On September 27, 2024, Justice Borrok of the New York County Commercial Division issued a decision in Camelot Event Driven Fund, a Series of Frank Funds Trust v. Morgan Stanley & Co. LLC, 2024 NY Slip Op. 51352(U), holding that 10b-5 letters were not privileged or work product, explaining:
As the defendants concede, 10b-5 letters are not legal opinions and lawyers issuing 10b-5 letters cannot be held liable in a private right of action for aiding and abetting a violation of the Securities Act of 1933. They are simply negative assurance letters indicating that, based on a discrete set of documents and both oral and written communications, that “nothing has come to [Hughes Hubbard & Reed LLP (HHR)’s] attention which gives us reason to believe that [the offering documents] contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.” Negative assurance is not a legal opinion. Rather, it is a statement of belief, unique to securities offerings, based principally on counsel’s participation in the process of preparing and discussing the registration statement or other offering document with the various participants in the process.
Because the 10b-5 letter is not legal advice or a legal opinion, the documents delivered to HHR (and both the written and oral communications with HHR) for the purpose of obtaining the 10b-5 letter were not delivered to or had with HHR for the purpose of obtaining or facilitating legal advice. They are thus not privileged and must be produced. Stated differently, the facts and communications that the defendants chose to have HHR review and rely on (or not rely) on for the purposes of the 10b-5 letter are validly within the purview of discovery and are not privileged because they are given for the purposes of a business document needed for the transaction and not for the purpose of obtaining a legal opinion or legal advice. As discussed below, this non-privileged information must be disclosed such that the 10b-5 letter can be properly understood by a fact finder. The plaintiff and the fact finder cannot be deprived of this non-privileged information that HHR reviewed and did not review in indicating in the 10b-5 letter that based on the information provided, no further disclosure was required in the offering documents.
. . .
To be clear, the plaintiff is entitled to fulsome discovery as to the non-privileged information given or not given by the underwriters for the 10b-5 analysis to HHR so that they can understand what the scope of the 10b-5 exercise was and what exactly HHR was provided (or not provided) in delivering what was a business document and not a legal opinion. For example, if the conflict at issue in this case was not provided to HHR, the plaintiffs are entitled to understand that and to tell that to a fact finder in addressing whether the defendants objectively can maintain their due diligence defense. In addition, without this information which the plaintiffs are otherwise entitled, the 10b-5 letter would be both sword and shield and hopelessly materially misleading, depriving the plaintiff of its ability to explain what the 10b-5 letter actually means.
For the avoidance of doubt, in the 10b-5 letter, HHR is not opining as to whether the diligence done by the underwriter defendants was adequate or reasonable or whether the underwriter defendants otherwise met their obligations under the 1933 Act. Nor is HHR either investigating or rendering a legal opinion about the truth of any of the due diligence information provided to them. To avoid confusion about any of that at trial, appropriate instruction can be given to the fact finder. However, the 10b-5 letter itself does not include the oral and written communications provided to HHR, so it simply is not clear what the significance of the 10b-5 letter is — meaning, among other things, it is not clear whether HHR was provided any information at all as to the conflict which is at issue in this case. This requires more than simple instruction and this is particularly important given the defendants’ assertion as to their knowledge or lack thereof and their due diligence defense. As discussed above, the defendants have not yet developed which, if any, of the written and oral communications provided to HHR were provided for the purpose of obtaining the 10b-5 letter and which, if any, were provided for obtaining or facilitating legal advice.
The defendants are not entitled however to a blanket privilege assertion as to all communications with HHR. Non-privileged facts that were in communications with HHR did not become privileged by communicating them to HHR or because they were communicated by HHR to the defendants. The plaintiff is entitled to know the existence or non-existence of those facts. The plaintiff is not however entitled to inquire of HHR as to why the underwriters chose to disclose or not disclose certain facts for the purposes of the 10b-5 letter. That information would appear to be privileged. The plaintiff is also entitled to know what if any information was withheld from HHR for the purposes of the 10b-5 letter.
(Internal quotations and citations omitted).