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Securities and Exchange Commission v. Yorkville Advisors, LLC

United States District Court, S.D. New York

February 27, 2015

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
YORKVILLE ADVISORS, LLC, MARK ANGELO and EDWARD SCHINIK, Defendants.

OPINION AND ORDER

HENRY B. PITMAN, Magistrate Judge.

I. Introduction

By notice of motion dated June 26, 2014 (Docket Item 88), defendants Yorkville Advisors, LLC, Mark Angelo and Edward Schinik (collectively, "defendants") move for an Order awarding attorneys' fees and costs incurred in bringing their motion to compel the Securities and Exchange Commission (the "SEC") to produce the documents scheduled in the SEC's January 25, 2013 and February 15, 2013 privilege logs (Docket Item 61); the motion to compel was granted in part and denied in part in my May 27, 2014 Opinion and Order (Docket Item 71).

For the reasons set forth below, defendants' counsel is awarded $21, 619.63 in attorneys' fees and $431.73 in costs, for a total award of $22, 051.36.

II. Facts

A. Background

The facts underlying the discovery dispute and the motion to compel upon which defendants base their motion for attorneys' fees and costs are set forth in my May 27, 2014 Opinion and Order resolving the motion to compel, familiarity with which is assumed. SEC v. Yorkville Advisors, LLC, 300 F.R.D. 152, 155-57 (S.D.N.Y. 2014). The pertinent facts and procedural posture of this case are briefly summarized here.

The SEC commenced this action alleging, among other things, that defendants had (1) "engaged in a fraudulent scheme pursuant to which they reported false and inflated values for certain convertible debentures, convertible preferred stock..., and promissory note investments held by the hedge funds managed by Yorkville" Advisors, LLC ("Yorkville") and (2) made other "materially false and misleading statements to investors and potential investors about" Yorkville (Complaint, dated October 17, 2012 (Docket Item 1) ΒΆΒΆ 1-2). On October 31, 2012, this case was designated for inclusion in the Pilot Project Regarding Case Management Techniques for Complex Civil Cases in the Southern District of New York (the "Pilot Project") (Docket Item 2).

On January 27, 2014, after an exchange of letters and a discovery conference regarding the adequacy of the SEC's January 25, 2013 and February 15, 2013 privilege logs (collectively, the "Privilege Logs") produced in response to defendants' First Request for the Production of Documents, the defendants filed a motion to compel. SEC v. Yorkville Advisors, LLC, supra, 300 F.R.D. at 155-56.

I concluded that the SEC's Privilege Logs failed to provide the information required by Federal Rule of Civil Procedure 26(b)(5), Local Civil Rule 26.2(a)(2)(A) and the Pilot Project's discovery procedures and that they lacked sufficient information to support the asserted claims of privilege. SEC v. Yorkville Advisors, LLC, supra, 300 F.R.D. at 164. In addition, I found that the SEC's submission of its Revised Privilege Log was untimely pursuant to Local Civil Rule 26.2(b) because it was served after defendants had filed their motion to compel and the SEC's justification for the delay in production was "totally inadequate." SEC v. Yorkville Advisors, LLC, supra, 300 F.R.D. at 165. I further determined that the new claims of privilege asserted for the first time in the Revised Privilege Log were untimely pursuant to Federal Rule of Civil Procedure 26(b)(5)(A)(i) and Local Civil Rule 26.2. SEC v. Yorkville Advisors, LLC, supra, 300 F.R.D. at 166. However, because I concluded that the statutory privilege afforded to Suspicious Activity Reports ("SARs") pursuant to the Annunzio-Wylie Anti-Money Laundering Act[1] could not be waived, I held that the SEC could assert its privilege with respect to twenty-six SARs listed in the Revised Privilege Log. SEC v. Yorkville Advisors, LLC, supra, 300 F.R.D. at 167. Thus, "the SEC's unjustified failure to serve indices of privileged documents in a timely and proper manner operate[d] as a waiver of any applicable privilege, with the exception of the SARs privilege." SEC v. Yorkville Advisors, LLC, supra, 300 F.R.D. at 167.

Because defendants only raised their claim for attorneys' fees and costs in their reply brief, I denied that request without prejudice, allowing defendants to renew their application through a formal motion. SEC v. Yorkville Advisors, LLC, supra, 300 F.R.D. at 168. On June 26, 2014, defendants filed the instant motion for attorneys' fees and costs (Docket Item 88).

B. Fees & Costs Sought by Defendants

Defendants' counsel seek attorneys' fees in the amount of $95, 736.50 and costs in the amount of $454.45 in connection with their motion to compel (Memorandum of Law in Support of Defendants Yorkville Advisors, LLC, Mark Angelo, and Edward Schinik's Motion for Attorney's Fees and Costs, dated June 26, 2014, (Docket Item 89) ("Defs.' Mem."), at 12).

