Securities and Exchange Commission v. Honig et al, No. 1:2018cv08175 - Document 295 (S.D.N.Y. 2021)
Court Description: OPINION & ORDER re: 287 MOTION to Strike Document No. 281 filed by Securities and Exchange Commission. For the reasons set forth above, the SECs motion is GRANTED in part and DENIED in part. It is hereby ordered that: (1) the S EC's motion is GRANTED to the extent that it seeks to strike an advice-of-counsel defense from Ladds Answer and any evidence or argument related thereto; (2) the SEC's motion is GRANTED to the extent that it seeks a formal withdrawal of t he defense of good faith or, in the alternative, the production of privileged communications between Ladd and MGT's counsel related to the categories described above; and (3) the SEC's motion is DENIED to the extent that it seeks the production of privileged communications between Honig and Honig's counsel. The Clerk of the Court is respectfully directed to terminate the motion, Doc. 289. It is SO ORDERED. (Signed by Judge Edgardo Ramos on 11/30/2021) (mml)
Download PDF
<![CDATA[
Securities and Exchange Commission v. Honig et al Doc. 295 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 1 of 35 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK SECURITIES AND EXCHANGE COMMISSION, Plainti , – against – BARRY C. HONIG, MICHAEL BRAUSER, JOHN STETSON, JOHN R. O’ROURKE III, ROBERT LADD, ELLIOT MAZA, BRIAN KELLER, JOHN H. FORD, ATG CAPITAL LLC, GRQ CONSULTANTS, INC., HS CONTRARIAN INVESTMENTS, LLC, GRANDER HOLDINGS, INC., and STETSON CAPITAL INVESTMENTS INC., OPINION & ORDER 18 Civ. 8175 (ER) Defendants. RAMOS, D.J.: At all times relevant to this motion, Defendant Robert Ladd was the CEO and director of MGT Capital Investments, Inc. (MGT). 1 In this action, the SEC has alleged that he participated in a “pump and dump” scheme with Defendants Barry C. Honig, Michael Brauser, John Stetson, and John R. O’Rourke III (collectively the “Honig Group”) to unlawfully in ate MGT’s stock price. e SEC brought these claims under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j, SEC Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Section 17(a)(2) of the Securities Act of 1933 (the “Securities Act”), 15 U.S.C. § 77q. In addition, the SEC alleged that Ladd aided and abetted the Honig Group in violation of Section 15(b) of the Securities Act, 15 U.S.C. § 77t(b), and Section 20(e) of the Exchange e Securities and Exchange Commission’s (SEC’s) Second Amended Complaint (“SAC”) refers to MGT as “Company B.” 1 Dockets.Justia.com Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 2 of 35 Act, 15 U.S.C. § 77o(e). See SEC v. Honig, No. 18 Civ. 8175 (ER), 2020 WL 906383, at *1 (S.D.N.Y. Feb. 25, 2020). In an Order dated February 25, 2020, the Court granted in part and denied in part Ladd’s rst motion to dismiss the SEC’s fraud claims against him. See id. e Court denied Ladd’s motion regarding allegedly false statements he made on May 9, 2016 about the appointment of John McAfee 2 as CEO of MGT. However, the Court granted his motion, with leave for the SEC to replead, regarding his omission of the “true extent” of members of the Honig Group’s bene cial ownership of MGT stock in SEC lings. In its SAC, the SEC re-alleged its securities fraud claims based both on Ladd’s statement about McAfee and his failure to disclose the bene cial ownership interest of the Honig Group. e SEC also added new allegations of securities fraud in connection with unregistered stock sales in May 2016, and Ladd’s failure to disclose changes to his own bene cial ownership of MGT on several occasions. See SAC, Doc. 233, at ¶¶ 247, 253. Ladd moved to dismiss all of these new fraud allegations except for those in connection with the McAfee announcement that the Court addressed in its February 25, 2020 Order. In an Order dated January 27, 2021, the Court granted in part and denied in part Ladd’s second motion to dismiss. See SEC v. Honig, No. 18 Civ. 8175 (ER), 2021 WL 276155 (S.D.N.Y. Jan. 27, 2021). Speci cally, the Court granted the motion regarding the Fifth and Sixth causes of action, which related to (1) Ladd’s failure to disclose stock sales on Forms 4 led on October 7 and December 1, 2015; and (2) statements and omissions made on his father’s Form 144 led May 10, 2016. His motion to dismiss 2 McAfee is referred to as “Cybersecurity Innovator” in the SAC. 2 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 3 of 35 claims stemming from all other alleged events under the Fifth and Sixth causes of action was denied. e Court also denied his motion to dismiss claims relating to the Seventh and Eighth causes of action. On March 25, 2021, Ladd led an amended answer to the SAC (“Answer”), asserting seven a rmative defenses. See Answer, Doc. 281. Approximately one month later, on April 27, 2021, the SEC moved to strike the Answer to the extent Ladd asserts any defense to any of the SEC’s scienter-based (fraud) claims based on his reliance on any advice of legal counsel. See Memorandum of Law in support of Plainti ’s Motion to Strike A rmative Defense (“Motion”) (“Mot.”), Doc. 289, at 1. Speci cally, the SEC seeks to preclude the following a rmative defense, and all references related thereto: “Plainti ’s claims are barred in whole or in part because Defendant relied in good faith upon the judgment, advice, and counsel of professionals.” Answer at ¶ 310. Alternatively, if Ladd were to obtain all necessary privilege waivers, the SEC would request an order scheduling discovery for a limited period to explore Ladd’s defense. See Mot. at 1. For the reasons discussed below, the SEC’s motion is GRANTED in part and DENIED in part. I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY A. Factual Background e facts underlying this case are described in detail in this Court’s February 25, 2020 and January 27, 2021 Orders, familiarity with which is assumed, and will not be repeated here. See Honig, 2020 WL 906383; Honig, 2021 WL 276155. 3 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 4 of 35 For present purposes, the Court provides an abbreviated summary. e SEC alleges that Ladd committed fraud by violating Section 10(b) of the Exchange Act and Rule 10b-5(b) promulgated thereunder, Section 17(a)(2) of the Securities Act, and by aiding and abetting other violations by the Honig Group. See SAC at Fifth, Sixth, Seventh, and Eighth Claims for Relief. e SEC also alleges several other strict liability violations of the securities laws based on the same conduct. See id. at Eleventh, irteenth, Fourteenth, and Seventeenth Claims for Relief. In support of its fraud claims, the SEC contends that Ladd allegedly provided false information in MGT’s November 6, 2015 Form S-1 and April 14, 2016 Form 10-K as to the disclosure of all bene cial owners of more than 5% of outstanding common stock, MGT’s May 9, 2016 Form 8-K attaching a press release announcing the appointment of McAfee as CEO of MGT, and Ladd’s May 25, 2016 Form 144 and May 31, 2016 Form 4 in connection with his May 2016 trading. B. Procedural History During discovery, in response to the SEC’s requests for the production of documents, Ladd invoked attorney-client privilege with respect to certain categories of documents. According to Ladd’s privilege log dated January 27, 2020, Ladd withheld, for example, communications for the purpose of requesting and rendering legal advice regarding “company SEC lings,” “issuance of company stocks or shares,” “review of draft press release,” and “review of trading activity.” Declaration of Nancy A. Brown in support of the Motion dated April 26, 2021 (“Brown Decl.”), Ex. A (Ladd Privilege Log dated January 27, 2020), Doc. 288-1, at Log Nos. 8, 14, 20, 21; see Mot. at 4. 4 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 5 of 35 On July 10, 2020, in connection with Ladd’s supplemental disclosures, which listed lawyers at Sichenzia Ross Ference LLP (“Sichenzia”) 3 as persons with discoverable information, the SEC emailed his counsel asking whether Ladd had waived privilege over communications with Sichenzia. Memorandum of Law in opposition to the Motion dated May 18, 2021 (“Opp. Brief”), Doc. 291, at 7 (quoting Declaration of Adam C. Ford in support of the Opposition Brief dated May 18, 2021, Ex. B, Doc. 2913). On July 13, 2020, Ladd’s counsel informed the SEC that Ladd had not waived privilege with respect to the communications with Sichenzia. Id. In response to the SEC’s question about how Ladd would rely on such communications if he had not waived privilege, Ladd’s counsel explained that Ladd would rely on “communications not subject to privilege, for example, communications involving a third party or the public, otherwise not intended to remain privileged, or other types of non-privileged communications.” Id. On October 15, 2020, at Ladd’s deposition, when asked about the Forms 4 led on October 7 and December 1, 2015, and May 31, 2016, he testi ed that while he “approved [their] issuance,” “Mr. Kaplowitz or someone at Sichenzia actually lled out these forms and [he] then reviewed them and approved them.” Brown Decl., Ladd Deposition, at Tr. 74:4–23. On November 10, 2020, at the continuation of his deposition, in response to a question about who had represented to Ladd that the Honig Group was not acting as a “group,” he testi ed, in part, that “[b]ased on the advice of [his] counsel, Di erent attorneys at the same law rm, Sichenzia, represented the Honig Group and MGT in connection with the relevant transactions, after receiving waivers from both parties: Harvey Kesner and Tara GuarniniFerrara represented the Honig Group, and Jay Kaplowitz and Arthur Marcus represented MGT. Brown Decl., Ex. B (Ladd Deposition Testimony dated October 15-16, 2020 and November 10, 2020) (“Ladd Deposition”), Doc. 288-2, at Tr. 347:6–15, 353:24–354:3, 359:6–17. 