Plaintiffs are individuals and entities that were victims of a Ponzi scheme allegedly perpetrated by defendant Four Star Financial Services, LLC (“Four Star”) and enabled by defendant Comerica Bank (“Comerica”). Plaintiffs allege that they were investors in Four Star from December 1999 through October 2002, and during this period, they invested approximately $50 million in Four Star in reliance on representations by Four Star and its managers that Four Star was a highly profitable enterprise that offered safe investments and lucrative returns. Plaintiffs allege that Four Star was actually insolvent, but maintained a practice of regularly paying monthly distributions to investors, even though investment documents provided that distributions would be paid only from available cash flow generated by Four Star’s investments. Plaintiffs allege that in truth, Four Star was only maintaining its operations by virtue of receiving large sums of new investment capital, that none of this capital was actually invested in any legitimate investments, but instead that Four Star simply banked the funds and used the same monies to pay monthly distributions to investors under the guise of “returns” on investment. Plaintiffs allege that Four Star finally ran out of cash in or about October 2002, and in October 2003, Four Star was placed into involuntary bankruptcy by its creditors. On November 21, 2008, the U.S. Bankruptcy Court for the Central District of California found that Four Star was a Ponzi scheme from January 1, 2000 to December 31, 2002.

Plaintiffs allege that Four Star was assisted in the Ponzi scheme by Comerica, where Four Star maintained a checking account. Plaintiffs allege that between December 1999 and April 2000, several creditors of Four Star obtained judgments and prejudgment writs of attachment totaling several million dollars, but Comerica enabled Four Star to avoid paying its creditors by allowing Four Star to maintain a negative balance in its checking account on most banking days. Comerica arranged for Four Star’s cash to be held in non-Four Star accounts where creditors could not reach it, and the main account used for this purpose was a personal line of credit that Comerica had issued to Ronald Anson (“Anson”) and Jack Garrett (“Garrett”), two of Four Star’s principals (the “Anson/Garrett Line of Credit”). Comerica would allow Four Star to move just enough funds from the non-Four Star accounts into the Four Star checking accounts to cover that day’s checks, leaving the account balance at or near zero at the end of the day, and allowing Four Star to write checks to Plaintiffs for regular distribution payments on their investments, thus maintaining an illusion of profitability even though Four Star was actually insolvent. Plaintiffs allege that at all relevant times, Four Star was managed by Mark Cohn (“Cohn”), Anson and Garrett.

The First Amended Complaint (“FAC”), filed May 18, 2010, asserts six causes of action against Comerica for: (1) aiding and abetting fraud; (2) aiding and abetting conversion; (3) conspiracy to commit fraud and conversion; (4) aiding and abetting breach of fiduciary duty; (5) violation of Cal. Bus. & Prof. Code Sec. 17200 et. seq.; and (6) aiding and abetting violation of Cal. Bus. & Prof. Code Sec. 17200 et. seq.

On September 24, 2013, the Court entered the parties’ stipulation pursuant to California Code of Civil Procedure section 638 appointing Martin Quinn, Esq. as the Discovery Referee.

On February 26, 2014, the Discovery Referee filed his Further Amended Recommended Order No. 4 granting Plaintiffs’ motion to compel further testimony of third-party witness Richard Smith. According to the Discovery Referee’s order, Mr. Smith is a former employee of Comerica who had some responsibility for managing the Four Star accounts and was deposed by Plaintiffs for more than five hours on February 5, 2014, but during his testimony, he was instructed by his counsel not to answer a number of questions relating to the Phoenix Hotel investment and his tax treatment of it based on privacy and other grounds. The Discovery Referee held that most of Mr. Smith’s privacy objections were without merit because his investments in Phoenix Hotel are relevant and necessary for a fair resolution, and information on whether he knew his tax returns were fraudulent is relevant to his overall credibility and to the closeness of his dealings with the Four Star principals. However, the Referee held that Mr. Smith need not answer questions on whether he amended his tax returns after learning that the Four Star principals had been convicted of tax fraud in connection with tax losses that he had received. The Discovery Referee held that Mr. Smith’s refusal to testify on whether he or another party was paying for his lawyers on the ground of the attorney-client privilege was improper because information on who is paying Mr. Smith’s fees does not disclose a confidential communication and is relevant to Mr. Smith’s potential bias and credibility if Comerica proves to be paying for his lawyer. Finally, the Discovery Referee held that Mr. Smith’s other objections (calls for expert testimony, legal conclusions, assumes facts not in evidence, lack of foundation, speculation, vague and ambiguous) were merely objections to form and not a proper basis for an instruction not to answer. The Discovery Referee ordered Mr. Smith to appear for further questioning (not to exceed 2 hours) and to answer questions about how much he contributed to the Phoenix Hotel partnership, the nature and extent of his activities on behalf of the partnership, the contents of the K-1 forms he received in connection with the investment, whether he knew his returns were fraudulent in connection with the Phoenix Hotel investment, and whether he or Comerica was paying for the two lawyers he said represented him at the deposition.

