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Securities & Exchange Commission v. Lek Securities Corp.

United States District Court, S.D. New York

January 16, 2018

SECURITIES & EXCHANGE COMMISSION, Plaintiff,
v.
LEK SECURITIES CORPORATION, SAMUEL LEK, VALI MANAGEMENT PARTNERS d/b/a AVALON FA, LTD., NATHAN FAYYER, and SERGEY PUSTELNIK a/k/a SERGE PUSTELNIK, Defendants.

          For the plaintiff: David J. Gottesman Robert A. Cohen Olivia S. Choe Sarah S. Nilson Securities & Exchange Commission E. Barrett Atwood

          For the defendant Vali Management Partners d/b/a Avalon FA, Ltd.: James M Wines Law Office of James M Wines Steven Barentzen

          OPINION AND ORDER

          DENISE COTE, UNITED STATES DISTRICT JUDGE.

         On March 10, 2017, the Securities and Exchange Commission (“SEC”) filed this action against Avalon FA, Ltd. (“Avalon”), Nathan Fayyer (“Fayyer”) and others for manipulative trading in violation of federal securities laws. On November 16, Avalon moved to disqualify all trial counsel for the SEC from pursuing this litigation due to their access to privileged communications between Avalon and its defense counsel. The privileged communications were contained in documents that were seized by federal agents pursuant to a search warrant and later provided by a federal prosecutor to the SEC. For the following reasons, the motion is denied.

         BACKGROUND

         I. The SEC's Investigation

         Avalon is a day-trading firm incorporated in Seychelles and headquartered in Kiev, Ukraine, that employs foreign traders to conduct trades. Fayyer is its sole disclosed owner. The SEC began this investigation of Avalon's activities in May 2013. In September 2013, the SEC issued investigative subpoenas to Avalon and Fayyer for documents relevant to its investigation. They produced documents pursuant to these subpoenas between November 2013 and January 2014. Although Fayyer had identified the company's email address to the SEC as avalonfaltd@gmail.com (the “Avalon Account”), as would become clear when the SEC later obtained access to the Avalon Account documents at issue here, those productions from Fayyer and Avalon omitted many documents highly relevant to the investigation that then existed in the Avalon Account.

         In August 2015, the United States Attorney's Office for the District of New Jersey (“DNJ”) advised the SEC that it had obtained records from the Avalon Account pursuant to a search warrant. The SEC provided the DNJ with a list of search terms to be used to screen for potentially privileged material (the “Filter Terms”). The Filter Terms included the names known to the SEC of counsel for the targets of the SEC investigation, including counsel for Avalon and Fayyer, those lawyers' law firm names, and those lawyers' email domain names. The DNJ advised the SEC that it had filtered the documents in the Avalon Account using the Filter Terms, and provided the remaining documents to the SEC on three discs. When an SEC attorney opened a disc and discovered a document that included a Filter Term, the SEC returned all three discs to the DNJ.

         In October 2015, the DNJ made a second production to the SEC of the Avalon Account documents in .pdf format (“PDF Production”). This contained 34, 000 documents and was supposed to have been rescreened by the DNJ using the Filter Terms. An SEC attorney again noticed a document containing a Filter Term. The SEC then sent the entire PDF Production to its technology group to filter for the Filter Terms. This review identified 52 documents that contained a Filter Term, which were then segregated as potentially privileged. The remaining documents were provided to SEC attorneys as a “Working Database.” An SEC filter attorney then reviewed these 52 documents and determined that 18 documents were not privileged, leaving 34 documents segregated as potentially privileged.

         Preferring to work in native format, the SEC then asked the DNJ to provide the Avalon Account documents in native format. In December 2015, the DNJ re-produced the Avalon Account documents to the SEC in native format. The SEC believed that the DNJ had screened for all the Filter Terms before doing so.[1]Because, unlike the PDF Production, the native file production treated emails and their attachments as separate records, the native file production consists of 51, 000 records. The SEC's attorneys did not read all 51, 000 records. Instead, the SEC used targeted searches to locate documents of potential significance to its investigation. During their review of the retrieved documents, no SEC trial attorney saw a document with the label “attorney-client privilege” or any similar formulation, or any that appeared to them to be an email communication between Fayyer and one of his attorneys.

         On October 2, 2017, the SEC produced to all defendants a copy of the native file production of the Avalon Account documents in its possession. On October 26, counsel for Avalon notified the SEC that an unsigned agreement among the produced documents might be privileged. Upon learning for the first time that the native file production might contain privileged documents, the SEC contacted the DNJ. On October 31, the SEC learned for the first time that although the DNJ had withheld documents containing the Filter Terms, it had not withheld the attachments to those documents unless the attachments themselves also contained Filter Terms. The SEC promptly shared this information, as well as a list of the Filter Terms, with defense counsel. On November 6, Avalon provided the SEC with a list of 28 potentially privileged documents. The SEC has segregated those documents. The SEC has also identified approximately 330 attachments to emails that contained Filter Terms (the “Attachments”). Twenty-five of the 28 potentially privileged documents identified by Avalon's counsel are among the 330 Attachments. The SEC has also segregated all of the Attachments.[2] On December 1, Avalon identified four of the 28 potentially privileged documents as documents as to which it was asserting a privilege. It is those four documents on which Avalon's motion concentrates.

         The SEC trial team has now segregated and ceased reviewing most of the Avalon Account documents that it received from the DNJ. On December 15, the Court approved the SEC's proposed privilege review process for the Avalon Account documents, over Avalon's objection.[3] Pursuant to this process, the only Avalon Account documents that the SEC has kept for use by its trial team are email exchanges in which layering, one of the trading strategies at issue in this case, is discussed. Avalon and Fayyer had not produced these email exchanges to the SEC in response to the subpoenas it issued to Fayyer and Avalon in September 2013, despite the fact that the emails are within the scope of the subpoenas. The defendants have not asserted a claim of privilege over these emails and Avalon has not contested the SEC's decision to retain these email exchanges, premising its motion to disqualify solely on the SEC's review of and/or access to the four documents described below.

         II. The Four Documents

         One of the four documents was reviewed by an SEC attorney during her work on this case, before it was identified by counsel for Avalon as potentially privileged and segregated. This document is approximately fifteen typed pages of notes (“Notes”) written in the third person. The Notes have now been identified as prepared by Fayyer and sent as an attachment to an email to his attorney, although neither its authorship nor the fact it was sent to an attorney is ...


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