3 5 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 6 of 35 that was also a conclusion that [he] was able to reach. [His] counsel had the luxury . . . of also having a partner who was counsel for . . . Honig, and that advice, or the outcome of that advice, was also that they were not acting in concert.” Id. at Tr. 342:22–343:18. Ladd further testi ed that he received advice on whether the Honig Group was acting as a “group” from “the counsel of MGT . . . by the name of Arthur Marcus and then Jay Kaplowitz.” Id. at Tr. 347:6–19. Finally, in response to a question about who informed MGT that Honig and his brother were separate investment entities, Ladd pointed to MGT’s attorneys. Id. at Tr. 352:24–353:16. Following Ladd’s testimony that MGT’s counsel represented to him that the Honig Group was not acting as a “group,” the SEC asked whether Ladd was thus “waiving privilege as to [his] communications with counsel about this topic.” Id. at Tr. 342:22–343:21; see Mot. at 4–5. Ladd’s counsel responded that Ladd was not waiving the privilege. Brown Decl., Ladd Deposition, at Tr. 343:23; see Mot. at 5. On February 26, 2021, Ladd led his initial answer, which contained the adviceof-counsel defense. Answer dated February 26, 2021, Doc. 278, at ¶ 310. Accordingly, on March 1, 2021, the SEC contacted Ladd’s counsel to discuss “the further discovery [the SEC] believed was necessary in light of Ladd’s a rmative advice-of-counsel defense.” Brown Decl., Doc. 288, at ¶ 4. In a meet and confer on March 8, 2021, the SEC asked Ladd to waive his attorney-client privilege regarding the documents withheld on that basis and testimony relating to his a rmative defense and to obtain waivers from applicable third parties. Id.; see Mot. at 6. His counsel advised that Ladd was not waiving privilege, and that no additional discovery was necessary. Mot. at 6; see Brown Decl. at ¶ 4. 6 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 7 of 35 On March 25, 2021, Ladd led his Answer, which raises the same defense at issue in the motion. Answer at ¶ 310. In addition, the Answer contains references to communications with MGT’s counsel and Honig’s counsel as well as the involvement of counsel in the relevant transactions and lings at issue. See Mot. at 5–6. For example, in the Answer, Ladd made the following allegations as to the involvement of counsel: (1) “ e gravamen of the SEC’s allegations is that Mr. Ladd failed to disclose in public lings that Mr. Honig and others investing with him were a ‘group’ as de ned under Section 13(d) of the Exchange Act. But the lings at issue were all vetted by competent counsel aware of all material facts . . . .”; (2) “[T]he Commission chooses to ignore the other times that Mr. Honig’s counsel and [MGT’s] counsel told Mr. Ladd that Honig and the others were not investing as a group under the legal requirements of Section 13(d). Mr. Ladd had no intention to violate the securities laws, nor did he do so.”; and (3) “[ e SEC] now seeks to hold Mr. Ladd liable for violating the securities laws on account of this one unintentional drafting error. In addition to promptly correcting the mistake, the press release had been sent to counsel for review prior to its release.” Answer at 2, 3 (emphasis in original); see Mot. at 6. e SEC led a letter on March 31, 2021, requesting a pre-motion conference regarding, in part, its proposed motion to strike the a rmative defense. Pre-motion Letter dated March 31, 2021, Doc. 282. In Ladd’s letter-response to the Court dated April 5, 2021 (Doc. 284) (“April 5, 2021 Letter”), he explained that he is not asserting the “classic” advice-of-counsel defense and that “his defense is the simple one that he lacked the knowledge and intent necessary to prove he violated the intent-based securities laws claims.” 4 April 5, 2021 Letter at 1–2. Furthermore, Ladd’s defense is allegedly based on the absence of any Moreover, as to Ladd’s a rmative defense at issue, Ladd’s counsel alleged that “[t]o the extent Mr. Ladd referenced a reliance on professionals in the a rmative defense section of his Amended Answer it was for preservation purposes only.” April 5, 2021 Letter at 2. 4 7 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 8 of 35 evidence proving that the Honig Group was acting as a “group” as de ned under Section 13(d) or that Ladd had any knowledge of such a “group.” Id. at 2. In fact, Ladd pointed to non-privileged communications between Honig’s counsel and MGT’s counsel that the Honig Group was not acting as a “group.” Id. at 2, 3. Moreover, Ladd intends to rely on allegedly non-privileged information including, but not limited to: Sichenzia’s role in and responsibility for ling MGT’s and Honig’s SEC lings, Sichenzia’s reputation as a “well-respected law rm with signi cant experience in advising public companies in connection with public SEC lings,” and the fact that Sichenzia “did not have information suggesting that Honig and the others were acting as a group,” and “would not have made a false ling with the SEC.” Id. at 2. In support of these claims, Ladd noted the documents that Sichenzia produced to the SEC, including non-privileged emails in which Sichenzia lawyers representing Honig communicated with Sichenzia lawyers representing MGT. Id. Furthermore, Ladd argues that he “did not intend to, nor did he, convey to the SEC that he received advice through a privileged communication with his attorney and acted thereupon.” Id. at 3. Ladd alleged that he has always represented that “professionals on both sides of the transaction engaged in non-privileged communications with one another and made the appropriate SEC lings in good faith according to knowledge in their possession.” Id. (emphasis in original). II. TIMELINESS OF A MOTION TO STRIKE e SEC alleges that “[d]ue to the timing of Ladd’s recent Answer –– and the related discovery schedule in this case –– the issues raised by this motion arose only recently.” Mot. at 4. In opposition, Ladd argues that the motion should be denied as 8 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 9 of 35 untimely. Ladd contends that the concerns raised in the motion have been at issue since at least October 17, 2019, when he led his supplemental disclosures listing lawyers at Sichenzia as persons with discoverable information. Opp. Br. at 7. Ladd further argues that the SEC knew of his position and its potential advice-of-counsel issue in mid-July 2020 when the SEC and Ladd’s counsel communicated regarding his supplemental disclosures. Id. e SEC argues that the motion is not untimely, because Ladd has continuously denied that he was contemplating waiving his attorney-client privilege despite the SEC’s attempts to con rm whether Ladd intended to assert an advice-of-counsel defense or a defense of good faith. Reply Memorandum of Law in further support of the Motion dated May 24, 2021 (“Reply Br.”), Doc. 292, at 2. Accordingly, the SEC alleges that it did not previously raise this issue, because prior to the initial answer, Ladd did not assert an advice-of-counsel defense, nor did he waive privilege. e SEC further alleges that although it inquired on numerous occasions as to the attorney communications and involvement at issue, Ladd alleged that he would rely solely on communications not subject to privilege, without further explanation. Moreover, the SEC contends that it “sought to protect itself from just this kind of post-discovery assertion of a defense that raised new issues for discovery,” as evidenced by the original and amended Scheduling Orders, which included a provision that reserved a period for potential additional discovery once Ladd answered. Id.; see Scheduling Order dated May 20, 2019, Doc. 126, at ¶ 13; Amended Scheduling Order dated June 10, 2020, Doc. 263, at ¶ 6. roughout this time period, Ladd routinely withheld documents and testimony on the basis of attorney-client privilege, informed the SEC on multiple occasions that he 9 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 10 of 35 was not waiving privilege, and did not assert an advice-of-counsel or good faith defense until his initial answer. erefore, although Ladd led his initial answer on February 26, 2021 and the SEC led the motion on April 27, 2021, the SEC moved in a timely fashion based on the parties’ Scheduling Orders and communications. III. MOTION TO STRIKE AN AFFIRMATIVE DEFENSE Legal Standard Under Rule 12(f), the court “may strike from a pleading an insu cient defense or any redundant, immaterial, impertinent, or