Marketxt Holdings Corp.

UNITED STATES BANKRUPTCY COURT 	NOT FOR PUBLICATION
SOUTHERN DISTRICT OF NEW YORK
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In re: 	Chapter 11
MARKETXT HOLDINGS CORP., 	Case No. 04-12078 (ALG)
Debtor.
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MEMORANDUM OF DECISION
A P P E A R A N C E S:
KAYE SCHOLER LLP
Attorneys for the Official Committee of Unsecured Creditors
By: Lester M. Kirshenbaum, Esq.
Margarita Y. Ginzburg, Esq.
425 Park Avenue
New York, New York 10022
DENNER PELLEGRINO LLP
Attorneys for Empyrean Investment Fund L.P.,
Rauf Ashraf, et al.
By: Robert Sinsheimer, Esq.
Four Longfellow Place
Boston, Massachusetts 02114
ALLAN L. GROPPER
UNITED STATES BANKRUPTCY JUDGE
This is another chapter in a long-running dispute between the representatives of
the Chapter 11 estates of Market XT Holdings Corp. (“Market XT”) and Epoch
Investments, L.P. (“Epoch”), on the one hand, and Empyrean Investment Fund, L.P.
(“EIF”) and its affiliates and controlling partner, Rauf Ashraf (“Ashraf”), on the other.1
1 EIF, Ashraf and their affiliates are hereafter sometimes referred to as the “EIF Parties.” The Chapter 11
estates of Market XT and Epoch have been substantively consolidated, a liquidating Chapter 11 plan (the
“Plan”) has been confirmed for both entities and for an affiliate, Market XT Inc., and these parties are
hereafter sometimes collectively referred to as the “Debtors.” Under the Plan, causes of action are to be
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The current dispute relates to the EIF Parties’ claim that certain documents in the
possession of attorneys they consulted—the Boston law firm of Bingham McCutchen
LLP (“Bingham”) and the California sole practitioner Mohammed I. Abdulla
(“Abdulla”)—are protected from disclosure by the attorney-client privilege. The Debtors
and their representatives contend that the communications between the EIF Parties and
their attorneys were in furtherance of a crime or fraud, that the documents evidencing
these communications fall within the crime-fraud exception to the attorney-client
privilege, and that they are not privileged from disclosure.
The Court held a hearing on the issues on November 18, 2008, at which the
question was whether sufficient evidence existed that a crime or a fraud had been
committed so as to establish “probable cause” for further in camera inspection of the
allegedly privileged documents. Before a court may undertake such a review, the party
asserting the crime-fraud exception must demonstrate a “factual basis adequate to support
a good faith belief by a reasonable person that in camera review of the materials may
reveal evidence to establish the claim that the crime-fraud exception applies.” U.S. v.
Zolin, 491 U.S. 554, 572 (1989) (citation omitted). The ultimate question is whether “a
prudent person [would] have a reasonable basis to suspect the perpetration or attempted
perpetration of a crime or fraud, and that the communications were in furtherance
thereof.” In re Grand Jury Subpoena Duces Tecum, 731 F.2d 1032, 1039 (2d Cir. 1984).
Based on the record before it at the hearing, the Court delivered an oral ruling
(Hr’g. Tr. 34:1-37:8, Nov. 18, 2008) that found probable cause for in camera review of
the documents. The Court first noted that the attorney-client privilege is one of the most
pursued on behalf of the Debtors for the benefit of creditors by a Plan committee and a creditor
representative, Alan Nisselson, who was the Chapter 11 trustee for the Debtors prior to Plan confirmation.
2
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important and respected privileges in the law and has often been held to be “sacrosanct”
(using the term propounded by counsel for the EIF Parties). Nevertheless, the Court
continued, the crime-fraud exception is also well-recognized; in the words of Justice
Cardozo, “There is a privilege protecting communications between attorney and client.
The privilege takes flight if the relation is abused. A client who consults an attorney for
advice that will serve him in the commission of a fraud will have no help from the law.
He must let the truth be told.” Clark v. United States, 289 U.S. 1, 15 (1933). See also,
Official Committee of Asbestos Claimants of G-I Holding, Inc. v. Heyman, 342 B.R. 416,
427 (S.D.N.Y. 2006); U.S. v. Barrier Industries, Inc., 1997 WL 16668, *1 (S.D.N.Y. Jan.
