K&L Gates v. Navin Kumar Aggarwal and Others

HCA 1061/2011 & HCA 349/2012

(Consolidated)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1061 OF 2011

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 349 OF 2012

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(Consolidated by the order of
Deputy High Court Judge B Chu dated 10 July 2013)

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DECISION

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1.These are discovery applications by the various Defendants.

BACKGROUND

2.The 1^st Defendant, Navin Kumar Aggarwal (“Aggarwal”), is a former solicitor practising in Hong Kong and the senior partner of the Plaintiff which is a solicitors’ firm known as “K&L Gates”.  Aggarwal is alleged to have misappropriated large sums of moneys from K&L Gates’s client account (“the Client Account”)[1] and used the same to gamble at various casinos in Macau.  K&L Gates is now suing for recovery of these sums from Aggarwal and the various casinos who received the sums allegedly misappropriated by Aggarwal.  K&L Gates is also claiming for damages caused by breach of duty on the part of the casinos.

3.By reason of the criminal conduct on the part of Aggarwal, K&L Gates is facing numerous claims by third parties.  According to K&L Gates, there were two types of misconduct by Aggarwal giving rise to these claims:

(i) Aggarwal misappropriated moneys and shares belonging to 4 clients of K&L Gates (“the Clients”).   K&L Gates has since made full restitution to the Clients, the sum of which amounts to HK$137 million.[2]

(ii) There were other entities who entered into purported escrow agreements with K&L Gates whereby their funds were paid into the Client Account for one RIM China Co Ltd (“RIM China”), a bona fide client whose file was non-active.  It is said that the payers of these moneys (“Non-Clients”) were never K&L Gates’ clients.

4.These Non-Clients have issued proceedings (“Escrow Actions”) against K&L Gates claiming return of the moneys deposited into the Client Account under the purported escrow arrangements, as it is alleged that Aggarwal had misappropriated those sums.  The Escrow Actions are being contested by K&L Gates and are ongoing, and I am also the judge assigned to case-manage and adjudicate the Escrow Actions.

5.There had been criminal prosecution brought against Aggarwal and he was sentenced to a long term of imprisonment.  K&L Gates has obtained default judgment against him in this action.

6.The remaining active Defendants are casinos, junket operators or their purported agents who received the moneys misappropriated by Aggarwal, and they are related to 4 casino groups in Macau:

(i) the 4^th, 7^th and 13^th Defendants in HCA 1061/2011 are related to “Crown Casino” (“the Crown Defendants”);

(ii) the 8^th Defendant in HCA 1061/2011 and the Defendant in HCA 349/2012 are related to “Melco Casino” (“the Melco Defendants”);

(iii) the 9^th and 11^th Defendants in HCA 1061/2011 are related to “Venetian Casino” (“the Venetian Defendants”); and

(iv) the 10^th and 14^th Defendants in HCA 1061/2011 are related to “Wynn Casino” (“the Wynn Casino”).

7.These Defendants (“the Casino Defendants”) are now applying for discovery against K&L Gates.

8.There is a common feature for the fraud committed by Aggarwal. The Non-Clients deposited the funds in the Client Account pursuant to certain escrow agreements, under which K&L Gates or Aggarwal agreed to hold the sums in escrow in return for payment of “interests” to these Non-Clients.  These funds were held in the Client Account under the name of a dormant company RIM China.  Eventually, Aggarwal falsified payment instructions and he managed to transfer these funds in the Client Account to other entities, and through this modus operandi, Aggarwal was able to misappropriate the funds of various Non-Clients.

9.Substantial funds were eventually transferred to various casinos in Macau and Aggarwal lost all such moneys through gambling.  In this action, K&L Gates seeks to recover these funds from the Casino Defendants.

10.The basis of the claims against the Casino Defendants can be summaried as follows:

(i) K&L Gates seeks recovery of the amounts transferred to the various casinos on the basis of knowing receipt or money had and received, on the ground that the Casino Defendants are alleged to have knowledge of Aggarwal’s fraud such as to make it unconscionable for them to retain the benefit of the receipt.

(ii) K&L Gates alleges that the Casino Defendants acted in breach of a duty of care for failing to make certain anti-money laundering reports to the relevant Hong Kong and Macau authorities in relation to the transfers.  It is alleged that if timely reports had been made, police investigation would have commenced, and Aggarwal’s fraud would have been “intercepted, prevented, or curtailed”.  K&L Gates claims to have suffered “loss and damage to be assessed”, the quantum of which will be higher than the sums transferred to the particular Casino Defendant.

11.Broadly speaking, the defences of the Casino Defendants against the knowing receipt and money had and received claims are as follows:

(i)   The Casino Defendants deny having received the sums with the requisite knowledge, whether actual or imputed, that the sums belonged to K&L Gates and were not Aggarwal’s funds, or of other circumstances putting them on inquiry.  They reasonably believed that the transfers were legitimate transfers for various reasons, including that: K&L Gates, as an international law firm, would have a proper internal system to prevent unauthorised withdrawals, the K&L Gates’ banks were satisfied that the withdrawals were properly authorised, and the fact that the Hong Kong authorities did not raise any issue with the transfers upon their reports[3].