scandalous matter.” In doing so, the court may act on its own or on motion made by a party either before responding to the pleading or, if a response is not allowed, within 21 days after being served with the pleading. Fed. R. Civ. P. 12(f). “An a rmative defense is an ‘assertion of facts and arguments that, if true, will defeat the plainti ’s . . . claim, even if all the allegations in the complaint are true.’” Tradewinds Airlines, Inc. v. Soros, No. 08 Civ. 5901 (JFK), 2013 WL 6669422, at *2 (S.D.N.Y. Dec. 17, 2013) (quoting Black’s Law Dictionary 482 (9th ed. 2009)). Although a court may strike “an insu cient defense or any redundant, immaterial, impertinent, or scandalous matter,” Fed. R. Civ. P. 12(f), “courts should not tamper with the pleadings unless there is a strong reason for so doing.” Lipsky v. Commonwealth United Corp., 551 F.2d 887, 893 (2d Cir. 1976). Motions to strike an a rmative defense are generally disfavored, Cty. Vanlines Inc. v. Experian Info. Sols., Inc., 205 F.R.D. 148, 152 (S.D.N.Y. 2002), and “will not be granted unless it appears to a certainty that plainti s would succeed despite any state of the facts which could be proved in support of the defense.” Salcer v. Envicon Equities Corp., 744 F.2d 935, 939 (2d Cir. 1984) 10 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 11 of 35 (citation and internal quotation marks omitted), vacated and remanded on other grounds, 478 U.S. 1015 (1986). To prevail on a motion to strike, the moving party must satisfy a stringent threepronged test: “(1) there must be no question of fact that might allow the defense to succeed; (2) there must be no substantial question of law that might allow the defense to succeed; and (3) the plainti must be prejudiced by the inclusion of the defense.” Specialty Minerals, Inc. v. Pluess-Staufer AG, 395 F. Supp. 2d 109, 111 (S.D.N.Y. 2005). 5 In considering the rst and second prongs, courts apply the same legal standard as that applicable to a motion to dismiss under Rule 12(b)(6). Coach, Inc. v. Kmart Corps., 756 F. Supp. 2d 421, 425 (S.D.N.Y. 2010). e “su ciency of a defense is to be determined In GEOMC Co. v. Calmare Therapeutics Inc., the Second Circuit considered each of the three factors relevant to striking an a rmative defense, as worded in S.E.C. v. McCaskey, 56 F. Supp. 2d 323 (S.D.N.Y. 1999) and thereafter repeatedly relied on by district courts in this Circuit “initially in identical wording and later with only slight variations, in a series of decisions,” including Specialty Minerals, Inc. v. PluessStaufer AG, 395 F. Supp. 2d 109 (S.D.N.Y. 2005). 918 F.3d 92, 96–97 (2d Cir. 2019). As to the rst factor, the Second Circuit held that “the plausibility standard of Twombly applies to determining the su ciency of all pleadings, including the pleading of an a rmative defense, but with recognition that, as the Supreme Court explained in Iqbal, applying the plausibility standard to any pleading is a ‘context-speci c’ task.” Id. at 98 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009)). erefore, a party must “support these defenses with some factual allegations to make them plausible.” Id. at 99. “[R]elevant to the degree of rigor appropriate for testing the pleading of an a rmative defense” are the following factors: (1) the amount of time given to gather facts necessary to satisfy the plausibility standard (which is ordinarily between 14 and 21 days for a defendant pleading an a rmative defense in response to a plainti ’s complaint) and (2) the nature of the a rmative defense and whether the facts needed to plead the defense are readily available. Id. at 98. As to the second factor, the Second Circuit held that it “needs no revision,” in that “[t]here is no dispute that an a rmative defense is improper and should be stricken if it is a legally insu cient basis for precluding a plainti from prevailing on its claims.” Id. As to the third factor, whether prejudice “should be a basis for dismissing or opposing the addition of an otherwise valid a rmative defense will normally depend on when the defense is presented.” Id. e Second Circuit opined that “[a] factually su cient and legally valid defense should always be allowed if timely led even if it will prejudice the plainti by expanding the scope of the litigation.” Id. “On the other hand, prejudice may be considered and, in some cases, may be determinative, where a defense is presented beyond the normal time limits of the Rules, especially at a late stage in the litigation, and challenged by a motion to dismiss or opposed by opposition to a Rule 15(a) motion.” Id. at 99 (citing Anderson v. National Producing Co., 253 F.2d 834, 838 (2d Cir. 1958)). Federal courts have discretion in deciding whether to strike an a rmative defense. Id. For the purposes of the SEC’s motion to strike Ladd’s a rmative defense, the Second Circuit’s ndings in GEOMC Co. do not change the Court’s analysis for the following reasons: (1) Ladd rst pled this a rmative defense on February 26, 2021 after the discovery period closed and nearly a year after the SAC was led on March 16, 2020; and (2) it is the SEC – not Ladd – who is seeking to expand the scope of the litigation in light of the waiver of privilege implicated by the a rmative defense. 5 11 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 12 of 35 solely upon the face of the pleading,” and the Court “accepts as true all well-pleaded factual allegations and draws all reasonable inferences in the [non-moving party’s] favor.” Id. (citations and internal quotation marks omitted). In evaluating the third prong, the Court may consider whether inclusion of the legally insu cient defense would needlessly increase the “time and expense of trial” or “duration and expense of litigation.” Id. at 426 (citing Estee Lauder, Inc. v. Fragrance Counter, Inc., 189 F.R.D. 269, 272 (S.D.N.Y. 1999)); see S.E.C. v. McCaskey, 56 F. Supp. 2d 323, 326 (S.D.N.Y. 1999) (“An increase in the time, expense and complexity of a trial may constitute su cient prejudice to warrant granting a plainti ’s motion to strike.”). IV. ATTORNEY-CLIENT PRIVILEGE Legal Standard “ e attorney-client privilege protects con dential communications between client and counsel made for the purpose of obtaining or providing legal assistance.” In re Cty. of Erie, 473 F.3d 413, 418 (2d Cir. 2007) (citing United States v. Constr. Prods. Research, Inc., 73 F.3d 464, 473 (2d Cir. 1996)). e purpose of attorney-client privilege is “to encourage attorneys and their clients to communicate fully and frankly and thereby to promote ‘broader public interests in the observance of law and administration of justice.’” Id. (quoting Upjohn Co. v. United States, 449 U.S. 383, 389 (1981)). “ e availability of sound legal advice inures to the bene t not only of the client who wishes to know his options and responsibilities in given circumstances, but also of the public which is entitled to compliance with the ever growing and increasingly complex body of public law.” In re Grand Jury Subpoena Duces Tecum Dated Sept. 15, 1983, 731 F.2d 1032, 1036–37 (2d Cir. 1984). 12 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 13 of 35 Courts should construe the attorney-client privilege narrowly, in light of its e ect in making relevant information undiscoverable, applying it “only where necessary to achieve its purpose.” In re Cty. of Erie, 473 F.3d at 418 (quoting Fisher v. United States, 425 U.S. 391, 403 (1976)). A party invoking the privilege bears the burden of establishing its applicability. Id. (citing In re Grand Jury Proceedings, 219 F.3d 175, 182 (2d Cir. 2000)). To invoke the attorney-client privilege, the proponent must establish the following three elements: “(1) a communication between client and counsel that (2) was intended to be and was in fact kept con dential, and (3) was made for the purpose of obtaining or providing legal advice.” Id. at 419 (citing Constr. Prods. Research, Inc., 73 F.3d at 473). V. WAIVER OF ATTORNEY-CLIENT PRIVILEGE Legal Standard To the extent that the attorney-client privilege applies to a communication, “[a] client may . . . by his actions impliedly waive the privilege or consent to disclosure.” In re von Bulow, 828 F.2d 94, 101 (2d Cir. 1987). Generally, courts have identi ed waiver by implication in the following three scenarios: “when a client testi es concerning portions of the attorney-client communication, . . . when a client places the attorneyclient relationship directly at issue, . . . and when a client asserts reliance on an attorney’s advice as an element of a claim or defense.” In re Cty. of Erie, 546 F.3d 222, 228 (2d Cir. 2008) (quoting Sedco Int’l, S.A. v. Cory, 683 F.2d 1201, 1206 (8th Cir. 1982)). “ e key to a nding of implied waiver in the third instance is some showing by the party arguing for a waiver that the opposing party relies on the privileged communication as a claim or defense or as an element of a claim or defense.” Id. 13 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 14 of 35 (emphasis in original). “ e assertion of an ‘advice-of-counsel’ defense has been properly described as a ‘quintessential example’ of an implied waiver of the