A Lawyer Wearing Two Hats Raises the Ire of the SEC in Motion to Compel Production of Documents

[I]n brief,the operative complaint alleges that the Defendants engaged in a scheme to defraud in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934 by secretly disseminating false and misleading information about RenovaCare and its experimental medical device for treating burn wounds, “SkinGun,” through an online financial publishing company, StreetAuthority, LLC (“StreetAuthority”), which was owned and operated by a long-time friend of Rayat. See generally Dkt. No. 118. The SEC alleges a classic “pump-and dump” scheme. The Defendants allegedly pumped the price of RenovaCare stock through the promotions and then, after the price of the stock had been artificially inflated, dumped the securities onto unsuspecting members of the public. Id. The Defendants include Rayat, a Canadian national who was at one time the majority and controlling shareholder of RenovaCare and served as Chairman of its Board of Directors, id. ¶ 25, Bhogal, who is alleged to be a “strategic advisor” to RenovaCare, id. ¶ 26, and Sidhu, who is alleged to have been a member of the board of directors of RenovaCare’s predecessor entity, id. ¶ 27. The complaint alleges that while the scheme was ongoing, Defendants took step to conceal their role in it, including by making false statements in response to an inquiry from OTC Markets Group, Inc. (“OTC Markets”), the entity that supervised the exchange on which RenovaCare stock was listed. Id. ¶¶ 137–66.

at Pages 1 - 2 of Securities and Exchange Commission, Plaintiff, v. Harmel S. Rayat, RenovaCare, Inc., Jatinder Bhogal, Jeetenderjit Singh Sidhu, and Sharon Fleming, Defendants (Memorandum and Order, United States District Court for the Southern District of New York, 21-CV-4777)
https://brokeandbroker.com/PDF/RayatSDNYMemo230724.pdf

Improperly Withholding Documents

Before SDNY is the SEC's motions pursuant to Federal Rules of Civil Procedure 26: Duty to Disclose; General Provisions Governing Discovery and FRCP 37: Failure to Make Disclosures or to Cooperate in Discovery: Sanctions to compel the production of documents by Defendants Rayat and RenovaCare:

The SEC claims that RenovaCare and Rayat have been improperly withholding documents between RenovaCare’s outside counsel, primarily Joseph Sierchio and persons who were not RenovaCare employees at the time, and Defendants Rayat and Sidhu. Dkt. No. 209 at 1–2. The SEC argues that the inclusion of these individuals on the communications deprives them of the confidentiality necessary for the assertion of the attorney-client privilege. The SEC also argues that Sierchio wore two hats at RenovaCare—outside counsel and Director—and that Defendants are withholding communications to and from him in his capacity as Director. Id. at 2. The SEC further claims that the descriptions of the communications in Defendants’ privilege log are broad and generic. Id.

at Page 2 of the SDNY Memorandum

One Head. Two Hats

In response to the SEC motions, the Defendants not only cite to the affiliation between RenovaCare and Kalen Capital Corporation but also assert that from January 2018 to mid-March 2018, those two companies jointly sought Sierchio's advice on multiple occasions and regarding multiple subjects. Defendant Rayat was President/Sole Stockholder of Kalen Capital, which during the relevant time was the majority shareholder of RenovaCare. Further, Defendant Sidhu had an administrative role at Kalen Capital and served at this company as Rayat's assistant. Moreover, during the relevant times, Sierchio asserts that:

[H]e served as outside U.S. general corporate counsel to both Kalen Capital and RenovaCare, that he and his associates functioned as one outside legal department servicing both Kalen Capital and RenovaCare, and that there were occasions in which Kalen Capital and RenovaCare together solicited his legal advice. Dkt. No. 214 ¶ 4. He characterizes the advice that he provided on each of the subjects above as joint advice. . . .

at Page 8 of the SDNY Memorandum

Common Interest

After considering the competing arguments, SDNY found that:

Defendants have met their burden to show that RenovaCare and Kalen Capital justifiably expected that their co-client communications with Sierchio, on matters of common legal interest, would have been protected by the joint-client privilege. As to his engagement with RenovaCare and Kalen Capital, Sierchio repeatedly declares, under the penalty of perjury, that he “acted as a legal advisor on joint communications” as to the OTC Markets letter, that he provided “joint legal advice” during the OTC Markets inquiry, that Bold and Rayat “jointly sought [his] legal advice on how to respond,” and that he “regarded communications between [himself], . . . RenovaCare, and . . . Kalen Capital as protected by attorney-client privilege due to their common interest in responding to OTC Markets.” Dkt. No. 214 ¶¶ 7–11. Supporting evidence indicates an implied agreement to joint representation on a common legal interest. Indeed, the January 3, 2018 letter from OTC Markets to RenovaCare specifically requires RenovaCare to make an “inquiry” request of any “controlling shareholders,” Dkt. No. 216-1 at 1, and RenovaCare’s press release makes representations on behalf of those shareholders, namely that Kalen Capital was “not involved in any way” with the promotion and that it had “not sold or purchased. . . any shares of common stock . . . within the last 90 days.” Dkt. No. 216-7 at 2. After RenovaCare was removed from the OTC Markets trading platform, RenovaCare sent a letter to OTC Markets with representations of Kalen Capital’s activities—including that it “had not sold any Company shares in many years” and had further invested in the company. Dkt. No. 216-9 at 4. Sierchio further notes that he developed a “joint legal strategy” regarding short sellers after requests from RenovaCare and Kalen Capital, Dkt. No. 214 ¶ 13, and that he likewise regarded that communication as privileged due to “their common interest in developing a joint legal strategy,” id. ¶ 15. Again, that implied agreement of joint representation, and common legal interest, is further evidenced by the communications from Rayat to Bold and the subsequent forwarding of that email from Bold to a representative of FINRA. See Dkt. Nos. 216-11, 216-12. And as to communications with Rayat in particular, Sierchio declares that Rayat “was the CEO and owner of Kalen Capital, and he served as the company’s agent” and that he “understood Mr. Rayat to be acting on behalf of Kalen Capital.” Dkt. No. 210-1 ¶ 19; see also Dkt. No. 214 ¶ 4 (describing Rayat as Kalen Capital’s “president”). Defendants have met their burden that communications with Kalen Capital and Rayat are protected under the joint-client privilege. 

at Pages 10 - 11 of the SDNY Memorandum

Having tackled and resolved the key issue of protection under joint-client privilege, SDNY makes short shrift of the SEC's remaining contentions. For example, the SEC argued that some of Sierchio's conduct involved communications he penned not in his role as counsel but as a Director; however, the Court was persuaded that:

[R]enovaCare and Kalen Capital (and Rayat, by extension) had common legal interests in ensuring that those statements and their representations were not materially false or misleading, as the veracity of representations by one entity potentially would have legal implications for the other. . . .

at Page 12 of the SDNY Memorandum

Bill Singer's Comment

When I first started practicing law in the 1980s, the prospect of a lawyer going into business with a client was frowned upon. As Wall Street heated up in the 1980s, however, more and more lawyers disregarded the frowns and either took on roles at various clients or "took stock" in a given deal. For some of those lawyers, the conduct was deemed legal and ethical, even if only "barely." For others, well, go look it up -- a number of erstwhile lawyers became felons and disbarred.

Notwithstanding the sordid history of crossing the ethical/legal line, many modern-day lawyers still take on in-house roles at clients, or, provide outside-counsel services that may appear to be more "business-related" than the providing of legal counsel. In all likelihood, most of the lawyers engaged is such dual roles are doing so in an ethical and legal fashion. On the other hand, "most" is not "all."

One lesson from today's litigation is that lawyers should carefully -- very carefully -- weigh the wearing of two hats.

Another lesson is for the clients of lawyers wearing two hats to consider the mess that occured in SEC v. Rayat and make sure that you slowly, carefully, and fully think through all the issues raised by the federal regulator and how the federal court disposed of them. One reading of  Rayat is that it can be done. The larger question that needs to be asked by any lawyer and client contemplating such a relationship is if it should be done.

• SEC
• Rayat
• Renovacare
• SDNY
• Kalen Capital
• FRCP 26
• FRCP 37
• Rule BrokeAndBroker
• Bill Singer