(ii) The sums were received by the Casino Defendants for valuable consideration, i.e. for Aggarwal’s gambling activities or settlement of outstanding credit.  They also rely on the defence of change of position.

12.For the breach of duty claims, the Casino Defendants deny the existence of any duty of care or breach of any alleged duty of care.

13.The Casino Defendants also aver that:

(i) The partners or accounting staff of K&L Gates who co-signed or prepared payment instructions with Aggarwal knew or ought to have known of the alleged misappropriation of funds from the Client Account, and such knowledge would be imputed to K&L Gates.

(ii) Alternatively, if such signatures by the co-signing partners were forged, then K&L Gates’ banks had no authority to make the payments and are liable to reverse the entries, so that K&L Gates has suffered no loss.

(iii) If Aggarwal had no authority from K&L Gates to enter into the purported escrow agreements, the moneys deposited by the Non-Clients would be treated as moneys paid to Aggarwal but not K&L Gates, so that K&L Gates was not liable to the Non-Clients (and would have suffered no loss for which K&L Gates can claim), and also had no title to sue for such moneys from the Casino Defendants.  It is also denied that the moneys apparently credited to RIM China were client moneys held by K&L Gates on trust for RIM China or any client.

(iv) K&L Gates ought to have discovered Aggarwal’s fraud by reason of its system of internal control and risk management and that Aggarwal’s fraud would not have gone unnoticed for such long periods of time.

14.By reason of the matters pleaded, I agree with Mr Man, SC, counsel for the Wynn Defendants, that the court needs to deal with the following issues at the trial:

(i) Whether, in terms of the bank mandates, the individual transfers were made with proper authority from K&L Gates.

(ii) The circumstances under which the payment instructions for the transfers were made and identity of persons (in addition to Aggarwal) who gave them on behalf of K&L Gates, and whether they had actual or constructive knowledge of Aggarwal’s misconduct in relation to the transfers.

(iii) The true nature and terms of the escrow arrangements, whether they were valid or whether Aggarwal had authority from K&L Gates to enter into such arrangements (so that they were binding on K&L Gates), and thus whether K&L Gates had title to the moneys received from the Non-Clients. These further raise the issue of whether the transfers to the Casino Defendants came from such moneys from the Non-Clients.  This is because if the source of funds for the transfers were moneys that came from the Non-Clients, then K&L Gates has suffered no loss and cannot maintain the claim against the Casino Defendants in respect of the transfers.  Those funds were simply the funds of the Non-Clients or Aggarwal.

(iv) Further, if K&L Gates successfully resisted the claims by the Non-Clients in the Escrow Actions, K&L Gates cannot then recover the same sums from the Casino Defendants.  Thus, the progress and merits of the Escrow Actions, including K&L Gates’ stance in resisting the claims by the Non-Clients are also relevant.

(v) The status of RIM China and its client account with K&L Gates, including whether it was a genuine client of K&L Gates, how its account was operated by Aggarwal and how money was moved in and out of its client account. This also relates to whether the other partners of K&L Gates knew or ought to have known of the fraud.

(vi) What, if any, internal system of control or governance or risk management were in place. This also relates to the knowledge (actual or constructive) of the other partners of K&L Gates of the fraud.

(vii) Given that K&L Gates is now claiming against the Casino Defendants loss and damage arising from Aggarwal’s fraud not being discovered earlier, i.e. the loss from Aggarwal’s fraud after it could have been discovered, K&L Gates’ claims against the Casino Defendants are not limited to the losses it suffered from the transfers received by the Casino Defendants.  This means that the reasonableness of any settlement K&L Gates has reached for claims made against it (by its clients or the Non-Clients) and the restitutions made, and thus the merits of such claims, are relevant.

RELEVANT LEGAL PRINCIPLES

15.The following legal principles for specific discovery applications are trite:[4]

(i) There is no jurisdiction to make an order under RHC O.24 r.7, unless (1) a document exists which the other party has not disclosed, (2) it is in or has been in the respondent’s possession, custody, or power, and (3) the document is relevant.

(ii) The discovery must be necessary either for disposing fairly of the cause or for saving costs.[5] The court should have regard to third party interests, including confidentiality, in deciding whether to order discovery.

(iii) Jurisdiction aside, the court has a discretion not to order disclosure.

(iv) The order must identify with precision the documents or categories of documents which are required to be disclosed, for otherwise the person making the list may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure.

(v) Where discovery is sought in relation to a class of documents, it is important that the class should not be defined or described too widely, and should not be defined so as to include documents which are not relevant.

(vi) Statements in a party’s affidavit of documents are conclusive. The respondent may answer an application for specific discovery by an affidavit stating that he does not have the documents, and this will be conclusive at the interlocutory stage.