17, 1997); In re Andrews, 186 B.R. 219, 222 (Bankr.E.D. Va. 1995); In re Warner, 87
B.R. 199, 201 (Bankr.M.D.Fla. 1988) (applying the crime-fraud exception in the
fraudulent conveyance context, which is the principal claim against the EIF Parties).
The Court then found at the November 18th hearing that the Debtors’
representatives had a reasonable basis to assert that a fraud had been committed or was
contemplated in connection with the legal advice sought. It referred first to its finding
that the principal of Market XT, Omar Amanat (“Amanat”), had entered into two
transactions with the EIF Parties, in the amounts of $15.5 million and $13.2 million,
respectively, with intent to “hinder, delay or defraud creditors” within the meaning of §
548(a)(1)(A) of the Bankurptcy Code. See, In re Market XT Holdings Corp., 376 B.R.
390 (Bankr.S.D.N.Y. 2007). With respect to the $13.2 million transfer, the Court had in
its opinion rejected the EIF Parties’ defense of good faith and fair value and found them
liable to the Market XT estate for $13.2 million as the transferee of an intentionally
3
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fraudulent conveyance.2 In response to the argument of the EIF Parties that the Court’s
earlier decision on summary judgment had been based on a finding of intent to hinder,
and that the issue on the privilege question was intent to defraud, the Court concluded
that the record was sufficient to establish reasonable grounds for a good faith belief that
the legal advice had been sought by the EIF Parties in furtherance of fraudulent activity,
particularly as Ashraf had admitted that he had procured from his lawyers and had used
several backdated documents in connection with his defense of the fraudulent
conveyance litigation.
The Court accordingly directed that the documents at issue be produced for in
camera inspection so that it could make a ruling on the claim of privilege. The document
production of the two law firms must be separately analyzed.
Documents Produced by the Bingham Firm
The Bingham firm produced more than 5,000 pages of documents for in camera
inspection. The documents establish that the Bingham firm was introduced to the EIF
Parties by a lawyer in California (not Abdulla), who had been contacted by a vice
president of EIF, Samee Bhatti. The communications between the EIF Parties and a
partner of the Bingham firm began on Christmas Eve, 2004, and continued until the
representation substantially and abruptly concluded on or about April 8, 2005.
The timing of the commencement of the representation is critical as to the
question whether the EIF Parties retained Bingham in furtherance of a fraud. Market XT,
2 Judgment was entered against the EIF Parties for $13.2 million in connection with the second of the
transactions, the so-called Collar transaction. The Court also found that Amanat had acted with the intent
to hinder creditors in connection with an earlier transaction, the so-called STARS transaction, but it denied
the motion for summary judgment on the ground that on the record before it, the EIF Parties had raised an
issue of fact regarding the defense that they had provided value and that they had acted in good faith, and
that the value they provided was reasonably equivalent value under the circumstances. Trial of these
remaining issues has been scheduled for a later date.
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formerly known as T. Corp., was a company owned and operated by Amanat and
members of his family. Market XT had once had great success with an electronic system
for trading securities but had deteriorated drastically by the winter of 2001-2002. On
June 3, 2002, it had sold a wholly-owned subsidiary to E*Trade Financial Corp.
(“E*Trade”) for shares of E*Trade stock, but it was unable to liquidate the stock in order
to meet the mounting demands of its creditors for payment.
In early 2003, Amanat enlisted the participation of Ashraf and the other EIF
Parties in connection with the liquidation of the shares, and between June and September,
2003, Market XT entered into a series of transactions that, in substance, left the EIF
Parties with the net proceeds of the E*Trade stock (approximately $28.7 million) and
Market XT with nothing. On March 26, 2004, creditors of Market XT filed an
involuntary petition against the company; Amanat disputed the filing for more than six
months, but by the fall of 2004, his ability to delay was faltering. On December 1, 2004,
Amanat finally consented to entry of a Chapter 11 order for relief against Market XT
(Case No. 04-12078, ECF Doc. # 105); it was entered the next day. A creditors’
committee was appointed on December 20, 2004 (ECF Doc. # 120), and on January 28,
2005, an independent Chapter 11 trustee was appointed to take over control of the estate
(ECF Doc. # 192). Creditors were also pursuing judgments against Amanat personally as
a party allegedly liable on certain of the Market XT debt, and he had engineered his own
involuntary bankruptcy in the mistaken belief this would help fend them off.3 An order
for relief in Amanat’s Chapter 7 case was ultimately entered on January 28, 2005 (Case
No. 04-43361, ECF Doc. # 56).