privilege.” Id. (quoting In re Kidder Peabody, 168 F.R.D. 459, 470 (S.D.N.Y. 1996)). As to the question of whether there has been a waiver of attorney-client privilege, “[t]he party seeking to assert a claim of privilege has the burden of demonstrating both that the privilege exists and that it has not been waived.” Granite Partners v. Bear, Stearns & Co., 184 F.R.D. 49, 52 (S.D.N.Y. 1999) (citing von Bulow v. von Bulow, 811 F.2d 136, 144 (2d Cir. 1987); Smith v. Conway Org., 154 F.R.D. 73, 77 (S.D.N.Y. 1994); and Nikkal Indus., Ltd. v. Salton, Inc., 689 F. Supp. 187, 191 (S.D.N.Y. 1988)). As the attorney-client privilege is one of the “oldest recognized privileges for con dential communications,” In re Cty. of Erie, 546 F.3d at 228 (quoting Swidler & Berlin v. United States, 524 U.S. 399, 403 (1998)), and its purpose is to “encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and the administration of justice,” id. (quoting Swidler, 524 U.S. at 403), “rules which result in the waiver of this privilege and thus possess the potential to weaken attorney-client trust, should be formulated with caution.” Id. Furthermore, the question of whether there has been an implied waiver of the attorney-client privilege should be “decided by the courts on a case-by-case basis, and depends primarily on the speci c context in which the privilege is asserted.” In re Grand Jury Proceedings, 219 F.3d at 183. 14 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 15 of 35 VI. ADVICE-OF-COUNSEL DEFENSE A. Legal Standard As discussed above, an advice-of-counsel defense is a “‘quintessential example’ of an implied waiver of the privilege.” In re Cty. of Erie, 546 F.3d at 228 (quoting In re Kidder Peabody, 168 F.R.D. at 470). To invoke a defense based on reliance upon the advice of counsel, the proponent must show that “he made complete disclosure to counsel, sought advice as to the legality of his conduct, received advice that his conduct was legal, and relied on that advice in good faith.” Markowski v. S.E.C., 34 F.3d 99, 104– 05 (2d Cir. 1994) (citing S.E.C. v. Savoy Indus., Inc., 665 F.2d 1310, 1314 n.28 (D.C. Cir. 1981)). Even if these elements are established, in the context of a civil securities action, “reliance is not a complete defense, but only one factor for consideration.” Id. at 105 (citing Savoy Indus., Inc., 665 F.2d at 1314 n.28); see S.E.C. v. Enters. Sols., Inc., 142 F. Supp. 2d 561, 576 (S.D.N.Y. 2001) (same). us, “[a] defense of reliance on advice of counsel is available only to the extent that it might show that a defendant lacked the requisite speci c intent.” S.E.C. v. Cavanagh, No. 98 Civ. 1818 (DLC), 2004 WL 1594818, at *27 (S.D.N.Y. July 16, 2004), a ’d on other grounds, 445 F.3d 105 (2d Cir. 2006). Courts in this Circuit require the timely assertion of a defense of reliance on the advice of counsel (and the corresponding waiver of attorney-client privilege) such that the non-asserting party will not face unfair prejudice in conducting discovery and managing the case. Where the asserting party either declines to de nitively assert the defense or raises the defense after having routinely withheld documents and deposition testimony based on the attorney-client privilege, courts have found that the party waived 15 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 16 of 35 the defense, and will not be permitted to assert it. Relatedly, courts generally grant motions to strike such a defense, including any evidence or argument concerning the party’s reliance on the advice of counsel, unless the party waives the attorney-client privilege over the evidence at issue. For example, in Royal Park Investments SA/NV v. Deutsche Bank National Trust Company, the court adopted Magistrate Judge Moses’ report and recommendation recommending that the court grant the plainti ’s motion to strike the defendant’s a rmative defense of reliance on the advice of counsel. No. 14 Civ. 4394 (AJN), 2018 WL 1750595, at *21–22 (S.D.N.Y. Apr. 11, 2018) (citing Magistrate Judge Moses’ Report and Recommendation, Deutsche Bank, No. 14 Civ. 4394 (AJN) (S.D.N.Y. Sept. 15, 2017) (Doc. 471) (“Report and Recommendation”)); see also Royal Park Invs. SA/NV v. HSBC Bank USA, N.A., No. 14 Civ. 8175 (LGS), 2017 WL 6403862, at *2 (S.D.N.Y. Dec. 14, 2017) (adopting Magistrate Judge Netburn’s Report and Recommendation, HSBC Bank, No. 14 Civ. 8175 (LGS) (S.D.N.Y. May 8, 2017) (Doc. 343) (“Magistrate Judge Netburn’s Report and Recommendation”), at 4 (opining that the deadline by which defendant was required to assert an advice-of-counsel defense was “set to build in enough time in the discovery schedule to allow for the possibility of [the defendant] asserting the defense” and “for the plainti s to review [otherwise privileged evidence] and conduct depositions accordingly”)). In Deutsche Bank, the defendant pled as an a rmative defense that “Plainti ’s claims are barred, in whole or in part, because the [defendant] relied upon the work, advice, professional judgment, and opinions of others.” Report and Recommendation at 2–3 (quoting Defendant’s Answer, Deutsche Bank, No. 14 Civ. 4394 (AJN) (S.D.N.Y. Mar. 18, 2016) (Doc. 113), at 52). roughout the fact discovery period, the defendant 16 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 17 of 35 repeatedly withheld documents and instructed deposition witnesses not to respond on the basis of the attorney-client privilege. Id. at 3. In response to the plainti ’s motions to compel the defendant to provide communications involving defendant’s in-house lawyers, the defendant routinely argued that such evidence was protected by the attorneyclient privilege, and that it did not yet have the information it needed to determine whether it would assert the defense so as to include the advice of counsel. Id. at 3–6. Relying, in part, on similar cases in which defendants were required to decide whether they intended to assert an advice-of-counsel defense (and waive any corresponding privilege) or forfeit the defense, Magistrate Judge Moses gave the defendant a deadline which would provide the parties with months before the end of fact discovery. Id. at 6–7. On the date of the deadline, the defendant advised that, at that time, it did not intend to assert an advice-of-counsel defense, and that its a rmative defense should not be so interpreted. Id. at 7. Furthermore, the defendant noted that discovery was still ongoing and reserved the right to seek leave of the court to assert the defense in the future. Id. Afterward, the plainti moved to strike the a rmative defense of advice of counsel from the defendant’s answer. Id. at 8. In the Report and Recommendation, Magistrate Judge Moses recommended that the defense be stricken, noting that “[a] defense which the defendant has declined to assert, despite an explicit deadline for doing so, is both insu cient and immaterial.” Id. at 10. In reaching the recommendation, Magistrate Judge Moses applied the threepronged test detailed in Specialty Minerals, Inc. With respect to the rst and second prongs, in light of the fact that the defendant “ha[d] consistently invoked the attorneyclient privilege to withhold all documents that could potentially support an advice of 17 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 18 of 35 counsel defense, there [was] now no question of law, and no evidence, ‘which might allow the defense to succeed.’” Id. at 10–11 (quoting McCaskey, 56 F. Supp. 2d at 326). With respect to the third prong, “to permit [the defendant] to change its mind at some point in the future and assert a defense that would necessarily require the reopening of fact discovery, the production of documents previously withheld on privilege grounds, and the recall of deposition witnesses who were previously instructed not to testify about any legal advice they received” would be “unfair to [the plainti ]” and “wildly ine cient.” Id. at 11. Moreover, Magistrate Judge Moses opined that “[t]aking [the defendant] at its word – that its pleading does not assert any advice of counsel defense – it is di cult to imagine any ground on which it could credibly oppose [the plainti ’s] motion [to strike].” Id. at 10 (emphasis in original). B. Discussion i. e SEC Seeks to Strike Ladd’s Advice-of-Counsel A rmative Defense e instant motion seeks to strike from the Answer the following a rmative defense: “Plainti ’s claims are barred in whole or in part because Defendant relied in good faith upon the judgment, advice, and counsel of professionals.” Answer at ¶ 310. e SEC alleges that the term “professionals” includes, at the very least, attorneys (Ladd’s, MGT’s, or Honig’s). Mot. at 6. e motion further seeks to strike references related to advice of counsel, including good faith based on advice of counsel. As discussed above, Ladd made certain allegations in the Answer as to the involvement of counsel. 