Column: Latham socked with sanctions in bitter fight involving short seller Muddy Waters
30/10/2024 21:03
(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Alison Frankel
Oct 30 (Reuters) - A federal judge in California has
found law firm Latham & Watkins in civil contempt for “flagrant
violations” of a protective order shielding discovery produced
by short seller Muddy Waters in a securities class action
against Banc of California.
U.S. District Judge Dolly Gee of Santa Ana ruled that Latham
improperly disclosed to its client, California businessman
Steven Sugarman, an expert witness report that incorporated
highly confidential information from Muddy Waters. (Gee issued
the sanctions opinion on Sept. 30, but it was only unsealed on
Tuesday.) The judge also ruled that Sugarman improperly shared
the expert witness report with an employee in an attempt to gin
up negative news stories about Muddy Waters.
Gee ordered Latham and Sugarman to pay Muddy Waters’ fees
and costs for investigating and litigating the short seller's
motion for sanctions and civil contempt. Muddy Waters’ counsel
from Harder Stonerock said in an Oct. 21 declaration that it has
incurred more than $330,000 in fees and costs in connection with
that motion. The firm also asked Gee to award additional fees
and costs of more than $800,000 to recompense Muddy Waters for
litigating Sugarman’s initial subpoena for documents and for
defending a pair of related lawsuits by Sugarman against the
short-seller.
A Latham spokesperson declined to comment. Sugarman’s
counsel from Michelman & Robinson did not respond to a query. I
also sent a query to Sugarman via his current business, The
Change Company, but did not hear back.
The background on this dispute, which I first told you about
last year, is quite convoluted, but here are the essential
details. A class of investors sued Sugarman and Banc of
California BANC.N back in 2017 after Banc's share price
plunged in response to an anonymous blog post asserting that it
had ties to a known securities fraudster. The company settled
with investors in 2020 for about $30 million. As part of the
deal, investors agreed to dismiss claims against Sugarman.
In the midst of the class action, Sugarman and Latham
subpoenaed documents from Muddy Waters, which was not a party in
the case, to back defense arguments that the short seller
published the anonymous blog post to profit from its short
position in Banc shares. Muddy Waters produced trading records
and internal emails under a protective order that designated the
material as attorneys' eyes only.
An expert defense witness subsequently wrote a report to
support the defense theory that Muddy Waters had engineered and
profited from the precipitous drop in Banc’s share price. That
report, according to Gee, incorporated the highly confidential
information produced by Muddy Waters in response to the defense
subpoena.
Sugarman escalated his feud with Muddy Waters after the
class action settlement, suing the short seller in state and
federal court. Muddy Waters won the dismissal of both suits.
Then in 2023, according to Muddy Waters founder Carson
Block, the expert witness report resurfaced as a point of
contention. A onetime Sugarman employee named Adam Levine told
Block that Sugarman had instructed him “to leak complete,
unredacted copies” of the expert witness report in order to
“plant negative articles about Mr. Block and Muddy Waters.”
Sugarman’s ultimate goal, according to Levine, was to prompt
the U.S. Justice Department and U.S. Securities and Exchange
Commission to investigate Muddy Waters.
A caveat here: Sugarman and Levine are engaged in vicious
litigation against one another, with Sugarman accusing Levine of
stealing documents and threatening violence and Levine asserting
that he was wrongly terminated.
Sugarman’s brief opposing sanctions for Muddy Waters asserts
that Levine “fabricated” evidence to suggest that Sugarman
improperly shared the expert witness report with journalists.
Levine’s counsel, Erica Gonzales of Brock & Gonzales, did
not respond to an email query.
After Levine contacted him, Block moved for sanctions in the
class action, asserting that Latham and Sugarman breached the
protective order shielding Muddy Waters’ trading records and
emails. Latham, he said, should not have shared the expert
report with Sugarman because it contained material designated to
be seen only by attorneys. And Sugarman, Block alleged, violated
the protective order by telling journalists about the report.
Latham offered two arguments in its brief opposing
sanctions. The firm told Gee that the expert report, which it
labeled as confidential, was not actually based on attorneys’
eyes only discovery from Muddy Waters but was instead largely
derived from trading records obtained from other sources. Latham
also argued that even if the firm should have designated the
expert report as for attorneys’ eyes only, the error was a
good-faith glitch.
“A technical error during a years-long, incredibly complex
litigation requiring near-daily application of the protective
order does not preclude a finding of substantial compliance or
warrant imposition of civil contempt,” the firm said. “Sanctions
are particularly inappropriate here where there is no evidence
of bad faith.”
Gee rejected those arguments, concluding that the expert
report included copious information designated to be seen only
by attorneys.
“The evidence is clear and convincing that Latham violated
the order and that the violation was not based on a good faith
and reasonable interpretation,” the judge said. “The court takes
such flagrant violations of a protective order seriously.”
Gee did acknowledge “insufficient evidence” that Latham
“acted in bad faith as opposed to in serious error,” citing the
firm’s 2019 query to a magistrate judge about sharing Muddy
Waters' discovery with Sugarman. The underlying class action
settled, Gee noted, before the magistrate issued a ruling.
The judge also rejected Sugarman’s assertions that he did
not realize the report contained highly confidential information
and that he disclosed it only to his former employee, Levine, in
the good-faith belief that he was entitled to share it.
Gee highlighted Levine’s evidence that Sugarman himself
discussed the report with journalists.
“Sugarman’s claim that Levine did this independently, of his
own initiative, and not at Sugarman’s behest is simply not
credible,” she said.
In an email statement, Muddy Waters’ Block said Gee’s
description of Latham’s conduct showed “pervasive rot in the
American legal industrial complex.” Block also said the judge’s
findings “make clear Steven Sugarman went way over the line in
pursuing his misguided vendetta against Muddy Waters.”
Read more:
Muddy Waters LLC wants Latham sanctioned in escalating war
with California businessman
(Reporting By Alison Frankel)
((alison.frankel@thomsonreuters.com; 646-223-6491 (o)
917-848-7493 (c);))