Compel: whether the Virginia statute protects from disclosure the
documents relating to Virginia’s investigation into Premier's
sale of Xentex stock.

DISCUSSION

At the outset, the Court notes that Plaintiffs have
submitted no authority recognizing a federal evidentiary
privilege based on the Virginia statute at issue. Mr. Flanagan,
on the other hand, has submitted strong authority in support of
his position that state law confidentiality provisions rarely
shield evidence in federal question cases‘, and that the statute
in question does not buck the trend. See Pearson v. Miller, 211
F.3d 57, 68 (3d Cir. 2000) (“Statutory provisions providing for
duties of confidentiality do not automatically imply the creation
of evidentiary privileges binding on the courts.”)

The Western District in Michigan recently analyzed a similar
issue in Lawrence v. Van Aken, NO. 4:03-CV-20, 2004 WL 228989
(W.D. Mich. Jan. 14, 2004). In Lawrence, the court declined to
recognize a federal evidentiary privilege based on Michigan
Supreme Court Rule 9.221, which creates a confidentiality

interest in Judicial Tenure Commission (“JTC”) proceedings.

“Federal law, not state law, supplies the rule of decision

in the case, despite the fact that Plaintiffs claim that some of
their allegations are based upon state law, as well as federal
law. See Memorial Hospital for McHenry County v. Shadur, 664
F.2d 1058, 1061 n.3 (7'* Cir. 1981). Neither party disputes that
federal law controis.


of admissible evidence. Later still, Plaintiffs claimed that a
Virginia statute, Va. Code Ann. § 13.1-518, protects from
disclosure documents related to the Virginia administrative
proceeding.

On January 19, 2005, Mr. Flanagan filed this Motion to
Compel the production of all documents relating to any
administrative proceedings involving Xentex, that were brought
against Plaintiffs. On January 21, 2005, the parties appeared
before the Court; Mr. Flanagan argued that the documents were
discoverable, and Plaintiffs argued that the documents were not
relevant and, with respect to the documents associated with the
Commonwealth of Virginia’s investigation, were protected by the
Virginia statute.

The Court found that the documents are clearly relevant, but
reserved judgment upon whether the Virginia statute prevent Mr.
Flanagan from discovering the documents related to the Virginia
investigation®. The Court ordered Plaintiffs to produce the
documents related to the Illinois investigation to Mr. Flanagan,
but to submit the Virginia documents to the Court for in camera
review. This Opinion, therefore, addresses the only remaining

issue before the Court with respect to Mr. Flanagan’s Motion to

+ The Court also ordered Plaintiffs to produce the

documents relating to the Illinois Secretary of State’s
investigation into the sale and solicitation of Xentex stock.


Id., at *5. The court noted that Rule 9.221 neither contained

”

the word “privilege,” nor purported to protect JTC files in civil
or criminal provisions. Id. This is not dispositive, however, as
the court explained:
federal courts recognize, however, that state statutes
creating a duty of confidentiality, but lacking an express
provision for an evidentiary privilege, could nevertheless
be construed by the state courts as implying an evidentiary
privilege.
Id, The court concluded, however, that the lack of any Michigan
cases regarding the statute as an evidentiary privilege weighed
heavily against the finding of an evidentiary privilege. Id.
Similarly, in the case at bar, the Virginia statute does not
use the word “privilege.” Nor are there any cases, state or
federal, recognizing an evidentiary privilege created by the
Virginia statute. Applying the rationale in Lawrence, the clear
conclusion is that no evidentiary privilege applies. Seventh
Circuit caselaw is in accord and dictates the same result.
Whether a state law confidentiality provision creates an
evidentiary privilege is “governed by the principles of the
common law as they may have been interpreted by the courts of the
United States in light of reason and experience.” Memorial
Hospital for McHenry County v. Shadur, 664 F.2d 1058, 1061 (7"
Cir. 1981) (quoting Fed. R. Evid. 501). The court explained that

evidentiary privileges are not favored because they operate to

exclude relevant evidence. Id. Courts should recognize the


QT

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

PREMIER CAPITAL MANAGEMENT, LLC
a Virginia Limited Liability
Company, TMB, LLC, a Virginia
Limited Liability Company, and
XEN INVESTORS, LLC, a Virginia
Limited Liability Company,

Case No. 02 C 5368
Plaintiffs,
Honorable Joan B.
vs. Gottschall
LARRY COHEN, individually,

BRIAN FLANAGAN, individually,

WAN HEE KIM, individually, JUNG

KOH, individually, MICHAEL TURCOTTE,
individually, BLAIR ROBINSON,
individually and NORTHVIEW BANK &
TRUST, an Tllinois Corporation.

