to usefulness resolved in favor of disclosure." Peitz I, 2002 WL

22685 at *3 (quoting United States v. Sudikoff, 36 F. Supp. 2d

1196, 1199 (C.D. Cal. 1999)). The exculpatory statement as to
Loutos, however, is the only passage in the Action Memorandum
that is found to be Brady material and it has already been
disclosed. Moreover, the prosecution is only obliged to disclose
evidence that would be useful and favorable, not necessarily the
privileged document itself. The prosecution is under an
obligation to read the Action Memorandum and disclose to
defendants any additional information that points to evidence
favorable to any defendant. It is not obligated to disclose the
document itself except those portions that are favorable to
defendants and admissible under Fed. R. Evid. 803(8).

Because the Action Memorandum is protected from
disclosure by the Attorney-Client privilege and no sufficient
basis is found for overriding that privilege, neither the SEC nor
the prosecution team will be required to provide the Action
Memorandum to defendants. The SEC and the prosecution team,
however, may consider whether they will voluntarily provide the
Action Memorandum to defendants without waiving privilege as to
other privileged documents.

IT IS THEREFORE ORDERED that defendant Loutos's request
for production of the SEC action memorandum [111] is denied. The

copy of the Action Memorandum provided in camera will be placed

~19 -


does not contain any finding as to Paladino engaging in conduct
that violated the securities law. Instead, it refers to money
and a car that he received from investor funds, Action Memo. at
3, 7. It also mentions that he was an officer of PBF Capital
Group, Inc. ("PBF") and a signatory on at least one of PBF's bank
accounts. Id. at 3. PBF is described as a corporation
controlled by Benson and which received almost $4,000,000 froma
Lennox account. Id. Although the Action Memorandum recommends
that Paladino be named only as a relief defendant who has assets
derived from investor funds, there is no statement that Paladino
lacked knowledge of the scheme. Unlike Loutos, there is no
statement that Paladino could attempt to present as evidence of
his not being guilty of the charges in the criminal case.

That the Action Memorandum is not itself admissible
evidence, except as to the one statement about Loutos, does not
preclude the possibility that it is otherwise material and
therefore must be disclosed under Rule 16. It is still possible
that it is material because it would "significantly help{] in
‘uncovering admissible evidence, aiding witness preparation,
corroborating testimony, or assisting impeachment and rebuttal.'"

Gaddis, 877 F.2d at 611 (quoting Felt, 491 F. Supp. at 186). As

previously indicated, lacking detailed information about the
evidence in this case, this is a difficult determination to make.
It may very well be that the Action Memorandum is fully

consistent with information and evidence otherwise known to

~13-


The Action Memorandum is addressed to the SEC from the
Central Regional Office, Forth Worth District Office, with the
signature of Harold Degenhardt, a supervising attorney in that
office. The Action Memorandum is 21 pages in length, including
the two introductory pages that are separately numbered. The
Action Memorandum recommends that the SEC take certain action
related to a civil investigation of Lennox and related entities
and individuals, including all the defendants in the criminal
case other than Loutos. This memorandum is obviously a precursor
to the authorization to file the Civil Action shortly thereafter.
The court lacks sufficient information about the actual Civil
Action to determine whether the SEC accepted absolutely all the
recommendations contained in the Action Memorandum.

It is in part understandable that this document was not
immediately recognized as the document Loutos was seeking since
he not only is not listed in the summary recommendation nor any
section heading of the memorandum, his name does not actually
appear anywhere in the memorandum. There are, however, two
direct references to Loutos, who was Benson's attorney during the
pertinent time period. In discussing Benson's conduct, it is
mentioned that Benson opened a bank account in Lennox's name and
that "[o]nly Benson and his attorney were authorized to transfer
or withdraw funds from this account." Action Memo. at 6-7.
Further down in this section it is mentioned that Benson executed
"nearly ali" the transactions in this account. The following

footnote is added at the end of that sentence: "Benson's


under seal by the Clerk of the Court and filed of record for any

possible review on appeal.