Discussion

Mr. Smith and Comerica now object to Further Amended Recommended Order No. 4.

Mr. Smith argues (1) the Discovery Referee had no jurisdiction over non-stipulating third parties because Code of Civil Procedure section 638 only gives power to the Referee over the stipulating parties; (2) even if the Discovery Referee did have jurisdiction, Plaintiffs have not demonstrated any particularized need for Mr. Smith’s private tax and financial information because Mr. Smith was not implicated in any of the fraud investigated as to the others and was not named as a defendant in this lawsuit; (3) the Referee did not apply the heightened standard of direct relevance for private information; (4) the Discovery Referee was incorrect that information on who is paying Mr. Smith’s attorney’s fees is relevant to bias because Comerica, his former employer, may be required by law to pay his fees under California Labor Code section 2802, and the Referee relied on inapposite case law; (5) the remaining deposition questions were validly objected to as to their form because they were vague and ambiguous, assumed facts not in evidence, lacked foundation, and called for a legal conclusion, expert testimony, and/or speculation.

Comerica objects to the portion of Further Amended Recommended Order No. 4 ordering Mr. Smith to respond to questioning regarding who is paying his legal fees in relation to this matter. Comerica argues that because Labor Code section 2802 may compel Comerica to pay these fees, it cannot be a basis upon which to establish bias. Comerica further argues the information is not relevant and not likely to lead to the discovery of admissible evidence because the question is unrelated to any issue in this litigation, and Plaintiffs were not precluded from asking Mr. Smith other questions that might flow from this question that might reasonably lead to admissible evidence. Comerica further argues the Referee’s recommended ruling directing Mr. Smith to answer questions on his tax return is inconsistent with Recommended Order No. 1, in which the Discovery Referee held that Comerica was not entitled to the same information from Plaintiffs. Finally, Comerica argues that Plaintiffs’ questions are overbroad and irrelevant because they seek information regarding Mr. Smith’s tax returns as far back as 1990, which was five years before he was employed by Comerica and ten years prior to the loss period at issue in this lawsuit.

Jurisdiction

Mr. Smith argues the Discovery Referee lacks jurisdiction over him because he is not a party and did not stipulate to the Referee’s appointment.

“A referee may be appointed upon the agreement of the parties…[t]o hear and determine any or all of the issues in an action or proceeding, whether of fact or of law, and to report a statement of decision.” (Cal. Code Civ. Proc., § 638, subd. (a).) Here, Mr. Quinn was appointed as Discovery Referee pursuant to Code of Civil Procedure section 638, and the Stipulation and Order of appointment expressly provides that the Discovery Referee’s scope of authority includes the ability to “[h]ear all discovery disputes, including those with witnesses and others who are not parties to the action (“third parties”)[.]” None of the case or statutory authorities cited by Mr. Smith in his moving brief supports the position that a Discovery Referee appointed under section 638 with the agreement of the parties lacks jurisdiction because his recommended order pertains to the deposition of a non-party.

Privacy

Mr. Smith argues that Plaintiffs have not demonstrated any particularized need for his private tax and financial information because he was not implicated in any of the fraud investigated as to the others and was not named as a defendant in this lawsuit. Mr. Smith further argues the Discovery Referee did not apply the heightened standard of direct relevance for private information.

