S.E.C. v. Lines
| Decision Date | 13 November 2009 |
| Docket Number | No. 07 Civ. 11387(DLC).,07 Civ. 11387(DLC). |
| Citation | 669 F.Supp.2d 460 |
| Parties | SECURITIES and EXCHANGE COMMISSION, Plaintiff, v. Brian N. LINES, Scott G.S. Lines, LOM (Holdings) Ltd., Lines Overseas Management Ltd., LOM Capital Ltd., LOM Securities (Bermuda) Ltd., LOM Securities (Cayman) Ltd., LOM Securities (Bahamas) Ltd., Anthony W. Wile, Wayne E. Wile, Robert J. Chapman, William Todd Peever, Phillip James Curtis, and Ryan G. Leeds, Defendants. |
| Court | U.S. District Court — Southern District of New York |
David Williams, Justin Chretien, Securities and Exchange Commission, Washington, DC, for Plaintiff.
Philip Smith, Kate Woodall, Patton Boggs LLP, New York, NY, for Defendant Brian N. Lines.
Invoking Rule 4.2(a) of the American Bar Association's Model Rules of Professional Conduct, defendant Brian N. Lines ("Lines") has moved for a protective order to avoid producing a tape recording of his conversation with the Securities and Exchange Commission ("SEC") during its investigation of stock manipulation. For the following reasons, Lines's motion is denied. Background
The SEC alleges that defendants in this case engaged in two separate but related fraudulent schemes to manipulate the stock prices of publicly-traded shell companies, Sedona Software Solutions, Inc. ("Sedona") and SHEP Technologies, Inc. Both alleged schemes took place between 2002 and mid-2003. Among the defendants alleged to have participated in these schemes are LOM (Holdings) Ltd., and its subsidiaries Lines Overseas Management Ltd., LOM Capital Ltd. ("LOM Capital"), LOM Securities (Bermuda) Ltd., LOM Securities (Cayman) Ltd., and LOM Securities (Bahamas) Ltd. (collectively, "LOM"). Lines was the President of LOM Holdings and each of its defendant subsidiaries. LOM Capital was the investment bank for the Sedona transaction.
On January 21, 2003, the SEC began investigating trading related to Sedona securities. The price of the securities on that day was at "price levels thousands of times the previous price of Sedona stock." On January 23, the SEC called an LOM office and was put in contact with Scott Lines, who was then the Managing Director of LOM Holdings and each of its defendant subsidiaries. The SEC advised Scott Lines of the voluntary nature of the call and began asking questions about matters related to Sedona. When Scott Lines announced that "we do not engage in voluntary exchange of information with the SEC," the SEC asked to be put in touch with the company's in-house counsel for further explanation of that policy. LOM's in-house counsel, David Surmon ("Surmon") explained that all investigative inquiries should be made in writing pursuant to company policy and that either he or the appropriate person within LOM would respond. The SEC alleges, and Lines does not dispute, that Surmon did not make any clear statements that he was representing anyone in this investigation. The SEC did not submit any written questions to Surmon or to anyone else at LOM. On January 29, the SEC suspended trading in Sedona securities.
On February 3, Jack Cooper ("Cooper"), the individual who sold the Sedona shell corporation to Brian and Scott Lines,1 urged Lines to call the SEC because "the quicker they can find out with certainty [who purchased the stock], probably the quicker we're going to get up trading and everyone get on with their lives." Cooper gave Lines the name and number of an SEC attorney.
About two hours later, Lines called the SEC and introduced himself as the president of LOM. The following is an excerpt of the transcript of the beginning of the call:2
Lines: I was speaking with [Cooper] basically and he said that we would be uncooperative, which was definitely not our agenda basically.
. . . .
SEC Attorney Ungar: What he [Scott Lines] basically told us, he transferred us to the general counsel.
SEC Attorney Weissman: He transferred me to Mr. Surmon.
Lines: Well he is our in-house legal counsel, right.
SEC Attorney Weissman: And Mr. Surmon said that everything had to go through the uh, the Bermuda Monetary Exchange and had to be pursuant to a strict process and that you weren't . . .
Lines: Yeah I think basically when you, but uh, I think the idea is that we want to be cooperative, basically, so that is not uh, [he is, it's neither here nor there? ?] so to speak.3
SEC Attorney Ungar: Well as long as you want to be cooperative, I mean that's what we want.
Lines: I am trying to figure out what the issue is here and obviously the issue seems to be more Tony's uncle basically, than anything else seems to be.
