U.S. Sec. & Exch. Comm'n v. Commonwealth Advisors, Inc.

• Decision Date: 06 April 2016
• Docket Number: CIVIL ACTION No. 3:12-00700-JWD-EWD
• Parties: UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. COMMONWEALTH ADVISORS, INC., and WALTER A. MORALES, Defendants.
• Court: U.S. District Court — Middle District of Louisiana

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. COMMONWEALTH ADVISORS, INC., and WALTER A. MORALES, Defendants.

CIVIL ACTION No. 3:12-00700-JWD-EWD

UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF LOUISIANA

April 6, 2016

RULING ON DEFENDANTS' MOTION TO AMEND ORDER

I. INTRODUCTION

Before the Court is the Defendants' Motion to Amend Order ("Motion to Amend"), (Doc. 141), filed by Commonwealth Advisors, Inc. ("Commonwealth") and Mr. Walter A. Morales ("Morales") (collectively, "Defendants"). In counter, the United States Securities and Exchange Commission ("SEC" or "Plaintiff") has submitted the Memorandum of Law in Opposition to Defendants' Motion to Amend Order ("Opposition"), (Doc. 182.) To the contentions advanced therein, Defendants have responded with the Reply Memorandum in Support of Motion to Amend Order ("Reply"), (Doc. 188). Only the latest discovery-related controversy between the Defendants and Plaintiff (collectively, "Parties"),¹ the Motion to Amend, asks that this Court's prior order of December 16, 2015, ("Relevant Order"), be corrected due to its ambiguity and reversed in full due to this Court's application of an incorrect standard of review. In essence, this request implicates the standards for both a ruling's reconsideration and for a district court's review of a magistrate judge's non-dispositive order, as stated in and implied into the Federal Rules of Civil Procedure² and effectively argues for the same result that the Defendants first sought in February 2, 2015, (Doc. 86): a judicial order preventing the release of certain documents, ones classified as "privileged" or as "work product" by Defendants pursuant to Rule 26³ and as falling outside the waiver of that privilege effectuated by Defendants' assertion of the advice-of-counsel defense, despite an order so mandating that was issued by the assigned United States Magistrate Judge ("MJ").

Briefly put, this Court disagrees with the Defendants' construction of law and understanding of their own duties. Once before, the now-retired MJ⁴ found that the Defendantshad waived the attorney-client privilege by virtue of certain adjudicated failures, thereby granting Plaintiff's first Motion to Compel ("First Ruling"). Particularly, he did so due to the Defendants' assertion of this privilege by means of blanket boilerplate, consistent with the trend in modern federal jurisprudence of treating such broad claims as effectuating absolute and unconditional waivers of any relevant privilege and possible shield. Despite the First Ruling, wishing to provide Defendants' counsel with a chance to avoid the foreseeable consequences of their deliberate use of such vague and sweeping language in the face of such precedent, this Court reversed the MJ's decision ("Reversal"). Presented with this opportunity, a second bite at the same apple, Defendants submitted a new privilege log. Yet, while much was corrected, these privilege logs contained at least two factually incorrect entries. Noting this factual deficiency and emphasizing its implication—that Defendants' own records could not be trusted to accurately portray the contents of the documents withheld, whether properly or improperly, in spite of Defendants' receipt of a reprieve to which much law does not entitle them, see infra Part III.B—the MJ ordered a release of all documents conceivably encompassed by the asserted privilege in a case in which a protective order otherwise constricts the potential ramifications of such a release ("Second Ruling"), (Doc. 116). Put differently, having two opportunities to comply with their discovery obligations, Defendants have yet to do so with the kind of rigor compelled by Rules 1 and 26. So this Court concluded on December 16, 2015, after parsing the MJ's legal and factual analyses. .

Having once more reviewed the Second Ruling upon the filing of the Motion to Amend, this Court reaches the same conclusion, finding the MJ's well-considered opinion neither "contrary to law" nor "clearly erroneous" when the full history of this litigation is unwound. By any fair measure, with ample support for his legal conclusions and factual deduction evident in much jurisprudence, the MJ applied the correct legal standard and weighed the facts reasonably when he assessed one of the Rules' lesser sanctions⁵ against a recalcitrant party. For these reasons, as more fully explained below, this Court DENIES the Defendants' Motion to Amend Order.⁶

II. BACKGROUND

A. Factual and Procedural History

This case's history has been documented before. (Doc. 168 at 1-3.) In brief, the SEC sued Defendants for an allegedly fraudulent scheme to hide investment losses and conceal the truth of those losses from investors. (Doc. 148 at 2; see also, e.g., Doc. 1 ¶¶ 38-65; Doc. 168 at 1-2.) Allegedly, "shortly before the original cutoff date for fact discovery . . ., Defendants formally asserted an advice-of-counsel defense," later submitting "a nearly four-page extended narrative describing their defense that spanned most, if not all, of the material allegations of this case." (Doc. 182 at 1; see also Doc. 57-2.) Beyond these bare details, only the most recent facts pertinent to the Parties' immediate controversy require summarization here.