ENTER:
.
hep look
UNITED STATES DISTRICT JUDGE
DATED: SEPTEMBER 17 , 2002

- 20 =


facts are in doubt or will be difficult to prove and the legal
discussion is largely a formulaic statement that the facts
constitute a violation of the securities laws. There is no
indication that any legal position to be taken in the case has
possible weaknesses. Moreover, the Civil Action is no longer
pending and therefore the defendants in the Civil Action would
not get an undue benefit from disclosure at this time. Still,
the likely limited value to the defendants would not call for
overriding the attorney-client privilege in this case.

Loutos also contends that only the SEC itself may invoke
the privilege, not the prosecution in this case. However, as a
convenience to the parties and the court, the prosecution team
inquired as to whether the Action Memorandum existed and has
provided an in camera copy as a courtesy to avoid the need for
further litigation over an SEC subpoena. Moreover, when before
the court, the SEC argued in the alternative that the privilege
would apply if a document responsive to Loutos's subpoena were to
be found. See SEC Motion to Quash Subpoenas Duces Tecum [Docket
Entry 66] at 12; Peitz II, 2002 WL 453601 at *2. Loutos contends
the SEC should be estopped from invoking the privilege because of
its failure to initially reveal the document's existence. There
is no basis for finding a deliberate attempt to hide the
document. Under the present circumstances, the prosecution will

not be precluded from arguing privileges on the SEC's behalf.

-17 -


bring civil charges of securities violations would not be
admissible as expert testimony in a criminal case.

Loutos also contends that the statement would be
admissible as a party admission under Fed. R. Evid. 801(d) (2).
The question as to such admissibility is whether the SEC should
be considered a party in this case. lLoutos contends the entire
federal government is his opponent or, if not the entire
government, at least those agencies that also had investigative
powers over the subject matter and which shared information with
the prosecution team. Contrary to Loutos's contention, the
Seventh Circuit has followed the general rule that Rule 801(d) (2)
does not apply as against the government. See United States v.
Prevatte, 16 F.3d 767, 779 n.9 (7th Cir. 1994). While noting
that some courts have found this rule inapplicable to statements

by government attorneys, see United States v. Zizzo, 120 F.3d

1338, 1351 n.4 (7th Cir.), cert. denied, 522 U.S. 998 (1997), the
Seventh Circuit has not indicated that it would apply that

exception, see id.; United States v. Nubuor, 274 F.3d 435, 442

n.7 (7th Cir. 2001). Even if the Seventh Circuit were to apply
the attorney exception, it is believed that the exception would
not apply in criminal cases to statements of attorneys outside
the Justice Department, who are not members of the prosecution
team, and who made the statements in a separate and distinct
civil proceeding. The Loutos exculpatory statement in the Action

Memorandum would not be admissible at trial under Rule 801(d) (2).


and the prosecution made its own independent decision to indict.
However, there has been cooperation between the two teams,
including permitting the prosecution access to the SEC
investigative file. SEC investigative files in the prosecution's
possession have been made available to the criminal defendants,
with the recently obtained Action Memorandum apparently being the
only exception. One member of the prosecution team is an SEC
attorney on special assignment, but he is from the SEC's Chicago
office and did not participate in the investigation or litigation
of the Civil Action which was conducted by the SEC's Fort Worth
office.

Rule 16(a) (1) (C) of the Federal Rules of Criminal
Procedure require that the prosecution, upon request, provide
"documents" within the prosecution's "possession, custody or
control . . . which are material to the preparation of the
defendant's defense." To be discoverable under Rule 16, the
document must be material. Rule 16 materiality has been defined
as evidence that would "enable the accused to substantially alter
the quantum of proof in his favor." United States v.
Orzechowski, 547 F.2d 978, 984 (7th Cir. 1976), cert. denied, 431

