SEC v. Navellier & Associates, Inc.
Posted on Categories Court Decisions, Securities/Commodities Regulation

By Paul J. Dubow

*In general, disclosing attorney client communications to a third party undermines the attorney client privilege. **There is an exception to the general rule waiving the privilege when communications are disclosed to a third party where the third party is assisting counsel but it is limited and only applies when the third party’s services are nearly indispensable to the attorney. ***Unlike the attorney client privilege, disclosure of work product to a third party does not waive the privilege, provided that the disclosure is not inconsistent with keeping the material away from an adversary.

SEC vs. Navellier & Associates, Inc., No. 17-11633 (D. Mass., 12/21/18).

In this case, defendant Navellier & Associates, Inc. (NAI) moves to quash a SEC subpoena seeking documents in the hands of a third party consultant, ACA Compliance Group, on the basis of the attorney client privilege and the work product doctrine. In February 2013, NAI had retained ACA to conduct a compliance review of NAI’s marketing materials regarding exchange traded funds (ETFs), which NAI had licensed from F-Squared Investments, Inc. NAI did so after learning of a FINRA enforcement action against F-Squared arising from marketing ETFs. NAI claimed that it commissioned the review, because it feared that it might ultimately be the subject of a FINRA or SEC investigation of NAI.

However, there was no mention of any enforcement action or litigation when NAI retained ACA, nor when ACA submitted its report to NAI. Indeed, the SEC did not open an investigation of NAI involving its marketing of ETFs until two years later. The motion to quash is denied. In general, disclosing attorney client communications to a third party undermines the privilege. An exception to this general rule exists for third parties employed to assist a lawyer in rendering legal advice. The circumstances under which the exception applies are limited. Under the exception, the third party must be necessary for the effective consultation between the client and the lawyer. The necessity element means more than just useful. The third party’s involvement must be nearly indispensable or serve some specialized purpose in facilitating the attorney client communications.

Here, there was no mention of litigation when ACA was retained, and it was not serving an interpretive role and was not necessary, or at least highly useful, to NAI’s counsel in providing legal advice to NAI. Thus, the attorney client privilege does not apply. With respect to the work product doctrine, it protects from disclosure materials prepared by attorneys in anticipation of litigation. The doctrine does not extend to materials assembled in the ordinary course of business or pursuant to public requirements unrelated to litigation, or for non-litigation purposes, even if the materials were prepared by a lawyer and reflect legal thinking. But a document can contain attorney work product, and thus fall within the protection, even though a person other than an attorney, such as the attorney’s client or agent, drafts the document.

Furthermore, unlike the attorney client privilege, disclosure of work product to a third party does not necessarily waive the protection. Only disclosing material in a way inconsistent with keeping it from an adversary waives work product protection. Thus, transmission of any work product from NAI to ACA did not waive the privilege. Nevertheless, NAI bears the burden to establish that the material was prepared in anticipation of litigation. Here, the SEC did not commence an investigation into NAI until more than two years after the end date of the time period for documents sought in the subpoena. NAI’s concern about possible future litigation with the SEC in 2013 does not make the prospect of litigation with the SEC “anticipated.” Accordingly, the work product doctrine does not provide protection for the withheld material.

(P. Dubow)

(SOLA Ref. No. 2019-05-08)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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