18 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 19 of 35 e thrust of the SEC’s argument for striking this defense and any related references is that Ladd impermissibly and unfairly seeks to wield attorney-client privilege as both sword and shield, such that he “could present to the jury a version of events that serves his defense, while insulating himself from discovery and cross examination about the advice and his reliance on it that could negate his good faith, resulting in undue prejudice to the Commission.” Id. at 2. In opposition, Ladd contends that he is not asserting a “classic” advice-of-counsel defense to the SEC’s scienter-based claims. Opp. Br. at 9. Instead, he argues that he acted in good faith, which was based on, in part, his communications with MGT’s counsel and Honig’s counsel as well as such counsel’s involvement in and review of the lings at issue. Id. at Section III. Ladd further alleges that he intends to support his good faith defense by relying solely on non-privileged evidence. See id. at 14 (“Ladd’s counsel has repeatedly pointed the SEC to exactly three non-privileged documents involving lawyers in evidence they intend to use in Ladd’s defense”). is evidence includes: (1) “a publicly led Schedule 13(d), led . . . on October 8, 2015, by the law rm Sichenzia, which states Barry Honig’s investment amount, making no election for his investment status as a group member under 13(d)”; (2) “an email between [MGT’s] counsel and Honig’s counsel stating [the Honig Group] were not [investing as a group], which directly refutes the SEC’s allegations that Honig and the others were investing as a 13(d) group”; and (3) “[MGT’s] October 8, 2015 8-K, the November 6, 2015 S-1, the April 14, 2016 10-K, and the May 9, 2016 8-K . . . [and] Honig’s SEC lings . . . [which relate to] the SEC allegations that Mr. Ladd defrauded investors by hiding the ‘Honig Group’ and mischaracterizing John McAfee’s role in his prior company.” 6 6 Although Ladd alleges that there are “three non-privileged documents involving lawyers in evidence they intend to use in Ladd’s defense,” it is not clear from Ladd’s opposition brief which three speci c documents he is referring to. Opp. Br. at 14. Upon review of Ladd’s opposition brief, April 5, 2021 Letter, and Answer, the Court interprets the three speci c documents to include Honig’s Schedule 13(d) and Schedule 19 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 20 of 35 Id. at 14, 19; April 5, 2021 Letter at 2. ii. e SEC Alleges that Ladd’s Deposition Testimony and April 5, 2021 Letter Indicate His Intent to Raise an Advice-of-Counsel Defense e SEC alleges that Ladd’s assertions in the opposition brief that he is not asserting an advice-of-counsel defense or relying on any privileged communications with counsel to establish his defense of good faith are recently fabricated. See Mot. at 4–7, 9, 11. In its argument refuting Ladd’s claim that he does not intend (nor has he ever intended) to raise an advice-of-counsel defense, the SEC points to Ladd’s testimony from his depositions dated October 15-16, 2020 and November 10, 2020, and his April 5, 2021 Letter. See id. at 4–7, 9; see also Brown Decl., Ladd Deposition; April 5, 2021 Letter. e SEC alleges that Ladd’s deposition testimony and April 5, 2021 Letter, as discussed further above, evidence an intent to rely on communications from and involvement of MGT’s counsel in support of his defense. See Mot. at 4–7, 9 n.6. e SEC further argues that such reliance on communications between MGT’s counsel and Honig’s counsel as well as MGT’s preparation and review of relevant public lings constitutes reliance on advice of counsel. Id. at 6–7, 9. Finally, the SEC challenges Ladd’s characterization of that evidence as non-privileged, stating that “Ladd ignores his own deposition testimony that he relied on Honig’s and his own counsel’s advice, and his April 5, 2021 Letter to the Court . . . in which he made various claims he now disavows about Honig’s counsel’s advice and how he planned to rely on both it and MGT’s counsel’s advice to support his defense.” Reply Br. at 1. Accordingly, the SEC alleges 13(g), the email between MGT’s counsel and Honig’s counsel, and the public lings that MGT’s counsel reviewed and led on behalf of MGT and Ladd. 20 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 21 of 35 that Ladd’s assertions in the record, in conjunction with the Answer, contradict his claim that he does not intend to raise an advice-of-counsel defense. iii. To the Extent that Ladd’s Allegations Assert an Advice-ofCounsel Defense, Such Defense is Stricken Ladd has repeatedly asserted that he does not intend to raise an advice-of-counsel defense notwithstanding his a rmative defense stating that “Plainti ’s claims are barred in whole or in part because Defendant relied in good faith upon the judgment, advice, and counsel of professionals.” 7 Answer dated February 26, 2021, Doc. 278, at ¶ 310; Answer at ¶ 310; see April 5, 2021 Letter at 1–2; Opp. Br. at 14–15. In light of Ladd’s assertions, which bear a striking resemblance to the defendant’s assertions in Deutsche Bank, the Court similarly nds that “it is di cult to imagine any ground on which [Ladd] could credibly oppose [the SEC’s] motion [to strike].” Report and Recommendation at 10. Furthermore, pursuant to Rule 12(f), this defense of advice of counsel, which Ladd has repeatedly disclaimed, is both “insu cient” and “immaterial.” Id. Under the three-pronged test in Specialty Minerals, Inc., given that Ladd has “consistently invoked the attorney-client privilege to withhold all documents that could potentially support an advice of counsel defense, there is now no question of law, and no evidence, ‘which might allow the defense to succeed’” under the rst and second prongs. Id. at 10–11 (quoting McCaskey, 56 F. Supp. 2d at 326). Under the third prong, to permit Ladd to assert a defense that necessarily requires the reopening of fact discovery after having withheld documents on privilege grounds and instructed deposition witnesses not to In the opposition brief, Ladd contends that he has “consistently maintained that he listed the a rmative defense as a prophylactic measure, and indeed, made no mention of his own counsel.” Id. at 3. 7 21 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 22 of 35 testify about allegedly privileged information would be unfair to the SEC and ine cient. Id. at 11. Moreover, as to counsel’s allegation that “[t]o the extent Mr. Ladd referenced a reliance on professionals in the a rmative defense section of his Amended Answer it was for preservation purposes only,” such preservation of the right to assert an advice-ofcounsel defense after the asserting party has, throughout the fact discovery period, routinely withheld documents and testimony on the basis of attorney-client privilege is generally disfavored and not permitted. April 5, 2021 Letter at 2; see, e.g., Deutsche Bank, 2018 WL 1750595, at *21–22; Magistrate Judge Netburn’s Report and Recommendation at 5–6 (recommending that defendant “be found to have forfeited any right to assert that defense in the future” and that the court “strike such a rmative defenses” where defendant alleged it was “currently not asserting an advice of counsel defense and [was] relying on its privilege to shield otherwise relevant discovery”). us, in light of Ladd’s continued assertions that he is not invoking an advice-ofcounsel defense and his withholding of evidence as privileged, the Court nds that Ladd has forfeited any right to assert that defense in this litigation. e Court further nds that to the extent any such a rmative defense exists in the Answer, it is stricken. VII. GOOD FAITH DEFENSE A. Legal Standard Notwithstanding its signi cance, “the attorney-client privilege cannot at once be used as a shield and a sword.” United States v. Bilzerian, 926 F.2d 1285, 1292 (2d Cir. 1991) (citing In re von Bulow, 828 F.2d at 103). us, courts have held that “the [attorney-client] privilege may implicitly be waived when [a] defendant asserts a claim 22 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 23 of 35 that in fairness requires examination of protected communications.” Id. In the determination of whether fairness requires the forfeiture of a privilege, courts must consider the notion of unfairness to the adversary that results “when a party uses an assertion of fact to in uence the decisionmaker while denying its adversary access to privileged material potentially capable of rebutting the assertion.” In re Cty. of Erie, 546 F.3d at 229 (quoting John Doe Co. v. United States, 350 F.3d 299, 306 (2d Cir. 2003)). is determination of whether fairness requires disclosure is made “on a case-by-case basis, and depends primarily on the speci c context in which the privilege is asserted.” Id. (quoting In re Grand Jury Proceedings, 219 F.3d at 183). In Bilzerian, the defendant alleged that he did not intend to violate the securities laws at issue and that the testimony he sought to introduce to establish his good faith in complying with the laws did not implicate any privileged communications. Bilzerian, 926 F.2d at 1291. e court found that the waiver principle applied here where the defendant planned to testify that he thought his actions were legal, thereby putting his knowledge of the law and the basis for his understanding of what the law required in issue. Id. at 1292. Finding that the attorney-client privilege was implicated, the court further opined that “[the defendant’s] conversations with counsel regarding the legality of his schemes would have been directly relevant in determining the extent of his knowledge and, as a result, his intent.” Id. (a rming the district court’s ruling that “[defendant’s] own testimony as to his good faith would open the door to crossexamination, possibly including inquiry into otherwise privileged communications with his attorney,” but that “[d]efendant was free to deny criminal intent either without asserting good faith or to argue his good faith defense by means of defense counsel’s 23 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 24 of 35 opening and closing statements and by his examination of witnesses,” id. at 1293). 