On October 29, 2014, the MJ issued the First Ruling. (Doc. 59.) Focused upon a single issue—the Defendants' responsiveness to the Plaintiff's First Set of Interrogatories and First Request for Production of Documents, served on both Defendants, (Id. at 1-2)—the First Ruling granted the Plaintiff's first Motion to Compel, (Doc. 35), in part. (Doc. 59 at 14; see also, e.g., Doc. 86-1 at 2-3.) Soon thereafter, this Court reversed that part of this First Ruling "holding that all Defendants waived their attorney-client privilege with respect to all documents for which that privilege was asserted and ordering production of those documents within seven days." (Doc. 77 at 1; see also, e.g., Doc. 86-1 at 3; Doc. 131 at 1.) This Court gave the Defendants until December 18, 2014, to submit to the Plaintiff a revised privilege log compliant with Rule 26(b)(5)(A) and produce all documents for which the attorney-client privilege had been waived by the Defendants' assertion of the advice-of-counsel defense. (Doc. 77 at 1; see also, e.g., Doc. 86-1 at 3; Doc. 131 at 1.) In its second paragraph, this same ruling and order expressly warned Defendants: "If the Court finds on or after December 18, 2014, that the privilege log descriptions fail to satisfy Rule 26(b)(5)(A) and/or that Defendants have withheld a document from production in bad faith, then the Court will deem the attorney-client privilege waived as to all such documents, and will consider other sanctions as are appropriate," (Doc. 77 at 1; see also, e.g., Doc. 86-1 at 3; Doc. 168 at 4), thereby placing Defendants on notice of the possible imposition of punishments pursuant to Rules 26(5) and 37(b)(2) and as otherwise authorized by this Court's inherent authority for any future disobedience.⁷ Crucially, at oral argument, theDefendants averred that it would take them no more than four weeks to submit more precise privilege logs; out of an abundance of caution, this Court gave Defendants five weeks to comply with the Rules' plain text. (Doc. 168 at 4.)

By this deadline, Defendants produced additional documents and five new logs. (Doc. 86-1 at 3.) This production prompted several objections from Plaintiff, as reflected in its Second Motion to Compel, (Doc. 86). First, "with respect to a significant number of entries," the revised logs purportedly still made "it difficult to discern whether the subject matter of the communication falls within the scope of Defendants' waiver" of the attorney-client privilege. (Doc. 86-1 at 3.) Moreover, the SEC contended that the "even the descriptions now provided by Defendants make clear that they continue to withhold materials clearly within the scope of the waiver," taking "a cramped and narrow view of the scope of their waiver that excludes communications that plainly and clearly shed light on the subject matter now at issue." (Id. at 4 (emphasis in original).) As it maintained, there "appear[ed] to be materials within the scope of Defendants' waiver that Defendants have not identified at all on any privilege log." (Id. at 5 (emphasis in original).) As summarized in the conclusion to this second motion to compel, the Defendants' alleged failures numbered three: "Defendants continue to withhold materials that by their own descriptions fall within the scope of their waiver; are in possession of a substantial volume of responsive materials that they have yet to identify on any privilege log; and have in fact logged items in a manner that conceals that withheld materials are within the scope of their waiver." (Id. at 18.)

Finding "[a]ll of the [P]laintiff's evidence and arguments . . . persuasive," on September 29, 2015, the MJ issued the Second Ruling. (Doc. 131; see also Doc. 168 at 5-6.) In this Second Ruling, the MJ correctly characterized this Court's prior order as follows: "In his Ruling andOrder[,] the district judge did not disagree with the determination that [D]efendants' privilege logs . . . were wholly inadequate. . . . He disagreed with the remedy: waiver of the privilege and production of the withheld documents." (Id. at 12-13.) The new privilege logs, however, combed through with care, now struck him as "less reliable than the ones . . . [Defendants] previously produced because they include insufficient and sometimes misleading descriptions." (Id. at 13 (emphasis in original).) Indeed, by his reckoning, Plaintiff had "persuasively shown that the [D]efendants improperly redacted at least two specific documents." (Id.) This omission, in turn, provided "good cause to believe there are more improperly redacted documents," a conclusion from which a key finding sprung: "[T]he [D]efendants waived their attorney-client privilege and should be required to produce all previously...