U.S. 906 (1977) (quoting United States v. Marshall, 532 F.2d

1279, 1285 (9th Cir. 1976)). See also United States v. Marshall,

132 F.3d 63, 68 (D.C. Cir. 1998); United States v. Stevens, 985

F.2d 1175, 1180 (2d Cir. 1993); United States v. Holloway, 971

F.2d 675, 679 (11th Cir. 1992), cert. denied, 507 U.S. 962

(1993); Charles Alan Wright, Federal Practice & Procedure § 254



attorney executed at least one transaction when Peitz was unable
to locate Benson. However, the staff uncovered no evidence that
the attorney knowingly participated in, or was aware of, the
scheme to defraud investors." Those are the only two references
to Loutos. As can be expected in a memorandum of this type, it
discusses the evidence against the proposed civil action
defendants, whether the legal standards for securities violations
are met, and the type of relief to request. There is nothing
that stands out as being helpful to Loutos, but the court is not
as familiar with the factual details or disclosures in the
criminal case as are the parties. Perhaps there is some
inconsistency between the SEC's recitation of facts and the
criminal accusations or other evidence that would be helpful to
Loutos, or, more of a possibility, the other criminal defendants,
though even that is highly doubtful given that the government has
an open file policy in the prosecution.

The court previously required that the prosecution "file
a statement describing its relationship with the SEC regarding
this prosecution and expressly stating whether the SEC or any SEC
employee is part of the prosecution team in this case." Order
dated May 28, 2002 [Docket Entry 99]. The prosecution thereafter
filed a statement, which the court takes as true. See Govt.
Statement Pursuant to May 28, 2002 Court Order [Docket Entry
100]. The SEC civil investigation and lawsuit has been conducted
separately from the criminal investigation and prosecution. The

SEC made its own independent decision to file the Civil Action


Additionally, Loutos contends the privilege has been
waived because the SEC's lead attorney in the Civil Action
previously disclosed to Loutos's counsel that a document likely
existed in which a determination of Loutos's nonliability was
stated. As Loutos has repeatedly argued in court, it is standard
SEC procedure to have an Action Memorandum or similar document
prior to bringing a civil action and it would be expected that
the document would address why other potential defendants should
not be named in the civil action. The SEC lead attorney was not
revealing any great secret by indicating that such a document
definitely or probably was created related to Loutos being a
defendant in the Civil Action. There is no contention that the
lead attorney provided a detailed description of the contents of
the Action Memorandum and any statement that Loutos was
determined not to be liable revealed nothing in that such a
determination was likely to have existed given that Loutos had
not been named in the Civil Action. The minimal information
provided by the lead attorney did not waive any privilege. Cf.

United States v. Zuckerman, 88 F. Supp. 2d 9, 15 (E.D.N.Y. 2000).

Loutos also contends that Brady v. Maryland, 373 U.S. 83
(1963), and its progeny require that the Action Memorandum be
disclosed, even if it is otherwise protected by the attorney-
client privilege. The prosecution "'is obligated to disclose all
evidence relating to guilt or punishment which might reasonably

be considered favorable to the defendant's case,' with doubt as

- 18 -


exculpatory statement as to Loutos is admitted at trial, it is
highly doubtful that any of the SEC employees would be
appropriate witnesses. In any event, the list of names of the
SEC employees stated in the Action Memorandum as "Persons to
Contact" is non-privileged information. They are as follows:
Fort Worth District Office~-Harold F. Degenhardt, Spencer C.
Barasch, Karen L. Cook, Douglas A. Gordimer; Central Regional
Office--Daniel F. Shea, Donald M. Hoerl; Branch of Regional
Office Assistance--Emily P. Gordy, Jan Batterman, Charlotte
Buford. Action Memo. at ii.

Loutos contends the Action Memorandum itself (or possibly
the live testimony of its author) would be admissible as expert
opinion testimony under Fed. R. Evid. 702 and consistently with
Fed. R. Civ. 704(b). He contends that "statements and opinions
in the Memorandum that relate to Mr. Loutos' role in the alleged
debenture scheme, as well as what information about the scheme he
had access to, when, and what that meant to expert SEC
investigators, will be admissible, even though those statements
will embrace Loutos' knowledge and willfulness." Def. Memo.
[Docket Entry 111] at 8. The Action Memorandum, however,
contains no such opinions. All it contains is a conclusory
statement, quoted in its entirety above, that no evidence of
Loutos's knowledge was found. Moreover, the indictment in the
criminal case does not charge Loutos with the violation of any
securities statute. Loutos is charged with wire fraud and
unlawful monetary transactions. That is not the SEC staff's

expertise. The SEC's determination that it lacked evidence to


‘Minute Onder Form (06/97)

United States District Court, Northern District of [linois

N f Assigned Jud; Wii Sitting Judge if Othe
or Magistrate Jude William T. Hart than Assigned Judge
CASE NUMBER 01 CR 852-3 DATE seer. [@ , 2002
:
CASE UNITED STATES OF AMERICA v. FRANK L. PEITZJet al.
TITLE

[In the fotlowing box (a) indicate the party filing the motion, e.g,, plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented.]

