U.S. Securities and Exchange Commission v. Commonwealth Advisors, Inc., et al CIVIL ACTION NO. 12-700-JWD-SCR Signed December 16, 2015 deGravelles, John W., United States District Judge RULING *1 Before the Court are Defendants' appeals of and/or objections to three separate but related rulings made by the United States Magistrate Judge: first, the Magistrate Judge's Order finding as moot Defendant's Motion to Strike, (Doc. 127); second, his ruling denying Defendants' Motion for Sanctions, (Doc. 128); and, third, his granting of Plaintiff's Second Motion to Compel, (Doc. 131).[1] The appeals/objections to these rulings are, respectively, Document Numbers 134, 133 and 141. They are, in turn, opposed. (Docs. 144, 145, 148.) Reply briefs were filed in support of the appeal/objections to the Magistrate Judge's rulings on the Motion for Sanctions, (Doc. 159), and the Motion to Compel, (Doc. 152). This Court has carefully reviewed the rulings, record, briefs and associated documents and, for the reasons which follow, denies Defendants' objections and appeals. BACKGROUND On November 8, 2012, the United States Securities and Exchange Commission (“Plaintiff,” “SEC,” or “Commission”) sued Commonwealth Advisors, Inc. (“Commonwealth”) and Mr. Walter A. Morales (“Morales”), (collectively, “Defendants”), for fraud in connection with their management of several hedge funds. (Doc. 1.) It is alleged that the hedge funds heavily invested in residential-mortgage-backed securities (“RMBS”)[2] which, when the investments began to falter during the financial crisis of 2007 and 2008, caused Defendants to orchestrate an elaborate, multifaceted, and fraudulent scheme to hide losses and conceal the truth of those losses from investors. (Id. ¶¶ 1–2 at 1–2; see also Doc. 57-1 at 1–2.) In a more recent filing, Plaintiff summarizes the alleged scheme as follows: Defendants carried out the scheme by (1) transferring distressed RMBS bonds to a hard-to-value collateralized debt obligation (“CDO”) at inflated prices to conceal declines in the RMBS' market value; (2) transferring massive amounts of the fraudulently overvalued CDO to a Commonwealth-managed fund, despite explicit promises to the largest investor of the fund that Commonwealth would limit the fund's exposure to the CDO to 10% of the fund's portfolio; (3) engaging in widespread cross-trading funds, selling securities from one Commonwealth-managed fund to another at fraudulently low prices in order to artificially create gains to hide the collapsing value of the CDO; and (4) purchasing still more of the troubled CDO and inflating its value to offset losses to the funds on the losing end of the cross-trades. (Doc. 148 at 2 (citing Doc. 1 ¶¶ 38-65).) *2 In the summer of 2014, Commonwealth informed the SEC that it intended to rely upon advice of counsel as a defense to certain of Plaintiff's claims. (Doc. 133-1 at 1.) Consequently, Commonwealth “was required to provide the SEC with all attorney-client communications related to those actions that Commonwealth claimed to have taken in good-faith reliance upon advice of counsel” so as to substantiate this defense; it also “provided the SEC with a superseding set of comprehensive privilege logs that identified, in detail, all documents that Commonwealth continued to withhold as privileged.” (Id. at 1; see also Doc. 57-1 at 3–4.) In an answer to discovery, Defendants described the scope of their voluntary waiver of the attorney-client privilege as a result of their assertion of an “advice of counsel” defense, a description some 3 1//2 pages in length. (Doc 57-3 at 3–6.) However, in its briefing in connection with the related motions under consideration, Defendants characterize this waiver more narrowly as implicating no more than “three discrete matters that fully transpired between 2007 and the fall of 2008.” (Doc. 141-1 at 6, 2; see also Doc. 64 at 2 n.1.) In their responses to Plaintiff's earlier discovery, Defendants objected and claimed privilege as to a significant number of inquiries. Plaintiff therefore moved to compel production of relevant documents, arguing before the Magistrate Judge that although Defendants had affirmatively waived privilege across a significant number of subjects by asserting the advice of counsel affirmative defense, the privilege logs provided to the Plaintiff failed to adequately identify the subject matters of items withheld as required by Federal Rule of Civil Procedure 26(b)(5)(A).