3 Amanat’s actions in inducing his personal chauffeur to file an involuntary bankruptcy petition against him
are described in this Court’s opinion dated January 19, 2005, reported at 321 B.R. 30.
5
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The creditors of Market XT had, months before, started an investigation into the
transfer of the proceeds of the E*Trade stock to the EIF Parties. It appears that several of
the creditors who filed the involuntary petition against Market XT in March 2004 had
earlier filed a lawsuit in Massachusetts State court against Ashraf or EIF.4 On January 4,
2005, the creditors’ committee in the Chapter 11 case in this Court filed an application to
take testimony pursuant to Bankruptcy Rule 2004 from several parties, including EIF,
representing that the need for discovery had become apparent from earlier depositions of
Amanat and a Market XT accountant. Ashraf retained Latham & Watkins LLP to
represent him in connection with his production of documents and a deposition, and on
January 13, 2005, that firm entered into a stipulation on his behalf that provided a
schedule for document production and set the date of Ashraf’s deposition as February 16,
2005.5
Bingham was not retained to represent Ashraf in connection with the bankruptcy
proceedings, and as far as the documents reviewed in camera disclose, did not even know
at the beginning that Market XT and Amanat were both in bankruptcy.6 The initial
documents merely refer to drafting. The California lawyer who turned the representation
over to Bingham stated that the purpose of the representation would be to “tighten”
documents evidencing EIF’s purchase of Market XT’s litigation rights in a potential
lawsuit against E*Trade. (Docs. 00040-41, 00046 ). However, Ashraf’s purpose soon
4 EIF and the other EIF Parties are located in Boston, Massachusetts, as is the Bingham firm. There is a
representation in papers filed in this case that an attorney for EIF had been contacted by the petitioning
creditors in November, 2004, about a deposition of EIF in the Massachusetts case.
5 Latham & Watkins was the first in a long series of counsel for the EIF Parties in these proceedings.
6 When Bingham was first contacted, on December 24, 2004, Market XT was in Chapter 11 and an
involuntary case had been filed against Amanat personally. As stated above, an order for relief was entered
in the personal case on January 28, 2005.
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became clear. As far as is shown in the documents, it is apparent that Bingham was
initially retained for a different purpose—to create documents that could be falsified to
evidence transactions that had never taken place or had taken place years before in a
different form. Thus, one of Ashraf’s first requests to the Bingham partner was for a
document to evidence EIF’s purchase of Amanat’s personal damage claims against
E*Trade. (Doc. 00156, dated Dec. 29, 2004). When Bingham began to draft a document
to evidence such a purchase, it appears it did not know that the document would
purportedly record a transaction that took place in 2003. (Doc. 0300). When the
Bingham partner on the matter first learned this, apparently on or about January 2, 2005,
he responded; “I am afraid that the current draft of the claims purchase agreement makes
no sense given what you told me…if these were already done in 2003, should we just
describe what was done…Why are we drafting new trading capital and trading
agreements? What do we gain by having new agreements?” (Doc. 00347).
The documentary record does not contain a clear answer to these questions or
why Bingham spent the next three months drafting and redrafting documents that were
supposed to reflect transactions that took place in 2003. Bingham has not had an
opportunity to be heard, and it is not necessarily inappropriate for an attorney to
document transactions that took place in the past and that are entered into “as of” a date
in the past. The Court makes no finding herein that Bingham’s actions were fraudulent or
that it knew that the client intended to use its work to further a fraud or a crime.
Bingham’s intent or complicity is, however, irrelevant on the privilege issue. The
question before the Court is whether the client consulted the attorney for the purpose of
furthering a crime or fraud, and the issue is the client’s state of mind. See, e.g., Clark v.
7
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United States, 289 U.S. at 15; In re Grand Jury Subpoena Duces Tecum, 731 F.2d at
1038; U.S. v. Ballard, 779 F.2d 287, 292 (5th Cir. 1986), cert. denied, 475 U.S. 1109
(1986).
