managing civil litigation against the backdrop of a ... · managing civil litigation against the...

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Managing Civil Litigation

Against the Backdrop of a

Government InvestigationBradley J. Andreozzi

Justin O. Kay

June 25, 2015

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� Government investigations alone are challenging, but they frequently don’t

stand alone.

� Consider a public company that discovers an internal control issue that

impacts its financial statements. Consequences may include:

- Audit Committee investigation and possible restatement

- SEC investigation with threat of administrative and civil penalties

- Federal criminal investigation of the company and senior management

- Multiple class action lawsuits under the federal securities laws (that will be consolidated)

- Shareholder derivative actions seeking to hold board members or officers liable to the

company for breach of fiduciary duties (and displace the authority of the Board to decide)

- ERISA class actions against the corporation and senior management (as fiduciaries of the

company’s pension plans) for failing to warn of risks of investing in company’s stock

� If the issue relates to a problem with the company’s product, consumer or

product liability class actions may be added to the stew.

One Problem - - But Multiple Legal Proceedings

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� The herbal supplement investigation provides a stark example:

- 2/2/15: NY Attorney General announces an investigation and accuses 4

major retailers of selling herbal supplements with labels that didn’t

accurately list the ingredients.

- Within 2 weeks, there were 25 consumer class action suits, against

Walgreens (10), GNC (6), Walmart (5) and Target (4).

- By mid-March, more than 50 class actions had been filed across the

country.

- The class action complaints parroted the NY AG’s allegations, despite

doubts that the DNA barcoding technology used by the NY AG was

accurate.

The Dominoes Can Fall Quickly

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� How important is coordinating your litigation strategy? Ask your adversaries:

- Federal agencies increasingly coordinate. The Financial Fraud Task Force includes various

regulators and prosecutors.

- The federal government recognizes the importance of coordination. US Attorneys’ Organization

And Functions Manual, 27. Coordination of Parallel Criminal, Civil, Regulatory, and

Administrative Proceedings (January 30, 2012) (Attached as Tab A).

� Comprehensive defense strategies will consider the impact of each move in any

proceeding on the position in every proceeding. Examples:

- Weigh the benefits of cooperating with government investigators against the risks that

disclosures to a government agency will be discoverable by private civil plaintiffs.

- Weigh the risk that testimony in a civil suit will be incriminating in a criminal proceeding, or

conversely that asserting the Fifth Amendment privilege will create an adverse inference in the

civil suit.

- Weigh the risk that remedial measures to satisfy the government will be used as admissions by

the civil plaintiff.

� No one answer: define your goals and pick your poison.

Defend the Company, Not Each Case As A Stand-

Alone Proceeding

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� Define the scope of the problem.

- Ongoing? One-time event?

- Are there financial statement implications? Should the auditors be informed?

- Identify the key players in the company who may have critical information, lock-down documents, consider issues

of separate representation.

� Identify the resources needed.

- Are internal personnel compromised?

- Can the outside auditor help or should you consult with a new accounting firm?

� Identify where the attacks may be launched: regulators, law enforcement, shareholders,

customers (consumer class actions, debarment proceedings), Congress.

� Consider public disclosure.

- Is disclosure required? Advisable?

- Do you know enough to make an accurate disclosure?

- Should your disclosures try to minimize the problem to limit the litigation fallout?

� Craft a message that is accurate, consistent and works for each constituency.

Mobilize A Crisis Plan Quickly

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� Auditors may need to be informed if the problem implicates the functioning

of internal controls or the accuracy of the financial statements or

management representation letters.

� A broad range of issues may trigger need for disclosure to the auditor.

� Sarbanes-Oxley requires the auditor to investigate, or make sure the

company is investigating and taking “timely and appropriate remedial

actions” in cases of illegality that could have a material effect on the

financial statements. ’34 Act � 10A, 15 U.S.C. � 78j-1. The auditor may

need to report to the Board and ultimately resign and report to the SEC if it

believes the company is not handling the matter appropriately. 15 U.S.C. �

78j-1(b)(3)-(4) (attached as Tab B).

� Thus, as a practical matter, the company may need to share significant,

sensitive information with the auditor. Will these communications wind up in

the hands of a civil plaintiff?

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Sharing Information With the Auditors

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� Virtually all cases agree that disclosure of attorney-client

privileged materials to the auditor waives the privilege.

See, e.g., United States v. Textron, 507 F. Supp. 2d 138,

151 (D.R.I. 2007) (“It is well established that voluntary

disclosure to a third party waives the attorney-client

privilege even if the third party agrees not to disclose the

communications to anyone else.”) (attached as Tab C).

� But the cases are divided on whether disclosure of

attorney work product to the auditor waives the work

product protection.

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Communications to the Auditor May Not Be Protected

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� Some courts find waiver on the theory that the auditor is required to

be independent, so its interests are not allied with the company’s.

See, e.g., Medinol, Ltd. v. Boston Scientific Corp., 214 F.R.D. 113,

116 (S.D.N.Y. 2002) (“[I]n order for auditors to properly do their job,

they must not share common interests with the company they

audit.”) (attached as Tab D).

� A growing number of courts decline to adopt a per se rule and look

to whether the company and the auditor share a common interest in

that particular situation, and whether the auditor has agreed to keep

the information confidential. See, e.g., Merrill Lynch & Co. v.

Alleghany Energy, Inc., 229 F.R.D. 441, 447 (S.D.N.Y. 2004) (the

“critical inquiry” is whether the auditor “should be conceived of as

an adversary or a conduit to a potential adversary.”) (attached as

Tab E).

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Disclosing Work Product to the Auditor

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� Don’t disclose attorney-client communications if avoidable.

� Before disclosing attorney work product, document the

common interest shared by the company and auditor (e.g.,

assuring the accuracy of the financial statements or the

proper functioning of internal controls).

� Document the auditor’s agreement to safeguard the

confidentiality of the information.

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Practical Tips for Communications with the Auditor

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� Government brings both Criminal and Civil Administrative

Proceedings.

� Government Proceeding (Civil or Criminal) and Private

Party Civil Litigation.

Two Types of Parallel Proceedings

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- “It would stultify enforcement of federal law to require a government

agency . . . invariably to choose either to forego recommendation of a

criminal prosecution once it seeks civil relief, or to defer civil proceedings

pending the outcome of a criminal trial.” United States v. Kordel, 397

U.S. 1, 10 (1970) (attached as Tab F).

- DOJ directs all departments to implement policies and procedures that

“stress early, effective, and regular communication between criminal, civil,

and agency attorneys to the fullest extent appropriate to the case and

permissible by law.” US Attorneys’ Organization And Functions Manual,

27. Coordination of Parallel Criminal, Civil, Regulatory, and Administrative

Proceedings (January 30, 2012) (see Tab A).

- SEC Staff encouraged “to work cooperatively with criminal authorities, to

share information, and to coordinate their investigations with parallel

criminal investigations when appropriate.” SEC, Division of Enforcement,

Enforcement Manual, � 5.2.1 (2013) (Section 5 attached as Tab G).

Parallel Government Proceedings: Allowable But With

Limits

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� The government may not use one type of proceeding

solely to gain an advantage in the other:

- “We do not deal here with a case where the Government has brought

a civil action solely to obtain evidence for its criminal prosecution or

has failed to advise the defendant in its civil proceeding that it

contemplates his criminal prosecution . . . Nor with any other special

circumstances that might suggest the unconstitutionality or even the

impropriety of this criminal prosecution.” U.S. v. Kordel, 397 U.S. 1,

769-70 (1970) (government may conduct parallel proceedings without

violating due process so long as it acts in good faith) (see Tab F).

The Limit On Parallel Government Proceedings

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� When facing civil regulatory investigations, ask the government

directly whether there is a parallel criminal investigation and

document the answer (if you get one).

- “If asked by counsel or any individual whether there is a parallel criminal

investigation, staff should direct counsel or the individual to the section of Form

1662 dealing with ‘Routine Uses of Information,’ and state that it is the general

policy of the Commission not to comment on investigations conducted by law

enforcement authorities responsible for enforcing criminal laws.” SEC Division of

Enforcement, Enforcement Manual � 5.2.1 (see Tab G).

� Be prepared to demonstrate an affirmative misrepresentation, or

other bad faith conduct by the government causing real prejudice.

� Try to condition settlement in the civil suit on government assurance

there is no parallel criminal investigation.

� Consider seeking stays to control sequencing.

Can You Protect Your Company From The Risk of

Parallel Government Criminal and Civil Proceedings?

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� Is “piggybacking” permissible?

� Rule 11 provides some protection:

- (b) Representations to the Court. By presenting to the court a pleading, written

motion, or other paper—whether by signing, filing, submitting, or later advocating

it—an attorney or unrepresented party certifies that to the best of the person's

knowledge, information, and belief, formed after an inquiry reasonable under the

circumstances:

. . . .

(3) the factual contentions have evidentiary support or, if specifically so identified,

will likely have evidentiary support after a reasonable opportunity for further

investigation or discovery.

� Lawyers in federal court have a “nondelegable responsibility” under

Rule 11 to “validate the truth and reasonableness” of the assertions

they make in court. Pavelic & LeFlore v. Marvel Enter. Group, 493

U.S. 120, 126 (1989).

Attacking Private Civil Suits Filed In the Wake of a

Government Investigation

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� Some courts will “not consider” allegations “taken directly from

uncorroborated allegations embedded in a complaint in another action.” In

re UBS AG Sec. Litig., No. 07cv11225, 2012 WL 4471265, at *17 n.17

(S.D.N.Y. Sept. 28, 2012). See also VNB Realty, Inc. v. Bank of Am. Corp.,

No. 11cv6805, 2013 U.S. Dist. LEXIS 132250 (S.D.N.Y. Sept. 16, 2013)

(dismissing complaint relying on statements of confidential witnesses

extracted from other complaints).

� Other courts allow borrowing if the complaint is more than a “cut and paste”

job. See Strougo v. Barclays PLC, No. 14cv5797, 2015 U.S. Dist. LEXIS

54059, at *20-21 (S.D.N.Y. Apr. 25, 2015) (permitted plaintiff to borrow

allegations from NYAG complaint because facts were derived from a

“credible” complaint based on facts “obtained after an investigation” and

counsel for plaintiff had reached out to NYAG attorneys to verify allegations;

court required plaintiffs to detail their independent investigation in an

amended complaint) (attached as Tab H).

Motions to Dismiss the “Piggyback” Complaints

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� Collateral Estoppel:

- Will preclude re-litigation of issues.

� Fifth Amendment:

- Testifying in civil case waives right against self-incrimination, but

asserting the Fifth can create adverse inference in civil case.

� Admissions/Admissibility:

- Not preclusive like collateral estoppel, but may handicap.

� Waivers of Privilege:

- Will provide outline of defense strategy, identify areas for attack.

� Discovery/Information Sharing:

- May provide a roadmap for future litigation.

Sequencing of Proceedings: Why It Matters

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� Precludes re-litigation of issues in subsequent proceedings where:

- Issues in both proceedings are identical;

- Issue was actually litigated in prior proceeding;

- The issue was necessary to support valid and final judgment on the merits;

- There was a full and fair opportunity for litigation in prior proceeding (the party

against whom it is invoked was fully represented). See Chicago Truck Drivers,

Helpers & Warehouse Union Pension Fund v. Century Motor Freight, 125 F.3d 526

(7th Cir. 1997).

� But, even if requirements are met, doctrine is equitable and should

not be applied where it encourages a “wait-and-see” approach or its

application would be fundamentally unfair. See Parklane Hosiery

Co. v. Shore, 439 U.S. 322 (1979).

Collateral Estoppel

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� Acquittal/Finding of No Liability:

- Criminal acquittal cannot be used by defendant in subsequent civil proceeding; higher burden of

proof in criminal proceeding.

- BUT, finding of no liability in civil proceeding can be used by defendant in subsequent criminal

proceeding.

� Criminal Convictions/Guilty Pleas:

- Can be used offensively against defendant in later civil case due to lower burden of proof.

� Sentencing Findings:

- Presumption against use, but not a per se ban. SEC v. Monarch Funding Corp., 192 F.3d 295

(2d Cir. 1999) (attached as Tab I); Maciel v. Comm’r of Internal Revenue, 489 F.3d 1018 (9th

Cir. 2006); Kozinski v. Comm’r of Internal Revenue, 541 F.3d 671 (6th Cir 2008).

- “While we do not foreclose application of the doctrine in all sentencing cases, we caution that it

should be applied only in those circumstances where it is clearly fair and efficient to do so. And

the burden should be on the plaintiff in the civil case to prove these elements.” Monarch, 192

F.3d at 306.

Collateral Estoppel (cont’d)

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� Refusal of an employee to answer questions in civil

proceedings based on Fifth Amendment may reflect poorly

on and trigger adverse inferences against the company.

- See Baxter v. Palmigiano, 425 U.S. 308, 318 (1976) (“The Fifth

Amendment does not forbid adverse inferences against parties to civil

actions when they refuse to testify in response to probative evidence

offered against them.”).

� Waiver of Fifth Amendment in civil proceedings may

criminally implicate the employee and company.

- See FRE 801(d)(2).

Fifth Amendment

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� Federal Rule of Evidence 408:

- “Evidence of the following is not admissible — on behalf of any party

— either to prove or disprove the validity or amount of a disputed

claim or to impeach by a prior inconsistent statement or a

contradiction: . . . conduct or a statement made during compromise

negotiations about the claim — except when offered in a criminal

case and when the negotiations related to a claim by a public office in

the exercise of its regulatory, investigative, or enforcement authority.”

- Exceptions (subpart (b)) “The court may admit this evidence for

another purpose, such as proving a witness’s bias or prejudice,

negating a contention of undue delay, or proving an effort to obstruct

a criminal investigation or prosecution.”

Admissions/Admissibility

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- In a civil or criminal case, evidence of the following is not admissible

against the defendant who made the plea or participated in the plea

discussions: (1) a guilty plea that was later withdrawn; (2) a nolo

contendere plea; (3) a statement made during a proceeding on either

of those pleas under Federal Rule of Criminal Procedure 11 or a

comparable state procedure; or (4) a statement made during plea

discussions with an attorney for the prosecuting authority if the

discussions did not result in a guilty plea or they resulted in a later-

withdrawn guilty plea.

- Exceptions (subpart (b))—other statements introduced that should be

considered or if prosecution for perjury.

Admissions/Admissibility (cont’d)

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� Federal Rule of Evidence 801(d)(2)(A):

- Statement not hearsay if “The statement is offered against an

opposing party and (A) was made by the party in an individual or

representative capacity; (B) is one the party manifested that it

adopted or believed to be true; (C) was made by a person whom the

party authorized to make a statement on the subject; (D) was made

by the party’s agent or employee on a matter within the scope of that

relationship and while it existed; or (E) was made by the party’s

coconspirator during and in furtherance of the conspiracy.


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� Federal Rule of Civil Procedure 36(b)

(Requests For Admission)

- “An admission under this rule is not an admission for any other purpose

and cannot be used against the party in any other proceeding.”

� Illinois Supreme Court Rule 216

(Request for Admission of Fact)

- “Any admission made by a party pursuant to request under this rule is for

the purpose of the pending action and any action commenced pursuant

to the authority of section 13-217 of the Code of Civil Procedure (735

ILCS 5/13-217) only. It does not constitute an admission by him for any

other purpose and may not be used against him in any other proceeding.”


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� SEC “No Admission” Settlement Agreements/Consent Judgments: Judge

Rakoff’s Quixotic Quest:

- October 2011

• SEC files complaint against Citigroup alleging negligent violations of securities laws related to

dumping of mortgage-backed securities.

• Same day, SEC presents a consent judgment to District Court (Judge Rakoff) in which Citigroup

consents to judgment “"[w]ithout admitting or denying the allegations of the complaint.”

• Same day, private plaintiff files similar complaint alleging knowing/fraudulent violations.

- November 2011

• The Court refuses to approve the proposed consent judgment: “the Court is forced to conclude that

a proposed Consent Judgment that asks the Court to impose substantial injunctive relief, enforced

by the Court's own contempt power, on the basis of allegations unsupported by any proven or

acknowledged facts whatsoever, is neither reasonable, nor fair, nor adequate, nor in the public

interest.” SEC v. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328, 332 (S.D.N.Y. 2011).


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� SEC Settlement Agreements/Consent Judgments (cont’d)

- November 2011-January 2013

• Several other courts follow Judge Rakoff’s lead. See Order, SEC v. Int'l Bus.

Machs. Corp., No. 11cv00563 (D.D.C. Dec. 20, 2012), ECF No. 10; SEC v.

Bridge Premium Fin., LLC, No. 12cv2131 (D.Colo. Jan. 17, 2013), ECF No. 53.

- June 2014

• Second Circuit reverses Judge Rakoff: “It is an abuse of discretion to require, as

the district court did here, that the SEC establish the ‘truth’ of the allegations

against a settling party as a condition for approving the consent decrees.” SEC

v. Citigroup Global Markets, Inc., 752 F.3d 285, 295 (2d Cir. 2014) (attached as

Tab J).

- August 2014

• Judge Rakoff approves and enters the consent judgment. SEC v. Citigroup

Global Markets, Inc., 34 F. Supp. 3d 379 (S.D.N.Y. 2014) (attached as Tab K).


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� Carefully crafted “Admissions” can be of little value to

plaintiffs:

- Between the District Court decision in Citigroup and the Second

Circuit’s reversal, JP Morgan entered into a consent judgment with

the SEC that did not include “neither admits nor denies” language.

• Case involved “London Whale” losses.

• JP Morgan admitted negligence regarding internal controls and ensuring

the accuracy of its public disclosures.

• Consensus view was that the carefully crafted admissions of negligence

provided no significant advantage to private plaintiffs faced with the burden

of proving scienter.

Carefully Crafting Language in Admissions

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� If appropriate, the government may agree to include findings that

will be helpful to the company in later litigation, such as that the

company:

- Has robust compliance programs;

- Discovered the issue and self-reported;

- Or didn’t discover the issue because it was hidden from senior

management by rogue employees;

- Cooperated fully in the government investigation; and

- Took prompt and effective remedial actions.

� While not binding in later litigation, these findings can be helpful

(for example in rebutting a claim that the company schemed to

hide the violations in order to protect the stock price).

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Work Helpful Findings Into The Consent Decree

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� Can be used as a sword. See Zapata Corp. v. Maldonado, 714

F.2d 436 (5th Cir. 1983).

- Corporation may seek dismissal of shareholder derivative suit where it shows that:

• Directors on special litigation committee were disinterested and independent;

• Committee conducted a good faith investigation;

• Committee had reasonable basis for its conclusion.

- In some states, if committee concludes in the exercise of its business judgment that

pursuing the claims wouldn’t be in the best interests of corporation, dismissal is

required (e.g., Michigan).

- In other states, court may make its own independent judgment.

� Use of the SLC’s findings will waive the privilege as to materials the

SLC considered and the process of the investigation.

Use of the Special Litigation Committee

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� Department of Justice Policy Shift: 1999-2008.

- Holder Memo June 1999: “[i]n gauging the extent of the corporation’s

cooperation, the prosecutor may consider the corporation’s

willingness…to disclose the complete results of its internal

investigation, and to waive the attorney-client and work product

privileges.”

- Thompson Memo January 2003: Waiver deemed mandatory for

cooperation credit.

- Filip Memo September 2008: Cooperation credit no longer

conditioned on waiver.

Will the Government Demand Waiver of Privilege?

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� Federal Rule Evidence 502 (effective Dec. 1, 2011)

- (a) Disclosure Made in a Federal Proceeding or to a Federal Office or

Agency; Scope of a Waiver. When the disclosure is made in a federal

proceeding or to a federal office or agency and waives the attorney-

client privilege or work-product protection, the waiver extends to an

undisclosed communication or information in a federal or state

proceeding only if:

• (1) the waiver is intentional;

• (2) the disclosed and undisclosed communications or information concern

the same subject matter; and

• (3) they ought in fairness to be considered together.

Waiver of Privilege: Scope

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� “Selective waiver” allows privileged documents produced to the government to remain privileged as to

others. Most cases have rejected selective waiver, but the case law mostly pre-dates enactment of Rule

502

� Selective waiver recognized only in the 8th Circuit: Diversified Indus., Inc. v. Meredith, 572 F.2d 596 (8th Cir.

1977) .

� Other courts reject the concept:

• U.S. v. Mass. Inst. Tech., 129 F.3d 681 (1st Cir. 1997);

• In re Steinhardt Partners, LP, 9 F.3d 230 (2d Cir. 1993);

• Westinghouse Elec. Corp. v. Republic of Philippines, 951 F.2d 1414 (3d Cir. 1991);

• Sheet Metal Workers Intern. Ass’n v Sweeney, 29 F.3d 120 (4th Cir.1994);

• U.S. v. El Paso Co., 682 F.2d 530 (5th Cir.1982);

• In re Columbia Healthcare Corp. Billing Practices Litig., 293 F.3d 289 (6th Cir. 2002);

• Dellwood Farms, Inc. v. Cargill, Inc. 128 F.3d 1122 (7th Cir. 1997);

• In re Pac. Pictures Corp., 679 F.3d 1121 (9th Cir. 2012) (attached as Tab L);

• In re Qwest Commc’ns Intern., Inc., 450 F.3d 1179 (10th Cir. 2006) (attached as Tab M);

• Permian Corp. v U.S., 665 F.2d 1214 (D.C. Cir. 1981);

• Genentech v. U.S. Int’l Trad Comm’n, 122 F.3d 1409 (Fed Cir. 1997).

Is “Selective Waiver” Viable?

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� Assume that whatever you share with a government agency will

make its way into the hands of other government agencies/private

plaintiffs.

� A protective order/confidentiality agreement may help:

- “Some courts have held or indicated that the existence of a confidentiality

agreement is irrelevant to a waiver of privilege. Others, however, have indicated

that the existence of a confidentiality agreement may justify adopting selective

waiver.” See In re Qwest, 450 F.3d at 1194 (see Tab M).

- At least one court recently has hinted that there would also need to have been a

modification of the outside counsel engagement letter: “Assuming that this letter

constitutes a confidentiality agreement, Petitioners have provided no convincing

reason that post hoc contracts regarding how information may be revealed

encourage frank conversation at the time of the advice.” In re Pac. Pictures, 679

F.3d at 1128 (see Tab L).

Waiver of Privilege: Strategic Considerations

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� Consider the format of the information and how it is shared

- Delivering underlying communications between attorney and client almost certainly will

constitute waiver:

• Courts have applied different standards to waiver in the context of attorney-client privilege and

attorney work product. See In re Qwest, 450 F.3d at 1186-1192 (analyzing cases) (see Tab M).

• Courts have drawn a further distinction between fact work product and opinion work product. See

id.

- An oral presentation can still result in waiver, but the scope of the waiver may be more

narrow:

• United States v. Treacy, No. 02cr366, 2009 U.S. Dist. LEXIS 66016, at *3, 6-7 (S.D.N.Y. Mar. 23,

2009) (finding a waiver as to a single memoranda where counsel provided “detailed oral recitations

to the Government,” but holding—after in camera review of government’s notes of meeting—that

“general summaries, impressions, and conclusions” of other information/interviews did not effect a

waiver”) (attached as Tab N).

- Consider framing disclosures to the government as part of a settlement negotiation.

Waiver of Privilege: Strategic Considerations (cont’d)

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� The “fiduciary duty exception” may allow shareholder

derivative plaintiffs to obtain privileged documents upon a

showing that the documents are necessary and proper to

investigate claims that company officials breached their

fiduciary duties.

� One recent example: Wal-Mart Stores, Inc. v. Ind. Elec.

Workers Pension Trust Fund, 95 A.3d 1264 (Del. 2014)

(shareholders entitled to investigatory materials and

board/committee minutes regarding company investigation

of alleged FCPA violations) (attached as Tab O).

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Shareholders May Be Able to Obtain Privileged

Documents Even Without A Waiver

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� “[A]though entering into a joint defense agreements is often,

indeed generally, beneficial to participants, like skating on thin

ice, dangers lurk below the surface.” United States v. LeCroy,

348 F. Supp. 2d 375, 387 (E.D. Pa. 2004) (attached as Tab P).

� When entering into a JDA:

- Define the common interest among the participants and limit disclosure to

that common interest.

- Provide for unilateral withdrawal by any party upon notice, while

continuing to protect information shared prior to the withdrawal.

- Include claw back provision to recover inadvertent disclosure of privileged

information.

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Joint Defense Agreements

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� Fed R Crim P 16 vs. Fed R Civ P 26

- Under Rule 16, the defendant is entitled to:

• Relevant written and oral statements made by the defendant to known

government agents.

• Defendant’s criminal records.

• Items that are material to preparing the defense; are intended for use in the

government’s case-in-chief at trial; or were obtained from or belong to the

defendant.

- Under Rule 16, the government is entitled to:

• Items that are intended for use in the defendant’s case-in-chief at trial.

- Under Rule 26, parties are entitled to:

• “Parties may obtain discovery regarding any nonprivileged matter that . . . .

appears reasonably calculated to lead to the discovery of admissible evidence.”

Discovery/Information Sharing

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� FOIA Exemptions for Information provided to government agencies.

- Is the information you provide subject to a FOIA exemption/exclusion?

• 5 U.S.C. � 552(b)(4): Exemption for documents that would reveal “[t]rade secrets and

commercial or financial information obtained from a person and privileged or

confidential.”

• 5 U.S.C. � 552(b)(7)(A): Exemption for “records or information compiled for law

enforcement purposes,” if the disclosure “could reasonable be expected to interfere

with enforcement proceedings,” or certain other factors are met.

• Issues are currently playing out in securities plaintiff firm Robbins Geller’s suit against

the SEC to obtain documents provided to the SEC by Wal-Mart concerning alleged

FCPA violations in Mexico; the SEC has resisted disclosure under Exemption 7(A).

- What information can you get with a FOIA request?

� Confidentiality Agreements with the government:

- See discussion re: waiver of privilege

Discovery/Information Sharing (cont’d)

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� Automatic at Start of Private 10b-5 Suits:

- PSLRA, 15 U.S.C. � 78u-4(b)(3)(B) (“In any private action arising under

this chapter, all discovery and other proceedings shall be stayed during

the pendency of any motion to dismiss, unless the court finds upon the

motion of any party that particularized discovery is necessary to preserve

evidence or to prevent undue prejudice to that party.”).

� Discretionary in Other Cases. Courts consider:

- The degree of overlap;

- The status/progress of the proceedings;

- The balance of harms to the plaintiff and defendant;

- The interests of the court;

- The interests of third parties and the public.

Stays: Standards

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� Primary Jurisdiction: a “prudential” doctrine “under which a court determines that an

otherwise cognizable claim implicates technical and policy questions that should be

addressed in the first instance by the agency with regulatory authority over the

relevant industry rather than by the judicial branch.” Clark v. Time Warner Cable, 523

F.3d 1110, 1114 (9th Cir. 2008); Arsberry v. Illinois, 244 F.3d 558, 563 (7th Cir. 2001).

- Elements: (i) a need to resolve an issue (ii) that Congress has placed within the jurisdiction of an

administrative body with regulatory authority (iii) pursuant to a statute subjecting an industry or

activity to a comprehensive regulatory authority that (iv) requires expertise or uniformity in

application.

� Equitable Abstention: Court declines to adjudicate “complex” regulatory issues better

left to administrative agencies “charged with regulating an industry” because those

agencies “have better sources of gathering information and assessing its value than

do courts in isolated cases.” Alvardo v. Selma Convalescent Hosp., 153 Cal. App. 4th

1292, 1295, 1300 (2d Dist. 2007).

Stays: Soliciting Government Assistance

39

��

��

� If the Court is wary of granting a complete stay of the civil

case, consider a fallback position:

- Ask Court to stay discovery only as to the targets of the government

investigation.

- Or to stay deposition discovery to avoid Fifth Amendment issues

while allowing document production to go forward (perhaps limited to

documents already produced to the government).

- Or to stay certain claims.

Stays: Scope

40

��

��

� Budget/Logistics

- Costs;

- Efficiency;

- Burden on internal business resources;

- Press.

� Will witnesses and evidence still be available when stay is

lifted?

� Tactical disadvantages of fighting on multiple fronts vs.

benefit of a prompt resolution that puts an end to the

torture.

Stays: Considerations For When to Pursue (cont’d)

41

��

��

� Government may be seeking a stay of civil proceedings to hamstring

discovery by a criminal defendant:

- Discovery in civil proceeding is broader than in criminal proceeding.

- Courts are becoming less inclined to rubberstamp government stay requests when

criminal/civil complaints filed simultaneously.

• See SEC v. Bray, No. 14cv13381, 2015 U.S. Dist. LEXIS 42686, at *11 (D. Mass. Apr. 1, 2015) (“If

the government and the SEC choose to bring parallel civil and criminal cases close in time to each

other, then each entity must be prepared to go ahead with its case on a usual schedule.”) (attached

as Tab Q)

� Defendant may want to use the civil case to circumvent the limits on

discovery in the criminal proceeding.

� Defendant may prefer to attack the civil suits now, before the government

investigation makes headway. The civil plaintiff may prefer to sit back and

wait for the fruits of the government investigation to fall into his lap.

Stays: Considerations For When to Forgo/Object

42

��

��

� Framing the Discussion: FLIR Systems, Inc.

- Facts Gathered From:

• In re Ellis, 356 Ore 691 (2015) (ethics opinion) (attached as Tab R)

• US v. Stringer, 521 F.3d 1189 (9th Cir. 2008)

• Sommers ex rel. FLIR Sys., Inc. v. Lewis, No. 07cv1142 (D. Ore. filed Aug. 3,

2007)

• In re Fitzhenry, 343 Ore. 86 (2007) (ethics opinion) (attaches as Tab S)

• US v. Stringer, 406 F. Supp. 2d 1083 (D. Ore. 2006)

• Edward J. Goodman Life Ins. Trust ex rel. FLIR Sys., Inc. v. Lewis, No.

06cv1829 (D. Ore. filed Dec. 22, 2006)

• Palmquist v. FLIR Sys, Inc., 189 Ore. App. 552 (2003)

• In re FLIR Sys., Inc. Sec. Litig. No. 00cv360 (D. Ore. filed Mar. 13, 2000)

Ethical Issues Involving Joint Representation

43

��

��

� February 2000:

- Former FLIR employee (Palmquist) files lawsuit claiming wrongful

termination. Complaint includes allegations of improper accounting.

� March 2000:

- FLIR announces it will restate financial data for 1998 and 1999.

- FLIR appoints special committee.

- First of five securities class actions filed (consolidated in May 2000).

- Stoel Rives LLP retained to represent Company and certain execs in

class actions.

Timeline

44

��

��

� June 2000:

- SEC launches investigation and begins issuing subpoenas.

� July 2000:

- Stoel Rives representation expanded to include SEC investigation:

• members of the board.

• lawyers for the special committee.

• FLIR officers and managers and employees who received subpoenas.

� November/December 2000:

- In class actions , Court grants (then stays pending a mandamus

petition) motion to take deposition of Palmquist.

Timeline (cont’d)

45

��

��

� January 2001:

- Parties seek preliminary approval of class action settlement.

� April 2001:

- Court grants final approval of class action settlement.

� July 2001:

- Former president and CEO (Stringer) sues FLIR. Stoel Rivers

represents FLIR.

� February 2002:

- SEC begins issuing Wells Notices.

Timeline (cont’d)

46

��

�

� October/November 2002:

- FLIR and certain executives enter into consent judgments with the SEC.

� (Post Consent Judgments):

- Debarment proceedings initiated against FLIR (ultimately not debarred).

� January 2003:

- AUSA informs Stoel Rives that it is opening criminal matter (SEC and

DOJ had been communicating since 2000).

� 2003:

- Stringer employment suit dismissed with prejudice.

� September 2003:

- Certain former FLIR execs indicted.

Timeline (cont’d)

47

��

�

� November 2003:

- Oregon Bar files complaint against former General Counsel of FLIR.

� January 2006:

- District Court dismisses indictments based on AUSA conduct.

� August 2006:

- FLIR receives shareholder demand letter related to back-dating of stock options.

� November 2006:

- FLIR appoints special committee to investigate back-dating from 1995-2006.

� December 2006:

- First of several shareholder derivative actions filed related to back-dating. Stoel

Rives retained.

Timeline (cont’d)

48

��

��

� March 2007:

- FLIR restates financial statements from 1995-2005 based on special committee

investigation, declines to take legal action.

� June 2007:

- Supreme Court of Oregon affirms 120-day suspension of former General Counsel

(represented by Stoel Rives).

� November 2007:

- Three of four shareholder suits dismissed for lack of standing.

� April 2008:

- Ninth Circuit reverses dismissal of indictments.

� April 2009:

- District Court dismisses fourth and final shareholder derivative suit.

Timeline (cont’d)

49

��

��

� June/October 2010:

- Former CEO, CFO, and VP of Sales sentenced to 3 years’ probation.

� July 2010:

- Oregon Bar files complaints against two attorneys from Stoel Rives.

� February 2012:

- Oregon Bar amends complaints against attorneys from Stoel Rives.

� May 2013

- Disciplinary Panel finds conflicts, failure to disclose conflicts, and

misrepresentations by omission: recommends public reprimand.

� February 2015:

- Oregon Supreme Court reviews de novo: finds no wrongdoing, dismisses amended

complaints.

Timeline (cont’d)

50

��

��

� ABA Model Rule 1-102

- (A) -A lawyer shall not:

• (1) -Violate a Disciplinary Rule.

• (2) -Circumvent a Disciplinary Rule through actions of another.

• (3) -Engage in illegal conduct involving moral turpitude.

• (4) -Engage in conduct involving dishonesty, fraud, deceit, or

misrepresentation.

• (5) -Engage in conduct that is prejudicial to the administration of justice.

• (6) -Engage in any other conduct that adversely reflects on his fitness to

practice law.

Ethical Rules

51

��

��

� ABA Model Rule 5-105 (Refusing to Accept or Continue

Employment if the Interests of Another Client May Impair the

Independent Professional Judgment of the Lawyer)

- (A) -A lawyer shall decline proffered employment if the exercise of his

independent professional judgment in behalf of a client will be or is likely

to be adversely affected by the acceptance of the proffered employment,

or if it would be likely to involve him in representing differing interests,

except to the extent permitted under DR 5-105(C)

- (B) -A lawyer shall not continue multiple employment if the exercise of his


to be adversely affected by his representation of another client, or if it

would be likely to involve him in representing differing interests, except to

the extent permitted under DR 5-105(C).

Ethical Rules

52

��

��

� ABA Model Rule 5-105 (cont’d)

- (C) -In the situations covered by DR 5-105(A) and (B), a lawyer may

represent multiple clients if it is obvious that he can adequately

represent the interest of each and if each consents to the

representation after full disclosure of the possible effect of such

representation on the exercise of his independent professional

judgment on behalf of each.

- (D) -If a lawyer is required to decline employment or to withdraw from

employment under a Disciplinary Rule, no partner, or associate, or

any other lawyer affiliated with him or his firm, may accept or continue

such employment.

Ethical Rules

53

��

��

� ABA Model Rule 5-106 (Settling Similar Claims of Clients)

- (A) -A lawyer who represents two or more clients shall not make or

participate in the making of an aggregate settlement of the claims of

or against his clients, unless each client has consented to the

settlement after being advised of the existence and nature of all the

claims involved in the proposed settlement, of the total amount of the

settlement, and of the participation of each person in the settlement.

Ethical Rules

54

Rafey S. BalabanianPartner and General Counsel Edelson PC

Kenneth R. CunninghamChief Legal O"cer Grant Thornton LLP

Justin O. Kaypage 2

Justin O. Kaypage 3

Notice

The United States Attorneys’ Manual is currently undergoing maintenance. If you are unable to

access specific content, please contact the webmaster.

U.S. Attorneys » U.S. Attorneys' Manual » Organization And Functions Manual

27. Coordination of Parallel Criminal, Civil, Regulatory, and Administrative Proceedings

January 30, 2012

MEMORANDUM FOR ALL UNITED STATES ATTORNEYS

DIRECTOR, FEDERAL BUREAU OF INVESTIGATION

ALL ASSISTANT UNITED STATES ATTORNEYS

ALL LITIGATING DIVISIONS

ALL TRIAL ATTORNEYS

FROM: THE ATTORNEY GENERAL

The Department has placed a high priority on combating white collar crime. This includes the fight

against fraud, waste, and abuse, whether it is in connection with health care, procurement, or

other financial fraud, as well as consumer protection, the environment, antitrust, tax, commodities

and securities fraud. The Department and the Financial Fraud Enforcement Task Force and its

members are committed to using all of the remedies available -criminal, civil, regulatory, and

administrative. To facilitate that goal, I am issuing this policy statement to update and further

strengthen the Department's longstanding policy that ensures that Department prosecutors and

civil attorneys coordinate together and with agency attorneys in a manner that adequately takes

into account the government's criminal, civil, regulatory and administrative remedies.

Department policy is that criminal prosecutors and civil trial counsel should timely communicate,

coordinate, and cooperate with one another and agency attorneys to the fullest extent

appropriate to the case and permissible by law, whenever an alleged offense or violation of

federal law gives rise to the potential for criminal, civil, regulatory, and/or agency administrative

parallel (simultaneous or successive) proceedings. By working together in this way, the

Department can better protect the government's interests (including deterrence of future

misconduct and restoration of program integrity) and secure the full range of the government's

remedies (including incarceration, fines, penalties, damages, restitution to victims, asset seizure,

civil and criminal forfeiture, and exclusion and debarment).

Page 1 of 427. Coordination of Parallel Criminal, Civil, Regulatory, and Administrative Proceedings ...

6/22/2015http://www.justice.gov/usam/organization-and-functions-manual-27-parallel-proceedings

The potential for parallel proceedings arises in many of the Department's white collar

enforcement priorities, and it is essential that an effective and successful response involve an

evaluation of criminal, civil, regulatory, and administrative remedies. Although some matters may

come to the attention of the Department through a criminal investigation, it may be appropriate for

the matter to include and/or be resolved through a civil, regulatory, or administrative remedy.

Conversely, there may be matters that come to the attention of the Department's civil attorneys or

attorneys of other agencies in the first instance that would be appropriate for the Department's

prosecutors to investigate and pursue to ensure culpable individuals and entities are held

criminally accountable. Early and effective communication and coordination will help avoid many

problems and enhance the overall result for the United States.

Courts have recognized that "[t]here is nothing improper about the government undertaking

simultaneous criminal and civil investigations" provided that we use those proceedings and

associated investigative tools for their proper purposes and in appropriate ways. United States v.

Stringer, 535 F.3d 929, 933 (9th Cir. 2008), vacating in part, and reversing in part, United States

v. Stringer, 408 F. Supp. 2d 1083 (D. Or. 2006); see also United States v. Kordel, 397 U.S. 1, 10

(1970) ("It would stultify enforcement of federal law to require a government agency ... invariably

to choose either to forego recommendation of a criminal prosecution once it seeks civil relief, or

to defer civil proceedings pending the outcome of a criminal trial."); SEC v. Dresser Industries,

Inc., 628 F.2d 1368, 1374 (D.C. Cir. 1980) (en banc) ("In the absence of substantial prejudice to

the rights of the parties involved, such parallel proceedings are unobjectionable under our

jurisprudence.").[FN1]

Where parallel proceedings are conducted effectively, the government is able to make more

efficient use of its investigative and attorney resources. If the government does not consider and

properly manage potential parallel matters, it may not be able to realize all of the remedies

available to the United States. For these reasons, it is important that criminal, civil, and agency

attorneys coordinate in a timely fashion, discuss common issues that may impact each matter,

and proceed in a manner that allows information to be shared to the fullest extent appropriate to

the case and permissible by law.

Every United States Attorney's Office and Department litigating component should have policies

and procedures for early and appropriate coordination of the government's criminal, civil,

regulatory and administrative remedies. Many of the Department's litigating components and

United States Attorneys' Offices that routinely engage in parallel proceedings already have in

place effective policies and procedures to manage them. These policies and procedures should

stress early, effective, and regular communication between criminal, civil, and agency attorneys

to the fullest extent appropriate to the case and permissible by law. In keeping with this objective,

such policies and procedures should specifically address the following issues, at a mInImum:

Intake: Early evaluation of all matters for criminal, civil, regulatory, or administrative

action. A case referral from any source, including an agency referral, a self-

disclosure, or a qui tam action, to any component of the Department or to a United

States Attorney's Office, is a referral for all purposes. From the moment of case

intake, attorneys should consider and communicate regarding potential civil,

administrative, regulatory, and criminal remedies, and explore those remedies with

the investigative agents and other government personnel.



Investigation: Consideration of investigative strategies that maximize the

government's ability to share information among criminal, civil, and agency

administrative teams to the fullest extent appropriate to the case and permissible by

law. In cases where civil, regulatory, or administrative remedies may be available,

prosecutors should, at least as an initial matter, consider using investigative means

other than grand jury subpoenas for documents or witness testimony. If a qui tam

action or other time-sensitive civil or administrative matter is under investigation,

consideration should be given to postponing service of grand jury subpoenas, as

appropriate. Prosecutors may obtain evidence without the grand jury through

administrative subpoenas, search warrants, consensual monitoring, interviews, and

potentially through other means, and with appropriate safeguards, that evidence

may be shared with attorneys responsible for pursuing the government's civil,

regulatory, and administrative remedies. Civil attorneys can obtain information

through the use of False Claims Act civil investigative demands and that information

may be shared with prosecutors and agency attorneys. Where evidence is obtained

by means ofa grand jury, prosecutors should consider seeking an order under

Federal Rule of Criminal Procedure 6(e) at the earliest appropriate time to permit

civil, regulatory, or administrative counterparts access to material, taking into

account the needs ofthe civil, regulatory, administrative, and criminal matters,

including relevant statutes of limitations, and the applicable standards governing

such an order.[FN2] At all times, consistent with their obligations under Rule 6(e),

prosecutors should keep careful track of the sources of information so that non-

grand jury material is identified and can be shared with the government's civil,

regulatory, and administrative teams. Prosecutors should, of course, do so in a

manner that does not jeopardize a grand jury investigation. Civil trial counsel should

apprise prosecutors of discovery obtained in civil, regulatory, and administrative

actions that could be material to criminal investigations.

Resolution: At every point between case intake and final resolution (e.g., declination,

indictment, settlement, plea, sentencing), attorneys should assess the potential

impact of such actions on criminal, civil, regulatory, and administrative proceedings

to the extent appropriate. For example, a prosecutor, when considering a plea

agreement, should also consider the impact the charge used as a basis for the guilty

plea (e.g., health care fraud as opposed to obstruction) and the facts set forth in

support of the plea agreement could have on a subsequent civil case (collateral

estoppel, res judicata) and/or administrative exclusion or debarment. Effective and

timely communication with representatives of the agency authorized to act on the

agency's behalf, including suspension and debarment authorities, should occur so

that agencies can pursue available remedies at an appropriate time.

The recommendations outlined above should be followed to the fullest extent appropriate and

permissible by law. There may be instances, however, in which the secrecy of an investigation is

paramount to the success of the investigation (e.g., an undercover operation), and compliance

with the above described policies may be impractical.

The support and contributions of agencies and the government's investigative offices are critical

to our ability to conduct effective parallel proceedings. It is vital that investigators obtain



‹ 26. Special Drug Enforcement

Authorization -- Illustrative Examples

up 28. Press Releases In Cases Involving The

IRS ›

appropriate credit for all of their work in support of the government's remedies, including civil and

administrative remedies. Many already have taken steps through work plans and credit in the

performance review process. I commend and appreciate these efforts and encourage continued

support in this area from agencies and investigative offices. I also commend and encourage the

continued practice by agencies of making simultaneous joint referrals, where appropriate, to both

civil and criminal attorneys.

I direct the Office of Legal Education, in consultation with the U.S. Attorneys' Offices, the Civil

Division, the Criminal Division, and other litigating divisions within the Department to facilitate the

provision of instruction and training materials on parallel proceedings.

FN 1. When conducting parallel investigations, Department attorneys should be mindful of

arguments like those raised in Stringer and United States v. Scrushy, 366 F. Supp. 2d 1134 (N.D.

Ala 2005), that civil, administrative, or regulatory proceedings are being used improperly to

further a criminal investigation. In addition, the Department's civil and criminal attorneys should

work together, and with agency attorneys, to consider and plan for grand jury secrecy and

discovery issues early in the process of conducting parallel proceedings. The Department has

provided and will continue to provide training opportunities to assist civil and criminal attorneys,

and joint training with agency attorneys, in evaluating these issues.

FN 2. In some circumstances, a prosecutor may have less authority to disclose grand jury

information to a regulatory or administrative, than to a civil, counterpart. Federal Rule of Criminal

Procedure 6(e)(3)(E)(i) authorizes a court only to order the disclosure of grand jury information

"preliminarily to or in connection with a judicial proceeding." See U.S. v. Baggot, 463 U.S. 476

(1983) (an Internal Revenue Service investigation to determine a taxpayer's civil tax liability is not

preliminary to or in connection with a judicial proceeding within the meaning of Rule 6(e)(3)(E)(i)).

[updated July 2012] [cited in USAM Chapter 1-12.000; Civil Resource Manual 228;

Criminal Resource Manual 2464]



Section 10A of the Securities Exchange Act of 1934, 15 U.S.C.§ 78j-1. Audit requirements.

(a) In general

Each audit required pursuant to this chapter of the financial statements of an issuer by a

registered public accounting firm shall include, in accordance with generally accepted auditing

standards, as may be modified or supplemented from time to time by the Commission--

(1) procedures designed to provide reasonable assurance of detecting illegal acts that

would have a direct and material effect on the determination of financial statement

amounts;

(2) procedures designed to identify related party transactions that are material to the

financial statements or otherwise require disclosure therein; and

(3) an evaluation of whether there is substantial doubt about the ability of the issuer to

continue as a going concern during the ensuing fiscal year.

(b) Required response to audit discoveries

(1) Investigation and report to management

If, in the course of conducting an audit pursuant to this chapter to which subsection (a) of

this section applies, the registered public accounting firm detects or otherwise becomes

aware of information indicating that an illegal act (whether or not perceived to have a

material effect on the financial statements of the issuer) has or may have occurred, the

firm shall, in accordance with generally accepted auditing standards, as may be modified

or supplemented from time to time by the Commission--

(A)(i) determine whether it is likely that an illegal act has occurred; and

(ii) if so, determine and consider the possible effect of the illegal act on the

financial statements of the issuer, including any contingent monetary effects, such

as fines, penalties, and damages; and

(B) as soon as practicable, inform the appropriate level of the management of the

issuer and assure that the audit committee of the issuer, or the board of directors

of the issuer in the absence of such a committee, is adequately informed with

respect to illegal acts that have been detected or have otherwise come to the

attention of such firm in the course of the audit, unless the illegal act is clearly

inconsequential.

(2) Response to failure to take remedial action

If, after determining that the audit committee of the board of directors of the issuer, or the

board of directors of the issuer in the absence of an audit committee, is adequately

informed with respect to illegal acts that have been detected or have otherwise come to

the attention of the firm in the course of the audit of such firm, the registered public

accounting firm concludes that--

(A) the illegal act has a material effect on the financial statements of the issuer;

(B) the senior management has not taken, and the board of directors has not

caused senior management to take, timely and appropriate remedial actions with

respect to the illegal act; and

(C) the failure to take remedial action is reasonably expected to warrant departure

from a standard report of the auditor, when made, or warrant resignation from the

audit engagement;

the registered public accounting firm shall, as soon as practicable, directly report its

conclusions to the board of directors.

(3) Notice to Commission; response to failure to notify

An issuer whose board of directors receives a report under paragraph (2) shall inform the

Commission by notice not later than 1 business day after the receipt of such report and

shall furnish the registered public accounting firm making such report with a copy of the

notice furnished to the Commission. If the registered public accounting firm fails to

receive a copy of the notice before the expiration of the required 1-business-day period,

the registered public accounting firm shall--

(A) resign from the engagement; or

(B) furnish to the Commission a copy of its report (or the documentation of any

oral report given) not later than 1 business day following such failure to receive

notice.

(4) Report after resignation

If a registered public accounting firm resigns from an engagement under paragraph

(3)(A), the firm shall, not later than 1 business day following the failure by the issuer to

notify the Commission under paragraph (3), furnish to the Commission a copy of the

report of the firm (or the documentation of any oral report given).

(c) Auditor liability limitation

No registered public accounting firm shall be liable in a private action for any finding,

conclusion, or statement expressed in a report made pursuant to paragraph (3) or (4) of

subsection (b) of this section, including any rule promulgated pursuant thereto.

(d) Civil penalties in cease-and-desist proceedings

If the Commission finds, after notice and opportunity for hearing in a proceeding instituted

pursuant to section 78u-3 of this title, that a registered public accounting firm has willfully

violated paragraph (3) or (4) of subsection (b) of this section, the Commission may, in addition to

entering an order under section 78u-3 of this title, impose a civil penalty against the registered

public accounting firm and any other person that the Commission finds was a cause of such

violation. The determination to impose a civil penalty and the amount of the penalty shall be

governed by the standards set forth in section 78u-2 of this title.

(e) Preservation of existing authority

Except as provided in subsection (d) of this section, nothing in this section shall be held to limit

or otherwise affect the authority of the Commission under this chapter.

(f) Definitions

As used in this section, the term "illegal act" means an act or omission that violates any law, or

any rule or regulation having the force of law.

As used in this section, the term "issuer" means an issuer (as defined in section 78c of this title),

the securities of which are registered under section 78l of this title, or that is required to file

reports pursuant to section 78o(d) of this title, or that files or has filed a registration statement

that has not yet become effective under the Securities Act of 1933 (15 U.S.C. 77a et seq.), and

that it has not withdrawn.

. . .

U.S. v. Textron Inc. and Subsidiaries, 507 F.Supp.2d 138 (2007)

100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1

Synopsis

Background: United States filed a petition to enforce an

Internal Revenue Service (IRS) summons served on taxpayer

and its subsidiaries in connection with the IRS's examination

of taxpayer's tax liability for tax years 1998-2001.

Holdings: The District Court, Ernest C. Torres, Senior

District Judge, held that:

[1] statements on the face of IRS summons itself, and the

supporting declaration of IRS agent constituted a prima facie

showing that the purpose of summons was legitimate, and

[2] tax accrual workpapers were protected by work product

privilege.

Petition denied.

West Headnotes (20)

[1] Internal Revenue

Grounds and Purposes

To obtain an order compelling compliance with

IRS summons, the IRS must show: (1) that

there is a legitimate purpose for the investigation

pursuant to which the summons is being sought,

(2) that the inquiry or the materials sought

may be relevant to that purpose, (3) that the

information sought is not already within the

Commissioner's possession, and (4) that the

administrative steps required by the Internal

Revenue Code have been followed. 26 U.S.C.A.

§ 7604.

Cases that cite this headnote


Presumptions and Burden of Proof

Internal Revenue

Weight and Sufficiency

Government may make a prima facie showing

that requirements for an order compelling

compliance with IRS summons have been

satisfied on the face of the summons and

by supporting affidavits; when the requisite

showing has been made, the burden shifts to

the party summoned to present evidence that the

Powell requirements have not been satisfied or

that there is some other reason why the summons

should not be enforced. 26 U.S.C.A. § 7604.

1 Cases that cite this headnote


Grounds and Purposes

Internal Revenue

Civil or Criminal Investigative Purposes;

Recommendation of Prosecution

It is improper to use a civil IRS summons to

gather evidence to be used solely in a criminal

prosecution, or to issue a summons to harass

the taxpayer or to put pressure on him to settle

a collateral dispute, or for any other purpose

reflecting on the good faith of the particular

investigation. 26 U.S.C.A. § 7602(a).



Weight and Sufficiency

Statements on the face of IRS summons

itself, and the supporting declaration of IRS

agent, that the purpose of the summons

was to ascertain the correctness of the tax

returns filed by the taxpayer for the years in

question, constituted a prima facie showing that

the purpose of summons was legitimate and

therefore enforceable. 26 U.S.C.A. § 7602(a).



100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605



Examination of Persons and Records

Internal Revenue Service (IRS) has discretion to

determine the manner in which its investigation

should be conducted, and IRS is not required to

obtain relevant documents by the least formal

means possible.


[6] Privileged Communications and

Confidentiality

Construction

Narrow construction of attorney-client privilege

is especially called for in the case of tax

investigations because of the Congressional

policy choice in favor of disclosure of all

information relevant to a legitimate IRS inquiry.

26 U.S.C.A. § 7525.



Confidentiality

Professional Character of Employment or

Transaction

Generally, the mere preparation of a tax return

is viewed as accounting work and a taxpayer

may not cloak the documents generated in that

process with attorney-client privilege simply by

hiring a lawyer to do the work that an accountant,

or other tax preparer, or the taxpayer himself

normally would do.



Confidentiality

Professional Character of Employment or

Transaction

Communications containing legal advice

provided by an attorney may be subject to

attorney-client privilege even though they are

made in connection with the preparation of a tax

return.



Confidentiality

Particular Cases

Taxpayer's tax accrual workpapers were

protected by the attorney-client privilege;

workpapers essentially consisted of nothing

more than counsel's opinions regarding items

that might be challenged because they involved

areas in which the law was uncertain

and counsel's assessment regarding taxpayer's

chances of prevailing in any ensuing litigation.



Work Product Privilege; Tax Practitioner

Privilege

Tax practitioner-client privilege is a privilege

on tax advice in the form of confidential

communications between a taxpayer and any

federally authorized tax practitioner to the same

extent that such communications would be

protected between a taxpayer and an attorney. 26

U.S.C.A. § 7525.




Privilege

In the case of a corporation, tax practitioner-

client privilege does not apply to written

communications between the tax practitioner

and the corporation in connection with the

promotion of the direct or indirect participation

of such corporation in any tax shelter nor

does the privilege extend to a tax practitioner's

work product in preparing a return or to

communications between a tax practitioner and a

client simply for the preparation of a tax return.

26 U.S.C.A. § 7525.




Privilege


100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605


Tax practitioner-client privilege applied to

tax accrual workpapers prepared by corporate

taxpayer's tax accountants; accountants were

acting as tax advisers and the workpapers

sought by IRS subpoena reflected their opinions

regarding the foreseeable tax consequences of

transactions that already had taken place. 26

U.S.C.A. § 7525.


[13] Federal Civil Procedure

Work Product Privilege; Trial Preparation

Materials

In determining whether documents were

prepared “in anticipation of litigation” so as

to be subject to protection of work product

discovery privilege, the relevant inquiry is

whether the document was prepared or obtained

“because of” the prospect of litigation. Fed.Rules

Civ.Proc.Rule 26(b)(3), 28 U.S.C.A.




Materials

Taxpayer's tax accrual workpapers were

protected by work product discovery privilege

since such documents would not have

been prepared by taxpayer's attorney and

accountants “but for” the taxpayer's well-

founded anticipation of possibility of litigation

with the Internal Revenue Service (IRS).

Fed.Rules Civ.Proc.Rule 26(b)(3), 28 U.S.C.A.




Materials

Work product discovery privilege does not apply

to documents that are prepared in the ordinary

course of business or that would have been

created in essentially similar form irrespective of

the litigation. Fed.Rules Civ.Proc.Rule 26(b)(3),

28 U.S.C.A.




Privilege

Privileged Communications and

Confidentiality

Waiver of Privilege

Voluntary disclosure to a third party waives

the attorney-client privilege and tax practitioner-

client privilege even if the third party agrees not

to disclose the communications to anyone else.

26 U.S.C.A. § 7525.




Privilege


Confidentiality

Waiver of Privilege

Corporate taxpayer's providing tax accrual

workpapers to independent auditor responsible

for reporting to the investing public waived the

protection of attorney-client privilege and tax

practitioner-client privilege. 26 U.S.C.A. § 7525.




Materials

Federal Civil Procedure

Waiver

Purpose of work product discovery privilege

is to prevent a potential adversary from

gaining an unfair advantage over a party by

obtaining documents prepared by the party or its

counsel in anticipation of litigation which may

reveal the party's strategy or the party's own

assessment of the strengths and weaknesses of

its case, and accordingly, only disclosures that

are inconsistent with keeping the information

from an adversary constitute a waiver of the


100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605


work product privilege. Fed.Rules Civ.Proc.Rule

26(b)(3), 28 U.S.C.A.



Waiver

Corporate taxpayer's providing tax accrual

workpapers to independent auditor responsible

for reporting to the investing public did not

waive the protection of work product discovery

privilege. Fed.Rules Civ.Proc.Rule 26(b)(3), 28

U.S.C.A.




Materials

Internal Revenue Service (IRS) failed to carry

the burden of demonstrating a “substantial need”

for taxpayer's tax accrual workpapers, which

constituted opinion work product; while the

opinions and conclusions of taxpayer's counsel

and tax advisers could provide the IRS with

insight into taxpayer's negotiating position and/

or litigation strategy, they had little bearing

on the determination of taxpayer's tax liability.



Attorneys and Law Firms

*141 Jennifer D. Auchterlonie, Thomas P. Cole, U.S.

Department of Justice, Washington, DC, for United States of

America.

Arthur L. Bailey, J. Walker Johnson, Steptoe & Johnson,

LLP, Washington, DC John A. Tarantino, Patricia K. Rocha,

Adler Pollock & Sheehan P.C., Providence, RI, for Textron

Inc. and Subsidiaries.

MEMORANDUM AND ORDER

ERNEST C. TORRES, Senior District Judge.

Pursuant to 26 U.S.C. §§ 7402(b) and 7604, the United States

has filed a petition to enforce an Internal Revenue Service

(IRS) summons served on Textron Inc. and its subsidiaries

(“Textron”) in connection with the IRS's examination of

Textron's tax liability for tax years 1998-2001. The summons

seeks Textron's “tax accrual workpapers” for its 2001 tax

year. Textron has refused to produce the requested documents

on the grounds that (1) the summons was not issued for a

legitimate purpose and (2) the tax accrual workpapers are

privileged.

Because this Court finds that the requested documents are

protected by the work product privilege, the petition for

enforcement is denied.

Facts

Based on the pleadings, affidavits submitted by the parties,

and the evidence presented at a hearing conducted on June 26,

2007, this Court finds the relevant facts to be as follows.

Textron, Inc. is a publicly traded conglomerate with

approximately 190 subsidiaries. One of its subsidiaries

is Textron Financial Corporation (TFC), a company that

provides commercial lending and financial services. In 2001

and 2002, Textron had six tax attorneys and a number

of CPAs in its tax department but TFC's tax department

consisted only of CPAs. Consequently, TFC relied on

attorneys in Textron's tax department, private law firms, and

outside accounting firms for additional assistance and advice

regarding tax matters.

Like other large corporations, Textron's federal tax returns

are audited periodically at which time the IRS examines

the returns for the tax years that are part of the audit

cycle. In conducting its audits, the IRS, typically, gathers

relevant information by issuing “information document

requests” (IDRs) to the taxpayer. If the IRS disagrees with a

position taken by the taxpayer on its return, the IRS issues a

Notice of Proposed Adjustments to the taxpayer. A taxpayer

that disputes the proposed adjustments has several options to

resolve the dispute within the agency. Those options range

from an informal conference with the IRS team manager to

a formal appeal to the IRS Appeals Board. If the dispute is

not resolved within the agency, the taxpayer may file suit in

federal court. In seven of its past eight audit cycles covering


100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605


the period between 1980 *142 and the present, Textron

appealed disputed matters to the IRS Appeals Board; and

three of these disputes resulted in litigation. 1

1 See Textron, Inc. v. Comm'r, 117 T.C. 67 (2001) (relating

to federal income tax liability for tax years 1987 through

1992); Textron, Inc. v. Comm'r, 336 F.3d 26 (1st

Cir.2003) (appeal regarding a different issue raised in the

tax court); Textron, Inc. v. United States, 418 F.Supp. 39

(D.R.I.1976) (relating to tax years 1959 through 1962).

