Lines Overseas Management Ltd and LOM Securities (Bermuda) Ltd v Lines

• Jurisdiction: Bermuda
• Judgment Date: 16 January 2006
• Date: 16 January 2006
• Docket Number: Commercial Jurisdiction 2006 No. 3
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Bell, J

Commercial Jurisdiction 2006 No. 3

BETWEEN:

Lines Overseas Management Limited

and

Lom Securities (Bermuda) Limited

Plaintiff

and

Brian Lines

Defendant

Mr P Smith for the Plaintiffs for the Petitioner

Mr T Marshall for the Defendant

Mr W Bourne for the Attorney General

The following cases were referred to in the judgment:

Tournier v National Provincial and Union Bank of EnglandELR [1924] 1 KB 461 20

X AG v A BankUNK [1983] 2 All ER 464

Chase Manhattan Bank v FDC Co Ltd [1985] 2 HKC 470

MacKinnon v Donaldson Luffkin and Jenrette Securities CorpELR [1986] 1 Ch 482

In re a Company's ApplicationELR [1989] 1 Ch 477

Woolgar v Chief Constable of Sussex PoliceUNK [1993] 3 All ER 604

Price Waterhouse v BCCIUNK [1992] BCLC 583

AG v Guardian Newspapers (No. 2)ELR [1990] 1 AC 109

Pharaon v BCCIUNK [1998] 4 All ER 455

Telecommunications Act 1986, s. 61

Disclosure to SEC — Duty of confidentiality — Telephone recordings — Financial services — Compulsion of law — Public interest — Interests of the company — Legal professional privilege

JUDGEMENT of Bell, J

Background

1. These proceedings arise from the service of a subpoena (‘the Subpoena’) issued on 19 April 2004 by the United States of America Securities and Exchange Commission (‘the SEC’) on the Plaintiffs (together ‘LOM’, and, with LOM's associated companies, ‘the LOM Group’) and served on LOM's managing director Scott Lines on 20 April 2004.

2. For some time following service of the Subpoena, LOM sought to set aside or stay the Subpoena in the United States, whilst the SEC was correspondingly seeking enforcement. LOM's application was first dealt with by a United States Magistrate Judge in the US District Court for the District of Columbia, and although a copy of his decision, in the form of a Memorandum Opinion, exhibited to the affidavit of Scott Lines dated 9 January 2006 is itself undated, the Magistrate Judge's Memorandum Opinion appears to have been delivered on 7 January 2005. Thereafter, LOM pursued an application to stay the Magistrate Judge's order, and this application was denied by the US District Judge on 30 December 2005. In denying LOM's motion, the US District Judge ordered LOM to comply with the Subpoena by 17 January 2006.

3. It was this order which led LOM to issue its originating summons on 9 January 2006, in which proceedings LOM sought orders from this Court entitling it to disclose to the SEC various documents which fell within the scope of the Subpoena. The Subpoena had listed the documents to be produced in some ten paragraphs, some of which referred to documents relating to the three companies which were the subject of the SEC investigation pursuant to which the Subpoena had been issued. These companies were defined in the Subpoena as Sedona, SHEP, and Inside Holdings, Inc. While some of the documents sought by the SEC were specific to these companies, others were concerned with named entities, presumably clients or customers of LOM. There was also a request for all telephone records of telephones used by Scott Lines or Brian Lines (then the President of LOM) for the period from 1 December 2002 through 28 February 2003, as well as requests for unredacted copies of documents previously produced in redacted form by LOM to the Bermuda Monetary Authority (‘the BMA’) as well as a request for documents which had been requested by the BMA concerning Sedona, SHEP and Inside Holdings Inc, but which had not been produced to the BMA.

LOM's Proceedings

4. Against this background in relation to the Subpoena, LOM sought a declaration that it was entitled to disclose to the SEC the following:—

• a. recordings of telephone conversations between Brian Lines/Scott Lines and customers, clients and other persons, falling within the scope of the Subpoena, and

• b. documents containing confidential information of third parties, (including recordings of interviews with LOM personnel made during the BMA investigation of the Sedona transaction) falling within the scope of the Subpoena.