There is ample evidence on the record before the Court that Ashraf on behalf of
the EIF Parties asked the Bingham firm to create documents to evidence transactions that
either never took place in 2003 or that could not lawfully be doctored or “tightened” in
2005, and that an attempt to do so would constitute the furtherance of a fraud or crime.
Thus, one of the first documents that Ashraf asked Bingham to draft was a claims
purchase agreement evidencing EIF’s alleged “purchase” of certain litigation claims by
Market XT against E*Trade. By 2005, these litigation claims were the principal asset of
the Market XT Chapter 11 estate.7 Even if Bingham did not know about Market XT’s
bankruptcy, Ashraf certainly did, and he had to know that Amanat could not sign
documents as principal of Market XT to evidence purported prepetition transactions.
Ashraf also had to know that the EIF Parties were certain to be sued as the transferees of
more than $27 million in alleged fraudulent conveyances. There can be no serious
question that he intended to backdate and fraudulently use the documents, as Ashraf has
admitted in connection with two of the documents. By letter dated May 9, 2006, on
EIF’s letterhead (Case No. 05-01268, ECF Doc. # 188), Ashraf wrote to inform the Court
“that I placed into circulation in these proceedings two documents that are dated, signed
and notarized with dates different from when the documents were actually executed.”
One of the two documents is the Claims Purchase Agreement. The other is a similar
7 For an analysis of the claims by Market XT against E*Trade, and the claims by E*Trade against Market
XT, see this Court’s decision on the parties’ respective motions to dismiss. In re Market XT Holdings
Corp., 2006 WL 2864963 (Bankr.S.D.N.Y. Sep.12, 2008).
8
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“agreement” documenting the purported purchase of Amanat’s personal claims against
E*Trade from an affiliate, Epoch. In his letter Ashraf admitted that he had
misrepresented facts relating to the documents, although he continued to insist that the
documents “drafted by my counsel at Bingham McCutchen, LLP in or about January of
2005” memorialized “arrangements and agreements reached by the parties in 2003.” He
also asserted that he had not been present when Amanat and Amanat’s brother had signed
the documents on behalf of Market XT and a notary had backdated the jurat by almost
two years.8
It is of no importance whether Ashraf actually saw Amanat backdate the
documents. A request to an attorney “for assistance in procuring fraudulent corporate
documents” provides probable cause that the attorney was retained in furtherance of a
fraud or crime. Antidote Int’l Films, Inc. v. Bloomsbury Publishing, PLC, 242 F.R.D.
248, 250 (S.D.N.Y. 2007); see also, In re Restaurant Development Group, Inc., 396 B.R.
717, 725 (Bankr. N.D. Ill. 2008). Backdating documents may be persuasive evidence of
fraudulent intent. Graham v. Comm’s of Internal Revenue, 2005 WL 730078, at *18
(Tax Ct. March 31, 2005). The fact that one of the parties was in bankruptcy makes the
fraud more blatant, as backdating documents to a date prior to a bankruptcy is clear
evidence of intent to defraud. Hadar Leasing Int’l Co., Inc. v. D.H. Overmyer
Telecasting Co., Inc. (In re D.H. Overmyer Telecasting,Co., Inc.), 53 B.R. 963, 981
(N.D.Ohio 1984); see also, U.S. v. Center, 853 F.2d 568, 571-572 (7th Cir. 1988). It may
8 Ashraf also admitted in his letter that “Of the tens of thousands of documents produced by myself and
other parties in this proceeding I believe that additional documents may also contain dates different from
the date which the document was actually executed.” (Case No. 05-01268, ECF Doc. # 188).
9
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also be a crime. See 18 U.S.C. § 152(8).9 This appears to have been Bingham’s
conclusion: if the documents accurately reflect the record, Bingham dropped its
representation of the EIF Parties on April 8, 2005, when its partner learned from “doing
some reading in recent bankruptcy cases” that there were outstanding bankruptcy cases
involving both Market XT and Amanat personally. (Doc. 3689).
Moreover, there is no reason to believe, based on the present record, that the
documents submitted for in camera inspection merely documented transactions that
actually occurred in 2003. For one thing, the documents being drafted constantly
changed based on the record that it appears Ashraf wanted to create. For example, on
January 16, 2005, Bingham wrote to Ashraf stating that the signatory would be changed
on one document and drafted an amendment to the Epoch partnership agreement,
presumably also to be backdated, and sent it to Ashraf with the comment, “We should
discuss since we are pushing the envelope on this one.” (Doc. 01501, dated Jan. 13,
2005). On the next day, Bingham asked, “Do you mean that we should draft the Epoch
documents we do not have on the assumption that they did not otherwise exist?” (Doc.