16.In respect of relevance, the test remains that of Peruvian Guano relevance, i.e. the document is relevant if: (1) it is reasonable to suppose that it contains information which may, not must, either directly or indirectly enable the party requiring the same either to advance his own case or to damage the case of his adversary; or (2) it is a document which may fairly lead the party to a train of inquiry which may have either of those two consequences.[6] However, the courts have also cautioned the excessively wide application of the Peruvian Guano test.  Ultimately, the question is whether the discovery is necessary for disposing fairly of the proceedings.[7]

17.Despite the Peruvian Guano test for relevance, "fishing" is not allowed, and discovery should not be oppressive. If oppression is suggested, the court will weigh any such potential oppression against the possible injustice that would be caused if the materials were not available at trial.[8]

18.In terms of necessity of order discovery, it is up to the party objecting to discovery to show that it is not necessary for disposing fairly of the cause or for saving costs.[9]

19.Further, the court should take into account the objectives of the CJR, which are to promote proportionality, cost effectiveness and fairness between the parties[10], in considering any discovery application.

20.If the court is of the view that a request is oppressive, too wide or imprecise, where such request contains within it a proper request which can be revealed without prejudice to the other side, the “blue pencil” test can be applied to limit the scope of the order.[11]

21.There is also an issue here as to whether K&L Gates is entitled to redact the contents of some of the disclosed documents on the ground of irrelevance and legal privilege.  Mr Coleman, SC, counsel for K&L Gates, submits that a party is entitled to redact parts of a document which he claims to be irrelevant or privileged.  Generally, the oath of the party giving discovery is conclusive.

22.But there is qualification to such broad principle.  Whilst redaction for irrelevance is permissible, it can only be done if it does not destroy the sense of the document or makes it misleading.[12] Further, the oath of the party giving discovery on irrelevance is not conclusive if it can be shown from the documents produced, or the respondent’s own affidavits, or necessarily from the circumstances of the case that the assertion on oath does not truly state that which it ought to state.[13]

23.The burden is on the applicant to show that a redaction has been done wrongly.[14]

24.The relevant principles as to claiming privilege and challenging such claims are restated by Beatson J in West London Pipeline & Storage Ltd v Total UK Ltd [15]as follows:

(i) The burden of proof is on the party claiming privilege to establish it.  A claim for privilege is an unusual claim in the sense that the party claiming privilege and that party's legal advisers are, subject to the power of the court to inspect the documents, the judges in their or their own client's cause. Because of this, the court must be particularly careful to consider how the claim for privilege is made out and affidavits should be as specific as possible without making disclosure of the very matters that the claim for privilege is designed to protect.

(ii) The claim for privilege should be specific enough to show something of the deponent’s analysis of the documents or, in the case of a claim to litigation privilege, the purpose for which they were created.

(iii) Although generally an affidavit of document is conclusive, this may not be so if, inter alia, it is reasonably clear that the affidavit is incorrect or incomplete on material points.

SUBJECT DOCUMENTS FOR THE DISCOVERY APPLICATIONS

25.There are numerous requests made by the various Casino Defendants.  Broadly speaking, the requests can be grouped under the following 5 types of documents:

(i) bank authorisation documents, bank statements and internal audit documents relating to the Client Account;

(ii) documents relating to the criminal proceedings against Aggarwal;

(iii) documents relating to the Escrow Actions and the claims by the other clients;

(iv) documents relating to the operation of the Rim China’s ledger account; and

(v) internal correspondence within K&L Gates and with its bankers.

26.For easy reference, I would use “C”, “M”, “V” and “W” as referring to the requests made by the Crown Defendants, the Melco Defendants, the Venetian Defendants and the Wynn Defendants respectively.  For example, “M1” would mean the 1^st request by the Melco Defendants and “W6” would mean the 6^th request by the Wynn Defendants.

(i)   Bank authorisation documents, bank statements and internal audit documents

27.The Casino Defendants are not pursuing some of the requests.  The outstanding requests are: C(i)&(ii), M1-5, M7-12, M27, V4, V6, V8, W1-6, W8-9 and W24.

28.I have no hesitation in ordering discovery for the bank documents under M1-2, V4 and W1-3.  These are account opening documents and mandates for the Client Account which are clearly relevant and material for the court in determining the issues mentioned in §§14(i), (ii) and (v) above.  In order to understand and assess K&L Gates’ assertion of lack of authority, one relevant aspect is to consider whether what happened in respect of the authorization of the transfers were consistent with the mandate given to the banks or the internal signing protocol of K&L Gates.  Hence these documents should be disclosed.

29.The requests under C(i), M4-5, V6&8 and W4-5 relate to: (i) the bank statements and transaction records of the Client Account referred to by K&L Gates in this action (presumably because they are relevant to Aggarwal’s misconduct) for the period between May 2007 and June 2011 (“the Period”), during which Aggarwal entered into escrow arrangements with the Non-Clients, and thus the period during which their moneys were paid into the Client Account; and (ii) reconciliation statements and client’s ledgers of the Client Account within the Period.

