United States Securities and Exchange Commission v. Collector's Coffee Inc.

Background

The SEC sued Collector’s Coffee Inc., doing business as Collectors Café, Mykalai Kontilai, and Veronica Kontilai. The SEC alleged that the defendants violated federal securities laws by defrauding investors. Gail Holt, a former CCI employee, had been represented by Andrew Ceresney, William Leone, and Susie Youn during the SEC’s investigation.

Holt was deposed twice. During the second deposition, she described communications with the three attorneys, including statements about an employment agreement, a loan agreement, and a bank statement. She testified that she had made or relayed false statements about the employment agreement at Kontilai’s direction and that she expected some information to be communicated to the SEC. She also testified about statements concerning the loan agreement and bank statement and about a meeting involving Youn and attorneys for other parties.

The defendants later deposed Ceresney, Leone, and Youn. Each asserted attorney-client privilege—the protection for confidential communications made to obtain or provide legal advice—in response to some questions. The defendants moved to compel further answers, arguing that Holt had waived the privilege and that the crime-fraud exception applied. That exception removes privilege from communications used to advance a contemplated or ongoing crime or fraud.

Rule 26 Proportionality

The court first considered whether the requested testimony was proportional to the needs of the case under Federal Rule of Civil Procedure 26(b)(1). The court accepted that impeachment information about a witness can be relevant, but concluded that discovery aimed primarily at impeaching Holt had to be limited. The court also considered that the attorneys were non-party witnesses, that defendants sought the testimony after discovery had ended, and that defendants had already conducted extensive questioning of Ceresney.

The court determined that any permitted questioning had to concern non-protected communications directly related to the allegations in the SEC’s amended complaint. The court found that the relevant overlap concerned the alleged fabrication or fraudulent production of the employment agreement, loan agreement, and bank statement.

Crime-Fraud Exception

The court found probable cause to believe that Holt attempted to use communications with Ceresney and Leone to advance a plan to give false information to the SEC about the employment agreement. Based on Holt’s deposition testimony, the court found that she told Leone to convey statements she knew were false and told Ceresney that she had created the employment agreement while knowing that the information would be communicated to the SEC.

The court concluded that these statements were material because they could influence the SEC’s investigation or distract investigators from a critical matter. It held that the crime-fraud exception applied to communications with Ceresney and Leone concerning Holt’s recreation of the employment agreement and any plan to transmit related information to the SEC. The court did not find a basis to apply that exception to Holt’s communications with Youn or to communications about the loan agreement or bank statement.

For Leone, the court ruled that additional communications about the employment agreement and Holt’s alleged recreation of it were no longer privileged. The court also found that Holt had waived privilege as to the particular communications in which she told Leone that she did not know where the bank statement came from and that the loan agreement and bank statement were authentic. The court rejected defendants’ request for a blanket waiver covering all communications between Holt and her attorneys.

Disposition

The court declined to require Ceresney to appear for another deposition, even though the crime-fraud exception would permit questioning about additional communications on the employment-agreement topic. The court relied on the lack of proportionality and the fact that defendants had already questioned Ceresney for nearly seven hours, including questioning about matters unrelated to the SEC’s allegations.

The court denied a further deposition of Youn. It found that the relevant meeting included several attorneys for CCI, Kontilai, and Veronica, that defendants’ own attorney had taken notes, and that the burden of further questioning was disproportionate given defendants’ access to those notes.

The court allowed only one further deposition, of Leone, limited to two subjects: communications about Holt’s recreation of Kontilai’s employment agreement, and the specific communications in which Holt discussed the source and authenticity of the loan agreement and bank statement. The deposition was limited to 60 minutes and was to occur within 14 days unless Leone’s schedule required otherwise. Judge Gorenstein therefore granted in part and denied in part the defendants’ motion to compel.