01518). Ashraf’s answer: “Yes! That’s it.” (Doc. 01520). At various points of time
there appears to have been no pretense that the transactions at issue had ever taken place.
(Doc. 01489).
One of the principal issues in the litigation by the Market XT estate against the
EIF Parties involved an enormous prepayment penalty that Amanat and Ashraf had
allegedly agreed to and that formed a principal basis for the claim by the EIF Parties that
9 “[A]fter the filing of a case under title 11 or in contemplation thereof, [any person who] knowingly and
fraudulently conceals, destroys, mutilates, falsifies, or makes a false entry in any recorded information
(including books, documents, records, and papers) relating to the property or financial affairs of a
debtor…shall be fined under this title, imprisoned not more than 5 years, or both.” 18 U.S.C. § 152(8).
10
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they were entitled to retain virtually all of the $28.7 million in net proceeds from the
disposition of the E*Trade stock.10 Bingham was involved in the drafting and redrafting
of numerous schedules that applied the prepayment penalty based on various scenarios,
without any pretense that the payments had actually been made. For example, Ashraf
wrote Bingham on January 19, 2005, about the creation of a “loan payment schedule” and
asked for a “version two without the 11/26/03 one with the $250,000 and the 1/10/15 one
with the $300,000.” Ashraf admitted, “So I have to review which one of the following
occurred: Converted all E*Trade stock into $41 million in Cash Collateral [or] Default
declared, cash collateral seized upon May 2003 and a 19% per annum 4 year prepayment
penalty incurred in August or October?” On February 1, 2005, Ashraf instructed, with
respect to the current version of the loan repayment table, “Use the alternative 2 one
herein (get rid of the 1/3/05 and the 11/26/amounts) in addition please get rid of the
5/2/03 wires (both of them).” (Doc. 02981). 	Bingham responded, on the same day,
“Given the change in the prepayment numbers, should we recalculate the prepayment fee
as well?” Ashraf replied, “Yes.” (Docs. 03022-23).
As another example, Ashraf apparently wanted a solvency certificate for Market
XT as of August 2003, the month when certain of the alleged fraudulent conveyances
took place. Bingham inquired, “If we use the amended corp. purchase agreement, the
solvency certificate would have a current date. If we use the April 23, 2003, version, the
solvency certificate would be dated as of April 23, 2003. I am not sure that I understand
why you would have an August 2003 solvency certificate, but maybe I am missing what
10 This Court invalidated the prepayment penalty in its summary judgment opinion. In re Market XT
Holdings Corp, 376 B.R. 390, 416-18 (Bankr.S.D.N.Y. 2007).
11
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you are looking for here.” (Doc. 01862, Jan. 20, 2005). The firm eventually provided
Ashraf with the document he wanted.
As time went on, Ashraf consulted Bingham on matters that did not involve the
drafting of documents. One matter involved the restatement of the EIF Parties’ tax
returns, which were amended to conform to the proposition that EIF had received a huge
prepayment penalty in 2003. The first indication from the Bingham documents that
Ashraf had consulted the firm on tax issues is a cryptic reference in an email on February
28, 2005. (Doc. 03446). Thereafter, and until the abrupt termination of the
representation on April 8th, Bingham provided Ashraf with advice as to the tax treatment
of the sums purportedly received from Market XT in 2003. The question is raised
whether this tax advice was in furtherance of a fraud.