Defendants calculate the amount sought as follows:

Hourly No. of Attorney Rate Sought[2] Hours Fee Sought John D. Huh $505 ('13) 6.0 $3, 030.00 Senior Associate, $540 ('14) 62.5 $33, 750.00 Philadelphia Litigation Department[3] Nicolas Morga $765 ('13) 5.9 $4, 513.50 Partner, Los Angeles Complex $810 ('14) 7.6 $6, 156.00 Securities Litigation Group, "specialized qualifications in areas of securities law and accounting"[4]

David Sack $595 ('13) 11.0 $6, 545.00 Former New York Associate[5] Caryn Schechtman $865 ('13) 9.8 $8, 477.00 Partner, New York, practicing $915 ('14) 4.0 $3, 660.00 private securities litigation and securities regulatory law Joshua Sohn $860 ('13) 10.9 $9, 374.00 Partner, New York, focusing $910 ('14) 7.9 $7, 189.00 on complex commercial, real estate and securities litigation[6] Perrie M. Weiner $780 ('13) 0.5 $390.00 Managing Partner, Los $825 ('14) 1.3 $1, 072.50 Angeles, International Co-Chair of securities litigation practice[7] Paralegal Bonny Yang $295 ('13) 16.3 $4, 808.50 Certified Senior Paralegal, $305 ('14) 22.2 $6, 771.00 New York, "approximately 12 years of experience in securities investigations and litigation"[8] Total 165.9 $95, 736.50

(Exhibit A annexed to June 26 Morgan Decl. ("Defs.' Invoice")).

In addition to the foregoing fees, defendants also seek an award of the following costs:

Transcripts $432.54 UPS $21.91 Total $454.45

(Exhibit B annexed to June 26 Morgan Decl.).

III. Analysis

A. Defendants are Entitled to Reasonable Fees and Costs Pursuant to Federal Rule of Civil Procedure 37(a)(5)(C)

Pursuant to Rule 37, if a motion to compel "is granted - or if the disclosure or requested discovery is provided after the motion was filed - the court must, after giving an opportunity to be heard, require the party... whose conduct necessitated the motion, ... to pay the movant's reasonable expenses incurred in making the motion, including attorney's fees." Fed.R.Civ.P. 37(a)(5)(A). An award of expenses is mandatory unless "(i) the movant filed the motion before attempting in good faith to obtain the disclosure or discovery without court action; (ii) the opposing party's nondisclosure, response, or objection was substantially justified; or (iii) other circumstances make an award of expenses unjust." Fed.R.Civ.P. 37(a)(5)(A). However, "[i]f the motion is granted in part and denied in part, the court... may, after giving an opportunity to be heard, apportion the reasonable expenses for the motion." Fed.R.Civ.P. 37(a)(5)(C).

"Whether exercising its inherent power, or acting pursuant to Rule 37, a district court has wide discretion in sanctioning a party for discovery abuses." Reilly v. Natwest Mkts. Grp. Inc., 181 F.3d 253, 267 (2d Cir. 1999); see Design Strategy, Inc. v. Davis, 469 F.3d 284, 294 (2d Cir. 2006). The imposition of Rule 37(a)(5) sanctions for failure to comply with discovery demands must be weighed in light of the full record. See Cine Forty-Second St. Theatre Corp. v. Allied Artists Pictures, 602 F.2d 1063, 1068 (2d Cir. 1979). Applying the foregoing principles to the facts in this case leads me to conclude that defendants are entitled to an award of fees and expenses.

1. Rule 37(a)(5) Applies to Defendants' Motion

Without citing any authority for the argument, the SEC first contends that the underlying motion was not brought under Rule 37 and that Rule 37(a)(5) does not, therefore, authorize an award of fees and expenses. The SEC argues that the underlying motion to compel was made under Federal Rule of Civil Procedure 26(b)(5) and Local Civil Rule 26.2 (Memorandum of Law in Support of the Securities and Exchange Commission's Opposition to Defendants Yorkville Advisors, LLC, Mark Angelo and Edward Schinik's Motion for Attorney's Fees and Costs, dated July 16, 2014, (Docket Item 91) ("SEC's Mem."), at 16). According to the SEC, an award of fees and expenses under Rule 37(a)(5) is available only with respect to motions made under Rule 37(a)(3). Because, in the SEC's view, the underlying motion was made under Rule 26(b)(5) and Local Civil Rule 26.2, Rule 37(a)(5) cannot be invoked as the basis for an award of fees and expenses.

