Trial in the SEC’s securities fraud action against several entities and individuals who managed the Reserve Primary Fund – the money market fund that “broke the buck” four years ago after Lehman Brothers announced its bankruptcy – is slated to begin on October 1, 2012. Earlier this week, in anticipation of the looming trial date, Judge Paul Gardephe issued a series of evidentiary rulings. They were a mixed bag for the parties. On the one hand, Judge Gardephe rejected the SEC’s attempt to prevent the Reserve Fund defendants from pursuing an advice of counsel defense. On the other, he ruled that two of defendants’ expert witnesses could not testify at trial. These rulings could have a substantial effect on the trial or on any settlement negotiations between the parties.
A centerpiece of the Reserve Fund defendants’ defense has been that they sought and relied on advice of counsel in communicating with the public on September 15 and 16, 2008 and considering a credit support agreement that would preserve the Primary Fund’s $1.00 NAV. The SEC sought to preclude defendants from claiming at trial that they had relied on advice of counsel, contending that the defendants had failed to comply with their discovery obligations and had not disclosed all the advice they had received. The SEC also argued that defendants’ in-house and outside counsel were not sufficiently independent and therefore defendants could not have reasonably relied on their advice. Judge Gardephe rejected the SEC’s arguments, finding that the defendants had met their discovery obligations with respect to the two topics about which they intend to assert an advice of counsel defense. He also held that the SEC had failed to demonstrate that defendants’ in-house and outside counsel were not in a position to give disinterested advice. The Reserve Fund defendants are free to move ahead with their advice of counsel defense. At the same time, however, Judge Gardephe denied defendants’ motion to allow their expert witnesses to put the events of September 2008 in historical context. Earlier in the litigation, the court had suggested that expert testimony “that addresses the historically unprecedented nature of the events that the defendants confronted in mid-September 2008” might be relevant to the jury’s determination of whether the defendants had acted with an intent to defraud. But the court found that the proffered expert testimony did not provide helpful historical context. Instead, the testimony presented a risk of jury confusion because it focused on the government’s alleged regulatory missteps in supervising Lehman and mishandling of the fallout from its bankruptcy. Judge Gardephe also excluded expert testimony about whether defendants’ actions were consistent with good corporate governance because the SEC represented that it no longer intended to argue that defendants’ actions were inconsistent with such principles. With trial set to begin in two weeks, we will soon see how these rulings play out.