The challenged questions are set forth in Exhibit A to Mr. Smith’s moving papers. The questions pertained to Mr. Smith’s participation, contributions and tax losses in the Phoenix Hotel in 1990 and 1991.

“Personal financial information comes within the zone of privacy protected by article I, section 1 of the California Constitution. The constitutional right of privacy is not absolute; it may be abridged to accommodate a compelling public interest. One such interest, evidenced by California’s broad discovery statutes, is the historically important state interest of facilitating the ascertainment of truth in connection with legal proceedings. When an individual’s right of privacy in his financial affairs conflicts with the public need for discovery in litigation, the competing interests must be carefully balanced. Even where the balance weighs in favor of disclosure of private information, the scope of the disclosure will be narrowly circumscribed; such an invasion of the right of privacy must be drawn with narrow specificity and is permitted only to the extent necessary for a fair resolution of the lawsuit.” (Moskowitz v. Sup. Ct. (1982) 137 Cal. App. 3d 313, 315-316, internal citations and quotation marks omitted.) A “compelling need” that overcomes the right of privacy is demonstrated where the information is “directly relevant” and “essential to the fair resolution” of a lawsuit. (See Britt v. Sup. Ct. (San Diego Unified Port Dist.) (1978) 20 Cal.3d 844, 859.)

In their response to Mr. Smith’s objection, Plaintiffs argue that the questioning is directly relevant to Mr. Smith’s motives in assisting Anson and Garrett with the Ponzi scheme. Plaintiffs submit that Mr. Smith was a long-time friend of Anson and Garrett and a partner with them in the Phoenix Hotel, an investment managed by Anson and Garrett. Plaintiffs submit that in 1990 and 1991, Mr. Smith contributed zero dollars to the partnership and worked no hours managing the hotel, but still received tax losses against active income. Plaintiffs submit that in 2008, Anson and Garrett were indicted for tax fraud in connection with the tax losses given to Mr. Smith and in 2009 they both pled guilty, and Mr. Smith’s involvement in the Phoenix Hotel tax loss scheme was a conflict of interest because Mr. Smith’s employer, Imperial Bank (which was eventually absorbed into Comerica), held the mortgage on the Phoenix Hotel from 1986 to May 2001, but Mr. Smith never disclosed this conflict to his employer. The supporting evidence submitted with the Declaration of Michael F. Ram includes transcripts of the depositions of Cohn, Mr. Smith, Alan Twedt (Comerica officer), Mark Campbell (Comerica executive), and Anson, the Declaration of Katherine Gough (Four Star accountant), the Judgment and Probation/Commitment Order of the U.S. District Court, Central District of California in United States v. Ronald Irving Anson, and the Criminal Minutes – Sentencing and Judgment of the U.S. District Court, Central District of California in United States v. Jack E. Garrett.

On March 26, 2014, Mr. Smith submitted written objections to portions of the Ram declaration and exhibits. Mr. Smith basically objects to Ram’s authentication of the deposition transcripts of Cohn, Mr. Smith, Twedt, Campbell, and Anson, the Gough declaration, the Judgment in US v. Anson, and the Criminal Minutes in US v. Garrett. The grounds for objection are hearsay, lack of foundation, lack of personal knowledge, best evidence rule, relevance, failure to highlight and reference page numbers, and failure to include the reporter’s signature and certification. The objections are OVERRULED. As Plaintiffs’ counsel, Mr. Ram is competent to authenticate these relevant deposition transcripts regarding Mr. Smith and the Phoenix Hotel, as well as the criminal court records involving Anson and Garrett. As for the hearsay objections, Plaintiffs’ burden here is not to establish a finding of fact, but to demonstrate more broadly that discovery into Mr. Smith’s involvement in the Phoenix Hotel investment is directly relevant to issues in this litigation in order to compel Mr. Smith’s further testimony.