30.There is a serious dispute between the parties as to whether the Casino Defendants are entitled to conduct a fund flow analysis of the Client Account.  As to the funds transferred to the Casino Defendants, K&L Gates at present makes no distinction between such moneys originating from the Clients and Non-Clients and does not identify which of its Clients or Non-Clients did such moneys originate from.

31.Obviously, K&L Gates does not want the Casino Defendants to conduct such exercise because the documents are voluminous and they contain a lot of information relating to other clients which is confidential in nature.  That is why K&L Gates is only prepared to disclose some redacted bank statements and documents showing only the transfer of the funds to the Casino Defendants.  However, the heavy redactions make it impossible for the Casino Defendants to conduct any meaningful fund flow analysis of the Client Account.

32.In my judgment, the Casino Defendants are entitled to conduct such exercise in order to trace the source of the moneys transferred to them.

33.According to the materials revealed in the criminal proceedings against Aggarwal:

(i) Between May 2007 and June 2011, Aggarwal approached 92 potential investors and falsely represented to them that: (1) Aggarwal had business opportunities for them and that they were required to deposit moneys with K&L Gates in escrow as proof of funds; (2) K&L Gates would act as their escrow agents and would only deal with the funds at their direction; (3) interest would be paid for the deposits.

(ii) The potential investors entered into escrow arrangements with Aggarwal and deposited funds with K&L Gates.  The total sums deposited during this period was HK$8.1 billion. These sums were transferred into the ledger account of RIM China with K&L Gates at Aggarwal’s direction.

(iii) Aggarwal would submit forged payment instructions purportedly from RIM China directing K&L Gates to remit funds out of RIM China’s ledger account.

(iv) “Inter-account” transfers were identified for the moneys going into and out of RIM China’s ledger account which suggests that the funds had been mixed.  In other words, the moneys in RIM China’s ledger account would include traceable proceeds of the moneys of Non-Clients and other genuine clients.

34.In order to ascertain the source of the funds for the transfers which were paid out from RIM China’s ledger account (and whether they came from the Non-Clients), which is obviously a relevant matter in considering the issue of causation, it is necessary for the Casino Defendants to conduct a fund flow analysis.  Such an exercise by nature requires an analysis of the other movements of funds into and out of RIM China’s ledger account up to the time of the transfers. Given that there were inter-client account transfers, the analysis must cover not only the RIM China ledger account but also K&L Gates’ other clients’ ledger accounts. The requested documents are clearly relevant for this purpose.

35.Other than irrelevance, K&L Gates also resists discovery on the ground that the requests are “extremely oppressive” because they involve thousands of transactions of over 4 years relating to other genuine clients. It is said this would be unnecessary and disproportional.

36.However, I do not accept that the scale of work involved is a valid objection for discovery in the present case.

37.As explained above, given the nature of the issue of the source of funds, these documents are necessary for the carrying out of a meaningful fund flow analysis.  Indeed they are central to the issue of the title of the moneys used to pay out the transfers.  It is not suggested that K&L Gates does not have the resources or other difficulties to produce the documents, and K&L Gates has not given particulars of the alleged “extreme oppression”.  In all likelihood, these documents would be well-organised and accessible reasonably easily.  Further, it appears that K&L Gates has already conducted its own fund flow analysis in respect of the movement of funds in the Client Account, which is its own evidence in Top Point Ltd v K&L Gates[16]. Finally, I agree with the observation of Mr Brown, counsel for the Crown Defendants, that this litigation is, by any measure, “big ticket” litigation being conducted by well-funded and resourced parties.  While proportionality is always a legitimate consideration, the additional strain on the parties to obtain, list and copy further documents that are undoubtedly in K&L Gates’ possession is, realistically, de minimis in the scheme of these proceedings.  Hence, the probative value of these documents and the substantial quantum of the claims clearly outweigh any alleged prejudice to K&L Gates.

38.Finally I have to deal with the question of confidentiality.  I agree that the bank statements, reconciliation statements and clients’ ledgers may contain a lot of confidential information about other clients which are not related to the fraud.  Hence, I agree with the suggestion made in the hearing that K&L Gates should have the liberty to redact the names of their clients so long as they are represented by client numbers.  The bottom line is that the information supplied should enable the Casino Defendants to conduct a meaningful fund flow analysis to trace the source of the funds eventually transferred out to the casinos.

39.For the above reasons, I order discovery of these documents subject to appropriate redactions.  In order to be more specific, I would refer the documents as “reconciliation statements and client’s ledgers” in place of the description “management accounts and cash low reports/statements”.  C(i), V4, 6 & 8 contain similar requests.  For the sake of consistency and to avoid the wide description of documents in C(i), I would use the same wordings in the requests by the Wynn Defendants to describe these documents so that K&L Gates does not deal with different sets of requests.

40.The Melco and Wynn Defendants are not pursuing the requests under M5, M49-50, M73-79 and W6, W46, W63-69 respectively because the documents would be covered by the requests under M3-4 and W4-5, which I have ruled in favour of these Defendants for disclosure.