[3] (Doc. 45 at 7-11.) Plaintiff argued that certain of the matters withheld were clearly within the scope of the waiver of the attorney-client privilege and therefore discoverable. (Id.) The Magistrate Judge agreed with Plaintiff. (Doc. 59.) He therefore held that Defendants had waived their attorney-client privilege over all documents for which that privilege was asserted and ordered Defendants to produce all documents within seven days. (Id. at 13-14.) This ruling was appealed to the District Court, (Doc. 64), which was opposed, (Doc. 66). In reversing the Magistrate Judge's ruling, this Court made several findings and observations which are important to its decision here. First, all Parties agreed that many document descriptions given in Defendants' privilege log were inadequate and not in compliance with Rule 26(b)(5)(A) in that they did not describe the documents “in a manner that, without revealing information itself privileged or protected, will enable other parties to assess the claim [of privilege].” (Doc. 77 at 3.) This concession was well-founded, and the Court agreed. (Id.) Second, at oral argument, the Court asked counsel for Defendants how much time would be needed to revise the log to bring it into compliance with the aforementioned rule. Defendants' counsel responded that two to four weeks would be adequate. (Id. at 6.) The Court gave Defendants five weeks. (Id.) The Court concluded that the Magistrate Judge's order finding an across-the-board waiver of the privilege, without giving Defendants an opportunity to correct the deficiencies, was unduly harsh. However, the Court made clear that “[i]f 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.” (Id. at 1.) STANDARD “Federal law affords a magistrate judge broad discretion in the resolution of non-dispositive pretrial matters. Thus, a district court reverses a magistrate judge's ruling on such matters only where the court finds the ruling to be ‘clearly erroneous or contrary to law.’ ” St. Paul Fire & Marine Ins. Co. v. SSA Gulf Terminals, Inc., No. 01-3063, 2002 WL 31375611, at *2, 2002 U.S. Dist. LEXIS 20120, at *3–4 (E.D. La. Oct. 21, 2001) (citations omitted) (finding a magistrate judge's ruling concerning waiver of the attorney-client privilege was not clearly erroneous). DISCUSSION – PLAINTIFF'S SECOND MOTION TO COMPEL *3 At the heart of this motion is whether Defendants' privilege logs adequately and correctly describe the documents upon which privilege is being asserted and whether Defendants are withholding documents which fall within the scope of the privilege which they deliberately waived. In that regard, the Magistrate Judge concluded “[a] comparison of those subjects with the descriptions on the defendants' privilege logs shows that the defendants continue to withhold documents within the scope of their waiver.” (Doc. 131 at 2.) “Defendants' narrow, cabined interpretation of the subjects and scope of their waiver is unfair to the [P]laintiff in the circumstances of this case.” (Id. at 4.) The Magistrate Judge found that the Defendants' redaction of certain portions of documents produced were based on an incorrect interpretation of the scope of Defendants' waiver. Using as an example two documents in which information was redacted on the basis that there was “no mention of waived topics” within the documents, (Doc. 86-12, Ex. J; Doc. 86-13, Ex. K),[4] the Magistrate Judge found that these representations were incorrect and that the information which had been redacted from these documents fell within the scope of the waiver and therefore were discoverable. (Doc. 131 at 9-10, 13.)[5] The Magistrate Judge concluded: Plaintiff has shown that the statement in a document description that there is “(No mention of waived topics)” is not trustworthy. Defendants did not timely produce all documents that became discoverable as a consequence of their attorney client privilege waiver. And they have improperly redacted parts of documents that include communications on the subjects of their waiver without any notice to the plaintiff that they did so. The only way to confirm, with a reasonable degree of confidence, which documents were properly withheld or redacted is to examine every document withheld in every redacted document that they produced. (Id. at 11.) Defendants