MOTION:

DOCKET ENTRY:

(1) o Filed motion of [ use listing in “Motion” box above.]

(2) oO Brief in support of motion due.

@) oO Answer brief to motion due. . Reply to answer briefdue___.

(4) im Ruling/Hearingon ss setfor_ at

(5) o Status hearing[held/continued to] [set for/re-set for]on ss setfor_ at
(6) oa Pretrial conference[held/continued to} [set for/re-set for]on ss setfor_ at

(ea) oO Trialfset for/re-set for]on______ at.

(8) oO [Bench/Jury trial] [Hearing] held/continuedto_— at

(9) oa This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}

OOFRCP4(n) (ClLocal Rule 41.1 OO FRCP41(a)(1) OO FRCP41(a)(2).

ao) =f {Other docket entry] | Defendant Loutos's request for production of the SEC action
memorandum [111] is denied. The copy of the Action Memorandum provided in camera will
be placed under seal by the Clerk of the Court and filed of record for any possible review on
appeal.

(il) [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

7

No notices requir
quired. number of notices

UY | Notices mailed by judge’s staff. 2002
Notified counsel by telephone. SEP 20

date docketed

Docketing to mail notices.

Mail AO 450 form. : .- Aine ther als
Copy to judge/magistrate judge. +
9/19/2002

courtroom daze mile notice
°” dept’ vo
initials

Date/time received in
central Clerk’s Office ‘mailing snitials:



148 F.3d 1206, 1217 (10th Cir. 1998); Smith v. Isuzu Motors Ltd.,

137 F.3d 859, 862-63 (Sth Cir. 1998), cert. denied, 525 U.S. 1142

(1999); Michael H. Graham, Federal Practice & Procedure § 7049 at

489 n.21 (interim ed. 2000). That is not a problem in the
present situation because the SEC followed the recommendations as
to who would be named in the Civil Action. The requirement that
the Rule be limited to factual findings, still includes
conclusions and opinions as to the facts found, as long as they
are based on a factual investigation and do not lack

trustworthiness. See Beech Aircraft Corp. v. Rainey, 488 U.S.

153, 169-70 (1988); United States v. Romo, 914 F.2d 889, 896 (7th

Cir. 1990), cert. denied, 498 U.S. 1122 (1991); Chesler v.

Trinity Industries, Inc., 2002 WL 1822918 *2 (N.D. Ill. Aug. 8,

2002); Klein v. Vanek, 86 F. Supp. 2d 812, 819-20 (N.D. Ill.
2000).

The prosecution concedes that the SEC is an agency
authorized by law to investigate the subject matter of the Action
Memorandum. It contends, however, that the Action Memorandum
does not qualify as a report of factual findings because it is a
legal memorandum containing legal opinions. Regardless of any
legal issues that may be discussed in the Memorandum, however,
the statement that Loutos seeks to use is a factual conclusion:
there being "no evidence that [Loutos] knowingly participated in,
or was aware of, the scheme to defraud investors." The three

requirements of an (a) agency report of {(b) factual findings

- 11 -


Last, Loutos contends the statement would be admissible
at trial pursuant to Fed. R. Evid. 803(8), which provides:

Records, reports, statements, or data
compilations, in any form, of public offices or
agencies, setting forth (A) the activities of the
office or agency, or (B) matters observed
pursuant to duty imposed by law as to which
matters there was a duty to report, excluding,
however, in criminal cases matters observed by
police officers and other law enforcement
personnel, or (C) in civil actions and
proceedings and against the Government in
criminal cases, factual findings resulting from
an investigation made pursuant to authority
granted by law, unless the sources of information
or other circumstances indicate lack of
trustworthiness.

