Securities and Exchange Commission v. Rayat

Background

The Securities and Exchange Commission (SEC) moved under Federal Rules of Civil Procedure 26 and 37 to compel production of documents that Harmel S. Rayat and RenovaCare, Inc. had withheld on attorney-client privilege grounds. The privilege generally protects confidential communications between a client and lawyer made to obtain or provide legal advice.

The SEC’s motion concerned documents involving RenovaCare’s outside counsel, primarily Joseph Sierchio, and people who were not RenovaCare employees at the time, including Rayat and Jeetenderjit “Jeet” Singh Sidhu. The SEC argued that sharing the communications with those people destroyed confidentiality. It also argued that Sierchio sometimes acted as a RenovaCare director rather than as its lawyer, and that the defendants’ privilege descriptions were too broad and generic.

The underlying SEC case alleges that the defendants participated in a scheme to promote RenovaCare and its experimental SkinGun medical device through StreetAuthority, LLC, artificially inflate RenovaCare’s stock price, and sell shares to members of the public. The SEC also alleges that the defendants later made false statements in response to an inquiry from OTC Markets Group, Inc.

The court had already granted the SEC’s motion to the extent it sought documents shared with Jatinder Bhogal. This order addressed the remaining issues involving documents shared with Rayat and Sidhu, as well as certain communications disclosed to other third parties.

Legal standards and analysis

Because the case involves federal-law claims, federal common law governed privilege. The party asserting attorney-client privilege had to establish that the communications were between a client and lawyer, were intended to remain confidential, and were made for legal advice. The court emphasized that the privilege is applied narrowly because it prevents relevant information from being disclosed.

The defendants argued that communications shared with Rayat and Sidhu remained protected under the joint-client privilege. That privilege can protect communications between one lawyer and multiple clients who share a legal interest. The court explained that common ownership or an affiliation between companies, by itself, does not establish the required common legal interest.

The court nevertheless found that RenovaCare and Kalen Capital had shown an implied agreement for joint representation by Sierchio on several matters. These included responding to OTC Markets’ inquiries about promotional materials and the involvement of controlling shareholders, responding to RenovaCare’s possible removal from an OTC trading platform, and addressing alleged efforts to depress RenovaCare’s stock price. The court relied on Sierchio’s sworn declaration and supporting documents showing that RenovaCare and Kalen Capital jointly sought legal advice and pursued common legal strategies.

The court also concluded that communications with Rayat were protected because Sierchio understood Rayat to be acting for Kalen Capital. As to Sidhu, the court found that testimony showed he worked for Rayat and Kalen Capital as an administrative assistant who facilitated the review and transmission of materials. The court therefore treated Sidhu as an agent of Kalen Capital and held that the communications involving him were protected by the joint-client privilege.

The court rejected the SEC’s argument that Sierchio’s communications were primarily business-related or involved his role as a director. Sierchio stated under penalty of perjury that he acted as a legal adviser and that the communications involved requests for or provision of legal advice. The court found that the record supported that characterization, including because OTC Markets’ inquiries raised concerns about potentially false or misleading statements and had legal consequences for both RenovaCare and Kalen Capital.

The SEC also briefly invoked the crime-fraud exception, which can remove privilege from communications made to further a crime or fraud. The court held that the SEC had produced only suspicion and had not shown enough to apply the exception. The court therefore declined to apply it.

The court reached a different conclusion for communications disclosed to Rhonda Rosen, whom the privilege log described as a consultant and RenovaCare de facto employee. Because the defendants had not attempted to establish privilege over communications disclosed to Rosen, the court ordered that those withheld communications be produced. As to other third parties, including people identified in the opinion but not addressed in the SEC’s motion and briefing, the court denied the motion without prejudice to renewal.

Disposition

The court stated: “The motion to compel is DENIED IN PART.” The order also noted that, in the earlier order, the motion had been granted as to communications involving Bhogal. Thus, the current order preserved privilege for the communications with Rayat and Sidhu that the defendants adequately supported, required production of communications disclosed to Rosen, and left the SEC able to renew its request concerning other third parties not addressed in this motion. Judge Lewis J. Liman signed the memorandum and order on July 24, 2023.