During the 1998-2001 audit cycle, the IRS learned, from

examining Textron's 2001 return, that TFC had engaged

in nine “sale-in, lease-out” (SILO) transactions involving

telecommunications equipment and rail equipment. The

IRS has classified such transactions as “listed transactions”

because it considers them to be of a type engaged in for

the purpose of tax avoidance. See 26 C.F.R. § 1.6011-4(b)

(2). The IRS issued more than 500 IDRs in connection

with the 1998-2001 audit cycle, and Textron complied with

all of them, except for the ones seeking its “tax accrual

workpapers.”

The Summons

On June 2, 2005, Revenue Agent Vasconcellos, the manager

of the IRS team examining Textron's return, issued an

administrative summons for “all of the Tax Accrual

Workpapers” for Textron's tax year ending on December 29,

2001. The summons defined the “Tax Accrual Workpapers”

to include:

[A]ll accrual and other financial

workpapers or documents created

or assembled by the Taxpayer, an

accountant for the Taxpayer, or

the Taxpayer's independent auditor

relating to any tax reserve for

current, deferred, and potential or

contingent tax liabilities, however

classified or reported on audited

financial statements, and to any

footnotes disclosing reserves or

contingent liabilities on audited

financial statements. They include,

but are not limited to, any and

all analyses, computations, opinions,

notes, summaries, discussions, and

other documents relating to such

reserves and any footnotes....

Textron refused to produce its tax accrual workpapers,

asserting that they are privileged and that the summons was

issued for an improper purpose.

The Tax Accrual Workpapers

Because there is no immutable definition of the term

“tax accrual workpapers,” the documents that make up a

corporation's “tax accrual workpapers” may vary from case

to case. 2 In this case, the evidence shows that Textron's

“tax accrual workpapers” for the years in question consist,

entirely, of:

2 Professor Douglas Carmichael, the government's expert,

explained that the content of tax accrual workpaper

files “does vary” because “Companies organize their

records in different ways.” Transcript of June 26, 2007

Evidentiary Hearing at 132. See also United States v. El

Paso Co., 682 F.2d 530, 533 (5th Cir.1982) (noting the

many names for tax accrual workpapers).

1. A spreadsheet that contains:

(a) lists of items on Textron's tax returns, which, in

the opinion of Textron's counsel, involve issues

on which the tax laws are unclear, and, therefore,

may be challenged by the IRS;

(b) estimates by Textron's counsel expressing,

in percentage terms, their judgments regarding

Textron's chances of prevailing in any litigation

over those issues (the “hazards of litigation

percentages”); and

(c) the dollar amounts reserved to reflect the

possibility that Textron *143 might not prevail

in such litigation (the “tax reserve amounts”).

2. Backup workpapers consisting of the previous

year's spreadsheet and earlier drafts of the

spreadsheet together with notes and memoranda

written by Textron's in-house tax attorneys

reflecting their opinions as to which items should

be included on the spreadsheet and the hazard of

litigation percentage that should apply to each item.

The evidence shows that while Textron may possess

documents, such as leases, that contain factual

information regarding the SILO transactions and other

items that may be listed on the spreadsheet, its tax


100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605


accrual workpaper files do not include any such

documents.

As stated by Norman Richter, Vice President of Taxes

at Textron and Roxanne Cassidy, Director, Tax Reporting

at Textron, Textron's ultimate purpose in preparing the

tax accrual workpapers was to ensure that Textron was

“adequately reserved with respect to any potential disputes

or litigation that would happen in the future.” It seems

reasonable to infer that Textron's desire to establish adequate

reserves also was prompted, in part, by its wish to satisfy

an independent auditor that Textron's reserve for contingent

liabilities satisfied the requirements of generally accepted

accounting principles (GAAP) so that a “clean” opinion

would be given with respect to the financial statements filed

by Textron with the SEC.

Each year, Textron's tax accrual workpapers are prepared

shortly after the corporation's tax return is filed. The

first step in preparing the workpapers is that Textron's

accountants circulate to Textron's attorneys a copy of

the previous year's tax accrual workpapers together with

recommendations regarding their proposed changes and/or

additions for the current year. Textron's attorneys, then,

review those materials, propose further changes to the

spreadsheets and hazard litigation percentages which are

returned to the accountants who compile the information and

perform the mathematical calculations necessary to compute

the tax reserve amounts. The attorneys and accountants, then,

meet to give their approval so that the accountants may

finalize the workpapers.

TFC goes through a similar process in preparing its tax

accrual workpapers but, since TFC does not have any in-

house attorneys, its accountants rely on tax advice obtained

from outside accounting and law firms, before meeting with

a Textron tax attorney to finalize the workpapers.

Once the tax reserve amounts for each item on the worksheets

are established, those amounts are aggregated with other

contingent liabilities and the total is reported as “other

liabilities” on Textron's financial statements.

During the course of an audit conducted by Ernst & Young

(E & Y), Textron's independent auditor, Textron permitted E

& Y to examine the final tax accrual workpapers at issue in

this case with the understanding that the information was to

be treated as confidential.

Analysis

I. The Summons

A. Scope and Enforceability, in General

Section 7602 authorizes the IRS to issue administrative

summonses for the production of “any books, papers,

records, or other data which may be relevant or material” in

“ascertaining the correctness of any return, ..., determining

the liability of any person for any internal revenue tax ...,

or collecting any such liability....” 26 U.S.C. § 7602(a). The

Supreme Court has *144 described § 7602 as a “broad

summons authority” reflecting a “congressional policy choice

in favor of disclosure of all information relevant to a

legitimate IRS inquiry.” United States v. Arthur Young & Co.,

465 U.S. 805, 816, 104 S.Ct. 1495, 1502, 79 L.Ed.2d 826

(1984).

[1] When documents requested in a summons are not

produced, the United States may petition a federal district

court for an order compelling compliance. 26 U.S.C. § 7604.

To obtain such an order, the IRS must show: (1) that there is

a legitimate purpose for the investigation pursuant to which

the summons is being sought, (2) that the inquiry or the

materials sought may be relevant to that purpose, (3) that the

information sought is not already within the Commissioner's

possession, and (4) that the administrative steps required by

the Code have been followed. United States v. Powell, 379

U.S. 48, 57-58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112 (1964).

[2] The government may make a prima facie showing that

those requirements have been satisfied “on the face of the

summons and by supporting affidavits.” United States v.

Freedom Church, 613 F.2d 316, 321 (1st Cir.1979). See also

United States v. Lawn Builders of New England, Inc., 856

F.2d 388, 392 (1st Cir.1988) (“Assertions by affidavit of

the investigating agent that the requirements are satisfied are

sufficient to make the prima facie case.”) (quoting Liberty

Financial Servs. v. United States, 778 F.2d 1390, 1392 (9th

Cir.1985)). When the requisite showing has been made, the

burden shifts to the party summoned to present evidence that

the Powell requirements have not been satisfied or that there is

some other reason why the summons should not be enforced.

Freedom Church, 613 F.2d at 319 (citing, inter alia, United

States v. LaSalle Nat. Bank, 437 U.S. 298, 316, 98 S.Ct. 2357,

57 L.Ed.2d 221 (1978)).


100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605


In this case, Textron does not dispute that the documents

sought may be relevant 3 or that the IRS has followed

the necessary administrative steps in issuing the summons.

Rather, Textron argues that the IRS seeks the documents

for the purpose of using them as leverage in settlement

negotiations and that the documents are privileged.

3 In United States v. Arthur Young & Co., 465 U.S.

805, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984), the

Supreme Court held that an IRS summons satisfies the

relevance prong of the Powell test if the documents

sought “ ‘might have thrown light upon’ the correctness

of [the taxpayer's] return,” Arthur Young, 465 U.S.

at 813-14, 104 S.Ct. 1495, and that the “tax accrual

workpapers” involved in that case, which were prepared

by the taxpayer's outside auditor, satisfied that relevance

standard. 465 U.S. at 815, 104 S.Ct. 1495.

B. The Legitimate Purpose Requirement

[3] Whether the purpose for issuing a summons is legitimate

depends on the circumstances. Section 7602(a) makes it

clear that “ascertaining the correctness of any return” and

“determining the liability of any person for any internal

revenue tax” are legitimate purposes for issuing a summons.

On the other hand, it is improper to “us[e] a civil summons to

gather evidence to be used solely in a criminal prosecution,”

United States v. Kis, 658 F.2d 526, 535 (7th Cir.1981), or to

issue a summons “to harass the taxpayer or to put pressure

on him to settle a collateral dispute, or for any other purpose

reflecting on the good faith of the particular investigation.”

Powell, 379 U.S. at 58, 85 S.Ct. 248.

[4] In this case, the statements on the face of the summons,

itself, and the supporting declaration of Agent Vasconcellos

*145 that the purpose of the summons is to “ascertain

the correctness of the tax returns filed by the taxpayer” for

the years in question, constitute a prima facie showing that

the purpose is legitimate. Consequently, the burden is on

Textron to “create a ‘substantial question in the court's mind

regarding the validity of the government's purpose.’ ” United

States v. Gertner, 65 F.3d 963, 967 (1st Cir.1995) (quoting

United States v. Salter, 432 F.2d 697, 700 (1st Cir.1970)).

In order to carry its burden, Textron “must articulate specific

allegations of bad faith and, if necessary, produce reasonably

particularized evidence in support of those allegations.” Id.

In arguing that the government's stated purpose is pretextual

and that the IRS's real objective is to use the opinions of

Textron's counsel and tax advisers with respect to the SILO

transactions as a bargaining lever, Textron alleges that the

2001 examination was substantially completed when the

summons was issued; that Textron already had provided

numerous documents requested by the IRS regarding the

SILO transactions; and that the IRS could have requested any

additional documents regarding the facts underlying those

transactions. However, those allegations are insufficient to

establish a bad faith purpose.

[5] As a factual matter, the IRS disputes the assertion that

the 2001 examination had been substantially completed when

the summons was issued and the only evidence offered by

Textron on this point was an IRS agenda for a March 22,

2005 meeting between the parties which stated, simply, that

the purpose of the meeting was to determine what steps were

needed to bring the examination to completion. Nor does

Textron's production of other documents relating to the SILO

transactions or the fact that the IRS could have requested

additional documents by issuing IDRs raise a substantial

question as to bad faith. The IRS has discretion to determine

the manner in which its investigation should be conducted.

See United States v. Norwest Corp., 116 F.3d 1227, 1233 (8th

Cir.1997) (“[I]t is for the agency, and not the taxpayer, to

determine the course and conduct of an audit”). Accordingly,

the IRS is not required to obtain relevant documents by the

least formal means possible. See Tiffany Fine Arts, Inc. v.

United States, 469 U.S. 310, 323, 105 S.Ct. 725, 732, 83

L.Ed.2d 678 (1985) (the IRS is not required to “conduct its

investigations in the least intrusive way possible.”).

Textron also argues that the summons is overbroad because

it seeks not only TFC's tax accrual workpapers but, also, the

tax accrual workpapers for Textron and all of its subsidiaries.

However, the request for Textron's workpapers does not

establish bad faith because TFC is a subsidiary of Textron and

the IRS asserts that it is seeking to determine Textron's overall

tax liability, not just any tax due from the SILO transactions.

In short, the IRS has made a prima facie showing that the

Powell requirements have been satisfied and Textron has

failed to rebut that showing.

II. Applicability of Privilege

Satisfaction of the Powell requirements is not sufficient to

warrant enforcement of an IRS summons if the documents

sought are privileged. Upjohn Co. v. United States, 449

U.S. 383, 386, 101 S.Ct. 677, 681, 66 L.Ed.2d 584 (1981)

(refusing to enforce IRS summons because documents

sought contained communications protected by the attorney-


100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605


client privilege and also recognizing that “the work-

product doctrine does apply in tax summons enforcement

proceedings.”). In general, when a claim of privilege is made,

the party asserting *146 the privilege “has the burden of

establishing not only the existence of that privilege, but also

that the privilege was not waived.” In re Raytheon Sec. Litig.,

218 F.R.D. 354, 357 (D.Mass.2003).

In this case, Textron argues that its tax accrual workpapers are

protected by the attorney-client privilege, the tax practitioner-

client privilege created by 26 U.S.C. § 7525, and the work

product privilege.

A. Attorney-Client Privilege

[6] The attorney-client privilege protects confidential

communications between an attorney and client relating to

legal advice sought from the attorney. See United States

v. Bisanti, 414 F.3d 168, 171 (1st Cir.2005); Cavallaro v.

United States, 284 F.3d 236, 245 (1st Cir.2002). Since the

privilege may hamper the search for truth by preventing the

disclosure of relevant evidence, it is narrowly construed. In

re Keeper of Records (XYZ Corp.), 348 F.3d 16, 22 (1st

Cir.2003) (“the attorney-client privilege must be narrowly

construed because it comes with substantial costs and stands

as an obstacle of sorts to the search for truth.”). Narrow

construction of the privilege is especially called for in the case

of tax investigations because of “the ‘congressional policy

choice in favor of disclosure of all information relevant to a

legitimate IRS inquiry.’ ” Cavallaro, 284 F.3d at 245 (quoting

Arthur Young, 465 U.S. at 816, 104 S.Ct. 1495).

Textron's affidavits state that its tax accrual workpapers are

privileged because they were prepared by counsel and reflect

counsel's legal conclusions in identifying items on Textron's

return that may be challenged and assessing Textron's

prospects of prevailing in any ensuing litigation. (Richter

Aff. ¶¶ 13, 22.) The IRS argues that the workpapers are not

privileged because, in preparing them, Textron's attorneys

were not providing legal advice but, rather, were performing

an accounting function by reconciling the company's tax

records and financial statements.

[7] [8] It is true that, generally, the mere preparation of

a tax return is viewed as accounting work and a taxpayer

may not cloak the documents generated in that process

with a privilege simply “by hiring a lawyer to do the work

that an accountant, or other tax preparer, or the taxpayer

himself ... normally would do.” United States v. Frederick,

182 F.3d 496, 500 (7th Cir.1999). See E.S. Epstein, The

Attorney-Client Privilege and the Work-Product Doctrine

246 (4th ed.2001). On the other hand, it is equally true

that communications containing legal advice provided by an

attorney may be privileged even though they are made in

connection with the preparation of a return.

Determining the tax consequences

of a particular transaction is rooted

entirely in the law.... [Therefore]

[c]ommunications offering tax advice

or discussing tax planning ... are

‘legal’ communications.

U.S. v. Chevron Texaco Corp., 241 F.Supp.2d 1065, 1076

(N.D.Cal.2002). See Epstein, at 249; Louis F. Lobenhoffer,

The New Tax Practitioner Privilege: Limited Privilege and

Significant Disruption, 26 Ohio N.U. L.Rev. 243, 252 (2000)

(the attorney-client privilege should not be lost when true

legal advice or lawyer's work is performed, albeit in support

of an accounting or financial reporting function).

The Seventh Circuit explained the distinction, in the context

of an IRS audit, by stating that where representation during an

audit consists of “merely verifying the accuracy of a return,”

it is “accountants' work”; but, if the attorney participates in

the audit “to deal with issues of statutory interpretation or

case law” that may have *147 been raised in connection

with examination of the taxpayer's return, “the lawyer is doing

lawyer's work and the attorney-client privilege may attach.”

Frederick, 182 F.3d at 502. Furthermore, in United States v.

El Paso Co., the Fifth Circuit addressed the distinction as it

applies specifically to tax accrual workpapers by observing

that, while preparation of tax accrual work papers might be

considered an accounting function, “we would be reluctant to

hold that a lawyer's analysis of the soft spots in a tax return

and his judgment on the outcome of the litigation on it are not

legal advice.” United States v. El Paso Co., 682 F.2d 530, 539

(5th Cir.1982).

[9] Here, since the tax accrual workpapers of Textron

and TFC essentially consist of nothing more than counsel's

opinions regarding items that might be challenged because

they involve areas in which the law is uncertain and counsel's

assessment regarding Textron's chances of prevailing in any

ensuing litigation, they are protected by the attorney-client

privilege.

The IRS's reliance on Arthur Young is misplaced because,

although Arthur Young deemed tax accrual workpapers

pinpointing the “soft spots” on a corporation's tax return


100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605


relevant to examination of the corporation's return, it did

not hold the attorney-client privilege inapplicable to legal

conclusions of counsel contained in the workpapers. On the

contrary, Arthur Young expressly recognized that “ § 7602 is

‘subject to the traditional privileges and limitations.’ ” Arthur

Young, 465 U.S. at 816, 104 S.Ct. 1495 (citation omitted).

Arthur Young also is distinguishable on the ground that,

there, the workpapers had been prepared by the corporation's

independent auditor whose “obligation to serve the public

interest assures that the integrity of the securities markets

will be preserved.” Arthur Young, 465 U.S. at 819, 104 S.Ct.

1495. By contrast, Textron's workpapers were prepared by

its counsel whose function was to provide legal advice to

Textron.

B. Tax Practitioner-Client Privilege- § 7525

[10] Section 7525, which created a tax practitioner privilege,

was enacted after the Supreme Court's decision in Arthur

Young, which declined to create a new “accountant-client

privilege” between a corporation and its independent auditor.

Arthur Young, 465 U.S. at 817, 104 S.Ct. 1495. Section

7525 confers a privilege on tax advice in the form of

confidential communications “between a taxpayer and any

federally authorized tax practitioner” to the same extent that

such communications would be protected between a taxpayer

and an attorney. 26 U.S.C. § 7525(a)(1).

[11] In the case of a corporation, the privilege does not

apply to written communications between the tax practitioner

and the corporation “in connection with the promotion of

the direct or indirect participation of such corporation in

any tax shelter (as defined in section 6662(d)(2)(C)(iii)).” 26

U.S.C. § 7525(b) (2001). Nor does the privilege extend to

a tax practitioner's “work product” in preparing a return or

to “communications between a tax practitioner and a client

simply for the preparation of a tax return.” United States v.

KPMG, LLP, 316 F.Supp.2d 30, 35 (D.D.C.2004) (“nothing

in the statute ‘suggests that these nonlawyer practitioners are

entitled to privilege when they are doing other than lawyers'

work ’ ”) (emphasis in original) (citation omitted).

Textron argues that, to the extent that the workpapers in

question reflect the advice that TFC received from CPAs in

its tax department, they are privileged under § 7525. The IRS

argues that the opinions *148 of TFC's tax accountants do

not qualify for protection under § 7525(a); and, even if they

did, they fall within the exception contained in § 7525(b).

Since TFC's tax accountants participated in advising Textron

regarding its tax liability with respect to matters on which

the law is uncertain and/or estimating the hazards of

litigation percentages, they were performing “lawyers' work.”

Accordingly, that advice would qualify for the privilege

conferred by § 7525(a). See 26 U.S.C. 7525(a) (tax advice

communications protected “to the extent the communication

would be considered a privileged communication if it were

between a taxpayer and an attorney.”).

[12] In support of its argument that the written

communications from TFC's tax accountants fall within

the “promotion” of a tax shelter exception created by §

7525(b), the IRS points out that 26 U.S.C. § 6662(d)(2)

(C)(ii) defines “tax shelter” to include any arrangement “a

significant purpose” of which “is the avoidance or evasion of

Federal income tax” and that an IRS notice identifies SILO

transactions as a type of tax avoidance arrangement. See 26

C.F.R. § 1.6011-4(b)(2); IRS Notice 2005-13 (February 11,

2005), 2005-9 I.R.B. 630. That argument is not persuasive

because even if the SILO transactions in which TFC

engaged are characterized as “tax avoidance” transactions

the communications were not made “in connection with the

promotion ” of TFC's participation in them. 26 U.S.C. §

7525(b) (emphasis added).

Section 7525(b) is aimed at communications by outside tax

practitioners attempting to sell tax shelters to a corporate

client. See 144 Cong. Rec. S7643-02, S7667 (July 8, 1998)

(statement of Sen. Mack) (“[section 7525(b) ] was meant to

target written promotional and solicitation materials used by

the peddlers of corporate tax shelters”). As the Conference

Report relating to § 7525(b) stated “[t]he Conferees do

not understand the promotion of tax shelters to be part of

the routine relationship between a tax practitioner and a

client. Accordingly, the Conferees do not anticipate that

the tax shelter limitation will adversely affect such routine

relationships.” H.R.Rep. No. 105-599 (Conf. Report to

Accompany HR 2676) (June 24, 1998).

Here, TFC's accountants were not “peddlers of corporate tax

shelters” or outside promoters soliciting TFC's participation

in the SILO transactions. Rather, they were acting as tax

advisers and the workpapers reflect their opinions regarding

the foreseeable tax consequences of transactions that, already,

had taken place, not future transactions they were seeking to

promote.

C. The Work Product Privilege


100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605


1. The Nature of the Privilege

The work product privilege applies to materials prepared

or gathered by an attorney in anticipation of litigation

or preparation for trial. The purpose of the privilege is

“to preserve a zone of privacy in which a lawyer can

prepare and develop legal theories and strategy ‘with an

eye toward litigation’ free from unnecessary intrusion by

his adversaries,” United States v. Adlman, 134 F.3d 1194,

1196 (2d Cir.1998) (citing Hickman v. Taylor, 329 U.S. 495,

510-11, 67 S.Ct. 385, 393-94, 91 L.Ed. 451 (1947)), “to

prevent a litigant from taking a free ride on the research and

thinking of his opponent's lawyer and to avoid the resulting

deterrent to a lawyer's committing his thoughts to paper.”

Frederick, 182 F.3d at 500.

The privilege first was articulated by the Supreme Court in

Hickman v. Taylor, 329 U.S. 495, 67 S.Ct. 385, 91 L.Ed. 451

(1947), *149 and, later, was codified in Federal Rule of Civil

Procedure 26(b)(3) which provides:

(3) Trial Preparation Materials ....

a party may obtain discovery

of documents and tangible

things otherwise discoverable under

subdivision (b)(1) of this rule and

prepared in anticipation of litigation or

for trial by or for another party or by or

for that other party's representative ...

only upon a showing that the party

seeking discovery has substantial need

of the materials in the preparation of

the party's case and that the party

is unable without undue hardship to

obtain the substantial equivalent of

the materials by other means. In

ordering discovery of such materials

when the required showing has been

made, the court shall protect against

disclosure of the mental impressions,

conclusions, opinions, or legal theories

of an attorney or other representative

of a party concerning the litigation.

Fed.R.Civ.P. 26(b)(3)(emphasis added).

As the rule indicates, unlike the attorney-client privilege, the

work product privilege is a qualified privilege which may be

overcome by a showing of “substantial need.” Fed.R.Civ.P.

26(b)(3). The burden of establishing “substantial need” rests

on the party seeking to overcome the privilege; and, when

“opinion work product” consisting of “mental impressions,

conclusions, opinions or legal theories” of attorneys is

involved, the burden of establishing “substantial need” is

greater than it is with respect to documents that are merely

obtained by a party. Upjohn, 449 U.S. at 401-02, 101 S.Ct.

677 (“we think a far stronger showing of necessity and

unavailability by other means ... would be necessary to

compel disclosure” of opinion work-product.). Indeed, some

courts have accorded “nearly absolute” protection to work

product consisting of opinions or theories. In re Grand Jury

Subpoena, 220 F.R.D. 130, 145 (D.Mass.2004) (collecting

cases).

In Upjohn, the Supreme Court made it clear that the

work product privilege may be invoked in response to IRS

summonses.

[T]he obligation imposed by a tax summons remains

‘subject to the traditional privileges and limitations.’ ...

Nothing in the language of the IRS summons provisions

or their legislative history suggests an intent on the

part of Congress to preclude application of the work-

product doctrine. Rule 26(b)(3) codifies the work-product

doctrine, and the Federal Rules of Civil Procedure are made

applicable to summons enforcement proceedings by Rule

81(a)(3).

Upjohn, 449 U.S. at 398-99, 101 S.Ct. 677 (citation omitted).

2. The “In Anticipation of Litigation” Requirement

[13] Courts have applied two different tests in determining

whether a document was prepared “in anticipation of

litigation.” Under the “primary purpose” test, documents are

held to be prepared in anticipation of litigation “as long

as the primary motivating purpose behind the creation of a

document was to aid in possible future litigation.” El Paso,

682 F.2d at 542. Under the more inclusive “because of” test,

the relevant inquiry is whether the document was prepared

or obtained “because of” the prospect of litigation. United

States v. Adlman, 134 F.3d 1194 (2d Cir.1998). In Adlman,

after making a detailed analysis of the two tests, the Second

Circuit found the “because of” test “more consistent with both

the literal terms and the purposes of [Rule 26(b)(3) ]” and the

Court stated:

In short, the enforceability of the IRS

summons for the Memorandum will

turn on whether it (or substantially


100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605


the same document) would have been

prepared *150 irrespective of the

anticipated litigation and therefore was

not prepared because of it.

Adlman, 134 F.3d at 1198, 1205.

The First Circuit has adopted the “because of” test articulated

in Adlman. Maine v. Dept. of the Interior, 298 F.3d 60, 68

(1st Cir.2002).

[14] Textron asserts that its tax accrual workpapers were

prepared because it anticipated the possibility of litigation

with the IRS regarding various items on its return and it points

to the hazards of litigation percentages as evidence that the

possibility of such litigation was the reason for preparing

the workpapers. The IRS asserts that the workpapers were

prepared in the ordinary course of business and in order to

satisfy the requirements of the securities laws that financial

statements filed by publicly traded companies comply with

GAAP (which mandate the creation of reserves to meet

contingent liabilities). The IRS contends that Textron had to

provide its independent auditor with the kind of information

contained in the workpapers in order to obtain a “clean”

opinion that the reserves satisfy GAAP's requirements.

[15] As the IRS correctly observes, the work product

privilege does not apply to “ ‘documents that are prepared

in the ordinary course of business or that would have

been created in essentially similar form irrespective of the

litigation.’ ” Maine, 298 F.3d at 70 (quoting Adlman, 134

F.3d at 1202). However, it is clear that the opinions of

Textron's counsel and accountants regarding items that might

be challenged by the IRS, their estimated hazards of litigation

percentages and their calculation of tax reserve amounts

would not have been prepared at all “but for” the fact that

Textron anticipated the possibility of litigation with the IRS.

If Textron had not anticipated a dispute with the IRS, there

would have been no reason for it to establish any reserve or

to prepare the workpapers used to calculate the reserve. Thus,

while it may be accurate to say that the workpapers helped

Textron determine what amount should be reserved to cover

any potential tax liabilities and that the workpapers were

useful in obtaining a “clean” opinion from E & Y regarding

the adequacy of the reserve amount, there would have been

no need to create a reserve in the first place, if Textron had

not anticipated a dispute with the IRS that was likely to result

in litigation or some other adversarial proceeding.

Nor can there be any doubt that Textron's belief in the

likelihood of litigation with the IRS was well-founded. As

already noted, the matters identified in the workpapers dealt

with issues on which the law was unclear. Moreover, in seven

of Textron's eight previous audit cycles, “unagreed” issues

had been appealed to the IRS Appeals Board, and three of

those issues were litigated in federal court.

The IRS relies on El Paso for the proposition that tax

accrual workpapers are prepared in the ordinary course of

business; and, therefore, are not protected by the work product

privilege. However, El Paso is not persuasive because it

applied the “primary purpose” test for determining whether

documents are prepared “in anticipation of litigation” and not

the “because of” test adopted by the First Circuit.

Moreover, even if the workpapers were needed to satisfy E &

Y that Textron's reserves complied with GAAP, that would

not alter the fact that the workpapers were prepared “because

of” anticipated litigation with the IRS. See Lawrence E.

Jaffe Pension Plan v. Household Int'l, Inc., 237 F.R.D. 176

(N.D.Ill.2006). In Jaffe Pension Plan, letters obtained by a

corporation's shareholders containing an *151 assessment

by the corporation's attorney of pending litigation against the

corporation were held to be protected by the work product

privilege even though the securities laws required that the

letters be provided to the corporation's independent auditor.

As the Jaffe Pension Plan court stated:

Plaintiffs insist that “[t]he documents at issue here were

created ‘pursuant to public requirements unrelated to

litigation,’ and in fact, would have been created regardless

of the litigation.” ... The court disagrees. In the absence of

any pending or threatened litigation, Household's counsel

would have had no need to advise [the independent auditor]

regarding such non-existent matters. Thus, the Opinion

Letters were prepared “because of” pending or threatened

litigation and are protected by the work product doctrine.

Jaffe Pension Plan, 237 F.R.D. at 181. See Simon v. G.D.

Searle & Co., 816 F.2d 397, 401 (8th Cir.1987) (holding

that individual case litigation reserves prepared by company's

attorney were protected opinion work product).

III. Waiver or Loss of Privilege

A. The Attorney-Client and Tax Practitioner-Client

Privileges


100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605


[16] It is well established that “voluntary disclosure to

a third party waives the attorney-client privilege even if

the third party agrees not to disclose the communications

to anyone else.” Westinghouse Elec. Corp. v. Republic of

the Philippines, 951 F.2d 1414, 1427 (3d Cir.1991). That

principle has been applied specifically to disclosures made

to independent auditors. First Fed. Sav. Bank of Hegewisch

v. United States, 55 Fed.Cl. 263, 268-69 (Fed.Cl.2003)

(attorney-client privilege was waived when board minutes

containing confidential communications between board

members and outside counsel were disclosed to outside

auditors who were auditing company's financial statements);

Gutter v. E.I. Dupont de Nemours & Co., 1998 WL 2017926

*5 (S.D.Fla.1998) (attorney-client privilege for legal opinion

letters and litigation reports to the board of directors

was waived when disclosed to independent auditor); In re

Pfizer Inc. Sec. Litig., 1993 WL 561125 *7 (S.D.N.Y.1993)

(“Pfizer cannot assert attorney-client privilege for any

documents that were provided to its independent auditor.

Disclosure of documents to an outside accountant destroys

the confidentiality seal required of communications protected

by the attorney-client privilege”); see also Cavallaro, 284

F.3d at 247-49 (attorney-client privilege was waived when

communications were disclosed to outside accountants who

were not retained to facilitate legal advice by attorneys).

Since the tax practitioner privilege created by § 7525 mirrors

the attorney-client privilege, it, too, may be waived by

disclosure to a third party. See United States v. BDO Seidman,

337 F.3d 802, 810 (7th Cir.2003) ( “the § 7525 privilege is

no broader than that of the attorney-client privilege”); Doe

v. KPMG, LLP, 325 F.Supp.2d 746, 752 (N.D.Tex.2004)

(Court must “look to the law of attorney-client privilege to

inform its interpretation of the taxpayer-federally authorized

tax practitioner privilege.”).

[17] Textron argues that providing the tax accrual

workpapers to E & Y did not waive the protection of either

privilege and it seeks to distinguish the cases holding that

disclosure to an outside auditor waives the attorney-client

privilege on the ground that those cases were decided prior

to the enactment of § 7525. More specifically, Textron

argues that, because it occasionally revises its reserves based

on the opinions of the independent auditor, the *152

auditor's review of Textron's workpapers should be viewed

as performed in connection with providing “tax advice”

to Textron and, therefore, it is privileged under § 7525.

That argument is creative but not persuasive because it

ignores reality to describe an independent auditor responsible

for reporting to the investing public whether a company's

financial statements fairly and accurately reflect its financial

condition, as providing “tax advice” to the company when the

auditor seeks to determine the adequacy of amounts reserved

by the company for contingent tax liabilities.

In short, any attorney-client privilege or tax practitioner

privilege that attached under § 7525 was waived when

Textron provided its workpapers to E & Y.

B. The Work Product Privilege

1. Waiver

Since the work product privilege serves a purpose different

from the attorney-client or tax practitioner privileges, the kind

of conduct that waives the privilege also differs.

The purpose of the attorney-client and tax practitioner

privileges is to encourage the full and frank discussion

necessary for providing the client with sound advice.

That purpose is achieved by guaranteeing that confidential

communications between the client and the advisor will

remain confidential. Since disclosure to a third party is

inconsistent with a claim of confidentiality, such disclosure

waives the privilege.

[18] By contrast, the purpose of the work product privilege

is to prevent a potential adversary from gaining an unfair

advantage over a party by obtaining documents prepared

by the party or its counsel in anticipation of litigation

which may reveal the party's strategy or the party's own

assessment of the strengths and weaknesses of its case.

Accordingly, only disclosures that are inconsistent with

keeping the information from an adversary constitute a waiver

of the work product privilege. Gutter, 1998 WL 2017926 *3

(S.D.Fl.1998) ( “While disclosure to outside auditors may

waive the attorney-client privilege, it does not waive the

work product privilege”). As the First Circuit stated in United

States v. Massachusetts Institute of Technology, (“MIT” ), 129

F.3d 681 (1st Cir.1997):

The [attorney-client] privilege ... is

designed to protect confidentiality,

so that any disclosure outside the

magic circle is inconsistent with

the privilege; by contrast, work

product protection is provided against

“adversaries,” so only disclosing

material in a way inconsistent with


100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605


keeping it from an adversary waives

work product protection.

129 F.3d at 687 (collecting cases). See Jaffe Pension Plan,

237 F.R.D. at 183 (“[T]he work product privilege may

be waived by disclosures to third parties ‘in a manner

which substantially increases the opportunity for potential

adversaries to obtain the information.’ ”) (citation omitted);

In re Raytheon Sec. Litig., 218 F.R.D. at 360 (D.Mass.2003)

(“[D]isclosure of a document to third persons does not

waive the protection unless it has substantially increased

the opportunity for potential adversaries to obtain the

information.”).

Most courts considering the question have held that disclosure

of information to an independent auditor does not waive

the work product privilege because it does not substantially

increase the opportunity for potential adversaries to obtain

the information. In re JDS Uniphase Corp. Sec. Litig., 2006

WL 2850049 (N.D.Cal.2006) (work product protection not

waived when protected board minutes were disclosed to the

independent auditor); Jaffe Pension Plan, 237 F.R.D. at 183

(Because an independent auditor does not have an adversarial

*153 relationship with the client, “[d]isclosing documents

to an auditor does not substantially increase the opportunity

for potential adversaries to obtain the information.”); Frank

Betz Assocs., Inc. v. Jim Walter Homes Inc., 226 F.R.D.

533, 535 (D.S.C.2005) (disclosure to independent auditor

of documents supporting reserve for copyright infringement

litigation did not waive work product protection); Merrill

Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D.

441 (S.D.N.Y.2004) (even though an auditor “must maintain

an independent role,” disclosure to auditor not a waiver

of work product privilege because no likelihood that the

independent auditors were a conduit to an adversary ... or that

accounting rules would “mandate public disclosure” of the

documents); Gutter, 1998 WL 2017926 *5, *3 (S.D.Fl.1998)

(work product privilege not waived by disclosure to auditor of

letters estimating cost of litigation “since the accountants are

not considered a conduit to a potential adversary” and “there

is an expectation that confidentiality of such information will

be maintained by the recipient.”); In re Pfizer Inc. Sec. Litig.,

1993 WL 561125 *6 (S.D.N.Y.2003) (no waiver of work

product privilege because auditor “not reasonably viewed as

a conduit to a potential adversary.”).

[19] In this case, too, the disclosure of Textron's tax

accrual workpapers to E & Y did not substantially increase

the IRS's opportunity to obtain the information contained

in them. Under AICPA Code of Professional Conduct

Section 301 Confidential Client Information, E & Y had a

professional obligation “not [to] disclos[e] any confidential

client information without the specific consent of the client.”

Furthermore, E & Y expressly agreed not to provide the

information to any other party, and confirms that it has

adhered to its promise. (Weston Aff. ¶ 3; Raymond Aff. ¶

20.) Even if the AICPA Code coupled with E & Y's promise

did not establish an absolute guarantee of confidentiality, they

made it very unlikely that E & Y would provide Textron's “tax

accrual workpapers” to the IRS and they negate any inference

that Textron waived the work product privilege. 4

4 The IRS points out that Rule 301 provides that it shall

not be construed to relieve an auditor of its obligation

to adhere to applicable accounting standards set forth by

GAAP or auditing standards set forth by GAAS, but there

is no indication that compliance with those standards

would have required disclosure in this case.

The IRS cites MIT for the proposition that disclosure to an

independent auditor waives work product protection but that

reliance is misplaced because MIT is factually distinguishable

from this case. The documents at issue in MIT were minutes of

meetings of the MIT Corporation and some of its committees

relating to bills submitted by MIT for services rendered

pursuant to a contract with the Department of Defense (DOD).

The documents were requested by the Defense Contract Audit

Agency (DCAA) in order to confirm that the bills were

justified and MIT provided the minutes due, in part, to the

fact that DCAA “regulations and practices offered MIT some

reason to think that indiscriminate disclosure was unlikely.”

MIT, 129 F.3d at 683. The First Circuit assumed, without

deciding, that the documents were protected work product,

but held that the documents had to be produced in response

to an IRS summons because disclosure had been made to the

DCAA, “a potential adversary.” Id. at 687.

The difference between this case and MIT is that, in MIT,

DOD was MIT's potential litigation adversary and DCAA,

as DOD's audit agency, had both an obligation *154 to

DOD to determine whether the amounts charged by MIT to

DOD were correct, and the authority to sue MIT in order to

recover any overcharges. By contrast, in this case, E & Y

was a truly independent auditor that had no obligation to the

IRS to determine whether Textron's tax return was correct

and no authority to challenge the return. In this instance, E

& Y was seeking, only, to determine whether the reserve

established by Textron to cover the corporation's contingent

tax liabilities satisfied the requirements of GAAP. Since E

& Y was not a potential Textron adversary or acting on


100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605


behalf of a potential adversary, and, since E & Y agreed to

treat the workpapers as confidential, disclosure to E & Y did

not substantially increase the likelihood that the workpapers

would be disclosed to the IRS or other potential Textron

adversaries. See Merrill Lynch, 229 F.R.D. at 447 (finding no

waiver where company shared internal investigative report of

executive's theft with independent auditor, and distinguishing

MIT: “The First Circuit, for example, found that the DOD's

audit agency was an adversary because it could potentially

dispute a billing charge and file suit against MIT, not because

of its duty to review MIT's accounts.”); see also In re

Pfizer Inc. Sec. Litig., 1993 WL 561125 *6 (finding Pfizer's

disclosure to an independent auditor not a waiver of work

product protection because “[Pfizer's independent auditor] is

not reasonably viewed as a conduit to a potential adversary.”).

2. Overcoming the Privilege

As already noted, the work product doctrine creates only a

qualified privilege that may be overcome by a showing of

(1) “substantial need” for the protected documents, and (2)

an inability to otherwise obtain the information contained

therein or its substantial equivalent without “undue hardship.”

Fed.R.Civ.P. 26(b)(3).

While establishing that protected documents relate to a

legitimate IRS investigation may satisfy the “relevancy”

requirement of § 7602, it is insufficient to establish the

“substantial need” showing necessary to overcome the

work product privilege. See Davis v. Emery Air Freight

Corp., 212 F.R.D. 432, 436 (D.Me.2003) (“the fact that the

documents sought might be relevant to [plaintiff's] claims

is not enough under Rule 26(b)(3).”). That is especially

true in the case of opinion work product, which consists

of the “mental impressions, conclusions, opinions or legal

theories” of attorneys, where the party seeking the materials

must meet a heightened burden. See Upjohn, 449 U.S.

at 401-02, 101 S.Ct. 677 (“a far stronger showing of

necessity and unavailability by other means ... would be

necessary to compel disclosure” of attorneys' notes and

memoranda regarding oral statements of witnesses which

“reveal the attorneys' mental processes in evaluating the

communications”); see also Fed.R.Civ.P. 26(b)(3) (“In

ordering discovery ... the court shall protect against disclosure

of the mental impressions, conclusions, opinions, or legal

theories of an attorney or other representative of a party

concerning the litigation.”).

[20] Here, the IRS has failed to carry the burden

of demonstrating a “substantial need” for ordinary work

product, let alone the heightened burden applicable to

Textron's tax accrual workpapers, which constitute opinion

work product. While the opinions and conclusions of

Textron's counsel and tax advisers might provide the IRS with

insight into Textron's negotiating position and/or litigation

strategy, they have little bearing on the determination of

Textron's *155 tax liability. 5 The determination of any tax

owed by Textron must be based on factual information, none

of which is contained in the workpapers and all of which

is readily available to the IRS through the issuance of IDRs

and by other means. The opinions of Textron's counsel, either

favorable or unfavorable, would have little to do with that

determination, and forced disclosure of those opinions would

put Textron at an unfair disadvantage in any dispute that

might arise with the IRS, just as requiring the IRS to disclose

the opinions of its counsel regarding areas of uncertainty in

the law or the likely outcome of any litigation with Textron

would place the IRS at an unfair disadvantage. See e.g.

Delaney, Migdail & Young, Chartered v. IRS, 826 F.2d 124,

127 (D.C.Cir.1987) (upholding IRS assertion of work product

privilege over “IRS memos advis[ing] the agency of the types

of legal challenges likely to be mounted against a proposed

program, potential defenses available to the agency, and the

likely outcome.”).

5 At the evidentiary hearing, the IRS argued that it

is entitled to the tax accrual workpapers because

the hazards of litigation percentages would assist

in determining whether Textron owes a penalty for

underpayment of taxes. Since the IRS has not even

asserted that Textron owes any further tax, this argument

is premature, at best.

Conclusion

For all of the foregoing reasons, the government's petition to

enforce the summons is denied.

IT IS SO ORDERED.

Parallel Citations

100 A.F.T.R.2d 2007-5848, 2007-2 USTC P 50,605

End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.

Medinol, Ltd. v. Boston Scientific Corp., 214 F.R.D. 113 (2002)


Licensor, a developer of stent for heart and arterial

implants, brought action against licensee, a distributor,

alleging licensee abused its position to create its own,

secret alternative sources of supply. On licensee's motion for

reconsideration of order requiring production of evidence,

the District Court, Hellerstein, J., held that licensee waived

protection of work product doctrine over minutes and

materials of its special litigation committee when it disclosed

such information to accountant, an outside auditor.

Motion denied.

West Headnotes (5)



Materials

Work product doctrine is intended to preserve a

zone of privacy in which a lawyer can prepare

and develop legal theories and strategy with

an eye toward litigation, free from unnecessary

intrusion by his adversaries.



Waiver

Unlike the attorney-client privilege, where the

rules of waiver are rather well defined and where

privilege is lost if a privileged item is shared

with a third party, work product protection is

not necessarily waived by disclosures to third

persons.



Waiver

Disclosure of work product to a party sharing

common litigation interests is not inconsistent

with the policies of encouraging zealous

advocacy and protecting privacy that underlie the

work product doctrine.



Waiver

Protection of the work product doctrine will be

waived where a third party to whom disclosure is

made is not allied in interest with the disclosing

party or does not have litigation objectives in

common.



Waiver

Licensee, a medical device distributor, waived

protection of work product doctrine over

minutes and materials of its special litigation

committee when it disclosed such information

to accountant, an outside auditor; licensee and

accountant did not share “common interests” in

litigation, and thus disclosures to accountant,

as independent auditor, did not serve privacy

interests that work product doctrine was intended

to protect.



*113 Keith Richard Hummel, Rory O. Millson, Elizabeth

L. Grayer, Cravath, Swaine & Moore, New York City, for

Medinol, Ltd., Judith Richter, Jacob R. Richter and Nasr

Salman.



Peter J. MacDonald, Johanna M. Toth, Hale and Dorr, LLP,

New York City, for Boston Scientific Corp.

Robert B. Fiske, Jr., Davis Polk & Wardwell, John P. Cooney,

Jr., New York City, for Peter M. Nicholas.

Samuel W. Seymour, Richard H. Klapper, Jeffrey J.

Chapman, Sullivan & Cromwell, New York City, for

Lawrence C. Best.

OPINION AND ORDER DENYING

MOTION TO RECONSIDER

HELLERSTEIN, District Judge.

Defendant's motion for reconsideration of my order of June

4, 2002, ordering production of the minutes of meetings

of the Special Litigation Committee of Boston Scientific

Corporation, is denied. I have again reviewed counsels'

arguments and briefs, and I adhere to my decision.

*114 I. Background

A. Facts

Plaintiff, Medinol, Ltd., is an Israeli company engaged in

biotechnology. It alleges that it developed a stent for heart

and arterial implants and licensed distribution rights and

limited back-up manufacturing rights to Boston Scientific

Corporation (“Boston Scientific” or “BSC”). Medinol claims

that Boston Scientific abused its position as licensee to create

its own, secret alternative sources of supply, and filed this suit

against Boston Scientific to obtain equitable and legal relief.

The parties have since been engaged in extensive discovery

proceedings.

It appears that certain practices of Boston Scientific and its

executives with regard to the stent caused its directors to

terminate a number of high-ranking employees, to engage

counsel to perform an investigation, and to report about that

investigation and its results to a Special Litigation Committee

of the Board. Minutes were taken of a meeting, or meetings,

of the Committee, and shown to the Company's outside public

accountants, Ernst & Young, in connection with their audit of

the Company's litigation exposures. The issue that I decided,

and which I am now asked to reconsider, is whether the

sharing of such information, developed by the Company's

counsel and shared with accountants, waives privilege.

B. Boston Scientific's Arguments

Boston Scientific urges this Court to find that the minutes of

the meetings of the Special Litigation Committee, even if not

protected by the attorney-client privilege, remain protected

by the work product privilege. Its argument, essentially,

is that work product protection is not necessarily waived

by disclosure to third parties, as long as a confidential

relationship exists with those parties, and there is no

appreciable risk that the work product will be given to others.

BSC claims that such a relationship exists with respect to

outside auditors and quotes my own previous writings for

that proposition. See Alvin K. Hellerstein, A Comprehensive

Survey of the Attorney–Client Privilege and the Work Product

Doctrine, 540 PLI/Lit 589, *780–*781, 1995 Revision (1996)

(reporting holdings in scattered cases that disclosure to

accountants does not waive the work product privilege).

While in some cases disclosure to accountants does not

waive the protections of the work product doctrine, there is a

difference between disclosure to accountants who have been

retained by a lawyer to understand technical aspects of a

case and whose interests are therefore allied with the client,

and outside auditors who, in order to be effective, must have

interests that are independent of and not always aligned with

those of the company.

II. The Work Product Doctrine

[1] [2] The work product doctrine “is intended to preserve

a zone of privacy in which a lawyer can prepare and develop

legal theories and strategy ‘with an eye toward litigation,’

free from unnecessary intrusion by his adversaries.” United

States v. Adlman, 134 F.3d 1194, 1196 (2d Cir.1998) (quoting

Hickman v. Taylor, 329 U.S. 495, 511, 67 S.Ct. 385, 394,

91 L.Ed. 451 (1947)). Unlike the attorney-client privilege,

where the rules of waiver are rather well defined and where

privilege is lost if a privileged item is shared with a third

party, In re Visa Check/Mastermoney Antitrust Litig., 190

F.R.D. 309, 314 (E.D.N.Y.2000), work product protection

is not necessarily waived by disclosures to third persons.

In re Pfizer Inc. Sec. Litig., No. 90 Civ. 1260(SS), 1993

U.S. Dist. LEXIS 18215, at *20, 1993 WL 561125, at *6

(S.D.N.Y. Dec. 23, 1993) (Buchwald, N., U.S.M.J.); see In re

Sealed Case, 676 F.2d 793, 809 (D.C.Cir.1982). In this sense,

the work product doctrine may be subject to considerations

different from those generally applicable to the attorney-

client privilege. In re Grand Jury Proceedings, 219 F.3d

175, 190 (2d Cir.2000) (recognizing that the work-product

doctrine is distinct from and, in some instances, broader

than the attorney-client privilege); see also United States v.



Nobles, 422 U.S. 225, 238 n. 11, 239–40, 95 S.Ct. 2160, 45

L.Ed.2d 141 (1975) (finding waiver). There are relatively few

cases that deal with the issue of waiver in the context of the

work product doctrine; too few, perhaps, to mark *115 out

the parameters when a breach of confidentiality will cause a

loss of privilege.

[3] [4] However, it is clear that disclosure of work

product to a party sharing common litigation interests is

not inconsistent with the policies of encouraging zealous

advocacy and protecting privacy that underlie the work

product doctrine. Hickman, 329 U.S. at 511, 67 S.Ct. at 393–

94 (“[I]t is essential that a lawyer work with a certain degree

of privacy, free from unnecessary intrusion by opposing

parties and their counsel.”); In re Copper Market, 200 F.R.D.

at 221 n. 6; In re Pfizer, 1993 U.S. Dist. LEXIS, at *21,

1993 WL 561125, at *6. Indeed, the cases in this area of law

recognize that, consistent with the policies that give rise to

the work product privilege, see Hickman, 329 U.S. at 511,

67 S.Ct. at 393–94, work product developed in one case may

be used in another by the same party or another allied in

interest without loss of the privilege. See Duplan Corp. v.

Deering Milliken, Inc., 397 F.Supp. 1146, 1172 (D.S.C.1974)

(“The sharing of information between counsel for parties

having common interests does not destroy the work product

privilege, during the course of the litigation.”); Transmirra

Products Corp. v. Monsanto Chemical Co., 26 F.R.D. 572,

578 (S.D.N.Y.1960). Such use of work product serves

the parties' litigation interests and does not “substantially

increase[ ] the opportunity for potential adversaries to obtain

information.” In re Copper Market Antitrust Litig., 200

F.R.D. 213, 221 n. 6 (S.D.N.Y.2001); In re Grand Jury, 561

F.Supp. 1247, 1257 (E.D.N.Y.1982). The policy of sharing

applies equally where an attorney engages the help of an

accountant to assist with some aspect of litigation, for the

accountant is assisting the lawyer in developing a litigation

objective and is thus enhancing the work product. See United

States v. Kovel, 296 F.2d 918, 922 (2d Cir.1961) (ruling

that accountant employed by tax law firm to assist firm in

understanding client's conversations does not waive privilege

because accountant considered equivalent to a translator);

United States v. Schwimmer, 892 F.2d 237, 244 (2d Cir.1989).

However, where the third party to whom the disclosure is

made is not allied in interest with the disclosing party or does

not have litigation objectives in common, the protection of the

doctrine will be waived. See, e.g., Verschoth v. Time Warner,

No. 00 Civ. 1339(AGS), 2001 U.S. Dist. LEXIS 6693, at *14,

2001 WL 546630, at *4 (S.D.N.Y. May 22, 2001) (ruling that

work product privilege was waived where defendant showed

work product to a third party whose “interests may not have

been aligned” with those of defendant).

III. Disclosure to Independent Auditors

[5] The question here, then, is whether Boston Scientific's

disclosure of the meeting minutes of the Special Litigation

Committee to Ernst & Young waives the protection of the

work product doctrine. I hold that it does.

In order to comply with various provisions of the federal

securities laws requiring publicly-held corporations to file

their financial statements with the Securities and Exchange

Commission, see Securities and Exchange Act of 1934, 15

U.S.C. §§ 78m(a)(2), 78m(b) (2002); 17 C.F.R. § 249.310

(2002), a company must open its books and records to an

independent auditor for review. The independent auditor is

required to express an opinion, based on a review according

to generally accepted auditing standards, see 1 AICPA,

Statement on Auditing Standards § 110.01 (1972), that the

financial records of the corporation have been prepared in

accordance with accounting principles and fairly reflect the

condition of the corporation, results of operations, and related

other matters as of certain reporting dates. The auditor, in

that connection, and among other tasks, will be required to

evaluate the adequacy and reasonableness of the corporation's

reserve accounts and in that capacity will generally receive

and evaluate disclosures made by the company's counsel

concerning the company's litigation exposures.

Customarily, Management asks counsel who represent it in

its lawsuits to make the relevant disclosures to the auditor and

express opinions about exposures and probable outcomes.

Counsel vary in how they respond to such inquiries, and some

will show aspects of their work product to auditors to support

the reasonableness of Management's *116 reserves. 1 The

independent auditor, however, must come to his own

understanding of reasonableness, based on the evidence. The

auditor's review supports the auditor's independent opinion

about the fairness of the company's financial reports, not

the audited company's litigation interests. Thus, the auditor's

interests are not necessarily aligned with the interests of the

company. And, as has become crystal clear in the face of

the many accounting scandals that have arisen as of late,

in order for auditors to properly do their job, they must

not share common interests with the company they audit.

“[G]ood auditing requires adversarial tension between the

auditor and the client.” Roberta S. Karmel, A New Watchdog



for Public Accountants, N.Y. Law J., Aug. 15, 2002, at 3. As

the Supreme Court has explained:

1 The American Bar Association has promulgated

standards that generally authorize opinions to be

expressed only where outcomes are reasonably certain.

See Report, Subcomm. on Law and Accounting,

Am. Bar Ass'n, Inquiry of a Client's Lawyer

Concerning Litigation, Claims, and Assessments:

Auditing Interpretation AU Section 337, 45 Bus. Law.

2245 (1990). Actual practice has moved away to some

degree from these restraints.

By certifying the public reports that collectively

depict a corporation's financial status, the independent

auditor assumes a public responsibility transcending any

employment relationship with the client. The independent

public accountant performing this special function owes

ultimate allegiance to the corporation's creditors and

stockholders, as well as to the investing public. This

“public watchdog” function demands that the accountant

maintain total independence from the client at all times and

requires complete fidelity to the public trust.

United States v. Arthur Young & Co., 465 U.S. 805, 817–

18, 104 S.Ct. 1495, 1503, 79 L.Ed.2d 826 (1984) (emphasis

in original).

Here, Ernst & Young reviewed the minutes of the meetings

of Boston Scientific's Special Litigation Committee in

connection with its role as outside auditor. As the outside

auditor, Ernst & Young's interests were not necessarily united

with those of Boston Scientific; they were independent of

them. Moreover, the sharing by Boston Scientific's lawyers of

selected aspects of their work product, although perhaps not

substantially increasing the risk that such work product would

reach potential adversaries, see Verschoth, 2001 LEXIS 6693,

at *14, 2001 WL 546630, at *3, did not serve any litigation

interest, either its own or that of Ernst & Young, or any other

policy underlying the work product doctrine. See Hickman,

329 U.S. at 510–12, 67 S.Ct. at 393–94. Compare United

States v. Kovel, 296 F.2d 918 (2d Cir.1961), where an

accountant was hired to help the attorney understand his

client's complicated tax strategies for use in litigation, thus

preserving privilege, with Eglin Fed. Credit Union v. Cantor,

Fitzgerald Sec. Corp., 91 F.R.D. 414 (N.D.Ga.1981), where

disclosures of board minutes to accountants for audit purposes

caused a loss of privilege.

In United States v. Kovel, disclosure to the accountant served

a litigation purpose and the privacy interest protecting the

adversary relationship inhered. 296 F.2d at 922. 2 Similarly,

in United States v. American Tel. & Tel. Co., 642 F.2d 1285

(D.C.Cir.1980), sharing of work product by plaintiff with

third-party intervenors did not result in a loss of privilege

because they shared a “common interest[ ]” and a “common

adversary” in the antitrust suits they had each filed. Id. at

1299. The purpose of disclosure was in aid of litigation, and a

refusal to protect the information shared would intrude upon

the lawyer's “essential zone of privacy,” In re Grand Jury,

219 F.3d at 190, in furthering the litigation interests of the

corporation for whose benefit the work product had been

created.

2 Although Kovel and similar cases discussed the attorney-

client privilege, the privileged activities were not

communications between client and lawyer, but rather

the gathering of information by a lawyer incident to

litigation, the classic area of work product.

That is not the case in the instant suit. While Boston Scientific

held meetings of its Special Litigation Committee with an eye

to litigation, the disclosures to the independent auditor had no

such purpose. Boston Scientific *117 and its outside auditor

Ernst & Young did not share “common interests” in litigation,

and disclosures to Ernst & Young as independent auditors did

not therefore serve the privacy interests that the work product

doctrine was intended to protect. 3

3 For these reasons, I depart from Judge Buchwald's

decision in In re Pfizer Inc. Sec. Litig., No. 90

Civ. 1260, 1993 U.S. Dist. LEXIS 18215, 1993 WL

561125 (S.D.N.Y. Dec. 23, 1993), holding that Pfizer's

disclosure of work product to its outside auditors did not

waive privilege.

Accordingly, the minutes and allied materials of Boston

Scientific's Special Litigation Committee that were disclosed

to Ernst & Young are not protected by the work product

doctrine and must be produced. Boston Scientific shall

produce all such documents, within 20 days from now, by

November 13, 2002.

SO ORDERED.


Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D. 441 (2004)


Synopsis

Background: Seller of energy commodities trading business

sued buyer, alleging breach of purchase agreement. Buyer

counterclaimed for rescission, fraudulent inducement, breach

of contract and breach of fiduciary duty. Defendant moved for

leave to file amended counterclaims and requested production

of reports made in connection with internal investigation

conducted by plaintiff.

[Holding:] The District Court, Baer, J., held that plaintiff's

disclosure to its independent auditor of internal investigative

reports of circumstances surrounding executive's theft of $43

million in connection with energy commodities trade did not

effect waiver of work product protection for the reports, as

auditor was not an adversary or conduit to potential adversary.

Motion to amend granted in part and denied in part;

West Headnotes (8)


Injustice or prejudice


Form and sufficiency of amendment;

futility

Leave to amend should not be granted if it

would prejudice the opposing party, or where the

proposed amendment would be futile. Fed.Rules

Civ.Proc.Rule 15(a), 28 U.S.C.A.



Time for amendment in general

Where a party seeks to amend pleadings after the

deadline set by the court's scheduling order, the

stricter “good cause” standard applies. Fed.Rules




Time for amendment

Defendant would be allowed to amend

counterclaims after deadline set by scheduling

order under “good cause” standard, where

defendant showed diligence in moving to

amend within three weeks of its receipt of

documents produced during discovery, which,

in part, formed basis of its motion. Fed.Rules




Counterclaim

Defendant would not be permitted to

amend fraudulent inducement counterclaim to

seek punitive damages, where district court

previously decided that punitive damages were

not available because claim arose out of

breach of contract claim, requiring defendant

to establish that plaintiff's conduct was directed

at and worked a harm to the public in

general, and defendant did not present additional

allegations of the requisite public harm.

Fed.Rules Civ.Proc.Rule 15(a), 28 U.S.C.A.



Counterclaim



Defendant would not be permitted to amend

counterclaims to make a jury demand in suit

for breach of asset purchase agreement, where

agreement plainly stated that parties waived right

to jury trial “in any legal proceeding arising out

of or related to this Agreement or any of the

transaction contemplated hereby,” and district

court had previously determined that case law

favored enforcement of mutually agreed-upon

and bargained for contractual term. Fed.Rules





Materials

The “work product privilege” provides that

materials prepared in anticipation of litigation

are not discoverable absent a showing that

the party seeking discovery has a substantial

need for the materials and cannot obtain the

equivalent without undue hardship. Fed.Rules




Waiver

The work product privilege is not automatically

waived by any disclosure to third persons;

rather, waiver is found only if the disclosure

substantially increases the opportunity for

potential adversaries to obtain the information.




Waiver

Plaintiff's disclosure to its independent auditor

of internal investigative reports of circumstances

surrounding executive's theft of $43 million in

connection with energy commodities trade did

not effect waiver of work product protection for

the reports, where auditor was not an adversary

or conduit to potential adversary; auditor

requested reports to determine whether the theft

and surrounding circumstances impacted upon

plaintiff's financial statements, and, if necessary,

to report any conditions that could adversely

affect plaintiff's ability to record or report

financial data to directors and officers. Fed.Rules




*442 John Gueli, Shearman & Sterling, L.L.P., New York

City, Stuart Jay Baskin, Shearman & Sterling L.L.P., New

York City, for plaintiffs.