"Rule 803(8)(C) requires that the evidence be (a) a
report or statement of a public office or agency; (b) factual
findings; (c) result from an investigation made pursuant to

authority; and (d) not indicate lack of trustworthiness." United

States ex rel. Collins v. Welborn, 49 F. Supp. 2d 597, 605 (N.D.

Til. 1999) ("Collins I"), aff'd sub nom., Bracy v. Schomig, 286

F.3d 406 (7th Cir. 2002). See also United States ex rel.

Collins v. Welborn, 79 F. Supp. 2d 898, 906 n.5 (N.D. Ill. 1999),

aff'd sub nom., Bracy v. Schomig, 286 F.3d 406 (7th Cir. 2002).

There is no requirement that the report itself be publicly
disclosed. Collins I, 49 F. Supp. 2d at 605; Redmond v. Baxley,
475 F. Supp. 1111, 1122 (E.D. Mich. 1979). It has been held that
staff recommendations to a commission or agency are not
admissible under Rule 803(8) (C), unless adopted by the commission

or agency. See Vining v. Enterprise Financial Group, Inc.,

- 10-


at 107-09 & nn.19&22 (3d ed. 2000). The Seventh Circuit has also
described materiality as evidence that would "significantly
help[] in 'uncovering admissible evidence, aiding witness
preparation, corroborating testimony, or assisting impeachment

and rebuttal.'" United States v. Gaddis, 877 F.2d 605, 611 (7th

Cir. 1989) (quoting United States v. Felt, 491 F. Supp. 179, 186

(D.D.C. 1979)). Under some circumstances, even inculpatory
materials may alter the proof in the defendant's favor by helping
to prepare a defense or investigation. Marshall, 132 F.3d at 68;
Wright, § 254 at 109.

As previously stated, it is not clear that the facts
recited in the Action Memorandum would be helpful to any of the
defendants in preparing a defense. Although the pending motion
is brought by Loutos, it cannot be ignored that the Action
Memorandum is also potentially discoverable by the other
defendants, for whom the Action Memorandum generally is
inculpatory. Loutos contends the Action Memorandum would be
helpful to him in that he would be entitled to present the Action
Memorandum at triai as evidence of his innocence.

At the status hearing on September 11, 2002, Loutos's
attorney indicated that he expected that the Action Memorandum
would refer to potential witnesses, including SEC employees who
worked on the investigation. The Action Memorandum does not
identify by name anyone other than those who were named in the
Civil Action nor does it refer to any source of information other

than those named in the Civil Action. Regardless of whether the


relief defendants. A judgment was obtained against all
defendants and relief defendants and Michael Quilling was
appointed as receiver to obtain and conserve funds on the
investors' behalf. When the indictment was returned in the
present case, the SEC issued a litigation release stating "[t]he
indictment is based on the same conduct alleged in a civil action
brought by the Commission's Forth Worth District Office in June
of 1998."

Since late last year, defendant Loutos has been trying to
obtain a copy of an SEC memorandum discussing his civil or
criminal liability related to this case. He contended that the
SEC attorney in charge of the Civil Action had told his attorney
that such a document existed. However, when Loutos filed motions
seeking the document, it was repeatedly. represented that no such

document could be found. See United States v. Peitz, 2002 WL

226865 (N.D. Ill. Feb. 14, 2002) ("Peitz I"); United States v.
Peitz, 2002 WL 453601 (N.D. Ill. March 22, 2002) ("Peitz II");
Govt. Response to Loutos Motion to Renew (May 6, 2002) [Docket
Entry 90]. In July 2002, the prosecutors in this case did locate
an SEC document that makes reference to Loutos's civil liability.
It is a June 17, 1998 Action Memorandum. Loutos moves for
disclosure of the Action Memorandum and the government opposes
disclosure other than to disclose that there are two references
to Loutos in the Memorandum. A copy of the Action Memorandum has

been provided to the court in camera.


defendants and/or alleged in the criminal indictment or Civil
Action complaint. Given the factual detail in the Action
Memorandum, though, there is a possibility that it will be
helpful to the defense of one or more defendants. Also,
defendants should be accorded the benefit of the doubt since they
are limited in the materiality arguments they can make without
first seeing the document. It seems particularly appropriate to
resolve such doubt in defendants' favor because the prosecution's
response to Loutos's motion contains no express representation to
the contrary. The government primarily contends that the Action
Memorandum is not subject to disclosure because it is privileged.
It is found that the Action Memorandum is material and therefore
ordinarily subject to disclosure under Rule 16(a) (1) (C).