Importantly, the challenged questioning is directly relevant to express allegations in the FAC regarding Mr. Smith and his relationship with Anson and Garrett as it relates to the Ponzi scheme that forms the basis for this lawsuit. Even though Mr. Smith is not a named defendant, he is expressly identified in the FAC, which alleges that Mr. Smith’s financial incentive to arrange for the Anson/Garrett Line of Credit was to return the favor to Anson and Garrett for fraudulent tax losses Mr. Smith received as a general partner interest in the Phoenix Hotel. Plaintiffs allege that even though the Anson/Garrett Line of Credit was underwritten based on Four Star’s cash flow and was intended for Four Star’s use, it was set up as a personal line of credit, and therefore, Comerica had no creditor rights against Four Star’s assets for repayment. Comerica allegedly devised the banking scheme to make Four Star’s funds available for investors but prevent creditors from reaching it. Thus, the line of questioning regarding Mr. Smith’s involvement with the Phoenix Hotel investment is directly relevant to Plaintiffs’ causes of action and is essential to the fair resolution of a lawsuit. (Britt, supra, 20 Cal.3d at p. 859.) The scope of disclosure is sufficiently narrow because the testimony will pertain only to Mr. Smith’s involvement and contributions in the Phoenix Hotel investment, and the Discovery Referee has already disallowed broader questioning about whether Mr. Smith amended his tax returns following Anson and Garrett’s convictions. Regarding the temporal scope of the questioning from 1990 to the present, 1990 is purportedly the year Mr. Smith became a partner in the Phoenix Hotel investment, and Plaintiffs’ theory regarding Mr. Smith’s motive to assist Anson and Garrett is based on their long-standing personal relationship.

Attorney-Client Privilege

Mr. Smith refused to identify who was paying his attorney’s fees on the ground of the attorney-client privilege. However, as the Discovery Referee pointed out, “information about who is paying for his lawyer does not disclose a confidential communication, and in the event Comerica proves to be paying for his lawyer, the information is certainly relevant to potential bias” in favor of Comerica. “[T]he nature of the attorney’s fee arrangements with his client, in an appropriate case, is not absolutely protected by the ambit of the privilege. [Citations.]” (Willis v. Superior Court (1980) 112 Cal.App.3d 277, 291.) A recognized exception is “where the person invoking the privilege can show that a strong probability exists that disclosure of such information would implicate that client in the very criminal activity for which legal service was sought.” (Ibid.) Mr. Smith does not argue that this exception applies. Mr. Smith tries to distinguish Willis as involving a distribution of fees between former law partners, but this distinction does not change the general proposition that the attorney-client privilege does not usually protect fee arrangements from disclosure.

Mr. Smith argues that information on who is paying his attorney’s fees is not relevant to bias because Comerica may be required by law (Cal. Lab. Code § 2802) to pay his fees. Labor Code section 2802 subdivision (a) provides that “[a]n employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.” However, because Comerica’s indemnity obligation under Labor Code section 2802 is not yet established, the issue of Mr. Smith’s bias remains potentially relevant. Because the information is not privileged, and the scope of permissible discovery is broad (Cal. Code Civ. Proc., § 2017.010), the questioning into Mr. Smith’s potential bias based on payment of his legal fees should proceed.

Objections to Form

Mr. Smith argues the remaining deposition questions were validly objected to as to their form because they were vague and ambiguous, assumed facts not in evidence, lacked foundation, and called for a legal conclusion, expert testimony, and/or speculation.

“Errors and irregularities of any kind occurring at the oral examination that might be cured if promptly presented are waived unless a specific objection to them is timely made during the deposition. These errors and irregularities include, but are not limited to, those relating to the manner of taking the deposition, to the oath or affirmation administered, to the conduct of a party, attorney, deponent, or deposition officer, or to the form of any question or answer. Unless the objecting party demands that the taking of the deposition be suspended to permit a motion for a protective order under Sections 2025.420 and 2025.470, the deposition shall proceed subject to the objection.” (Cal. Code Civ. Proc., § 2025.460, subd. (b), italics added.) “Taken as a whole, these provisions clearly contemplate that deponents not be prevented by counsel from answering a question unless it pertains to privileged matters or deposing counsel’s conduct has reached a stage where suspension is warranted.” (Stewart v. Colonial Western Agency, Inc. (2001) 87 Cal.App.4th 1006, 1015.)

Because Mr. Smith did not suspend his deposition to seek a protective order, he was not justified in simply refusing to testify based on these objections to the form of the questions.

For all of these reasons, the objections to Further Amended Recommended Order No. 4 are OVERRULED.