Alan Ross Arkin, Arkin, Kaplan, LLP, New York City,

Daniel E. Morrison, Sachnoff & Weaver, Chicago, IL, David

C. Bohan, Sachnoff & Weaver, Chicago, IL, Hyman L.

Schaffer, Arkin, Schaffer & Kaplan L.L.P., New York City,

Jonathan S. Polish, Sachnoff & Weaver, Chicago, IL, for

defendant.

MEMORANDUM & ORDER

BAER, District Judge.

Present before the Court are two outstanding issues.

First, counterclaim plaintiffs Allegheny Energy, Inc. 1

and Allegheny Energy Supply Co., LLC (collectively,

“Allegheny”) move pursuant to Federal Rule of Civil

Procedure (“Fed. R. Civ.P.”) 15(a) for leave to file Second

Amended Counterclaims in the above-captioned matter.

Second, Allegheny seeks discovery of two reports produced

in connection with an internal investigation conducted by

counterclaim defendants Merrill Lynch & Co., Inc. and

Merrill Lynch Capital Services, Inc. 2 (collectively, “Merrill

Lynch”). For the reasons discussed herein, Allegheny's

motion for leave to amend is granted in part and denied in

part and its request for production of the two reports is denied.

For the purposes of the following discussion, familiarity with

the facts of this case as set out in the Court's November

24, 2003 Opinion and Order, Merrill Lynch & Co., Inc.

v. Allegheny Energy, Inc., 382 F.Supp.2d 411, 2003 WL

22795650 (S.D.N.Y. Nov.25, 2003), 3 is presumed.

1 Allegheny Energy, Inc. is also a defendant in this action.



2 These two Merrill Lynch entities, together with ML IBK

Positions, Inc., are the original plaintiffs.

3 Although the Westlaw version of this decision is dated

November 25, 2003, the Slip Opinion was signed on

November 24, 2003.

I. Motion for Leave to Amend

[1] [2] [3] Fed.R.Civ.P. 15(a) provides that leave to

amend “shall be freely given when justice so requires.”

Under this standard *443 the decision to grant leave to

amend is within the sound discretion of the Court. Krumme

v. WestPoint Stevens Inc., 143 F.3d 71, 88 (2d Cir.1998).

Leave should not be granted, however, if it would prejudice

the opposing party, id., or where the proposed amendment

would be futile, Prudential Ins. Co. of Am. v. BMC Indus.,

Inc., 655 F.Supp. 710, 711 (S.D.N.Y.1987) (finding that “it

is inappropriate to grant leave when the amendment would

not survive a motion to dismiss”). Merrill Lynch does not

claim it would be prejudiced by the proposed amendments

or that it would be futile to amend. Indeed, Merrill Lynch

only opposes Allegheny's motion to the extent that Allegheny

seeks punitive damages and demands a jury trial in its

proposed Second Amended Counterclaims. Where, as here,

a party seeks to amend pleadings after the deadline set by

the Court's scheduling order, 4 the Second Circuit has held

that the stricter “good cause” standard applies. Parker v.

Columbia Pictures Indus., 204 F.3d 326, 340 (2d Cir.2000).

“Good cause” requires diligence, id., which Allegheny has

shown, as it moved for leave to amend within three weeks of

its receipt of documents produced during discovery, which, in

part, formed the basis of its motion. 5 Allegheny therefore has

met both of these standards and, accordingly, will be allowed

to amend its counterclaims. Unfortunately, this does not end

the inquiry.

4 The last date for amended pleadings in the June 23, 2003

pre-trial scheduling order—agreed to and signed off by

the parties—was August 29, 2003.

5 Allegheny also bases its motion on Daniel Gordon's

guilty plea, which was entered and accepted by Judge

Lynch on December 19, 2003. United States v. Gordon,

No. 03 Cr. 1494.

[4] Allegheny's proposed amendments conflict with

the Court's November 24, 2003 Opinion and Order

in two important regards. First, Allegheny's proposed

Second Amended Counterclaims seek punitive damages for

Allegheny's first counterclaim for fraud. I previously decided

that punitive damages were not available for Allegheny's

fraudulent inducement claim. Merrill Lynch & Co., Inc.,

382 F.Supp.2d at 421, 2003 WL 22795650 at *8. As I

earlier explained, this claim arises from Allegheny's breach

of contract claim, which requires Allegheny to establish that

Merrill Lynch's conduct was directed at and worked a harm

to the public in general. Id. at 421–22, 2003 WL 22795650

at *8–9. As Merrill Lynch points out, Allegheny did not

move for reconsideration, and it is far too late for it to do

so now. In any event, Allegheny has not presented additional

allegations of the requisite public harm. It may be that Daniel

Gordon's (“Gordon”) plea allocution has implied a more far-

reaching fraud, Letter from Stanley Arkin to the Court of

7/12/04 (“Arkin Letter”), Ex. A at 27:23–28–:1 (describing

a decision by Gordon's “superiors” to alter financial data

to make the Energy Trading Division look more profitable

to potential buyers). This does not alter the harm alleged.

As I have already noted, “the conduct for which Allegheny

here seeks redress is not Merrill Lynch's role in assisting

Enron [to] deceive and harm the public, but rather Merrill

Lynch's alleged deception of Allegheny.” Id. at 421, 2003

WL 22795650 at *8. Therefore, Allegheny's motion is denied

to the extent that it seeks punitive damages on its fraud

counterclaim.

[5] Second, Allegheny's proposed Second Amended

Counterclaims are at odds with my earlier decision in this

matter to the extent that they make a jury demand. The

plain language of Section 11.09(b) of the Asset Contribution

and Purchase Agreement 6 provides that “[t]he parties hereto

hereby irrevocably waive any and all right to trial by jury

in any legal proceeding arising out of or related to this

Agreement or any of the transaction contemplated hereby.”

Id. at 423, 2003 WL 22795650 at *10. All of Allegheny's

counterclaims either “arise out of” or are “related to” the

agreement between the parties and I have already decided

that the balance of the case law favors enforcement of this

mutually agreed-upon and bargained for contractual term.

There is nothing further *444 to address and therefore

Allegheny's motion is denied in this respect as well.

6 The Asset Contribution and Purchase Agreement was

the January 8, 2001 agreement between Allegheny and

Merrill Lynch for the purchase of the Merrill Lynch's

energy commodity trading business, Global Energy

Markets for $490 million in cash and a 2% equity interest

in Allegheny Supply. Merrill Lynch & Co., Inc., 382

F.Supp.2d at 414–15, 2003 WL 22795650, at *2.



II. Discovery of Reports

A. Factual Background

Allegheny also seeks production of two reports, which are

the results of Merrill Lynch's internal investigation into

the circumstances surrounding Gordon's theft of some $43

million in connection with the Falcon Energy Trade. 7 In

the Fall of 2002, shortly after this lawsuit was filed, the

United States Attorney's Office for the Southern District of

New York informed Merrill Lynch that it was investigating

the Falcon Energy Trade. Merrill Lynch therefore undertook

its own internal investigation (conducted by and under

the supervision of in-house and outside counsel), which

culminated in two reports: (1) the March 5, 2003 Report to

James Mann, Office of the General Counsel of Merrill Lynch;

and (2) the June 25, 2003 Special Review of Transaction

Approval and Processing Controls.

7 At his plea allocution, Gordon admitted that he created

a fictitious entity called Falcon, which he presented to

his colleagues as a company that would hedge the risk

of other long-term energy transactions, including those

of the Global Energy Markets purchased by Allegheny.

Arkin Letter, Ex. A at 26:24–27:16. The parties disagree

as to whether or not Gordon acted alone.

In August 2003, there was widespread publicity concerning

Gordon's theft in connection with the Falcon Energy Trade.

As a result, Andrew McMaster (“McMaster”), the lead

client services partner for Deloitte & Touche, Merrill

Lynch's independent auditor, spoke with John McDermott

(“McDermott”), the Director of Corporate Audit at Merrill

Lynch, who works out of Merrill Lynch's Office of General

Counsel, and inquired about Gordon's theft and Merrill

Lynch's subsequent actions. McDermott informed McMaster

that Merrill Lynch's counsel and corporate auditor had

investigated the theft and produced the two reports at

issue here, under the direction and supervision of counsel.

McMaster requested and was provided with a copy of these

reports. Both McMaster and McDermott attested that these

reports were provided to assist McMaster to “identif[y] any

potential internal control, accounting or audit issues of which

[he] was not already aware based on [his] routine and regular

prior discussions with Merrill Lynch during the course of

the audit....” Letter from John Gueli to the Court of 9/28/04

(“Gueli Letter”), Ex. B. ¶ 5; see also id., Ex. A ¶ 4. Further,

both McMaster and McDermott declared that these reports

were provided with the understanding that (1) they were

prepared by counsel and were privileged; (2) Deloitte &

Touche would keep these materials confidential; and (3) there

would be no further disclosure. Id., Ex. A ¶¶ 4–6; Ex. B

¶¶ 5–7. According to McMaster, he read the reports and

concluded that they presented no new issues and did not

impact Deloitte & Touche's audit work or Merrill Lynch's

financial statements. Ultimately, Deloitte & Touche issued an

unqualified audit report with regard to Merrill Lynch's 2003

financial statements.

Allegheny now seeks to obtain both of these reports and

argues that this disclosure to Deloitte & Touche constituted a

waiver of any applicable privileges. Merrill Lynch apparently

concedes that the attorney-client privilege has been waived

and argues that the reports instead fall under the work

product privilege. Merrill Lynch acknowledges that Deloitte

& Touche's audit work and discussions with Merrill Lynch

personnel regarding internal control and other issues are

discoverable. However, Merrill Lynch argues that these two

reports contain substantially more information, including the

details of “Merrill Lynch's counsel's investigation, mental

impressions, conclusions, and opinions regarding Gordon's

theft....” Gueli Letter at 4 n. 2. Merrill Lynch seeks to shield

these intimate details from disclosure.

B. The Work Product Privilege

[6] The work product privilege, as articulated by the

Supreme Court in Hickman v. Taylor, 329 U.S. 495, 67 S.Ct.

385, 91 L.Ed. 451 (1947) and later codified by Fed.R.Civ.P.

26(b)(3), provides that materials prepared in anticipation

of litigation are not discoverable absent a showing that

the party seeking discovery has a substantial need for the

materials and cannot obtain the equivalent without *445

undue hardship. This doctrine “is intended to preserve a zone

of privacy in which a lawyer can prepare and develop legal

theories and strategy ‘with an eye toward litigation,’ free from

unnecessary intrusion by his adversaries.” United States v.

Adlman, 134 F.3d 1194, 1196 (2d Cir.1998) (citing Hickman,

329 U.S. at 510–11, 67 S.Ct. 385). The policy underlying

work product protection is “to promote the adversary system

by safeguarding the fruits of an attorney's trial preparations

from the discovery attempts of the opponent.” United States

v. Am. Tel. & Tel. Co., 642 F.2d 1285, 1299 (D.C.Cir.1980).

As counsel for Allegheny observed not too long ago,

[t]he American legal system takes as its axioms the

importance of effective counsel, the need for a client to

be able to confide in his or her (or, since Upjohn, 8 its)

attorney, and the advantages of zealous representation

in an adversarial system. The attorney-client and



work-product privileges were instituted to serve those

important social ends, even at the cost of occasionally

limiting the truth-seeking function in individual cases.

8 Upjohn Co. v. United States, 449 U.S. 383, 101 S.Ct. 677,

66 L.Ed.2d 584 (1981).

Stanley S. Arkin and Charles Sullivan Attacking, Business

Crime: Corporate Attorney–Client Privilege and Work

Product, N.Y.L.J., May 5, 2004, at 3, (col.1).

Thus, when weighing two fundamental components of our

legal system—the liberal rules of discovery outlined by the

Federal Rules of Civil Procedure, e.g., Ratliff v. Davis Polk

& Wardwell, 354 F.3d 165, 170 (2d Cir.2003) ( “Discovery

rules ‘are to be accorded a broad and liberal treatment [ ] to

effectuate their purpose that civil trials in the federal courts

no longer need be carried on in the dark.’ ”) (alteration

in original) (quoting Schlagenhauf v. Holder, 379 U.S.

104, 115, 85 S.Ct. 234, 13 L.Ed.2d 152 (1964)), and the

“adversary system's interest in maintaining the privacy of

an attorney's thought processes and in ensuring that each

side relies on its own wit in preparing their respective

cases,” Sporck v. Peil, 759 F.2d 312, 316 (3d Cir.1985)—

the balance must sometimes tip towards a limitation on the

free-flow of information so that a higher purpose is served.

This is entirely consistent with a variety of other doctrines

within our legal system, including the exclusionary rule,

the prohibition against hearsay, and the application of

evidentiary privileges. As the Supreme Court has observed,

“[t]here is no gainsaying that arriving at the truth is

a fundamental goal of our legal system. But various

constitutional rules limit the means by which government

may conduct this search for truth in order to promote other

values embraced by the Framers and cherished throughout

our Nation's history.” James v. Illinois, 493 U.S. 307, 311,

110 S.Ct. 648, 107 L.Ed.2d 676 (1990) (internal quotation

marks and citation omitted) (discussing the exclusionary

rule).

The parties here do not contest the applicability of the work

product privilege to the two reports. Indeed, it is evident that

the reports were at least initially protected by the privilege as

they were the results of an internal investigation conducted

under the guidance of counsel after Merrill Lynch was

informed that it was the subject of a criminal investigation.

Under these circumstances, it is safe to say that the reports

were prepared in anticipation of litigation. See In re LTV Sec.

Litig., 89 F.R.D. 595, 612 (N.D.Tex.1981) (“Investigation by

a federal agency presents more than a ‘remote prospect’ of

future litigation and gives grounds for anticipating litigation

sufficient for the work-product rule to apply.”). Instead, the

debate here centers on whether Merrill Lynch waived the

applicable privilege when it provided the reports to Deloitte

& Touche.

C. Waiver

[7] Generally speaking, “[t]he work product privilege

should not be deemed waived unless disclosure is inconsistent

with maintaining secrecy from possible adversaries.” Stix

Prods. v. United Merchants & Mfrs., 47 F.R.D. 334,

338 (S.D.N.Y.1969). “The work product privilege is not

automatically waived by any disclosure to third persons.

Rather, the courts generally find a waiver of the work product

privilege only if the disclosure ‘substantially increases

the opportunity for potential adversaries to obtain the

information.’ *446 ” In re Pfizer Inc. Sec. Litig., No.

90 Civ. 1260, 1993 WL 561125, at *6 (S.D.N.Y. Dec.23,

1993) (quoting In re Grand Jury, 561 F.Supp. 1247, 1257

(E.D.N.Y.1982)) (internal citation omitted). Implicit in this

analysis is the question of whether the third party itself can or

should be considered an adversary. Accordingly, courts have

generally held that where the disclosing party and the third

party share a common interest, there is no waiver of the work

product privilege. E.g., id. (“Disclosure of work product to a

party sharing common interests is not inconsistent with the

policy of privacy protection underlying the doctrine.”); see

also In re Copper Mkt. Antitrust Litig., 200 F.R.D. 213, 221

n. 6 (S.D.N.Y.2001) (same).

[8] This much is settled. However, courts are split

in their treatment of disclosures to a corporation's

accountants or auditors. More precisely, courts differ in

their conceptualization of two critical points that are

often implicitly intertwined in their analysis: whether the

“adversary” contemplated by the work product privilege is

necessarily a litigation adversary and whether a corporation's

auditor is such an adversary, to whom disclosure will waive

the privilege. While admittedly there are good arguments

on both sides, in this case, I answer both questions in the

negative and conclude that Merrill Lynch's disclosure of the

reports to Deloitte & Touche did not constitute a waiver of

the applicable work product protection.

In a frequently cited case, In re Pfizer, Inc. Sec. Litig.,

Judge Buchwald held that Pfizer's disclosure of documents

to its independent auditor, KPMG Peat Marwick (“Peat

Marwick”), did not waive its work product privilege. 1993

WL 561125, at *6. Judge Buchwald's decision was based

on her observation that “Pfizer and Peat Marwick obviously



shared common interests in the information, and Peat

Marwick is not reasonably viewed as a conduit to a potential

adversary.” Id. Other courts have adopted precisely this

analysis. E.g., Gutter v. E.I. Dupont de Nemours & Co., No.

95 Civ. 2152, 1998 WL 2017926, at *5 (S.D.Fla. May 18,

1998) (holding that disclosure to outside accountants did not

waive the work product privilege “since the accountants are

not considered a conduit to a potential adversary”); Gramm

v. Horsehead Indus., Inc., No. 87 Civ. 5122, 1990 WL

142404, at *5 (S.D.N.Y. Jan.25, 1990) (same). Still others

have applied this approach, but scrutinized the precise role

of the accountants. E.g., Samuels v. Mitchell, 155 F.R.D.

195, 201 (N.D.Cal.1994) (deciding that disclosure did not

constitute a waiver of the work product privilege because

the accounting firm was acting as a consultant, not a “public

accountant,” at the relevant time).

Judge Hellerstein articulated another view in Medinol, Ltd.

v. Boston Scientific Corp., where, in finding a waiver of

the work product privilege, he emphasized the “public

watchdog” role of independent auditors. 214 F.R.D. 113,

116 (S.D.N.Y.2002) (quoting United States v. Arthur Young

& Co., 465 U.S. 805, 817–18, 104 S.Ct. 1495, 79 L.Ed.2d

826 (1984)). Judge Hellerstein observed that it “has become

crystal clear in the face of the many accounting scandals that

have arisen as of late, in order for auditors to properly do their

job, they must not share common interests with the company

they audit.” Id. at 116 (emphasis in original). While this is a

valid policy consideration, the fact is that the determination

in Medinol was based on a finding that the auditor's interests

were not aligned with that of the corporation and that the

disclosure of the documents at issue—the Special Litigation

Committee's minutes—did not serve a pertinent litigation

interest.

These cases turn on their facts. In Mass. Inst. of Tech.,

for example, the First Circuit noted that the Massachusetts

Institute of Technology (“MIT”) had a common interest

with the Department of Defense's (“DOD”) audit agency

in “the proper performance of MIT's defense contracts

and the proper auditing and payment of MIT's bills.” 129

F.3d at 686. However, the First Circuit found that the

audit agency—which was responsible for preventing an

overcharge for services—was a potential adversary because

a review of MIT's billing statements could result in a

dispute or even litigation. Id. at 683, 687. Thus, MIT

was found to have forfeited its work product protection,

but only after an analysis of the parties' relationship.

Similarly, in In re Raytheon Sec. Litig. *447 , the court

recognized that “[t]he pivotal question is whether disclosure

of documents protected by the work product doctrine to an

independent auditor substantially increases the opportunities

for potential adversaries to obtain the information.” 218

F.R.D. 354, 360 (D.Mass.2003). After a discussion of the

public responsibilities of independent auditors, the court

noted that “there is no evidence that materials disclosed to

an independent auditor are likely to be turned over to the

company's adversaries except to the extent that the securities

laws and/or accounting standards mandate public disclosure.”

Id.

As these cases make clear, the Court's inquiry must not

end with the mere fact of a disclosure to the independent

auditors. Indeed, in an analogous context, the Second Circuit

has specifically eschewed a per se rule of waiver. In re

Steinhardt Partners, 9 F.3d 230, 236 (2d Cir.) (“we decline

to adopt a per se rule that all voluntary disclosures to the

government waive work product protection”). Instead, the

Court must assess of what type of common interests the work

product doctrine contemplates and whether a corporation and

its outside auditors share any such interest.

Courts in this District have ruled that it not necessary that the

party to whom disclosure made share a “litigation” interest

with the party that asserts the privilege. Cellco P'ship d/b/

a Verizon Wireless v. Nextel Communication, Inc., No. M8–

85, Civ.A. 03–725, 2004 WL 1542259, at *1 (S.D.N.Y. July

9, 2004) (deciding that defendant and its advertising agency

shared a common business interest and therefore disclosure

of an e-mail with legal advice did not waive work product

privilege); In re Copper Mkt. Antitrust Litig., 200 F.R.D. at

221 n. 6 (holding that there was no waiver of the work product

protection because the business and public relations firm

specializing in “litigation-related crisis management” shared

a common interest). Thus, the fact that Merrill Lynch and

Deloitte & Touche do not share a common litigation interest

is of no moment. 9

9 This view of “common interests” may very well stem

from this Circuit's approach to work product protection

in general. Our Circuit has adopted the more expansive

“because of” test for work product, under which any

document prepared “ ‘because of’ existing or expected

litigation” is sheltered under the protection of the work

product privilege. Adlman, 134 F.3d at 1198 (rejecting

the narrower formulation that encompasses only those

documents “prepared ‘primarily or exclusively to assist

in litigation’ ”). Under this formulation, work product



protection extends to documents prepared in anticipation

of litigation even if they are “intended to assist in the

making of a business decision influenced by the likely

outcome of the anticipated litigation.” Id. at 1195.

Instead, the critical inquiry—to me—must be whether

Deloitte & Touche should be conceived of as an adversary or

a conduit to a potential adversary. As Judge Hellerstein and

other courts have observed, an independent auditor could be

conceived of as an adversary because of its important public

function to independently ensure the accuracy of a company's

financial reports. Clearly, outside auditors must maintain an

independent role in this regard. Indeed, a good portion of

the reforms embodied in the Sarbanes–Oxley Act of 2002

(“Sarbanes Oxley”), 17 U.S.C. § 7201 et seq., are aimed at

strengthening the independence of auditors and eliminating

conflicts of interest. See, e.g., John C. Coffee, Jr., Gatekeeper

Failure and Reform: The Challenge of Fashioning Relevant

Reforms, 84 B.U. L.Rev. 301, 335, 336 (April 2004). I concur

with the need for auditors to retain their independence. I

conclude, however, that a waiver is not supported by the

circumstances of this case or applicable case law and that such

a holding will not impair auditor independence.

As I read them, the work product cases require a tangible

adversarial relationship. The First Circuit, for example, found

that the DOD's audit agency was an adversary because it

could potentially dispute a billing charge and file suit against

MIT, not because of its duty to review MIT's accounts.

Mass. Inst. of Tech., 129 F.3d at 687. This requirement

makes particular sense when one considers the importance

of the work product doctrine in safeguarding our adversary

system of litigation. Hickman, 329 U.S. at 511, 67 S.Ct.

385 (reasoning that without work product protection “[a]n

attorney's thoughts, heretofore inviolate, would not be his

own. *448 Inefficiency, unfairness and sharp practices

would inevitably develop in the giving of legal advice and

in the preparation of cases for trial. The effect on the legal

profession would be demoralizing. And the interests of the

clients and the cause of justice would be poorly served.”).

Further counseling for a more concrete approach is the

Supreme Court's observation that the work product “doctrine

is an intensely practical one, grounded in the realities of

litigation in our adversary system.” Nobles, 422 U.S. at 238,

95 S.Ct. 2160.

Thus, any tension between an auditor and a corporation that

arises from an auditor's need to scrutinize and investigate a

corporation's records and book-keeping practices simply is

not the equivalent of an adversarial relationship contemplated

by the work product doctrine. Nor should it be. A business

and its auditor can and should be aligned insofar as they

both seek to prevent, detect, and root out corporate fraud.

Indeed, this is precisely the type of limited alliance that courts

should encourage. For example, here Merrill Lynch complied

with Deloitte & Touche's request for copies of the internal

investigation reports so that the auditors could further assess

Merrill Lynch's internal controls, both to inform its audit

work and to notify the corporation if there was a deficiency.

An internal control, as defined by the professional standards

of the American Institute of Certified Public Accountants

(“AICPA”), “is a process—effected by an entity's board

of directors, management, and other personnel—designed

to provide reasonable assurance regarding the achievement

of objectives in the following categories: (a) reliability

of financial reporting, (b) effectiveness and efficiency of

operations, and (c) compliance with applicable laws and

regulations.” AICPA AU § 319.06 (2001). As this definition

indicates, information regarding internal controls directly

relates to the reliability of financial information and legality

of corporate behavior. 10 Without access to this information,

auditors would likely fail in the fulfillment of their important

public function. Consistent with this, Deloitte & Touche

requested Merrill Lynch's investigative reports in August

2003 so that it could determine whether Gordon's theft and the

surrounding circumstances impacted upon Merrill Lynch's

financial statements, and, if necessary, report any conditions

that could adversely affect the corporation's ability to record

or report financial data to directors and officers, e.g., AICPA

Statement on Auditing Standards (“SAS”) 60.02—both of

which ultimately lead to the dissemination of more accurate

information to the investing public.

10 At the time of the disclosure in this case, auditors

were not required to report separately on a corporation's

internal controls. Compare AICPA AU § 319.05 (“The

auditor uses the understanding of internal control and the

assessed level of control risk in determining the nature,

timing, and extent of substantive tests for financial

statement assertions.”) with Sarbanes–Oxley § 404,

15 U.S.C. § 7262 (requiring management to report

annually on internal controls and auditors to report

on management's assessment of such controls). Under

current law, internal controls play a more direct role in

the work of auditors.

There was no further disclosure of the protected material

in this case, nor could there have been, as Deloitte &

Touche was under an ethical and professional obligation

to maintain materials received from its client confidential,



unless disclosure was required by law or accounting

standards. Gueli Letter, Ex. B ¶ 7. The relevant standards

at the time in question did not contemplate disclosure of

documents or their specific contents to a third party. Instead,

if an auditor learned of a “reportable condition,” i.e., an

internal control deficiency that “could adversely affect the

organization's ability to record, process, summarize, and

report financial data,” AICPA SAS 60.02, the auditor was

obligated to report this information to corporate management,

the audit committee, and/or the board of directors, AICPA

SAS 60.02, .09, .10, AICPA SAS 61. The applicable standard

specifically provides that an auditor's report on a reportable

condition should state that it is to be used only by personnel

within the corporation, unless the auditor is required to

furnish the report to government authorities. AICPA SAS

60.10. The only public revelation could have been, in the

worst case scenario, a general statement by Deloitte &

Touche regarding its inability to accurately evaluate Merrill

Lynch's financial statements due to internal *449 control

deficiencies. In sum, the nature of the disclosure in this case

and the obligations of Deloitte & Touche under the applicable

accounting standards simply do not make out a waiver.

Moreover, to construe a company's auditor as an adversary

and find a blanket rule of waiver of the applicable work

product privilege under these circumstances could very well

discourage corporations from conducting a critical self-

analysis and sharing the fruits of such an inquiry with the

appropriate actors. See United States v. Arthur Young &

Co., 677 F.2d 211, 220 (2d Cir.1982), aff'd in part, rev'd

in part, 465 U.S. 805, 104 S.Ct. 1495, 79 L.Ed.2d 826

(1984) (noting that “a prudent organization might not be

perfectly candid with independent auditors once it knew

that the information revealed would be reachable” by the

Internal Revenue Service). Because this likelihood cannot

be empirically documented, the Court's assessment “is thus

intuitive and indeed visceral. With that caveat, the court is

‘persuaded’ that it is likely that corporations will be less

willing to engage in this sort of self-investigation if the results

of such an investigation can be discovered in parallel civil

litigation.” In re LTV Sec. Litig., 89 F.R.D. at 612.

This conclusion does not necessarily mean that auditors will

be any less independent. In fact, the SEC rules implementing

the Sarbanes–Oxley Act specifically contemplate a

role for independent auditors in internal investigations

that will not compromise their independence. In re

Strengthening the Commission's Requirements Regarding

Auditor Independence, 2003 WL 183801 (S.E.C. Release No.

Jan 28, 2003). Instead, the aim should be for corporations to

share information with their auditors to facilitate a meaningful

review and, ultimately, the availability of more accurate

information for the investing public. It is also important

to encourage complete disclosure between a company and

its auditor, so that auditors are not inadvertently shielded

from complete frankness by corporate management, so that

they can later claim that they had no knowledge of alleged

malfeasance. As one commentator has urged, public policy

should seek to eliminate the “perverse incentives” for auditors

not to inquire too closely into corporate wrongdoing lest

they too be held liable in subsequent securities litigation.

Coffee, 84 B.U. L.Rev. at 345. Finally, a waiver of the

work product privilege upon disclosure of a document to a

company's outside auditor will not meaningfully prevent the

situations that have arisen in recent scandals where auditors

actively participated in corporate fraud and the ensuing cover-

ups. Instead, lawmakers and professional organizations can

and have acted to alter the legal, regulatory, and ethical

framework in which corporate management and auditors

operate. The work product privilege is a separate doctrine that

exists to safeguard other values no less precious, those of our

adversary system of litigation. We should not sacrifice one to

save another, particularly when I believe no such savings will

be made.

Thus, this Court must weigh, on the one hand, a litigant's right

to “every man's evidence,” United States v. Bryan, 339 U.S.

323, 331, 70 S.Ct. 724, 94 L.Ed. 884 (1950), with the need

to promote complete disclosure between a corporation and its

auditors so that both parties can fulfill their necessary roles.

When presented with a similar dilemma of competing policy

concerns, the Second Circuit reasoned that “one policy has to

bend a bit.” Arthur Young & Co., 677 F.2d at 220. I therefore

find that Allegheny is not entitled to the roadmap to Merrill

Lynch's internal investigation and the mental impressions and

opinions of its counsel. In this context, Merrill Lynch and

Deloitte & Touche were not adversaries contemplated by the

work product doctrine and there was no waiver.

It is hereby:

ORDERED that Allegheny's motion for leave to amend is

granted, except to the extent that it seeks punitive damages

on its fraud counterclaim and demands a jury trial; and it is

further

ORDERED that Allegheny's application for production of the

two reports discussed herein is denied; and it is further



ORDERED that the Clerk of the Court close this motion.SO ORDERED.


U.S. v. Kordel, 397 U.S. 1 (1970)

90 S.Ct. 763, 25 L.Ed.2d 1, 13 Fed.R.Serv.2d 868


Prosecution of corporation and its president and vice-

president for introduction of misbranded drugs into interstate

commerce and for causing drug to be misbranded after it

had been shipped in interstate commerce. The United States

District Court for the Eastern District of Michigan entered

judgments of conviction and defendants appealed. The Court

of Appeals, 407 F.2d 570, reversed and remanded. On

certiorari, the Supreme Court, Mr. Justice Stewart, held that

vice-president, who answered government's interrogatories

in civil proceeding to condemn quantities of corporation's

allegedly misbranded products, could have invoked his Fifth

Amendment privilege against compulsory self-incrimination

and, having failed to do so, could not assert that he was

compelled to give testimony against himself as ground

for overturning conviction, even if information supplied in

answers provided evidence or leads useful to government in

criminal prosecution.

Judgment of Court of Appeals reversed and case remanded

with directions.

West Headnotes (9)

[1] Federal Courts

Particular Cases, Contexts, and Questions

Supreme Court granted certiorari to consider

questions raised by government's invocation of

simultaneous civil and criminal proceedings in

enforcement of federal law.



Motion for leave to submit, and proceedings

thereon

Even assuming that information corporation's

vice-president supplied government in his

answers to interrogatories filed by United States

attorney in civil action by government to

condemn quantities of corporation's allegedly

misbranded products, if not necessary to proof

of government's case in criminal prosecution

against corporation and its vice-president

and president for introduction of misbranded

products into interstate commerce, at least

provided evidence or leads useful to the

government, evidence supported finding that

government did not act in bad faith in filing

interrogatories.


[3] Criminal Law

Compelling Self-Incrimination

Vice-president, whose answers to government's

interrogatories in civil condemnation proceeding

may have provided evidence or leads useful to

government in criminal prosecution against vice-

president for introduction of misbranded drugs

into interstate commerce, was not barred from

asserting his Fifth Amendment privilege against

compulsory self-incrimination simply because

the corporation, which appeared as claimant,

had no privilege of its own, nor because the

proceeding in which the government sought

information was civil rather than criminal in

character. Federal Food, Drug, and Cosmetic

Act, § 1 et seq., 21 U.S.C.A. § 301 et seq.;

U.S.C.A.Const. Amend. 5.



Duty to Answer

Interrogatories, which were filed by United

States attorney in civil action by government

to condemn quantities of corporation's allegedly

misbranded products, obligated the corporation

to appoint an agent who could, without fear

of self-incrimination, furnish such requested

information as was available to the corporation,

and the corporation could not satisfy its

obligation simply by pointing to an agent about

U.S. v. Kordel, 397 U.S. 1 (1970)



to invoke his constitutional privilege against

compulsory self-incrimination. Federal Food,

Drug, and Cosmetic Act, § 305, 21 U.S.C.A. §

335; Fed.Rules Civ.Proc. rule 33, 28 U.S.C.A.;

U.S.C.A.Const. Amend. 5.


[5] Criminal Law


Vice-president, who answered government's

interrogatories in civil proceeding to condemn

quantities of corporation's allegedly misbranded

products, could have invoked his privilege

against compulsory self-incrimination and,

having failed to do so, could not assert that

he was compelled to give testimony against

himself as ground for overturning conviction

for introducing misbranded drugs into interstate

commerce, even if information supplied in

answers provided evidence or leads useful to

government in criminal prosecution. Federal

Food, Drug, and Cosmetic Act, § 1 et seq., 21

U.S.C.A. § 301 et seq.; U.S.C.A.Const. Amend.

5.


[6] Criminal Law


President of corporation, whose allegedly

misbranded products were seized in civil

condemnation proceeding, was, not entitled

to claim Fifth Amendment privilege with

respect to leads and evidence obtained

from vice-president's answers to government's

interrogatories in civil action, where president

never asserted Fifth Amendment privilege, and

the corporation, not the president, appeared as

claimant in civil action. Federal Food, Drug and

Cosmetic Act, § 1 et seq., 21 U.S.C.A. § 301 et

seq.; U.S.C.A.Const. Amend. 5.


[7] Criminal Law

Prejudice to Defendant in General

President of corporation was not entitled to

reversal of his conviction for introduction of

misbranded drugs into interstate commerce on

theory that government had used vice-president's

admissions in proving its criminal case against

both president and vice-president, where vice-

president's admissions were never introduced in

evidence at trial.


[8] Criminal Law

Prejudice to Defendant in General

Even if information vice-president supplied

government in his answers to government's

interrogatories in civil action to condemn

quantities of corporation's allegedly misbranded

products provided evidence or leads useful to

government in prosecution of corporation and

vice-president and president for introduction of

misbranded products into interstate commerce,

government's conduct did not reflect such

unfairness and want of consideration for justice

as independently to require reversal of their

convictions. Federal Food, Drug, and Cosmetic

Act, § 1 et seq., 21 U.S.C.A. § 301 et seq.


[9] Criminal Law


Government may not use evidence against a

defendant in a criminal case which has been

coerced from him under penalty of either giving

the evidence or suffering a forfeiture of his

property. U.S.C.A.Const. Amend. 5.



**764 *2 Lawrence G. Wallace, Washington, D.C., for

petitioner.

Solomon H. Friend, New York City, for respondents.

U.S. v. Kordel, 397 U.S. 1 (1970)



Opinion

Mr. Justice STEWART delivered the opinion of the Court.

[1] The respondents are the president and vice president,

respectively, of Detroit Vital Foods, Inc. They were convicted

in the United States District Court for the Eastern District

of Michigan, along with the corporation, for violations

of the Federal Food, Drug, and Cosmetic Act. 1 The

Court of Appeals for the Sixth Circuit reversed the

respondent's convictions on the ground that the Government's

use of interrogatories to obtain evidence *3 from the

respondents in a nearly contemporaneous civil condemnation

proceeding operated to violate their Fifth Amendment

privilege against compulsory self-incrimination. 2 We

**765 granted certiorari to consider the questions raised

by the Government's invocation of simultaneous civil and

criminal proceedings in the enforcement of federal law. 3

1 52 Stat. 1040, 21 U.S.C. s 301 et seq.

2 United States v. Detroit Vital Foods, Inc., 6 Cir., 407

F.2d 570. The Court of Appeals initially reversed the

judgments of conviction of all three defendants, but on

the Government's petition for rehearing it affirmed with

respect to the corporation.

3 395 U.S. 932, 89 S.Ct. 1998, 23 L.Ed.2d 447.

In March 1960 the Division of Regulatory Management of

the Food and Drug Administration (hereafter FDA) instructed

the agency's Detroit office to investigate the respondents'

possible violations of the Food, Drug, and Cosmetic Act.

Within a month the Detroit office recommended to the

Division a civil seizure of two of the respondents' products,

‘Korleen’ and ‘frutex’; within another month the Division

similarly recommended seizure to the FDA's General

Counsel. On June 6, 1960, the General Counsel requested the

United States Attorney for the Eastern District of Michigan

to commence an in rem action against these products of

the corporation, and the United States Attorney filed a libel

three days later. The corporation, appearing as the claimant

answered the libel on September 12, 1960. An FDA official

in the Division of Regulatory Management then prepared

extensive interrogatories to be served on the corporation in

this civil action. The United States Attorney filed the agency's

interrogatories on January 6, 1961, pursuant to Rule 33 of the

Federal Rules of Civil Procedure. 4

4 Rule 33 provides in pertinent part: ‘Any party may

serve upon any adverse party written interrogatories to

be answered by the party served or, if the party served

is a public or private corporation or a partnership or

association, by any officer or agent, who shall furnish

such information as is available to the party.’

*4 After the Division official had drafted the interrogatories,

he recommended that pursuant to s 305 of the Food, Drug,

and Cosmetic Act the FDA serve upon the corporation and the

respondents a notice that the agency contemplated a criminal

proceeding against them with respect to the transactions that

were the subject of the civil action. 5 On January 9, 1961,

three days after the filing of the interrogatories in the civil

action, the Detroit office received an instruction from the

Division to serve the statutory notice. The Detroit office

complied 10 days later, and on March 8, 1961, the agency

held a hearing on the notice.

5 Section 305 of the Act, 21 U.S.C. s 335, provides:

‘Before any violation of (the Act) * * * is reported by

the Secretary (of the Department of Health, Education,

and Welfare) to any United States attorney for institution

of a criminal proceeding, the person against whom such

proceeding is contemplated shall be given appropriate

notice and an opportunity to present his views, either

orally or in writing, with regard to such contemplated

proceeding.’ Service of the statutory notice did not

necessarily mean that a criminal prosecution would

follow; the testimony before the District Court on

the respondents' pretrial motion to suppress evidence

indicated that fewer than 10% of the matters involving

a s 305 notice reach the stage of either indictment or

information.

On April 10, the corporation, having received the FDA's

interrogatories but not yet having answered them, moved

to stay further proceedings in the civil action or, in the

alternative, to extend the time to answer the interrogatories

until after disposition of the criminal proceeding signaled

by the s 305 notice. The motion was accompanied by the

affidavit of counsel. The moving papers urged the District

Court to act under Rule 33 ‘in the interest of substantial

justice’ and as a ‘balancing *5 of hardship and equities of the

respective parties * * *.’ Permitting the Government to obtain

proof of violations of the Act by resort to civil discovery

procedures, the movant urged, would be ‘improper’ and

would ‘work a grave injustice against **766 the claimant’;

it would also enable the Government to have pretrial

discovery of the respondents' defenses to future criminal

charges. Counsel expressly disavowed any ‘issue of a self-

U.S. v. Kordel, 397 U.S. 1 (1970)



incrimination privilege in favor of the claimant corporation.’

And nowhere in the moving papers did counsel raise a claim

of the Fifth Amendment privilege against compulsory self-

incrimination with respect to the respondents.

On June 21, 1961, the District Court denied the motion

upon finding that the corporation had failed to demonstrate

that substantial prejudice and harm would result from being

required to respond to the interrogatories. The court reasoned

that the s 305 notice did not conclusively indicate the

Government would institute a criminal proceeding, that six

to 12 months could elapse from the service of the statutory

notice to initiation of a criminal prosecution, and that the

Government could obtain data for a prosecution from the

testimony in the civil action or by subpoenaing the books and

records of the corporation. Accordingly, the court concluded,

the interests of justice did not require that the Government

be denied the information it wanted simply because it

had sought it by way of civil-discovery procedures. On

September 5, 1961, in compliance with the court's directive,

the corporation, through the respondent Feldten, answered the

Government's interrogatories.

On July 28, 1961, five weeks after the District Court's

order but more than a month before receipt of the answers

to the interrogatories, the Director of the FDA's Detroit

office recommended a criminal prosecution to the Division.

The Division forwarded the recommendation *6 to the

General Counsel on August 31, 1961, still prior to receipt

of Feldten's answers. While the matter was pending in

the General Counsel's office, the Division officer who had

originally drafted the proposed interrogatories recommended

that additional violations of the statute be alleged in the

indictment. On June 13, 1962, the Department of Health,

Education, and Welfare requested the Department of Justice

to institute a criminal proceeding, and about two months

after that the latter department instructed the United States

Attorney in Detroit to seek an indictment. The civil case, still

pending in the District Court, proceeded to settlement by way

of a consent decree in November 1962, and eight months

later the Government obtained the indictment underlying the

present judgments of conviction.

I

[2] At the outset, we assume that the information Feldten

supplied the Government in his answers to the interrogatories,

if not necessary to the proof of the Government's case in

the criminal prosecution, as the Court of Appeals thought, at

least provided evidence or leads useful to the Government. 6

However, the record amply supports the express finding of

the District Judge who presided at the criminal trial, and

who held an extensive evidentiary hearing on the respondents'

pretrial motion to suppress evidence, that the Government

did not act in bad faith in filing the interrogatories. Rather,

the testimony before the trial court demonstrated that the

Division of Regulatory Management regularly prepares such

interrogatories upon the receipt of claimants' answers to civil

libels, and files them in over three-fourths of such cases,

to hasten their disposition by securing *7 admissions and

laying the foundation for summary judgments.

6 Compare 407 F.2d, at 575, with id., at 572.

The Court of Appeals thought the answers to the

interrogatories were involuntarily given. The District Judge's

order denying the corporation's motion to **767 defer the

answers to the interrogatories, reasoned the court, left the

respondents with three choices: they could have refused to

answer, thereby forfeiting the corporation's property that was

the subject of the libel; they could have given false answers

to the interrogatories, thereby subjecting themselves to the

risk of a prosecution for perjury; or they could have done just

what they did—disclose the requested information, thereby

supplying the Government with evidence and leads helpful in

securing their indictment and conviction. 7

7 Id., at 573.

[3] In this analysis we think the Court of Appeals erred. For

Feldten need not have answered the interrogatories. Without

question he could have invoked his Fifth Amendment

privilege against compulsory self-incrimination. 8 Surely

Feldten was not barred from asserting his privilege simply

because the corporation had no privilege of its own, 9 or

because the proceeding in *8 which the Government sought

information was civil rather than criminal in character. 10

8 Wilson v. United States, 221 U.S. 361, 377, 385, 31 S.Ct.

538, 543, 546, 55 L.Ed. 771; Boyd v. United States,

116 U.S. 616, 633—635, 6 S.Ct. 524, 533— 534, 29

L.Ed. 746; cf. United States v. 42 Jars . . . ‘Bee Royale

Capsules,’ D.C., 162 F.Supp. 944, 946, aff'd, 3 Cir., 264

F.2d 666.

9 Curcio v. United States, 354 U.S. 118, 124, 77 S.Ct.

1145, 1149, 1 L.Ed.2d 1225; Wilson v. United States,

supra, 221 U.S. at 385, 31 S.Ct. at 546; United States

v. 3963 Bottles . . . of . . . ‘Enerjol Double Strength,’

U.S. v. Kordel, 397 U.S. 1 (1970)



7 Cir., 265 F.2d 332, 335—336, cert. denied, 360 U.S.

931, 79 S.Ct. 1448, 3 L.Ed.2d 1544; United States v. 30

Individually Cartoned Jars . . . ‘Ahead Hair Restorer . . .,’

D.C., 43 F.R.D. 181, 187; cf. Shapiro v. United States,

335 U.S. 1, 27, 68 S.Ct. 1375, 1389, 92 L.Ed. 1787.

That the corporation has no privilege is of course long

established, and not disputed here. See George Campbell

Painting Corp. v. Reid, 392 U.S. 286, 288—289, 88 S.Ct.

1978, 1979—1980, 20 L.Ed.2d 1094; Oklahoma Press

Pub. Co. v. Walling, 327 U.S. 186, 196, 208, 209—210,

66 S.Ct. 494, 498, 505, 505—506, 90 L.Ed. 614; United

States v. Bausch & Lomb Optical Co., 321 U.S. 707, 726

—727, 64 S.Ct. 805, 815, 88 L.Ed. 1024; Essgee Co.

of China v. United States, 262 U.S. 151, 155—156, 43

S.Ct. 514, 516, 67 L.Ed. 917; Wheeler v. United States,

226 U.S. 478, 489—490, 33 S.Ct. 158, 162, 57 L.Ed.

309; Baltimore & Ohio R. Co. v. ICC, 221 U.S. 612, 622

—623, 31 S.Ct. 621, 626—627, 55 L.Ed. 878; Hale v.

Henkel, 201 U.S. 43, 74—75, 26 S.Ct. 370, 378—379,

50 L.Ed. 652; cf. Curcio v. United States, supra; United

States v. White, 322 U.S. 694, 698, 705, 64 S.Ct. 1248,

1251, 1254, 88 L.Ed. 1542.

10 Gardner v. Broderick, 392 U.S. 273, 276, 88 S.Ct. 1913,

1915, 20 L.Ed.2d 1082; McCarthy v. Arndstein, 266

U.S. 34, 40, 45 S.Ct. 16, 17, 69 L.Ed. 158; Counselman

v. Hitchcock, 142 U.S. 547, 562, 563—564, 12 S.Ct.

195, 197, 198, 35 L.Ed. 1110; Boyd v. United States,

supra; United States v. Saline Bank, 1 Pet. 100, 104, 7

L.Ed. 69; 8 J. Wigmore, Evidence s 2257, pp. 339—

340 (McNaughton rev. 1961); C. McCormick, Evidence

s 123, p. 259 (1954).

[4] To be sure, service of the interrogatories obliged the

corporation to ‘appoint an agent who could, without fear of

self-incrimination, furnish such requested information as was

available to the corporation.' 11 The corporation could not

satisfy its obligation under Rule 33 simply by pointing to an

agent about to invoke his constitutional privilege. ‘It would

indeed be incongruous to permit a corporation to select an

individual to verify the corporation's answers, who because he

fears self-incrimination may thus secure for the corporation

the benefits of a privilege it does not have.’ 12 Such a result

would effectively **768 permit the corporation to assert

on its own behalf the personal privilege of its individual

agents. 13

11 United States v. 3963 Bottles . . . of . . . ‘Enerjol Double

Strength,’ supra, 265 F.2d at 336; cf. United States v.

48 Jars . . . ‘Tranquilease,’ D.C., 23 F.R.D. 192, 195,

196; 2A W. Barron & A. Holtzoff, Federal Practice and

Procedure s 651, p. 101 (Wright ed. 1961).

12 United States v. 3963 Bottles . . . of . . . ‘Enerjol Double

Strength,’ supra, at 336.

13 Cf. George Campbell Painting Corp. v. Reid, supra, 392

U.S. at 289, 88 S.Ct. at 1980; Hale v. Henkel, supra, 201

U.S. at 69—70, 26 S.Ct. 376—377.

[5] The respondents press upon us the situation where

no one can answer the interrogatories addressed to the

*9 corporation without subjecting himself to a ‘real

and appreciable’ risk of self-incrimination. 14 For present

purposes we may assume that in such a case the appropriate

remedy would be a protective order under Rule 30(b),

postponing civil discovery until termination of the criminal

action. 15 But we need not decide this troublesome question.

For the record before us makes clear that even though the

respondents had the burden of showing that the Government's

interrogatories were improper, 16 they never even asserted,

let alone demonstrated, that there was no authorized person

who could answer the interrogatories without the possibility

of compulsory self-incrimination. 17 To the contrary, the

record shows that nobody associated with the corporation

asserted his privilege at all. The respondents do not suggest

*10 that Feldten, who answered the interrogatories on behalf

of the corporation, did so while unrepresented by counsel or

without appreciation of the possible consequences. His failure

at any time to assert the constitutional privilege leaves him in

no position to complain now that he was compelled to give

testimony against himself. 18

14 Cf. Minor v. United States, 396 U.S. 87, 98, 90 S.Ct. 284,

289, 24 L.Ed.2d 283; Leary v. United States, 395 U.S.

6, 16, 89 S.Ct. 1532, 1537, 23 L.Ed.2d 57; Marchetti v.

United States, 390 U.S. 39, 48, 88 S.Ct. 697, 702, 19

L.Ed.2d 889; Mason v. United States, 244 U.S. 362, 365,

37 S.Ct. 621, 622, 61 L.Ed. 1198.

15 See Paul Harrigan & Sons v. Enterprise Animal Oil Co.,

D.C., 14 F.R.D. 333.

16 Luey v. Sterling Drug, Inc., D.C., 240 F.Supp. 632, 634;

Glick v. McKesson & Robbins, Inc., D.C., 10 F.R.D.

477, 479, 480; Bowles v. Safeway Stores, Inc., D.C., 4

F.R.D. 469, 470; Blanc v. Smith, D.C., 3 F.R.D. 182,

183. The respondents, urging that the Government had

the burden of establishing the availability of an agent to

answer for the corporation, rely upon the decision of the

Court of Appeals for the District of Columbia Circuit

U.S. v. Kordel, 397 U.S. 1 (1970)



in Communist Party v. United States, 118 U.S.App.D.C.

61, 331 F.2d 807, cert. denied, 377 U.S. 968, 84 S.Ct.

1646, 12 L.Ed.2d 737. But there the court departed from

the customary allocation of the burden on the ground

that the mere act of volunteering the information sought,

or even of showing that an effort had been made to

find someone who would answer, was itself potentially

incriminatory. Id., at 68—69, 331 F.2d, at 814—815.

17 See United States v. American Radiator & Standard

Sanitary Corp., 3 Cir., 388 F.2d 201, 204, cert. denied,

390 U.S. 922, 88 S.Ct. 857, 19 L.Ed.2d 983; United

States v. Simon, 2 Cir., 373 F.2d 649, 653, cert. granted

sub nom. Simon v. Wharton, 386 U.S. 1030, 87 S.Ct.

1485, 18 L.Ed.2d 591, vacated as moot, 389 U.S. 425,

88 S.Ct. 577, 19 L.Ed.2d 653; but see National Discount

Corp. v. Holzbaugh, D.C., 13 F.R.D. 236, 237.

18 Gardner v. Broderick, 392 U.S. 273, 276, 88 S.Ct. 1913,

1915, 20 L.Ed.2d 1082; Rogers v. United States, 340

U.S. 367, 372—375, 71 S.Ct. 438, 441—443, 95 L.Ed.

344; United States v. Monia, 317 U.S. 424, 427, 63 S.Ct.

409, 410, 87 L.Ed. 376; Vajtauer, United States ex rel.

v. Commissioner of Immigration, 273 U.S. 103, 113, 47

S.Ct. 302, 306, 71 L.Ed. 560; Brown v. Walker, 161 U.S.

591, 597, 16 S.Ct. 644, 647, 40 L.Ed. 819.

[6] Kordel's claim of compulsory self-incrimination is even

more tenuous than Feldten's. Not only did Kordel never assert

the privilege; he never even answered any interrogatories.

The Court of Appeals nevertheless reversed his conviction

because it thought it ‘clear from the record that Detroit Vital

Foods, Inc., was merely the corporate device through which

Kordel sold his **769 products. The Government naturally

wanted to cut through the facade and get to Kordel who was

the president and dominant personality in the corporation.’ 19

We disagree. The Government brought its libel against the

goods; the corporation, not Kordel, appeared as claimant. The

Government subsequently prosecuted Kordel as an officer

of the company. If anyone has sought to cut through the

corporate facade so far as the Fifth Amendment privilege is

concerned, it is Kordel: he has, in effect, attempted to fashion

a self-incrimination claim by combining testimony that he

never gave and an assertion of the privilege that he never

made with another assertion of the privilege that his company

never had.

19 407 F.2d, at 575.

[7] The Court of Appeals thought that Kordel must

go free in any event because the Government had used

Feldten's admissions in proving its criminal case against both

respondents, in violation of the rule in *11 Bruton v. United

States. 20 This too was error. Feldten's admissions were never

introduced in evidence at the trial, and thus Kordel cannot

maintain that the reception in evidence of a codefendant's

inculpatory statements violated his Sixth Amendment right to

confrontation. 21

20 391 U.S. 123, 88 S.Ct. 1620, 20 L.Ed.2d 476. See 407

F.2d, at 575.

21 See Bruton v. United States, supra, at 126, 88 S.Ct. at

1622.

II

[8] The respondents urge that even if the Government's

conduct did not violate their Fifth Amendment privilege

against compulsory self-incrimination, it nonetheless

reflected such unfairness and want of consideration for

justice as independently to require the reversal of their

convictions. On the record before us, we cannot agree that the

respondents have made out either a violation of due process

or a departure from proper standards in the administration

of justice requiring the exercise of our supervisory power.

The public interest in protecting consumers throughout the

Nation from misbranded drugs requires prompt action by

the agency charged with responsibility for administration

of the federal food and drug laws. But a rational decision

whether to proceed criminally against those responsible

for the misbranding may have to await consideration of

a fuller record than that before the agency at the time

of the civil seizure of the offending products. It would

stultify enforcement of federal law to require a governmental

agency such as the FDA invariably to choose either to forgo

recommendation of a criminal prosecution once it seeks civil

relief, or to defer civil proceedings pending the ultimate

outcome of a criminal trial. 22

22 Cf. Standard Sanitary Mfg. Co. v. United States, 226 U.S.

20, 51—52, 33 S.Ct. 9, 15—16, 57 L.Ed. 107 (Sherman

Act).

We do not deal here with a case where the Government has

brought a civil action solely to obtain evidence for *12 its

criminal prosecution 23 or has failed to advise the defendant

in its civil proceeding that it contemplates his criminal

prosecution; 24 nor with a case where the defendant is

without counsel 25 or reasonably fears prejudice from adverse

U.S. v. Kordel, 397 U.S. 1 (1970)



**770 pretrial publicity or other unfair injury; 26 nor with

any other special circumstances that might suggest the

unconstitutionality or even the impropriety of this criminal

prosecution. 27

23 Cf. United States v. Procter & Gamble Co., 356 U.S.

677, 683—684, 78 S.Ct. 983, 986—987, 2 L.Ed.2d 1077;

United States v. Pennsalt Chemicals Corp., D.C., 260

F.Supp. 171; and see United States v. Thayer, D.C., 214

F.Supp. 929; Beard v. New York Central R. Co., D.C.,

20 F.R.D. 607.

24 See Smith v. Katzenbach, 122 U.S.App.D.C. 113, 114—

116, 351 F.2d 810, 811—813; United States v. Lipshitz,

D.C., 132 F.Supp. 519, 523; United States v. Guerrina,

D.C., 112 F.Supp. 126, 128.

25 Cf. Nelson v. United States, 93 U.S.App.D.C. 14, 19, 21,

and n. 19, 208 F.2d 505, 510, 512, and n. 19, cert. denied,

346 U.S. 827, 74 S.Ct. 48, 98 L.Ed. 352.

26 Cf. United States v. American Radiator & Standard

Sanitary Corp., 3 Cir., 388 F.2d 201, 204—205, cert.

denied, 390 U.S. 922, 88 S.Ct. 857, 19 L.Ed.2d 983.

27 Federal courts have deferred civil proceedings pending

the completion of parallel criminal prosecutions when

the interests of justice seemed to require such action,

sometimes at the request of the prosecution, Campbell

v. Eastland, 5 Cir., 307 F.2d 478, cert. denied, 371

U.S. 955, 83 S.Ct. 502, 9 L.Ed.2d 502; United States v.

Bridges, D.C., 86 F.Supp. 931, 933; United States v. 30

Individually Cartoned Jars . . . ‘Ahead Hair Restorer . . .,’

D.C., 43 F.R.D. 181, 187 n. 8; United States v. One 1964

Cadillac Coupe DeVille, D.C., 41 F.R.D. 352, 353—354;

United States v. $2,437 United States Currency, D.C.,

36 F.R.D. 257; United States v. Steffes, D.C., 35 F.R.D.

24; United States v. Maine Lobstermen's Assn., D.C.,

22 F.R.D. 199; United States v. Cigarette Merchandisers

Assn., D.C., 18 F.R.D. 497; United States v. Linen

Supply Institute, D.C., 18 F.R.D. 452; sometimes at the

request of the defense, Kaeppler v. Jas. H. Matthews &

Co., D.C., 200 F.Supp. 229; Perry v. McGuire, D.C.,

36 F.R.D. 272; cf. Nichols v. Philadelphia Tribune Co.,

D.C., 22 F.R.D. 89, 92.

[9] Overturning these convictions would be tantamount

to the adoption of a rule that the Government's use of

interrogatories directed against a corporate defendant in the

ordinary course of a civil proceeding would always *13

immunize the corporation's officers from subsequent criminal

prosecution. The Court of Appeals was correct in stating that

the Government may not use evidence against a defendant in a

criminal case which has been coerced from him under penalty

of either giving the evidence or suffering a forfeiture of his

property.' 28 But on this record there was no such violation

of the Constitution, and no such departure from the proper

administration of criminal justice.

28 407 F.2d, at 575—576.

Accordingly, the judgment of the Court of Appeals is

reversed, and the case is remanded to that court for further

proceedings consistent with this opinion.

It is so ordered.

Reversed and remanded.

Mr. Justice BLACK did not take part in the decision of this

case.