41.For the requests under M7-12 and W8-9 for the supply of the unredacted version of the documents, parties agree that it would not be necessary for the court to make any further order as these documents would be covered by the previous requests for bank statements.

42.For the internal audit documents under C(ii), M27 & 68 and W24 & 58, since K&L Gates has already filed an affidavit confirming that no such documents exist[17] and such answer should be treated as conclusive, I would not make any order for discovery of these documents.  M68 and W58 contain similar requests and likewise I would not make any order for discovery.

(ii)    Documents relating to the criminal proceedings

43.The outstanding requests are M37 & 38, V12, and W34 & 35.

44.The requests relate to the seizure list setting out the documents and items seized by the police in respect of the criminal investigation against Aggarwal and the witness statements given by the partners and staff of K&L Gates to the police in respect of such criminal investigation.

45.In my judgment, these documents should be disclosed.  They are related to Aggarwal’s fraud which is an important element in the present case giving rise to all the claims against the Casino Defendants.  The seizure list may reveal other items and documents unknown to the Casino Defendants.  For the witness statements, they may contain relatively contemporaneous evidence from K&L Gates’ partners and staff relating to Aggarwal’s fraud.  One can also expect that they may contain explanations of K&L Gates’ internal system, and why the fraud had not been discovered earlier, and the knowledge of the individual staff and partners.  These are certainly relevant to the issues in the present case.

46.The mere fact that K&L Gates’ partners have now given witness statements in this action does not mean that the previous statements are not relevant or not necessary.  The Casinos Defendants must be entitled to cross-check the versions given previously for any inconsistency or additional information.  Indeed, it can reasonably be expected that the contents of the statements given to the police would be different from those given in this action, not least because in this action, K&L Gates can choose who would be witnesses (e.g. there are no accounting or other staff) and what the witnesses would say in the witness statements.

47.The documents should not be voluminous and so oppression is not a valid consideration.

48.I understand that the courts had ordered discovery of similar documents in one Escrow Action[18] but denied similar request in another one[19].  In any event, these decisions are not binding on this court.  Further, the issues in the Escrow Actions and those in the present action against the Casino Defendants may be slightly different, and so different considerations apply. 

(iii)   Documents relating to the Escrow Actions and the claims by other clients

49.The outstanding requests are C(iii), M40-44, 67, V7 and W37-41, 57.

50.These requests relate to: (i) the documents in the Escrow Actions; (ii) settlement agreements between K&L Gates and the plaintiffs in the Escrow Actions or other Non-Clients who are not plaintiffs in the Escrow Actions; and (iii) all escrow agreements whether they relate to the Escrow Actions or not.

51.This action is clearly related to the Escrow Actions, as substantial portion of the funds transferred to the Casino Defendants originated from the plaintiffs in the Escrow Actions.  K&L Gates claims that the persons who paid the moneys into the Client Account are not their clients, and that it should not be liable to the plaintiffs in the Escrow Actions because, inter alia, receiving these payments pursuant to such escrow agreements did not fall within the ordinary business of solicitors’ firm.  Obviously, if K&L Gates succeeds in defending the Escrow Actions, the Casino Defendants may have a good case in arguing that K&L Gates is not able to recover the amounts transferred to the casinos the funds of which originated from the plaintiffs in the Escrow Actions.  Put it simply, the moneys in the RIM China’s ledger account were not K&L Gates’ moneys.  In such case, the Casino Defendants need to know the issues, the progress and the results of the Escrow Actions.  There may be a lot of documents involved, but I cannot see how K&L Gates can seriously object the disclosure of these documents.  In any event, I do not find the exercise oppressive.  After all, it is K&L Gates who seeks to recover substantial transferred funds and damages from the various Casino Defendants, and it would be grossly unfair to the latter if they are not allowed to investigate the transactions and the legal proceedings giving rise to such claims.

52.Mr Coleman argues that the results of the Escrow Actions are not relevant.  Even if the plaintiffs in the Escrow Actions fail in their claims against K&L Gates, the Casino Defendants would not be entitled to keep the funds transferred to them.  As compared with the Casino Defendants, K&L Gates has a better title in respect of the transferred funds.

53.This is a bold submission.  If K&L Gates succeeds in defending the Escrow Actions on the ground that the plaintiffs were not their clients and that it did not hold the funds for them, then those plaintiffs may be able to sue the Casino Defendants for the return of those funds.  Does it mean that the Casino Defendants would have to pay twice for the transfer of the funds?  This simply cannot be right.

54.In his written submission, Mr Coleman concedes that these documents are at least relevant to the quantum of K&L Gates’ breach of duty claim, but he argues that discovery for the purpose of the assessment of damages exercise is premature.  I disagree.  There is no order for split trial and so the discovery cannot be said to be premature.  In any event, the Casino Defendants are entitled to obtain these documents to enable them to consider the issue of quantum and to make appropriate decisions for the future conduct of the case.

