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Securities and Exchange Commission v. Carrillo Huettel LLP

United States District Court, S.D. New York

April 8, 2015



JAMES C. FRANCIS IV, Magistrate Judge.

This is an enforcement action brought by the Securities and Exchange Commission (the "SEC"), alleging that the defendants engaged in a "pump and dump" scheme in connection with Tradeshow Marketing Company Ltd. ("Tradeshow") and Pacific Blue Energy Corporation ("Pacific Blue"). (Amended Complaint ("Am. Compl."), ¶ 1). Two of the defendants, Luis Carrillo and Wade Huettel, are attorneys who, together with their firm, Carrillo Huettel LLP ("CHLLP"), are alleged to have furthered the illegal activity by assisting the promoters to acquire the Pacific Blue corporate shell, by drafting misleading public filings and legal opinions, by allowing the promoters to funnel sales proceeds through the law firm, and by obscuring the promoters' ownership of Pacific Blue. (Am. Compl., ¶¶ 2-4). According to the SEC, the defendants' activities constituted securities fraud in violation of Section 17(a) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77q(a), and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, as well as sale of unregistered securities, in violation of Sections 5(a) and (c) of the Securities Act, 15 U.S.C. § 77e(a) & (c). (Am. Compl., ¶ 9).

The SEC now moves pursuant to Rule 37 of the Federal Rules of Civil Procedure for an order (1) compelling production of all documents previously withheld by Mr. Carrillo, Mr. Huettel, and CHLLP on grounds of attorney-client privilege, (2) compelling the testimony of Mr. Carrillo and Mr. Huettel on issues for which they previously asserted the privilege, and (3) finding that defendants Benjamin T. Kirk and Luniel de Beer waived the privilege by relying on the advice-of-counsel defense. (Plaintiff's Motion to Compel ("Pl. Memo.") at 1, 5-18). I will discuss the relevant facts as they pertain to specific aspects of the legal analysis.


A. Attorney-Client Privilege

The attorney-client privilege protects from disclosure "(1) a communication between client and counsel that (2) was intended to be and was in fact kept confidential, and (3) was made for the purpose of obtaining or providing legal advice." In re County of Erie, 473 F.3d 413, 419 (2d Cir. 2007) (citing United States v. Construction Products Research, Inc., 73 F.3d 464, 473 (2d Cir. 1996)); accord United States v. Mejia, 655 F.3d 126, 132 (2d Cir. 2011); National Immigration Project of the National Lawyers Guild v. United States Department of Homeland Security, 842 F.Supp.2d 720, 728 (S.D.N.Y. 2012). The privilege protects not only the advice of the attorney to the client, but also the information communicated by the client that provides a basis for giving advice. See Upjohn Co. v. United States, 449 U.S. 383, 390 (1981); In re Six Grand Jury Witnesses, 979 F.2d 939, 943-44 (2d Cir. 1992); Oak-Jin Oh v. Sim & Park, LLP, No. 12 MC 66, 2012 WL 1193755, at *1 (S.D.N.Y. April 10, 2012). "It is axiomatic that the burden is on a party claiming the protection of a privilege to establish those facts that are the essential elements of the privileged relationship, a burden not discharged by mere conclusory or ipse dixit assertions." In re Grand Jury Subpoena Dated Jan. 4, 1984, 750 F.2d 223, 224-25 (2d Cir. 1984) (citations omitted) (internal quotation marks omitted); accord von Bulow by Auersperg v. von Bulow, 811 F.2d 136, 144 (2d Cir. 1987); Schanfield v. Sojitz Corp. of America, 258 F.R.D. 211, 214 (S.D.N.Y. 2009). In a case such as this, which is governed by federal law, "interpretation of the privilege's scope is guided by the principles of the common law... as interpreted by the courts... in the light of reason and experience." Swidler & Berlin v. United States, 524 U.S. 399, 403 (1998) (quoting Fed.R.Evid. 501).

