to local counsel for the Trustees, expressing puzzlement over an act of the Trustees that seems to be adversarial. It is not indicative of a common interest.

Ruling on Document 3: Not protected.

Document 4:

The document logged at #4 is another letter from local counsel for the Wylys to local counsel for the Trustees. Short of an adversary pleading, it's hard to think of a document less within a common interest. Indeed the letter expresses the fact that there is a substantial disagreement that appears at that time to be unlikely to be rectified.

It might be argued, as to all the contentious letters reviewed so far (Documents 1 through 4), that the parties have actually agreed on a common goal - allowing the Wylys to view the documents - but are simply fighting about the means to that common goal. But given the fact that the privilege itself - not to speak of the common interest rule - is narrowly construed, it cannot be that such adversarial letters on implementation can be protected simply because the parties have agreed on a broad concept such as "we both hope the SEC will go away" or "it would be nice to have an exchange of information."*fn3 If a broad common endpoint like that were all that were necessary to trigger the common interest rule, it would apply in virtually all cases in which parties have the potential to be joined on the same side of the litigation. But that is not the law.As Judge Scheindlin stated in Jenkens, supra, 362 F.Supp.2d at 415:

In order to invoke the common interest doctrine, it is not enough merely to show, as the doctrine's name might suggest, that [the parties] had interests in common. Nor is it sufficient to show that they shared concerns about potential litigation. [The claimant] must show a "cooperative and common enterprise towards an identical legal strategy." (Quoting Lugosch v. Congel, 219 F.R.D. 220, 237 (N.D.N.Y.2003)).

In this case, as to all the Trustee documents logged so far, the Wylys have shown nothing more than possible shared concerns about potential litigation. They have definitely not shown that the Wilys and the Trustee have agreed, as of the date of these documents, to pursue a common legal strategy.

Ruling on Document 4: Not protected.

Documents 5, 5.1 and 5.2:

Document 5 is an email from Michael Smith (lawyer for the Wileys) to Michael Mann (lawyer for the Trustees) expressing disagreement with the Trustees' position on access to documents but also speaking about a spirit of cooperation. The email attaches Document 5.1, and

5.2, which are drafts with mark-ups.

The letter and the drafts indicate an iterative process, and they are not as adversarial as the prior documents in the log. Nonetheless, it does not come close to indicating that the parties have agreed on a common legal strategy, or that they are engaged in a cooperative effort at this point..

Ruling on Documents 5 and 5.1 and 5.2: Not protected.

Documents 6 and 6.1:

Document #6 is Mann's email response to Michael Smith's email, logged as #5 supra. Document 6.1 is Smith's email also logged at 5 (already found not protected). Mann's email indicates more disagreement about implementing a strategy, as well as the need for the Trustees to protect their legal interest even if it will impede the Wylys. As such a common interest has not been proved.

Ruling on Documents 6 and 6.1: Not protected.

Document 7:

This is an email from Michael Mann to Michael Smith, again about disagreements regarding the process of document review. As discussed above, even assuming the parties have an intent at some time to pursue a common interest (a matter discussed below) they have not at this time agreed on a common legal strategy.

Ruling on Document 7: Not protected.

Documents 8 and 8.1:

This is an email string of two emails, both logged. #8.1 is from Luke McGrath, counsel for the Wylys, to Paul Leder, counsel for the Trustees. It provides a progress report for implementing some of the Trustees' demands regarding access to documents, and notes some outstanding issues. Document 8 is Leder's response, noting an area of disagreement.

At this point - December 9, 2005 - the parties are closer to agreeing upon "an identical legal strategy." Id. But they are not there yet. The Wylys have the burden of showing an agreement and they have not shown it as of the date of these emails.

Ruling on Documents 8 and 8.1: Not Protected.

Documents 9, 9.1 and 9.2:

Document 9 is an email dated December 12, 2005, from McGrath's Executive Assistant to Paul Leder, attaching two documents executed by Cheryl Wyly, which are logged at 9.1 and 9.2. The attached documents are not reasonably intended to remain confidential because they are intended for the purpose of possible public disclosure by the Trustees should legal circumstances require. They are not simply intended for the file. So even if there is a common-interest agreement between the Wylys and the Trustees at this point (see the discussion as to other documents below) the attachments are unprotected because there is no reasonable anticipation that the documents will be kept confidential within the common-interest unit.

The email itself is not protected to the extent it simply transmits the documents. The email also contains a sentence about document production but nothing in the email is based on confidential information.

Ruling on Documents 9, 9.1 and 9.2: Not protected.

Document 10:

This is an email from Paul Leder to Michael Smith, cc:d to other lawyers for the Trustees, referring to presentations to be made about a legal matter. This matter does not appear to be about the points of contention that had generated the adversarial documents reviewed previously in this Opinion. The question then is whether the Wylys and the Trustees had a common legal interest in the matter stated in the email. Given the breadth of the various investigations of the Wylys - all of them based on use of the offshore trusts - the Trustees, properly counseled would reasonably have been concerned about being swept up in the legal proceedings and subject to a legal complaint and possible legal liability. The Trustees could reasonably have believed that if the Wylys and the Trustees could pool information about the offshore trusts on the topic of the planned meeting, that pooling could provide a stronger defense to all the investigations.

The Wylys have made a sufficient showing that they had agreed with the Trustees to pursue a common defense on the matters described in the email from Leder to Smith.

Ruling on Document 10: Protected by common-interest doctrine.

Documents 11 through 15:

These are all clones of the email logged as #10. Documents 11 through 15 are a series of scheduling emails in response to the original email from Leder to Smith. That email is redacted in each of the email strings. The scheduling emails are not logged - and rightly so, because as discussed in the Opinion on the Michael French log, a communication that does nothing more than schedule a meeting of lawyers is not protected by the privilege.

Ruling on Documents 11 through 15: Redaction of email from Leder to Smith is proper in each email string, as that email is protected by the common-interest doctrine.

Documents 16 and 17:

This is the same email in both log numbers, from Michael Mann to Michael Smith, on a matter of operation of a particular Trust. (#17 also has a responsive email from Smith, but it discloses no confidential information and is not logged). Notably, the topic of the email does not involve the matters in contention that were raised in earlier emails and letters in the log. The parties would clearly have a common interest and a common strategy on the issue raised in the email. And the email indicates that the parties had agreed on a common approach on this matter. Even assuming the parties had still not agreed on a protocol for document review at the time of this email, the common-interest doctrine does not require the parties to be in lock-step agreement on every single matter between them.*fn4

Ruling on Documents 16 and 17: Protected by the common-interest doctrine.

Document 18:

This email, from Michael Mann to lawyers for the Wylys (cc:d to other lawyers for the Trustees) indicates that the exchange of information goes both ways. It is not just a "one-way" arrangement for the Wylys. It also indicates that by this time - April 6, 2006 - the parties had worked out their previous disagreements about the protocol for access to documents. Moreover, it is apparent by this time that the Trustees believe they will benefit from having the Wylys look at the documents - that is, if the Wylys have access, it will help both sides in defending the investigation and also will be important for an exchange of information and strategy. In sum, the email and other supporting information provided indicates that the parties are now pursuing a common interest with a unified strategy.

Ruling on Document 18: Protected by the common-interest doctrine.

Documents 19 and 19.1:

Document 19.1 is the same email that was logged as 18. Document 19 is the response to Mann's email from William Brewer, counsel to the Wylys. That email elaborates upon the legal topic raised by Mann in the previous email and ...


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