55.So far as the settlement agreements are concerned, it is not necessary for me to deal with such requests because K&L Gates agrees to provide information relating to these settlement agreements.  If the Casino Defendants are still pressing for the documents, I understand that notification would be given to the counterparties of these agreements so that they can address the court on any confidentiality issue.  V7 contains similar request and so I would treat it the same way.  However, I must emphasise that the reasonableness of the settlement and thus the amount of the settlement sum are highly relevant for the court in determining the reasonableness of the quantum of the claim against the Casino Defendants.

56.Finally, I come to the escrow agreements themselves.  It is difficult to see how K&L Gates can resist this request, as they are clearly relevant to the merits of the Escrow Actions generally and also specifically to the issue of Aggarwal’s authority to bind K&L Gates to such agreements.

57.As can be seen from DHCJ Saunders’ decision in Hind International Investment Ltd v K&L Gates[20], K&L Gates itself obtained expert evidence as to whether such escrow arrangements are within the usual business of a solicitors’ firm.  Such evidence is equally relevant in this action and the Casino Defendants cannot begin to consider the point unless the escrow agreements had been disclosed.

58.In this regard, the Wynn Defendants agree that the discovery should be limited to the agreements which form the “purported escrow arrangements” and the “bogus loan arrangements” referred to in §12(a) of the Re-Re-Amended Statement of Claim, which were entered into with K&L Gates by the Non-Clients who had either commenced Escrow Actions against K&L Gates or those who K&L Gates has compensated or settled with it without proceedings having been commenced.  I would therefore limit the discovery to these documents as against all other Casino Defendants.

59.C(iii) and V7 contain similar requests.  For the sake of consistency, I would use the same wordings in the requests by the Wynn Defendants to describe these documents so that K&L Gates does not need to deal with different sets of requests.  Parties also agree that M67 and W57 are in substance the same as the previous requests and so there is no need for the court to make additional discovery order.

(iv)    Documents relating to the operation of Rim China’s ledger account

60.The outstanding requests are M45-48 and W42-45.

61.I do not order discovery of these documents on the ground that K&L Gates has adequately dealt with such requests in the affidavits.

62.In these requests, the Casino Defendants ask for documents relating to the opening of Rim China’s ledger account, the correspondence between K&L Gates and Rim China, invoices issued by K&L Gates to Rim China, etc.  However, Tso Shiu Kei Vincent (“Tso”) in §§ 35-38 of his 20^th Affidavit has provided a detailed account as to how Aggarwal was able to send forged instructions to K&L Gates for moneys to be transferred to the ledger of Rim China’s ledger account.  Tso also confirms that there were no communications, correspondence or invoices involved.  Mr Coleman also submits that all the accounting vouchers (which contain the forged client instructions) in relation to the transfer to the Casino Defendants have been disclosed.[21]  All the bank records relating to Rim China’s ledger account should have been covered by the previous order for discovery.  As to the documents relating to the opening of Rim China’s ledger account, since such ledger account was opened long time before the fraud committed by Aggarwal and Aggarwal only made use of such dormant client, I agree with K&L Gates that such documents are not relevant to the issue of this case.  However, I do not rule out the possibility that these documents may be relevant after considering further materials to be disclosed from the new documents.

63.There is one troubling issue.  K&L Gates says that there is a “company secretarial file” which is subject to legal privilege.[22] I agree with the Casino Defendants that this is not a sufficient assertion of privilege.  No particulars are given as to why such file, if it contains relevant materials, is subject to legal privilege.  K&L Gates should therefore provide further explanation in this regard.  In addition, it is not disputed that K&L Gates has to disclose all the forged instructions and related documents given by Aggarwal (presumably on behalf of Rim China) to K&L Gates for the transfer of the moneys to the Casino Defendants.  I am of the view there is still some ambiguity in the affidavits as to whether K&L Gates has disclosed all such documents.  Hence, further clarification should be made.

(v)   Internal correspondence within K&L Gates and with its bankers

64.The outstanding requests relating to the internal correspondence within K&L Gates and its bankers are C(iv)-(v), M53-65, V5 and W49-55.

65.The Casino Defendants seek discovery of the documents relating to a meeting between Aggarwal and Tso on 16 June 2011, the internal correspondence in respect of the making of the various transfers and the internal correspondence in respect of the enquires made by K&L Gates’ banker about the transfer of funds.

66.I first deal with the documents relating to the meeting on 16 June 2011.  In the Re-Re-Amended Statement of Claim[23], K&L Gates avers that Aggarwal made an admission about his unlawful activities and provided a written admission.  Obviously, the matters discussed at that meeting get to Aggarwal’s own version of his fraud and are clearly relevant to the claims against the Casino Defendants.  One would expect that there would be meeting notes or attendance notes and also further internal communications in relation to this meeting, and the same should be disclosed in this action.

67.In respect of this request, K&L Gates asserts that “there are no discoverable documents”, and that “insofar as there are documents in existence, these documents were created in conjunction with the Firm’s legal advisers and are therefore subject to legal privilege”.^[24]

68.I cannot accept such legal privilege claim:

(i) It is not understood how Tso could swear to the content or purpose of the documents if he is also saying that the documents do not exist, or that he does not know if they exist.