For the reasons explained below, Bingham’s tax advice cannot be considered
privileged as, apparently unbeknownst to Bingham, Ashraf was using this advice as the
predicate for sending $6.7 million in escrowed funds out of the country in contempt of a
court order. The history is as follows. When the Market XT estate representatives first
filed their avoidance complaint against the EIF Parties on March 17, 2005, they sought
and obtained a temporary restraining order against the transfer of $16 million in EIF’s
possession that was alleged to be traceable to funds conveyed to EIF in 2003. At the
request of counsel for the EIF Parties, the TRO allowed an exception so that the EIF
Parties could use some of the escrowed funds for the “payment of taxes.” On May 5,
2005, Ashraf sent $6.7 million to Canada to an account of EIF’s limited partner and
Amanat’s cousin, Samee Bhatti, assertedly to “pay” Bhatti’s Canadian taxes. In a
decision dated January 10, 2006, this Court found that these payments were made in
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knowing violation of the court order, held the EIF Parties, including Ashraf, in contempt
of court, and ordered that the funds be recovered.11 There is no indication in the
documents that Bingham knew anything about the TRO or the use that its tax advice
would be given. However, the above course of conduct demonstrates that the advice
sought from Bingham on tax matters was also used to further a fraudulent course of
conduct and is not privileged.
There is one final category of documents that must be considered. Ashraf also
sought Bingham’s legal advice in order to formulate his best arguments that the 2003
transactions were not fraudulent conveyances and that he had provided value or
reasonably equivalent value to Market XT. The question is raised whether the crime-
fraud exception should apply to the communications and documents relating to this
portion of Bingham’s engagement. In the Second Circuit, the “crime-fraud exception has
a narrow and precise application ….” United States v. Jacobs, 117 F.3d 82, 88 (2d Cir.
1994); see also, In re Richard Roe, 68 F.3d 38, 40 (2d Cir. 1995). In Roe, the Circuit
Court rejected the District Court’s reasoning that the crime-fraud exception applies to any
document that reveals evidence of fraudulent or criminal activity and held that a
communication must be “in furtherance” of a crime or fraud if the communication is to
come within the exception. Id. This Court must therefore reject the position of some
commentators that when “the client consults the attorney for some criminal or fraudulent
purpose,” the client-attorney professional relationship never comes into effect and
“nothing that is said is privileged.” See 24 A. Wright and W. Graham, Federal Practice
11 See In re Market XT Holdings Corp., 336 B.R. 39 (Bankr.S.D.N.Y. 2006). There never has been any
substantial recovery and none at all from Bhatti, who paid no taxes in Canada and absconded with the
money notwithstanding an order of arrest from a Canadian court.
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and Procedure § 5501, pp 499-500, n. 52 (1986); see also, Note, The Future Crime or
Tort Exception to Communications Privileges, 77 Harv.L.Rev. 730, 733 (1964). Instead,
the Court must consider each communication and document dealing with Bingham’s
advice on the fraudulent conveyance issue to determine whether the exception applies,
even though the firm’s advice was in part premised on the false documents being created.
It is therefore concluded that the crime-fraud exception does not apply to those
documents in which Bingham merely provided legal advice on issues surrounding past
transactions. This conclusion is especially warranted because the attorney-client
privilege is specifically intended to protect communications where a client asks a lawyer
to analyze the record in a manner that would best support his position according to the
lawyer’s understanding of applicable law, even if the client admits prior wrongdoing. As
the Supreme Court has stated,
courts long have viewed [the privilege’s] central concern as one to
encourage full and frank communication between attorneys and their
clients and thereby promote broader public interests in the
observance of law and administration of justice. That purpose, of
course, requires that clients be free to make full disclosure to their
attorneys of past wrongdoings, in order that the client may obtain
the aid of persons having knowledge of the law and skilled in its
practice.
Zolin, 491 U.S. at 562 (internal citations and quotations omitted). It is therefore
appropriate to require a close correlation between intended and not a prior wrongdoing in
determining whether the crime-fraud exception applies. Id.12
12 It is also likely that many of the documents that should be protected as within the attorney-client
privilege also fall within the work product privilege, as the crime-fraud exception applies in the same
fashion to the work-product privilege as it does to the attorney-client privilege. In re Richard Roe, 68 F.3d
38, 40, n. 2 (2d Cir. 1995). Although Bingham did not apparently know of the existence of a bankruptcy or
Rule 2004 examination, and it was told the advice was for “meetings,” there is indication that the parties
may have believed litigation to be imminent, which is all that is needed to invoke the work product
privilege. Fed.R.Civ.P. 26(b)(3); U.S. v. Constr. Prods. Research, Inc., 73 F.3d 464, 473 (2d Cir. 1996),
cert. denied, 519 U.S. 927 (1996); Bowne of N.Y. City, Inc. v. AmBase Corp., 150 F.R.D. 465, 471
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On the same basis, the crime-fraud exception is inapplicable to documents that
evidence Bingham’s retention of a business consultant, the Michel-Shaked Group, to
assist the EIF Parties in their contention that Market XT had received “fair value” in 2003
for what it gave up. (e.g., Doc. 02977). Michel-Shaked later turned up as a declarant on
the summary judgment motion in which this Court found that $13.2 million had been
fraudulently transferred to the EIF Parties in 2003 and reserved decision on the remaining
$15.5 million.13 Although there are instances where the attorney-client privilege is
inapplicable to communications between an attorney and a third-party consultant, there is
no question that the privilege can apply when the consultant is hired to support the legal
advice the client receives. See U.S. v. Kovel, 296 F.2d 918, 921-923 (2d Cir. 1961).