8 Accordingly, “the assertion of a good-faith defense involves an inquiry into state of mind, which typically calls forth the possibility of implied waiver of the attorney-client privilege.” In re Cty. of Erie, 546 F.3d at 228–29. Although an advice-of-counsel defense will not result in waiver unless the proponent relies on privileged advice, see id. at 229, “[c]ourts within this Circuit, relying on Bilzerian, have rea rmed the broader principle that forfeiture of the privilege may result where the proponent asserts a good faith belief in the lawfulness of its actions, even without expressly invoking counsel’s advice.” Scott v. Chipotle Mexican Grill, Inc., 67 F. Supp. 3d 607, 611 (S.D.N.Y. 2014) (quoting Favors v. Cuomo, 285 F.R.D. 187, 199 (E.D.N.Y. 2012)). In other words, the privilege holder need not attempt to make use of a privileged communication to implicate waiver – the proponent “may waive the privilege if he makes factual assertions the truth of which can only be assessed by examination of the privileged communication.” In re Kidder Peabody, 168 F.R.D. at 470 (citing Bilzerian, 926 F.2d at 1292). e rationale underlying this waiver principle is that “it would be unfair for a party asserting contentions [of good faith] to then rely on its privileges to deprive its adversary of access to material that might disprove or undermine the party’s contentions.” Arista Recs. LLC v. Lime Grp. LLC, No. 06 Civ. 5936 (KMW), 2011 WL 1642434, at *3 (S.D.N.Y. Apr. 20, 2011) (alterations in original) (quoting Newmarkets Partners, LLC v. Sal. Oppenheim Jr. & Cie. S.C.A., 258 F.R.D. 95, 106 A rming the district court’s refusal to grant the defendant protection from an implied waiver of the attorney-client privilege, the court held that “[t]he trial court’s ruling left defendant free to testify without getting into his state of mind, but correctly held that if he asserted his good faith, the jury would be entitled to know the basis of his understanding that his actions were legal.” United States v. Bilzerian, 926 F.2d 1285, 1294 (2d Cir. 1991). 8 24 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 25 of 35 (S.D.N.Y. 2009)) (precluding defendants from o ering evidence or argument at trial regarding their purported belief in the lawfulness of their conduct even if defendants did not rely on advice of counsel for their good faith defense). In line with Bilzerian and Erie, courts within this Circuit have generally upheld the preclusion of parties from invoking a defense based on the good faith belief in the lawfulness of their actions, even where such parties argue that they intend to rely solely on non-privileged evidence to support their defense. See, e.g., S.E.C. v. Ripple Labs, Inc., No. 20 Civ. 10832 (AT) (SN), 2021 WL 2323089, at *4–5 (S.D.N.Y. May 30, 2021) (opining that “a ‘good faith’ defense is grounded in a party’s subjective belief that its behavior complied with the law, thus putting at issue any legal advice” and that the “critical question” in nding privilege waiver is “whether [the defense] puts at issue questions about the defendant’s state of mind or their reliance on counsel’s advice, regardless of whether the defense is stylized as ‘good faith’ or something else”); Brown v. Barnes & Noble, Inc., No. 16 Civ. 7333 (MKV) (KHP), 2020 WL 5037573, at *2–3 (S.D.N.Y. Aug. 26, 2020) ( nding that “this formulation of the good faith defense [that defendant should not be required to produce otherwise privileged communications unless they assert a defense of ‘good faith reliance on counsel’] is too narrow and ignores contrary law” and that “[w]hen a defendant invokes a good faith defense, he necessarily puts the mindset of the decision maker at issue” (citing Wang v. Hearst Corp., No. 12 Civ. 793 (HB), 2012 WL 6621717, at *2 (S.D.N.Y. Dec. 19, 2012))) (a rming orders granting plainti ’s motion to compel production of documents withheld as privileged in light of defendant’s defense of good faith); Parneros v. Barnes & Noble, Inc., 332 F.R.D. 482, 501 (S.D.N.Y. 2019) (“ e waiver doctrine, however, does not apply exclusively to 25 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 26 of 35 situations where a party explicitly relies – or states that it intends to rely – on attorneyclient communications.”). 9 While courts within this Circuit have followed the broader principle that waiver of privilege may result where the proponent asserts a good faith belief in the lawfulness of its actions, as described above, courts have also recognized the limitations of this principle. While a party is not required to explicitly assert “reliance on counsel” to put evidence protected by the attorney-client privilege at issue, “[n]either, however, does every claim of good faith open up inquiries into privileged communications,” because “[n]ot every assertion of good faith implicates the legal understanding of the party making the claim.” Bank Brussels Lambert v. Chase Manhattan Bank, N.A., No. 93 Civ. 1317 (LMM) (RLE), 1996 WL 173138, at *3–4 (S.D.N.Y. Apr. 12, 1996) ( nding no waiver of privilege where defendant’s a rmative defense was based on defendant’s knowledge of facts, not knowledge of law); see, e.g., 2002 Lawrence R. Buchalter Alaska Tr. v. Philadelphia Fin. Life Assurance Co., No. 12 Civ. 6808 (KMK) (PED), 2016 WL 1060336, at *2 (S.D.N.Y. Mar. 11, 2016) (“post-Erie caselaw con rms that such implied 9 Courts have found waiver where a party raises a good faith defense, because the party makes assertions the truth of which can only be assessed by examination of the privileged evidence. See MBIA Ins. Corp. v. Patriarch Partners VIII, LLC, No. 09 Civ. 3255 (RWS), 2012 WL 2568972, at *7 (S.D.N.Y. July 3, 2012) (“After Erie, the Southern District has continued to recognize the broader waiver principles endorsed by the Second Circuit.”) (granting defendants’ motion in limine and nding implied waiver of attorney-client privilege where plainti sought to introduce evidence re ecting its witnesses’ intent, beliefs, and understanding); Arista Recs. LLC v. Lime Grp. LLC, No. 06 Civ. 5936 (KMW), 2011 WL 1642434, at *3 (S.D.N.Y. Apr. 20, 2011) (granting plainti s’ motion in limine and nding waiver of privilege even where defendant’s good faith defense was allegedly based on non-privileged evidence, because plainti s were entitled to know if defendant ignored counsel’s advice); Leviton Mfg. Co. v. Greenberg Traurig LLP, No. 09 Civ. 8083 (GBD) (THK), 2010 WL 4983183, at *3 (S.D.N.Y. Dec. 6, 2010) (holding that “advice of counsel may be placed in issue where, for example, a party’s state of mind, such as his good faith belief in the lawfulness of his conduct, is relied upon in support of a claim of defense” and that “[b]ecause legal advice that a party received may well demonstrate the falsity of its claim of good faith belief, waiver in these instances arises as a matter of fairness”) (denying defendants’ motion to compel and holding that there was no waiver of privilege by plainti where plainti did not intend to rely on its state of mind to advance its claims), objections overruled, No. 09 Civ. 8083 (GBD) (THK), 2011 WL 2946380 (S.D.N.Y. July 14, 2011). 26 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 27 of 35 reliance is con ned to situations involving a party’s state of mind concerning a question of law, such as the party’s belief as to the lawfulness of its conduct”) ( nding no forfeiture of privilege where plainti invoked facts he knew or should have known, not his state of mind concerning question of law). With respect to the scope of the implied waiver of attorney-client privilege resulting from the assertion of a good faith defense, courts have held that such waiver “should be formulated with caution,” In re Cty. of Erie, 546 F.3d at 228, and “decided . . . on a case-by-case basis.” In re Grand Jury Proceedings, 219 F.3d at 183. erefore, determinations of waiver should be made “in the speci c context in which the privilege has been asserted, rather than on the basis of generalizations.” Leviton Mfg. Co. v. Greenberg Traurig LLP, No. 09 Civ. 8083 (GBD) (THK), 2010 WL 4983183, at *3 (S.D.N.Y. Dec. 6, 2010) (citing John Doe Co., 350 F.3d at 302), objections overruled, No. 09 Civ. 8083 (GBD) (THK), 2011 WL 2946380 (S.D.N.Y. July 14, 2011); see Enea v. Bloomberg L.P., No. 12 Civ. 4656 (GBD) (FM), 2015 WL 4979662, at *6 (S.D.N.Y. Aug. 20, 2015) (describing scope of waiver arising from good faith defense as “ordinarily [] quite ‘narrow’” (quoting Seyler v. T-Systems N.A., Inc., 771 F. Supp. 2d 284, 287–88 (S.D.N.Y. 2011))). For example, in Foster v. City of New York, where the plainti s led a motion to compel the production of documents and testimony seeking not only communications between counsel for the defendant and defendant’s employees, but also internal communications and other information not communicated to the defendant, the court found that “information not communicated to the [defendant] need not be disclosed.” No. 14 Civ. 4142 (PGG) (JCF), 2016 WL 524639, at *1 (S.D.N.Y. Feb. 5, 2016). 