argue that their privilege logs accurately describe the redacted information or withheld documents and that the information redacted or withheld is properly beyond the scope of the waiver. Defendants further argue that the Magistrate Judge's ruling is overly broad and goes beyond what is properly discoverable. Furthermore, in the alternative, Defendants argue that to the extent there is any error in their understanding and application of the scope of the waiver, it is based upon guidance received from a previous ruling by the Magistrate Judge. Plaintiff counters that the Magistrate Judge's findings are correct and that the privilege assertions and document descriptions are non-existent or so vague and unreliable that nothing short of an across-the-board waiver will assure that all information which is properly discoverable is provided to Plaintiff. As stated above, the ruling of the Magistrate Judge is entitled to deference and should be reversed only where the ruling is “clearly erroneous”. Williams v. Connick, No. 12-1274, 2014 WL 3909113 at *2, 2014 U.S. Dist. LEXIS 110636, at *5 (E.D. La. Aug. 11, 2014). A finding is “clearly erroneous” when the reviewing Court is “left with the definite and firm conviction that a mistake has been committed.” Id. (quoting United States v. Stevens, 487 F.3d 232, 240 (5th Cir. 2008)). The Magistrate Judge has spent countless hours presiding over the complex discovery disputes in this case and, based on his intense familiarity with both its facts and the Parties' legal posture, found an unacceptable mismatch between the true nature of the documents withheld and the rightful ambit of Commonwealth's remaining privilege. Cf., e.g., Avgoustis v. Shinseki, 639 F.3d 1340, 1345–46 (Fed. Cir. 2011); United States v. Constr. Prods. Research, 73 F.3d 464, 473 (2d Cir. 1996). In his reasonable analysis, as an inadvertent disclosure revealed, Defendant's log was imperfect and imprecise; much was deemed privileged that a reasonable mind would not have classified so. In so concluding, the Magistrate Judge applied the proper standard in a most reasonable manner, leaving this Court with no firm conviction that a mistakes has been committed. As such, having carefully reviewed the record and briefs in this matter, this Court does not find that the ruling of the Magistrate Judge is clearly erroneous. DISCUSSION – MOTION FOR SANCTIONS *4 In their appeal from the Magistrate Judge's denial of Defendants' Motion for Sanctions, Defendants argue that Plaintiff violated this Court's M.D. La. Local Rule 83(b)(6) and the ethical obligations imposed by LA. R. PROF. COND. 4.4(b) when it reviewed and utilized in its Motion to Compel two documents which were inadvertently provided to Plaintiff in un-redacted versions. (Doc. 133-1.) On two points, this Court concurs with Defendants. First, it does agree that the Magistrate Judge was incorrect in basing his conclusion, in part, on his finding that Defendants were at fault in inadvertently disclosing the information in question and that Defendants should have discovered the inadvertent disclosure sooner. Second, it does agree with Defendants that these considerations have nothing to do with Plaintiff's obligation under the circumstances. On the central point, however, this Court agrees with the Magistrate Judge: under the circumstances of this case, Plaintiff did not act inappropriately. The Court thus disagrees with Defendants' characterization of what happened as “the SEC ... review[ing] hundreds of privileged documents and fil[ing] its favorite samples into the public record.” (Doc. 133-1 at 4.) It is clear from the description given by Plaintiff as to how the inadvertent disclosure was discovered, a description not seriously contested by the Defendants, that there was no item by item review of each of the documents produced and then cherry picking by the Plaintiff of its “favorites” for use in its motion. (See Doc. 145 at12-15; Doc. 145-1.) Rather, the Court agrees with the Magistrate Judge: given this Court's prior ruling, (Doc. 77), “the [P]laintiff was expecting to receive documents for which the attorney-client privilege was waived-documents that were not redacted, or at least had fewer redactions.” (Doc. 128 at 3 (emphasis in the original).) Further: All the [P]laintiff did was review the documents the defendants produced, including the associated