Parallel Citations



Securities and Exchange CommissionDivision of Enforcement

Enforcement Manual

Office of Chief Counsel

June 4, 2015

Table of Contents

1. Introduction.......................................................................................................................1

1.1 Purpose and Scope ............................................................................................................1

1.2 Origin ................................................................................................................................1

1.3 Public Disclosure ..............................................................................................................1

1.4 Fundamental Considerations.............................................................................................1

1.4.1 Mission Statement.............................................................................................................1

1.4.2 Updating Internal Systems................................................................................................2

1.4.3 Consultation ......................................................................................................................2

1.4.4 Ethics.................................................................................................................................2

2. A Guide to Matters Under Inquiry (“MUIs”) and the Stages of Investigations ...............4

2.1 General Policies and Procedures.......................................................................................4

2.1.1 Ranking Investigations and Allocating Resources ...........................................................4

2.1.2 Quarterly Reviews of Investigations and Status Updates .................................................6

2.2 Tips, Complaints, and Referrals........................................................................................7

2.2.1 Complaints and Tips from the Public ...............................................................................7

2.2.1.1 Processing Tips and Complaints from the Public .............................................................7

2.2.1.2 Whistleblower Award Program ........................................................................................8

2.2.2 Other Referrals..................................................................................................................9

2.2.2.1 Referrals Involving Bank Secrecy Act Material ...............................................................9

2.2.2.2 Referrals from the Public Company Accounting Oversight Board ................................10

2.2.2.3 Referrals from State Securities Regulators .....................................................................10

2.2.2.4 Referrals from Congress .................................................................................................11

2.2.2.5 Referrals from Self-Regulatory Organizations ...............................................................11

2.3 Matters Under Inquiry and Investigations ......................................................................12

2.3.1 Opening a MUI ...............................................................................................................12

2.3.2 Opening an Investigation and Converting or Closing a MUI.........................................14

2.3.3 Formal Orders of Investigation.......................................................................................17

2.3.4 Formal Order Process .....................................................................................................17

2.3.4.1 Supplementing a Formal Order.......................................................................................18

2.3.4.2 Requests for a Copy of the Formal Order.......................................................................18

2.4 The Wells Process...........................................................................................................19

2.5 Enforcement Recommendations .....................................................................................22

2.5.1 The Action Memo Process..............................................................................................22

2.5.2 Commission Authorization .............................................................................................23

2.5.2.1 Closed Meetings..............................................................................................................23

2.5.2.2 Seriatim Consideration....................................................................................................23

2.5.2.3 Duty Officer Consideration.............................................................................................24

2.5.3 Delegations of Commission Authority ...........................................................................24

2.6 Closing an Investigation .................................................................................................25

2.6.1 Policies and Procedures ..................................................................................................25

2.6.2 Termination Notices........................................................................................................27

3. A Guide to Investigative Practices..................................................................................28

3.1 Special Considerations....................................................................................................28

ii

3.1.1 External Communications Between Senior Enforcement Officials and Persons Outside .the SEC Who Are Involved in Investigations.................................................................28

3.1.2 Statutes of Limitations and Tolling Agreements ............................................................31

3.1.3 Investigations During Ongoing SEC Litigation..............................................................32

3.1.4 Parallel Investigations and the State Actor Doctrine ......................................................33

3.2 Documents and Other Materials .....................................................................................34

3.2.1 Privileges and Privacy Acts ............................................................................................34

3.2.2 Bluesheets .......................................................................................................................34

3.2.3 Voluntary Document Requests .......................................................................................35

3.2.3.1 Forms 1661 and 1662......................................................................................................36

3.2.4 Document Requests to Regulated Entities......................................................................37

3.2.5 Document Requests to the News Media .........................................................................38

3.2.6 Subpoenas for Documents ..............................................................................................40

3.2.6.1 Service of Subpoenas......................................................................................................41

3.2.7 Form of Production .........................................................................................................42

3.2.7.1 Accepting Production of Copies .....................................................................................44

3.2.7.2 Bates Stamping ...............................................................................................................45

3.2.7.3 Format for Electronic Production of Documents to the SEC .........................................46

3.2.7.4 Privilege Logs .................................................................................................................48

3.2.7.5 Business Record Certifications .......................................................................................48

3.2.7.6. Confirming Completeness of Production........................................................................49

3.2.8 Forthwith Subpoenas in Investigations...........................................................................49

3.2.9 Maintaining Investigative Files.......................................................................................50

3.2.9.1 Document Control...........................................................................................................52

3.2.9.2 Document Imaging in Investigations ..............................................................................53

3.2.9.3 Electronic Files ...............................................................................................................54

3.2.9.4 Complying with Federal Rule of Civil Procedure 26(a) Requirements and PreservingEvidence in Anticipation of Litigation ...........................................................................56

3.2.9.5 Iron Mountain .................................................................................................................57

3.2.9.6 Preserving Internet Evidence ..........................................................................................57

3.2.9.7 Preserving Physical Evidence .........................................................................................57

3.2.9.8 Preserving Audio Recordings .........................................................................................58

3.2.9.9 Preserving Electronic Media...........................................................................................58

3.3 Witness Interviews and Testimony.................................................................................59

3.3.1 Privileges and Privacy Acts ............................................................................................59

3.3.2 No Targets of Investigations...........................................................................................60

3.3.3 Voluntary Telephone Interviews.....................................................................................60

3.3.3.1 Privacy Act Warnings and Forms 1661 and 1662 ..........................................................60

3.3.3.2 Documenting the Interview.............................................................................................61

3.3.4 Voluntary On-the-Record Testimony .............................................................................61

3.3.5 Testimony Under Subpoena............................................................................................62

3.3.5.1 Authority .........................................................................................................................62

3.3.5.2. Using a Background Questionnaire ................................................................................62

3.3.5.3 Witness Right to Counsel................................................................................................63

3.3.5.4 Going off the Record ......................................................................................................64

3.3.5.5 Transcript Availability ....................................................................................................64

iii

3.3.6 Special Cases ..................................................................................................................65

3.3.6.1 Contacting Employees of Issuers and Other Entities......................................................65

3.3.6.2 Contacting Witnesses Residing Overseas .......................................................................66

3.3.7 Proffers and Proffer Agreements ....................................................................................67

4. Privileges and Protections...............................................................................................68

4.1 Assertion of Privileges....................................................................................................68

4.1.1 Attorney-Client Privilege................................................................................................68

4.1.1.1 Multiple Representations ................................................................................................71

4.1.2 Attorney Work Product Doctrine....................................................................................71

4.1.3 The Fifth Amendment Privilege Against Self-Incrimination .........................................72

4.2 Inadvertent Production of Privileged or Non-Responsive Documents...........................73

4.2.1 Purposeful Production Without Privilege Review..........................................................74

4.3 Waiver of Privilege .........................................................................................................75

4.3.1 Confidentiality Agreements ............................................................................................77

4.4 Compliance with the Privacy Act of 1974......................................................................78

4.5 Compliance with the Right to Financial Privacy Act of 1978 ........................................78

4.6 Compliance with the Electronic Communications Privacy Act of 1986 ........................79

4.7 Handling Bank Secrecy Act Material .............................................................................80

5. Working with Other Agencies and Organizations ..........................................................81

5.1 Disclosure of Information and Access Requests ............................................................81

5.2 Cooperation with Criminal Authorities ..........................................................................83

5.2.1 Parallel Investigations.....................................................................................................83

5.2.2 Grand Jury Matters .........................................................................................................85

5.3 Cooperation with the Food and Drug Administration ....................................................85

5.4 Cooperation with the Public Company Accounting Oversight Board............................87

5.5 Coordination and Consultation with Banking Agencies.................................................87

5.6 Informal Referrals from Enforcement ............................................................................88

5.6.1 Informal Referrals to Criminal Authorities.....................................................................90

5.6.2 Informal Referrals to Self-Regulatory Organizations.....................................................91

5.6.3 Informal Referrals to the Public Company Accounting Oversight Board ......................92

5.6.4 Informal Referrals to State Agencies ..............................................................................93

6. Cooperation.....................................................................................................................94

6.1 Analytical Frameworks...................................................................................................94

6.1.1 Framework for Evaluating Cooperation by Individuals .................................................94

6.1.2 Framework for Evaluating Cooperation by Companies .................................................97

6.2 Cooperation Tools...........................................................................................................98

6.2.1 Cooperation Agreements ................................................................................................98

6.2.2 Deferred Prosecution Agreements ................................................................................100

6.2.3 Non-Prosecution Agreements .......................................................................................101

6.2.4 Immunity Requests .......................................................................................................102

6.2.5 Oral Assurances ............................................................................................................104

6.2.6 Termination Notices......................................................................................................105

6.2.7 Settlement Recommendations.......................................................................................105

6.3 Publicizing the Benefits of Cooperation .......................................................................106

81

All SAR materials must be segregated, marked to indicate that they contain sensitive SAR information, and properly secured.

In investigations and litigation, SEC production of SARs or documents identified by the filer as supporting the filing of a SAR is generally prohibited.

Staff may share SARs and SAR information with certain other government agencies only under very limited circumstances and after implementing appropriate safeguards.

SAR materials cannot be shown to witnesses or marked as exhibits in testimony.

Staff may not disclose SAR information or its existence to persons who may be assisting in a matter, such as an Independent Compliance Consultant or Receiver.

Further Information:

Staff should contact the Division’s BSA Review Group for specific information and guidance about how to properly handle SARs and other materials filed pursuant to the BSA.

See also Sections 2.2.2.1 and 3.2.9 of the Manual.

5. Working with Other Agencies and Organizations

5.1 Disclosure of Information and Access Requests

Basics:

All information obtained or generated by SEC staff during investigations or examinations should be presumed confidential and nonpublic unless disclosure has been specifically authorized. The SEC’s rules permit the staff, by delegated authority, to grant access to nonpublicinformation to domestic and foreign governmental authorities, SROs, and other persons specified in Section 24(c) of the Exchange Act and Rule 24c-1 thereunder. Disclosures of such information to members of the general public will normally be made only pursuant to the Freedom of Information Act.

Rule 2: The Discussion Rule:

Cooperation and coordination with other law enforcement agencies often require the staff to engage in discussions of nonpublic information prior to the grant of a formal access request. Rule 2 of the SEC’s Rules Relating to Investigations was adopted to permit discussions with those persons who may obtain access to nonpublic information through the SEC’s access program. Discussions under Rule 2 must be authorized by officials at or above the level of Assistant Director. Rule 2 extends only to the conduct of discussions and not to the furnishing of nonpublic documents. See Rule 2 of the SEC’s Rules Relating to Investigations, 17 C.F.R. § 203.2.

82

The Access Program:

Section 24(c) of the Exchange Act and Rule 24c-1 authorize the SEC to grant access to nonpublic information in enforcement files. Note, however, that work product and other privileged information is rarely disclosed, even when third-parties are granted access to the other materials in nonpublic files, and should not be disclosed without specific supervisory approval. In addition, information obtained by the SEC from other agencies should be safeguarded, and the staff should comply with all conditions placed on the information by the agency that provided access.

Rule 24c-1 authorizes disclosure to the following classes of requestors:

Federal, state, local and foreign governmental authorities

self-regulatory and similar organizations

foreign financial regulatory authorities

Securities Investor Protection Corporation and its trustees

trustees in bankruptcy

trustees, receivers, masters, special counsels, or others court-appointed persons charged with performing functions arising from securities litigation

professional licensing or oversight authorities that are government-sponsored (e.g., bar associations that are part of a state’s court system)

agents, employees or representatives of the above persons

Access Procedures:

The SEC’s rules require that all access requests be in writing and signed by an official who is in a sufficiently senior or supervisory position to make and enforce required representations. Requestors are generally expected to use the Division’s template access lettersand direct the letter to the assigned Assistant Director.

The access request should be entered into the Hub. The authority to grant access has been sub-delegated to senior officers at or above the level of Associate Director or Associate Regional Director. When an access request has been approved, the staff should prepare an access grant letter for signature by assigned supervisory staff at the Assistant Director level or higher. Staff should retain the original access request and grant letters.

Disclosure of Whistleblower Identifying Information

There are strict limitations on the Commission’s authority to disclose information that could reasonably be expected to reveal the identity of a whistleblower (“whistleblower identifying information”) to other government agencies, either orally (pursuant to the Discussion

83

Rule) or in response to an Access Request. The Exchange Act expressly provides the Commission with the authority to disclose whistleblower identifying information to certain regulatory and law enforcement authorities when “necessary to accomplish the purposes of [the Exchange Act] and to protect investors.” Exchange Act § 21F(h)(2)(D). Making such a disclosure requires Commission authorization, which can be granted by the Division Directorexercising delegated authority. Disclosure to an agency not enumerated in Exchange Act Section21F(h)(2), whether orally or in response to an Access Request, cannot be approved using delegated authority. If staff propose to disclose whistleblower identifying information to an agency not enumerated in Exchange Act Section 21F(h)(2), they should contact OCC or OWB.


For further information regarding the access program and procedures, staff should consult with OCC. For further information regarding disclosure of whistleblower identifying information to another regulatory or law enforcement authority, staff should consult with OWB.

5.2 Cooperation with Criminal Authorities

Cooperating with criminal authorities is an important component of the SEC’senforcement mission. The SEC is an independent federal agency charged by Congress with upholding the federal securities laws. The SEC has authority to bring civil, but not criminal, actions to enforce those laws. This authority is not compromised when the Department of Justice or state criminal authorities conduct a criminal investigation and/or make a determination to bring criminal charges concurrent with the SEC’s investigation and/or civil action. Nonetheless, there are certain unique considerations that arise when cooperating with criminal authorities, as discussed in Sections 5.2.1 and 5.2.2 of the Manual.

5.2.1 Parallel Investigations

Basics:

Parallel civil and criminal proceedings are not uncommon.4 In furtherance of the SEC’smission and as a matter of public policy, the staff is encouraged to work cooperatively with criminal authorities, to share information, and to coordinate their investigations with parallel criminal investigations when appropriate. There are, however, a number of considerations the staff should be mindful of when conducting a parallel investigation and when determining

4 The Supreme Court recognized in United States v. Kordel, 397 U.S. 1, 11 (1970) that parallel civil and criminal proceedings are appropriate and constitutional. As the Court of Appeals for the D.C. Circuit put it in the leading case of SEC v. Dresser, 628 F.2d 1368, 1377 (D.C. Cir. 1980), “effective enforcement of the securities laws require that the SEC and [the Department of] Justice be able to investigate possible violations simultaneously.” Other courts have issued opinions to the same effect. E.g., SEC v. First Financial Group of Texas, 659 F.2d 660, 666-67 (5th Cir. 1981) (“The simultaneous prosecution of civil and criminal actions is generally unobjectionable.”); United States v.

Stringer, 521 F.3d 1189, 1191 (9th Cir. 2008) (“There is nothing improper about the government undertaking simultaneous criminal and civil investigations. . .”). Moreover, the federal securities laws themselves expressly provide that the SEC can share information gathered in a civil investigation with other government agencies and provide information to the Department of Justice for a determination whether to institute criminal proceedings. See

Section 20(b), Securities Act; Section 21(d), Exchange Act; 17 C.F.R. § 240.24c-1 (access to nonpublicinformation).

84

whether to seek authorization to bring a case that involves a parallel criminal investigation. Because each case presents a unique set of circumstances, assigned staff should consult with supervisors whenever they are involved in parallel proceedings.

Considerations:

While every situation is different, the staff typically should keep the following considerations in mind when conducting a parallel investigation and when determining whether to seek authorization to bring a case that involves a parallel criminal investigation:

It is important that the civil investigation has its own independent civil investigative purpose and not be initiated to obtain evidence for a criminal prosecution. This does not prevent the staff from taking an action if the action will provide a benefit to both the SEC’s case and the parallel criminal matter. It does mean, however, that staff should not take an SEC civil investigative action for which the sole aim is to benefit the criminal matter.

The staff should make its own independent decision about what documents to request, what investigative testimony to take, what questions to ask during testimony, the location of testimony and similar matters.

If asked by counsel or any individual whether there is a parallel criminal investigation, staff should direct counsel or the individual to the section of Form 1662 dealing with “Routine Uses of Information,” 5 and state that it is the general policy of the Commission not to comment on investigations conducted by law enforcement authorities responsible for enforcing criminal laws. Staff should also invite any person who raises such issues to contact criminal authorities if they wish to pursue the question of whether there is a parallel criminal investigation. Should counsel or the individual ask which criminal authorities they should contact, staff should decline to answer unless authorized by the relevant criminal authorities.

Supervisors must be involved in all significant discussions and written communications with criminal authorities.

Generally, sharing information with criminal prosecutors is permissible, even though the sharing of information is intended to and does in fact assist criminal prosecutors. (For more information regarding the Discussion Rule and access requests, see Section 5.1 of the Manual.) In addition, in certain circumstances it is appropriate for criminal authorities to ask SEC staff to refrain from taking actions that would harm the criminal investigations, and likewise it can be appropriate for SEC staff to ask criminal authorities not to take action that would harm our investigations. Each case is unique and assigned staff should discuss these and other considerations with their supervisors.

5 This section of Form 1662 states that “The Commission often makes its files available to other government agencies, particularly United States Attorneys and state prosecutors. There is a likelihood that information supplied by you will be made available to such agencies where appropriate. Whether or not the Commission makes its files available to other government agencies is, in general, a confidential matter between the Commission and such governmental agencies.”

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For more information on joint proffer sessions, see Section 6.2.1 of the Manual.

5.2.2 Grand Jury Matters

Basics:

The SEC is generally not privy to grand jury matters. Grand jury matters are subject to the confidentiality restrictions set forth in Federal Rule of Criminal Procedure 6(e) and analogous state rules of criminal procedure. Rule 6(e) provides for secrecy of all “matter(s) occurring before the grand jury,” subject to certain exceptions.

Considerations:

Subject to the limitations in Rule 6(e) and similar state rules, the staff may receive information from the criminal authorities about the status of the criminal investigation and the future investigative plans of the criminal authorities.

Before receiving information from the criminal authorities in an investigation, staff should inquire whether any of the information provided comes directly or indirectly from grand jury proceedings, including subpoenas.

If staff comes into possession of grand jury materials, he or she should immediately inform his or her supervisor to take appropriate steps.

5.3 Cooperation with the Food and Drug Administration

Authority:

Section 331(j) of the Federal Food, Drug and Cosmetic Act prohibits the Food and Drug Administration (“FDA”) from disclosing trade secrets, even to other federal agencies such as the SEC.

The FDA may share other nonpublic records with other federal agencies, but before disclosing such information the FDA must receive a written agreement that the information will not be further disclosed without written permission from the FDA. See 21 C.F.R. § 20.85.

The FDA will not agree to further disclosure of confidential commercial information without the consent of the owner or submitter of the information.

Before the FDA will grant permission for any further disclosure, the agency will review each document to identify potentially privileged or otherwise protected information.

The Commissioner of Food and Drugs must authorize any investigative testimony by FDA employees. See 21 C.F.R. § 20.1(c).

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Basics:

Staff may seek information from the FDA in investigations arising from referrals by the FDA, or in which the FDA may have relevant information. For example, a company’s public statements about the status for FDA approval of its product may cause the staff to seek information from the FDA about its review of the product. Before making any request to the FDA, staff should review the statutes and regulations that govern the FDA’s ability to disclose information to SEC staff. Staff should also consult with their supervisors about the scope of the request and the appropriate addressee. The designated Enforcement FDA liaison should be informed of requests.

To obtain nonpublic information or records, staff can prepare a written request, including:

identification of the type of information requested

whether the request is the result of an ongoing investigation

acknowledgement that trade secret information cannot be disclosed

agreement not to further disclose the nonpublic information without written consent from the FDA, or, in the case of confidential commercial information, the submitter of the information

The written request should be addressed to an appropriate FDA contact person.

To obtain investigative testimony from an FDA employee, staff can prepare a written request, including:

identification of the employee whose testimony is sought

the subject matter of the requested testimony and why the testimony is appropriate under 21 C.F.R. § 20.1

how the testimony would serve the public interest and promote the objectives of the FDA

The written request should be addressed to the Commissioner of Food and Drugs. Before requesting testimony from an FDA employee, staff should contact the appropriate FDA lawyer.

To request FDA permission to make further disclosure of nonpublic records or information that was provided by the FDA, staff should prepare a written request and attach copies of the documents or transcripts it wishes to disclose.

Considerations:

Documents relating to FDA consideration of applications for new drugs or biologics can be extremely voluminous—sometimes millions of pages—so staff should consider the extent to which they are relevant to its investigation before making broad requests for all documents relating to a product.

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When preparing to litigate a case in which nonpublic FDA documents or testimony transcripts will be part of the SEC’s initial disclosure, staff should keep in mind that before the FDA consents to further disclosure, it will conduct a review of each page to determine whether any of the material is privileged. Because this review can take a very long time, staff should allow ample time for that review before filing a case or in the litigation discovery schedule.

If staff expects to charge a defendant who is not the owner of the information (for example, a current or former employee of the company), staff should seek consent from the company for the disclosure as early as practical, because the FDA will not agree to further disclosure of confidential commercial information without the consent of the owner or submitter of the information.

Further information:

Staff should refer any questions about FDA matters to the designated Enforcement Division liaison or OCC.

For more information on the FDA, see Inside the FDA, a manual available on the FDA’spublic website, www.fda.gov.

5.4 Cooperation with the Public Company Accounting Oversight Board

Basics:

The SEC and the PCAOB have a mutual interest in ensuring that investigations relating to the audit profession are properly coordinated. This will help to promote, among other things,consistent regulatory approaches as well as efficient and cost effective investigations and enforcement actions.

Considerations:

The SEC and PCAOB generally have concurrent jurisdiction over auditors but there may be instances in which it may be preferable for one organization to be principally responsible for investigating an auditor’s conduct.

Some of the factors the staff may wish to evaluate when coordinating investigations with the PCAOB include differences between possible charges and remedies, the nature of the conduct, and the standards involved.

5.5 Coordination and Consultation with Banking Agencies

Basics:

Under Section 241 of Subtitle D of Title II of the Gramm-Leach-Bliley Act, the SEC “shall consult and coordinate comments with the appropriate Federal banking agency before taking any action or rendering any opinion with respect to the manner in which any insured depository institution or depository institution holding company reports loan loss reserves in its

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financial statement, including the amount of any such loan loss reserves.” Therefore, staff should contact the relevant banking agency prior to contacting a bank about a loan loss allowance matter:

For national banks, federal savings associations, and federal branches and agencies of foreign banks, contact the Office of the Comptroller of the Currency.

For bank holding companies, savings and loan holding companies, or commercial lending companies, contact the Federal Reserve.

For State savings associations, contact the Federal Deposit Insurance Corporation.

5.6 Informal Referrals from Enforcement

Introduction:

The staff may informally refer a matter to federal or state criminal authorities, SROs, the PCAOB, or state agencies. The decision to make an informal referral should be made in the Home Office by officials at or above the level of Associate Director. In the regional offices, the decision to make an informal referral should be made by officials at or above the level of Associate Regional Director.

The staff may also determine that it is appropriate to refer a matter or information concerning potential professional misconduct to state bar associations or other state professional associations or licensing boards. Such referrals, however, are considered Commission actions and the staff must consult with the Office of the General Counsel, to which the Commission has delegated this authority, in order for a referral to be made.

Authority:

A number of SEC rules grant the Commission the authority to make informal referrals, which authority the Commission has delegated to staff.

Rule 5(b) of the SEC’s Informal and Other Procedures, 17 C.F.R. § 202.5(b):

After investigation or otherwise the Commission may in its discretion take one or more of the following actions: Institution of administrative proceedings looking to the imposition of remedial sanctions, initiation of injunctive proceedings in the courts, and, in the case of a willful violation, reference of the matter to the Department of Justice for criminal prosecution. The Commission may also, on some occasions, refer the matter to, or grant requests for access to its files made by, domestic and foreign governmental authorities or foreign securities authorities, SROs such as stock exchanges or the [Financial Industry Regulatory Authority, Inc.], and other persons or entities.

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Rule 2 of the SEC’s Rules Relating to Investigations, 17 C.F.R. § 203.2:

Information or documents obtained by the Commission in the course of any investigation or examination, unless made a matter of public record, shall be deemed non-public, but the Commission approves the practice whereby officials of the Divisions of Enforcement, Corporation Finance, [Trading and Markets],and Investment Management and [OIA] at the level of Assistant Director or higher, and officials in Regional Offices at the level of Assistant Regional Director or higher, may engage in and may authorize members of the Commission’s staff to engage in discussions with persons identified in Section 240.24c-1(b) of this chapter concerning information obtained in individual investigations or examinations, including formal investigations conducted pursuant to Commission order.

Rule 24c-1(b) of the Exchange Act, 17 C.F.R. § 240.24c-1(b):

The Commission may, in its discretion and upon a showing that such information is needed, provide nonpublic information in its possession to any of the following persons if the person receiving such nonpublic information provides such assurances of confidentiality as the Commission deems appropriate:

(1) A federal, state, local or foreign government or any political subdivision, authority, agency or instrumentality of such government;

(2) A [SRO] as defined in Section 3(a)(26) of the Act, or any similar organization empowered with self-regulatory responsibilities under the federal securities laws (as defined in Section 3(a)(47) of the Act), the Commodity Exchange Act (7 U.S.C. § 1, et seq.), or any substantially equivalent foreign statute or regulation;

(3) A foreign financial regulatory authority as defined in Section 3(a)(51) of the Act;

(4) The Securities Investor Protection Corporation or any trustee or counsel for a trustee appointed pursuant to Section 5(b) of the Securities Investor Protection Act of 1970;

(5) A trustee in bankruptcy;

(6) A trustee, receiver, master, special counsel or other person that is appointed by a court of competent jurisdiction or as a result of an agreement between the parties in connection with litigation or an administrative proceeding involving allegations of violations of the securities laws (as defined in Section 3(a)(47) of the Act) or the Commission’s Rules of Practice, 17 C.F.R. Part 201, or otherwise, where such trustee, receiver, master, special counsel or other person is specifically designated to perform particular functions with respect to, or as a result of, the litigation or proceeding or in connection with the administration and enforcement by the Commission of the federal securities laws or the Commission’s Rules of Practice;

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(7) A bar association, state accountancy board or other federal, state, local or foreign licensing or oversight authority, or a professional association or self-regulatory authority to the extent that it performs similar functions; or

(8) A duly authorized agent, employee or representative of any of the above persons.

5.6.1 Informal Referrals to Criminal Authorities

Basics:

Staff inquiries or investigations may reveal conduct that warrants informal referral to criminal law enforcement authorities – including federal, state or foreign criminal law enforcement authorities. If there is a matter or conduct that appears to warrant an informal referral, staff generally should follow the procedures below:

Assigned staff should consult with their direct supervisors and obtain approval at the Associate Director, Unit Chief, or Associate Regional Director level to informally refer the matter or conduct. Informal referrals to foreign criminal authorities should also first be discussed with OIA so that consideration is given to the policies and procedures of the foreign authorities.

Once given approval by an Associate Director, Unit Chief, or Associate Regional Director, assigned staff, along with their supervisors, may notify the appropriate criminal authorities.

Staff then may invite the criminal authorities to make an access request (see Section 5.1 regarding access requests). When the access request has been approved, staff may share documents from the investigative file. Staff may not forward documents to the criminal authorities prior to the approval of the access request.

After an informal referral to criminal authorities is made, staff is encouraged and expected to maintain periodic communication with the criminal authorities concerning the status of any criminal investigation. See Section 5.2 of the Manual for information relating to parallel investigations, the grand jury secrecy rule, and other concerns when cooperating with criminal authorities.

Considerations:

In determining whether to make an informal referral to criminal law enforcement authorities,the staff may consider, among other things, the egregiousness of the conduct, whether recidivism is a factor, and whether the involvement of criminal authorities will provide additional meaningful protection to investors.

In determining whether to make an informal referral to federal, state, or foreign criminal authorities, the staff may also consider jurisdictional factors, such as where the conduct occurred or the domicile of the possible violators or victims.

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5.6.2 Informal Referrals to Self-Regulatory Organizations

Basics:

In the course of conducting an inquiry or investigation, the staff may determine that it would be appropriate to refer the matter, or certain conduct, informally to one or more SROs. In particular, if an inquiry or investigation concerns matters over which SROs have enforcement authority (e.g., financial industry standards, rules and requirements related to securities trading and brokerage), staff should evaluate whether to contact the SRO about the matter and assess whether it would be appropriate for the SRO to consider investigating the matter in lieu of, or in addition to, an SEC Enforcement investigation. Because SROs may impose disciplinary or remedial sanctions against their members or associated individuals, staff generally should make an effort to apprise the SRO about conduct that may violate the rules of the SRO. Internally, staff generally should consult as needed with OMI and/or the Division of Trading and Markets in evaluating potential informal referrals to SROs.

If there is a matter or conduct that appears to warrant an informal referral, staff generally should follow the procedures below:

Assigned staff should consult initially with their direct supervisors, as well as OMI and/orthe Division of Trading and Markets, as appropriate.

Assigned staff must obtain approval at the Associate Director, Unit Chief, or Associate Regional Director level to refer the matter or conduct informally.

Once given approval, assigned staff, along with their supervisors, may notify the appropriate liaison at the SRO to discuss the matter or conduct, and a possible informal referral.

Staff then may invite the SRO to make an access request (see Section 5.1 of the Manual regarding access requests). When the access request has been approved, staff may share documents from the investigative file. Staff may not forward documents to the SRO prior to the approval of the access request.

After an informal referral to an SRO is made, staff should maintain periodic communication with the SRO concerning the status of the SRO inquiry or investigation and periodically assess whether any or additional SEC Enforcement measures should be taken.

Considerations:

Staff should evaluate whether an informal referral is warranted in the early stages of an inquiry or investigation. As the investigation progresses, the staff should periodically review the record to determine whether a new or additional informal referral may be appropriate.

Staff should make efforts to continue communicating with SRO staff throughout the SRO’sinquiry or investigation to determine whether SEC staff and SRO staff are investigating the

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same conduct, and so that SEC staff is aware of any determination by the SRO not to pursue an investigation or certain avenues of investigation.

Further information:

Staff should contact their supervisors and/or OMI with any questions about making an informal referral to an SRO.

For guidance regarding receiving referrals from an SRO, see Section 2.2.2.5 of the Manual.

5.6.3 Informal Referrals to the Public Company Accounting Oversight

Board

Basics:

In certain instances, Enforcement staff may refer matters regarding auditor misconduct informally to the PCAOB, which is authorized, under Section 105 of the Sarbanes-Oxley Act, to conduct investigations, and impose disciplinary or remedial sanctions against registered public accounting firms and their associated persons. If there is a matter that may be appropriate for referral, assigned staff generally should follow the procedures below:

Assigned staff should consult initially with their supervisors.

Assigned staff should then get approval at or above the Associate Director, Unit Chief, or Associate Regional Director level to refer the matter informally.

Assigned staff then should discuss the matter with the Chief Accountant of Enforcement, and secure his or her approval for making the referral.

Assigned staff then should, along with their supervisor, or through the office of Enforcement’s Chief Accountant, call the head of enforcement, or another designated official, at the PCAOB, and discuss the matter.

Staff then can invite the PCAOB to make an access request (see Section 5.1 of the Manual). Once the access request has been approved, staff can share documents from the investigative file. Staff should provide a copy of the access request to the Chief Accountant of Enforcement.

Considerations:

Staff should keep in mind the following considerations when making a referral to the PCAOB:

Staff should consider evaluating whether to refer a matter as early as the inception of an investigation, and in any event, as the investigation progresses.

Staff should continue communication with PCAOB staff throughout the PCAOB’sinvestigation, to determine whether SEC staff and PCAOB staff are investigating the

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same conduct, and so that SEC staff are alerted to any determination by the PCAOB not to pursue its investigation.


Staff should refer any questions about making an informal referral to the PCAOB to the Chief Accountant of Enforcement.

For guidance regarding receiving tips from the PCAOB, see Section 2.2.2.2 of the Manual.

5.6.4 Informal Referrals to State Agencies

Basics:

Congress created a dual securities regulatory system in which both federal and state agencies serve specific, valuable functions in protecting investors. In the course of conductingan inquiry or investigation, the staff may determine that it would be appropriate to refer the matter, or certain conduct, informally to state regulators. It may be appropriate for the state agency to investigate the matter in lieu of, or in addition to, an SEC Enforcement investigation.

If there is a matter or conduct that appears to warrant an informal referral, staff generally should follow the procedures below:

Assigned staff should consult with their direct supervisors and obtain approval at the Associate Director, Unit Chief, or Associate Regional Director level to refer the matter or conduct informally.

Once approval has been obtained, assigned staff along with their supervisors may contact the state agency and discuss with them the relevant findings of the inquiry or investigation to date and explain why the staff is referring the matter informally.

Staff may then invite the state agency to make an access request (see Section 5.1 of the Manual regarding access requests). When the access request has been approved, staff may share documents from the investigative file. Staff may not forward documents to the state agency prior to the approval of the access request.

Considerations:

Assigned staff should discuss with their supervisors whether it may be appropriate to refer a matter or certain conduct to the state informally. For example, a state may have a particular interest in a case or type of case, the victims or parties may be concentrated in a particular geographic location, the conduct may be limited, though significant, or there may be no federal jurisdiction. In the early stages of an inquiry or investigation, staff should evaluate whether an informal referral is warranted. As the investigation progresses, the staff is encouraged to periodically review the record to determine whether a new or additional informal referral may be appropriate. Staff should continue communicating with the state agency after an informal referral has been made.

��

�

Managing Civil Litigation

Against the Backdrop of a

Government InvestigationBradley J. Andreozzi

Justin O. Kay

June 25, 2015

� Government investigations alone are challenging, but they frequently don’t

stand alone.

� Consider a public company that discovers an internal control issue that

impacts its financial statements. Consequences may include:

- Audit Committee investigation and possible restatement

- SEC investigation with threat of administrative and civil penalties

- Federal criminal investigation of the company and senior management

- Multiple class action lawsuits under the federal securities laws (that will be consolidated)

- Shareholder derivative actions seeking to hold board members or officers liable to the

company for breach of fiduciary duties (and displace the authority of the Board to decide)

- ERISA class actions against the corporation and senior management (as fiduciaries of the

company’s pension plans) for failing to warn of risks of investing in company’s stock

� If the issue relates to a problem with the company’s product, consumer or

product liability class actions may be added to the stew.

One Problem - - But Multiple Legal Proceedings

2

��

�

� The herbal supplement investigation provides a stark example:

- 2/2/15: NY Attorney General announces an investigation and accuses 4

major retailers of selling herbal supplements with labels that didn’t

accurately list the ingredients.

- Within 2 weeks, there were 25 consumer class action suits, against

Walgreens (10), GNC (6), Walmart (5) and Target (4).

- By mid-March, more than 50 class actions had been filed across the

country.

- The class action complaints parroted the NY AG’s allegations, despite

doubts that the DNA barcoding technology used by the NY AG was

accurate.

The Dominoes Can Fall Quickly

3

� How important is coordinating your litigation strategy? Ask your adversaries:

- Federal agencies increasingly coordinate. The Financial Fraud Task Force includes various

regulators and prosecutors.

- The federal government recognizes the importance of coordination. US Attorneys’ Organization

And Functions Manual, 27. Coordination of Parallel Criminal, Civil, Regulatory, and

Administrative Proceedings (January 30, 2012) (Attached as Tab A).

� Comprehensive defense strategies will consider the impact of each move in any

proceeding on the position in every proceeding. Examples:

- Weigh the benefits of cooperating with government investigators against the risks that

disclosures to a government agency will be discoverable by private civil plaintiffs.

- Weigh the risk that testimony in a civil suit will be incriminating in a criminal proceeding, or

conversely that asserting the Fifth Amendment privilege will create an adverse inference in the

civil suit.

- Weigh the risk that remedial measures to satisfy the government will be used as admissions by

the civil plaintiff.

� No one answer: define your goals and pick your poison.

Defend the Company, Not Each Case As A Stand-

Alone Proceeding

4

��

�

� Define the scope of the problem.

- Ongoing? One-time event?

- Are there financial statement implications? Should the auditors be informed?

- Identify the key players in the company who may have critical information, lock-down documents, consider issues

of separate representation.

� Identify the resources needed.

- Are internal personnel compromised?

- Can the outside auditor help or should you consult with a new accounting firm?

� Identify where the attacks may be launched: regulators, law enforcement, shareholders,

customers (consumer class actions, debarment proceedings), Congress.

� Consider public disclosure.

- Is disclosure required? Advisable?

- Do you know enough to make an accurate disclosure?

- Should your disclosures try to minimize the problem to limit the litigation fallout?

� Craft a message that is accurate, consistent and works for each constituency.

Mobilize A Crisis Plan Quickly

5

� Auditors may need to be informed if the problem implicates the functioning

of internal controls or the accuracy of the financial statements or

management representation letters.

� A broad range of issues may trigger need for disclosure to the auditor.

� Sarbanes-Oxley requires the auditor to investigate, or make sure the

company is investigating and taking “timely and appropriate remedial

actions” in cases of illegality that could have a material effect on the

financial statements. ’34 Act � 10A, 15 U.S.C. � 78j-1. The auditor may

need to report to the Board and ultimately resign and report to the SEC if it

believes the company is not handling the matter appropriately. 15 U.S.C. �

78j-1(b)(3)-(4) (attached as Tab B).

� Thus, as a practical matter, the company may need to share significant,

sensitive information with the auditor. Will these communications wind up in

the hands of a civil plaintiff?

6

Sharing Information With the Auditors

��

�

� Virtually all cases agree that disclosure of attorney-client

privileged materials to the auditor waives the privilege.

See, e.g., United States v. Textron, 507 F. Supp. 2d 138,

151 (D.R.I. 2007) (“It is well established that voluntary

disclosure to a third party waives the attorney-client

privilege even if the third party agrees not to disclose the

communications to anyone else.”) (attached as Tab C).

� But the cases are divided on whether disclosure of

attorney work product to the auditor waives the work

product protection.

7

Communications to the Auditor May Not Be Protected

� Some courts find waiver on the theory that the auditor is required to

be independent, so its interests are not allied with the company’s.

See, e.g., Medinol, Ltd. v. Boston Scientific Corp., 214 F.R.D. 113,

116 (S.D.N.Y. 2002) (“[I]n order for auditors to properly do their job,

they must not share common interests with the company they

audit.”) (attached as Tab D).

� A growing number of courts decline to adopt a per se rule and look

to whether the company and the auditor share a common interest in

that particular situation, and whether the auditor has agreed to keep

the information confidential. See, e.g., Merrill Lynch & Co. v.

Alleghany Energy, Inc., 229 F.R.D. 441, 447 (S.D.N.Y. 2004) (the

“critical inquiry” is whether the auditor “should be conceived of as

an adversary or a conduit to a potential adversary.”) (attached as

Tab E).

8

Disclosing Work Product to the Auditor

��

�

� Don’t disclose attorney-client communications if avoidable.

� Before disclosing attorney work product, document the

common interest shared by the company and auditor (e.g.,

assuring the accuracy of the financial statements or the

proper functioning of internal controls).

� Document the auditor’s agreement to safeguard the

confidentiality of the information.

9

Practical Tips for Communications with the Auditor

� Government brings both Criminal and Civil Administrative

Proceedings.

� Government Proceeding (Civil or Criminal) and Private

Party Civil Litigation.

Two Types of Parallel Proceedings

10

��

�

- “It would stultify enforcement of federal law to require a government

agency . . . invariably to choose either to forego recommendation of a

criminal prosecution once it seeks civil relief, or to defer civil proceedings

pending the outcome of a criminal trial.” United States v. Kordel, 397

U.S. 1, 10 (1970) (attached as Tab F).

- DOJ directs all departments to implement policies and procedures that

“stress early, effective, and regular communication between criminal, civil,

and agency attorneys to the fullest extent appropriate to the case and

permissible by law.” US Attorneys’ Organization And Functions Manual,

27. Coordination of Parallel Criminal, Civil, Regulatory, and Administrative

Proceedings (January 30, 2012) (see Tab A).

- SEC Staff encouraged “to work cooperatively with criminal authorities, to

share information, and to coordinate their investigations with parallel

criminal investigations when appropriate.” SEC, Division of Enforcement,

Enforcement Manual, � 5.2.1 (2013) (Section 5 attached as Tab G).

Parallel Government Proceedings: Allowable But With

Limits

11

� The government may not use one type of proceeding

solely to gain an advantage in the other:

- “We do not deal here with a case where the Government has brought

a civil action solely to obtain evidence for its criminal prosecution or

has failed to advise the defendant in its civil proceeding that it

contemplates his criminal prosecution . . . Nor with any other special

circumstances that might suggest the unconstitutionality or even the

impropriety of this criminal prosecution.” U.S. v. Kordel, 397 U.S. 1,

769-70 (1970) (government may conduct parallel proceedings without

violating due process so long as it acts in good faith) (see Tab F).

The Limit On Parallel Government Proceedings

12

��

� When facing civil regulatory investigations, ask the government

directly whether there is a parallel criminal investigation and

document the answer (if you get one).

- “If asked by counsel or any individual whether there is a parallel criminal

investigation, staff should direct counsel or the individual to the section of Form

1662 dealing with ‘Routine Uses of Information,’ and state that it is the general

policy of the Commission not to comment on investigations conducted by law

enforcement authorities responsible for enforcing criminal laws.” SEC Division of

Enforcement, Enforcement Manual � 5.2.1 (see Tab G).

� Be prepared to demonstrate an affirmative misrepresentation, or

other bad faith conduct by the government causing real prejudice.

� Try to condition settlement in the civil suit on government assurance

there is no parallel criminal investigation.

� Consider seeking stays to control sequencing.

Can You Protect Your Company From The Risk of

Parallel Government Criminal and Civil Proceedings?

13

� Is “piggybacking” permissible?

� Rule 11 provides some protection:

- (b) Representations to the Court. By presenting to the court a pleading, written

motion, or other paper—whether by signing, filing, submitting, or later advocating

it—an attorney or unrepresented party certifies that to the best of the person's

knowledge, information, and belief, formed after an inquiry reasonable under the

circumstances:

. . . .

(3) the factual contentions have evidentiary support or, if specifically so identified,

will likely have evidentiary support after a reasonable opportunity for further

investigation or discovery.

� Lawyers in federal court have a “nondelegable responsibility” under

Rule 11 to “validate the truth and reasonableness” of the assertions

they make in court. Pavelic & LeFlore v. Marvel Enter. Group, 493

U.S. 120, 126 (1989).

Attacking Private Civil Suits Filed In the Wake of a

Government Investigation

14

��

� Some courts will “not consider” allegations “taken directly from

uncorroborated allegations embedded in a complaint in another action.” In

re UBS AG Sec. Litig., No. 07cv11225, 2012 WL 4471265, at *17 n.17

(S.D.N.Y. Sept. 28, 2012). See also VNB Realty, Inc. v. Bank of Am. Corp.,

No. 11cv6805, 2013 U.S. Dist. LEXIS 132250 (S.D.N.Y. Sept. 16, 2013)

(dismissing complaint relying on statements of confidential witnesses

extracted from other complaints).

� Other courts allow borrowing if the complaint is more than a “cut and paste”

job. See Strougo v. Barclays PLC, No. 14cv5797, 2015 U.S. Dist. LEXIS

54059, at *20-21 (S.D.N.Y. Apr. 25, 2015) (permitted plaintiff to borrow

allegations from NYAG complaint because facts were derived from a

“credible” complaint based on facts “obtained after an investigation” and

counsel for plaintiff had reached out to NYAG attorneys to verify allegations;

court required plaintiffs to detail their independent investigation in an

amended complaint) (attached as Tab H).

Motions to Dismiss the “Piggyback” Complaints

15

� Collateral Estoppel:

- Will preclude re-litigation of issues.

� Fifth Amendment:

- Testifying in civil case waives right against self-incrimination, but

asserting the Fifth can create adverse inference in civil case.

� Admissions/Admissibility:

- Not preclusive like collateral estoppel, but may handicap.

� Waivers of Privilege:

- Will provide outline of defense strategy, identify areas for attack.

� Discovery/Information Sharing:

- May provide a roadmap for future litigation.

Sequencing of Proceedings: Why It Matters

16

��

�

� Precludes re-litigation of issues in subsequent proceedings where:

- Issues in both proceedings are identical;

- Issue was actually litigated in prior proceeding;

- The issue was necessary to support valid and final judgment on the merits;

- There was a full and fair opportunity for litigation in prior proceeding (the party

against whom it is invoked was fully represented). See Chicago Truck Drivers,

Helpers & Warehouse Union Pension Fund v. Century Motor Freight, 125 F.3d 526

(7th Cir. 1997).

� But, even if requirements are met, doctrine is equitable and should

not be applied where it encourages a “wait-and-see” approach or its

application would be fundamentally unfair. See Parklane Hosiery

Co. v. Shore, 439 U.S. 322 (1979).

Collateral Estoppel

17

� Acquittal/Finding of No Liability:

- Criminal acquittal cannot be used by defendant in subsequent civil proceeding; higher burden of

proof in criminal proceeding.

- BUT, finding of no liability in civil proceeding can be used by defendant in subsequent criminal

proceeding.

� Criminal Convictions/Guilty Pleas:

- Can be used offensively against defendant in later civil case due to lower burden of proof.

� Sentencing Findings:

- Presumption against use, but not a per se ban. SEC v. Monarch Funding Corp., 192 F.3d 295

(2d Cir. 1999) (attached as Tab I); Maciel v. Comm’r of Internal Revenue, 489 F.3d 1018 (9th

Cir. 2006); Kozinski v. Comm’r of Internal Revenue, 541 F.3d 671 (6th Cir 2008).

- “While we do not foreclose application of the doctrine in all sentencing cases, we caution that it

should be applied only in those circumstances where it is clearly fair and efficient to do so. And

the burden should be on the plaintiff in the civil case to prove these elements.” Monarch, 192

F.3d at 306.

Collateral Estoppel (cont’d)

18

��

��

� Refusal of an employee to answer questions in civil

proceedings based on Fifth Amendment may reflect poorly

on and trigger adverse inferences against the company.

- See Baxter v. Palmigiano, 425 U.S. 308, 318 (1976) (“The Fifth

Amendment does not forbid adverse inferences against parties to civil

actions when they refuse to testify in response to probative evidence

offered against them.”).

� Waiver of Fifth Amendment in civil proceedings may

criminally implicate the employee and company.

- See FRE 801(d)(2).

Fifth Amendment

19


- “Evidence of the following is not admissible — on behalf of any party

— either to prove or disprove the validity or amount of a disputed

claim or to impeach by a prior inconsistent statement or a

contradiction: . . . conduct or a statement made during compromise

negotiations about the claim — except when offered in a criminal

case and when the negotiations related to a claim by a public office in

the exercise of its regulatory, investigative, or enforcement authority.”

- Exceptions (subpart (b)) “The court may admit this evidence for

another purpose, such as proving a witness’s bias or prejudice,

negating a contention of undue delay, or proving an effort to obstruct

a criminal investigation or prosecution.”

Admissions/Admissibility

20

��

��


- In a civil or criminal case, evidence of the following is not admissible

against the defendant who made the plea or participated in the plea

discussions: (1) a guilty plea that was later withdrawn; (2) a nolo

contendere plea; (3) a statement made during a proceeding on either

of those pleas under Federal Rule of Criminal Procedure 11 or a

comparable state procedure; or (4) a statement made during plea

discussions with an attorney for the prosecuting authority if the

discussions did not result in a guilty plea or they resulted in a later-

withdrawn guilty plea.

- Exceptions (subpart (b))—other statements introduced that should be

considered or if prosecution for perjury.


21

� Federal Rule of Evidence 801(d)(2)(A):

- Statement not hearsay if “The statement is offered against an

opposing party and (A) was made by the party in an individual or

representative capacity; (B) is one the party manifested that it

adopted or believed to be true; (C) was made by a person whom the

party authorized to make a statement on the subject; (D) was made

by the party’s agent or employee on a matter within the scope of that

relationship and while it existed; or (E) was made by the party’s

coconspirator during and in furtherance of the conspiracy.


22

��

��

� Federal Rule of Civil Procedure 36(b)

(Requests For Admission)

- “An admission under this rule is not an admission for any other purpose

and cannot be used against the party in any other proceeding.”

� Illinois Supreme Court Rule 216

(Request for Admission of Fact)

- “Any admission made by a party pursuant to request under this rule is for

the purpose of the pending action and any action commenced pursuant

to the authority of section 13-217 of the Code of Civil Procedure (735

ILCS 5/13-217) only. It does not constitute an admission by him for any

other purpose and may not be used against him in any other proceeding.”


23

� SEC “No Admission” Settlement Agreements/Consent Judgments: Judge

Rakoff’s Quixotic Quest:

- October 2011

• SEC files complaint against Citigroup alleging negligent violations of securities laws related to

dumping of mortgage-backed securities.

• Same day, SEC presents a consent judgment to District Court (Judge Rakoff) in which Citigroup

consents to judgment “"[w]ithout admitting or denying the allegations of the complaint.”

• Same day, private plaintiff files similar complaint alleging knowing/fraudulent violations.

- November 2011

• The Court refuses to approve the proposed consent judgment: “the Court is forced to conclude that

a proposed Consent Judgment that asks the Court to impose substantial injunctive relief, enforced

by the Court's own contempt power, on the basis of allegations unsupported by any proven or

acknowledged facts whatsoever, is neither reasonable, nor fair, nor adequate, nor in the public

interest.” SEC v. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328, 332 (S.D.N.Y. 2011).


24

��

��

� SEC Settlement Agreements/Consent Judgments (cont’d)

- November 2011-January 2013

• Several other courts follow Judge Rakoff’s lead. See Order, SEC v. Int'l Bus.

Machs. Corp., No. 11cv00563 (D.D.C. Dec. 20, 2012), ECF No. 10; SEC v.

Bridge Premium Fin., LLC, No. 12cv2131 (D.Colo. Jan. 17, 2013), ECF No. 53.

- June 2014

• Second Circuit reverses Judge Rakoff: “It is an abuse of discretion to require, as

the district court did here, that the SEC establish the ‘truth’ of the allegations

against a settling party as a condition for approving the consent decrees.” SEC

v. Citigroup Global Markets, Inc., 752 F.3d 285, 295 (2d Cir. 2014) (attached as

Tab J).

- August 2014

• Judge Rakoff approves and enters the consent judgment. SEC v. Citigroup

Global Markets, Inc., 34 F. Supp. 3d 379 (S.D.N.Y. 2014) (attached as Tab K).


25

� Carefully crafted “Admissions” can be of little value to

plaintiffs:

- Between the District Court decision in Citigroup and the Second

Circuit’s reversal, JP Morgan entered into a consent judgment with

the SEC that did not include “neither admits nor denies” language.

• Case involved “London Whale” losses.

• JP Morgan admitted negligence regarding internal controls and ensuring

the accuracy of its public disclosures.

• Consensus view was that the carefully crafted admissions of negligence

provided no significant advantage to private plaintiffs faced with the burden

of proving scienter.

Carefully Crafting Language in Admissions

26

��

��

� If appropriate, the government may agree to include findings that

will be helpful to the company in later litigation, such as that the

company:

- Has robust compliance programs;

- Discovered the issue and self-reported;

- Or didn’t discover the issue because it was hidden from senior

management by rogue employees;

- Cooperated fully in the government investigation; and

- Took prompt and effective remedial actions.

� While not binding in later litigation, these findings can be helpful

(for example in rebutting a claim that the company schemed to

hide the violations in order to protect the stock price).

27

Work Helpful Findings Into The Consent Decree

� Can be used as a sword. See Zapata Corp. v. Maldonado, 714

F.2d 436 (5th Cir. 1983).

- Corporation may seek dismissal of shareholder derivative suit where it shows that:

• Directors on special litigation committee were disinterested and independent;

• Committee conducted a good faith investigation;

• Committee had reasonable basis for its conclusion.

- In some states, if committee concludes in the exercise of its business judgment that

pursuing the claims wouldn’t be in the best interests of corporation, dismissal is

required (e.g., Michigan).

- In other states, court may make its own independent judgment.

� Use of the SLC’s findings will waive the privilege as to materials the

SLC considered and the process of the investigation.

Use of the Special Litigation Committee

28

��

��

� Department of Justice Policy Shift: 1999-2008.

- Holder Memo June 1999: “[i]n gauging the extent of the corporation’s

cooperation, the prosecutor may consider the corporation’s

willingness…to disclose the complete results of its internal

investigation, and to waive the attorney-client and work product

privileges.”

- Thompson Memo January 2003: Waiver deemed mandatory for

cooperation credit.

- Filip Memo September 2008: Cooperation credit no longer

conditioned on waiver.

Will the Government Demand Waiver of Privilege?

29

� Federal Rule Evidence 502 (effective Dec. 1, 2011)

- (a) Disclosure Made in a Federal Proceeding or to a Federal Office or

Agency; Scope of a Waiver. When the disclosure is made in a federal

proceeding or to a federal office or agency and waives the attorney-

client privilege or work-product protection, the waiver extends to an

undisclosed communication or information in a federal or state

proceeding only if:

• (1) the waiver is intentional;

• (2) the disclosed and undisclosed communications or information concern

the same subject matter; and

• (3) they ought in fairness to be considered together.

Waiver of Privilege: Scope

30

��

��

� “Selective waiver” allows privileged documents produced to the government to remain privileged as to

others. Most cases have rejected selective waiver, but the case law mostly pre-dates enactment of Rule

502

� Selective waiver recognized only in the 8th Circuit: Diversified Indus., Inc. v. Meredith, 572 F.2d 596 (8th Cir.

1977) .

� Other courts reject the concept:

• U.S. v. Mass. Inst. Tech., 129 F.3d 681 (1st Cir. 1997);

• In re Steinhardt Partners, LP, 9 F.3d 230 (2d Cir. 1993);

• Westinghouse Elec. Corp. v. Republic of Philippines, 951 F.2d 1414 (3d Cir. 1991);

• Sheet Metal Workers Intern. Ass’n v Sweeney, 29 F.3d 120 (4th Cir.1994);

• U.S. v. El Paso Co., 682 F.2d 530 (5th Cir.1982);

• In re Columbia Healthcare Corp. Billing Practices Litig., 293 F.3d 289 (6th Cir. 2002);

• DellwoodFarms, Inc. v. Cargill, Inc. 128 F.3d 1122 (7th Cir. 1997);

• In re Pac. Pictures Corp., 679 F.3d 1121 (9th Cir. 2012) (attached as Tab L);

• In re Qwest Commc’ns Intern., Inc., 450 F.3d 1179 (10th Cir. 2006) (attached as Tab M);

• Permian Corp. v U.S., 665 F.2d 1214 (D.C. Cir. 1981);

• Genentech v. U.S. Int’l Trad Comm’n, 122 F.3d 1409 (Fed Cir. 1997).

Is “Selective Waiver” Viable?

31

� Assume that whatever you share with a government agency will

make its way into the hands of other government agencies/private

plaintiffs.

� A protective order/confidentiality agreement may help:

- “Some courts have held or indicated that the existence of a confidentiality

agreement is irrelevant to a waiver of privilege. Others, however, have indicated

that the existence of a confidentiality agreement may justify adopting selective

waiver.” See In re Qwest, 450 F.3d at 1194 (see Tab M).

- At least one court recently has hinted that there would also need to have been a

modification of the outside counsel engagement letter: “Assuming that this letter

constitutes a confidentiality agreement, Petitioners have provided no convincing

reason that post hoc contracts regarding how information may be revealed

encourage frank conversation at the time of the advice.” In re Pac. Pictures, 679

F.3d at 1128 (see Tab L).

Waiver of Privilege: Strategic Considerations

32

��

�

� Consider the format of the information and how it is shared

- Delivering underlying communications between attorney and client almost certainly will

constitute waiver:

• Courts have applied different standards to waiver in the context of attorney-client privilege and

attorney work product. See In re Qwest, 450 F.3d at 1186-1192 (analyzing cases) (see Tab M).

• Courts have drawn a further distinction between fact work product and opinion work product. See

id.

- An oral presentation can still result in waiver, but the scope of the waiver may be more

narrow:

• United States v. Treacy, No. 02cr366, 2009 U.S. Dist. LEXIS 66016, at *3, 6-7 (S.D.N.Y. Mar. 23,

2009) (finding a waiver as to a single memoranda where counsel provided “detailed oral recitations

to the Government,” but holding—after in camera review of government’s notes of meeting—that

“general summaries, impressions, and conclusions” of other information/interviews did not effect a

waiver”) (attached as Tab N).

- Consider framing disclosures to the government as part of a settlement negotiation.

Waiver of Privilege: Strategic Considerations (cont’d)

33

� The “fiduciary duty exception” may allow shareholder

derivative plaintiffs to obtain privileged documents upon a

showing that the documents are necessary and proper to

investigate claims that company officials breached their

fiduciary duties.

� One recent example: Wal-Mart Stores, Inc. v. Ind. Elec.

Workers Pension Trust Fund, 95 A.3d 1264 (Del. 2014)

(shareholders entitled to investigatory materials and

board/committee minutes regarding company investigation

of alleged FCPA violations) (attached as Tab O).

34

Shareholders May Be Able to Obtain Privileged

Documents Even Without A Waiver

��

�

� “[A]though entering into a joint defense agreements is often,

indeed generally, beneficial to participants, like skating on thin

ice, dangers lurk below the surface.” United States v. LeCroy,

348 F. Supp. 2d 375, 387 (E.D. Pa. 2004) (attached as Tab P).

� When entering into a JDA:

- Define the common interest among the participants and limit disclosure to

that common interest.

- Provide for unilateral withdrawal by any party upon notice, while

continuing to protect information shared prior to the withdrawal.

- Include claw back provision to recover inadvertent disclosure of privileged

information.

35

Joint Defense Agreements

� Fed R Crim P 16 vs. Fed R Civ P 26

- Under Rule 16, the defendant is entitled to:

• Relevant written and oral statements made by the defendant to known

government agents.

• Defendant’s criminal records.

• Items that are material to preparing the defense; are intended for use in the

government’s case-in-chief at trial; or were obtained from or belong to the

defendant.

- Under Rule 16, the government is entitled to:

• Items that are intended for use in the defendant’s case-in-chief at trial.

- Under Rule 26, parties are entitled to:

• “Parties may obtain discovery regarding any nonprivileged matter that . . . .

appears reasonably calculated to lead to the discovery of admissible evidence.”

Discovery/Information Sharing

36

��

��

� FOIA Exemptions for Information provided to government agencies.

- Is the information you provide subject to a FOIA exemption/exclusion?

• 5 U.S.C. � 552(b)(4): Exemption for documents that would reveal “[t]rade secrets and

commercial or financial information obtained from a person and privileged or

confidential.”

• 5 U.S.C. � 552(b)(7)(A): Exemption for “records or information compiled for law

enforcement purposes,” if the disclosure “could reasonable be expected to interfere

with enforcement proceedings,” or certain other factors are met.

• Issues are currently playing out in securities plaintiff firm Robbins Geller’s suit against

the SEC to obtain documents provided to the SEC by Wal-Mart concerning alleged

FCPA violations in Mexico; the SEC has resisted disclosure under Exemption 7(A).

- What information can you get with a FOIA request?

� Confidentiality Agreements with the government:

- See discussion re: waiver of privilege

Discovery/Information Sharing (cont’d)

37

� Automatic at Start of Private 10b-5 Suits:

- PSLRA, 15 U.S.C. � 78u-4(b)(3)(B) (“In any private action arising under

this chapter, all discovery and other proceedings shall be stayed during

the pendency of any motion to dismiss, unless the court finds upon the

motion of any party that particularized discovery is necessary to preserve

evidence or to prevent undue prejudice to that party.”).

� Discretionary in Other Cases. Courts consider:

- The degree of overlap;

- The status/progress of the proceedings;

- The balance of harms to the plaintiff and defendant;

- The interests of the court;

- The interests of third parties and the public.

Stays: Standards

38

��

��

� Primary Jurisdiction: a “prudential” doctrine “under which a court determines that an

otherwise cognizable claim implicates technical and policy questions that should be

addressed in the first instance by the agency with regulatory authority over the

relevant industry rather than by the judicial branch.” Clark v. Time Warner Cable, 523

F.3d 1110, 1114 (9th Cir. 2008); Arsberry v. Illinois, 244 F.3d 558, 563 (7th Cir. 2001).

- Elements: (i) a need to resolve an issue (ii) that Congress has placed within the jurisdiction of an

administrative body with regulatory authority (iii) pursuant to a statute subjecting an industry or

activity to a comprehensive regulatory authority that (iv) requires expertise or uniformity in

application.

� Equitable Abstention: Court declines to adjudicate “complex” regulatory issues better

left to administrative agencies “charged with regulating an industry” because those

agencies “have better sources of gathering information and assessing its value than

do courts in isolated cases.” Alvardo v. Selma Convalescent Hosp., 153 Cal. App. 4th

1292, 1295, 1300 (2d Dist. 2007).

Stays: Soliciting Government Assistance

39

� If the Court is wary of granting a complete stay of the civil

case, consider a fallback position:

- Ask Court to stay discovery only as to the targets of the government

investigation.

- Or to stay deposition discovery to avoid Fifth Amendment issues

while allowing document production to go forward (perhaps limited to

documents already produced to the government).

- Or to stay certain claims.

Stays: Scope

40

��

��

� Budget/Logistics

- Costs;

- Efficiency;

- Burden on internal business resources;

- Press.

� Will witnesses and evidence still be available when stay is

lifted?

� Tactical disadvantages of fighting on multiple fronts vs.

benefit of a prompt resolution that puts an end to the

torture.

