Securities and Exchange Commission v. Rayat

Background

The SEC brought an enforcement action alleging that the defendants participated in a scheme involving false and misleading promotions of RenovaCare and its experimental burn-wound medical device, SkinGun. In this opinion, the court addressed only the SEC’s motion to compel documents that Harmel S. Rayat and RenovaCare, Inc. withheld based on attorney-client privilege. The court noted that other privilege issues remained subject to additional briefing and evidence.

The privilege dispute

The attorney-client privilege generally protects confidential communications between a client and lawyer made to obtain or provide legal advice. The party claiming the privilege bears the burden of proving that it applies. The SEC argued that communications involving Bhogal were not confidential because he was a consultant rather than a RenovaCare employee. The defendants argued that Bhogal was the “functional equivalent” of an employee and therefore could participate in privileged communications without waiving the privilege.

The court explained that some courts have applied a narrow exception for consultants who are effectively integrated into a company’s staff. Relevant considerations include whether the consultant had authority to make decisions for the company, held primary responsibility for an important corporate function, maintained a close and continuous working relationship with the company, possessed information not held by others, and sought legal advice to perform company duties. The court also stated that a person’s formal title or payroll status is not by itself decisive.

Court’s analysis

The court found the defendants’ evidence insufficient. That evidence showed that Bhogal had a close relationship with RenovaCare’s chief executive officer, assisted him with various tasks, and was viewed by RenovaCare’s outside counsel as important to providing legal advice. But the evidence did not establish that Bhogal had authority to make decisions for RenovaCare, primary responsibility for a key corporate function, or responsibility for necessary tasks that only he performed.

The court also relied on RenovaCare’s consulting agreement with Vector Asset Management, Inc., which stated that the consultant would not manage the company’s business, could perform services for others, and would not have an employee or agency relationship with RenovaCare. The court noted that RenovaCare’s annual report stated that its consultants were not required to devote all their time and efforts to the company. There was also no evidence that Bhogal possessed information unavailable to RenovaCare’s employees or regular consultants.

Ruling

Judge Liman concluded that, at most, the defendants had shown that Bhogal was a helpful consultant. They had not shown that he was a de facto employee entitled to the functional-equivalent exception to the attorney-client privilege.

The court’s conclusion states: “Plaintiff’s motion is GRANTED IN PART as to Bhogal.” The court ordered production of the withheld documents shared with Bhogal or on which he was copied. It reserved decision on the remaining assertions of privilege.