native-format files and metadata, which were produced to it for that very purpose. Defendants did not separately identify, in a cover letter or index or table or by Bates numbers, those documents which they thought they had redacted. Given the procedural history leading to the production, which culminated with the district judge's Ruling and Order, the [P]laintiff had every reason to expect the [D]efendants' production would be complete and correct. (Id. at 5.) Also, as mentioned by the Magistrate Judge, the Defendants had previously produced other documents in two versions, one version not redacted and the other redacted. (Id. at 4.) “Consequently, that the image was redacted, whereas the native-format file and metadata were not, did not necessarily mean there was a problem.” (Id.) Finally, this Court agrees specifically with the Magistrate Judge's conclusion that “[n]or did the [P]laintiff do anything sanctionable by presenting to the court two examples from the [D]efendants' production for the purpose of explaining how the [D]efendants' revised privilege logs are still unreliable and why the court should again find that the [D]efendants waived their attorney-client privilege.” (Doc. 128 at 6.) At the very least, this Court finds no clear error of the kind needed to reverse the ruling of the Magistrate Judge, and the appeal is therefore denied.[6] See, e.g., Bank of Camden v. State Bank & Trust Co., No. 5:13-CV-21 (MTT), 2014 WL 991782, at *2, 2014 U.S. Dist. LEXIS 32264, at *6 (M.D. Ga. Mar. 13, 2014) (noting that the recipient of an inadvertent disclosure acted improperly in “providing the unredacted documents to its expert witness, using them in a deposition, and filing them on the public docket” but otherwise “properly filed a motion to compel for the Court to determine whether the documents were privileged”); Cudd Pressure Control, Inc. v. N.H. Ins. Co., 297 F.R.D. 495, 501 (W.D. Okla. 2014) (granting motion to compel “to the extent that Plaintiff's Motion to Compel seeks to retain and utilize the inadvertently produced documents” discussed within the motion itself). DISCUSSION – MOTION TO STRIKE *5 In this appeal (Doc. 134), Defendants maintain that Plaintiff's Motion to Compel should be stricken as “illegally-based” for the same reasons articulated in support of Defendants' Motion for Sanctions. For the reasons detailed above, this Court does not find clear error in the ruling of the Magistrate Judge. (Doc. 127.) This appeal is therefore denied. CONCLUSION For the foregoing reasons, Defendants' Appeal of Magistrate Judge's Ruling on Motion for Sanctions, (Doc. 133), Defendants' Appeal of Magistrate Judge's Ruling on Motion to Strike, (Doc. 134), and Defendants' Objection to and Appeal of Magistrate Judge's Ruling on SEC's Second Motion to Compel, (Doc. 141), are DENIED and OVERRULED. Signed in Baton Rouge, Louisiana, on December 16, 2015. Footnotes [1] The underlying motions are, respectively, Docs. 95, 96, and 86. [2] Generally, RMBS are “a type of asset-backed security—that is, a security whose value is derived from a specified pool of underlying assets. Typically, an entity (such as a bank) will buy up a large number of mortgages from other banks, assemble those mortgages into pools, securitize the pools (i.e., split them into shares that can be sold off), and then sell them, usually as bonds, to banks or other investors.” City of Pontiac Policemen's & Firemen's Ret. Sys. v. UBS AG, 752 F.3d 173, 177 n.7 (2d Cir. 2014). [3] In this order, any and all reference to “Rule” or “Rules” is to the Federal Rules of Civil Procedure unless otherwise noted. [4] See also Doc. 154 at 1-21. [5] These two documents and the inadvertent disclosure of the metadata revealing the full text of these documents is the subject of the Motion for Sanctions and the foundation for the Motion to Strike, which are discussed, infra. [6] Revealingly, Rule 26(b)(5)(B) places the onus on the mistakenly disclosing party to rectify its mistake and allows the recipient to “promptly present the [relevant] information to the court under seal for a determination of the claim.” FED. R. CIV. P. 26(b)(5)(B). Plaintiff arguably did no more than bring the “specified information” to a court's attention for review of a privilege's applicability in a case in which a protective order preserved any surrendered information's confidentiality, (Doc. 24).