Stays: Considerations For When to Pursue (cont’d)

41

� Government may be seeking a stay of civil proceedings to hamstring

discovery by a criminal defendant:

- Discovery in civil proceeding is broader than in criminal proceeding.

- Courts are becoming less inclined to rubberstamp government stay requests when

criminal/civil complaints filed simultaneously.

• See SEC v. Bray, No. 14cv13381, 2015 U.S. Dist. LEXIS 42686, at *11 (D. Mass. Apr. 1, 2015) (“If

the government and the SEC choose to bring parallel civil and criminal cases close in time to each

other, then each entity must be prepared to go ahead with its case on a usual schedule.”) (attached

as Tab Q)

� Defendant may want to use the civil case to circumvent the limits on

discovery in the criminal proceeding.

� Defendant may prefer to attack the civil suits now, before the government

investigation makes headway. The civil plaintiff may prefer to sit back and

wait for the fruits of the government investigation to fall into his lap.

Stays: Considerations For When to Forgo/Object

42

��

��

� Framing the Discussion: FLIR Systems, Inc.

- Facts Gathered From:

• In re Ellis, 356 Ore 691 (2015) (ethics opinion) (attached as Tab R)

• US v. Stringer, 521 F.3d 1189 (9th Cir. 2008)

• Sommers ex rel. FLIR Sys., Inc. v. Lewis, No. 07cv1142 (D. Ore. filed Aug. 3,

2007)

• In re Fitzhenry, 343 Ore. 86 (2007) (ethics opinion) (attaches as Tab S)

• US v. Stringer, 406 F. Supp. 2d 1083 (D. Ore. 2006)

• Edward J. Goodman Life Ins. Trust ex rel. FLIR Sys., Inc. v. Lewis, No.

06cv1829 (D. Ore. filed Dec. 22, 2006)

• Palmquist v. FLIR Sys, Inc., 189 Ore. App. 552 (2003)

• In re FLIR Sys., Inc. Sec. Litig. No. 00cv360 (D. Ore. filed Mar. 13, 2000)

Ethical Issues Involving Joint Representation

43

� February 2000:

- Former FLIR employee (Palmquist) files lawsuit claiming wrongful

termination. Complaint includes allegations of improper accounting.

� March 2000:

- FLIR announces it will restate financial data for 1998 and 1999.

- FLIR appoints special committee.

- First of five securities class actions filed (consolidated in May 2000).

- Stoel Rives LLP retained to represent Company and certain execs in

class actions.

Timeline

44

��

��

� June 2000:

- SEC launches investigation and begins issuing subpoenas.

� July 2000:

- Stoel Rives representation expanded to include SEC investigation:

• members of the board.

• lawyers for the special committee.

• FLIR officers and managers and employees who received subpoenas.

� November/December 2000:

- In class actions , Court grants (then stays pending a mandamus

petition) motion to take deposition of Palmquist.

Timeline (cont’d)

45

� January 2001:

- Parties seek preliminary approval of class action settlement.

� April 2001:

- Court grants final approval of class action settlement.

� July 2001:

- Former president and CEO (Stringer) sues FLIR. Stoel Rivers

represents FLIR.

� February 2002:

- SEC begins issuing Wells Notices.

Timeline (cont’d)

46

��

��

� October/November 2002:

- FLIR and certain executives enter into consent judgments with the SEC.

� (Post Consent Judgments):

- Debarment proceedings initiated against FLIR (ultimately not debarred).

� January 2003:

- AUSA informs Stoel Rives that it is opening criminal matter (SEC and

DOJ had been communicating since 2000).

� 2003:

- Stringer employment suit dismissed with prejudice.

� September 2003:

- Certain former FLIR execs indicted.

Timeline (cont’d)

47

� November 2003:

- Oregon Bar files complaint against former General Counsel of FLIR.

� January 2006:

- District Court dismisses indictments based on AUSA conduct.

� August 2006:

- FLIR receives shareholder demand letter related to back-dating of stock options.

� November 2006:

- FLIR appoints special committee to investigate back-dating from 1995-2006.

� December 2006:

- First of several shareholder derivative actions filed related to back-dating. Stoel

Rives retained.

Timeline (cont’d)

48

��

��

� March 2007:

- FLIR restates financial statements from 1995-2005 based on special committee

investigation, declines to take legal action.

� June 2007:

- Supreme Court of Oregon affirms 120-day suspension of former General Counsel

(represented by Stoel Rives).

� November 2007:

- Three of four shareholder suits dismissed for lack of standing.

� April 2008:

- Ninth Circuit reverses dismissal of indictments.

� April 2009:

- District Court dismisses fourth and final shareholder derivative suit.

Timeline (cont’d)

49

� June/October 2010:

- Former CEO, CFO, and VP of Sales sentenced to 3 years’ probation.

� July 2010:

- Oregon Bar files complaints against two attorneys from Stoel Rives.

� February 2012:

- Oregon Bar amends complaints against attorneys from Stoel Rives.

� May 2013

- Disciplinary Panel finds conflicts, failure to disclose conflicts, and

misrepresentations by omission: recommends public reprimand.

� February 2015:

- Oregon Supreme Court reviews de novo: finds no wrongdoing, dismisses amended

complaints.

Timeline (cont’d)

50

��

��

� ABA Model Rule 1-102

- (A) -A lawyer shall not:

• (1) -Violate a Disciplinary Rule.

• (2) -Circumvent a Disciplinary Rule through actions of another.

• (3) -Engage in illegal conduct involving moral turpitude.

• (4) -Engage in conduct involving dishonesty, fraud, deceit, or

misrepresentation.

• (5) -Engage in conduct that is prejudicial to the administration of justice.

• (6) -Engage in any other conduct that adversely reflects on his fitness to

practice law.

Ethical Rules

51

� ABA Model Rule 5-105 (Refusing to Accept or Continue

Employment if the Interests of Another Client May Impair the

Independent Professional Judgment of the Lawyer)

- (A) -A lawyer shall decline proffered employment if the exercise of his


to be adversely affected by the acceptance of the proffered employment,

or if it would be likely to involve him in representing differing interests,

except to the extent permitted under DR 5-105(C)

- (B) -A lawyer shall not continue multiple employment if the exercise of his


to be adversely affected by his representation of another client, or if it

would be likely to involve him in representing differing interests, except to

the extent permitted under DR 5-105(C).

Ethical Rules

52

��

�

� ABA Model Rule 5-105 (cont’d)

- (C) -In the situations covered by DR 5-105(A) and (B), a lawyer may

represent multiple clients if it is obvious that he can adequately

represent the interest of each and if each consents to the

representation after full disclosure of the possible effect of such

representation on the exercise of his independent professional

judgment on behalf of each.

- (D) -If a lawyer is required to decline employment or to withdraw from

employment under a Disciplinary Rule, no partner, or associate, or

any other lawyer affiliated with him or his firm, may accept or continue

such employment.

Ethical Rules

53

� ABA Model Rule 5-106 (Settling Similar Claims of Clients)

- (A) -A lawyer who represents two or more clients shall not make or

participate in the making of an aggregate settlement of the claims of

or against his clients, unless each client has consented to the

settlement after being advised of the existence and nature of all the

claims involved in the proposed settlement, of the total amount of the

settlement, and of the participation of each person in the settlement.

Ethical Rules

54

2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503

Page 1

LEXSEE

BARBARA STROUGO, Individually and on Behalf of All Others Similarly Situated,

Plaintiffs, -against- BARCLAYS PLC, BARCLAYS CAPITAL INC., ROBERT

DIAMOND, ANTONY JENKINS, CHRISTOPHER LUCAS, TUSHAR MORZA-

RIA, and WILLIAM WHITE, Defendants.

14-cv-5797 (SAS)

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF

NEW YORK

2015 U.S. Dist. LEXIS 54059; Fed. Sec. L. Rep. (CCH) P98,503

April 24, 2015, Decided

April 24, 2015, Filed

CORE TERMS: pool, dark, trading, misstatement, transparency, investor, trader, quotation marks omitted, liquidity, scienter, puffery, motive, misrepresentation, actionable, recommendation, misleading, causation, amend, business practices, materiality, reputation, reck-lessness, stock, omission, predatory, scandal, Exchange Act, inactionable, aggressive, electronic

COUNSEL: [*1] For Plaintiffs: Jeremy A. Lieberman, Esq., Emma Gilmore, Esq., Pomerantz LLP, New York, New York; Patrick V. Dahlstrom, Esq., Pomerantz LLP, Chicago, Illinois.

For Defendants: Jeffrey T. Scott, Esq., David H. Braff, Esq., Matthew A. Schwartz, Esq., Andrew H. Reynard, Esq. John J. Hughes, III, Esq., Sullivan & Cromwell LLP, New York, New York.

JUDGES: Shira A. Scheindlin, United States District Judge.

OPINION BY: Shira A. Scheindlin

OPINION

OPINION AND ORDER

SHIRA A. SCHEINDLIN, U.S.D.J.:

I. INTRODUCTION

Plaintiffs bring this putative class action on behalf of themselves and all others similarly situated against Bar-clays PLC and Barclays Capital Inc. (collectively, "Bar-clays"), and Robert Diamond, Antony Jenkins, Christo-pher Lucas, Tushar Morzaria, and William White (the

"Individual Defendants" and, together with Barclays, "defendants"). The putative class consists of all persons and entities who purchased Barclays PLC's American Depositary Shares ("ADSs") between August 2, 2011 and June 25, 2014 and were allegedly damaged thereby.

On June 25, 2014, the New York State Office of the Attorney General ("NYAG") brought a lawsuit against Barclays under New York's Martin Act, alleging that Barclays concealed information about [*2] the opera-tion of its "dark pool" -- marketed as Barclays' Liquidity Cross or LX -- a private trading venue where investors can trade stocks with near anonymity. Borrowing heavily from the complaint in the NYAG action, plaintiffs allege that the success of LX was accomplished through false representations about its transparency and safeguards. Contrary to these representations, Barclays not only al-lowed aggressive high frequency traders ("HFTs") in its dark pool, but it sought them out and gave them the in-formation they needed to take advantage of other traders.

Plaintiffs allege that Barclays intentionally falsified marketing materials and made other false statements about the safeguards of LX to increase its market share. But the fraud at LX is only the latest in a series of scan-dals that have marred Barclays' reputation. Plaintiffs emphasize that as a result of these prior scandals, Bar-clays vowed change. Thus, plaintiffs seek to hold de-fendants liable for the statements Barclays made about changing its governance related to conduct and reputa-tion, as well as the statements made about LX.

Plaintiffs assert violations of section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated [*3] thereunder against all defendants, and violations of section 20(a) of the Ex-change Act against the Individual Defendants. Defend-


Page 2

ants move under Federal Rule of Civil Procedure 12(b)(6) to dismiss the Amended Complaint ("Com-plaint") on the grounds that: (1) plaintiffs cannot rely on allegations copied from the NYAG complaint without investigation; (2) plaintiffs fail to plead any material misrepresentations; (3) plaintiffs fail to plead facts giving rise to a strong inference of scienter; (4) plaintiffs are not entitled to recover losses based on an article published several days after the filing of the NYAG action because they have not pleaded loss causation as to that article; and (5) plaintiffs' section 20(a) claims for control person liability must be dismissed because plaintiffs have failed to adequately allege a primary violation of section 10(b) or control on the part of the Individual Defendants. For the following reasons, defendants' motion is GRANTED solely to the extent that the section 20(a) claims are dis-missed as to Individual Defendants Lucas and Morzaria, and is otherwise DENIED (except insofar as the alleged misstatements regarding Barclays' general business prac-tices and risk controls and in response to the Salz report are deemed inactionable, and plaintiffs [*4] may not seek damages arising from the June 27 Telegraph arti-cle).

II. BACKGROUND1

1 The facts below are taken from the Consoli-dated Amended Complaint for Violations of the Federal Securities Laws ("Compl.").

Barclays PLC is a financial services company based in England. Its indirect subsidiary, Barclays Capital Inc., has its primary offices in New York City, and operates Barclays LX.2 Robert Diamond was Barclays PLC's Chief Executive Officer from January 2011 until July 3, 2012; in August 2012, he was replaced by Antony Jen-kins. Christopher Lucas was Barclays PLC's Finance Director from April 2007 until August 2013; in October 2013, Tushar Morzaria assumed that role. William White is the Head of Equities Electronic Trading at Barclays Capital Inc.3

2 See Compl. ¶¶ 15-16. 3 See id. ¶¶ 17-21.

A. Dark Pools and HFTs

A "dark pool" is "an [Alternative Trading System ("ATS")] that does not display quotations or subscribers' orders to any person or entity, either internally within an ATS dark pool or externally beyond an ATS dark pool (other than to employees of the ATS)."4 "Dark pools were first established to avoid large block orders from influencing financial markets and to ensure trading pri-vacy. Trading [*5] in dark pools is conducted away from public exchanges purportedly so the trades remain

anonymous."5 As a result, investors can trade on an ATS with a lower risk of moving the market price. "About 15% of U.S. equity-trading volume is transacted in dark pools, more than triple levels of five years ago."6

4 Id. ¶ 40 (quotation marks omitted). 5 Id. By contrast, "when an investor places a sell order on a 'lit' venue, such as the New York Stock Exchange, the exchange immediately broadcasts the price and quantity that the investor is seeking to sell. In response to the supply of shares for sale, the market price may drop." De-fendants' Memorandum of Law in Support of Their Motion to Dismiss the Amended Complaint ("Def. Mem."), at 5. 6 Compl. ¶ 40.

HFTs use high-speed computers to make large numbers of trades within fractions of a second in order to profit from small changes in the prices of securities. Some HFTs "gauge supply and demand and recognize movements in market sentiment before other traders."7

HFTs can use this information to "trade ahead" of the investor who placed the order. That is, HFTs can buy shares ahead of an investor seeking to purchase shares at market price and then sell those shares [*6] to that in-vestor at a somewhat higher price. The identification of the order, the purchase, and the sale all take place within fractions of a second.8 "As of 2009, studies suggested HFT trading accounted for 60%-73% of all U.S. equity trading volume."9

7 Id. ¶ 42. 8 See id.

9 Id. ¶ 43.

B. The Libor Scandal and the Salz Report

In 2012 Barclays agreed to pay roughly five hundred million dollars to regulators to settle allegations that it manipulated Libor rates from 2005 through 2009. One form of manipulation was that traders were able to in-fluence their colleagues on the Libor desk by making requests by email to misstate Libor -- either upwards or downwards -- so that the traders could earn profits for their clients. Regulators believed that Barclays lacked specific internal controls and procedures that would have enabled management to discover the false reporting of Libor rates.10

10 See id. ¶¶ 24-26.

In July 2012, Barclays commissioned Sir Anthony Salz, a prominent lawyer and former chairman of the BBC, to review its practices "with a view to providing a comprehensive roadmap for cultural change at the bank."11 Salz issued his report on April 3, 2013. The re-


Page 3

port made a number of findings, including that: [*7] "Barclays' bankers were engulfed in a culture of 'edgi-ness' and had a 'winning at all costs' attitude"; pay "con-tributed significantly to a sense among a few that they were somehow unaffected by the rules"; "[s]ignificant failings developed in the organization as it grew"; "[t]he business practices for which Barclays has rightly been criticized were shaped predominantly by its culture[], which rested on uncertain foundations"; and "[t]here was no sense of common purpose in a group that had grown and diversified significantly in less than two decades." Over all, there was a "strong drive to win," which led to an "over-emphasis" on short-term financial performance, reinforced by a bonus and pay culture that rewarded money-making over serving the public interest. There was also a sense that senior management did not want to hear bad news. And "Barclays was sometimes perceived as being within the letter of the law but not within its spirit," on account of "an institutional cleverness."12

11 Id. ¶ 28. 12 Id.

Salz made thirty-four recommendations intended to "provide a valuable road map for [Barclays'] future." For example, Salz recommended that "Barclays [] ensure its conduct, reputational and operational risk framework includes [*8] the articulation of a tangible risk appetite statement and mechanisms to ensure that conduct, repu-tational and operational risk are fully factored into busi-ness decisions and governance." Salz's recommendations were meant to be "global and span all businesses within Barclays without exception."13

13 Id. ¶ 30.

Barclays' new chairman, Sir David Walker, de-scribed the Salz report as "an insightful, rigorous, and, crucially, independent view of how Barclays could im-prove," which was "informed by unprecedented access to the bank and its people."14 Barclays committed to im-plement in full each recommendation in the Salz report as part of Barclays' determination to regain the trust of all of Barclays' shareholders.15

14 Id. ¶ 31. 15 See id. ¶ 32.

Indeed, Barclays claimed to have made changes starting in 2012 through the "Transform Programme," which was designed to "deliver the fundamental cultural, financial and performance changes necessary" to gain the public trust.16 Barclays represented that "[i]n the spirit of transparency and rebuilding trust, Barclays will publish updates on [its] progress in [its] implementation pro-gramme." Barclays "aim[ed] to have the majority of all the [Salz] recommendations fully implemented by [*9]

2015."17 Even so, as reported on May 23, 2014 by Reu-ters, Barclays was fined $43.8 million "for failures in internal controls that allowed a trader to manipulate the setting of gold prices, just a day after the bank was fined for rigging Libor interest rates in 2012."18

16 Id. ¶ 33. 17 Id.

18 Id. ¶ 37.

C. Barclays LX

In 2009, Barclays LX was the tenth largest dark pool in the United States. Becoming the largest dark pool be-came the principal goal of Barclays' Equities Electronic Trading division. Barclays LX was referred to internally as "The Franchise" and growing the pool was "not only central to driving profits for the division, but also an im-primatur of prestige."19 Barclays identified the "market share value of attracting more [order] flow" into its dark pool at between thirty-seven and fifty million dollars per year.20

19 Id. ¶ 52. 20 Id. ¶ 54 (alterations in original).

In order to grow the dark pool, Barclays had to in-crease the number of orders that it, acting as broker, ex-ecuted in LX. This required that Barclays route more client orders into the dark pool, and ensure that there was sufficient liquidity to fill those orders. To meet this need, Barclays charged White with attracting HFTs into the dark pool. [*10] 21 As a result of "false and misleading statements and marketing materials," LX became one of the top two largest dark pools in the United States by January 2013.22

21 See id. ¶¶ 56-57. 22 Id. ¶ 59.

At the same time, White attributed "LX's success to Barclays' commitment to being transparent regarding Barclays' operations, how Barclays routes client orders, and the kinds of counterparties traders can expect to deal with when trading in the dark pool."23 According to White, transparency was "the one issue that we really took a stance on" and "[t]ransparency on multiple levels is a selling point for our entire equities franchise."24 To convince the market of the safety of trading in its dark pool, Barclays promoted a service called "Liquidity Pro-filing." Barclays represented that Liquidity Profiling al-lowed it to monitor the "toxicity" of the trading behavior in its dark pool and to "hold traders accountable if their trading was aggressive, predatory, or toxic."25 Barclays also said its team "quickly responds with corrective ac-tion when adverse behavior is detected."26 And Barclays


Page 4

claimed it would refuse clients access to the dark pool if they engaged in aggressive or "toxic" trading strategies.27

23 Id. ¶ 61. 24 Id. ¶¶ 61, 181, [*11] 183. 25 Id. ¶ 65 (quotation marks and alterations omitted). 26 Id. ¶ 67 ("[Barclays claimed that b]y identi-fying aggressive behavior, we can take corrective action with clients who exhibit opportunistic be-havior in the pool."). 27 Id.

However, LX was a magnet for HFTs. According to the Complaint, Barclays never refused a client access, and applied "overrides" to a number of traders in the dark pool, assigning safe Liquidity Profiling ratings to traders that should have been rated as toxic. The Complaint al-leges that Barclays knew that its Liquidity Profiling tool was ineffective. One former director explained that Bar-clays "purports to have a toxicity framework that will protect you when everybody knows internally that that thing is done manually with outliers removed and things are classified only if they feel like it."28 Another former director described Liquidity Profiling as "a scam."29

28 Id. ¶ 98 (alterations omitted). 29 Id.

D. Disclosure

The NYAG commenced its lawsuit on June 25, 2014. On news of the lawsuit, Barclays' ADSs fell 7.38 percent on heavy volume.30 On June 27, 2014, the Tele-graph, a newspaper in London, reported that a financial analyst "estimated" that Barclays might pay three hun-dred million [*12] pounds to settle the NYAG case.31

On June 30, the next trading day, Barclays' stock dropped an additional one-and-a-half percent on heavily traded volume of over eleven million shares.32

30 See id. ¶ 6. 31 See id. ¶¶ 119, 197. 32 See id. ¶ 197. In addition, the scandals at Barclays continued. On July 29, 2014, the Wall Street Journal reported that banking regulators threatened to install government monitors inside Barclays' United States offices after concluding that the bank may have manipulated the for-eign-exchange market. In an article published on November 7, 2014, the Wall Street Journal re-ported that as part of a proposed settlement relat-ed to the foreign-exchange manipulation, regula-tors "are likely to criticize [Barclays] for alleged-ly failing to appropriately supervise their for-

eign-exchange employees and lacking sufficient internal controls." Id. ¶ 38.

III. STANDARD OF REVIEW

A. Rule 12(b)(6) Motion to Dismiss

In deciding a motion to dismiss pursuant to Rule 12(b)(6), the court must "accept[] all factual allegations in the complaint as true and draw[] all reasonable infer-ences in the plaintiff's favor."33 The court may consider "the complaint, [] any documents attached thereto or incorporated by reference and documents [*13] upon which the complaint relies heavily,"34 as well as "legally required public disclosure documents filed with the SEC[] . . . ."35

33 Grant v. County of Erie, 542 Fed. App'x 21, 23 (2d Cir. 2013).34 Building Indus. Elec. Contractors Ass'n v.

City of New York, 678 F.3d 184, 187 (2d Cir. 2012) (quotation marks omitted). 35 ATSI Commc'ns, Inc. v. Shaar Fund, Ltd.,493 F.3d 87, 98 (2d Cir. 2007).

The court evaluates the sufficiency of the complaint under the "two-pronged approach" suggested by the Su-preme Court in Ashcroft v. Iqbal.36 Under the first prong, a court may "begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth."37 For example, "[t]hreadbare recit-als of the elements of a cause of action, supported by mere conclusory statements, do not suffice."38 Under the second prong of Iqbal, "[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief."39 A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."40 "The plausibility standard is not akin to a probability requirement" because it re-quires "more than a sheer possibility that a defendant has acted unlawfully."41

36 See 556 U.S. 662, 678-79, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009).37 Id. at 679.38 Id. at 678.39 Id. at 679.40 Id. at 678.41 Id. (quotation marks omitted).

B. Heightened Pleading Standard Under [*14] Rule

9(b) and the Private Securities Litigation Reform Act

("PSLRA")


Page 5

Private securities fraud claims are subject to a heightened pleading standard. First, Rule 9(b) requires plaintiffs to allege the circumstances constituting fraud with particularity. However, "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally."42

42 Fed. R. Civ. P. 9(b).

Second, the PSLRA provides that, in actions alleg-ing securities fraud, "the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind."43

43 15 U.S.C. § 78u-4(b)(2).

C. Leave to Amend

Whether to permit a plaintiff to amend its complaint is a matter committed to a court's "sound discretion."44

Federal Rule of Civil Procedure 15(a) provides that leave to amend a complaint "shall be freely given when justice so requires."45 "When a motion to dismiss is granted, the usual practice is to grant leave to amend the complaint."46

In particular, it is the usual practice to grant at least one chance to plead fraud with greater specificity when a complaint is dismissed under Rule 9(b).47 Leave to amend should be denied, however, where the proposed amendment would be futile.48

44 McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007).45 Fed. R. Civ. P. 15(a).46 Hayden v. County of Nassau, 180 F.3d 42, 53 (2d Cir. 1999).47 See ATSI, 493 F.3d at 108.48 See Dougherty v. Town of N. Hempstead

Bd. of Zoning Appeals, 282 F.3d 83, 87-88 (2d Cir. 2002).

IV. APPLICABLE LAW [*15]

A. Section 10(b) of the Exchange Act and Rule 10b-5

Section 10(b) of the Exchange Act prohibits using or employing, "in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance. . . ."49 Rule 10b-5, promulgated thereunder, makes it illegal to "make any untrue statement of a mate-rial fact or to omit to state a material fact . . . in connec-tion with the purchase or sale of any security."50 To sus-tain a claim for securities fraud under Section 10(b), "a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the pur-

chase or sale of a security; (4) reliance upon the misrep-resentation or omission; (5) economic loss; and (6) loss causation."51

49 15 U.S.C. § 78j(b).50 17 C.F.R. § 240.10b-5.51 Stoneridge Inv. Partners, LLC v. Scien-

tific-Atlanta, Inc., 552 U.S. 148, 157, 128 S. Ct. 761, 169 L. Ed. 2d 627 (2008).

1. Material Misstatements or Omissions

In order to satisfactorily allege misstatements or omissions of material fact, a complaint must "state with particularity the specific facts in support of [plaintiffs'] belief that [defendants'] statements were false when made."52 "[A] fact is to be considered material if there is a substantial likelihood that a reasonable person would consider it important in deciding whether to buy or sell [securities] . . . ."53 Mere "allegations [*16] that de-fendants should have anticipated future events and made certain disclosures earlier than they actually did do not suffice to make out a claim of securities fraud."54

52 Rombach v. Chang, 355 F.3d 164, 172 (2d Cir. 2004) (internal quotation marks omitted). 53 Operating Local 649 Annuity Trust Fund v.

Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 92-93 (2d Cir. 2010) (internal quotation marks omitted). 54 Id. Accord Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000).

Certain statements are protected by the PSLRA's safe harbor provision and the bespeaks caution doctrine. Under the safe harbor provision, a forward-looking statement is non-actionable when it is "accompanied by meaningful cautionary language or is immaterial or the plaintiff fails to prove that it was made with actual knowledge that it was false or misleading."55 "To avail themselves of safe harbor protection under the meaning-ful cautionary language prong, defendants must demon-strate that their cautionary language was not boilerplate and conveyed substantive information"56 identifying "important factors that could cause actual results to differ materially from those in the forward-looking state-ments."57 Moreover, statements are not protected where defendants "had no basis for their optimistic statements and already knew (allegedly) that certain risks had be-come reality."58 The applicability of the immateriality prong of the safe harbor "necessarily [*17] depends on all relevant circumstances."59 Under the judicially created bespeaks caution doctrine, "alleged misrepresentations . . . are deemed immaterial as a matter of law [if] it cannot be said that any reasonable investor could consider them important in light of adequate cautionary language. . . ."60


Page 6

Statements may also be deemed immaterial as merely

vague expressions of optimism or puffery.61 Liability

under the actual knowledge prong of the safe harbor "at-

taches only upon proof of knowing falsity" -- a showing

of recklessness is insufficient.62 Lastly, pleadings based

on fraud by hindsight are not actionable as a matter of

law.63

55 Slayton v. American Express Co., 604 F.3d

758, 766 (2d Cir. 2010) (emphasis in original).

56 Id. at 772.

57 15 U.S.C. § 78u-5(c)(1)(A).

58 In re Nortel Networks Corp. Sec. Litig., 238

F. Supp. 2d 613, 629 (S.D.N.Y. 2003). Accord

Gabriel Capital, L.P. v. NatWest Fin., Inc., 122

F. Supp. 2d 407, 419 (S.D.N.Y. 2000) (observing

that the bespeaks caution doctrine "does not ap-

ply where a defendant knew that its statement

was false when made").

59 ECA &Local 134 IBEW Joint Pension Trust

of Chicago v. JP Morgan Chase Co., 553 F.3d

187, 197 (2d Cir. 2009).

60 Halperin v. eBanker USA.com, Inc., 295

F.3d 352, 357 (2d Cir. 2002).

61 See ECA, 553 F.3d at 206; In re Gildan Ac-

tivewear, Inc., 636 F. Supp. 2d 261, 274

(S.D.N.Y. 2009); In re NTL, Inc. Sec. Litig., 347

F. Supp. 2d 15, 34 (S.D.N.Y. 2004).

62 Slayton, 604 F.3d at 773.

63 See Caiafa v. Sea Containers, Ltd., 525 F.

Supp. 2d 398, 410-11 (S.D.N.Y. 2007).

2. Scienter

The required level of scienter under Section 10(b) is

either "intent to deceive, manipulate, or defraud"64 or

"reckless disregard for the truth."65 Plaintiffs may meet

this standard by "alleging facts (1) showing that the de-

fendants had both motive and opportunity to commit the

fraud or (2) constituting strong circumstantial evidence

of conscious misbehavior [*18] or recklessness."66 Un-

der the latter theory, plaintiffs must allege that the de-

fendants have engaged in "conduct which is highly un-

reasonable and which represents an extreme departure

from the standards of ordinary care to the extent that the

danger was either known to the defendant or so obvious

that the defendant must have been aware of it."67

"[S]ecurities fraud claims typically have sufficed to state

a claim based on recklessness when they have specifi-

cally alleged defendants' knowledge of facts or access to

information contradicting their public statements. Under

such circumstances, defendants knew or, more im-

portantly, should have known that they were misrepre-

senting material facts related to the corporation."68 An

inference of scienter "must be more than merely plausi-

ble or reasonable -- it must be cogent and at least as

compelling as any opposing inference of nonfraudulent

intent."69

64 Ernst & Ernst v. Hochfelder, 425 U.S. 185,

193, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976).

65 South Cherry St., LLC v. Hennessee Grp.

LLC, 573 F.3d 98, 109 (2d Cir. 2009) ("By reck-

less disregard for the truth, we mean 'conscious

recklessness -- i.e., a state of mind approximating

actual intent, and not merely a heightened form of

negligence.'") (quoting Novak v. Kasaks, 216

F.3d 300, 308 (2d Cir. 2000)).

66 ATSI, 493 F.3d at 99 (citing Ganino v. Citi-

zens United Co., 228 F.3d 154, 168-69 (2d Cir.

2000)).

67 Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir.

2001) (quotation marks and citations omitted).

68 Novak, 216 F.3d at 308.

69 Tellabs, Inc. v. Makor Issues & Rights, Ltd.,

551 U.S. 308, 314, 127 S. Ct. 2499, 168 L. Ed. 2d

179 (2007). Accord Sawabeh Info. Servs. Co. v.

Brody, 832 F. Supp. 2d 280, 295 (S.D.N.Y. 2011)

(noting that "the tie . . . goes to the plaintiff"

(quotation marks [*19] and citations omitted)).

3. Loss Causation

A securities fraud plaintiff is required to "prove both

transaction causation (also known as reliance) and loss

causation."70 Loss causation is "the proximate causal link

between the alleged misconduct and the plaintiff's eco-

nomic harm."71 "A misrepresentation is 'the proximate

cause of an investment loss if the risk that caused the loss

was within the zone of risk concealed by the misrepre-

sentations . . . .'"72 Therefore, "to plead loss causation, the

complaint[] must allege facts that support an inference

that [defendant's] misstatements and omissions concealed

the circumstances that bear upon the loss suffered such

that plaintiffs would have been spared all or an ascer-

tainable portion of that loss absent the fraud."73

70 ATSI, 493 F.3d at 106. Defendants do not

dispute transaction causation.

71 Id. at 106-07 (citing Dura Pharms., Inc. v.

Broudo, 544 U.S. 336, 346, 125 S. Ct. 1627, 161

L. Ed. 2d 577 (2005); Lentell v. Merrill Lynch &

Co., Inc., 396 F.3d 161, 172 (2d Cir. 2005)). Ac-

cord Lattanzio v. Deloitte & Touche LLP, 476

F.3d 147, 157 (2d Cir. 2007).

72 In re Omnicom Grp., Inc. Sec. Litig., 597

F.3d 501, 513 (2d Cir. 2010) (quoting Lentell,

396 F.3d at 173) (emphasis in original).

73 Lentell, 396 F.3d at 175.

B. Section 20(a) of the Exchange Act


Page 7

Section 20(a) of the Exchange Act creates a cause of

action against "control persons" of the primary violator.74

"To establish a prima facie case of control person liabil-

ity, a plaintiff must show (1) a primary violation by the

controlled person, (2) control of the primary violator by

the defendant, and (3) that the defendant [*20] was, in

some meaningful sense, a culpable participant in the

controlled person's fraud."75 Where there is no primary

violation, there can be no "control person" liability under

Section 20(a).76

74 See 15 U.S.C. § 78t(a).

75 ATSI, 493 F.3d at 108.

76 See id. See also In re eSpeed, Inc. Sec.

Litig., 457 F. Supp. 2d 266, 297-98 (S.D.N.Y.

2006).

V. DISCUSSION

A. Plaintiffs Are Entitled to Rely on Allegations from

the NYAG Complaint

Defendants argue that under Rule 11 of the Federal

Rules of Civil Procedure, the Court should strike plain-

tiffs' allegations or give them no weight because "they

are entirely (and impermissibly) premised on an unadju-

dicated complaint brought by the NYAG . . . without any

investigation by plaintiffs as to their truth or falsity."77

However, permitting plaintiffs to borrow allegations

from the NYAG's complaint is warranted at this stage in

the litigation. The facts are derived from a credible com-

plaint based on facts obtained after an investigation.78 In

addition, counsel for plaintiffs have indicated that they

have reached out to attorneys at the NYAG to verify the

allegations in the Complaint.

77 Def. Mem. at 15.

78 See, e.g., In re Bear Stearns Mortg.

Pass-Through Certificates Litig., 851 F. Supp. 2d

746, 768 n.24 (S.D.N.Y. 2012) (stating that com-

plaints containing detailed factual information

may be appropriate for borrowing).

While there is no basis to strike the Complaint at this

time, plaintiffs have an ongoing obligation under Rule

11. Plaintiffs should [*21] amend the Complaint to

eliminate any allegations that are false or inaccurate.79 At

that time, plaintiffs should also describe the independent

investigations they have done to verify the allegations in

the Complaint.

79 See, e.g., Def. Mem. at 15-16 (describing

allegations copied from NYAG action that are

factually incorrect).

B. Barclays' Statements Regarding Its Business Prac-

tices and Risk Controls Are Not Actionable Mis-

statements

1. General Statements Regarding Business Practices

and Risk Controls

Defendants argue that Barclays' statements about its

business practices and risk controls are too general to be

actionable.80 This includes statements such as "Barclays

has clear risk management objectives, and a

well-established strategy and framework for managing

risk[,]" "[a]nother key focus over 2013 and the coming

years is rebuilding the trust that customers, clients, and

stakeholders have in our organisation[, and w]e have

pledged to increase transparency and conduct our busi-

ness in the right way, as set out in our values."81

80 See id. at 17-22.

81 Compl. ¶¶ 130, 176, 190.

As courts in this Circuit routinely hold, such "gen-

eral statements about reputation, integrity, and compli-

ance with ethical norms are inactionable [*22] 'puffery,'

meaning that they are 'too general to cause a reasonable

investor to rely upon them.'"82 The alleged misstatements

based on general business practices and risk controls

contained in paragraphs 130, 134, 137, 138, 140, 147,

149, 176, 185-186, and 190 are not actionable because

they are too general to have been relied upon by a rea-

sonable investor.83

82 City of Pontiac Policemen's & Firemen's

Ret. Sys. v. UBS AG, 752 F.3d 173, 183 (2d Cir.

2014) (quoting ECA, 553 F.3d at 206). Accord

ECA, 553 F.3d at 206 (stating that "[n]o investor

would take such statements [about integrity and

risk management] seriously in assessing a poten-

tial investment, for the simple fact that almost

every investment bank makes these statements");

Boca Raton Firefighters & Police Pension Fund

v. Bahash, 506 Fed. App'x 32, 37 (2d Cir. 2012)

(holding that statements regarding a company's

"dedication towards transparent and independent

decision-making" are too "generic [and] indefi-

nite" to form the basis of a fraud claim).

83 See Gusinsky v. Barclays PLC, 944 F. Supp.

2d 279, 288-89 (S.D.N.Y. 2013), aff'd in part and

rev'd in part on other grounds sub nom. Carpen-

ters Pension Trust Fund of St. Louis v. Barclays

PLC, 750 F.3d 227, 236 (2d Cir. 2014) (holding

that statements substantially similar to the ones at

issue here are actionable puffery, including

statements such as "Barclays has clear risk man-

agement objectives and a well-established strate-

gy to deliver them, through core risk management


Page 8

processes" and "Barclays is committed to operat-

ing within a strong system of internal control that

enables [*23] business to be transacted and risk

taken without exposing itself to unacceptable po-

tential losses or reputational damage," which

closely resemble paragraphs 130, 147, 149, 176,

and 186 of the Complaint).

2. Statements Responding to the Salz Report

Plaintiffs argue that statements following the Salz

report are actionable because they address a specific

problem -- restoring Barclays' reputation following the

LIBOR scandal.84 In making this argument, plaintiffs rely

heavily on In re BP P.L.S. Securities Litigation.85 In that

case, shareholders argued that the Deepwater Horizon

explosion supported the claim that BP's statements about

its implementation of safety measures following several

earlier oil refinery accidents were false or misleading.

The statements in BP were actionable because the

Deepwater Horizon disaster was "so similar to prior dis-

asters -- the culmination of corner-cutting, overlooked

and disregarded warnings, a lack of oversight, a failure to

train employees properly, and long overdue maintenance

-- that it raised a genuine question as to whether BP was

truly making the progress it claimed."86 The court applied

those facts to the principle that "[a] repeated utterance,

even on a [*24] promise of progress, can become mis-

leading where repetition becomes a statement of current

and ongoing compliance."87

84 Plaintiffs' Opposition to Defendants' Motion

to Dismiss the Amended Complaint ("Pl. Opp."),

at 12-18 (arguing that following the Salz report,

which made thirty-four "formal recommenda-

tions, . . . Barclays embarked on a marketing

campaign designed to clean up its reputation and

regain the public's trust"). The alleged misstate-

ments made in response to the Salz report are

found at paragraphs 153, 155, 157, 159, and 161

of the Complaint.

85 843 F. Supp. 2d 712 (S.D. Tex. 2012).

86 Id. at 758.

87 Id. at 759.

However, the Complaint does not permit the same

inference with respect to Barclays. Barclays' statements

regarding the Salz report did not directly reference LX,

had not become a statement of current and ongoing com-

pliance, and lacked the requisite specificity. The allega-

tions fail to connect the statements made in response to

the Salz report to the alleged fraud at LX. Plaintiffs con-

tend that these statements relate to LX because Barclays

"represented and reinforced the commitment to imple-

ment the Salz recommendations across the entire bank"88

and that recommendations were focused on avoiding

reputational risks. But these links are [*25] too tenuous

to support liability under the securities laws. If they did,

then every individual who purchased

the stock of a company that was later dis-

covered to have broken any law could

theoretically sue for fraud. This is pre-

cisely what the Second Circuit sought to

avoid when it declined to "'bring within

the sweep of federal securities laws many

routine representations made by invest-

ment institutions.'"89

88 Pl. Opp. at 19 (emphasis in original).

89 Gusinsky, 944 F. Supp. 2d at 289-90 (quot-

ing Bahash, 506 Fed. App'x at 37 (quoting ECA,

553 F.3d at 206)). Accord In re Australia & N.Z.

Banking Grp. Ltd. Sec. Litig., No. 08-cv-11278,

2009 U.S. Dist. LEXIS 116578, 2009 WL

4823923, at *14 (S.D.N.Y. Dec. 14, 2009) (find-

ing statements not false or misleading where the

"[alleged] fraud consisted of ANZ's misrepresen-

tation of its 'equity finance practices'" but "[t]hose

practices . . . are not the subject of the representa-

tions cited in the Complaint").

While courts have held that fraud is adequately al-

leged "where statements touting risk management [are] .

. . juxtaposed against detailed factual descriptions of the

Company's woefully inadequate or non-existent credit

risk procedures,"90 plaintiffs have failed to "demonstrate

with specificity why and how" the statements here are

false or misleading.91 The most specific allegation is that

Barclays did not implement certain [*26] "specific"

controls, such as reviewing email communications.

However, neither the Salz report nor Barclays' response

to it mention reviewing email communications or any

other specific controls.

90 Freudenberg v. E*Trade Fin. Corp., 712 F.

Supp. 2d 171, 190 (S.D.N.Y. 2010).

91 Rombach, 355 F.3d at 174.

The Complaint also generally alleges that the pur-

ported fraud at LX renders false Barclays' statements that

its new risk culture and control framework "will also be

strengthened by actions to reinforce a control and com-

pliance culture throughout the bank" and that "imple-

mentation of the framework will incorporate mechanisms

to ensure that conduct, reputational and operational risks

are fully factored into business decisions and govern-

ance."92 Likewise the alleged fraud at LX is claimed to

make false the statement that Barclays is "committed to


Page 9

robust oversight in the form of a world-class compliance

function" and that it "will reinforce a culture of compli-

ance throughout the bank via a combination of training,

discussion forums and performance management."93

92 Compl. ¶ 157.

93 Id. ¶ 161.

But the fact that White lied about the "transparency

and safeguards of its dark pool in a quest to boost prof-

its" does not support an inference that Barclays was not

in fact committed to making changes [*27] or adopting

a consistent set of practices.94 The problem is that the

Complaint does not set forth specific allegations that

suggest that the conduct of Barclays' Equities Electronic

Trading division -- an entity contributing approximately

0.1 percent of Barclays' revenue -- is "representative of

[Barclays' compliance efforts in its other divisions], or

material to the company's overall financial condition."95

Thus, unlike in BP, the Complaint fails to link Barclays'

efforts to address its past misconduct with the fraud at

LX; and unlike in Freudenberg v. E*Trade Financial

Corporation, the Complaint fails to detail the lack of

controls that made the fraud at LX possible.96

94 The word "transparency" has several mean-

ings. In Barclays' response to the Salz report,

Barclays indicates in the introduction that "[t]his

report is our response to those recommendations

and strives to outline our approach to imple-

menting each of those in a clear and transparent

fashion." Id. ¶ 153. Barclays also represented that

"[i]n the spirit of transparency and rebuilding

trust, Barclays will publish updates on [its] pro-

gress in [its] implementation programme." Id. ¶

33. The Complaint also states that Barclays' 2013

Annual Report [*28] disclosed that "[a]nother

key focus over 2013 and the coming years is re-

building the trust that customers, clients, and

stakeholders have in our organisation. We have

pledged to increase transparency and conduct our

business in the right way, as set out in our val-

ues." Id. ¶ 190. The first two statements refer to

being open about implementing the Salz recom-

mendations. The Complaint does not allege that

Barclays failed to be open about this process. The

meaning of transparency in the last statement,

which is paradigmatic puffery, is unclear.

95 Rombach, 355 F.3d at 174.

96 This case is also different from In re Bar-

rick Gold Secs. Litig., No. 13-cv-3851, 2015 U.S.

Dist. LEXIS 43053, 2015 WL 1514597, at

*13-14 (S.D.N.Y. Apr. 1, 2015), in which Barrick

was required to establish internal controls that

provide assurances regarding the achievement of

objectives. In that case, Barrick certified that its

internal controls were effective, the fraud was di-

rectly related to a failure of those controls, and

the fraud occurred at a key company project. See

also City of Brockton Ret. Sys. v. Avon Prods.,

Inc., No. 11-cv-4665, 2014 U.S. Dist. LEXIS

137387, 2014 WL 4832321, at *16 (S.D.N.Y.

Sept. 29, 2014) ("A reasonable investor could in-

terpret Avon's statements about its allegedly

elaborate internal controls operation as reflecting

concrete steps that Avon had taken in this area,

and might rely [*29] upon these statements as a

guarantee that such steps had, in fact, been im-

plemented."); In re Goldman Sachs Group, Inc.

Sec. Litig., No. 10-cv-3461, 2014 U.S. Dist.

LEXIS 85683, 2014 WL 2815571, at *4-5

(S.D.N.Y. June 23, 2014) ("Goldman's represen-

tations about its purported controls for avoiding

conflicts were directly at odds with its alleged

conduct. For instance, Goldman represented that

'[w]e have extensive procedures and controls that

are designed to . . . address conflicts of interest'

and 'we increasingly have to address potential

conflicts of interest, including situations where

our services to a particular client or our own pro-

prietary investments or other interests conflict, or

are perceived to conflict, with the interest of an-

other client. . . .' Meanwhile, Goldman is alleged

to have sold financial products to clients despite

clear and egregious conflicts of interest -- indeed,

where its 'services to a particular client' . . . and

its 'own proprietary investments' . . . 'conflict[ed]

with the interest of [the] other client[s]' investing

in those deals.") (citations omitted); In re UBS

AG Sec. Litig., No. 07-cv-11225, 2012 U.S. Dist.

LEXIS 141449, 2012 WL 4471265, at *36

(S.D.N.Y. Sept. 28, 2012) (distinguishing state-

ments that were mere puffery from "qualitative

assurances and affirmative guarantees regarding .

. . specific steps [the Defendant] had [*30] taken

to achieve particular results").

Moreover, Barclays never said that it had completed

implementation of the Salz recommendations. To the

contrary, Barclays stated that it "aim[ed] to have the

majority of all the [Salz report] recommendations im-

plemented by 2015."97 But plaintiffs commenced this

action in July of 2014, based on earlier conduct. Ac-

cordingly, no reasonable investor could believe that Bar-

clays' statements in response to the Salz report were "a

statement of current and ongoing compliance."98

97 Compl. ¶ 33 (emphasis added).

98 BP, 843 F. Supp. 2d at 759.

Finally, it is well settled in this Circuit that it is the

generic nature of the statement that makes it puffery, and


Page 10

this quality is not typically altered by context.99 State-

ments that Barclays' "new risk culture and control

framework 'will also be strengthened by actions to rein-

force a control and compliance structure'" or describing

Barclays' "world-class compliance function" are nearly

identical to statements that have been held to be

non-actionable puffery by courts in this Circuit.100

99 See UBS AG, 752 F.3d at 183 ("It is

well-established that general statements about

reputation, integrity, and compliance with ethical

norms are inactionable 'puffery,' meaning that

they are 'too general [*31] to cause a reasonable

investor to rely upon them.' This is particularly

true where, as here, the statements are explicitly

aspirational, with qualifiers such as 'aims to,'

'wants to,' and 'should.' Plaintiffs' claim that these

statements were knowingly and verifiably false

when made does not cure their generality, which

is what prevents them from rising to the level of

materiality required to form the basis for as-

sessing a potential investment.") (quoting ECA,

553 F.3d at 206); Bahash, 506 Fed. App'x at 37

(explaining that "[t]he 'puffery' designation . . .

stems from the generic, indefinite nature of the

statements at issue, not their scope").

100 See, e.g., C.D.T.S. No. 1, No. 12-cv-4924,

2013 U.S. Dist. LEXIS 175757, 2013 WL

6576031, at *4-5 (S.D.N.Y. Dec. 13, 2013)

(holding that statements regarding the bank's new

"controlled and disciplined risk culture" were in-

actionable puffery); In re Gentiva Secs. Litig.,

932 F. Supp. 2d 352, 370 (E.D.N.Y. 2013)

(holding that statements regarding a bank's

"best-of-class" compliance program were puff-

ery). Likewise, the court in BP dismissed as

puffery many generalized statements similar to

those at issue here. For example, the court dis-

missed statements BP made about its "commit-

ment to safety" and its "progress" towards im-

proving its safety, noting that "general 'progress'

is simply too illusory a metric" to be actionable.

843 F. Supp. 2d at 757.

As already noted, [*32] Barclays' statements are

not only generic, but are for the most part aspirational.

However, the statements that purport to describe what

Barclays had already accomplished are also "too

open-ended and subjective to constitute a guarantee" that

fraudulent conduct would not again occur at Barclays.101

This applies to the statements that "Barclays' Investment

Bank adopted new processes for effectively learning

from mistakes in 2012 following an internal review,"

which "allow[s] Barclays to understand and address un-

derlying root causes of issues and apply lessons learned

more broadly."102 Accordingly, the alleged misstatements

made in response to the Salz report are inactionable

puffery.

101 UBS AG, 752 F.3d at 186.

102 Compl. ¶ 159.

C. The Misrepresentations Regarding LX

According to plaintiffs, "[i]n an effort to propel LX

to the very top, . . . Barclays embarked on a mission to

mislead the market about the transparency and safe-

guards of its dark pool."103 Barclays "touted Liquidity

Profiling as a 'sophisticated surveillance framework,

helping to protect [clients] from predatory trading . . .

.'"104 And White stated in trade journals and in a comment

letter to the Financial Industry Regulatory Authority that,

with respect to LX, "the biggest [*33] theme of the

[2013] year was transparency," and that "Barclays[] be-

lie[ves] that transparency is not only important but bene-

fits both our clients and the market."105

103 Pl. Opp. at 27.

104 Id. (quoting Compl. ¶ 67).

105 Compl. ¶¶ 165, 169, 181, 183. The Com-

plaint states that a certain Liquidity Landscape

Chart misrepresented the extent of trading by

HFTs on LX because Tradebot, one of the largest

participants in the pool, was not included in the

chart. See id. ¶¶ 132-133. The Complaint also al-

leges that Barclays gave some clients confidential

marketing materials that described factors Bar-

clays considered in assigning the Liquidity Pro-

filing ratings that clients could use to block ag-

gressive counterparties, but that Barclays did not

disclose several features. See id. ¶¶ 45-46, 64, 93,

123, 128, 143, 145. However, plaintiffs do not

allege that these documents were disclosed pub-

licly or to Barclays ADS holders. Plaintiffs can-

not rely on the "fraud on the market" presumption

of reliance because they cannot plausibly allege

that the statements contained in these materials

were intended to affect the price for Barclays

ADSs or even that they reached the market. See

Stoneridge Inv. Partners, LLC, 552 U.S. at 159.

The same holds true for plaintiffs' allegations

[*34] regarding latency arbitrage and the inter-

nalization statistic. See Compl. ¶¶ 102, 109-112.

White also said in trade journals and in presentation

slides he used at the American Enterprise Institute con-

ference that Barclays "monitors client orders continu-

ously" on LX, has "controls" and "safeguards to manage

toxicity" on LX and "can take corrective action" if nec-

essary. Further, White stated that by "understanding the

characteristics of flow at the client level, Barclays can

improve the overall quality of LX liquidity: . . . high al-


Page 11

pha takers [i.e., aggressive traders] can be held account-

able, e.g., by demanding liquidity providing strategies, or

by refusing a client access."106 Plaintiffs allege that these

statements were misleading because Barclays did not

disclose that it did not eliminate traders who behaved in

a predatory manner, did not restrict predatory traders

access to LX, did not monitor client orders continuously,

and did not apply Liquidity Profiling to some trading

activity in LX.107 In fact, plaintiffs allege, Barclays en-

couraged predatory traders to enter LX.

106 Compl. ¶¶ 122, 127, 144, 151, 163.

107 See id. ¶¶ 123, 128, 143, 145, 152, 164,

167, 172, 194.

In addition, slides White used [*35] at the AEI

conference indicated that Barclays' order router would

"send[] orders to . . . venues with the greatest likelihood

of fill."108 And White told trade journals that Barclays'

order router "constantly examines market conditions in

real time and adjusts its order-handling strategy immedi-

ately."109 Plaintiffs contend that these statements were

misleading because Barclays did not disclose that an

"internal analysis" found that orders unfilled on LX were

"routed disproportionately to other trading venues based

on where Barclays had been most profitable" and that

client orders were routed to LX at a "high rate."110

108 Id. ¶ 125.

109 Id. ¶ 163.

110 Id. ¶¶ 105, 108.

1. The Complaint Adequately Pleads Materiality

Defendants argue that plaintiffs have not alleged

"any facts suggesting that statements about LX could

have been material to any investor in Barclays PLC."111

According to defendants, "[t]he bare fact that Barclays'

ADS price dropped after the NYAG sued Barclays does

not suffice to show materiality because the stock drop

could reflect the market's reaction to additional regulato-

ry scrutiny of Barclays -- rather than a reaction to the

correction of prior alleged misstatements about LX."112

111 Def. Mem. at 23.

112 Id.

Materiality [*36] is a fact-intensive inquiry that is

ordinarily inappropriate for resolution on a motion to

dismiss.113 As defendants correctly note, the Second Cir-

cuit follows the quantitative and qualitative factors set

forth in SEC Staff Accounting Bulletin No. 99 ("SAB

No. 99").114 Under the quantitative factor, the SEC con-

siders the financial magnitude of the misstatement. The

"use of a percentage as a numerical threshold, such as

5%, may provide the basis" for determining whether an

alleged misstatement could be material.115 Under the

qualitative factor, the SEC considers: (1) whether there

was a concealment of an unlawful transaction; (2) the

significance of the misstatement in relation to the com-

pany's operations; and (3) management's expectation that

the misstatement will result in a significant market reac-

tion.116 At the same time, the Second Circuit has "con-

sistently rejected a formulaic approach to assessing the

materiality of an alleged misrepresentation."117 Thus, to

plead materiality a plaintiff must specifically identify

qualitative factors demonstrating a substantial likelihood

that a reasonable shareholder would think that the addi-

tion of that fact "significantly alter[s] the 'total mix' of

information [*37] made available."118

113 See Ganino, 228 F.3d at 162.

114 See SAB No. 99, 64 Fed. Reg. 45150,

45150-52 (1999).

115 ECA, 553 F.3d at 204 (quotation marks

omitted).

116 See id.

117 Hutchison v. Deutsche Bank Sec. Inc., 647

F.3d 479, 485 (2d Cir. 2011).

118 Id. Accord ECA, 553 F.3d at 198 ("While

SAB No. 99 does not change the standard of ma-

teriality, we consider the factors it sets forth in

determining whether the misstatement signifi-

cantly altered the 'total mix' of information

available to investors.").

Plaintiffs' allegations and publicly available docu-

ments indicate that LX's revenue in relation to the overall

revenue of Barclays PLC is far below the five percent

threshold.119 Despite this, the Complaint adequately al-

leges materiality. Barclays had staked its "long-term

performance" on restoring its integrity.120 As alleged, the

specific misstatements about LX -- which include touting

its safety while secretly encouraging predatory behavior

-- call into question the integrity of the company as a

whole. For this reason, it is inappropriate to focus only

on the revenue stream of LX when assessing the quanti-

tative factor. Likewise, SAB No. 99 permits considera-

tion of market reaction in instances where management

expects "that a known misstatement may result in a sig-

nificant positive or negative market reaction." Drawing

all reasonable inference in plaintiffs' favor, the Com-

plaint adequately alleges Barclays' [*38] past scandals,

its efforts to restore its reputation, and, most significant-

ly, misrepresentations that go to the heart of the firm's

integrity and reputation. Accordingly, I cannot conclude

as a matter of law that there is not a "substantial likeli-

hood that a reasonable shareholder would consider [the

misrepresentations about LX] important in deciding how

to [act]."121

119 Plaintiffs allege that LX reflected a reve-

nue "growth opportunity" of "between $37 and


Page 12

$50 million per year." Compl. P 54. Barclays'

annual income from 2011 and 2013 was between

twenty-five and roughly thirty-three billion

pounds. See 3/9/14 Barclays PLC, 2013 Annual

Report (Form 20-F). That means that LX ac-

counted for 0.1 percent of Barclays PLC's total

revenue.

120 Compl. P 138 (Jenkins stated that "I be-

lieve Barclays will only be a valuable business if

it is a values-driven business. We must operate to

the highest standards if our stakeholders are to

trust us and bring their business to Barclays. Our

long-term performance depends on it.").

121 Basic Inc. v. Levinson, 485 U.S. 224,

231-32, 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988)

(quotation marks omitted). This holding does not

foreclose defendants from attempting to demon-

strate at a later stage that the price drop was not a

reaction to the particular fraud alleged [*39] but

to the fact that Barclays was being sued by a reg-

ulator. Nor does it preclude defendants from at-

tempting to demonstrate lack of materiality on

other grounds, including that the alleged mis-

statements were not in fact false or misleading.

2. The Complaint Pleads Scienter as to White

To state a claim for securities fraud, the "scienter al-

legations must give rise to a strong inference of fraudu-

lent intent."122 "A plaintiff can establish this intent either

(a) by alleging facts to show that defendants had both

motive and opportunity to commit fraud, or (b) by alleg-

ing facts that constitute strong circumstantial evidence of

conscious misbehavior or recklessness."123

122 Kalnit, 264 F. 3d at 138 (quotation marks

omitted).

123 Id. (quotation marks omitted).

a. Motive and Opportunity

The Complaint does not allege that any Individual

Defendant other than White knew about the LX product,

much less that they intended to mislead ADS holders

with regard to that product. Accordingly, the allegations

in the Complaint are insufficient to allege scienter based

on motive as to these defendants.

Plaintiffs contend that White was motivated by the

potential profitability of LX and that "improving LX to

be the most successful ATS was also an imprimatur

[*40] of prestige."124 However, it is well settled in this

Circuit that general allegations of a profit or prestige

motive are insufficient to allege scienter.125 The problem

is that "plaintiffs' motive allegations [are] too generalized

to demonstrate defendants' concrete and personal benefit

from the alleged fraud."126 Furthermore, "the facts alleged

must support an inference of an intent to defraud the

plaintiffs rather than some other group."127 At most, the

allegations relate to White's motive to defraud clients of

LX, not ADS holders.

124 Pl. Opp. at 40.

125 See ECA, 553 F.3d at 201 (holding that

"the allegation that [defendants] had the requisite

motive because they received bonuses based on

corporate earnings and higher stock prices does

not strengthen the inference of fraudulent in-

tent"); Teamsters Local 445 Freight Div. Pension

Fund v. Dynex Capital Inc., 531 F.3d 190, 196

(2d Cir. 2008); Kalnit, 264 F.3d at 139-40 ("In-

sufficient motives, we have held, can include (1)

the desire for the corporation to appear profitable

and (2) the desire to keep stock prices high to in-

crease officer compensation. On the other hand,

we have held motive sufficiently pleaded where

plaintiff alleged that defendants misrepresented

corporate performance to inflate stock prices

while they sold their own shares.") (citations

omitted); Chill v. General Elec. Co., 101 F.3d

263, 268 (2d Cir. 1996).

126 Kalnit, 264 F.3d at 140 (quotation marks

omitted).

127 ECA, 553 F.3d at 198 (citing [*41] Kal-

nit, 264 F.3d at 140-41).

b. Strong Circumstantial Evidence of Conscious Mis-

behavior or Recklessness

Where a plaintiff cannot show motive, circumstan-

tial evidence of conscious misbehavior or recklessness

will suffice. But "the strength of the circumstantial alle-

gations must be correspondingly greater" in the absence

of motive.128 Plaintiffs argue that Individual Defendants

Diamond, Jenkins, Lucas, and Morzaria had knowledge

because they "occupied senior executive positions at

Barclays" and "[a]s champions for a changed Barclays,

[they] were responsible for and had a duty to monitor

Barclays' purported transformation."129 However,

"[c]ourts in this Circuit have long held that accusations

founded on nothing more than a defendant's corporate

position are entitled to no weight."130 And the Complaint

has not "specifically identified any reports or statements

that would have come to light in a reasonable investiga-

tion and that would have demonstrated the falsity of the

alleged misleading statements."131

128 Id. at 199 (quotation marks omitted).

129 Pl. Opp. at 37.

130 Plumbers & Steamfitters Local 773 Pen-

sion Fund v. Canadian Imperial Bank of Com-

merce, 694 F. Supp. 2d 287, 300 (S.D.N.Y.

2010).


Page 13

131 Teamsters Local 445, 531 F.3d at 196.

Plaintiffs argue that "Jenkins met regularly with

members of the Business Practices Review

Committee," but there is no allegation that this

Committee presented any information contra-

dicting [*42] the public statements about LX or

otherwise raised red flags about the implementa-

tion of LX. Pl. Opp. at 37.

