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A Reckless Production Endangers an Informer’s Privilege

May 23, 2014
barn door

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Last week the U.S. District Court for the Southern District of New York addressed what happens when a federal agency’s “complete recklessness” could lead to the unmasking of a confidential informant. Contrary to what might be imagined, the case doesn’t involve corrupt police or ambitious prosecutors. Nor does it involve jailhouse snitches or microphone wearing witnesses. Instead, the agency in question is the CFTC and the confidential informant is an employee of an energy trader.

The case stems from a three-year old CFTC civil enforcement action alleging the accumulation and sell-off of a large position in physical crude oil for the purpose of manipulating the futures price. Defendants are Parnon Energy Inc., Arcadia Petroleum Ltd. Arcadia Energy (Suisse) SA, James T. Dyer, and Nicholas J. Wildgoose. View the CFTC press release announcing the lawsuit here.

As part of the pre-trial discovery process, the parties executed a protective order in which they agreed to return inadvertently produced privileged information. In March and April of last year, and in accordance with that protective order, the CFTC made two document productions. The March documents contained unredacted information, including emails between the agency and a third-party attorney. In the April production, the CFTC invoked the “informer’s privilege” and redacted information that “tended to reveal the identity of an attorney and a law firm representing certain anonymous sources.” By comparing the information from the two sets of documents and using unredacted metadata from 21 redacted documents produced in April, defendants were able to learn that the third-party attorney represented a confidential informant who worked for defendants’ competitor. Defendants then subpoenaed the attorney.

In an attempt to close the barn door after the horse escaped, the CFTC moved to suppress the subpoena and have the unredacted metadata returned. It was only partially successful. The Court found that “the CFTC’s utter failure to review tens of thousands of third-party documents for privilege constituted ‘complete recklessness’” which effectively waived any claim of privilege the agency may have had in the documents and in the identity of the attorney.

However, the Court did rein in defendants’ subpoena to some extent. It drew the distinction between the identity of the attorney, which had been waived, and the information sought in the subpoena. To the extent that the subpoena sought information which would have revealed the identity of the informant, that information remained privileged. Defendants failed to establish that their need for information concerning the informant outweighed the CFTC’s need to keep that information secret.

Additional salve was applied to the CFTC’s wounds when the Court ordered the return of the unredacted metadata. That metadata was associated with an otherwise carefully redacted document production and was, therefore, clearly inadvertent and must be returned.

So while the CFTC’s horse remains in its paddock, it’s time for the agency to check its fence. View the District Court opinion here.

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