B. CHLLP Documents

CHLLP has submitted a 27-page privilege log indicating that it has withheld documents relating to legal advice concerning the following clients: Skymark Research, Scottsdale Capital Advisors, Gibraltar Global Securities Inc. ("Gibraltar"), Punch Line Games, Pacific Blue, Tradeshow, GMU Wireless, and Sandstrom OnTV Company ("Sandstrom"). (Privilege Log - Carrillo Huettel LLP - In Re: Skymark No. NY-8377, attached as Exh. A to Declaration of Todd D. Brody dated Feb. 24, 2015 ("Brody 2/24/15 Decl.")). The SEC contends that (1) the corporate entities that CHLLP once represented are now defunct and therefore no attorney-client privilege can be asserted on their behalf (Pl. Memo. at 5-8); (2) any privilege that might once have existed has been waived (Pl. Memo. at 8, 12-13); and (3) even if there is a privilege that may currently be asserted, the crime/fraud exception applies (Pl. Memo. at 13-18). Because the first argument is fully dispositive with respect to most of the entities at issue, I will not reach the other arguments except where necessary.

The Fourth Circuit has characterized the issue of whether "the corporate attorney-client privilege survives the dissolution of the corporate entity" as an "unsettled legal question." In re Grand Jury Subpoena # 06-1, 274 F.Appx. 306, 309 (4th Cir. 2008) (per curiam); see also Nelson Construction Co. v. United States, No. 51205C, 2008 WL 5049304, at *2 (Fed. Cl. Nov. 18, 2008) ("[T]he issue of whether the attorney-client privilege can be invoked by a defunct corporation is ultimately unsettled."); Lewis v. United States, No. 02-2958, 2004 WL 3203121, at *3 (W.D. Tenn. Dec. 7, 2004) ("[C]ourts are split over whether a corporation is entitled to protection from the attorney-client privilege after the corporation's death.'"). The weight of authority, however, holds that a dissolved or defunct corporation retains no privilege. See In re Behr Dayton Thermal Products, LLC, 298 F.R.D. 536, 541-43 (S.D. Ohio 2013); Trading Technologies International, Inc. v. GL Consultants, Inc., Nos. 05-4120, 05 C 5164, 2012 WL 874322, at *4 (N.D. Ill. March 14, 2012); Official Committee of Administrative Claimants ex rel. LTV Steel Co. v. Moran, 802 F.Supp.2d 947, 948-49 (N.D. Ill. 2011); Lopes v. Viera, 688 F.Supp.2d 1050, 1059-69 (E.D. Cal. 2010); TAS Distributing Co. v. Cummins Inc., No. 07-1141, 2009 WL 3255297, at *1-2 (C.D. Ill. Oct. 7, 2009); City of Rialto v. United States Department of Defense, 492 F.Supp.2d 1193, 1200 (C.D. Cal. 2007); Gilliland v. Geramita, No. 2:05-CV-1059, 2006 WL 2642525, at *4 (W.D. Pa. Sept. 14, 2006); Lewis, 2004 WL 3203121, at *4; In re Fundamental Long Term Care, Inc., No. 8:11-bk-22258, 2012 WL 4815321, at *8-10 (Bkrtcy. M.D. Fla. Oct. 9, 2012).

Several rationales support this conclusion. First, the interests that are furthered by the extension of the privilege beyond the death of a natural person simply do not apply in the context of a corporate entity. In Swidler & Berlin, the Supreme Court found that "[i]t has been generally, if not universally, accepted, for well over a century, that the attorney-client privilege survives the death of the client" where the client is an individual. 524 U.S. at 410. The Court reasoned that "[k]nowing that communications will remain confidential even after death encourages the client to communicate fully and frankly with counsel" because "[c]lients may be concerned about reputation, civil liability, or possible harm to friends or family. Posthumous disclosure of such communications may be as feared as disclosure during the client's lifetime." Id. at 407. By contrast, there is no "tradition" of the privilege surviving the demise of a corporation. Furthermore, "[t]he possibility that a corporation's management will hesitate to confide in legal counsel out of concern that such communication may become unprivileged after the corporation's demise is too remote and hypothetical to outweigh the countervailing policy considerations supporting discoverability." Gilliland, 2006 WL 2642525, at *4. For example, after dissolution, "the corporation would no longer have any goodwill or reputation to maintain." Id .; accord Trading Technologies International, 2012 WL 874322, at *4 ("When the corporation is gone, so to is its interest in protecting its communications; the need to promote full and frank exchanges between an attorney and agents of his corporate clients disappears when the corporation employing those clients has departed."); City of Rialto, 492 F.Supp.2d at 1200. Nor are there tangible assets left to protect. See City of Rialto, 492 F.Supp.2d at 1200 ("As there are usually no assets left and no directors, the protections of the attorney-client privilege are less meaningful to the dissolved corporation."); Lewis, 2004 WL 3203121, at *4 ("The company is bankrupt and has no assets, liabilities, directors, shareholders, or employees.").