Plaintiffs also contend that Individual Defendants

Diamond, Jenkins, Lucas, and Morzaria acted with sci-

enter because they "should have been particularly dili-

gent" once they were on notice that dark pools were sub-

ject to manipulation.132 And plaintiffs contend that these

same defendants were reckless because they were not

sufficiently "diligent in ensuring that Barclays was im-

plementing sufficient internal controls and procedures

designed to prevent fraud."133 But these allegations are far

too general to give rise to a strong inference in the ab-

sence of a motive.

132 Pl. Opp. at 38.

133 Id. at 39.

On the other hand, there is strong circumstantial ev-

idence of conscious misbehavior or recklessness on the

part of White. Not only was White the source of many of

the allegedly false allegations about LX, but he was the

head of Equities Electronic Trading at Barclays, "the

driving force behind the Company's goal to be the num-

ber one dark pool," and he "held himself [out] to the

public as intimately knowledgeable about LX's functions

and purported transparency."134

134 Id. at 34.

For instance, in February 2014, Barclays' [*43]

dark pool was named the "Best Dark Pool" by an indus-

try publication. White attributed its growth to "Barclays'

commitment to being transparent about how Barclays

operates, how Barclays routes client orders, and the

kinds of counterparties traders can expect to deal with

when trading in the dark pool." White stated that trans-

parency was "the one issue that we really took a stance

on . . . We always come back to transparency as the key

driver -- letting [clients] know how we're interacting with

their flow and what type of flow they're interacting

with." In addition, he stated that "[t]ransparency on mul-

tiple levels is a selling point for our entire equities fran-

chise."135 At the same time, a former Barclays Director in

the Equities Electronic Trading division informed the

government that Barclays "purport[s] to have a toxicity

framework that will protect you when everybody knows

internally that the thing is done manually with outliers

removed and things are classified only if they feel like

it."136 Corroborating this Director's account, another for-

mer Director in the division described Liquidity Profiling

as "a scam."

135 Compl. P 61; see also id. P 64 (in March

2013, defendant White stated that Barclays' dark

pool "is an integral [*44] part of our electronic

trading offering, providing clients with enhanced

execution quality . . . built on transparency and

preventing information leakage. We have built in

safeguards to manage toxicity, and to help our in-

stitutional clients understand how to manage their

interactions with high-frequency traders.").

136 Id. P 98 (emphasis added).

These allegations are sufficient to create a strong in-

ference of "an extreme departure from the standards of

ordinary care . . . to the extent that the danger was either

known to the defendant or so obvious that the defendant

must have been aware of it."137 Given the alleged nature

of the fraud -- whereby Barclays was touting the safety

of LX while at the same time courting predatory firms --

the common knowledge within the group about the fraud,

and the importance of Barclays' reputation to the com-

pany's continuing success,138 White either knew or should

have known that the disclosure of the fraud would harm

shareholders.

137 ECA, 553 F.3d at 198.

138 See, e.g., Compl. P 138.

3. Scienter of the Corporate Defendants

"'When the defendant is a corporate entity, . . . the

pleaded facts must create a strong inference that some-

one whose intent could be imputed to the corporation

acted with the requisite [*45] scienter.'"139 Here, White

is a management-level employee and his scienter is

properly imputed to Barclays.

139 Carpenters Pension Trust Fund of St. Lou-

is, St. Clair Shores Police & Fire Ret. Sys. v.

Barclays PLC, No. 12-cv-5329, 2014 U.S. Dist.

LEXIS 148772, 2014 WL 5334053, at *2

(S.D.N.Y. Oct. 20, 2014) (quoting Teamsters

Local 445, 531 F.3d at 195). In this context, "it is

possible to raise the required inference [of scien-

ter] with regard to a corporate defendant without

doing so with regard to a specific individual de-

fendant." Id. (quotation marks omitted).

D. Loss Causation as to the June 27 Telegraph Article

Defendants contend that the Court should dismiss

any claim for losses allegedly incurred on June 30, 2014,

as a result of the June 27 Telegraph report. Defendants

argue that because the article does not reveal a new

fraud, the Complaint does not adequately plead loss cau-


Page 14

sation. Defendants also assert that the market had already

reacted to the corrective disclosure of the NYAG com-

plaint, and the only information added in the June 27

article was speculation about the size of a possible fine.140

A review of the article supports the defendants' argu-

ments. The analyst's speculation about the size of a pos-

sible fine and the opinion about the relative importance

of the scandal do not reveal any new truth about [*46]

the alleged fraud.141

140 See Def. Mem. at 42-43.

141 See Janbay v. Canadian Solar, Inc., No.

10-cv-4430, 2012 U.S. Dist. LEXIS 47125, 2012

WL 1080306, at *16 (S.D.N.Y. Mar. 30, 2012)

(stating that "the raising of questions and specu-

lation by analysts and commentators does not re-

veal any 'truth' about an alleged fraud) (citing In

re Omnicom Group, Inc. Sec. Litig., 597 F.3d at

510 holding that "negative journalistic character-

ization of previously disclosed facts does not

constitute a corrective disclosure")).

E. Control Person Liability

The Complaint adequately pleads a primary viola-

tion as to Barclays and White. It also pleads that White

and Individual Defendants Diamond, the former CEO,

and Jenkins, who replaced Diamond as CEO in August

2012 and continues to hold that position, are control

persons for purposes of section 20(a). Although Individ-

ual Defendants Lucas and Morzaria, who were both Fi-

nance Directors, would likely have had control over

statements in Barclays' SEC filings, none of the actiona-

ble statements remaining in the case were in those fil-

ings. Accordingly, the Complaint does not adequately

allege a section 20(a) claim against Individual Defend-

ants Lucas and Morzaria.

F. Leave to Replead

Plaintiffs request leave to amend in the event any

portion of defendants' motion is granted. Leave to amend

should be freely given "when justice so requires." [*47] 142 However, plaintiffs already had an opportunity to

amend their claims and had notice of defendants' antici-

pated defenses prior to the filing of this motion to dis-

miss.143 Moreover, any further amendment would be fu-

tile. The alleged misstatements about Barclays' business

practices and internal controls and in response to the Salz

report are too general to be actionable; and, because

these statements are not actionable, there is no basis for

section 20(a) liability against Individual Defendants Lu-

cas and Morzaria.

142 Fed. R. Civ. P. 15(a)(2).

143 See Individual Rules and Procedures of

Judge Shira A. Scheindlin, Rule IV.B (stating

that parties must exchange letters prior to bring-

ing a motion to dismiss to "attempt to eliminate

the need for [the] motion[]").

VI. CONCLUSION

For the foregoing reasons, defendants' motion is

GRANTED solely to the extent that the section 20(a)

claims are dismissed as to Individual Defendants Lucas

and Morzaria, and is otherwise DENIED (except insofar

as the alleged misstatements regarding Barclays' general

business practices and risk controls and in response to

the Salz report identified herein are deemed inactionable

and plaintiffs may not seek damages based on the June

27 Telegraph article). Plaintiffs shall amend the [*48]

Complaint within thirty days to comply with their obli-

gations under Rule 11 as noted in section IV. A of this

Opinion and Order. The Clerk of the Court is directed to

close this motion (Docket No. 28). A conference is

scheduled for May 5, 2015 at 4:30 p.m.

SO ORDERED:

/s/ Shira A. Scheindlin

Shira A. Scheindlin

U.S.D.J

Dated: New York, New York

April 24, 2015

Caution

As of:Jun 02, 2015

SECURITIES EXCHANGE COMMISSION,Plaintiff-Appellee,- v. - MONARCH

FUNDING CORPORATION,LEO M. EISENBERG,STEVEN R. CLOYES,and

RICHARD M. CANNISTRARO,Defendants,RICHARD O. BERTOLI,

Defendant-Appellant.

Docket No. 98-6120

UNITED STATES COURT OFAPPEALS FOR THE SECOND CIRCUIT

192 F.3d 295;1999 U.S. App. LEXIS 22815;Fed. Sec. L. Rep. (CCH) P90,646

April 20,1999,Argued

September 20,1999,Decided

SUBSEQUENT HISTORY: [**1] Counsel

Amended November 5, 1999.

PRIOR HISTORY: Richard O. Bertoli appeals from

an order of the United States District Court for the

Southern District of New York (Sand, J.), granting the

Securities Exchange Commission summary judgment.

DISPOSITION: VACATED and REMANDED.

COUNSEL:JOHN AVERY, Securities and Exchange

Commission, Washington, D.C. (Harvey J. Goldschmid,

General Counsel, Jacob H. Stillman, Associate General

Counsel, Katharine B. Gresham, Assistant General

Counsel, Rada Potts, Senior Counsel; and Paul Gonson,

Solicitor, on the brief) for Plaintiff-Appellee.

RICHARD WARE LEVITT, Law Offices of Richard

Ware Levitt, New York, New York (Nicholas Kaizer on

the brief), for Defendant-Appellant.

John H. Doyle, III, Anderson Kill & Olick, P.C., New

York, New York and Jack Arseneault, and David W.

Fassett, Arseneault & Krovatin, Chatham, New Jersey,

submitted a brief for amici curiae, New York Council of

Defense Lawyers and the Association of Criminal

Defense Lawyers of New Jersey.

Joshua L. Dratel, Law Offices of Joshua L. Dratel, P.C.,

New York, New York, for amici curiae, National

Association of Criminal Defense Lawyers and the New

York State Association of Criminal Defense Lawyers.

JUDGES: Before: KEARSE, McLAUGHLIN,

CALABRESI, Circuit Judges.

OPINION BY:MCLAUGHLIN

OPINION

[*298]McLAUGHLIN, Circuit Judge:

The question before us on this appeal, one of first

impression, is whether findings made in a criminal

sentencing proceeding may preclude [**2]relitigation of

Page 1

an issue in a subsequent civil case.

The SEC sued Richard Bertoli in the United States

District Court for the Southern District of New York

(Sand, J.) seeking injunctive relief based on his alleged

violations of the federal securities laws. Those same

alleged violations formed the predicate acts for a parallel

criminal prosecution of Bertoli under the Racketeer

Influenced and Corrupt Organizations Act ("RICO"), 18

U.S.C. §1961, et seq., in the United States District Court

for the District of New Jersey (Lechner, J.).

In the criminal case, a jury acquitted Bertoli of the

RICO charges but convicted him on related obstruction of

justice charges. Following the conviction, Judge Lechner

enhanced Bertoli's sentence after finding that he had

committed securities fraud and had engaged in an

eight-year conspiracy to cover it up. The SEC then

moved for summary judgment in the civil proceeding,

arguing that Bertoli should be collaterally estopped from

denying his securities fraud liability by virtue of Judge

Lechner's sentencing findings. Judge Sand agreed and

granted the SEC a permanent injunction enjoining Bertoli

from future violations [**3]of Section 10(b) of the

Securities Exchange Act of 1934 (the "1934 Act")

together with Rule 10b-5 promulgated thereunder, and

Section 17(a) of the Securities Act of 1933 (the "1933

Act").

Bertoli now appeals. Supported by various amici, he

maintains that sentencing findings should never be given

preclusive effect in civil litigation. Alternatively, Bertoli

argues that even if collateral estoppel could extend to

sentencing findings, application of the doctrine in this

case was inappropriate.

While we decline to adopt the sweeping per se

prohibition urged by Bertoli, we conclude that the

application of collateral estoppel in this case was

improper. Accordingly, we vacate and remand for further

proceedings.

BACKGROUND

We recount only the facts necessary to this appeal. 1

The SEC originally filed this civil suit in September 1985

in the Southern District of New York (Sand, J.). See

S.E.C. v. Monarch Funding Corp., 85 Civ. 7072

(S.D.N.Y.) (LBS). The Commission alleged that Bertoli

and others violated Section 10(b) of the 1934 Act, Rule

10b-5, and Section 17(a)(1)-(3) of the 1933 Act in

connection with his involvement in the activities of

Monarch Funding Corporation [**4]("Monarch"), a

securities brokerage firm in New York City. The SEC

sought disgorgement of Bertoli's ill-gotten gains and a

permanent injunction enjoining Bertoli from future

violations of those laws.

1 For a comprehensive account of the prior

proceedings in this case, as well as the related

criminal cases, see S.E.C. v. Monarch Funding

Corp., 983F. Supp. 442(S.D.N.Y. 1997); United

States v. Bertoli, 854 F. Supp. 975(D.N.J.), aff'd

in part, vacated in part, 40 F.3d 1384 (3d Cir.

1994); United States v. Cannistraro, 800F. Supp.

30(D.N.J. 1992); United States v. Eisenberg, 773

F. Supp. 662(D.N.J. 1991).

[*299]The civil action was placed on Judge Sand's

suspense calendar pending the outcome of a related

criminal prosecution in the United States District Court

for the District of New Jersey (Lechner J.). See United

States v. Richard O. Bertoli, 89 Cr. 218(D.N.J. 1989).

That action was prosecuted by the New Jersey United

[**5]States Attorney's Office with "a high degree of

consultation and coordination" with the SEC. S.E.C. v.

Monarch Funding Corp., 983 F. Supp. 442, 455

(S.D.N.Y. 1997).

In the criminal action, Bertoli and his two

co-defendants, Richard Cannistraro and Leo Eisenberg,

faced a multiple count indictment. Of particular relevance

to this appeal are Counts One and Two, charging Bertoli

with RICO violations based on a pattern of racketeering

activity involving, inter alia, predicate violations of

Section 10(b) and Rule 10b-5. Also relevant to this appeal

are Count Three, which charged Bertoli with conspiracy

to obstruct justice in violation of 18U.S.C. §371, based

on his attempts to obstruct the various civil, grand jury

and criminal proceedings arising from his alleged fraud,

and Count Six accusing him of obstructing justice in

violation of 18 U.S.C. §§ 1502 and 1503by moving

certain proceeds of his racketeering activities from the

Cayman Islands to the principality of Andorra in Europe.

After Eisenberg and Cannistraro pled guilty, Bertoli

was tried before a jury in the summer of 1993. Following

a three-month trial, Bertoli [**6]was convicted of the

obstruction of justice charges contained in Counts Three

and Six. He was acquitted, however, on all other charges,

including Counts One and Two, which charged the

predicate securities fraud violations.

Page 2192 F.3d 295, *298; 1999 U.S. App. LEXIS 22815, **2;

Fed. Sec. L. Rep. (CCH) P90,646

A. The Original Sentencing

Following Bertoli's conviction, the parties engaged

in extensive litigation over various post-trial and

sentencing issues. On March 28, 1994, Judge Lechner

sentenced Bertoli, issuing a 189 page opinion two days

later to, inter alia, "clarify and amplify the rulings made

during . . . sentencing." United States v. Bertoli, 854 F.

Supp. 975,1164(D.N.J. 1994)("Bertoli I").

Judge Lechner began the sentencing portions of that

opinion by recounting Bertoli's long and diverse history

of legal troubles. Included in those troubles were several

run-ins with the SEC in the 1970s, which resulted in

injunctions against Bertoli. See Bertoli I, 854 F. Supp. at

1127. Also noteworthy were Bertoli's efforts to thwart a

creditor through the fraudulent transfer of assets to his

brother and minor children, see id. at 1127-28, as well as

his ensuing personal bankruptcy, see id. at 1060.

[**7]Next, Judge Lechner turned to the calculation

of Bertoli's sentence, using the 1993 version of the

United States Sentencing Guidelines and accompanying

Commentary. Specifically, Judge Lechner applied §

2J1.2, the Guideline applicable to obstruction of justice.

That provision provides in pertinent part that:"if the

offense involved obstructing the investigation or

prosecution of a criminal offense, apply §2X3.1 . . . ."

Section 2X3.1, in turn, provides that the offense level is to

be calculated on the basis of the criminal conduct

underlying the investigation obstructed by the defendant.

And, according to Judge Lechner, §2X3.1applied even if

the defendant was not actually convicted of that

underlying criminal conduct. See Bertoli I, 854 F. Supp.

at 1144-46.

Judge Lechner found that the underlying criminal

conduct that Bertoli had attempted to conceal was

securities fraud - specifically, Bertoli's orchestration of

what Judge Lechner termed the "Stock Manipulation

Schemes." To summarize, Judge Lechner found that in or

about 1982 or 1983, Bertoli began to work at Monarch,

the securities brokerage firm. See id. at 1128. Eisenberg,

Monarch's owner [**8]and president, permitted Bertoli

to use the firm's offices to promote and arrange securities

[*300]transactions on a "behind the scenes" basis. Id.

Among the deals arranged by Bertoli was Monarch's

underwriting of the initial public offerings ("IPOs") of

three new issuers:Liquidation Control, Inc. ("LCI"),

Toxic Waste Containment, Inc. ("Toxic"), and High

Technology Capital Corp. ("High Tech"). See id. In

trading immediately following the IPOs, Bertoli

orchestrated an artificial increase in the price of each

stock through a series of controlled trades at successively

higher prices. See id. at 1129. After the prices had risen

to a certain level, unwitting members of the investing

public were brought in to purchase the stocks.

Cannistraro, an analyst at a New York City brokerage,

helped recruit outside buyers by writing favorable

research reports about the IPOs. See id. Unsurprisingly,

the true nature of this fraudulent scheme was not

disclosed in the public documents filed and issued in

connection with the IPOs. See id. at 1129 n.237.

The scheme was hugely successful. Within a few

months of their issuance, the shares of LCI, Toxic, and

High [**9]Tech were trading at many times their

offering prices. See id. at 1129. Eventually, Bertoli and

his cohorts pricked the bubble at the inflated prices,

selling out for millions in profit. The stock prices then

plummeted leaving the public investors with large losses.

See id.

Bertoli, Cannistraro, and Eisenberg initially stashed

their profits in Cayman Island accounts, either in their

own names or those of various companies they created to

serve as repositories. Later, however, Bertoli transferred

those profits to the tiny principality of Andorra. See id. at

1130,1135.

According to Judge Lechner, these findings

established that Bertoli had committed securities fraud

"by at least a preponderance of the evidence." Id. at 1139.

As a result, directed by the cross reference provision of §

2X3.1, Judge Lechner calculated Bertoli's sentence using

§2F1.1- the Guideline applicable to fraud. Application

of that Guideline yielded a total offense level of 28 and a

Guideline range of 87 to 108 months. Judge Lechner

sentenced Bertoli to two 100-month concurrent prison

terms and three years supervised release. Judge Lechner

also imposed, [**10]without explanation, a special

condition of supervised release barring Bertoli from

associating with any person involved in the securities

industry.

On appeal, the Third Circuit affirmed Bertoli's

conviction but vacated his sentence. See United States v.

Bertoli, 40F.3d 1384, 1401-11(3d Cir. 1994)("Bertoli

II"). The Third Circuit determined that by using the 1993

version of the Guidelines and Commentary, Judge

Lechner imposed a sentence in excess of what was



permissible under the 1989 version applicable to Bertoli's

conduct, thereby violating his right against expost facto

punishment. See Bertoli II, 40F.3d at 1407.

B. The Resentencing

On remand, the government moved for an

enhancement of Bertoli's sentence under Guideline §

2J1.2(b)(2), which Judge Lechner had been prevented

from applying at the original sentencing because he had

chosen to apply the mutually exclusive § 2X3.1

provision. Section 2J1.2(b)(2)allows for a three-level

increase for obstruction of justice convictions if the

offense "resulted in substantial interference with the

administration of justice." After holding a hearing, Judge

Lechner issued an opinion [**11] expressly

incorporating by reference his factual findings from

Bertoli I. See United States v. Bertoli, 89 Cr. 218(D.N.J.

March 22, 1995)("Bertoli III").

In the second opinion, Judge Lechner found that

Bertoli moved assets, induced an important witness to

evade service of process, filed false affidavits, and

shredded documents, all in an effort to interfere with the

government's investigation into Monarch's activities.

Judge Lechner further found that Bertoli had directed two

key witnesses to lie to SEC investigators. More

specifically, Judge Lechner found [*301]that Bertoli

caused Robert Cooper, a stock broker and a player in the

fraudulent LCI IPO, to claim falsely that:(1) he, not

Cannistraro, wrote a favorable research report on LCI

based on analysis of the company and discussions with its

officers; and (2) Bertoli had never discussed LCI with

him and had no involvement in the drafting of the

research report. See Bertoli III at 19-21 (referring to

Bertoli I, 854 F. Supp. at 1131-32). Similarly, Judge

Lechner found that Bertoli instructed Eisenberg to "do

whatever he had to do" to protect himself and Bertoli, and

that Eisenberg responded by lying to [**12]the SEC

regarding Monarch's trading in LCI and Toxic securities.

Id. (referring to Bertoli I, 854 F. Supp. at 1131-32).

These activities were, according to Judge Lechner,

"critical components of Bertoli's eight year conspiracy to

cover up and conceal his illegal fraudulent trading

schemes." Id. at 19.

Based on these findings, Judge Lechner concluded

that Bertoli had substantially interfered with justice under

§ 2J1.2(b)(2)with respect to each of three sentencing

"Groups" he had previously established for purposes of

calculating Bertoli's offense level. See Bertoli I, 854 F.

Supp. at 1138-1144 (explaining "grouping" methodology

under U.S.S.G. §§ 1B1.2(d), 3D1.1, and 3D1.2).

Imposing the § 2J1.2(b)(2) enhancement within each

sentencing Group yielded a total offense level of 25,

which provided for a Guidelines range of 63 to 78 months

imprisonment.

Judge Lechner sentenced Bertoli to 78 months. In

addition, Judge Lechner re-imposed, again without

explanation, the special condition of supervised release

forbidding Bertoli from associating with any person

involved in the securities industry.

The Third Circuit affirmed Bertoli's resentencing

[**13]by summary order.

C. Judge Sand's Summary Judgment Rulings

1. The June 1996 decision

Following Bertoli's resentencing, the SEC moved for

summary judgment in the pending civil action, arguing

that Bertoli should be collaterally estopped by virtue of

Judge Lechner's sentencing findings from denying that he

violated the federal securities laws. See S.E.C. v.

Monarch Funding Corp., 1996 U.S. Dist. LEXIS 8756,

No. 85Civ. 7072, 1996 WL 348209 at *3(S.D.N.Y. June

24, 1996)("Monarch I"). Judge Sand agreed with the

SEC, holding that the elements of civil liability under

Section 10(b), Rule 10b-5, and Section 17(a)(1)-(3) had

been established by Judge Lechner's sentencing findings.

Accordingly, the court granted the SEC's request for a

permanent injunction enjoining Bertoli from committing

future violations of those laws.

Bertoli appealed. On the SEC's motion, this Court

remanded to allow the district court to consider Judge

Lechner's opinion in Bertoli III, which the SEC had failed

to submit on the original motion for summary judgment.

2. The October 1997decision

On remand, the SEC renewed its motion for

summary judgment on collateral estoppel grounds.

Bertoli responded [**14]by arguing that:(1) sentencing

findings should never be given preclusive effect in

subsequent civil litigation; and (2) even if they could,

applying collateral estoppel in this case would be

inappropriate.

In a published opinion, Judge Sand rejected Bertoli's



arguments for a per se rule. See S.E.C. v. Monarch

Funding Corp., 983 F. Supp. 442, 448 (S.D.N.Y. 1997)

("Monarch II"). The court recognized the "potential

dangers underlying the extension of collateral estoppel to

sentencing findings." Id. at 447. Judge Sand reasoned,

however, that such dangers should not be dispositive so

long as, after "close scrutiny" of the sentencing

proceeding, it is clear that the "traditional safeguards" of

the collateral estoppel doctrine as set forth by the

Supreme Court and by this Court have been met. Id. at

446 (citing Parklane [*302]Hosiery Co. v. Shore, 439

U.S. 322, 58 L. Ed. 2d 552, 99 S. Ct. 645 (1979), and

Gelb v. Royal Globe Ins. Co., 798 F.2d 38 (2d Cir.

1986)).

Applying these traditional safeguards, the district

court rejected Bertoli's contention that he had been

deprived of an adequate opportunity [**15]to litigate his

securities fraud liability at sentencing. While

acknowledging that the typical sentencing proceeding

may afford inadequate procedural opportunities for

purposes of collateral estoppel, Judge Sand found that the

Bertoli sentencing was "anything but a garden-variety

sentencing." 983F. Supp. at 458. In the nearly two-year

period between Bertoli's conviction and his ultimate

sentencing, the parties made voluminous submissions and

participated in at least two hearings. See id. at 449-50.

These "protracted proceedings," Judge Sand

concluded, afforded Bertoli ample opportunity to

challenge the government's evidence supporting Judge

Lechner's sentencing findings. Id. at 458. Moreover, the

court found that because the civil action antedated the

criminal action, and in fact was suspended for the express

purpose of allowing the criminal action to be decided

first, Bertoli could not claim that the use of collateral

estoppel was unforeseeable. See id. at 450, 458. Finally,

Judge Sand rejected Bertoli's complaints that Judge

Lechner made his sentencing findings after considering

two hearsay documents - namely, an affidavit of a

government investigator, Michael J. Cahill; [**16]and

the plea allocution of co-conspirator Cannistraro. Judge

Sand found that Judge Lechner's consideration of these

documents presented no obstacle to estoppel because,

prior to resentencing, Judge Lechner held a hearing at

which Bertoli actually called Cahill as a witness and

could have called Cannistraro.

Judge Sand also concluded that the findings of

securities fraud were necessary to Bertoli's sentencing. In

reaching this conclusion, Judge Sand declined to rely on

the findings made for Bertoli's original sentencing

because they had been deprived of all preclusive effect by

virtue of the Third Circuit's reversal in Bertoli II. See

Monarch II, 983F. Supp. at 451& n.9 (citing Buckv.

United States Aviation Underwriters, Inc., 763F.2d 224,

226-27(6th Cir. 1985)). Instead, Judge Sand relied on the

resentencing findings made for purposes of the §

2J1.2(b)(2)enhancement for substantial interference with

justice, concluding that they were necessary to Bertoli's

ultimate sentence on essentially two discrete theories.

First, Judge Sand reasoned that Judge Lechner's

resentencing findings only made sense in the context of

his prior finding that [**17]Bertoli had committed

securities fraud. To Judge Sand, the findings made for

purposes of the § 2J1.2(b)(2) enhancement were

"significant only" because of the prior finding that Bertoli

orchestrated the Stock Manipulation Schemes. 983F.

Supp. at 454. As such, Judge Sand concluded that "the

adjustments to Groups One, Two and Three each

presuppose the validity of factual findings that establish

Bertoli's liability for securities fraud." Id.

For his second necessity rationale, Judge Sand relied

on the proposition that inferential determinations may

provide the basis for collateral estoppel. See id. at 453&

n.14. Applying that proposition, Judge Sand reasoned

that the resentencing findings Judge Lechner necessarily

made for purposes of the § 2J1.2(b)(2)enhancement,

"also establish Bertoli's liability for securities fraud." Id.

at 453(citing Monarch I, 1996 WL 348209 at *7-8). As

examples, Judge Sand pointed to Judge Lechner's

findings that Bertoli told Cooper and Eisenberg to lie

about his involvement in the LCI report and Monarch's

trading activities. These findings were, according to

Judge Sand, "necessary" because absent a finding that

Bertoli was in fact [**18]involved in preparing the LCI

report and Monarch's activities, "Judge Lechner could not

have properly concluded that Cooper and Eisenberg's

statements were mistruths [*303]warranting an

adjustment under §2J1.2(b)(2)." Id.

Based on this analysis, Judge Sand reaffirmed his

original determination that:(1) Bertoli was collaterally

estopped by Judge Lechner's sentencing findings from

denying liability under Section 10(b), Rule 10b-5, and

Section 17(a) of the securities laws; and (2) the SEC was

entitled to a permanent injunction enjoining Bertoli from

future violations of those laws. However, Judge Sand



found that collateral estoppel did not apply to the SEC's

claim for disgorgement, and the SEC abandoned that

claim. A final judgment was entered and Bertoli now

appeals.DISCUSSION

I. Jurisdiction

Before reaching the substantive aspects of this

appeal, we briefly address a jurisdictional challenge by

Bertoli. He contends that after the SEC dropped its claim

for disgorgement, the district court lost subject matter

jurisdiction to issue an injunction in the civil action

because that injunction would merely duplicate

judgments already rendered against Bertoli in earlier

proceedings. [**19]Therefore, he argues, there was no

"case or controversy" as required by Article III, Section 2

of the United States Constitution. We disagree.

Article III limits subject matter jurisdiction to

"cases" and "controversies." United States v. Probber,

170F.3d 345, 347(2d Cir. 1999). Thus, an action which

promises to merely duplicate the relief afforded by prior

proceedings may, indeed, be non-justiciable. See Marshel

v. AFW Fabric Corp., 552F.2d 471, 472(2d Cir. 1977)

(per curiam). As a factual matter, however, there is

simply no such duplication in this case.

The prior injunctions entered against Bertoli were:

(1) a 1975 order enjoining him from violating the

record-keeping provisions of Section 17(a) of the 1934

Act; (2) a 1979 SEC order barring him from associating

with any broker dealers; and (3) Judge Lechner's

condition of supervised release that he not associate with

anybody in the securities industry. None of these

judgments duplicate the specific injunctive relief granted

by Judge Sand in this case - namely, the permanent

injunction enjoining Bertoli from violating the anti-fraud

provisions of Section 10(b), Rule 10b-5, and Section

17(a) [**20]of the 1933 Act. Judge Sand had

jurisdiction to issue that injunction; and we have

jurisdiction over this appeal.

II. Offensive Collateral Estoppel

Bertoli's position is that:(1) sentencing findings

should never merit preclusive effect; and (2) even if they

should in a particular case, this is not that case. We

decline to adopt a per se rule against extending the

doctrine of offensive collateral estoppel to sentencing

findings. We agree with Bertoli, however, that applying

the doctrine in this case was inappropriate.

We review a district court's grant of summary

judgment based on the doctrine of collateral estoppel de

novo, construing the record in the light most favorable to

the non-moving party and drawing all inferences in that

party's favor. See Boguslavsky v. Kaplan, 159 F.3d 715,

719(2dCir. 1998).

Under the doctrine of offensive collateral estoppel

(more recently called offensive issue preclusion), a

plaintiff may foreclose a defendant from relitigating an

issue the defendant has previously litigated but lost

against another plaintiff. See Parklane Hosiery Co. v.

Shore, 439 U.S. 322, 329, 58L. Ed. 2d 552, 99 S. Ct. 645

(1979). [**21]The principal virtue of collateral estoppel

is self-evident:it promotes judicial economy by reducing

the burdens associated with revisiting an issue already

decided. See id. at 326; Gelb, 798F.2d at 44. Its virtues

do not come without a price, however. Just as

occasionally "the race is not to the swift, nor the battle to

the strong . . . but time and chance happeneth to them

all," Ecclesiastes [*304]9:11 (King James ed.), so too

the results of an earlier resolution of an issue may simply

be wrong. See Johnson v. Watkins, 101F.3d 792, 795(2d

Cir. 1996)(citing 18 Charles Alan Wright, Arthur R.

Miller & Edward H. Cooper, Federal Practice and

Procedure § 4416, at 142 (1981)).

Ultimately, in allowing collateral estoppel, courts

have decided that "the occasional permanent

encapsulation of a wrong result is a price worth paying to

promote the worthy goals of ending disputes and

avoiding repetitive litigation." Johnson, 101F.3d at 795;

see Gelb, 798F.2d at 44. When the efficiency rationale

for collateral estoppel fails, however, courts have

understandably declined to apply the doctrine. See,

[**22]e.g., Davis v. West Community Hosp., 786 F.2d

677,682(5th Cir. 1986)(district court properly declined

to apply collateral estoppel because precluding

relitigation "would not have furthered one of the

important underlying purposes of this doctrine:

promotion of judicial economy"); Swineford v. Snyder

Co., 15F.3d 1258, 1269 (3d Cir. 1994).

Although collateral estoppel jurisprudence generally

places termination of litigation ahead of a correct result,

there are some circumstances that so undermine

confidence in the validity of an original determination as

to render application of the doctrine impermissibly

"unfair" to a defendant. Parklane, 439 U.S. at 330; see

Remington Rand Corp. v. Amsterdam-Rotterdam Bank,



N.V., 68F.3d 1478, 1487(2d Cir. 1995).

One such circumstance arises where the second

action affords "procedural opportunities unavailable in

the first action that could readily cause a different result."

Parklane, 439 U.S. at 330-31. Another exists where a

defendant has little incentive to litigate the relevant issue

vigorously in the original action, particularly if the

second action [**23]is not foreseeable. See id. at 330.

And of course, collateral estoppel may have a devastating

impact on a civil litigant's constitutional right to a jury

trial. True, the Seventh Amendment poses no

insurmountable barrier to applying collateral estoppel.

See id. at 336 (holding that once a common factual issue

has been resolved in a previous action (by a jury or

otherwise), "there is no further factfinding function for

the jury to perform"). However, this is true only where

the issue was "fully and fairly" adjudicated in the prior

proceeding. Id. at 325 (emphasis added) (internal

quotation marks omitted).

To strike an appropriate balance between the

competing concerns for fairness on the one hand, and

efficiency on the other, courts have imposed a number of

prerequisites to assure that the precluded issue, whether

or not correctly resolved, was at least carefully

considered in the first proceeding. See Gelb, 798F.2d at

44; Johnson, 101F.3d at 795. For the bar to apply:(1)

the issues in both proceedings must be identical; (2) the

issue in the prior proceeding must have been actually

litigated [**24]and actually decided; (3) there must have

been a full and fair opportunity for litigation in the prior

proceeding; and (4) the issue previously litigated must

have been necessary to support a valid and final judgment

on the merits. See Gelb, 798F.2d at 44; Boguslavsky, 159

F.3d at 720.

A. Application of Collateral Estoppel to Sentencing

Findings

As the district court acknowledged, the application

of collateral estoppel to sentencing findings presents a

novel issue. While a few cases have brushed against the

question, they have done so without much elaboration

leaving the darkness unobscured. See Allen v. City of Los

Angeles, 92F.3d 842, 850(9th Cir. 1996), overruled on

other grounds by Acri v. Varian Assocs., Inc., 114 F.3d

999 (9th Cir. 1997)(en banc); United States v. Montes,

976F.2d 235, 239 (5th Cir. 1992); M. Prusman Ltd. v.

Ariel Maritime Group, Inc., 781F. Supp. 248, 250, 252

(S.D.N.Y. 1991).

[*305]Not surprisingly, the parties disagree on how

this nettlesome issue should be resolved. For its part, the

SEC assumes that collateral estoppel should, at the very

least, [**25]be presumptively available in the

sentencing context so long as the traditional safeguards of

the doctrine are met. On the other hand, Bertoli and the

various amici assert that sentencing findings should never

be given preclusive effect. We chart a middle course.

The arguments for a per se prohibition are attractive.

As Bertoli maintains, such a rule is warranted because

allowing sentencing findings to control subsequent

litigation is simply "unfair" - as that term is used in

Parklane - in two fundamental respects.

First, a plenary civil trial affords a defendant

procedural opportunities that are unavailable at

sentencing and that could command a different result.

Unlike a civil litigant, a criminal defendant's

opportunities to take discovery may be limited for

sentencing purposes. See Wade v. United States, 504 U.S.

181,186,118L. Ed. 2d 524, 112 S. Ct. 1840 (1992).

Although whenever a factor important to sentencing is

reasonably in dispute, a defendant must be given an

adequate opportunity to present information on that

factor, see U.S.S.G. § 6A1.3(a), a defendant has no

absolute right either to present his own witnesses or to

receive a full-blown [**26]evidentiary hearing. See

United States v. Prescott, 920 F.2d 139, 143 (2d Cir.

1990). Moreover, the evidence admissible against a civil

litigant must survive challenge under the Federal Rules of

Evidence. By contrast, a sentencing judge "is largely

unlimited either as to the kind of information [he] may

consider, or the source from which it may come," United

States v. Sisti, 91F.3d 305, 312(2d Cir. 1996)(internal

quotation marks omitted) (alteration in original), so long

as the information has sufficient indicia of reliability to

support its probable accuracy, see U.S.S.G. §6A1.3(a).

Second, the incentive to litigate a sentencing finding

is frequently less intense, and certainly more fraught with

risk, than it would be for a full-blown civil trial. As Judge

Sand acknowledged, a criminal defendant will often

choose not to challenge sensitive issues during sentencing

for any number of reasons, including a belief, or at least a

hope, that the sentencing court will grant a prosecutorial

downward departure motion or other recommendation. In

addition, sometimes sentencing procedures may deter a

defendant from raising certain issues. See Monarch II,



983F. Supp. at 448. [**27]For instance, given that a

sentencing judge may make a finding based on evidence

inadmissible in a civil trial without even giving the

defendant an evidentiary hearing to challenge that

evidence, see Prescott, 920F.2d at 144, a defendant may

choose to let sleeping dogs lie. Finally, a defendant,

though uniquely knowledgeable about underlying events,

may be reluctant to testify during sentencing. Again,

there are a number of reasons for such reticence - not the

least of which is that if the defendant is disbelieved, his

sentence may be enhanced under Guideline §3C1.1.

In light of these legitimate concerns over potential

unfairness, it is important to reflect upon whether the

efficiency rationale for collateral estoppel would be

advanced or hindered, were the doctrine to be freely

available in the sentencing context. After all, it makes

little sense to forego the opportunity to reexamine a

potentially wrong decision if the economies achieved by

doing so are slight or non-existent. See Johnson, 101F.3d

at 795.

In our view, several considerations suggest that,

despite its theoretical economies, applying collateral

estoppel in the sentencing context [**28]will just as

often multiply, rather than reduce, total litigation.

First, where a civil action is pending or just beyond

the horizon, allowing sentencing findings to earn

collateral estoppel respect may greatly increase the stakes

at sentencing, producing more exhaustive litigation over

matters of only tangential importance to the criminal

case. This risk is [*306]exacerbated by the procedural

looseness of sentencing litigation. There is virtually no

limit on the extent and character of the evidence that the

government may seek to introduce at sentencing. See

Sisti, 91F.3d at 312. Even if the sentencing judge is able

to fend off all attempts to introduce gratuitous material,

the additional burdens that such an approach would

impose on our already over-worked district courts would

change the essential nature of sentencing proceedings.

They are not supposed to be "mini-trials." United States

v. Pugliese, 805 F.2d 1117, 1123 (2d Cir. 1986); see

Prescott, 920F.2d at 144.

Second, while a permissive approach to collateral

estoppel will probably lead to sentencing proceedings of

mushrooming complexity, ironically, there is no

guarantee that [**29]subsequent civil actions will be

made proportionately simpler. As Judge Sand

acknowledged, the concerns of unfairness raised by

Bertoli require a more cautious approach in the civil case

- in his words a "close scrutiny" and "searching

examination" - than would be otherwise necessary. See

Monarch II, 983F. Supp. at 446, 448.

These practical considerations undermine a primary

rationale for allowing collateral estoppel in the first place.

If the economies achieved by applying collateral estoppel

are not readily apparent, why risk the permanent

encapsulation of a wrong result?See Johnson, 101F.3d

at 795. And that risk is especially acute with respect to

sentencing proceedings, in which, for the reasons already

mentioned, the government's factual assertions may well

be subjected to less adversarial testing.

While extending collateral estoppel effect to

sentencing findings may, in a given case, threaten

fairness and/or judicial efficiency, these factors do not

justify the blanket prohibition urged by Bertoli. Generally

speaking, the same concerns of unfairness and

inefficiency were considered by the Parklane Court and

were rejected as justifications [**30]for a total ban on

the use of offensive collateral estoppel. See 439 U.S. at

330-31. Instead, the Court held that the "the preferable

approach" is to entrust the task of minimizing such

dangers to the discretion of our district courts. Id. at 331.

And although such dangers may be more pronounced in

the sentencing context, we are confident that our trial

judges will be able to limit their impact on a case-by-case

basis. So long as the threat to fairness and/or efficiency

has been minimized, we see no need to entirely foreclose

application of the doctrine. Indeed, precluding relitigation

of findings made during sentencing may promote an

institutional goal of particular importance to the criminal

process, namely, "preserving the integrity of the judicial

system by eliminating inconsistent results." Johnson, 101

F.3d at 795; see 18 Federal Practice and Procedure §

4416, at 139 (1981) ("preclusion prevents the risk of the

clearest and most embarrassing inconsistencies"). For

these reasons, we reject the per se rule urged by Bertoli

and the amici.

On the other hand, we cannot accept the SEC's

position that collateral estoppel [**31]should

presumptively extend to sentencing findings on the same

basis as in other contexts. To the contrary, we conclude

that precluding relitigation on the basis of such findings

should be presumed improper. While we do not foreclose

application of the doctrine in all sentencing cases, we

caution that it should be applied only in those



circumstances where it is clearly fair and efficient to do

so. And the burden should be on the plaintiff in the civil

case to prove these elements.

B. The Instant Case

In this case, the SEC has failed to show that

preclusion was fair, as that concept is refined in Gelb. See

798F.2d at 44-45. In addition, the record reveals that

application of collateral estoppel here was simply not

efficient. For these reasons, we conclude that Judge Sand

erred in precluding Bertoli from litigating his securities

fraud liability afresh.

[*307]As noted above, to minimize the potential

unfairness caused by applying collateral estoppel to a

finding that may be wrong, it is essential that the finding

have been "necessary" to the judgment in the first action.

See id. As explained by Judge Learned Hand, the

necessity requirement "protects" against [**32]

unfairness, by ensuring that the issue will be "really

disputed and that the loser will have put out his best

efforts." The Evergreens v. Nunan, 141F.2d 927, 929 (2d

Cir. 1944).

We recognize that in other contexts there is authority

for relaxing the necessity requirement. As Judge Sand

pointed out, determinations that can be inferred from

necessary findings have sometimes provided a basis for

estoppel. See Monarch II, 983F. Supp. at 454 & 453 n.

14 (citing In re Mirulla, 163 B.R. 912, 916-17 (Bankr.

D.N.H. 1994) (applying collateral estoppel where

"although it is true that 'malice' was not per se found by

the state court, the written decision of the state court

nevertheless is replete with factual findings from which it

can be inferred"); and Greenblatt v. Drexel Burnham

Lambert, Inc., 763F.2d 1352, 1361-62(11th Cir. 1985)).

However, given the potential for unfairness associated

with applying collateral estoppel based on sentencing

findings, we hold that only the stricter approach remains

appropriate in the sentencing context. Hence, regardless

of how carefully considered an issue may have been

during the [**33]process leading up to decision, and

regardless of what may be inferred from that decision,

estoppel does not apply to a finding that was not legally

necessary to the final sentence. See 18 Charles Alan

Wright, Arthur R. Miller & Edward H. Cooper, Federal

Practice and Procedure § 4421, at 196 (1981).

Throughout proceedings in this civil case, Bertoli's

primary argument has been that the finding that he

committed securities fraud was not necessary to the

ultimate sentence imposed in Bertoli III. Three separate

bases for necessity have been offered in response to this

contention. First, there are Judge Lechner's findings of

securities fraud in Bertoli I, which were expressly

incorporated by reference into Bertoli III. According to

the SEC, these prior fraud findings were necessary to

Bertoli III because the § 2J1.2(b)(2)enhancement for

substantial interference with the administration of justice,

"necessarily rested" on such findings. Second, there are

the obstructive act findings that were necessary to the §

2J1.2(b)(2) enhancement imposed in Bertoli III.

According to Judge Sand, these same obstructive act

findings also established Bertoli's liability [**34]for

securities fraud. Third, the SEC contends that the

securities fraud findings were necessary to the imposition

of the special condition of Bertoli's supervised release

that he was not to associate with any persons involved in

the securities industry. We are unpersuaded by any of

these responses.

The SEC's assertion that the § 2J1.2(b)(2)

enhancement "necessarily rested" on the prior finding of

securities fraud from Bertoli I, is in essence a contention

that Bertoli could not have interfered with the

investigation into his securities fraud, unless there was

such a fraud to cover up in the first place. As the SEC

puts it, "it was not the obstructive acts themselves, but

Bertoli's attempt through those obstructive acts to cover

up his role in the fraud that warranted the enhancement

for substantial interference with the administration of

justice." This argument improperly confuses why Bertoli

may have felt it necessary to interfere with the

administration of justice, with what was legally necessary

to find before concluding that he did so.

To start with, concealment of his alleged securities

fraud need not have been the motive behind Bertoli's

various acts of obstruction [**35]at all. There is a host

of competing explanations as to why a former bankrupt

would attempt to hide assets, or why a man subject to an

order barring him from associating with any broker dealer

would seek to shield his involvement with [*308]

Monarch. These plausible alternative explanations for

Bertoli's obstructive acts reinforce why, as a matter of

fairness, it is so important to focus not on necessity from

the defendant's subjective perspective, but on the legal

necessity of a finding to the ultimate judgment.

And in this case, it was not legally necessary for



Judge Lechner to find that Bertoli committed securities

fraud to impose the §2J1.2(b)(2)enhancement. It is true

that in Bertoli I Judge Lechner found that Bertoli

committed securities fraud by orchestrating the Stock

Manipulation Schemes, and that that finding was

expressly incorporated by reference into the Bertoli III

decision. It is also true that in Bertoli III, Judge Lechner

found that Bertoli "substantially interfered with the

administration of justice" under §2J1.2(b)(2), to "cover

up" his securities fraud. This does not mean, however,

that it is legally necessary for a defendant to be found

guilty of securities [**36]fraud to impose the §

2J1.2(b)(2)enhancement. That obviously cannot be so,

for one could be held responsible for substantially

interfering with an investigation within the meaning of §

2J1.2(b)(2), without having been involved in the conduct

investigated at all. Thus, while Judge Lechner's findings

that Bertoli induced perjury, attempted to conceal assets

and shredded documents were necessary to the §

2J1.2(b)(2)enhancement, the finding that these nefarious

activities were part of a securities fraud was not.

Nor do we agree with Judge Sand that the same

obstructive act findings that were necessary to the §

2J1.2(b)(2) enhancement, "also establish Bertoli's

liability for securities fraud." See Monarch II, 983 F.

Supp. at 453. The problem with this reasoning is that it

infers one congeries of legal determinations - that Bertoli

violated Section 10b, Rule 10b-5, and Section 17(a) -

from facts that were necessarily found to support another

- that Bertoli interfered with the administration of justice

under § 2J1.2(b)(2). This case provides a textbook

illustration of how such a process of inference can

produce a potentially unfair result.

To have violated Section [**37]10(b) and Rule

10b-5, Bertoli must have: (1) made a material

misrepresentation or a material omission as to which he

had a duty to speak, or used a fraudulent device; (2) with

scienter; (3) in connection with the purchase or sale of

securities. See S.E.C. v. First Jersey Securities, Inc., 101

F.3d 1450, 1467 (2d Cir. 1996). Essentially the same

elements are required under Section 17(a)(1)-(3) in

connection with the offer or sale of a security, though no

showing of scienter is required for the SEC to obtain an

injunction under subsections (a)(2) or (a)(3). See id.

(citing Aaron v. SEC, 446 U.S. 680, 701-02, 64 L. Ed. 2d

611,100S. Ct. 1945(1980)).

While Judge Lechner's findings regarding Bertoli's

various obstructive acts may have been necessary to the §

2J1.2(b)(2) enhancement, contrary to Judge Sand's

conclusion, none of those findings establish the elements

of securities fraud. Bertoli's various efforts to hide assets

clearly do not do so. Similarly, while Judge Lechner

found that Bertoli told Eisenberg to lie about his

involvement with Monarch, that finding alone does not

establish all the elements of a Section 10b, Rule 10b-5or

Section [**38]17(a) violation. And although Bertoli

may have overseen the drafting of the LCI report, that

finding does not establish that the LCI report was

materially misleading. See First Jersey Securities, 101

F.3d at 1467.

We also reject the third necessity argument advanced

in this case - the SEC's contention that the securities

fraud findings were necessary to the special condition of

Bertoli's release that he not associate with any persons

involved in the securities industry.

As a threshold matter, we note that the SEC failed to

raise this argument in the district court. The general rule

is that "a federal appellate court does not consider an

issue not passed upon below." [*309]Austin v. Healey,

5F.3d 598, 601(2d Cir. 1993)(internal quotation marks

omitted) (quoting Singleton v. Wulff, 428U.S. 106, 120,

49 L. Ed. 2d 826, 96 S. Ct. 2868 (1976)). We see no

reason to eschew application of that general rule in this

case. In any event, even if we were to exercise our

considerable discretion and consider this argument, we

would find it to be unpersuasive.

For a finding to merit estoppel effect it must not only

be necessary to the final judgment, [**39]but must also

have been actually litigated and actually decided in the

initial action. See Gelb, 798F.2d at 44. Again, the actual

litigation and actual decision prerequisites help ensure

that a finding was carefully considered in the first action,

and that it therefore may serve as a fair basis for estoppel.

See id.; Johnson, 101 F.3d at 795. A corollary of the

actual litigation and decision requirements is that "when a

court cannot ascertain what was litigated and decided,

issue preclusion cannot operate." 18 James W. Moore et

al, Moore's Federal Practice, § 132.03[2][g] (3d ed.

1998) (citing Mitchell v. Humana Hosp.-Shoals, 942F.2d

1581,1583-84(11th Cir. 1991)); see also id. §

132.03[3][d].

In light of these principles, we need not address the

potentially far reaching issue of whether it was necessary

for Judge Lechner to find that Bertoli committed



securities fraud before imposing the special condition.

Throughout sentencing proceedings, the special condition

of supervised release received little attention from either

the parties or the court. Indeed, the prospect that Bertoli

would be banned from further [**40]participation in the

securities industry is not even mentioned in either of

Judge Lechner's lengthy sentencing opinions, raising the

question of whether it was ever really litigated.

Moreover, Judge Lechner never specifically ruled

that he was banning Bertoli from the securities industry

because Bertoli had violated the securities laws. Indeed,

there may have been alternative reasons for that ban

which did not hinge on the finding that Bertoli committed

securities fraud. After all, Bertoli was convicted of

obstruction of justice, not securities fraud, and it is

possible that Judge Lechner imposed the ban on the basis

of the obstruction of justice alone. See U.S.S.G. §

5F1.5(a) (court may impose occupational restrictions

only if "a reasonably direct relationship existed between

the defendant's occupation . . . and the conduct relevant to

the offense of conviction;" and (2) the "restriction is

reasonably necessary to protect the public [from

continued] unlawful conduct similar to that for which the

defendant was convicted." (emphasis added)). In light of

the fact that Bertoli's conviction for obstruction of justice

arose from his interference with investigations focusing

[**41]on securities fraud, Judge Lechner may have

believed that banning him from the securities industry

was "reasonably necessary to protect the public," id.,

even if Bertoli himself had not committed securities

fraud, simply because he had obstructed the government's

efforts to police that industry. We cannot rule that option

out because Judge Lechner gave no specific reasons for

imposing the ban. And in the absence of clarity on this

issue, applying collateral estoppel on the basis of the

special condition would be improper. See Mitchell, 942

F.2d at 1584 (refusing to apply collateral estoppel

"because the state court did not specify the reasons for its

decision, [and] we cannot be certain if the court actually

decided" the issue on the ground that would allow

preclusion); Fay v. South Colonie Cent. Sch. Dist., 802

F.2d 21, 30 (2d Cir. 1986)(denying preclusion where

underlying decision was "vague").

In sum, application of collateral estoppel in this case

failed to satisfy the prerequisites to preclusion that are

designed to ensure fairness.

In addition, we conclude that precluding relitigation

in this case failed to promote the primary rationale [**42]

for collateral estoppel, namely:judicial economy. The

sentencing proceedings in the criminal action were

exhaustive. As noted, there was a [*310]high degree of

cooperation between the SEC and the New Jersey United

States Attorney's Office in the criminal action. Given that

cooperation, we cannot say that the criminal action was

not complicated by efforts to have express findings made

on tangential issues at sentencing in order to give the

SEC a chance to invoke collateral estoppel in the

subsequent civil action. More importantly, however,

collateral estoppel did not do much to simplify the civil

action. Even discounting the added complexities

associated with the novelty of the issue, the district

court's "close scrutiny" and "searching examination" in

this case required considerable effort - in all probability

more effort than would have been required for a summary

adjudication under Federal Rule of Civil Procedure

56(c), or even for a trial. In light of such efforts, it made

little sense to bar Bertoli from litigating his securities

fraud liability ab initio. See Davis, 786 F.2d at 682.

We raise this point to make clear that in determining

whether to apply collateral [**43]estoppel to sentencing

findings in the future, district courts should start by

making a threshold assessment of whether it will be

efficient to do so. Given the potential unfairness

associated with extending collateral estoppel to

sentencing findings generally, if the court reasonably

determines that the doctrine will not promote efficiency,

it should feel free to deny preclusion for that reason

alone.

CONCLUSION

The decision of the district court granting summary

judgment based on the doctrine of offensive collateral

estoppel is vacated. This case is remanded for further

proceedings.



U.S.S.E.C. v. Citigroup Global Markets, Inc., 752 F.3d 285 (2014)

Fed. Sec. L. Rep. P 97,983


Synopsis

Background: Securities and Exchange Commission (SEC)

filed securities fraud action against brokerage and securities

firm. After denial of parties' motion for approval of

consent judgment, 827 F.Supp.2d 328, parties moved to

stay proceedings pending determination of their appeals. The

United States District Court for the Southern District of New

York, Jed S. Rakoff, J., 827 F.Supp.2d 336, denied stay.

Parties appealed and sought stay of proceedings.

Holdings: After granting a stay, 673 F.3d 158, the Court of

Appeals, Pooler, Circuit Judge, held that:

[1] Court of Appeals had jurisdiction to consider interlocutory

appeal from district court's denial of consent decree;

[2] in reviewing and approving a proposed consent judgment

in an SEC enforcement action, the district court must

determine whether the proposed consent decree is fair and

reasonable, abrogating S.E.C. v. CR Intrinsic Investors, LLC,

939 F.Supp.2d 431, and S.E.C. v. Cioffi, 868 F.Supp.2d 65;

[3] requirement that SEC establish the “truth” of the

allegations against firm as a condition for approving consent

decrees was abuse of discretion; and

[4] to the extent that district court withheld approval of

consent decree on the ground that it believed SEC failed to

bring the proper charges, such decision constituted an abuse

of discretion.

Vacated and remanded.

Lohier, Circuit Judge, filed concurring opinion.

West Headnotes (17)

[1] Federal Courts

Compromise and Settlement

Court of Appeals reviews the district court's

denial of a settlement agreement under an abuse

of discretion standard.


[2] Federal Courts

Abuse of discretion in general

A district court abuses its discretion if it (1)

based its ruling on an erroneous view of the

law, (2) made a clearly erroneous assessment

of the evidence, or (3) rendered a decision that

cannot be located within the range of permissible

decisions.


[3] Securities Regulation

Judicial review and enforcement of

decisions

Court of Appeals had jurisdiction to consider

interlocutory appeal from district court's denial

of consent decree in Securities and Exchange

Commission's (SEC) securities fraud action

against brokerage and securities firm, where,

in rejecting the consent decree, district court

effectively denied SEC two types of injunctive

relief, and the denial caused SEC irreparable

harm in that district court expressed no

willingness to revisit the settlement agreement.

28 U.S.C.A. § 1292(a)(1).


[4] Federal Courts

Interlocutory and Collateral Orders

Unless a litigant can show that an interlocutory

order of the district court might have a serious,




perhaps irreparable, consequence, and that the

order can be effectually challenged only by

immediate appeal, the general congressional

policy against piecemeal review will preclude

interlocutory appeal. 28 U.S.C.A. § 1292(a)(1).


[5] Federal Courts

Compromise and settlement

To bring an interlocutory appeal from a district

court's denial of settlement approval, a party

must demonstrate that (1) the district court,

by refusing to approve a settlement, effectively

denied a party injunctive relief and (2) in the

absence of an interlocutory appeal, a party will

suffer irreparable harm. 28 U.S.C.A. § 1292(a)

(1).



On Consent


Compliance; enforcement

Strong federal policy favors the approval and

enforcement of consent decrees.



Approval hearing; entry

When the district judge is presented with a

proposed consent judgment, he is not merely a

“rubber stamp.”



Form and requisites; validity

In reviewing and approving a proposed

consent judgment in a Securities and Exchange

Commission (SEC) enforcement action, the

district court must determine whether the

proposed consent decree is fair and reasonable,

with the additional requirement that the public

interest would not be disserved in the event

that the consent decree includes injunctive relief;

absent a substantial basis in the record for

concluding that the proposed consent decree

does not meet these requirements, the district

court is required to enter the order, abrogating

S.E.C. v. CR Intrinsic Investors, LLC, 939

F.Supp.2d 431, and S.E.C. v. Cioffi, 868

F.Supp.2d 65.




A court evaluating a proposed Securities and

Exchange Commission (SEC) consent decree

for fairness and reasonableness should, at a

minimum, assess (1) the basic legality of the

decree; (2) whether the terms of the decree,

including its enforcement mechanism, are clear;

(3) whether the consent decree reflects a

resolution of the actual claims in the complaint;

and (4) whether the consent decree is tainted by

improper collusion or corruption of some kind.




District court's requirement that Securities and

Exchange Commission (SEC) establish the

“truth” of the securities fraud allegations against

brokerage and securities firm as a condition

for approving consent decrees was abuse of

discretion, where district court, with the benefit

of copious submissions by the parties, likely

had a sufficient record before it on which to

determine if the proposed decree was fair and

reasonable.



Construction and operation

A consent decree must be construed as written,

and not as it might have been written had the

plaintiff established his factual claims and legal

theories in litigation.





[12] Compromise and Settlement

Nature and Requisites

The numerous factors that affect a litigant's

decision whether to compromise a case or

litigate it to the end include the value of the

particular proposed compromise, the perceived

likelihood of obtaining a still better settlement,

the prospects of coming out better, or worse, after

a full trial, and the resources that would need to

be expended in the attempt.


[13] Injunction

Grounds in general; multiple factors

A plaintiff seeking a permanent injunction

must demonstrate: (1) that it has suffered an

irreparable injury; (2) that remedies available

at law, such as monetary damages, are

inadequate to compensate for that injury; (3) that,

considering the balance of hardships between the

plaintiff and defendant, a remedy in equity is

warranted; and (4) that the public interest would

not be disserved by a permanent injunction.




The job of determining whether a proposed

Securities and Exchange Commission (SEC)

consent decree best serves the public interest

rests squarely with the SEC, and its decision

merits significant deference.




Securities Regulation

Nature and grounds of injunction in general

In considering the public interest in deciding

whether to grant proposed injunctive relief in

Securities and Exchange Commission (SEC)

consent decree, district court was required to

determine whether the public interest would be

disserved by entry of the consent decree, not

whether public had an overriding interest in

knowing the truth.




To the extent that district court withheld approval

of consent decree in Securities and Exchange

Commission's (SEC) securities fraud action

against brokerage and securities firm on the

ground that it believed SEC failed to bring

the proper charges against firm, such decision

constituted an abuse of discretion; the exclusive

right to choose which charges to levy rested with

SEC.



On Consent


Construction and operation

Consent decrees are a hybrid in the sense that

they are at once both contracts and orders;

they are construed largely as contracts, but are

enforced as orders.



*287 Michael A. Conley, Deputy General Counsel,

Securities and Exchange Commission *288 (Jacob H.

Stillman, Solicitor, Mark Pennington, Assistant General

Counsel, Jeffrey A. Berger, Senior Counsel, on the brief),

Washington, D.C., for Plaintiff–Appellant–Cross–Appellee

United States Securities and Exchange Commission.

Brad S. Karp, Paul, Weiss, Rifkind, Wharton & Garrison,

LLP (Theodore V. Wells, Jr., Mark F. Pomerantz, Walter

Rieman, Susanna M. Buergel, on the brief), New York, N.Y.,

for Defendant–Appellee–Cross–Appellant Citigroup Global

Markets, Inc.