Since there is no indication in the documents that Michel-Shaked was hired specifically
to perpetrate a fraud or a crime, these documents should also remain confidential.
For the reasons discussed above, the Bingham documents reviewed in camera fall
within the crime-fraud exception, except those relating to the firm’s advice on the
fraudulent conveyance issues and the work performed by the Michel-Shaked Group.
Documents Produced by the Firm of Mohammed Abdulla
The firm of Mohammed Abdulla, apparently a single practitioner in California,
produced approximately 800 pages of documents. It is hard to tell when the professional
relationship began; there are many drafts of engagement letters, but all of them are
(S.D.N.Y. 1993). Therefore, the Court’s determination regarding the application of the exception in this
opinion would be the same regardless of the privilege claimed. Indeed, the EIF Parties had counsel in the
fraudulent conveyance proceedings before this Court, starting with Latham & Watkins and continuing
through six successor lawyers or law firms down to the present day. There has been no suggestion that the
EIF Parties should not be entitled to the attorney-client and work product privileges for communications
with these counsel.
13 The Court disregarded the declaration of the Michel-Shaked firm as it was based on wrong assumptions,
did not even state an opinion and merely recounted a methodology for possibly reaching an opinion if the
firm were paid for doing so. 376 B.R. at 415, n. 35.
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undated and unsigned. It is not clear that the principal purpose of the representation was
to document transactions dating from 2003. Nevertheless, the Abdulla documents also
provide ample probable cause for a finding that Ashraf used him as a vehicle for the
commission of a fraud or crime.
Thus the documents indicate that Abdulla had a role in the creation of documents
to be backdated. In an email dated January 27, 2005, Abdulla provided advice to Ashraf
regarding different alternatives for preparing the 2003 documents that Bingham was
working on.14 Abdulla’s files contain copies of the false documents that Bingham
prepared and that Ashraf put into circulation. (Doc. 76-99). They also contain copies of
the schedules showing the alleged repayment of the Market XT “debt” to the EIF Parties
and the accrual of the “prepayment penalty” as Bingham prepared and then revised the
schedules. Although the documents do not show that Abdulla knew about the
backdating, it is Ashraf’s intent that is relevant, not Abdulla’s. These are schedules that
purport to reflect past events but were revised to reflect the current version of history that
Ashraf wanted.15
There are other indications in the documents of probable cause that Ashraf hired
Abdulla for the purpose of furthering a fraudulent course of conduct. For example, the
documents include a copy of a purchase agreement signed by Ashraf as the manager of
14 For example, Abdulla wrote that “The other option is to separate the two transactions entirely and make
this an altogether different transaction that has nothing to do with EIF or Epoch altogether (see structure
II).” (Doc. 49, dated Jan. 27, 2005).
15 The Market XT estate representatives have filed an adversary proceeding against Abdulla seeking to
avoid certain transfers to him, contending that he was not a good faith transferee within the meaning of §
548(c) of the Bankruptcy Code. Nisselson v. Abdulla, Adv. Pro. No. 06-1164 (ALG). Nothing herein is
intended to prejudice Abdulla’s position in that suit; however, it should be noted that there is some
evidence that Abdulla knew about the bankruptcy. The amended complaint in the adversary proceeding
against Abdulla asserts this, citing a letter he sent to Bank of America on March 7, 2005, in which he asked
the bank to notify his office of any subpoena from the Bankruptcy Court in connection with the Market XT
case. (Case No. 06-01164, ECF Doc. # 21, Ex. F).
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Ash General Partner LLC to purchase the shares of WR BSG, Ltd. (Docs. 00063-75).