27 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 28 of 35 B. Discussion i. Ladd’s Assertion of a Good Faith Defense Implicates Waiver of Attorney-Client Privilege In defending against the SEC’s scienter-based fraud claims, Ladd alleges that he acted in good faith based on his reliance on communications with Honig’s counsel and MGT’s counsel in which they told him “that Honig and the others were not investing as a group under the legal requirements of Section 13(d)” and the fact that the public lings at issue were “all vetted by competent counsel aware of all material facts” and “sent to counsel for review prior to [] release.” Answer at 2, 3 (emphasis in original). In support of his good faith defense, Ladd allegedly intends to rely on the fact that he “did not know of a 13(d) group, and the facts known at that time, including Honig’s Schedule 13(d) . . . did not suggest such a group existed.” Opp. Br. at 3. Ladd further contends that “his position has always been, and remains now, that there is no evidence that Honig and the others were in fact acting as a group, or if they were, there is no evidence that Ladd knew this, and as a result, MGT did not have a reporting obligation,” and was not “compelled [] to make such a disclosure in its forms 10-K and S-1.” Id. at 9, 11. us, Ladd alleges that he “had no intention to violate the securities laws.” Answer at 3. Ladd’s contention that his defense of good faith is not a basis to nd a waiver of privilege is contrary to the well-settled precedent in this Circuit. Opp. Br. at 5; see generally In re Cty. of Erie, 546 F.3d at 228–29 (“the assertion of a good-faith defense involves an inquiry into state of mind, which typically calls forth the possibility of implied waiver of the attorney-client privilege”); Scott, 67 F. Supp. 3d at 611 (“[c]ourts within this Circuit, relying on Bilzerian, have rea rmed the broader principle that forfeiture of the privilege may result where the proponent asserts a good faith belief in 28 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 29 of 35 the lawfulness of its actions, even without expressly invoking counsel’s advice” (quoting Favors, 285 F.R.D. at 199)). In response, the SEC cites to, among other cases, Abromavage v. Deutsche Bank Sec. Inc., No. 18 Civ. 6621 (VEC), 2019 WL 6790513 (S.D.N.Y. Dec. 11, 2019), Scott, and In re Keurig Green Mountain Single Serve Co ee, No. 14 MD 2542 (VSB) (HBP), 2019 WL 2724269 (S.D.N.Y. July 1, 2019) as precedent that courts in this district have required either the production of privileged materials surrounding advice in the face of similar good-faith reliance defenses, or defendants’ withdrawal of the defense, notwithstanding the defendants’ claimed reliance on solely non-privileged evidence. Mot. at 8, 12. Ladd distinguishes Abromavage and Scott as being “particularly inapposite.” Opp. Br. at 17–18. While Abromavage involved the assertion of an a rmative defense of good faith under a statute, the court in nding waiver opined that the defendants’ knowledge of the law and belief as to the lawfulness of their actions were at least as central to their statutory a rmative defense as the privileged communications were to the defendant’s mens rea in Bilzerian. Abromavage, 2019 WL 6790513, at *3 (noting that the at-issue waiver principle is a “broader rule in this circuit, which applies to other defenses that rely on the defendant’s good faith”). Similarly, while the Court recognizes that Scott also involved the assertion of an a rmative defense of good faith under a statute, the court relied on the “broader waiver principles endorsed by the Second Circuit” under Bilzerian, Erie, and their progeny in nding waiver. Scott, 67 F. Supp. 3d at 610–11 (quoting MBIA Ins. Corp. v. Patriarch Partners VIII, LLC, No. 09 Civ. 3255 (RWS), 2012 WL 2568972, at *7–8 (S.D.N.Y. July 3, 2012)). us, Ladd’s argument that 29 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 30 of 35 these cases are inapposite, because his defense does not trigger an inquiry by statute or otherwise, is not accurate. Opp. Br. at 17–18. Ladd further distinguishes two cases, In re Keurig and Arista Recs. LLC, as being inapplicable. Id. at 16. In In re Keurig, the court granted the defendant’s motion to compel the production of communications between the plainti and its attorneys unless the plainti formally withdrew its good faith defense. While it is true that the plainti ’s “sole basis for claiming that it acted in good faith [was] the advice it received from [its counsel],” the court opined that it was “aware of no authority . . . suggesting that the existence of waiver turns on what other evidence is available or what inferences can be drawn from the other evidence.” In re Keurig, 2019 WL 2724269, at *4. In fact, the court cited with approval cases recognizing the broader waiver principles endorsed by the Second Circuit. Id. at n.3 (quoting MBIA Ins. Corp., 2012 WL 2568972, at *6–7). In Arista Recs. LLC, the court granted the plainti s’ motion in limine to preclude the defendants from o ering any argument or evidence at the trial regarding the defendants’ alleged good faith belief in the lawfulness of their conduct. Although the defendants argued that their good faith defense was separate from and not based on the advice of counsel, the court held that the defendants’ assertion that Bilzerian therefore did not apply misread the law, and opined that advice of counsel may be placed in issue where a party’s state of mind, such as his good faith belief in the lawfulness of his conduct, is relied upon in support of a claim of defense. Arista Recs. LLC, 2011 WL 1642434, at *3 (quoting Leviton Mfg. Co., 2010 WL 4983183, at *3). us, Ladd’s assertion that he did not know 30 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 31 of 35 of a “group” and therefore did not believe he had a legal requirement to disclose such status falls within Bilzerian and its progeny, and is not contradicted by these two cases. 10 Here, similar to the defendant in Bilzerian, Ladd alleges that he did not intend to violate the securities laws and that the evidence he seeks to introduce to establish his good faith in complying with the laws is not privileged. Bilzerian, 926 F.2d at 1291. Ladd’s pro ered evidence that he believed there was no “group” as contemplated under Section 13(d) and therefore no legal requirement to disclose such information puts his knowledge of the law and the basis for his understanding of what the law required at issue. Id. at 1292. us, Ladd’s communications with MGT’s counsel on this subject would have been directly relevant in determining the extent of his knowledge and, as a result, his intent. Id. Although Ladd asserts that his good faith defense is based solely on publicly available lings and non-privileged communications, he “may waive the privilege if he makes factual assertions the truth of which can only be assessed by examination of the 10 Furthermore, Ladd distinguishes several cases the SEC cites in support of its argument that his reliance on communications with Honig’s counsel waives privilege with respect to communications from any other attorney on the same topic or in the same time period. Ladd emphasizes that he “relied on a factual statement by Honig’s attorney,” as opposed to legal advice, and that he was not relying on Honig as his attorney. Opp. Br. at 21–22. In In re Gaming Lottery, the court held that “[s]ince the defendants claim they were relying on [the seller’s counsel’s] legal advice as their attorney [as a defense on the issue of scienter], the legal advice they received from any other lawyers on that subject relates to the reasonableness of defendants’ reliance and is not subject to the attorney/client privilege.” No. 96 Civ. 5567 (RPP), 2000 WL 340897, at *2 (S.D.N.Y. Mar. 30, 2000); see Meskunas v. Auerbach, No. 17 Civ. 9129 (VB) (JCM), 2020 WL 7768486, at *5 (S.D.N.Y. Dec. 30, 2020) ( nding that by alleging reliance on defendants’ legal advice, plainti s waived their privilege regarding any advice they received from other counsel, because such advice bears on the issue of reasonable reliance). Relatedly, the SEC relies on S.E.C. v. Lek Sec. Corp. for the proposition that a defendant cannot rely on the advice of another’s lawyer to establish good faith. No. 17 Civ. 1789 (DLC), 2019 WL 5703944 (S.D.N.Y. Nov. 5, 2019) (granting the SEC’s motion in limine precluding defendants from relying on co-defendants’ consultations with co-defendants’ counsel to establish good faith where defendants did not receive such communications, and did not discuss subject matter of such communications with co-defendants’ counsel). e Court recognizes Ladd’s arguments distinguishing these cases from the facts at issue and the SEC’s arguments as to whether Ladd relied on facts or legal advice. See Mot. at 13–14; Opp. Br. at 21–23; Reply Br. at 8–9. Nonetheless, Ladd’s alleged reliance on the representations of Honig’s counsel and MGT’s counsel—facts or legal advice—and the public lings at issue implicates the waiver of privilege under Bilzerian. 