John R. Wing, Lankler Siffert & Wohl LLP (Patrick P.

Garlinger, on the brief), New York, N.Y., Appointed Pro

Bono Counsel for the United States District Court for the

Southern District of New York (Jed S. Rakoff, J.).

Mark A. Perry, Gibson, Dunn & Crutcher, LLP, Washington,

D.C., for Amicus Curiae Business Roundtable, in support of

reversal.

William Michael Cunningham, Temple Hills, MD, Amicus

Curiae pro se, in support of affirmance.

Dennis M. Kelleher (Stephen W. Hall, Katelynn O. Bradley,

on the brief) Washington, D.C., for Amicus Curiae Better

Markets, Inc., in support of the affirmance.

Matthew G. Yeager, PH.D., Department of Sociology, King's

University College, London, Ontario (William Calathes,

Department of Criminal Justice, New Jersey City University,

Jersey City, N.J., on the brief), Amici Curiae pro se, in support

of affirmance.

Barbara J. Black, Charles Hartsock Professor of Law &

Director, Corporate Law Center, University of Cincinnati

College of Law, Cincinnati, OH, for Amici Curiae Securities

Law Scholars Jayne W. Barnard, Douglas M. Branson,

Chris J. Brummer, Samuel W. Buell, John C. Coffee, Jr.,

James D. Cox, James Fanto, Jill E. Fisch, Tamar Frankel,

Theresa Gabaldon, Joan MacLeod Heminway, Thomas W.

Joo, Lawrence E. Mitchell, Jennifer O'Hare, Alan R. Palmiter,

Margaret V. Sachs, Faith Stevelman, and Lynn A. Stout, in

support of affirmance.

Akshat Tewary, Edison, N.J., for Amicus Curiae Occupy

Wall Street–Alternative Banking Group, in support of

affirmance.

Teresa Marie Goody, Kalorama Legal Services, PLLC,

Washington, D.C., for Amicus Curiae Harvey L. Pitt, in

support of affirmance.

Lori Alvino McGill, Latham & Watkins LLP, (Robin S.

Conrad, Rachel Brand, National Chamber Litigation Center,

Inc.; James M. Spears, Melissa B. Kimmel, Pharmaceutical

Research and Manufacturers of America, on the brief),

Washington, D.C., for Amici Curiae Chamber of Commerce

of the United States and Pharmaceutical Research and

Manufacturers of America, in support of reversal.

Annette L. Nazareth, Davis Polk & Wardwell LLP (Edmund

Polubinski III, Gina Caruso, on the brief) New York, N.Y.,

for Amicus Curiae Securities Industry and Financial Markets

Association, in support of reversal.

Daniel P. Chiplock, Lieff Cabraser Heimann & Bernstein,

LLP, New York, N.Y., for Amicus Curiae National

Association of Shareholder and Consumer Attorneys, in

support of reversal.

Before: POOLER, LOHIER, and CARNEY, Circuit Judges.

Opinion

POOLER, Circuit Judge:

The United States Securities and Exchange Commission

(“S.E.C.”) in conjunction with Citigroup Global Markets, Inc.

(“Citigroup”) appeals from the November 28, 2011 order of

the United States District Court for the Southern District of

*289 New York (Rakoff, J.) refusing to approve a consent

decree entered into by the parties and instead setting a trial

date. Our Court stayed that order and referred the matter to

a merits panel for consideration of the underlying questions.

S.E.C. v. Citigroup Global Markets, Inc., 673 F.3d 158 (2d

Cir.2012). We now hold that the district court abused its

discretion by applying an incorrect legal standard in assessing

the consent decree and setting a date for trial.

BACKGROUND

I. Complaint and proposed consent judgment.

In October 2011, the S.E.C. filed a complaint against

Citigroup, alleging that Citigroup negligently misrepresented

its role and economic interest in structuring and marketing

a billion-dollar fund, known as the Class V Funding III

(“the Fund”), and violated Sections 17(a)(2) and (3) of the

Securities Act of 1933 (the “Act”). The complaint alleges that

Citigroup “exercised significant influence” over the selection

of $500 million worth of the Fund's assets, which were

primarily collateralized by subprime securities tied to the

already faltering U.S. housing market. Citigroup told Fund

investors that the Fund's investment portfolio was chosen by

an independent investment advisor, but, the S.E.C. alleged,

Citigroup itself selected a substantial amount of negatively

projected mortgage-backed assets in which Citigroup had

taken a short position. By assuming a short position, Citigroup

realized profits of roughly $160 million from the poor

performance of its chosen assets, while Fund investors

suffered millions of dollars in losses.




Shortly after filing of the complaint, the S.E.C. filed

a proposed consent judgment. In the proposed consent

judgment, Citigroup agreed to: (1) a permanent injunction

barring Citigroup from violating Act Sections 17(a)(2) and

(3); (2) disgorgement of $160 million, which the S.E.C.

asserted were Citigroup's net profits gained as a result of the

conduct alleged in the complaint; (3) prejudgment interest

in the amount of $30 million; and (4) a civil penalty of $95

million. Citigroup also agreed not to seek an offset against

any compensatory damages awarded in any related investor

action. Citigroup consented to make internal changes, for a

period of three years, to prevent similar acts from happening

in the future. Absent from the consent decree was any

admission of guilt or liability.

The S.E.C. also filed a parallel complaint against Citigroup

employee Brian Stoker. See S.E.C. v. Brian H. Stoker, 11

Civ. 7388(JSR). The Stoker complaint alleged that Stoker

negligently violated Sections 17(a)(2) and (3) of the Act in

connection with his role in structuring and marketing the

collateralized debt obligations in the Fund.

II. Proceedings before the district court.

The district court scheduled a hearing in the matter, and

presented the S.E.C. and Citigroup with a list of questions to

answer. The questions included:

• Why should the Court impose a judgment in a case in

which the S.E.C. alleges a serious securities fraud but

the defendant neither admits nor denies wrongdoing?

• Given the S.E.C.'s statutory mandate to ensure

transparency in the financial marketplace, is there an

overriding public interest in determining whether the

S.E.C.'s charges are true? Is the interest even stronger

when there is no parallel criminal case?

*290 • How was the amount of the proposed judgment

determined? In particular, what calculations went into

the determination of the $95 million penalty? Why,

for example, is the penalty in this case less than one-

fifth of the $535 million penalty assessed in S.E.C. v.

Goldman Sachs & Co ....? What reason is there to believe

this proposed penalty will have a meaningful deterrent

effect?

• The proposed judgment imposes injunctive relief against

future violations. What does the S.E.C. do to maintain

compliance? How many contempt proceedings against

large financial entities has the S.E.C. brought in the

past decade as a result of violations of prior consent

judgments?

• Why is the penalty in this case to be paid in large

part by Citigroup and its shareholders rather than

by the “culpable individual offenders acting for the

corporation?” [ ] If the S.E.C. was for the most part

unable to identify such alleged offenders, why was this?

• How can a securities fraud of this nature and magnitude

be the result simply of negligence?

Both the S.E.C. and Citigroup submitted written responses

to the district court's questions. On November 9, 2011, the

district court conducted a hearing to explore the questions

presented. A few weeks later, the district court issued a

written opinion declining to approve the consent judgment.

S.E.C. v. Citigroup Global Markets Inc., 827 F.Supp.2d 328

(S.D.N.Y.2011) ( “Citigroup I ”). The district court stated that

before a court may employ its

injunctive and contempt powers

in support of an administrative

settlement, it is required, even after

giving substantial deference to the

views of the administrative agency, to

be satisfied that it is not being used as

a tool to enforce an agreement that is

unfair, unreasonable, inadequate, or in

contravention of the public interest.

Id. at 332. It found that the proposed consent decree

is neither fair, nor reasonable, nor

adequate, nor in the public interest ...

because it does not provide the Court

with a sufficient evidentiary basis to

know whether the requested relief is

justified under any of these standards.

Purely private parties can settle a case

without ever agreeing on the facts, for

all that is required is that a plaintiff

dismiss his complaint. But when a

public agency asks a court to become

its partner in enforcement by imposing

wide-ranging injunctive remedies on a

defendant, enforced by the formidable

judicial power of contempt, the court,

and the public, need some knowledge

of what the underlying facts are: for

otherwise, the court becomes a mere




handmaiden to a settlement privately

negotiated on the basis of unknown

facts, while the public is deprived of

ever knowing the truth in a matter of

obvious public importance.

Id. (footnotes omitted).

The district court criticized the relief obtained by the S.E.C. in

the consent decree, comparing it unfavorably with settlements

entered in S.E.C. v. Bank of America Corp., No. 09 Civ.

6829(JSR), 2010 WL 624581 (S.D.N.Y. Feb. 22, 2010),

and in S.E.C. v. Goldman Sachs & Co. et al., No. 10 Civ.

3229(BSJ), Docket No. 25 (S.D.N.Y. July 20, 2010). See

Citigroup I, 827 F.Supp.2d at 330–31, 334 n. 7. In both Bank

of America and Goldman Sachs, the district court noted, the

parties stipulated to certain findings of facts. Without such

an evidentiary basis in this case, the district court reasoned,

“the Court is forced to conclude that a proposed Consent

Judgment *291 that asks the Court to impose substantial

injunctive relief, enforced by the Court's own contempt

power, on the basis of allegations unsupported by any proven

or acknowledged facts whatsoever, is neither reasonable, nor

fair, nor adequate, nor in the public interest.” Id. at 335. Thus,

the district court concluded:

An application of judicial power that

does not rest on facts is worse than

mindless, it is inherently dangerous.

The injunctive power of the judiciary

is not a free-roving remedy to be

invoked at the whim of a regulatory

agency, even with the consent of the

regulated. If its deployment does not

rest on facts— cold, hard, solid facts,

established either by admissions or by

trials— it serves no lawful or moral

purpose and is simply an engine of

oppression.

Id.

The district court refused to approve the consent judgment,

and instead consolidated this case with the Stoker action and

ordered the parties to be prepared to try both cases on July

16, 2012.

III. Prior proceedings before this Court.

The S.E.C. and Citigroup filed immediate notices of appeal.

The S.E.C. also moved in the district court for an emergency

stay pending the outcome of the appeal, but before the district

court could decide the stay motion before it, the S.E.C. sought

an emergency stay in our Court. As an alternative basis for

relief, the S.E.C. also filed a petition for a writ of mandamus

to set the order aside.

Prior to our Court's ruling on the stay motion and mandamus

petition, the district court issued its decision denying the

motion for a stay. S.E.C. v. Citigroup Global Markets Inc.,

827 F.Supp.2d 336 (S.D.N.Y.2011) (“Citigroup II ”). The

district court reasoned that our Court lacked jurisdiction to

hear an interlocutory appeal from the denial of approval

of a consent judgment. Id. at 338–39. As to the S.E.C.'s

proposal to file a writ of mandamus as an alternative to a

statutory appeal, the district court similarly found that such

action would not divest it of jurisdiction, and, consequently,

declined to consider the S.E.C.'s request for a stay. Id. at 339–

40.

Our Court disagreed, granting the motion for a stay pending

before us. S.E.C. v. Citigroup Global Markets Inc., 673 F.3d

158 (2d Cir.2012) ( “Citigroup III ”). We concluded that the

S.E.C. demonstrated a strong likelihood of success on the

merits, because the district court did not accord the S.E.C.'s

judgment adequate deference. Id. at 163–65. As both parties

before us advocated for approving the consent order, we

ordered counsel appointed to advocate for the district court's

order. Id. at 169. Before us now is the merits appeal.

ANALYSIS

[1] [2] We review the district court's denial of a settlement

agreement under an abuse of discretion standard. See S.E.C. v.

Wang, 944 F.2d 80, 85 (2d Cir.1991). A district court abuses

its discretion if it “(1) based its ruling on an erroneous view

of the law,” (2) made a “clearly erroneous assessment of the

evidence,” or (3) “rendered a decision that cannot be located

within the range of permissible decisions.” Lynch v. City of

New York, 589 F.3d 94, 99 (2d Cir.2009) (internal quotation

marks omitted).

I. Appellate jurisdiction.

[3] The S.E.C. argues that we have jurisdiction to consider

this interlocutory appeal pursuant to 28 U.S.C. § 1292(a)(1).

We agree. Section 1292(a)(1) states in relevant part:




*292 (a) [T]he courts of appeals shall have jurisdiction of

appeals from:

(1) Interlocutory orders of the district courts of the United

States, ... or of the judges thereof, granting, continuing,

modifying, refusing or dissolving injunctions, or refusing

to dissolve or modify injunctions....

[4] “Because § 1292(a)(1) was intended to carve out only

a limited exception to the final-judgment rule, we have

construed the statute narrowly to ensure that appeal as of right

under § 1292(a)(1) will be available only in circumstances

where an appeal will further the statutory purpose of

permitting litigants to effectually challenge interlocutory

orders of serious, perhaps irreparable, consequence.” Carson

v. Am. Brands Inc., 450 U.S. 79, 84, 101 S.Ct. 993, 67

L.Ed.2d 59 (1981) (internal quotation marks omitted). Thus,

“[u]nless a litigant can show that an interlocutory order of

the district court might have a serious, perhaps irreparable,

consequence, and that the order can be effectually challenged

only by immediate appeal, the general congressional policy

against piecemeal review will preclude interlocutory appeal.”

Id. (internal quotation marks omitted).

In Carson, the consent decree at issue permanently enjoined

an employer and a union from discriminating against

African–American employees, required changes to the way

seniority and benefits were awarded, established hiring goals,

and granted job bidding preferences. 450 U.S. at 84, 101

S.Ct. 993. The Carson court found the district court's refusal

to approve the consent decree constituted irreparable harm

because:

the District Court made clear that

it would not enter any decree

containing remedial relief provisions

that did not rest solidly on evidence

of discrimination and that were

not expressly limited to actual

victims of discrimination. In ruling

so broadly, the court did more

than postpone consideration of the

merits of petitioners' injunctive

claim. It effectively foreclosed such

consideration. Having stated that it

could perceive no vestiges of racial

discrimination on the facts presented,

and that even if it could, no relief could

be granted to future employees and

others who were not actual victims of

discrimination, the court made clear

that nothing short of an admission

of discrimination by respondents plus

a complete restructuring of the class

relief would induce it to approve

remedial injunctive provisions.

Id. at 87 n. 12, 101 S.Ct. 993 (internal quotation marks

omitted). Moreover, the Carson court found that “[b]ecause

a party to a pending settlement might be legally justified in

withdrawing its consent to the agreement once trial is held

and final judgment entered, the District Court's order might

thus have the ‘serious, perhaps irreparable, consequence’ of

denying the parties their right to compromise their dispute

on mutually agreeable terms.” Id. at 87–88, 101 S.Ct. 993

(footnote omitted). Finally, by delaying approval of the

consent decree, the plaintiffs were losing access to the

“specific job opportunities and the training and competitive

advantages that would come with those opportunities.” Id. at

89 n. 16, 101 S.Ct. 993.

In New York v. Dairylea Cooperative, Inc., the parties entered

into a settlement to resolve a civil antitrust action. 698

F.2d 567, 568–69 (2d Cir.1983). The settlement included a

provision labeled “Injunction” that:

would enjoin Dairylea from

participating in any agreement to

fix the price of milk or allocate

customers during the next six years....

Dairylea [also] agreed to allow New

York access to its books, records and

personnel and to publicize, among

its employees, the terms of the

*293 arrangement for the purpose of

ensuring Dairylea's compliance with

the decree's provisions.

Id. at 569. We found that the proposed injunction did not

meet the requirements of Carson because the settlement

agreement proposed minimal injunctive relief: defendants

were enjoined from violating the law. Id. at 570. The parties

argued that “because the proposed settlement would enjoin

Dairylea from participating in any conspiracy to fix prices or

allocate customers,” the “order disapproving the settlement is

in effect the denial of an injunction.” Id. We disagreed:

Taken to its extreme [ ] this argument

would render the disapproval of every




proposed settlement appealable. It

would be a simple matter for the

settling parties to include in the

agreement an injunctive provision

forbidding one party from violating

the law. The mere existence of an

injunctive clause, therefore, cannot be

sufficient to render the disapproval

of a proposed settlement agreement

appealable.

Id.

[5] Thus, to bring an interlocutory appeal from a

district court's denial of settlement approval, a party must

demonstrate “that (1) the district court, by refusing to approve

a settlement, effectively denied a party injunctive relief and

(2) in the absence of an interlocutory appeal, a party will

suffer irreparable harm.” Grant v. Local 638, 373 F.3d

104, 108 (2d Cir.2004). That standard is satisfied here. The

rejected consent decree provided for two types of injunctive

relief: (1) enjoining Citigroup from violating provisions

of the Act in the future, and (2) requiring Citigroup to

undertake steps aimed at preventing future occurrences of

securities fraud, and periodically demonstrate compliance to

the S.E.C. The S.E.C. also demonstrated irreparable harm:

unlike the court in Dairylea, here the district court expressed

no willingness to revisit the settlement agreement with the

parties, instead setting a trial date. See, e.g., Grant, 373 F.3d

at 111 (“It bears repeating that the Carson court relied heavily

on the district court's warning that it would never approve

a settlement similar to the one the parties made.” (citing

Carson, 450 U.S. at 87 n. 12, 101 S.Ct. 993)). We are

satisfied that our Court may exercise jurisdiction over this

interlocutory appeal.

II. The scope of the consent decree.

We quickly dispense with the argument that the district court

abused its discretion by requiring Citigroup to admit liability

as a condition for approving the consent decree. In both the

briefing and at oral argument, the district court's pro Bono

counsel stated that the district court did not seek an admission

of liability before approving the consent decree. With good

reason-there is no basis in the law for the district court to

require an admission of liability as a condition for approving

a settlement between the parties. The decision to require an

admission of liability before entering into a consent decree

rests squarely with the S.E.C. As the district court did not

condition its approval of the consent decree on an admission

of liability, we need not address the issue further.

III. The scope of deference.

[6] [7] We turn, then, to the far thornier question of

what deference the district court owes an agency seeking a

consent decree. Our Court recognizes a “strong federal policy

favoring the approval and enforcement of consent decrees.”

Wang, 944 F.2d at 85. “To be sure, when the district judge

is presented with a proposed consent judgment, he is not

merely a ‘rubber stamp.’ ” S.E.C. v. Levine, 881 F.2d 1165,

1181 (2d Cir.1989). The district *294 court here found it

was “required, even after giving substantial deference to the

views of the administrative agency, to be satisfied that it

is not being used as a tool to enforce an agreement that is

unfair, unreasonable, inadequate, or in contravention of the

public interest.” Citigroup I, 827 F.Supp.2d at 332. Other

district courts in our Circuit view “[t]he role of the Court

in reviewing and approving proposed consent judgments

in S.E.C. enforcement actions [as] ‘restricted to assessing

whether the settlement is fair, reasonable and adequate within

the limitations Congress has imposed on the S.E.C. to recover

investor losses.’ ” S.E.C. v. CR Intrinsic Investors, LLC, 939

F.Supp.2d 431, 434 (S.D.N.Y.2013) (quoting S.E.C. v. Cioffi,

868 F.Supp.2d 65, 74 (E.D.N.Y.2012)); see also United

States v. Peterson, 859 F.Supp.2d 477, 478 (E.D.N.Y.2012)

(“A district court has the duty to determine whether a consent

decree based on a proposed settlement is ‘fair and reasonable.’

”).

The “fair, reasonable, adequate and in the public interest”

standard invoked by the district court finds its origins in a

variety of cases. Our Court previously held, in the context of

assessing a plan for distributing the proceeds of a proposed

disgorgement order, that “once the district court satisfies

itself that the distribution of proceeds in a proposed S.E.C.

disgorgement plan is fair and reasonable, its review is at

an end.” Wang, 944 F.2d at 85. The Ninth Circuit— in

circumstances similar to those presented here, a proposed

consent decree aimed at settling an S.E.C. enforcement action

—not ed that “[u]nless a consent decree is unfair, inadequate,

or unreasonable, it ought to be approved.” S.E.C. v. Randolph,

736 F.2d 525, 529 (9th Cir.1984).

[8] Today we clarify that the proper standard for reviewing a

proposed consent judgment involving an enforcement agency

requires that the district court determine whether the proposed

consent decree is fair and reasonable, with the additional

requirement that the “public interest would not be disserved,”




eBay, Inc. v. MercExchange, 547 U.S. 388, 391, 126 S.Ct.

1837, 164 L.Ed.2d 641 (2006), in the event that the consent

decree includes injunctive relief. Absent a substantial basis

in the record for concluding that the proposed consent decree

does not meet these requirements, the district court is required

to enter the order.

We omit “adequacy” from the standard. Scrutinizing a

proposed consent decree for “adequacy” appears borrowed

from the review applied to class action settlements, and

strikes us as particularly inapt in the context of a proposed

S.E.C. consent decree. See Fed.R.Civ.P. 23(e)(2) (“If the

proposal would bind the class members, the court may

approve it only after a hearing and on a finding that it is

fair, reasonable, and adequate.”). The adequacy requirement

makes perfect sense in the context of a class action settlement

— a class action settlement typically precludes future claims,

and a court is rightly concerned that the settlement achieved

be adequate. By the same token, a consent decree does

not pose the same concerns regarding adequacy— if there

are potential plaintiffs with a private right of action, those

plaintiffs are free to bring their own actions. If there is no

private right of action, then the S.E.C. is the entity charged

with representing the victims, and is politically liable if it fails

to adequately perform its duties.

[9] A court evaluating a proposed S.E.C. consent decree for

fairness and reasonableness should, at a minimum, assess (1)

the basic legality of the decree, see Benjamin v. Jacobson,

172 F.3d 144, 155–59 (2d Cir.1999) (terminating existing

consent *295 decrees as required by the Prison Litigation

Reform Act); (2) whether the terms of the decree, including

its enforcement mechanism, are clear, see, e.g., Angela

R. ex rel. Hesselbein v. Clinton, 999 F.2d 320, 325 (8th

Cir.1993) (district court abused its discretion by approving

consent decree that did not properly define the enforcement

mechanisms); (3) whether the consent decree reflects a

resolution of the actual claims in the complaint; and (4)

whether the consent decree is tainted by improper collusion or

corruption of some kind. Cf. Kozlowski v. Coughlin, 871 F.2d

241, 244 (2d Cir.1989) (“Before entering a consent judgment,

the district court must be certain that the decree 1) springs

from and serves to resolve a dispute within the court's subject-

matter jurisdiction, 2) comes within the general scope of the

case made by the pleadings, and 3) furthers the objectives

of the law upon which the complaint was based.” (internal

quotation marks and alternations omitted)). Consent decrees

vary, and depending on the decree a district court may

need to make additional inquiry to ensure that the consent

decree is fair and reasonable. The primary focus of the

inquiry, however, should be on ensuring the consent decree

is procedurally proper, using objective measures similar to

the factors set out above, taking care not to infringe on the

S.E.C.'s discretionary authority to settle on a particular set of

terms.

[10] [11] [12] It is an abuse of discretion to require, as

the district court did here, that the S.E.C. establish the “truth”

of the allegations against a settling party as a condition for

approving the consent decrees. Citigroup I, 827 F.Supp.2d at

332–33. Trials are primarily about the truth. Consent decrees

are primarily about pragmatism. “[C]onsent decrees are

normally compromises in which the parties give up something

they might have won in litigation and waive their rights to

litigation.” United States v. ITT Continental Baking Co., 420

U.S. 223, 235, 95 S.Ct. 926, 43 L.Ed.2d 148 (1975). Thus,

a consent decree “must be construed as ... written, and not

as it might have been written had the plaintiff established his

factual claims and legal theories in litigation.” United States v.

Armour & Co., 402 U.S. 673, 682, 91 S.Ct. 1752, 29 L.Ed.2d

256 (1971). Consent decrees provide parties with a means

to manage risk. “The numerous factors that affect a litigant's

decision whether to compromise a case or litigate it to the

end include the value of the particular proposed compromise,

the perceived likelihood of obtaining a still better settlement,

the prospects of coming out better, or worse, after a full trial,

and the resources that would need to be expended in the

attempt.” Citigroup III, 673 F.3d at 164; see also Randolph,

736 F.2d at 529 (“Compromise is the essence of settlement.

Even if the Commission's case against [defendants] is strong,

proceeding to trial would still be costly. The S.E.C.'s

resources are limited, and that is why it often uses consent

decrees as a means of enforcement.” (citation omitted)).

These assessments are uniquely for the litigants to make. It is

not within the district court's purview to demand “cold, hard,

solid facts, established either by admissions or by trials,”

Citigroup I, 827 F.Supp.2d at 335, as to the truth of the

allegations in the complaint as a condition for approving a

consent decree.

As part of its review, the district court will necessarily

establish that a factual basis exists for the proposed decree.

In many cases, setting out the colorable claims, supported

by factual averments by the S.E.C., neither admitted nor

denied by the wrongdoer, will suffice to allow the district

court to conduct its review. Other cases may require more of

a showing, for example, if the district court's initial review

*296 of the record raises a suspicion that the consent decree




was entered into as a result of improper collusion between

the S.E.C. and the settling party. We need not, and do not,

delineate the precise contours of the factual basis required to

obtain approval for each consent decree that may pass before

the court. It is enough to state that the district court here,

with the benefit of copious submissions by the parties, likely

had a sufficient record before it on which to determine if the

proposed decree was fair and reasonable. On remand, if the

district court finds it necessary, it may ask the S.E.C. and

Citigroup to provide additional information sufficient to allay

any concerns the district court may have regarding improper

collusion between the parties.

[13] As noted earlier, when a proposed consent decree

contains injunctive relief, a district court must also consider

the public interest in deciding whether to grant the injunction.

See eBay, 547 U.S. at 391, 126 S.Ct. 1837; Salinger v.

Colting, 607 F.3d 68, 80 (2d Cir.2010). eBay makes clear that

a plaintiff seeking a permanent

injunction must satisfy a four-factor

test before a court may grant such

relief. A plaintiff must demonstrate:

(1) that it has suffered an irreparable

injury; (2) that remedies available

at law, such as monetary damages,

are inadequate to compensate for

that injury; (3) that, considering the

balance of hardships between the

plaintiff and defendant, a remedy in

equity is warranted; and (4) that the

public interest would not be disserved

by a permanent injunction.

547 U.S. at 391, 126 S.Ct. 1837. “eBay strongly indicates

that the traditional principles of equity it employed are the

presumptive standard for injunctions in any context,” be they

preliminary or permanent. Salinger, 607 F.3d at 78; see also

World Wide Polymers, Inc. v. Shinkong Synthetic Fibers

Corp., 694 F.3d 155, 160–61 (2d Cir.2012) (applying the

eBay test to a permanent injunction sought to remedy a breach

of an exclusive distributorship agreement).

Our analysis focuses on the issue reached by the district court:

that the district court must assure itself the “public interest

would not be disserved” by the issuance of a permanent

injunction. eBay, 547 U.S. at 391, 126 S.Ct. 1837; cf. WPIX,

Inc. v. ivi, Inc., 691 F.3d 275, 278 (2d Cir.2012) (describing

the test as “non-disservice of the public interest by issuance

of a preliminary injunction.”) 1

1 The district court did not address, and the parties do

not brief, whether the remaining eBay factors were

satisfied here. We therefore do not address this issue,

except to note that the proposed consent decree waived

Citigroup's right to challenge any enforcement action on

the ground that the consent decree fails to conform to the

requirements of Rule 65 of the Federal Rules of Civil

Procedure.

[14] The job of determining whether the proposed S.E.C.

consent decree best serves the public interest, however, rests

squarely with the S.E.C., and its decision merits significant

deference:

[F]ederal judges— who have no constituency— have a

duty to respect legitimate policy choices made by those

who do. The responsibilities for assessing the wisdom of

such policy choices and resolving the struggle between

competing views of the public interest are not judicial ones:

“Our Constitution vests such responsibilities in the public

branches.”

Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc.,

467 U.S. 837, 866, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984)

(quoting TVA v. Hill, 437 U.S. 153, 195, 98 S.Ct. 2279, 57

L.Ed.2d 117 (1978)); see also *297 In re Cuyahoga Equip.

Corp., 980 F.2d 110, 118 (2d Cir.1992) (“Appellate courts

ordinarily defer to the agency's expertise and the voluntary

agreement of the parties in proposing the settlement.”).

[15] The district court correctly recognized that it was

required to consider the public interest in deciding whether

to grant the injunctive relief in the proposed injunction.

Citigroup I, 827 F.Supp.2d at 331. However, the district

court made no findings that the injunctive relief proposed

in the consent decree would disserve the public interest, in

part because it defined the public interest as “an overriding

interest in knowing the truth.” Id. at 335. The district court's

failure to make the proper inquiry constitutes legal error.

On remand, the district court should consider whether the

public interest would be disserved by entry of the consent

decree. For example, a consent decree may disserve the public

interest if it barred private litigants from pursuing their own

claims independent of the relief obtained under the consent

decree. What the district court may not do is find the public

interest disserved based on its disagreement with the S.E.C.'s

decisions on discretionary matters of policy, such as deciding

to settle without requiring an admission of liability.




[16] To the extent the district court withheld approval of the

consent decree on the ground that it believed the S.E.C. failed

to bring the proper charges against Citigroup, that constituted

an abuse of discretion. See Citigroup I, 827 F.Supp.2d at

330. In comparing the complaint filed by the S.E.C. against

Citigroup with the complaint filed by the S.E.C. against

Stoker, the district court noted that “[a]lthough this would

appear to be tantamount to an allegation of knowing and

fraudulent intent (‘scienter,’ in the lingo of securities law),

the S.E.C., for reasons of its own, chose to charge Citigroup

only with negligence, in violation of Sections 17(a)(2) and

(3) of the Securities Act, 15 U.S.C. § 77q(a)(2) and (3).”

Id. The exclusive right to choose which charges to levy

against a defendant rests with the S.E.C. See, e.g., United

States v. Microsoft Corp., 56 F.3d 1448, 1459 (D.C.Cir.1995)

(“[T]he district court is not empowered to review the actions

or behavior of the Department of Justice; the court is only

authorized to review the decree itself.”); see also Heckler v.

Chaney, 470 U.S. 821, 831, 105 S.Ct. 1649, 84 L.Ed.2d 714

(1985) (“[A]n agency's decision not to prosecute or enforce,

whether through civil or criminal process, is a decision

generally committed to an agency's absolute discretion.”).

Nor can the district court reject a consent decree on the ground

that it fails to provide collateral estoppel assistance to private

litigants— that simply is not the job of the courts.

[17] Finally, we note that to the extent that the S.E.C. does

not wish to engage with the courts, it is free to eschew the

involvement of the courts and employ its own arsenal of

remedies instead. See, e.g., Exchange Act § 21C(a), 15 U.S.C.

§ 78u–3(a); Securities Act § 8A(a), 15 U.S.C. § 77h–1(a). The

S.E.C. can also order the disgorgement of profits. Exchange

Act § 21B(e), 15 U.S.C. § 78u–2(e); Securities Act § 8A(e),

15 U.S.C. § 77h–1(e). Admittedly, these remedies may not be

on par with the relief afforded by a so-ordered consent decree

and federal court injunctions. But if the S.E.C. prefers to call

upon the power of the courts in ordering a consent decree and

issuing an injunction, then the S.E.C. must be willing to assure

the court that the settlement proposed is fair and reasonable.

“Consent decrees are a hybrid in the sense that they are at

once both contracts and orders; they are construed largely as

contracts, but are enforced as orders.” Berger v. Heckler, 771

F.2d 1556,1568–69 (2d Cir.1985) (citation *298 omitted).

For the courts to simply accept a proposed S.E.C. consent

decree without any review would be a dereliction of the

court's duty to ensure the orders it enters are proper.

CONCLUSION

For the reasons given above, we vacate the November 28,

2011 order of the district court and remand this case for

further proceedings in accordance with this opinion. As

we exercise jurisdiction pursuant to Section 1292(a)(1), the

petition for a writ of mandamus is denied as moot.

LOHIER, Circuit Judge, concurring:

I thank my panel colleagues for addressing many of my

concerns in this case. In particular, today's majority opinion

makes clear that district courts assessing a proposed consent

decree should consider principally four factors: “(1) the basic

legality of the decree; (2) whether the terms of the decree,

including its enforcement mechanism, are clear; (3) whether

the consent decree reflects a resolution of the actual claims in

the complaint; and (4) whether the consent decree is tainted

by improper collusion or corruption of some kind.” Majority

Op., ante, at 294–95 (citations omitted). I write separately to

make two more observations.

First, in my view, the “fair and reasonable” standard for

assessing the appropriateness of monetary relief (as opposed

to injunctive relief) involves a straightforward analysis of

only the four factors identified by the majority and described

above. If all four factors are satisfied, the perceived modesty

of monetary penalties proposed in a consent decree is not a

reason to reject the decree.

Second, I would be inclined to reverse on the factual record

before us and direct the District Court to enter the consent

decree. It does not appear that any additional facts are needed

to determine that the proposed decree is “fair and reasonable”

and does not disserve the public interest. Nor, to use the

words of the majority opinion's holding, is there a “substantial

basis ... for concluding” that further development of the

record will show that the proposed terms of this decree are

not fair, reasonable, and in the public interest. Under the

circumstances, though, it does no harm to vacate and remand

to permit the very able and distinguished District Judge to

make that determination in the first instance.

Parallel Citations


S.E.C. v. Citigroup Global Markets Inc., 34 F.Supp.3d 379 (2014)



Andrew H. Feller, Jeffrey Thomas Infelise, Kenneth R.

Lench, Reid Anthony Muoio, Thomas D. Silverstein,

Securities and Exchange Commission, Washington, DC, for

Plaintiff.

Brad Scott Karp, Susanna Michele Buergel, Theodore Von

Wells, Jr., Paul, Weiss, Rifkind, Wharton & Garrison LLP,

New York, NY, for Defendant.

OPINION

JED S. RAKOFF, District Judge.

This case is back before the Court on remand from the Court

of Appeals. They who must be obeyed have spoken, 1 and

this Court's duty is to faithfully fulfill their mandate. 2

1 SEC v. Citigroup Global Mkts., Inc., 752 F.3d 285 (2d

Cir.2014).

2 Mandate dated July 28, 2014, ECF No. 58.

As the Court of Appeals recognized, this Court declined

to approve the proposed Consent Judgment in this case

because the *380 parties had failed to provide the Court

with sufficient evidence to enable it to assess whether the

agreement was fair, adequate, reasonable, and in the public

interest. 3 The Court of Appeals held that this standard was

mistaken and/or misapplied because:

3 Citigroup, 752 F.3d at 289; SEC v. Citigroup Global

Mkts., 827 F.Supp.2d 328, 332 (S.D.N.Y.2011), rev'd,

752 F.3d 285 (2d Cir.2014).

— proof of “adequacy” is not required; 4

4 Citigroup, 752 F.3d at 294. This would be true, the

Court of Appeals stated, even in those cases where

“there is no private right of action, [because] then

the S.E.C. is the entity charged with representing the

victims, and is politically liable if it fails to adequately

perform its duties.” Id. It is difficult to know what the

Court of Appeals meant by “politically liable” since the

SEC, by its charter, is designed to be free of political

interference, see 17 C.F.R. § 140.10, and routinely

asserts its independence from political pressures, see

Mary Jo White, The Importance of Independence,

SEC, http://www.sec. gov/News/Speech/Detail/Speech/

l370539864016# .U9_ekGNWEsI (last visited Aug. 4,

2014).

— proof of “fairness” and “reasonableness” requires little

more than a showing that the consent decree is clear and

lawful on its face, resolves the parties' claims, and is not

“tainted by improper collusion or corruption”; 5

5 Citigroup, 752 F.3d at 295. The Court of Appeals

added: “In many cases, setting out the colorable claims,

supported by factual averments by the S.E.C, neither

admitted nor denied by the wrongdoer, will suffice to

allow the district court to conduct its review. Other

cases may require more of a showing, for example, if

the district court's initial review of the record raises a

suspicion that the consent decree was entered into as a

result of improper collusion between the S.E.C. and the

settling party.” Id. at 295–96. The Court of Appeals gave

no indication of how a facial review of such a limited

record, joined in by both parties, could raise a suspicion

of collusion, nor did it offer any other example of where

a fuller inquiry would be appropriate.

— “determining whether the proposed S.E.C. consent

decree serves the public interest ... rests squarely with

the S.E.C.”; 6 and

6 Id. at 296.

— more generally, the “primary focus of the [district

court's] inquiry ... should be on ensuring the consent

decree is procedurally proper, ... taking care not to

infringe on the S.E.C.'s discretionary authority to settle

on a particular set of terms.” 7

7 Id. at 295.

Upon review of the underlying record in this case, the

Court cannot say that the proposed Consent Judgment is

procedurally improper or in any material respect fails to

comport with the very modest standard imposed by the Court

S.E.C. v. Citigroup Global Markets Inc., 34 F.Supp.3d 379 (2014)


of Appeals. Accordingly, in an Order that will be filed

separately today, the Consent Judgment will be approved.

Nonetheless, this Court fears that, as a result of the Court of

Appeal's decision, the settlements reached by governmental

regulatory bodies and enforced by the judiciary's contempt

powers will in practice be subject to no meaningful oversight

whatsoever. 8 But it would be a dereliction *381 of duty

for this Court to seek to evade the dictates of the Court of

Appeals. That Court has now fixed the menu, leaving this

Court with nothing but sour grapes.

8 Indeed, the Court of Appeals invites the SEC to avoid

even the extremely modest review it leaves to the district

court by proceeding on a solely administrative basis.

(“Finally, we note that to the extent that the S.E.C. does

not wish to engage with the courts, it is free to eschew the

involvement of the courts and employ its own arsenal of

remedies instead.” Id. at 297). One might wonder: from

where does the constitutional warrant for such unchecked

and unbalanced administrative power derive?


Caution

As of: Jun 04, 2015

Inre:PACIFICPICTURESCORPORATION;IPWORLDWIDE,LLC;IPW,

LLC;MARCTOBEROFF;MARK WARRENPEARY;LAURASIEGEL

LARSON;JEANADELEPEAVY,PACIFICPICTURESCORPORATION;IP

WORLDWIDE,LLC;IPW,LLC;MARK WARRENPEARY,aspersonal

representativeoftheEstateofJosephShuster;MARCTOBEROFF,anindividual;

JEANADELEPEAVY;LAURASIEGELLARSON,anindividual,Petitioners,v.

UNITEDSTATESDISTRICTCOURTFORTHECENTRALDISTRICTOF

CALIFORNIA,LOSANGELES,Respondent,DCCOMICS,RealPartyinInterest.

No.11-71844

UNITEDSTATESCOURTOFAPPEALSFORTHENINTH CIRCUIT

679F.3d1121;2012U.S.App.LEXIS9691

February7,2012,ArguedandSubmitted,Pasadena,California

May10,2012,Amended

PRIORHISTORY:[**1]

Appeal from the United States District Court for the

Central District of California. D.C. No.

2:10-cv-03633-ODW-RZ. Otis D. Wright, District Judge,

Presiding.

Pac. Pictures Corp. v. United States Dist. Court, 2012

U.S. App. LEXIS 7643(9th Cir. Cal., Apr. 17, 2012)

COUNSEL:Richard B. Kendall, Kendall Brill & Klieger

LLP, Los Angeles, California, argued the cause and filed

the briefs for the petitioners. With him on the briefs were

Laura W. Brill, Kendall Brill & Kleiger, LLP, Los

Angeles, California as well as Marc Toberoff and Keith

G. Adams, Toberoff & Associates, P.C., Los Angeles,

California.

Matthew T. Kline, O'Melveny & Myers LLP, Los

Angeles, California, argued the cause and filed the brief

for the real party in interest. With him on the brief were

Daniel M. Petrocelli and Cassandra L. Seto, O'Melveny

& Myers LLPas well as Patrick T. Perkins, Perkins Law

Office, P.C., Cold Spring, New York.

JUDGES: Before: KOZINSKI, Chief Judge,

O'SCANNLAIN and N.R. SMITH, Circuit Judges.

OPINIONBY:O'SCANNLAIN

OPINION

[*1124]AMENDED OPINION

Opinion by Judge O'SCANNLAIN, Circuit Judge:

We must decide whether a party waives

attorney-client privilege forever by voluntarily disclosing

Page 1

privileged documents to the federal government.

I

In the 1930s, writer Jerome Siegel and illustrator Joe

Shuster joined forces to create the character that would

eventually [**2]become Superman. They ceded their

intellectual property rights to D.C. Comics when they

joined the company as independent contractors in 1937.1

Since the Man of Steel made his first appearance in 1938,

he has been fighting for "truth, justice, and the American

way." Shuster, Siegel, their heirs ("Heirs"), and D.C.

Comics have been fighting for the rights to his royalties

for almost as long.

1 The name and corporate structure of the real

party in interest has changed a number of times

since 1938. For simplicity, we refer to it as "D.C.

Comics."

Marc Toberoff, a Hollywood producer and a licensed

attorney, stepped into the fray around the turn of the

millennium. As one of his many businesses, Toberoff

pairs intellectual property rights with talent and markets

these packages to movie studios. Having set his sights on

Superman, Toberoff approached the Heirs with an offer

to manage preexisting litigation over the rights Siegel and

Shuster had ceded to D.C. Comics. He also claimed that

he would arrange for a new Superman film to be

produced. To pursue these goals, Toberoff created a joint

venture between the Heirs and an entity he owned.

Toberoff served as both a business advisor and an

attorney [**3]for that venture. The ethical and

professional concerns raised by Toberoff's actions will

likely occur to many readers, but they are not before this

court.

While the preexisting litigation was pending,

Toberoff hired a new lawyer to work for one of his

companies. This attorney remained in Toberoff's employ

for only about three months before allegedly absconding

with copies of several documents from the Siegel and

Shuster files. Unsuccessful in his alleged attempt to use

the documents to solicit business from the [*1125]

Heirs, this attorney sent the documents to executives at

D.C. Comics. While he did not include his name with the

package, he did append a cover letter, written in the form

of a timeline, outlining in detail Toberoff's alleged master

plan to capture Superman for himself.

This happened no later than June 2006, and the

parties have been battling over what should be done with

these documents ever since. Rather than exploiting the

documents, D.C. Comics entrusted them to an outside

attorney and sought to obtain them through ordinary

discovery in the two ongoing lawsuits over Superman.

Considering every communication he had with the Heirs

to be privileged--regardless of whether the [**4]

communication was in his capacity as a business advisor

or an attorney--Toberoff resisted all such efforts.

Ultimately, in April 2007, a magistrate judge ordered

certain documents, including the attorney's cover letter,

turned over to D.C. Comics. A few months later,

Toberoff at long last reported the incident to the

authorities (specifically the Federal Bureau of

Investigation). In December 2008, Toberoff finally

produced at least some of the documents.

In 2010, D.C. Comics filed this lawsuit against

Toberoff, the Heirs, and three entities in which Toberoff

owned a controlling interest (collectively, the

"Petitioners"), claiming that Toberoff interfered with its

contractual relationships with the Heirs. The attorney's

cover letter formed the basis of the lawsuit and was

incorporated into the complaint. Toberoff has continued

to resist the use of any of the documents taken from his

offices, including those already disclosed to D.C. Comics

and especially the cover letter.

About a month after the suit was filed, Toberoff

asked the Office of the United States Attorney for the

Central District of California to investigate the theft. In

response to a request from Toberoff, the U.S. Attorney's

[**5]Office issued a grand jury subpoena for the

documents as well as a letter stating that if Toberoff

voluntarily complied with the subpoena the Government

would "not provide the . . . documents . . . to

non-governmental third parties except as may be required

by law or court order."The letter also confirmed that

disclosure would indicate that "Toberoff has obtained all

relevant permissions and consents needed (if any) to

provide the . . . documents . . . to the government."

Armed with this letter, Toberoff readily complied with

the subpoena, making no attempt to redact anything from

the documents.

D.C. Comics immediately requested all documents

disclosed to the U.S. Attorney, claiming that the

disclosure of these unredacted copies waived any

remaining privilege. Examining the weight of authority

from other circuits, the magistrate judge agreed that a

Page 2679 F.3d 1121, *1124; 2012 U.S. App. LEXIS 9691, **1

party may not selectively waive attorney-client privilege.

The magistrate judge reasoned that, because a voluntary

disclosure of privileged materials breaches confidentiality

and is inconsistent with the theory behind the privilege,

such disclosure waives that privilege regardless of

whether the third party is the government or a civil

litigant. [**6]Having delivered the documents to the

government, the magistrate judge concluded, Petitioners

could not rely on the attorney-client privilege to shield

them from D.C. Comics.

However, the magistrate judge noted that this circuit

has twice declined to decide whether a party may

selectively waive the attorney-client privilege, and stayed

his order to allow Petitioners to seek review. The district

court denied review. Petitioners seek to overturn the

magistrate's order through a writ of mandamus.

II

A writ of mandamus is an extraordinary remedy. A

party seeking the [*1126]writ has the "burden of

showing that [his] right to the issuance of the writ is clear

and indisputable."Bauman v. U.S. Dist. Ct., 557 F.2d

650,656(9th Cir. 1977) (internal quotation marks

omitted). In evaluating whether a petitioner has met that

burden, we consider: (1) whether he "has no other

adequate means"of seeking relief; (2) whether he "will

be damaged or prejudiced in a way not correctable on

appeal" after final judgment; (3) whether the "district

court's order is clearly erroneous as a matter of law"; (4)

whether the order "is an oft-repeated error"; and (5)

whether the order "raises new and important problems, or

[**7]issues of first impression."Id. at 654-55. We have

established no specific formula to weigh these factors,

but failure to show what is generally listed as the third

factor, error, is fatal to any petition for mandamus. See

Burlington N. & Santa Fe. Ry. v. U.S. Dist. Ct., 408F.3d

1142,1146(9th Cir. 2005).2

2 Petitioners assert that, because this case

presents an issue of first impression, they must

demonstrate simple rather than clear error. We

have not always been precise as to whether we

look for "error"or "clear error"where our sister

circuits have addressed an issue, but we have not.

Compare Anon. Online Speakers v. U.S. Dist. Ct.,

661F.3d 1168(9th Cir. 2011)(applying the clear

error standard in a circuit split situation), with San

Jose MercuryNews, Inc. v. U.S. Dist. Ct., 187

F.3d 1096(9th Cir. 1999)(applying the simple

error standard when other circuits had weighed in

on parts of an issue). We assume but do not

decide that Petitioners need show only error.

III

Under certain circumstances, the attorney-client

privilege will protect communications between clients

and their attorneys from compelled disclosure in a court

of law. See Upjohn Co. v. United States, 449U.S. 383,

389,101S. Ct. 677, 66L. Ed. 2d 584(1981). [**8]

Though this in some way impedes the truth-finding

process, we have long recognized that "the advocate and

counselor [needs] to know all that relates to the client's

reasons for seeking representation"if he is to provide

effective legal advice. Trammel v. United States, 445U.S.

40,51,100S. Ct. 906, 63L. Ed. 2d 186(1980); see also

8 John Henry Wigmore, Evidence § 2290 (John T.

McNaughton, ed. 1961). As such, we recognize the

privilege in order 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."Upjohn

Co., 449U.S. at 389.3

3 Because Petitioners have never challenged the

district court's application of federal law, we

assume but do not decide that this was correct

even though this case involves diversity claims to

which state privilege law would apply. Lewis v.

United States, 517F.2d 236, 237 n.2(9th Cir.

1975)(per curiam).

Nonetheless, because, like any other testimonial

privilege, this rule "contravene[s] the fundamental

principle that the public has a right to every man's

evidence,"Trammel, 445U.S. at 50(internal alterations

and quotation marks omitted), we construe it narrowly

[**9]to serve its purposes, see, e.g., United States v.

Martin, 278F.3d 988, 999(9th Cir. 2002).4 In particular,

we recognize several ways by which parties may waive

the privilege. See, e.g., Hernandezv. Tanninen, 604F.3d

1095,1100(9th Cir. 2010). Most pertinent here is that

voluntarily disclosing [*1127]privileged documents to

third parties will generally destroy the privilege. Id. The

reason behind this rule is that, "'[i]f clients themselves

divulge such information to third parties, chances are that

they would also have divulged it to their attorneys, even

without the protection of the privilege.'" Comment,

Stuffing the Rabbit Back into the Hat:Limited Waiver of

the Attorney-Client Privilege in an Administrative Agency


Investigation, 130 U. Pa. L. Rev. 1198, 1207 (1982).

Under such circumstances, there simply is no justification

to shut off judicial inquiry into these communications.

4 Because no one challenges whether these

communications would have been privileged

absent waiver, we do not address that issue. For

example, we assume but do not decide that these

communications were all made for the purpose of

obtaining legal as opposed to business advice. Cf.

United States v. Ruehle, 583F.3d 600, 608n.8

(9th Cir. 2009) [**10](noting that business

advice does not fall within the purview of

attorney-client privilege even if the advisor is a

lawyer).

Petitioners concede that this is the general rule, but

they assert a number of reasons why it should not apply

to them.

A

Petitioners' primary contention is that because

Toberoff disclosed these documents to the government,

as opposed to a civil litigant, his actions did not waive the

privilege as to the world at large. That is, they urge that

we adopt the theory of "selective waiver" initially

accepted by the Eight Circuit, Diversified Industries, Inc.

v. Meredith, 572F.2d 596(8th Cir. 1978)(en banc), but

rejected by every other circuit to consider the issue since,

see In re Qwest Communs. Int'l, 450F.3d 1179, 1197

(10th Cir. 2006); Burden-Meeks v. Welch, 319F.3d 897,

899(7th Cir. 2003); In re Columbia/HCA Healthcare

Corp. Billing Practices Litig., 293F.3d 289, 295(6th

Cir. 2002)[hereinafter "In re Columbia"]; United States

v. Mass. Inst, of Tech., 129F.3d 681, 686(1st Cir. 1997);

Genentech, Inc. v. United States Int'l Trade Comm'n, 122

F.3d 1409, 1416-18(Fed. Cir. 1997); In re Steinhardt

Partners, L.P., 9 F.3d 230, 236 (2d Cir. 1993);

Westinghouse Elec. Corp. v. Republic of Philippines, 951

F.2d 1414, 1425(3d Cir. 1991); [**11]In re Martin

Marietta Corp., 856F.2d 619, 623-24(4th Cir. 1988);

Permian Corp. v. United States, 665F.2d 1214, 1221,

214U.S. App. D.C. 396(D.C. Cir. 1981).

As the magistrate judge noted, we have twice

deferred judgment on whether we will accept a theory of

selective waiver. United States v. Bergonzi, 403 F.3d

1048,1050(9th Cir. 2005) (per curiam); Bittaker v.

Woodford, 331F.3d 715, 720 n.5(9th Cir. 2003)(en

banc). But we share the concerns expressed by many of

our sister circuits about the cursory analysis behind the

Diversified rule. The Eighth Circuit--the first court of

appeals to consider the issue--adopted what has become a

highly controversial rule only because it concluded that

"[t]o hold otherwise may have the effect of thwarting the

developing procedure of corporations to employ

independent outside counsel to investigate and advise

them in order to protect stockholders."Diversified, 572

F.2d at 611. This apprehension has proven unjustified.

Officers of public corporations, it seems, do not require a

rule of selective waiver to employ outside consultants or

voluntarily to cooperate with the government. See, e.g.,

Westinghouse Elec. Corp., 951F.2d at 1426.

More importantly, such reasoning does [**12]little,

if anything, to serve the public good underpinning the

attorney-client privilege. That is, "selective waiver does

not serve the purpose of encouraging full disclosure to

one's attorney in order to obtain informed legal

assistance; it merely encourages voluntary disclosure to

government agencies, thereby extending the privilege

beyond its intended purpose."Id. at 1425.

It may well be that encouraging cooperation with the

government is an alternative route to the ultimate goal of

promoting adherence to the law. In re Columbia, 293

F.3d at 311(Boggs, J., dissenting). And there are those

who assert that "an exception to the third-party waiver

rule need [not] be moored to the justifications of the

attorney-client privilege."Id. at 308(emphasis omitted).

We disagree. If [*1128]we were to unmoor a privilege

from its underlying justification, we would at least be

failing to construe the privilege narrowly. Cf. Univ. of Pa.

v. EEOC, 493U.S. 182, 189, 110S. Ct. 577, 107L. Ed.

2d 571(1990)(citing Trammel, 445U.S. at 50; United

States v. Bryan, 339U.S. 323, 331, 70S. Ct. 724, 94L.

Ed. 884)(1950)). And more likely, we would be creating

an entirely new privilege. In re Qwest Communs. Int'l,

450F.3d 1179; Westinghouse, 951F.2d at 1425.

It is not [**13]beyond our power to create such a

privilege. Univ. of Pa., 493U.S. at 189(noting that Fed.

R. Evid. 501provides certain flexibility to adopt privilege

rules on a case-by-case basis). But as doing so requires

balancing competing societal interests in access to

evidence and in promoting certain types of

communication, the Supreme Court has warned us not to

"exercise this authority expansively."Id.; see also United

States v. Nixon, 418U.S. 683, 710, 94S. Ct. 3090, 41L.

Ed. 2d 1039 (1974). Put simply, "[t]he balancing of


conflicting interests of this type is particularly a

legislative function."Univ. of Pa., 493U.S. at 189.

Since Diversified, there have been multiple

legislative attempts to adopt a theory of selective waiver.

Most have failed. Report of the Advisory Committee on

Evidence Rules, May 15, 2007, at 4, available at

http://www.uscourts.gov/uscourts/RulesAn

dPolicies/rules/Reports/2007-05-Committe

e_Report-Evidence.pdf (reporting the selective waiver

provision separately from the general proposed rule);

SEC Statement in Support of Proposed Section 24(d)of

the Securities Exchange Act of 1934, 16 Sec. Reg. & L.

Rep. 456, 461 (Mar. 2, 1984). But see H.R. Rep. No. 870,

96th Cong., 1st Sess. (1980), codified at 15U.S.C. §

1312. [**14]Given that Congress has declined broadly

to adopt a new privilege to protect disclosures of

attorney-client privileged materials to the government,

we will not do so here. Univ. of Pa., 493U.S. at 189

(requiring federal courts to be particularly cautious when

legislators have "considered the relevant competing

concerns but [have] not provided the privilege").

B

Petitioners next assert that even if we reject selective

waiver as a general matter, we should enforce a purported

confidentiality agreement based upon the letter from the

U.S. Attorney's Office. Though no circuit has officially

adopted such a rule, at least two have "left the door open

to selective waiver" where there is a confidentiality

agreement. In re Columbia, 293F.3d at 301(discussing

Steinhardt and Dellwood Farms, Inc. v. Cargill, 128F.3d

1122(7th Cir. 1997)); see also In re Qwest Communs

Int'l, 450F.3d at 1192-94 (describing such a rule as a

"leap"but declining to reject it completely).

Assuming that this letter constitutes a confidentiality

agreement, Petitioners have provided no convincing

reason that post hoc contracts regarding how information

may be revealed encourage frank conversation at the time

of the [**15]advice. Indeed, as the Sixth Circuit has

noted, while this approach "certainly protects the

expectations of the parties to the confidentiality

agreement, it does little to serve the 'public ends' of

adequate legal representation that the attorney-client

privilege is designed to protect." In re Columbia, 293

F.3d at 303. Instead, recognizing the validity of such a

contract "merely [adds] another brush on an attorney's

palette [to be] utilized and manipulated to gain tactical or

strategic advantage." Steinhardt, 9 F.3d at 235; cf.

Permian Corp., 665 F.2d at 1221. And it would

undermine the public good of promoting an efficient

judicial [*1129]system by fostering uncertainty and

encouraging litigation. Upjohn, 449U.S. at 393 (noting

that an "uncertain privilege . . . is little better than no

privilege at all").

The only justification behind enforcing such

agreements would be to encourage cooperation with the

government. But Congress has declined to adopt even

this limited form of selective waiver. See Statement of

Congressional Intent Regarding Rule 502of the Federal

Rules of Evidence, 154 Cong. Rec. H. 7817 (2008),

reprinted in Fed. R. Evid. 502 addendum to comm. n

subdivision (d) (noting [**16]that Rule 502"does not

provide a basis for a court to enable parties to agree to a

selective waiver of the privilege, such as to a federal

agency conducting an investigation"). As such, we reject

such a theory here.

C

Petitioners next aver that, because Toberoff was the

victim of the crime rather than the target of the grand jury

probe, his disclosure should be treated differently. But if

it is unnecessary to adopt a theory of selective waiver to

encourage potential defendants to cooperate with the

government, In re Qwest Communs. Int'l, 450F.3d at

1193; Westinghouse, 951F.2d at 1425, it is even less

necessary to do so to encourage victims to report crimes

to the government. The desire to see the crime prosecuted

is sufficient impetus to cooperate.

We are unconvinced by Petitioners' argument that

adopting such a rule will drastically impair law

enforcement attempts to investigate espionage against

"attorneys, financial institutions, medical providers,

national security agencies, judges, large corporations, or

law firms."This has not occurred despite near universal

rejection of a selective waiver rule. Furthermore, most of

these documents are not covered by attorney-client

privilege [**17]because they do not represent

communications between a lawyer and his client for the

purpose of obtaining legal advice. Cf. Ruehle, 583F.3d at

608-09& n.8 (rejecting a presumption of privilege even

when a communication involves a lawyer). And, even if

they were originally covered by the privilege, they would

eventually have to be made public if they are to become

evidence in a criminal trial. To the extent that timing is a

concern, it can be ameliorated by properly seeking a

protective order. Fed. R. Evid. 502(d).


We are similarly unpersuaded that, because Toberoff

was a victim of the crime, Petitioners have a common

interest with the government. Rather than a separate

privilege, the "common interest"or "joint defense"rule is

an exception to ordinary waiver rules designed to allow

attorneys for different clients pursuing a common legal

strategy to communicate with each other. See Hunydee v.

United States, 355F.2d 183, 185(9th Cir. 1965); see

also In re Grand JurySubpoenas, 902F.2d 244, 249(4th

Cir. 1990)(collecting cases). However, a shared desire to

see the same outcome in a legal matter is insufficient to

bring a communication between two parties within this

exception. Id. Instead, [**18]the parties must make the

communication in pursuit of a joint strategy in

accordance with some form of agreement--whether

written or unwritten. Cf. Continental Oil Co. v. United

States, 330F.2d 347, 350(9th Cir. 1964).

There is no evidence that Toberoff and the Office of

the U.S. Attorney agreed before the disclosure jointly to

pursue sanctions against Toberoff's former employee.

Toberoff is not strategizing with the prosecution. He has

no more of a common interest with the government than

does any individual who wishes to see the law upheld.

Furthermore, the statements here were not "intended to

facilitate [*1130]representation"of either Toberoff or

the government. Hunydee, 355 F.2d at 185 (limiting

privilege to those circumstances); accord United States v.

BDO Seidman, 492F.3d 806, 816(7th Cir. 2007)(same).

D

Petitioners also argue that they should be treated

differently because Toberoff produced these documents

subject to a subpoena. Involuntary disclosures do not

automatically waive the attorney-client privilege. United

States v. De La Jara, 973F.2d 746, 749-50(9th Cir.

1992). But without the threat of contempt, the mere

existence of a subpoena does not render testimony or the

production [**19]of documents involuntary.

Westinghouse Elec. Corp., 951F.2d at 1414; see also

United States v. Plache, 913F.2d 1375, 1380(9th Cir.