The SEC's argument is unconvincing. Although the underlying motion to compel did not specify under what Rule it was being brought, it could only have been brought under Rule 37(a)(3)(B)(iv) which provides:

(3) Specific Motions.
* * *
(B) To Compel a Discovery Response. A party seeking discovery may move for an order compelling an answer, designation, production, or inspection. This motion may be made if:
* * *
(iv) a party fails to respond that inspection will be permitted - or fails to permit inspection - as requested under Rule 34.

The underlying motion was brought because the SEC refused to permit inspection of certain documents on the ground that they were privileged - a motion that is within the heartland of Rule 37(a)(3)(B)(iv).

Rule 26(b)(5) and Local Civil Rule 26.2 do not provide for any motions. Rather, they are part of the general provisions applicable to all discovery applications and merely set forth the information that must be provided when a privilege is asserted to resist a discovery request.

Properly viewed, the underlying motion sought to compel production of documents pursuant to Rule 37(a)(3)(B)(iv) because the SEC failed to provide the information required by Rule 26(b)(5) and Local Civil Rule 26.2. The SEC's contention that the underlying motion was brought under Rule 26(b)(5) and Local Civil Rule 26.2 ignores the language and structure of the Federal Rules of Civil Procedure and ignores a number of cases in which fees and expenses under Rule 37(a)(5) have been awarded for motions to compel predicated on a party's failure to comply with Rule 26(b)(5). See United States v. Bouchard Transp., No. 08CV4490 (NGG)(ALC), 2010 WL 3842268 at *1-*2 (E.D.N.Y. Sept. 28, 2010); see also Lafleur v. Ean Holdings, LLC, No. 12-233-SDD-RLB, 2013 WL 2490613 at *3 (M.D. La. June 10, 2013); Isilon Sys., Inc. v. Twin City Fire Ins. Co., No. C10-1392MJP, 2012 WL 503852 at *4 (W.D. Wash. Feb. 15, 2012); Black v. Pilot Travel Ctrs., LLC, No. CIV. 09-4170-KES, 2011 WL 3421595 at *3-*4 (D.S.D. Aug. 4, 2011).

Thus, to the extent the SEC contends that Rule 37(a)(5) is not applicable to the underlying motion, I reject its argument.

2. The Court May Apportion Reasonable Expenses Pursuant to Rule 37(a)(5)(C)

Defendants next claim that the court may not apportion attorneys' fees and costs because (1) the SEC disclosed the requested discovery when it produced the Revised Privilege Log and (2) the only reason their motion to compel was denied in part was because the statutory privilege afforded the SARs could not be waived (Reply Brief in Support of Defendants Yorkville Advisors, LLC, Mark Angelo, and Edward Schinik's Motion for Attorney's Fees and Costs, dated July 28, 2014 (Docket Item 9) ("Defs.' Reply"), at 7-8). The SEC contends that any award must be apportioned because the defendants' motion was granted in part and denied in part (SEC's Mem., at 10).

I conclude that apportionment is required. As clearly stated in my opinion resolving defendants' motion to compel, the "motion [was] granted in part and denied in part." SEC v. Yorkville Advisors, LLC, supra, 300 F.R.D. at 154, 168-69.

Defendants first argue that Rule 37(a)(5)(A) precludes apportionment because the SEC did not produce its Revised Privilege Log until after defendants filed their motion to compel, i.e., "the disclosure or requested discovery [was] provided after the motion was filed." See Fed.R.Civ.P. 37(a)(5)(A). This argument fails. As evidenced by defendants' continued litigation of the motion to compel and my subsequent order, although the SEC produced the Revised Privilege Log after the defendants filed the motion to compel, the Revised Privilege Log failed to fully satisfy the defendants' discovery request and did not moot defendants' motion to compel. See SEC v. Yorkville Advisors, LLC, supra, 300 F.R.D. at 165 (While the Revised Privilege Log "provide[d] additional details regarding the subject matter, authors and recipients of emails and letters, [it] still fail[ed] to provide details for documents categorized as reports."). Rule 37(a)(5)(A) applies when the post-motion disclosure provides the "requested discovery, " i.e., when it puts the movant in the position it would have been in had the motion to compel been granted in its entirety. Because the SEC, in producing the Revised Privilege Log, failed to provide either adequate descriptions of the withheld documents or the requested documents themselves, Rule 37(a)(5)(A) is inapplicable.

Defendants also argue that Rule 37(a)(5)(A) applies because their motion was partially denied only because the statutory privilege for the SARs could not be waived. Rule 37(a)(5)(C) provides for allocation when, as here, a motion to compel is granted in part and denied in part. Nothing in the language of Rule 37(a)(5)(C) suggests that its applicability turns on the basis for the ruling on the motion to compel.

Thus, I conclude that, as a matter of discretion, I may apportion the defendants' reasonable expenses ...


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