(ii) It appears from Tso’s witness statement that the meeting was only between Tso and Aggarwal.^[25] There is no suggestion that there were legal representatives of K&L Gates present.  It is not understood how any attendance notes could have been created “in conjunction with the Firm’s legal advisors”.

(iii) To create a document “in conjunction with one’s legal advisors” does not explain the content or purpose of the document, and therefore is not a valid claim of legal advice or litigation privilege.  Indeed, it is difficult to see how e.g. internal correspondence between partners on the meeting could have been “created in conjunction with” K&L Gates’ legal advisors.

(iv) Given that K&L Gates has summarised and relied on the contents of the meeting in its pleadings and witness statements, any privilege over the meeting must have been waived.

69.I then turn to the documents relating to the enquiry by K&L Gates’ banker.  On 17 August 2010, Shirley Yuen, the relationship officer in HSBC of K&L Gates’ accounts, contacted Michael Chan (partner) of K&L Gates to inquire into a number of transactions through K&L Gates’ account involving payments to (signed by Aggarwal and Stephen Lo) and from some casinos, specifically to check whether those transactions were for legitimate and proper business transactions that K&L Gates undertook for its clients.  Following that, Michael Chan emailed Aggarwal, Clifford Ng and Stephen Lo (partners of K&L Gates) to inquire about the same.

70.The emails show that two things happened after Shirley Yuen’s call:

(i) Michael Chan and Clifford Ng followed up with Aggarwal to seek an explanation on these transactions with the casinos.  It appears that there was a conversation between Aggarwal and Michael Chan; separately Aggarwal also promised to provide more information to his partners.

(ii) Aggarwal agreed to provide documents to Shirley Yuen to substantiate the supposed legitimacy of these transactions, but the attachment to the letter is missing.

71.Accordingly, the emails suggest that there was internal correspondence between the partners (at least between Aggarwal, Michael Chan, Clifford Ng and Stephen Lo) whereby Aggarwal provided an explanation and information about these transactions which were queried by HSBC, which would clearly be relevant to the extent of knowledge these other partners had on these payments which were made out from K&L Gates Client Account to the casinos and other related issues identified above.

72.The same applies to the internal correspondence relating to the making of the various transfers, which is again relevant to show how Aggarwal managed to transfer substantial funds from the Client Account and the extent of knowledge of the other partners about Aggarwal’s fraud.

73.Insofar as K&L Gates seeks to rely on any claim for legal privilege, there is simply nothing before the court to explain why such internal correspondence is privileged.  At least, the court is entitled to know the circumstances under which such internal correspondence was created, and so the absence of such particulars is fatal to the claim for legal privilege, in particular such correspondence is highly relevant as to whether the other partners of the firm were aware of Aggarwal’s fraud and the circumstances under such the transfers were made.

74.K&L Gates has disclosed some documents but in redacted version.

75.The Casino Defendants ask for the unredacted version of the email contained in #73 of K&L Gates’ List of Document (“LoD”).  The relevance of such email is not in issue, but the redaction is sought to be justified on legal privilege, allegedly because they were emails exchanged between K&L Gates’ partners and K&L Gates’ legal advisers subsequent upon discovery of Aggarwal’s fraud[26]. However this explanation is inconsistent with K&L Gates’ own materials.  In LoD, K&L Gates describes #73 as emails which were dated 17 to 18 August 2010. That would predate the discovery of Aggarwal’s fraud which K&L Gates claims to be on 9 June 2011[27]. No satisfactory explanation has been given by K&L Gates of such inconsistency, and the existing redactions are to such extent that one cannot even see the date of those emails and cannot begin to verify K&L Gates’ assertion (which on its face is inconsistent with its own LoD description).

76.There is also a request relating to #78 of LoD.  Relevance is not disputed, but K&L Gates asserts that it “only has this document to disclose”[28]. Normally a party’s assertion on oath that he does not have any document within the class sought is conclusive, but in this case the justification of K&L Gates that it only has #78 is that the attachment has been deleted by Shirley Yuen.  That the attachment might have been deleted by the recipient is not the same as K&L Gates not having possession of the same.  The email and attachment were sent from K&L Gates’ server.  Regardless of whether Shirley Yuen has deleted it, K&L Gates should still have a copy on its own server. K&L Gates has not suggested that the attachment can no longer be located from its own server (and if it did assert that, it would have to provide a convincing explanation as to why it could locate the email but not the attachment).  Absent a proper explanation, I agree that the court simply cannot accept K&L Gates’ oblique assertion that it does not have other document to disclose.

77.For the above reasons, I allow the requests under M53-65 and W49-55.  C(iv)-(v) and V5 contain similar requests.For the sake of consistency, I would use the same wordings in the requests by the Melco and Wynn Defendants to describe these documents so that K&L Gates does not deal with different sets of requests.