WR BSG was one of the vehicles that, according to a complaint filed by the Market XT
estate, was used to funnel proceeds of the 2003 transactions to a “bank” in Colorado that
has since been placed in liquidation proceedings. (See Complaint in Adv. Pro. No. 05-
2243). WR BSG, which was supposedly an “international business company” formed in
the British Virgin Islands on December 24, 2004, defaulted in answering the complaint,
and a judgment for $3.2 million was entered against it on January 26, 2007. There is also
a purported subordinated loan agreement dated as of March 10, 2005, between FX
Trading, Oz Corp., LLC, T-Corp., and two individuals. (Docs. 546-550). It is hard to see
how this document would be privileged as to any of the EIF Parties, but there is an
allegation in the record that it was part of a plan to commit a fraud. T-Corp (a/k/a T-
Corp-Technologies) was a vehicle controlled by Omar Amanat’s brother, Irfan Amanat,
that allegedly received and transferred to the EIF Parties certain of the proceeds of the
2003 transactions in the amount of just under $1 million. (See Complaint in Adv. Pro.
No. 06-1762). FX Trading was similarly used in a transfer that Amanat had engineered.
(See Complaint in Adv. Pro. No. 07-1726). It is recognized that the adversary complaints
identified above contain allegations that have not yet been proven, but the question is
whether there is probable cause to believe there was intent to further a fraud, and there is
probable cause.
The documents also indicate that Ashraf retained Abdulla as a funnel for
payments to other lawyers. During the period covered by the documents, Abdulla sent
wires to the following lawyers or law firms: Bingham, Engel & Reiman, John Araneo,
and Brown Raysman. Whether or not any of these payments were connected to
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fraudulent activity, the documents showing the transfers of these payments are not
protected by the attorney-client privilege. An attorney cannot be used as a conduit for
making payments on behalf of the client and shield the payee and the amount. See e.g.,
U.S. v. Hirsch (In re Grand Jury Subpoenas), 803 F.2d 493, 499 (9th Cir. 1986) (“The
attorney-client relationship is not genuine where its only purpose is to gain confidentiality
for the client or to use the lawyer as a mere conduit for the payment of money.”); In re
Stein Law Firm, 2006 WL 1305041, at *10 (D.N.M. Feb. 9, 2006) (“To the extent [the
attorney's] services to the Horvaths took the form of transferring funds and facilitating
transactions, they were not privileged.").16
Abdulla also acted as a middleman for the retention of another firm, Engel &
Reiman, which was hired to set up offshore trusts for the benefit of Ashraf’s family
members. In addition to funneling $48,412 to Engel & Reiman, Abdulla sent a total of
$1.5 million to Dr. Farooq Ashraf. Considering the timing of the creation of these trusts,
in June 2005, and the fact that representatives of the Market XT bankruptcy estate had
already sued Ashraf, there is probable cause to believe that this activity was designed to
place Ashraf’s own funds beyond the reach of his creditors and in furtherance of a
fraudulent conveyance. See, e.g., In re Grand Jury Subpoena, 731 F.2d at 1041; U.S. v.
Barrier Industries, Inc., 1997 WL 16668, at *2.
CONCLUSION
The EIF Parties’ blanket claim of privilege is overruled. Consistent with the
analysis set forth above, the only privileged documents are those that relate to the advice
16 Document 417 also consists of a one-page schedule setting forth transfers in 2003 and 2004 from T Corp
and Epoch, including millions of dollars from something called the Gallo Geffner Fenster Attorney Trust.
It is unclear on what basis this document could be privileged as to the EIF Parties since it documents
payments not by the EIF Parties but by the Amanat companies.
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Ashraf sought and received from Bingham in connection with “meetings” on the
fraudulent conveyance issues and in connection with the retention of the Michel-Shaked
Group.
The EIF Parties may accordingly have a brief period to specify each document
that they maintain is privileged based on the principles set forth herein. The Court will
thereafter make its final ruling. In the meantime, counsel for the EIF Parties is directed to
arrange for the turnover of those documents that are plainly not privileged. Counsel for
the Debtors may settle an order on five days’ notice.
Dated: New York, New York
March 4, 2009
/s/ Allan L. Gropper
ALLAN L. GROPPER
UNITED STATES BANKRUPTCY JUDGE
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