Magistrate Judge
Arlander Keys

Defendants.

LARRY COHEN, WAN HEE KIM, and
MICHAEL TURCOTTE,

Third-Party Plaintiffs,

VS.
DOUGLAS TUCKER,

Third-Party Defendant.

MEMORANDUM OPINION AND ORDER
Currently before the Court is Defendant Brian Flanagan’s
Motion to Compel the production of documents relating to state-
level administrative proceedings, investigating some of Premier

Capital Management LLC’s (“Premier”) activities. Mr. Flanagan


privilege only when the policy sought to be furthered by the
privilege outweighs the need for truth. Id.

Plaintiffs make little attempt to define the policy sought
to be furthered by the Virginia statute, only explaining that the
documents Mr. Flanagan seeks fall squarely within its ambit.
Conversely, Mr. Flanagan has aptly demonstrated that the
documents in question (documents relating to Premiers’ marketing
and sale of Xentex stock) bear directly upon the issues paramount
to the lawsuit at hand (whether Defendants violated securities
laws in promoting Xentex to Plaintiffs). Under these
circumstances, the balancing test inspired by Fed. R. Evid. 501
clearly weighs in favor of disclosure.

CONCLUSION
For the reasons set forth above, the Court Grants Defendant
Brian Flanagan’s Motion to Compel. Plaintiffs are ordered to
produce all documents relating to the Commonwealth of Virginia’s
administrative proceedings involving Plaintiffs’ sale and

marketing of Xentex.

DATED: March 2, 2005 ENTER:

Oden Kans

Arlander Keys
United States Magistrate Judge



claims that documents relating to these administrative
proceedings are highly relevant to his defense, and are not
protected by any federally-recognized privilege. The Court
agrees and grants Mr. Flanagan’s Motion, directing Plaintiffs to
produce all documents relating to the Commonwealth of Virginia’s
administrative investigation into Plaintiffs’ sale and promotion
of the Xentex stock.
BACKGROUND FACTS

Plaintiffs Premier Capital Management, LLC ("Premier
Capital"), TMB, LLC, and Xen Investors, LLC sued Xentex
Technologies’ ("Xentex"), Xentex's individual officers and
directors (Larry Cohen, Brian Flanagan, Wan Hee Kim and Michael
Turcotte), a Xentex shareholder (Ron Falese), Northview Bank and
Trust, and the bank's president Blair Robinson, claiming that
Defendants viclated federal securities laws, as well as several
state statutes and common law prohibitions, when they
fraudulently induced Plaintiffs to invest in Xentex. Plaintiffs
also brought several state law claims against Xentex's officers
and directors for (1) violations of the Virginia Securities Act
("VSA"), Va.Code Ann. § 13.1-522, (2) common law fraud, (3)
breach of fiduciary duty, (4) negligent misrepresentation

(against defendant Turcotte), and (5) accounting malpractice

1 Plaintiffs voluntarily dismissed (without prejudice) their

claims against Xentex, after Xentex filed for Chapter 11
bankruptcy.


(against Turcotte)?*.

In the interim, Premier was the subject of at least two
governmental inquiries. Premier actively located and introduced
potential investors to Xentex. As a result of Premier’s
activities on Xentex’s behalf, the Securities Department of the
Secretary of State of Illinois and the State Corporation
Commission of the Commonwealth of Virginia filed administrative
proceedings against Premier and its owner, Mathieu Reyna. Both
administrative bodies alleged that Premier and Mr. Reyna
defrauded investors in connection with their efforts to sell
Xentex stock.

Defendant Brian Flanagan sought to discover documents
related to the Illinois and Virginia investigations. Mr.
Flanagan served a document request upon Plaintiffs, seeking
“[a]ll documents . . . relating to any investigations
including any federal or state securities commission or agency
proceedings, involving [Plaintiffs] .” Plaintiffs initially
agreed to produce all documents responsive to the request. Weeks
later, however, Plaintiffs objected to producing documents
related to both the Illinois and Virginia administrative
proceedings, on the ground that the requests were ambiguous,

overbroad, and not reasonably calculated to lead to the discovery

Judge Gottschall dismissed a number of these claims. See
Premiere Capital Management, LLC. v. Larry Cohen, et al., No. 02
C 5368, 2004 WL 2203419 (N.D. Ill. Sept. 29, 2004).

3