SEC Attorney Ungar: Ah, well let me just, before we begin we do have some questions for you.
Lines: Right.
SEC Attorney Ungar: There is a standard set of introductions that we give to everyone who . . . have you ever gotten called by the SEC before?
Lines: No.
SEC Attorney Ungar: Okay, well there is a standard set of introductions, I'd like to just give it to you. You are not being singled out, whether it was you or the Pope calling us, we give him the same introduction. Okay?
Lines: Yep.
SEC Attorney Ungar: Okay, first thing it's voluntary, that means you do not have to answer our questions and uh and you have the right to counsel, we're going to be taking notes.
Lines: Yeah.
Lines proceeded to talk to the SEC for over an hour. It is the recording of this call that is at issue.
The SEC received notification sometime after February 3 that Patton Boggs had begun representing Lines and that Kellogg, Huber, Hansen, Todd, Evans & Figel P.L.L.C. had begun its representation of LOM.4 It is undisputed that after receiving these notifications the SEC directed all investigative inquiries through the appropriate attorneys.
The SEC has made a number of requests for the February 3 recording. Lines has refused to produce that recording and he moved for a protective order on October 8, 2009. This motion became fully submitted on October 19.
Although disciplinary rules and rules of professional responsibility are not statutorily mandated, "federal courts enforce professional responsibility standards pursuant to their general supervisory authority over members of the bar." United States v. Hammad, 858 F.2d 834, 837 (2d Cir.1988); see also Southern District of New York, Local Rules, Rule 1.5(b)(5). Lines argues that the SEC violated Rule 4.2(a), which provides:
In representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or a court order.5
Rule 4.2 applies to SEC attorneys. 28 U.S.C. § 530B(a); Securities and Exchange Commission Division of Enforcement, Enforcement Manual at 3.3.5.3.3., available at http://www.sec.gov/divisions/ enforce/enforcementmanual.pdf.
Comment 8 to the Rule requires actual knowledge of the representation. It provides:
The prohibition on communications with a represented person only applies in circumstances where the lawyer knows that the person is in fact represented in the matter to be discussed. This means that the lawyer has actual knowledge of the fact of the representation; but such actual knowledge may be inferred from the circumstances. Thus, the lawyer cannot evade the requirement of obtaining the consent of counsel by closing eyes to the obvious.
Rule 4.2 protects against inappropriate communications with both individuals and organizations, regardless of who initiates the communication. Comment 3 to the Rule provides that "[t]he Rule applies even though the represented person initiates or consents to the communication." Comment 7 establishes that in the case of an organization, Rule 4.2 protections extend to a high-level employee "who supervises, directs or regularly consults with the organization's lawyer concerning the matter or has authority to obligate the organization with respect to the matter or whose act or omission in connection with the matter may be imputed to the organization for purposes of civil or criminal liability." Accord Miano v. AC & R Adver., Inc., 148 F.R.D. 68, 76-77 (S.D.N.Y.1993). An organization is not necessarily "represented," however, simply because it has general counsel; it must have an attorney-client relationship with respect to the matter at issue. See Id. at 80.
SEC attorneys are charged with conducting investigations to determine if someone has violated securities laws. 15 U.S.C. § 78u(a)(1). Comment 5 to Rule 4.2 acknowledges that "investigative activities of lawyers representing governmental entities . . . prior to the commencement of . . . civil enforcement proceedings" may, in some instances, constitute communications that are authorized by law; communications authorized by law are exempted from Rule 4.2.
Because the terms of the Rule are "vague," the Second Circuit has cautioned that it "should be construed narrowly in the interests of providing fair notice to those affected by the Rule." Simels, 48 F.3d at 650. Nonetheless, courts have acknowledged that its precepts may apply to investigations before litigation has formally been commenced. See Hammad, 858 F.2d at 838 (in criminal context); accord Miano, 148 F.R.D. at 77 (in civil context). Care must be used in deciding, however, that Rule 4.2 applies to investigative communications. In the criminal context, the Second Circuit "urge[s] restraint in applying the rule to criminal investigations to avoid handcuffing law enforcement officers in their efforts to develop evidence." Hammad, 858 F.2d at 838. The Rule may therefore be limited in the pre-litigation phase to those cases where the attorney and represented parties have an adverse or a "ripening adverse" relationship. 2 Geoffrey C. Hazard, Jr. & William Hodes, The Law of Lawyering, A Handbook on The Model Rules of Professional Conduct § 38.6 (2005).
The Second Circuit has declined to offer bright-line rules delineating specific...
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