DENISE COTE, District Judge.
The Securities and Exchange Commission ("SEC") moved in limine to prohibit defendants Avalon FA Ltd, Nathan Fayyer, and Sergey Pustelnik (the "Avalon Defendants") and their attorneys from presenting evidence of, or making any argument concerning, these defendants' reliance on any advice of counsel from the attorneys representing their codefendants Samuel Lek and Lek Securities Corporation (the "Lek Defendants"). For the reasons that follow, the motion was granted at the final pretrial conference of October 11, 2019.
At a conference of October 27, 2017, which was held to address discovery issues, including the affirmative defenses available to the Avalon Defendants, the Court asked the Avalon Defendants whether they were "relying on an advice-of-counsel defense or any related defense like that." Because counsel was uncertain, the Avalon Defendants were given two weeks to state whether they intended to rely on any such defense. The Avalon Defendants did not notify the Court or the SEC within two weeks of the conference, or at any time thereafter, of their intent to rely on any such defense.
At a March 15, 2018 conference, the Lek Defendants confirmed that they would not waive the attorney-client privilege; they explicitly rejected the defense of reliance on advice of counsel. The Lek Defendants also affirmed that they would "not elicit testimony at trial that they consulted with counsel and [would] not offer evidence at trial of consultation with counsel." The Lek Defendants and the SEC agreed to accept an instruction to witnesses at trial that they are not to volunteer that counsel was consulted at any time unless they are specifically asked about consultation with counsel by the SEC attorneys.
Counsel for Avalon was present at the March 15, 2018 conference. He did not raise then, just as he had not raised earlier, any intent to rely on an advice-of-counsel defense or any related defense. Nor did he object to the instruction described on the record.
Pursuant to the schedule for motions in limine, the SEC filed on September 13, 2019 its motion to preclude the Avalon Defendants from offering evidence of, or referring to, any reliance on counsel or the presence or involvement of counsel in the events at issue at trial. The motion identifies two examples of ways in which it anticipates that the Avalon Defendants would seek to introduce evidence of a reliance on the advice of counsel. First, the motion refers to the Avalon Defendants' anticipated reliance on a letter from counsel for the Lek Defendants. The letter was not sent to any of the Avalon Defendants and none of the Avalon Defendants discussed the subject matter of the letter with counsel for the Lek Defendants. Second, the motion refers to a representation by the Lek Defendants that their counsel approved of the trading at issue in this case.
Section 20(a) of the Exchange Act provides for an affirmative defense of good faith. Section 20(a) states,
15 U.S.C. § 78t(a) (emphasis added).
Under § 20(a), "[o]nce the plaintiff makes out a prima facie case of § 20 liability, the burden shifts to the defendant to show that he acted in good faith, and that he did not directly or indirectly induce the act or acts constituting the violation."
Unlike § 20(a) of the Exchange Act, Sections 10(b) and 9(a)(2) of the Exchange Act and § 17(a)(1) of the Securities Act do not provide for an affirmative defense of good faith. Each of them, however, requires the plaintiff to prove either "scienter" (§§ 10(b) and 17(a)(1)) or a "manipulative motive and willfulness" (§ 9(a)(2)). Evidence of a defendant's state of mind is also relevant to the jury's determination of whether the defendant aided and abetted a primary violation of the securities laws, where the SEC must show that the defendant knowingly or recklessly provided substantial assistance to someone who violated the securities laws.
The Supreme Court has defined "scienter" as an "intent to deceive, manipulate or defraud" or "knowing or intentional misconduct."
With respect to claims under § 9(a)(2), the statute makes it unlawful
15 U.S.C. § 78i(a)(2) (emphasis supplied). According to the Second Circuit, § 9(a)(2) is at "the very heart" of the Exchange Act.
An advice of counsel defense "is not an affirmative defense that defeats liability" if the jury accepts the SEC's allegations as true.
The advice-of-counsel defense requires a defendant "to show that he [1] made a complete disclosure to counsel, [2] sought advice as to the legality of his conduct, [3] received advice that his conduct was legal, and [4] relied on that advice in good faith."
There are at least three interconnected reasons why the Avalon Defendants may not refer in any way to the Lek Defendants' consultations with counsel or offer evidence suggesting that there were such consultations, even in an effort to demonstrate their good faith. First, the attorney-client privilege "cannot at once be used as a shield and a sword."
Second, references to counsel's communications are not relevant in the absence of an advice-of-counsel defense and should be excluded as well pursuant to Rule 403, Fed. R. Evid. The intimation that counsel has blessed a transaction or practice without waiver of the attorney-client privilege "would give the defendant all of the essential benefits of an advice of counsel defense without having to bear the burden of proving any of the elements of the defense."
Third, legal advice given to another does not establish good faith as a matter of law. Without knowing what information the Lek Defendants shared with their attorneys and what those attorneys said to their clients in the context of privileged communications, the Avalon Defendants cannot assert that they relied in good faith on the fact that the Lek Defendants consulted counsel, much less on the Lek Defendants' reports of their supposed communications with their attorneys. The Avalon Defendants could have had the necessary access to the information that the Lek Defendants provided their attorneys and the advice that those attorneys gave the Lek Defendants only if both the Avalon and Lek Defendants were jointly represented and present during the privileged communications. A defendant cannot assert good faith or reasonable reliance based on a third-party's representation of advice the third party received through consultations with counsel to which the defendant did not have access.
For these reasons, the SEC's September 13 motion in limine to prohibit the Avalon Defendants from relying on or referring in any way to the Lek Defendants' consultations with counsel was granted.