Next, as a practical matter, there is no one who can speak for a defunct corporation in order to assert the privilege. While a corporate entity is still in the process of dissolution, there may be a trustee or someone serving a similar function who represents the corporation. See Commodities Futures Trading Commission v. Weintraub, 471 U.S. 343, 352-53 (1985) (holding that bankruptcy trustee retains control of corporate privilege for pre-bankruptcy communications); Official Committee of Administrative Claimants, 802 F.Supp.2d at 949 ("If the trustee controls the privilege, then the privilege must still exist. Similarly, a dissolved corporation should be permitted to assert its privilege during the windup process at least until all matters involving the company have been resolved and no further proceedings are contemplated." (internal quotation marks omitted)). But once a corporation is truly extinct, it has lost practical ability to assert the privilege. See Fundamental Long Term Care, 2012 WL 4815321, at *9 ("So there is no one left to assert or waive the privilege on [the corporation's] behalf."); Gilliland, 2006 WL 2642525, at *3 ("[T]here is no current management personnel who can now assert the attorney-client privilege on behalf of the corporation.").

Finally, limiting the duration of the attorney-client privilege to the life of a corporation is consistent with the principle that the privilege is to be construed narrowly because it withholds relevant information from the judicial process. See City of Rialto, 492 F.Supp.2d at 1200; Gilliland, 2006 WL 2642525, at *4; see generally Fisher v. United States, 425 U.S. 391, 403 (1976) ("[S]ince the privilege has the effect of withholding relevant information from the fact-finder, it applies only where necessary to achieve its purpose."); County of Erie, 473 F.3d at 418 (holding that courts should "construe the privilege narrowly because it renders relevant information undiscoverable").

Cases that hold that the privilege survives the dissolution of a corporation generally do so on the basis of state law. See PCS Nitrogen, Inc. v. Ross Development Corp., No. 2:09-3171, 2011 WL 3665335, at *4 (D.S.C. Aug. 19, 2011); Wallace v. Huntington National Bank, Nos. 2:09-CV-104, 2:10-CV-469, 2010 WL 3603494, at *7 (S.D. Ohio Sept. 10, 2010). In diversity cases, this is consistent with Rule 501 of the Federal Rules of Evidence, which provides that "in civil actions and proceedings, with respect to an element of a claim or defense as to which State law supplies the rule of decision, the privilege of a witness... shall be determined in accordance with State law." Fed.R.Evid. 501. Thus, in PCS Nitrogen, South Carolina privilege law applied to state law claims of fraudulent conveyance, civil conspiracy, and breach of fiduciary duty. 2011 WL 3665335, at *1. Likewise, in Wallace, the court relied on Ohio law to determine whether a defunct corporation retained the privilege where the plaintiff asserted state law claims of breach of obligations under a guaranty and a note. 2010 WL 3603494, at *1. These cases do not undermine the principle that where federal law supplies the rule of decision, as it does here, the question of whether the corporate attorneyclient privilege survives the demise of the corporation is answered by reference to federal common law.[1]

This is not to say that state law is altogether irrelevant. It may dictate, for example, whether a corporation is, in fact, defunct, such that there is no privilege to be asserted. Indeed, in this case the parties debate whether the corporations at issue have ceased to exist. The SEC has presented evidence that Pacific Blue's business license expired and that its status as a domestic Nevada corporation was revoked on April 30, 2011. (Printout from Nevada Secretary of State for Pacific Blue Energy Corp., attached as Exh. K to Brody 2/24/15 Decl.). It also represents that the last public filing made by Pacific Blue was on November 15, 2011, and was simply a notification of its inability to file timely quarterly financial statements. (Pl. Memo. at 5). Counsel for CHLLP, Mr. Carrillo, and Mr. Huettel argues that the SEC's position ignores communications to the SEC from the President and Chairman of Pacific Blue that post-date the company's apparent demise. (Letter of William B. Fleming dated March 20, 2015 ("Fleming Letter") at 4). They also contend that by moving for default against Pacific Blue, the SEC implicitly acknowledged its ongoing existence. (Fleming Letter at 4). Neither of the defendants' arguments is persuasive. The fact that former officers attempted to exercise some role in connection with Pacific Blue does not demonstrate that they had the authority to ...

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