31 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 32 of 35 privileged communication.” In re Kidder Peabody, 168 F.R.D. at 470 (citing Bilzerian, 926 F.2d at 1292). e truth as to Ladd’s belief regarding the existence of the Honig Group and his corresponding duty to disclose can only be assessed by examination of the privileged communications between Ladd and MGT’s counsel. His defense implicates privileged communications because the SEC is entitled to know if Ladd ignored MGT’s counsel’s advice. Arista Recs. LLC, 2011 WL 1642434, at *3. Furthermore, the legal advice that Ladd received may well demonstrate the falsity of his claim of good faith belief. Leviton Mfg. Co., 2010 WL 4983183, at *3. roughout the fact discovery period, Ladd has routinely withheld documents and deposition testimony on the basis of attorney-client privilege. Ladd continues to assert privilege while raising a good faith defense based on his belief in the lawfulness of his actions. Here, where Ladd is attempting to use the attorney-client privilege as a shield and sword, the Court nds that the waiver principle applies, as it would be unfair for him to assert good faith and to then rely on privilege to deprive the SEC of access to material that might disprove or undermine his contentions. Arista Recs. LLC, 2011 WL 1642434, at *3 (quoting Newmarkets Partners, LLC, 258 F.R.D. at 106). ii. e Scope of the Implied Waiver of Attorney-Client Privilege Includes Communications Between Ladd and MGT’s Counsel, Not Communications Between Honig and Honig’s Counsel Having found that Ladd’s defense of good faith results in an implied waiver of the attorney-client privilege, the Court must determine the scope of that waiver. e SEC’s motion seeks the preclusion of Ladd’s defense or the production of the following categories of information: (1) communications between Ladd and MGT’s counsel 32 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 33 of 35 regarding the Honig Group and its status as a “group” as well as MGT’s related disclosure obligations; 11 (2) communications between Ladd and MGT’s counsel regarding MGT’s May 9, 2016 Form 8-K attaching the press release containing allegedly false information; (3) communications between Ladd and MGT’s counsel regarding Ladd’s Form 4 and Form 144 in connection with his May 2016 trading; and (4) communications between Honig and Honig’s counsel regarding the Honig Group’s status as a “group.” Mot. at 10, 14–15. Furthermore, the SEC alleges that seeking such categories of information requires Ladd to obtain attorney-client privilege waivers from MGT and Honig concerning his communications with their counsel. Id. at 1, 9, 10. e SEC requests these communications for the period between October 18, 2012, when Honig’s counsel sent an email concerning the status of the Honig Group, to MGT’s counsel 12 and the ling of MGT’s 2015 Form S-1 and 2016 Form 10-K. Id. at 14. Based on the speci c context in which the attorney-client privilege has been asserted, the Court nds that the scope of waiver includes the privileged communications between Ladd and MGT’s counsel as to the categories described above, but not privileged communications between Honig and Honig’s counsel. See Leviton Mfg. Co., 2010 WL 4983183, at *3 (citing John Doe Co., 350 F.3d at 302). In light of Ladd’s defense of good 11 With respect to the SEC’s references to Honig’s counsel Kesner in the motion (see Mot. at 14–15), Ladd requests that the Court order the SEC to disclose the factual basis for its assertion regarding Kesner’s alleged investments with Honig or evidence that it believes suggests Kesner was part of a group. Opp. Br. at 24–25. Ladd further requests that if no factual predicate for this assertion exists, it should be stricken from the record, and this Court should consider appropriate sanctions. Id. at 25. In response, the SEC alleges that it has turned over all relevant information on this topic in its possession. Reply Br. at 10 n.10. is issue is not fully briefed, so the Court declines to address it at this time. 12 While the SEC does not bring charges for the 2012 events alleged in the SAC, it alleges that these events provide relevant context to the other allegations. See SAC at ¶¶ 129–33. e Court allowed these events to be included in the pleadings as background in its February 2020 Order. See SEC v. Honig, No. 18 Civ. 8175 (ER), 2020 WL 906383, at *6 (S.D.N.Y. Feb. 25, 2020). 33 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 34 of 35 faith based on the representations of Honig’s and MGT’s counsel, it would be unfair for him to then rely on the privilege to deprive the SEC of access to material that might disprove or undermine his contentions. Arista Recs. LLC, 2011 WL 1642434, at *3 (quoting Newmarkets Partners, LLC, 258 F.R.D. at 106). Here, Ladd’s communications with MGT’s counsel have the potential to disprove or rebut his assertions about his good faith belief. erefore, if Ladd persists in his defense of good faith, he must seek MGT’s waiver of the privilege, because the privilege at issue belongs to MGT and only MGT can elect to waive it. See United States v. Wells Fargo Bank, N.A., 132 F. Supp. 3d 558, 566– 67 (S.D.N.Y. 2015). 13 In contrast, the scope of the implied waiver should not include any communications between Honig and Honig’s counsel, as they would not potentially undermine Ladd’s contentions of good faith. Similar to the court’s ruling in Foster, where the plainti s sought information not communicated to the defendant as falling within the scope of waiver arising from the defendant’s good faith defense, the Court nds that information not communicated to Ladd need not be disclosed. 2016 WL 524639, at *1. Given that Ladd was not privy to the communications between Honig and Honig’s counsel, such communications do not place in issue Ladd’s state of mind, and therefore cannot demonstrate the falsity of his claim of good faith belief. Leviton Mfg. Co., 2010 WL 4983183, at *3. Moreover, the SEC appears to rely on several cases in arguing that the Court should nd a waiver of privilege over Honig’s communications 13 In United States v. Wells Fargo Bank, N.A., the court held that an employee’s right to pursue an adviceof-counsel defense that requires disclosure of the employer’s privileged communications was not su cient to overcome the employer’s assertion of attorney-client privilege over communications between the employee and employer’s counsel. 132 F. Supp. 3d 558 (S.D.N.Y. 2015). 34 Case 1:18-cv-08175-ER Document 295 Filed 11/30/21 Page 35 of 35 with his counsel resulting from Ladd’s alleged reliance on the advice of Honig’s counsel. e Court does not nd this persuasive. 14 VIII. CONCLUSION For the reasons set forth above, the SEC’s motion is GRANTED in part and DENIED in part. It is hereby ordered that: (1) the SEC’s motion is GRANTED to the extent that it seeks to strike an adviceof-counsel defense from Ladd’s Answer and any evidence or argument related thereto; (2) the SEC’s motion is GRANTED to the extent that it seeks a formal withdrawal of the defense of good faith or, in the alternative, the production of privileged communications between Ladd and MGT’s counsel related to the categories described above; and (3) the SEC’s motion is DENIED to the extent that it seeks the production of privileged communications between Honig and Honig’s counsel. e Clerk of the Court is respectfully directed to terminate the motion, Doc. 289. It is SO ORDERED. Dated: November 30, 2021 New York, New York EDGARDO RAMOS, U.S.D.J. Ladd appears to construe the SEC’s reliance on these cases, speci cally In re Gaming Lottery, Wells Fargo Bank, N.A., and Lek Sec. Corp., as support for its arguments that Ladd must obtain a waiver from Honig to access Honig’s privileged communications with Honig’s counsel in order to assert his defense of good faith. Opp. Br. at 21–23; Reply Br. at 9–10. To the extent that Ladd’s representations of the SEC’s arguments are correct, the Court does not nd these cases applicable. Honig and Ladd do not share the same employer-employee relationship as in Wells Fargo Bank, N.A. Nor do the cases stand for the proposition that where one relies on the advice of a third party’s attorney, communications between the third party and its attorney must be disclosed in order for one to assert a good faith defense. Furthermore, for the aforementioned reasons, the Court formulates the scope of waiver to exclude privileged communications between Honig and Honig’s counsel. 14 35
]]>
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You
should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