Still, the Action Memorandum is not subject to disclosure

under Rule 16 if it falls within an exception, see Fed. R. Crim.

P. 16(a) (2), or is privileged, see United States v. Edelin, 128

F. Supp. 2d 23, 39 (D.D.C. 2001); United States v. Furrow, 100

F. Supp. 2d 1170, 1174 (C.D. Cal. 2000).

The prosecution contends that, consistent with Loutos's
contention that the SEC is part of the prosecution team, the
Action Memorandum is not disclosable under Fed. R. Crim.

P. 16(a) (2). The court, however, has accepted the prosecution's
representation that the SEC attorneys who worked on the Civil
Action and the SEC as an agency are not part of the prosecution

team. Therefore, the exception contained in Rule 16(a) (2) does

- 14 -


Neither the Seventh Circuit nor the other circuits held that the
attorney-client privilege between an agency and its attorney had
no application in any criminal case, only that it did not apply
to grand jury subpoenas in cases involving possible criminal
wrongdoing by a government official. That is not the situation
in the present case.

Special Grand Jury does not hold and it is not expected
that the Seventh Circuit would hold that the attorney-client
privilege for a government agency has absolutely no application
in a criminal case. See Charles Alan Wright & Kenneth W. Graham,

dxv., Federal Practice & Procedure § 5475 at 128 (1986); id. at 41

n.26 (2002 Supp.); Lindsey, 158 F.3d at 1268-70. At most, it
would be expected to hold that the privilege is not absolute in a
criminal case and considerations of the requesting party's need
for the information and the agency's need for confidentiality
could be considered. Cf. Special Grand Jury, 288 F.3d at 192

(citing Lindsey, 158 F.3d at 1283 (Tatel, J., dissenting); Duces

Tecum, 112 F.3d at 935-38 (Kopf, d., dissenting)). Here, as
previously indicated, it does not appear that the Action
Memorandum would be very helpful to defendants. Many of the
facts recited therein are also alleged in the indictment and
likely were also alleged in the Civil Action complaint. On the
other hand, the Action Memorandum does not contain any equivocal
or novel legal or factual discussion that particularly calls for

keeping it confidential. It does not indicate that any of the

-16-


well as by repaying earlier, disgruntled

investors with funds from new investors.
Indictment @ 3.

All six defendants are charged with eight substantive
counts of wire fraud in violation of 18 U.S.C. §§ 1343 and 2.
The alleged wire communications underlying these counts occurred
from October 10, 1996 through May 22, 1997. Defendants Peitz,
Benson, Loutos, and Paladino are also charged with a conspiracy
in violation of 18 U.S.C. § 1956(h) under which they agreed to
(1) engage in wire fraud violations that were designed to conceal
the source and ownership of unlawful proceeds in violation of
18 U.S.C. § 1956(a) and (2) engage in monetary transactions in
criminally derived property with a value greater than $10,000 in
violation of 18 U.S.C. § 1957(a). The conspiracy allegedly began
no later than October 1994 and continued until at least June
1998. The four alleged conspirators are also charged with four
substantive counts of violating 18 U.S.C. §§ 1957 and 2 and two
substantive counts of violating 18 U.S.C. §§ 1956(a) (1) (B) (i)
and 2.