78.Finally, I deal with the two requests by the Venetian Defendants about the supply of unredacted copies of the documents, namely V1 (which relates to #96 of the LoD) and V2 (which relates to #95 of LoD and other notes or instructions of Aggarwal concerning the transfers).

79.#96 of the LoD is described as “copy handwritten notes by [Aggarwal]”.  I agree with Ms Sit, counsel for Venetian Defendants, that the document is simply incomprehensible in current redacted form.  The only things which are unredacted are a few isolated references to “pay Venetian”, “pay San Ing” and “pay Wynn”. Looking at it as a whole, it appears to be some form of record showing, inter alia, how moneys were transferred or moved around.

80.There is no issue about the relevance of such document.  However, K&L Gates claims for entitlement to redact certain materials on the ground of (i) irrelevance and (ii) legal privilege.[29]

81.As mentioned above, whilst redaction for irrelevance is permissible, it can only be done if it does not destroy the sense of the document or makes it misleading.  The oath of the party giving discovery on irrelevance is not conclusive if it can be shown from the documents produced, or the respondent’s own affidavits, or necessarily from the circumstances of the case that the assertion on oath does not truly state that which it ought to state.[30]

82.At no time, not even in its affirmation in opposition, did K&L Gates attempt to explain the broad nature of the redacted materials so as to give the court a sense of the materials excluded and why they are not relevant to the issues in this case even in a Peruvian Guano sense.  This is very different from GE Capital Corporation Finance Group Ltd v. Bankers Trust Co[31], where the redaction was very limited and the court was able to work out from the rest of the document what the nature of the redaction was (the identity of the account involved in another transaction which also revealed internal management problems), and formed a view as to relevance.  I agree with Ms Sit that, in the circumstances of this case, the court should not simply accept K&L Gates’ bald assertion of irrelevance when there is nothing available to the court to assess the credibility of this assertion.

83.I also agree with Ms Sit that the argument that redaction is permissible for legal privilege is not open to K&L Gates. First,K&L Gates has made clear twice that the redaction of #96 is done on the basis of irrelevance only, not privilege.[32]  Second, K&L Gates has also not identified #96 as a privileged document in LoD.  In any event, K&L Gates is not even able to articulate (i) what precisely is the privilege claimed or (ii) what are the circumstances as to the creation of #96 such as to attract privilege.  The allegation in Tso’s 22^nd Affidavit is only a bare assertion, and K&L Gates cannot therefore justify redaction on the ground of legal privilege.

84.If K&L Gates seek to protect the identity of unrelated clients, I accept that the clients can be referred to by reference to their client numbers.

85.V2 refers to #95 of the LoD and notes or instructions of Aggarwal of a similar nature concerning the 8 transfers K&L Gates made to Venetian Defendants.  The same reasoning in respect of V1 applies to #95 and so I order the disclosure of the unredacted copy.  Since K&L Gates accepts that #95 is a relevant document, there may be other payment instructions or records of a similar nature in respect of any of the 8 transfers to the Wynn Defendants, the same would likewise be relevant and should be disclosed to them.

86.There is also a related application for a further and better particular list in respect of some categories of documents.  Since I have already ordered extensive discovery against K&L Gates as mentioned above, I do not see the need to require it to file a further and better list of documents at this stage.   However, I have to remind K&L Gates that discovery is a continuing obligation.  It should also give serious consideration as to whether there should be any other documents that need to be disclosed in light of my ruling above.

87.The requests are numerous and I hope I have dealt with all of them.  In case of any omission, the parties are at liberty to restore the summonses for further argument.  Further, this Decision can only set out the broad principles for discovery.  There may be slight differences in the requests by the different Defendants, for example the periods for discovery may not be the same because of the timing of the different transfers, and so I expect the parties to work out the details and try to agree on the exact wording of the order in accordance with my decision above.  In case of any disagreement, the parties are at liberty to restore the applications for further argument.

88.I also make a costs order nisi that K&L Gates should pay to the Casino Defendants 80% of the costs of the various discovery summonses to be taxed if not agreed with certificate for 2 counsel if applicable, which shall be made absolute 21 days after the date of the handing down of this Decision.

89.There are also summonses for further and better particulars of the Statement of Claim taken out by the Melco and the Wynn Defendants.  However in view of the answers given by K&L Gates, these applications are not pursued.  I also make costs order nisi that the costs of these two summonses be paid by K&L Gates which will also be made absolute 21 days after the handing down of this Decision.

Mr Russell Coleman, SC and Ms Frances Lok, instructed by Robertsons, for the Plaintiffs in both actions

Mr Toby Brown, instructed by Minter Ellison, for the 4^th, 7^th and 13 Defendants in HCA 1061/2011

Ms Carrie Chow, instructed by Mayer Brown JSM, for the 8^th Defendant in HCA 1061/2011 and the Defendant in HCA 349/2012

Ms Eva Sit, instructed by Deacons, for the 9^th and 11^th Defendants in HCA 1061/2011

Mr Bernard Man, SC and Mr Keith Lam, instructed by Mayer Brown JSM, for the 10^th and 14^th Defendants in HCA 1061/2011