5. These proceedings taken by LOM named Brian Lines as the Defendant, and were returnable on 13 January 2006. However LOM through counsel had suggested a prior directions hearing, which duly took place on 12 January 2006. When the matter then came on for hearing in chambers on 13 January 2006, the Attorney General made an application to be joined to the proceedings, on the basis that the originating summons potentially raised issues of statutory interpretation and constitutional issues, and having heard Mr. Bourne for the Attorney General, I ordered that the Attorney General should be joined as a party. I then proceeded to hear the matter on 13 January and at the conclusion of argument indicated that I would give judgment at 9:30 a.m. on Monday 16 January, on the basis that written reasons for the judgment would follow. On 16 January, I gave judgment to the following effect:—

• a. that LOM was entitled to disclose to the SEC

  • i. recordings of its telephone conversations with its customers, clients and other persons falling within the scope of the Subpoena

  • ii. documents of such customers, clients and other persons falling within the scope of the Subpoena, and

• b. that Brian Lines was entitled to an injunction restraining LOM from disclosing

  • i. details of his telephone conversations to which legal professional privilege attached, and his personal telephone conversations insofar as a duty of confidentiality attached to them, and

  • ii. the transcripts of two interviews given by Brian Lines to the BMA during the course of its investigation of the Sedona transaction.

I now proceed to put in writing the reasons for that judgment.

The Evidence

6. As indicated, LOM's application was supported by an affidavit sworn by Scott Lines on 9 January 2006, in which he described

• a. the business of the LOM Group as an international financial services group.

• b. the Sedona and SHEP transactions.

• c. the investigations by the SEC and the BMA into the Sedona transaction. (It is to be noted that although the Subpoena refers to an investigation into Sedona, the investigation appears to extend to SHEP and Inside Holdings Inc. Scott Lines' affidavit suggests no link between Sedona and SHEP; he simply says that the SEC began to ask questions about SHEP as part of the investigation into Sedona.)

• d. the system of telephone recording operated by LOM at its business premises, and

• e. the documents which LOM has within its possession falling within the terms of the Subpoena. Scott Lines indicated that the majority of these documents had already been made available to the SEC through the BMA, although certain documents provided to the BMA had been redacted. Scott Lines also indicated that having failed in its efforts to challenge the Subpoena, LOM now wished to make the documents covered by the Subpoena available to the SEC if they were properly able to do so. In this regard Scott Lines indicated that LOM had ‘the consent of some customers to make disclosure of at least some documents to the SEC’. It is not clear from this evidence whether LOM sought consents from some or all of its customers.

7. The Attorney General supported LOM's application. Given the comprehensive arguments of counsel for LOM and Brian Lines, it was not necessary at the end of the day for Mr. Bourne to make detailed submissions, and he adopted Mr. Smith's arguments for LOM.

8. LOM's application was opposed by Brian Lines, and on 12 January 2006 he swore an affidavit in which he set out the basis for his opposition to the grant of the relief sought by LOM. I should mention that at the directions hearing held on 12 January, I ordered that Brian Lines' affidavit should stand as if it were a pleading on his part (pursuant to Order 28 rule 8 (1) of the Rules of the Supreme Court 1985), and in response to the indication made by Mr. Marshall on behalf of Brian Lines that his client sought an injunction in respect of the matters referred to in his affidavit, I directed that Brian Lines' case should be treated as if his counterclaim included an application for the grant of an injunction.

9. In general terms, there were four grounds on which Brian Lines opposed the application by LOM. These were:—

• a. that he was not aware that the LOM system of recording telephone conversations within its office extended to his own telephone extension.

• b. that his telephone conversations with LOM customers were expected by those customers to remain confidential and accordingly he had a fiduciary duty to protect such confidence.

• c. that his telephone conversations contained legally privileged information, insofar as he had retained Bermuda counsel in relation to the SEC's investigation on 5 February 2003, and New York counsel shortly thereafter, and

• d. that the recording of his telephone conversations by LOM contravened section 61 of the Telecommunications Act 1986.

10. In broad terms, therefore, the Court was obliged to consider the obligation of confidentiality owed by LOM in relation to:—

• a. documents containing the confidential information of third parties.

• b. recordings of telephone conversations effected pursuant to the LOM system of recording. In this regard, in was recognised that the recordings of telephone conversations made by Brian Lines could be divided into conversations where he was acting in relation to LOM's business and conversations where he was dealing with his own personal affairs. In relation to those conversations dealing with LOM business, during argument these were further divided into those conversations concerning Sedona, SHEP and Inside Holdings, Inc., those concerned with other LOM business, and those relating to the operation of LOM's business itself. At the end of the day, it did not seem to me that these further distinctions were material. In respect of the personal...