In June 1998, the Securities and Exchange Commission
("SEC") filed a civil action in the Northern District of Texas
alleging that certain defendants had defrauded investors
utilizing a fictitious "prime bank security” investment that
never existed (the "Civil Action"). Law, Iles, Peitz, and Benson
were named as defendants in the Civil Action, as well as was

James Wardell. Paladino and various entities were named as


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

UNITED STATES OF AMERICA,
Plaintiff,

ve No. 01 CR 852
FRANK L. PEITZ, DANIEL B.
BENSON, PETER A. LOUTOS, SR.,
ROBERT D. PALADINO, RANDALL W.
LAW, and MONICA M. ILES,

DoeKeren

SEP 29 2002

Defendants.

MEMORANDUM OPINION AND ORDER

The indictment in this case alleges:

defendants FRANK PEITZ, DANIEL BENSON, PETER
LOUTOS, ROBERT PALADINO, RANDALL LAW, MONICA ILES
and others, through FLP Capital, Active
International[, Inc.] and Lennox [Investment
Group, Ltd.], sought to and did obtain and retain
funds from prospective investors and investors by
offering and selling investments purportedly in
the international trading of bank financial
instruments. In offering and selling these
investments, the defendants made and caused to be
made material misrepresentations and omissions
about, among other things: the risk involved

in the investment; the expected return on

the investment; the use of money raised from
investors; and the previous investment experience
and the criminal and regulatory background of
those offering and selling the investment. As a
part of the scheme, the defendants raised over
$11,000,000 from at least 30 investors and then
misappropriated almost all of the funds for their
own benefit. In order to retain the use of
investors' funds and obtain additional funds from
new investors and to conceal various parts of

the scheme from victim investors and others,
defendants continued to lull investors through a
series of misrepresentations and omissions about
the nature and status of their investments as

[AE


(c) resulting from an investigation pursuant to authority are
satisfied. Since these requirements are met, the report is
presumed to be trustworthy and the burden is on the prosecution
to show that it is not. Collins I, 49 F. Supp. 2d at 605. The
government does not make any such contention and, in any event,
the report appears to be based on a thorough investigation and
therefore appears to be trustworthy. On the information and
arguments presently before the court, the statement in footnote
11 would be admissible if Loutos chooses to present it.

Although one sentence of the Action Memorandum would be
admissible, that is not a basis for requiring that the Action
Memorandum be provided to the defendants. The prosecution has
already disclosed to Loutos the exculpatory information that is
useful to him, as well as the one other reference to him
contained in the Memorandum. It is undisputed that the statement
is part of a staff investigation by the SEC. The remainder of
the report is not pertinent to this statement and is not needed
to place the statement in context.

As to four of the other defendants, the Action Memorandum
finds that they engaged in unlawful activity. The Action
Memorandum does not contain exculpatory statements that these
defendants might attempt to put in evidence against the
government as admissible under Rule 803(8). Paladino's situation
is different; he was recommended to be and was actually named as

a relief defendant in the Civil Action. The Action Memorandum


not apply. Instead, the prosecution must rely on the privileges
it has invoked.

The prosecution contends the Action Memorandum is
protected from disclosure by the Attorney-Client privilege. It
has been held that enforcement recommendations from legal staff
to the SEC are protected by the attorney-client privilege. See
SEC v. World-Wide Coin Investments, Ltd., 92 F.R.D. 65, 66-67
(N.D. Ga. 1981); Feshbach v. SEC, 5 F. Supp. 2d 774, 784 (N.D.
Cal. 1997).

Loutos raises various grounds why the attorney-client
privilege should not be applied in this situation. First, he
contends that the privilege does not apply to a communication
with a government attorney when the information is being

requested for a criminal case, citing In re Witness Before

Special Grand Jury 2000-2, 288 F.3d 289, 293-94 (7th Cir. 2002),

and In re Grand Jury Subpoena Duces Tecum, 112 F.3d 910 (8th

Cir.), cert. denied, 521 U.S. 1105 (1997). See also In re
Lindsey, 158 F.3d 1263, 1270-78 (D.C. Cir.), cert. denied, 525
U.S. 996 (1998). These cases are distinguishable. In all of
these cases, the question was whether a government attorney's
advice to an officeholder was privileged as against a grand jury
subpoena in a criminal investigation of government officials. It
was noted by the Seventh Circuit that the client was the
government office itself, not the individual officials that were

under investigation. Special Grand Jury, 288 F.3d at 293-94.