1990). Instead, whether the subpoenaed party "chose not

to assert the privilege when it was appropriate to do so is

[also] relevant to the waiver analysis."In re Grand Jury

Proceedings, 219F.3d 175, 187(2d Cir. 2000); cf. In re

Subpoenas Duces Tecum, 738F.2d 1367, 1369-70, 238

U.S. App. D.C. 221(D.C. Cir. 1984).

Toberoff both solicited the subpoena and "chose not

to assert the privilege when it was appropriate to do so.. .

."In re Grand JuryProceedings, 219F.3d at 187. That

is, even though the subpoena specifically contemplated

that Toberoff may choose to redact privileged materials,

he did not. Petitioners assert that the U.S. Attorney would

not have been satisfied with redacted documents, but we

will never know because Toberoff never tried. As such,

we conclude that the district court properly treated the

disclosure of these documents as voluntary.5

5 As these preexisting documents were "sought

for [their] own sake rather than to learn what took

place before the grand jury" and as their

"disclosure will not compromise the integrity of

the grand jury process," Petitioners' [**20]

argument that the disclosure was protected by

Federal Rule of Criminal Procedure 6(e)(2)(B)is

similarly without merit. United States v. Dynavac,

Inc., 6F.3d 1407, 1411-12(9th Cir. 1993).

E

Finally, Petitioners asserted for the first time in oral

argument that these documents should remain

confidential because the Heirs themselves did not take the

affirmative step to disclose the documents. We generally

do not consider issues raised for the first time during oral

argument, unless "failure to do so would result in

manifest injustice" and the appellee would not be

prejudiced by such consideration. United States v. Ullah,

976F.2d 509, 514(9th Cir. 1992)(internal quotation

marks and emphasis omitted). There are several instances

in which an attorney's behavior may waive the privilege,

even without an explicit act by the client. See, e.g.,

Himmelfarb v. United States, 175F.2d 924, 939(9th Cir.

1949); see generally 8 Wigmore, Evidence § 2325

(listing actual and implied consent as well as theft of

documents from the attorney's office). As many of these

documents fall within these situations, we do not consider

it a manifest injustice to hold Petitioners to their apparent

acceptance of [**21]Toberoff's authority to waive the

privilege on behalf of his clients, who have never

disputed his authority to do so.6

6 Indeed, there is even circumstantial evidence

that the Heirs affirmatively consented to

Toberoff's actions. There is also evidence that

Toberoff should himself be treated as a co-client.

After all, Toberoff represented all of the

Petitioners, including a joint venture between the

Heirs and himself in which he had a controlling

interest. As such, he likely had authority


unilaterally to waive the privilege on at least some

of these documents. Restatement (Third)of Law

Governing Lawyers §76cmt. g; see also In re

Teleglobe Commc'ns Corp., 493F.3d 345,363(3d

Cir. 2007).

[*1131]V

Because Petitioners have not established error, we

need not discuss the other Bauman factors. The petition

for mandamus is DENIED.


Warning

As of: Jun 04, 2015

Inre:QWESTCOMMUNICATIONSINTERNATIONALINC.,Securities

Litigation,Petitioner.NEW ENGLANDHEALTH CAREEMPLOYEESPENSION

FUND;CLIFFORDMOSHER;TEJINDARSINGH;SATPALSINGH,

Real-Parties-in-Interest,andASSOCIATIONOFCORPORATECOUNSEL;

CHAMBEROFCOMMERCEOFTHEUNITEDSTATESOFAMERICA,Amici

Curiae.

No.06-1070

UNITEDSTATESCOURTOFAPPEALSFORTHETENTH CIRCUIT

450 F.3d 1179; 2006 U.S. App. LEXIS 14937; 70 Fed. R. Evid. Serv. (Callaghan) 492

June 19, 2006, Filed

SUBSEQUENT HISTORY: Class certification granted

by, Settled by, Dismissed by, in part, Injunction granted

at, Judgment entered by, in part In re Qwest Communs.

Int'l, Inc. Sec. Litig., 2006 U.S. Dist. LEXIS 71039 (D.

Colo., Sept. 28, 2006)

US Supreme Court certiorari denied by Qwest Communs.

Int'l Inc. v. New Eng. Health Care Emples. Pension Fund,

127 S. Ct. 584, 166 L. Ed. 2d 429, 2006 U.S. LEXIS 8627

(U.S., 2006)

Subsequent appeal at, Remanded by New Eng. Health

Care Emples. Pension Fund v. Woodruff, 2008 U.S. App.

LEXIS 954 (10th Cir. Colo., Jan. 16, 2008)

PRIOR HISTORY: [**1] ON PETITION FOR

WRIT OF MANDAMUS TO THE UNITED STATES

DISTRICT COURT FOR THE DISTRICT OF

COLORADO. (D.C. No. 01-CV-1451-REB-CBS).

In re Qwest Communs. Int'l, Inc. Secs. Litig., 2006 U.S.

Dist. LEXIS 14358 (D. Colo., Mar. 10, 2006)

COUNSEL: David R. Boyd, Boies, Schiller & Flexner,

LLP, Washington, D.C., (Jonathan D. Schiller, Alfred P.

Levitt, Kenneth F. Rossman IV, Boies, Schiller &

Flexner, LLP, Washington, D.C.; Terrence C. Gill,

Sherman & Howard LLC, Denver, Colorado, with him on

the brief), for Petitioner.

Joseph D. Daley, Lerach Coughlin Stoia Geller Rudman

& Robbins, LLP, San Diego, California, (Eric Alan

Isaacson, Michael J. Dowd, Spencer A. Burkholz,

Thomas E. Egler, X. Jay Alvarez, Lerach Coughlin Stoia

Geller Rudman & Robbins, LLP, San Diego, California;

Robert J. Dyer, III, Kip B. Shuman, Jeffrey A. Berens,

Dyer & Shuman, LLP, Denver, Colorado, with him on

the briefs), for Real-Parties-in-Interest.

William J. Leone, United States Attorney, Denver,

Colorado; Catherine Y. Hancock, Michael S. Rabb,

Appellate Staff, United States Department of Justice,

Washington, D.C., on the brief for the United States

Department of Justice.

Page 1

Susan Hackett, Association of Corporate Counsel; Robin

S. Conrad, Amar D. Sarwal, National Chamber Litigation

Center, Inc.; W. Stephen Cannon, [**2] Todd Anderson,

Jean Kim, Constantine Cannon, P.C., Washington, D.C.,

on the brief for Amici Curiae.

JUDGES: Before HENRY, MURPHY, and HARTZ,

Circuit Judges.

OPINION BY: [*1181] MURPHY

OPINION

MURPHY, Circuit Judge.

In this mandamus action, Qwest Communications

International, Inc. (Qwest), presents an issue of first

impression in this circuit, namely, whether Qwest waived

the attorney-client privilege and work-product doctrine,

as to third-party civil litigants, by releasing privileged

materials to federal agencies in the course of the agencies'

investigation of Qwest. Qwest urges us to adopt a rule of

"selective waiver"or "limited waiver"which would allow

production of attorney-client privileged and work-product

documents to the United States Department of Justice

(DOJ) and the Securities and Exchange Commission

(SEC) without waiver of further protection for those

materials. On the record before us, we hold that the

district court did not abuse its discretion in declining to

apply selective waiver. Thus, we DENY the petition for a

writ of mandamus.

I.Background and DistrictCourtProceedings

In early 2002, the SEC began investigating Qwest's

business practices. In the summer of 2002, [**3] Qwest

learned that the DOJ, through the United States

Attorney's Office for the District of Colorado, had also

commenced a criminal investigation of Qwest. During

these investigations, Qwest produced to the agencies over

220,000 pages of documents protected by the

attorney-client privilege and the work-product doctrine

(the Waiver Documents). Qwest chose not to produce

another 390,000 pages of privileged documents to the

agencies.

The production of the Waiver Documents was

pursuant to subpoena and pursuant to written

confidentiality agreements between Qwest and each

agency. 1 In relevant part, these agreements stated that

Qwest did not intend to waive the attorney-client

privilege or work-product protection. The SEC agreed to

"maintain the confidentiality of the [Waiver Documents]

pursuant to this Agreement and . . . not disclose them to

any third party, except to the extent that the Staff

determines that disclosure is otherwise required by law or

would be in furtherance of the Commission's discharge of

its duties and responsibilities." Pet'r Br., Ex. B at 1.

Similarly, the DOJ agreed to maintain the Waiver

Documents'confidentiality and not disclose them to third

parties, "except [**4] to the extent that DOJ determines

that disclosure is otherwise required by law or would be

in furtherance of DOJ's discharge of its duties and

responsibilities." Id., Ex. C at 1. In addition, Qwest

agreed that the DOJ could share the Waiver Documents

with other state, local, and federal agencies, and that it

could "make direct or derivative use of the [Waiver

Documents]in any proceeding and its investigation."Id.

at 1-2. In other agreements with the DOJ, Qwest agreed

that the agency could

make full use of any information it

obtains under this agreement in any lawful

manner in furtherance of its investigation,

including, without limitation, analyses,

interviews, grand jury proceedings,

[*1182] court proceedings, consultation

with and support of other federal, state or

local agencies, consultations with experts

or potential experts, and the selection

and/or retention of testifying experts.

DOJ Resp. Br., Ex. 3at 1; see also id. Ex. 4 at 3(same);

id. Ex. 5 (same) at 1-2.

1 At oral argument Qwest disclaimed any

argument that its production of the Waiver

Documents to the agencies was involuntary. Thus,

we take it as settled that Qwest's production of the

Waiver Documents was voluntary, and we do not

address the effect of the subpoenas. We commend

Qwest for its candor, which allows us to focus on

material issues rather than extraneous matters.

[**5] Even prior to the initiation of the federal

investigations, plaintiffs had filed civil cases against

Qwest that involved many of the same issues as the

investigations. More such actions were filed after the

federal investigations began. Several of the cases were

filed in the United States District Court for the District of

Colorado, and many were consolidated into a federal

Page 2450 F.3d 1179, *; 2006U.S. App. LEXIS 14937, **1;

70 Fed. R. Evid. Serv. (Callaghan) 492

securities action designated In re Qwest Communications

International, Inc. Securities Litigation, Case No.

1:01-CV-01451 REB-CBS (the Securities Case). The

Real Parties in Interest before us (the Plaintiffs) are the

lead plaintiffs in the Securities Case.

In the course of the Securities Case, Qwest produced

millions of pages of documents to the Plaintiffs, but it did

not produce the Waiver Documents. It argued the Waiver

Documents remained privileged despite Qwest's

production to the agencies. After the Plaintiffs moved to

compel production of the Waiver Documents, the

magistrate judge concluded Qwest had waived the

attorney-client privilege and work-product protection by

producing the Waiver Documents to the agencies and

ordered Qwest to produce the Waiver Documents to the

Plaintiffs. Qwest objected. The [**6] district court

refused to overrule the magistrate judge's order

compelling production and ordered Qwest to produce the

Waiver Documents. The district court also ordered Qwest

to produce certain reports prepared by its counsel Boies,

Schiller & Flexner LLP (collectively, the BSF Report),

redacted of attorney opinion work product.

Qwest filed a motion to reconsider the order to

produce the Waiver Documents and to certify an

interlocutory appeal. Granting the motion in part, the

district court clarified its order to specify that Qwest

could redact attorney opinion work product from the

Waiver Documents, as well as from the BSF Report,

before producing them to the Plaintiffs. The court,

however, declined to certify an interlocutory appeal of

the waiver issue. Consequently, Qwest filed a petition for

a writ of mandamus in this court. At Qwest's request, the

district court stayed its order to produce pending our

mandamus decision.

Neither the directive to redact the BSF Report nor

the order to disclose the redacted version have been

challenged in this proceeding. Moreover, the parties have

not challenged the order to redact attorney opinion work

product from the Waiver Documents. Thus, [**7] there

is no issue concerning opinion work product before us,

and our decision is not directed to waiver of opinion work

product. For purposes of clarity, we also note that this

decision involves no issues of inadvertent disclosure, see,

e.g., Genentech, Inc. v. United States ITC, 122 F.3d 1409,

1417 (Fed. Cir. 1997), disclosure to a non-adverse party,

see In re M & L Bus. Mach. Co., 161 B.R. 689, 696 (D.

Colo. 1993), or disclosure under a confidentiality

agreement that prohibits further disclosures without the

express agreement of the privilege holder.

II.Analysis

A.Mandamus

We must first decide whether it is appropriate for us

to entertain Qwest's petition for an extraordinary writ.

"The Supreme Court has required that a party seeking

mandamus demonstrate that he has no other adequate

means of relief and that his right to the writ is 'clear and

[*1183]indisputable.'"Barclaysamerican Corp. v. Kane,

746 F.2d 653, 654 (10th Cir. 1984) (quoting Allied

Chem. Corp. v. Daiflon, Inc., 449 U.S. 33, 35, 101 S. Ct.

188, 66 L. Ed. 2d 193 (1980) (per curiam)).

In a mandamus action in which

petitioner seeks to [**8] have discovery

orders involving a claim of privilege

reviewed, we have held that review is

appropriate when:(1) disclosure of the

allegedly privileged or confidential

information renders impossible any

meaningful appellate review of the claim

of privilege or confidentiality; and (2) the

disclosure involves questions of

substantial importance to the

administration of justice.

Id. at 654-55 (quotations omitted).

Citing Boughton v. Cotter Corp., 10 F.3d 746 (10th

Cir. 1993), the Plaintiffs first contend Qwest has

adequate appellate remedies, in that the district court's

order can be reviewed on direct appeal after final

judgment. In Boughton, a company sought to bring an

interlocutory appeal of an order to produce allegedly

privileged documents. In considering whether other

avenues of relief might be appropriate, this court held that

it could not grant the defendant mandamus relief because

the district court's order requiring production would be

correctable on appeal. Id. at 751. Qwest replies that

production would negate the value of the attorney-client

privilege and work-product protection. Qwest further

submits that appellate review [**9] after judgment would

be meaningless because there are numerous other cases

pending across the country in which coordinated

discovery agreements would require it to disclose the

Waiver Documents to other plaintiffs if it discloses them

to the Plaintiffs in the Securities Case.

Page 3450 F.3d 1179, *1182; 2006U.S. App. LEXIS 14937, **5;


In Barclaysamerican, this court held that "[i]n most

cases disclosure makes meaningful review impossible

because after disclosure whatever privilege attaches

would be worthless." 746 F.2d at 655 (quotation

omitted); see also United States v. West, 672 F.2d 796,

799 (10th Cir. 1982) ("Whether disclosure is limited to a

motion or granted in the course of the trial, the privilege

is still rendered worthless. Any subsequent review, even

after limited disclosure, would be for naught, because the

damage would already be accomplished. Thus, appellate

review of the claim would be meaningless."). Boughton

did not address this principle. In this case, however, given

the litigation pending outside this court's jurisdiction,

normal appellate review could not return the parties to the

status quo by ordering the return of any documents this

court might determine were improperly ordered [**10]

produced. As in Barclaysamerican and West, review after

production would essentially be meaningless in terms of

protecting the Waiver Documents.

The Plaintiffs also argue Qwest does not raise an

issue of substantial importance to the administration of

justice, and this case is instead merely a discovery dispute

between private litigants. See Barclaysamerican, 746

F.2d at 655. To the contrary, it appears the issue of

selective waiver is of considerable public interest. 2 In

addition, in advocating the adoption of selective waiver,

Qwest primarily relies on the interests of law

enforcement in ensuring voluntary cooperation of

companies subject to [*1184] investigation. To the

extent this matter requires us to consider applying

selective waiver, then, it presents an issue of substantial

importance to the administration of justice.

2 Indicia of public interest in selective waiver

include numerous commentaries and articles, the

filing of the amicus brief in this action, a recent

oversight hearing by a House subcommittee, and

recent developments before the United States

Sentencing Commission and the Advisory

Committee on Evidence Rules to the Committee

on Rules of Practice and Procedure of the Judicial

Conference of the United States (the Advisory

Committee). The actions of Congress, the

Sentencing Commission, and the Advisory

Committee are discussed below.

[**11] Finally, other circuit courts considering

selective waiver have decided it was appropriate to do so

in the context of a petition for a writ of mandamus. See In

re Steinhardt Partners, L.P., 9 F.3d 230, 233 (2d Cir.

1993); Westinghouse Elec. Corp. v. Republic of the Phil.,

951 F.2d 1414, 1422 (3d Cir. 1991); In re Chrysler

Motors Corp., 860 F.2d 844, 845 (8th Cir. 1988);

Diversified Indus., Inc. v. Meredith, 572 F.2d 596, 607

(8th Cir. 1977) (en banc). Noting that the question

remained open in the circuit, that the district courts of the

circuit and other circuit courts had split, and the

consequence that the privilege would be lost if review

awaited final judgment, the Second Circuit went so far as

to state, "[t]his dispute presents one of the very rare

circumstances permitting the use of mandamus to review

a district court order."Steinhardt Partners, 9 F.3d at 233.

For these reasons, this court addresses the merits of

Qwest's petition.

The issuance of the writ rests within the court's

discretion. Kerr v. United States Dist. Court, 426 U.S.

394, 403, 96 S. Ct. 2119, 48 L. Ed. 2d 725 (1976). [**12]

This court considers five nonconclusive factors to assist

in determining whether to grant mandamus relief:(1)

whether the party has alternative means to secure relief;

(2) whether the party will be damaged "in a way not

correctable on appeal"; (3) whether "the district court's

order constitutes an abuse of discretion"; (4) whether the

order "represents an often repeated error and manifests a

persistent disregard of federal rules"; and (5) whether the

order raises "new and important problems or issues of

law of the first impression."Pacificare of Okla., Inc. v.

Burrage, 59 F.3d 151, 153 (10th Cir. 1995). We have

held that "[t]he right to the writ is clear and indisputable

when the petitioner can show a judicial usurpation of

power or a clear abuse of discretion."West, 672 F.2d at

799; see also Frontier Ref., Inc. v . Gorman-Rupp Co.,

136 F.3d 695, 699 (10th Cir. 1998) (holding that a

district court's order compelling discovery is reviewed for

abuse of discretion, legal questions are reviewed de novo

and factual determinations for clear error). When the

district court errs in deciding a legal issue, it necessarily

abuses its discretion. [**13] See Koon v. United States,

518 U.S. 81, 100, 116 S. Ct. 2035, 135 L. Ed. 2d 392

(1996).

B.The Attorney-ClientPrivilege and W ork-Product

Doctrine

Federal Rule of Evidence 501 provides that

privileges in federal-question cases generally are

"governed by the principles of the common law as they

may be interpreted by the courts of the United States in



the light of reason and experience." The Advisory

Committee Notes state that the rule "reflect[s]the view

that the recognition of a privilege based on a confidential

relationship and other privileges should be determined on

a case-by-case basis."3

3 Technically the work-product doctrine is

distinguishable from the testimonial "true"

privileges. See 1 Edward J. Imwinkelried, The

New Wigmore:Evidentiary Privileges § 1.3.11

(Richard D. Friedman ed., 2002). The

work-product doctrine is embodied in Fed. R. Civ.

P. 26(b)(3). It is therefore excepted from Rule

501, which applies except where "otherwise

required . . . in rules prescribed by the Supreme

Court pursuant to statutory authority." The

principles of Hickman v. Taylor, 329 U.S. 495, 67

S. Ct. 385, 91 L. Ed. 451 (1947), continue to

govern the application of Rule 26(b)(3). Edna

Selan Epstein, The Attorney-Client Privilege and

the Work-Product Doctrine 479-81(4th ed. 2001).

Given that our analysis focuses on the common

law, the fact that the work-product doctrine is not

a true privilege is not material in this case.

[**14] [*1185]The Supreme Court has cautioned

that "[t]estimonial exclusionary rules and privileges

contravene the fundamental principle that the public . . .

has a right to every man's evidence."Trammel v. United

States, 445 U.S. 40, 50, 100 S. Ct. 906, 63 L. Ed. 2d 186

(1980) (quotations omitted). The Court further has

cautioned that such rules and privileges "must be strictly

construed and accepted 'only to the very limited extent

that permitting a refusal to testify or excluding relevant

evidence has a public good transcending the normally

predominant principle of utilizing all rational means for

ascertaining truth.'"Id. (quoting Elkins v. United States,

364 U.S. 206, 234, 80 S. Ct. 1437, 4 L. Ed. 2d 1669

(1960) (Frankfurter, J., dissenting)). "[A]lthough Rule

501 manifests a congressional desire not to freeze the law

of privilege but rather to provide the courts with

flexibility to develop rules of privilege on a case-by-case

basis, we are disinclined to exercise this authority

expansively."Univ. of Pa. v. EEOC, 493 U.S. 182, 189,

110 S. Ct. 577, 107 L. Ed. 2d 571 (1990) (citation and

quotation omitted).

1.Attorney-ClientPrivilege

The attorney-client privilege is "the [**15] oldest of

the privileges for confidential communications known to

the common law."Upjohn Co. v. United States, 449 U.S.

383, 389, 101 S. Ct. 677, 66 L. Ed. 2d 584 (1981). "Its

purpose is 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." Id. The privilege serves the

client's need for legal advice, but it also serves the

attorney's need to receive complete information in order

to give the proper advice. See id. at 390; see also 8John

Henry Wigmore, Evidence §2291 (John T. McNaughton

rev. 1961); Edna Selan Epstein, The Attorney-Client

Privilege and the Work-Product Doctrine 3 (4th ed.

2001).Under the common law, a critical component of

the privilege "is whether the communication between the

client and the attorney is made in confidence of the

relationship and under circumstances from which it may

reasonably be assumed that the communication will

remain in confidence."United States v. Lopez, 777 F.2d

543, 552 (10th Cir. 1985).

Because confidentiality is key to the privilege, "[t]he

attorney-client privilege [**16] is lost if the client

discloses the substance of an otherwise privileged

communication to a third party."United States v. Ryans,

903 F.2d 731, 741 n.13 (10th Cir. 1990). This court has

stated, "the confidentiality of communications covered by

the privilege must be jealously guarded by the holder of

the privilege lest it be waived. The courts will grant no

greater protection to those who assert the privilege than

their own precautions warrant." Id. (quotation and

alteration omitted). This court has also held that "[c]ourts

need not allow the claim of attorney-client privilege when

the party claiming the privilege is attempting to utilize

the privilege in a manner that is not consistent with the

privilege."United States v. Bernard, 877 F.2d 1463, 1465

(10th Cir. 1989). "Any voluntary disclosure by the client

is inconsistent with the attorney-client relationship and

waives the privilege."Id.

2.Work-ProductDoctrine

In Hickman v. Taylor, the source of the work-product

doctrine, plaintiffs sought the production of certain

witness statements collected by defendants'attorney and

memoranda concerning the attorney's interviews of

[**17] other witnesses. 329 U.S. 495, 499-500, 67 S. Ct.

385, 91 L. Ed. 451 (1947). The Court held that plaintiffs

had made no showing of need for the materials or

justification for securing them from defendants'[*1186]

counsel. The requests thus "[fell]outside the arena of



discovery and contravene[d]the public policy underlying

the orderly prosecution and defense of legal claims. Not

even the most liberal of discovery theories can justify

unwarranted inquiries into the files and the mental

impressions of an attorney."Id. at 510. "In performing

his various duties . . . it is essential that a lawyer work

with a certain degree of privacy, free from unnecessary

intrusion by opposing parties and their counsel."Id.

The work-product doctrine subsequently was

incorporated into Fed. R. Civ. P. 26(b)(3), which

provides:

[A]party may obtain discovery of

documents and tangible things otherwise

discoverable under subdivision (b)(1) of

this rule and prepared in anticipation of

litigation or for trial by or for another . . .

party's representative . . . only upon a

showing that the party seeking discovery

has substantial need of the materials in

[**18] the preparation of the party's case

and that the party is unable without undue

hardship to obtain the substantial

equivalent of the materials by other

means. In ordering discovery of such

materials when the required showing has

been made, the court shall protect against

disclosure of the mental impressions,

conclusions, opinions, or legal theories of

an attorney or other representative of a

party concerning the litigation.

Thus, the doctrine is interpreted under both the rule and

Hickman. See Epstein at 479-81. "At its core, the

work-product doctrine shelters the mental processes of

the attorney, providing a privileged area within which he

can analyze and prepare his client's case."United States

v. Nobles, 422 U.S. 225, 238, 95 S. Ct. 2160, 45 L. Ed. 2d

141 (1975). It "is an intensely practical [doctrine],

grounded in the realities of the litigation in our adversary

system."Id.

Work product can be opinion work product, which

some courts have held to be absolutely privileged, or

non-opinion work product, i.e., fact work product, which

may be discoverable under appropriate circumstances.

See Frontier Ref., 136 F.3d at 704 n.12; see also

Hickman, 329 U.S. at 511-12 [**19] (noting that, upon

presentation of adequate reasons, non-privileged, relevant

facts included in an attorney's files may be subject to

discovery); Fed. R. Civ. P. 26(b)(3) (providing special

protection for opinion work product). The protection

provided by the work-product doctrine is not absolute,

and it may be waived. See Nobles, 422 U.S. at 239. This

court has indicated that production of work-product

material during discovery waives a work-product

objection. Grace United Methodist Church v. City of

Cheyenne, 427 F.3d 775, 801-02 (10th Cir. 2005); see

also Foster v. Hill (In re Foster), 188 F.3d 1259, 1272

(10th Cir. 1999) (indicating that the work-product

doctrine is affected when a disclosure is to an adversary).

C.Case Lawon Selective W aiver

In light of this precedent, Qwest will have waived

the attorney-client privilege and work-product protection

for the Waiver Documents by disclosing them to the SEC

and the DOJ, unless this court adopts a selective waiver

rule. This court has not yet considered the concept of

selective waiver. Our review of the opinions of other

circuits, however, [**20] indicates there is almost

unanimous rejection of selective waiver. Only the Eighth

Circuit has adopted selective waiver in circumstances

applicable to Qwest.

1.Attorney-ClientPrivilege

a.CircuitAdoptingSelective W aiver

The Eighth Circuit created the concept of selective

waiver in Diversified Industries, [*1187] 572 F.2d at

611. There, a company defending a civil proceeding

sought to protect a memorandum and a report prepared

by its counsel that it had previously produced to the SEC

in response to an agency subpoena. Id. at 599. The court's

discussion of selective waiver is but a single paragraph:

We finally address the issue of whether

Diversified waived its attorney-client

privilege with respect to the privileged

material by voluntarily surrendering it to

the SEC pursuant to an agency subpoena.

As Diversified disclosed these documents

in a separate and nonpublic SEC

investigation, we conclude that only a

limited waiver of the privilege occurred.

To hold otherwise may have the effect of

thwarting the developing procedure of

corporations to employ independent

outside counsel to investigate and advise



them in order to protect stockholders,

[**21] potential stockholders and

customers.

Id. at 611 (citations omitted).

b.CircuitsRejectingSelective W aiver

Most circuits have rejected selective waiver of the

attorney-client privilege. The D.C. Circuit was the first

circuit to consider the issue after Diversified. In Permian

Corp. v. United States, the Department of Energy

requested documents from the SEC, which had obtained

them from the company. 214 U.S. App. D.C. 396, 665

F.2d 1214, 1216-17 (D.C. Cir. 1981). After considering

the privilege's purpose of protecting the attorney-client

relationship by shielding confidential communications,

the court held that the company had "destroyed the

confidential status of the seven attorney-client

communications by permitting their disclosure to the

SEC staff."Id. at 1219. It found the proposal of selective

waiver "wholly unpersuasive."Id. at 1220.

First, we cannot see how the availability

of a "limited waiver" would serve the

interests underlying the common law

privilege for confidential communications

between attorney and client. . . . Voluntary

cooperation with government

investigations may be a laudable activity,

[**22] but it is hard to understand how

such conduct improves the attorney-client

relationship. If the client feels the need to

keep his communications with his attorney

confidential, he is free to do so under the

traditional rule by consistently asserting

the privilege, even when the discovery

request comes from a "friendly"agency.

Id. at 1220-21. The court continued, "[t]he client cannot

be permitted to pick and choose among his opponents,

waiving the privilege for some and resurrecting the claim

of confidentiality to obstruct others, or to invoke the

privilege as to communications whose confidentiality he

has already compromised for his own benefit." Id. at

1221. "We believe that the attorney-client privilege

should be available only at the traditional price:a litigant

who wishes to assert confidentiality must maintain

genuine confidentiality."Id. at 1222. The D.C. Circuit

reiterated its position in In re Subpoenas Duces Tecum,

238 U.S. App. D.C. 221, 738 F.2d 1367, 1370 (D.C. Cir.

1984).

Using similar reasoning, the First, Second, Third,

and Fourth Circuits all have joined the D.C. Circuit in

rejecting selective [**23] waiver. See United States v.

Mass. Inst. of Tech., 129 F.3d 681, 686 (1st Cir. 1997)

("Anyone who chooses to disclose a privileged document

to a third party, or does so pursuant to a prior agreement

or understanding, has an incentive to do so, whether for

gain or to avoid disadvantage. It would be perfectly

possible to carve out some of those disclosures and say

that, although the disclosure itself is not necessary to

foster attorney-client communications, neither does it

forfeit the privilege. With rare exceptions, courts have

been unwilling to start down this path-which has no

logical terminus-and we join in [*1188] this

reluctance."); Westinghouse, 951 F.2d at 1425

("[S]elective waiver does not serve the purpose of

encouraging full disclosure to one's attorney in order to

obtain informed legal assistance; it merely encourages

voluntary disclosure to government agencies, thereby

extending the privilege beyond its intended purpose."); In

re Martin Marietta Corp., 856 F.2d 619, 623-24 (4th Cir.

1988) ("The Fourth Circuit has not embraced the concept

of limited waiver of the attorney-client privilege."); In re

John Doe Corp., 675 F.2d 482, 489 (2d Cir. 1982) [**24]

("A claim that a need for confidentiality must be

respected in order to facilitate the seeking and rendering

of informed legal advice is not consistent with selective

disclosure when the claimant decides that the confidential

materials can be put to other beneficial purposes.").

The most recent circuit to reject selective waiver of

the attorney-client privilege is the Sixth Circuit, which

issued a comprehensive opinion in In re Columbia/HCA

Healthcare Corp. Billing Practices Litigation, 293 F.3d

289 (6th Cir. 2002). As in this case, civil plaintiffs in

Columbia/HCA Healthcare sought documents the

company already had provided to the DOJ and other

government agencies. Id. at 292-93. The court reviewed

the available case law, which it characterized as falling

into three categories:"selective waiver is permissible;

selective waiver is not permissible in any situation; and

selective waiver is permissible in situations where the

Government agrees to a confidentiality order."Id. at 295

(citations omitted). It concluded, "after due consideration,

we reject the concept of selective waiver, in any of its

various forms."Id. at 302. [**25] "First, the uninhibited

approach adopted out of wholecloth by the Diversified



court has little, if any, relation to fostering frank

communication between a client and his or her attorney."

Id. (footnote omitted). "Secondly, any form of selective

waiver, even that which stems from a confidentiality

agreement, transforms the attorney-client privilege into

'merely another brush on an attorney's palette, utilized

and manipulated to gain tactical or strategic advantage.'"

Id. (quoting Steinhardt Partners, 9 F.3d at 235).

Although recognizing "[t]here is considerable appeal, and

justification, for permitting selective waiver when the

initial disclosure is to an investigating arm of the

Government," the court stated there is "no logical

terminus" and that private litigants serve a valuable

purpose as private attorneys general which should not be

thwarted by imposition of selective waiver. Id. at 303

(quotation omitted).

In dissent, Judge Boggs stated that "[a]s the harms of

selective disclosure are not altogether clear, the benefits

of the increased information to the government should

prevail."Id. at 311. He characterized [**26] the court's

choice as:

[N]ot one whether or not to release

privileged information to private parties

that has already been disclosed to the

government, but rather one to create

incentives that permit voluntary

disclosures to the government at all. In the

run of cases, either the government gets

the disclosure made palatable because of

the exception, or neither the government

nor any private party becomes privy to the

privileged material.

Id. at 312 (Boggs, J., dissenting). Because of the greater

importance of governmental investigations, the fact that

"increased access to privileged information increases the

absolute efficacy of government investigations,"and the

fact that "the government has no other means to secure

otherwise privileged information," id. at 311, Judge

Boggs "would have resolved this open question by

holding that there is a government investigation

exception to the third-party waiver rule,"id. at 308.

[*1189] c.OtherIllustrative Cases

In a case involving an asserted waiver of the law

enforcement privilege, the Seventh Circuit did not

foreclose adopting selective waiver. In Dellwood Farms,

Inc. [**27] v. Cargill, Inc., the government played

certain tapes for corporate defense counsel to persuade

the company to plead guilty. 128 F.3d 1122, 1124 (7th

Cir. 1997). The plaintiffs in ensuing civil litigation

against the company argued the government had waived

its law enforcement privilege by playing the tapes. Id.

Any release to the plaintiffs would make the tapes

available to individuals who were the targets of

then-uncompleted grand jury investigations. Id. The court

adopted the government's selective waiver theory in the

circumstances of that case, holding that "[s]ince there is

no indication either that the government was acting in

bad faith or that the plaintiffs in the present suits were

hurt-and, to repeat, the government is not trying to take

advantage of an adversary-interfering with a criminal

investigation would be an excessive punishment."Id. at

1127. The court specifically noted, though, that it might

find waiver (or, more accurately, forfeiture) if there were

"conduct that warranted declaring a forfeiture."Id.

The Federal Circuit rejected selective waiver in a

case involving an entirely different means of waiving

attorney-client [**28] and work-product protection,

namely, the careless disclosure of inadequately screened

materials directly to the adversary. See Genentech, Inc. v.

United States ITC, 122 F.3d 1409, 1417 (Fed. Cir. 1997)

("A small number of courts have recognized, in

circumstances not present here, a limited waiver that

enables the attorney-client privilege to survive certain

breaches of confidentiality. This court, however, has

never recognized such a limited waiver. Moreover,

Genentech has presented no compelling arguments as to

why we should apply such a limited waiver theory in this

case."(citations omitted)).

In contrast is In re M & L Business Machine Co.,

where the district court applied selective waiver of the

attorney-client privilege where disclosures were protected

by a confidentiality agreement. 161 B.R. 689 (D. Colo.

1993). There, a bank sought a protective order for its

counsel's letters and memoranda that it had previously

provided to the United States Attorney to assist in an

investigation of one of the bank's clients, M & L Business

Machines Co. Id. at 691-92. "The Bank's cooperation was

expressly made subject to the [**29] requirement that

any information provided under the Letter Agreement be

treated as privileged, subject to protection under Fed. R.

Crim. P. 16(a)(2) and not be disseminated except as

required under federal law or the rules of criminal

procedure."Id. at 691. The trustee of M & L then sought



production of the materials. After reviewing Diversified,

Permian, and other selective waiver cases, the district

court stated, "while I am wary of extending evidentiary

privileges, in the unique circumstances of this case, the

policies upon which the above decisions were based lead

me to conclude that the Bank has not waived the

attorney-client privilege as to the Letters and

Memoranda."Id. at 696. Specifically, the court's decision

rested on:(1) the "substantial steps"the bank took to

ensure the confidentiality of the materials disclosed; (2)

the fact that there was "no evidence that the Bank's

cooperation with the U.S. Attorney was for the purpose

of obtaining some benefit for itself"; and (3) the fact that

"the Bank does not seek to protect the privilege in an

investigatory or law enforcement proceeding brought

[**30] by another federal regulatory agency," but in

bankruptcy adversary proceedings "akin to one brought

by a civil litigant."Id.

[*1190] 2.W ork-ProductDoctrine

a.CircuitsAdoptingSelective W aiver

Only one circuit has specifically adopted selective

waiver in the work-product arena. The Fourth Circuit has

approved using selective waiver in relation to opinion

work product. In Martin Marietta, the court concluded

the company had made testimonial use of non-opinion

work product by disclosing it to the government, and that

the waiver was comprehensive. 856 F.2d at 625. Noting

that opinion work product generally receives greater

protection from the courts, however, and that Federal

Rule of Civil Procedure 26(b)(3) "suggests especial

protection for opinion work product,"the court declined

to hold that the company had waived work-product

protection for opinion work product. Id. at 626.

In Permian, the D.C. Circuit upheld the district

court's finding that the work-product doctrine had not

been waived as to the majority of documents. 665 F.2d at

1222. This ruling, however, contains no analysis [**31]

and may have been the product of the clearly erroneous

standard of review applied in that case. Moreover, the

D.C. Circuit has since rejected selective waiver of

work-product protection in other circumstances, as

discussed below.

b.CircuitsRejectingSelective W aiver

Interestingly, the circuit that created selective waiver

for attorney-client privilege rejected it in the context of

non-opinion work product. In Chrysler Motors, the

company had produced a computer tape to its adversaries

in civil litigation under a non-waiver/confidentiality

agreement. 860 F.2d at 845. When the United States

Attorney sought production of the computer tape from the

plaintiffs, the company protested. Id. The Eighth Circuit

determined that the tape was not opinion work product.

Id. at 846. It then held that "Chrysler waived any work

product protection by voluntarily disclosing the computer

tape to its adversaries, the class action plaintiffs, during

the due diligence phase of the settlement negotiations."

Id. The company's requirement that the plaintiffs enter

into the non-waiver/confidentiality agreement was

irrelevant; the crucial fact was that the computer [**32]

tape had not been kept confidential. Id. at 847.

As discussed above, the Fourth Circuit applied

selective waiver to protect opinion work product, but it

declined to apply it to protect non-opinion work product.

See Martin Marietta Corp., 856 F.2d at 623. The First

Circuit has also rejected selective waiver for non-opinion

work product, stating "it would take better reason than we

have to depart from the prevailing rule that disclosure to

an adversary, real or potential, forfeits work product

protection."Mass. Inst. of Tech., 129 F.3d at 687.

The Third Circuit held that, while work-product

protection may be retained where a disclosure furthers the

goals underlying the doctrine:

When a party discloses protected

materials to a government agency

investigating allegations against it, it uses

those materials to forestall prosecution (if

the charges are unfounded) or to obtain

lenient treatment (in the case of

well-founded allegations). These

objectives, however rational, are foreign to

the objectives underlying the

work-product doctrine. Moreover, an

exception for disclosures to government

agencies is not necessary to further [**33]

the doctrine's purposes; attorneys are still

free to prepare their cases without fear of

disclosure to an adversary as long as they

and their clients refrain from making such

disclosures themselves.

Westinghouse, 951 F.2d at 1429.



Finally, the Sixth Circuit concluded that "[m]any of

the reasons for disallowing selective waiver in the

attorney-client privilege [*1191] context also apply to

the work product doctrine. The ability to prepare one's

case in confidence . . . has little to do with talking to the

Government."Columbia/HCA Healthcare, 293 F.3d at

306. It continued, "[e]ven more than attorney-client

privilege waiver, waiver of the protections afforded by

the work product doctrine is a tactical litigation decision.

. . . [W]hether or not to 'show your hand'is quintessential

litigation strategy."Id. at 306-07.

c.CircuitsLeavingPossibilityofSelective W aiver

Open

Unlike their treatment of the attorney-client

privilege, a few circuits have rejected selective waiver of

work-product protection in the particular cases before

them, while simultaneously leaving room for applying

the doctrine in other circumstances.

[**34] In In Re Sealed Case, the D.C. Circuit

rejected work-product protection against discovery by a

grand jury of documents a company had previously made

available to the SEC. 219 U.S. App. D.C. 195, 676 F.2d

793, 824 (D.C. Cir. 1982). The record in that case did not

indicate whether the company had entered into a

confidentiality agreement with the SEC. Id. at 820. In

rejecting selective waiver, the court indicated it was

reluctant to supply any such agreement:"[t]he SEC or

any other government agency could expressly agree to

any limits on disclosure to other agencies consistent with

their responsibilities under law. But courts should not

imply such agreements on a categorical basis."Id. at 824.

Shortly thereafter, in In re Subpoenas Duces Tecum,

the D.C. Circuit applied Sealed Case to reject a claim of

selective waiver for work-product material in

circumstances similar to Qwest's case. 738 F.2d at

1371-72. The court, however, did not definitively reject

the selective waiver doctrine under all circumstances;

rather, the decision rested on three factors: (1) the

proposed use of work-product protection was not

consistent with the doctrine's [**35] purpose, (2)

"appellants had no reasonable basis for believing that the

disclosed materials would be kept confidential by the

SEC,"and (3) applying waiver "would not trench on any

policy elements now inherent in this [protection]."Id. at

1372. Noting the company chose to participate in the

SEC's voluntary disclosure program, the court stated:

That decision was obviously motivated

by self-interest. Appellants now want

work product protection for those same

disclosures against different adversaries in

suits centering on the very same matters

disclosed to the SEC. It would be

unreasonable to suppose that litigation

with these other adversaries was not

anticipated at the time of disclosure to the

SEC. It would also be inconsistent and

unfair to allow appellants to select

according to their own self-interest to

which adversaries they will allow access

to the materials.

Id. The court emphasized that the company had failed to

ensure the SEC would in turn not disclose the materials,

stating that companies could protect their materials by not

disclosing them, "[o]r the company can insist on a

promise of confidentiality before disclosure to the SEC."

Id. at [**36] 1375.

Similarly, in Steinhardt Partners, the Second Circuit

denied mandamus relief to defendants claiming

work-product protection for a memorandum previously

disclosed to the SEC. 9 F.3d at 230. "Examination of

conflicting authority and of the purposes of the work

product doctrine convinces us that Steinhardt waived any

work product protection by voluntarily submitting the

memorandum to the SEC." Id. at 235. The court,

however, continued, "[i]n denying the petition, we

decline to adopt a per se rule that all voluntary

disclosures [*1192] to the government waive work

product protection. Crafting rules relating to privilege in

matters of governmental investigations must be done on a

case-by-case basis."Id. at 236. It especially noted that a

per se rule "would fail to anticipate situations . . . in

which the SEC and the disclosing party have entered into

an explicit agreement that the SEC will maintain the

confidentiality of the disclosed materials."Id.

These decisions all involved situations in which the

parties failed to enter into a confidentiality agreement

before disclosing materials, not circumstances in which

the government [**37]agreed to strict confidentiality in

exchange for disclosure of work product. But see

Columbia/HCA Healthcare, 293 F.3d at 307 (rejecting

selective waiver for work product, despite existence of

confidentiality agreement); Westinghouse, 951 F.2d at

1430 (same). As a consequence, it remains an open



question in those circuits whether a stringent

confidentiality agreement limiting further dissemination

by the government might support selective waiver.

D.NoSelective W aiverIn ThisCase

Generally it is the nature of the common law to move

slowly and by accretion; swift and massive movements

are not impossible, but they are relatively rare. Justice

Cardozo described the common law's modification

process as "gradual. It goes on inch by inch. Its effects

must be measured by decades and even centuries. Thus

measured, they are seen to have behind them the power

and the pressure of the moving glacier."Benjamin N.

Cardozo, The Nature of the Judicial Process 24 (1921).

The common law's methodology has been identified as

both its strength and its weakness:

[I]ts strength is derived from the manner

in which it has been forged from actual

experience [**38] by the hammer and

anvil of litigation, and . . . its weakness

lies in the fact that law guided by

precedent which has grown out of one

type of experience can only slowly and

with difficulty be adapted to new types

which the changing scene may bring.

Harlan F. Stone, The Common Law in the United States,

50 Harv. L. Rev. 1, 7 (1936); see also Richard B.

Cappalli, The American Common Law Method 15 (1997)

(stating that "[t]he accretional nature of the common law

is a great strength").

Keeping these precepts in mind, and having

considered the purposes behind the attorney-client

privilege and the work-product doctrine as well as the

reasoned opinions of the other circuits, we conclude the

record in this case is not sufficient to justify adoption of a

selective waiver doctrine as an exception to the general

rules of waiver upon disclosure of protected material.

Qwest advocates a rule that would preserve the protection

of materials disclosed to federal agencies under

agreements which purport to maintain the attorney-client

privilege and work-product protection but do little to

limit further disclosure by the government. The record

does not establish a need [**39] for a rule of selective

waiver to assure cooperation with law enforcement, to

further the purposes of the attorney-client privilege or

work-product doctrine, or to avoid unfairness to the

disclosing party. Rather than a mere exception to the

general rules of waiver, one could argue that Qwest seeks

the substantial equivalent of an entirely new privilege,

i.e., a government-investigation privilege. Regardless of

characterization, however, the rule Qwest advocates

would be a leap, not a natural, incremental next step in

the common law development of privileges and

protections. On this record, "[w]e are unwilling to

embark the judiciary on a long and difficult journey to

such an uncertain destination."Branzburg v. Hayes, 408

U.S. 665, 703, 92 S. Ct. 2646, 33 L. Ed. 2d 626 (1972).

[*1193] 1.Cooperation withLawEnforcement

Qwest argues selective waiver is necessary to ensure

cooperation with government investigations. Selective

waiver may well be a means to encourage cooperation

with law enforcement, an end with unquestioned benefits

to the commonweal. See, e.g., Andrew J. McNally,

Revitalizing Selective Waiver:Encouraging Voluntary

Disclosure of Corporate Wrongdoing by Restricting

[**40] Third PartyAccess to Disclosed Materials, 35

Seton Hall L. Rev. 823, 825-27 (2005). The Sixth Circuit

majority in Columbia/HCA Healthcare conceded that a

selective waiver rule would further the search for truth,

realize considerable investigative efficiencies, encourage

settlements, and possibly increase corporate self-policing.

293 F.3d at 303.

The record before us, however, does not support the

contention that companies will cease cooperating with

law enforcement absent protection under the selective

waiver doctrine. Most telling is Qwest's disclosure of

220,000 pages of protected materials knowing the

Securities Case was pending, in the face of almost

unanimous circuit-court rejection of selective waiver in

similar circumstances, and despite the absence of Tenth

Circuit precedent. These actions undermine its argument

that selective waiver is vitally necessary to ensure

companies'cooperation in government investigations. See

Steinhardt Partners, 9 F.3d at 236 ("The SEC has

continued to receive voluntary cooperation from subjects

of investigations, notwithstanding the rejection of the

selective waiver doctrine by two circuits and [**41]

public statements from Directors of the Enforcement

Division that the SEC considers voluntary disclosures to

be discoverable and admissible."); Westinghouse, 951

F.2d at 1426 ("[W]e do not think that a new privilege is

necessary to encourage voluntary cooperation with

government investigations. . . . We find it significant that



Westinghouse chose to cooperate despite the absence of

an established privilege[] protecting disclosures to

government agencies."); see also Branzburg, 408 U.S. at

693-94 (rejecting creation of reporters'privilege and

stating "the evidence fails to demonstrate that there

would be a significant constriction of the flow of news to

the public if this Court reaffirms the prior common-law

and constitutional rule regarding the testimonial

obligations of newsmen"). The record is equally deficient

concerning whether the DOJ and the SEC may have

independently gained access to the Waiver Documents by

invoking other means or theories, such as the crime or

fraud exception to the attorney-client privilege. The DOJ

posed this very possibility in its response to Qwest's

mandamus petition. See DOJ Resp. Br. at 2n.1.

Further, if [**42] selective waiver were as essential

to government operations as Qwest claims, it would seem

the agencies would support Qwest's position. At the

court's request, the DOJ responded to Qwest's petition. 4

Rather than urging the adoption of selective waiver,

though, it carefully took no position on the parties'

dispute. Additionally, the DOJ declined an invitation to

participate in oral argument. It would appear, then, that

the government's interest is not as Qwest portrays it. 5

4 The court's order did not address the SEC.

Unlike Association of Corporate Counsel and the

Chamber of Commerce of the United States of

America, the SEC did not file an amicus brief in

this action.

5 Qwest's confidentiality agreements provided

that the agencies would not assert that production

of the Waiver Documents constituted a waiver, as

to a third party, of the attorney-client privilege,

the work-product doctrine, or any other applicable

privilege. See Pet'r Br., Ex. B at 2; id. Ex. C at 2.

This restriction, however, does not prohibit the

agencies from arguing in favor of a theory of

selective waiver.

[**43] [*1194] 2.ConfidentialityAgreements

Qwest also contends the key point distinguishing this

case from the majority of the cases rejecting selective

waiver is the fact that Qwest entered into confidentiality

agreements with the agencies prior to disclosing the

Waiver Documents. Some courts have held or indicated

that the existence of a confidentiality agreement is

irrelevant to a waiver of privileges. See, e.g.,

Columbia/HCA Healthcare, 293 F.3d at 303; Chrysler

Motors Corp., 860 F.2d at 847. Others, however, have

indicated that the existence of a confidentiality agreement

may justify adopting selective waiver. See, e.g.,

Steinhardt Partners, 9 F.3d at 236; M & L Bus. Mach.

Co., 161 B.R. at 696.

The record does not support reliance on the Qwest

agreements with the SEC and the DOJ to justify selective

waiver. The agreements do little to restrict the agencies'

use of the materials they received from Qwest. The

agencies are permitted to use the Waiver Documents as

required by law and in furtherance of the discharge of

their obligations. The DOJ is specifically permitted to

share the Waiver Documents with other agencies, [**44]

federal, state, and local, and make use of them in

proceedings and investigations. In its brief, the DOJ

illustrates just how far some of the documents may have

traveled, stating that, at a minimum, Waiver Documents

have been introduced into evidence in a criminal trial,

produced as discovery in three separate criminal

proceedings, and used as exhibits to SEC investigative

testimony. The DOJ also informs us it was not required to

"segregate material obtained from Qwest, file it under

seal, keep records of its use, or otherwise deal with the

information in any special way,"and it had made no

effort to determine what information had been

disseminated to third parties. DOJ Resp. Br. at 6.

The record does not indicate whether Qwest

negotiated or could have negotiated for more protection

for the Waiver Documents, or whether, as it asserted at

oral argument, seeking further restrictions would have so

diluted its cooperation to render it valueless. Be that as it

may, the confidentiality agreements gave the agencies

broad discretion to use the Waiver Documents as they

saw fit, and any restrictions on their use were loose in

practice. As Qwest has conceded, it is unknown how

many or which [**45] of the Waiver Documents the

agencies have used or disclosed, how those uses or

disclosures occurred, who might have had access to the

Waiver Documents, and the extent of continuing

disclosures. It is therefore not inappropriate to conclude

that some undetermined number of Waiver Documents

have been widely disseminated and have thus become

public information.

At oral argument, Qwest essentially conceded that

those widely distributed Waiver Documents have lost any

protection they once enjoyed. In so conceding, Qwest is

effectively advocating a rule that would place control of



its attorney-client privilege and work-product protection

in the hands of the agencies. Under this rule, the agencies

would determine which documents would remain

privileged or protected by limitation on further

dissemination. The concession highlights a further record

deficiency:the nature and severity of the burden placed

upon the district court to sort through all 220,000 pages

of Waiver Documents to determine what use the

government made of each document, and whether any

further disclosure had vitiated an otherwise applicable

privilege or protection.

In short, Qwest's confidentiality agreements do not

support [**46] adoption of selective waiver.

[*1195] 3.Purpose ofProtections

The Supreme Court has required caution in the arena

of testimonial privileges:"these exceptions to the demand

for every man's evidence are not lightly created nor

expansively construed, for they are in derogation of the

search for truth."United States v. Nixon, 418 U.S. 683,

710, 94 S. Ct. 3090, 41 L. Ed. 2d 1039 (1974). Because

exceptions to the waiver rules necessarily broaden the

reach of the privilege or protection, selective waiver must

be viewed with caution. If the suggested exception

advances the purpose of the privilege or protection, that

exception should be viewed more favorably.

The generally recognized exceptions already in place

tend to serve the purposes of the particular privilege or

protection. When disclosure is necessary to accomplish

the consultation or assist with the representation, as in the

case of an interpreter, translator, or secretary, an

exception to waiver preserves the privilege. See Mass.

Inst. of Tech., 129 F.3d at 684; Westinghouse, 951 F.2d

at 1424. Similarly, when the disclosure is to a party with

a common interest, the "joint defense" or "common

[**47]interest"doctrine provides an exception to waiver

because disclosure advances the representation of the

party and the attorney's preparation of the case. See

Westinghouse, 951 F.2d at 1424; see also Grand Jury

Proceedings v. United States, 156 F.3d 1038, 1042-43

(10th Cir. 1998) (stating that establishing joint-defense

privilege requires showing "(1) the documents were made

in the course of a joint-defense effort; and (2) the

documents were designed to further that effort").

The record in this case does not indicate that the

proposed exception would promote the purposes of the

attorney-client privilege or work-product doctrine. 6

Rather than promoting exchange between attorney and

client, selective waiver could have the opposite effect of

inhibiting such communication. If officers and employees

know their employer could disclose privileged

information to the government without risking a further

waiver of the attorney-client privilege, they may well

choose not to engage the attorney or do so guardedly.

Such reticence and caution could be heightened where, as

here, further disclosures by the government mean that the

information may be disclosed to [**48]countless others.

6 Among the authorities advocating the adoption

of selective waiver, including Diversified, Judge

Boggs'dissent in Columbia/HCA Healthcare, and

the SEC's position expressed in amicus briefs

filed in other cases, none of their rationales appear

to be premised on the purposes underlying the

attorney-client privilege and work-product

doctrine.

Moreover, the purpose of the work-product doctrine

is to enable counsel to prepare a case in privacy. As other

circuits have indicated, selective waiver does little to

further this purpose and in some cases, may instead

encourage counsel to conduct investigations with an eye

toward pleasing the government. See Columbia/HCA

Healthcare, 293 F.3d at 306; Westinghouse, 951 F.2d at

1429-30; Steinhardt Partners, 9 F.3d at 235.

4.Unfairnesstothe Parties

Qwest argues that adopting selective waiver would

avoid unfairness to Qwest while visiting no unfairness on

the Plaintiffs. If companies do [**49] not have the

assurance of protection, Qwest theorizes, they simply will

not release privileged documents to federal authorities.

Thus, civil plaintiffs will not have access to them

anyway. See Columbia/HCA Healthcare, 293 F.3d at 312

(Boggs, J., dissenting) ("[T]he choice presented in this

case is not one whether or not to release privileged

information to private parties that has already been

disclosed to the government, but [*1196] rather one to

create incentives that permit voluntary disclosures to the

government at all."); Westinghouse, 951 F.2d at 1426

n.13 ("[I]n our view, when a client discloses privileged

information to a government agency, the private litigant

in subsequent proceedings is no worse off than it would

have been had the disclosure to the agency not

occurred."). Allowing Qwest to choose who among its

opponents would be privy to the Waiver Documents is far

from a universally accepted perspective of fairness. See



Permian Corp., 665 F.2d at 1221; John Doe Corp., 675

F.2d at 489.

As discussed above, the record is silent on whether

selective waiver truly is necessary to achieve cooperation.

Qwest's fairness [**50] argument nevertheless rests on

that very foundation. It is difficult to understand how a

rejection of selective waiver will work an unfairness on

Qwest when Qwest disclosed the Waiver Documents in

the face of the known threat from Plaintiffs, the absence

of Tenth Circuit precedent, and a dearth of favorable

circuit authority. It hedged its bets by choosing to release

220,000 pages of documents but to retain another

390,000pages of privileged documents. Qwest perceived

an obvious benefit from its disclosures but did so while

weighing the risk of waiver.

In sum, the record does not support application of

selective waiver as a matter of fairness.

5.Case Law

As a review of federal circuit case law has indicated,

there is but one circuit that has applied the selective

waiver doctrine to attorney-client material. All other

circuits addressing the matter have refused to apply the

doctrine. In the context of non-opinion work product, no

circuit has adopted selective waiver and five circuits have

rejected the doctrine. Some circuits have expressly not

precluded the application of selective waiver but have

limited that possibility to cases where the initial

disclosure was not to [**51] an adversary or was

accomplished under a confidentiality agreement strictly

limiting further dissemination by the government. Here,

Qwest disclosed to adversaries under agreements which

did not realistically control further dissemination.

The only conclusion from the federal case law is that

the federal circuits have not expanded either the

attorney-client privilege under Federal Rule of Evidence

501 or the non-opinion work-product doctrine under Fed.

R. Civ. P. 26(b)(3) or Hickman v. Taylor by applying

selective waiver.

A review of state appellate decisions yields

substantially the same conclusion. 7See McKesson Corp.

v. Green, 279 Ga. 95, 610 S.E.2d 54, 56 (Ga. 2005)

(rejecting selective waiver of work-product protection

where materials were disclosed to government, despite

confidentiality agreement); McKesson HBOC, Inc. v.

Superior Court, 115 Cal. App. 4th 1229, 9 Cal.Rptr. 3d

812, 819, 821 (Cal. Ct. App. 2004) (rejecting selective

waiver of attorney-client privilege and work-product

protection where materials were disclosed to government,

despite confidentiality agreement); State v. Thompson,

306 N.W.2d 841, 843 (Minn. 1981) [**52] (finding "no

occasion" to apply selective waiver and suppress

testimony where the attorney-client privilege was waived

through disclosure of investigation reports, notes, and

statements to attorney-general and grand [*1197] jury);

butsee Danielson v. Superior Court, 157 Ariz. 41, 754

P.2d 1145 (Ariz. Ct. App. 1988) (adopting selective

waiver of physician-patient privilege under the particular

circumstances of that case). It is clear then that the

common law of attorney-client privilege and the

work-product doctrine in both state and federal courts has

not embraced the doctrine of selective waiver.

7 The Supreme Court has "observed that the

policy decisions of the States bear on the question

whether federal courts should [] amend the

coverage of an existing [privilege]." Jaffee v.

Redmond, 518 U.S. 1, 12-13, 116 S. Ct. 1923, 135

L. Ed. 2d 337 (1996); see also Trammel v. United

States, 445 U.S. 40, 48-50, 100 S. Ct. 906, 63 L.

Ed. 2d 186 (1980); United States v. Gillock, 445

U.S. 360, 368, 100 S. Ct. 1185, 63 L. Ed. 2d 454

(1980).

[**53]6.New Privilege

While Qwest has disavowed any intention of seeking

to create a new privilege for materials surrendered in a

government investigation, that does not necessarily

foreclose the subject. There is a principled position that

the breadth of the selective waiver doctrine advocated by

Qwest is the substantial equivalent of a new privilege.

Qwest justifies its proposed new rule on a policy of

cooperation with government investigations. It does not

ground its advocacy on the purposes underlying the

attorney-client privilege. At least one court has indicated

that such justification is suggestive of a new privilege,

rather than gloss on an ancient one. See Westinghouse,

951 F.2d at 1425.

More often than not, the Supreme Court has declined

to recognize new privileges. In Branzburg, for example,

the Court rejected a proposed journalists'privilege

against being compelled to testify before a grand jury.

408 U.S. at 667. In reaching its decision, the Court noted

the proposed privilege was not recognized at common

law, id. at 685; some states had adopted it, but the



majority had not, and that no federal statute had adopted

[**54]it, id. at 689; the evidence did not support the dire

consequences the privilege's proponents predicted, id. at

693; even if the record had supported the need for the

privilege, the public interest of pursuing and punishing

criminal behavior would outweigh the interest in possible

future news stories, id. at 695; and there were daunting

logistical difficulties in implementing the proposed

privilege, id. at 703-04. The Court suggested other

government bodies, such as Congress or the state

legislatures and courts, could consider implementing the

proposed privilege. Id. at 706.

In other cases, the Court has refused to adopt

privileges for peer review materials, see Univ. of Pa., 493

U.S. at 189; for state legislators in federal criminal

proceedings, see United States v. Gillock, 445 U.S. 360,

374, 100 S. Ct. 1185, 63 L. Ed. 2d 454 (1980); for the

editorial processes of the media in defamation action, see

Herbert v. Lando, 441 U.S. 153, 175, 99 S. Ct. 1635, 60

L. Ed. 2d 115 (1979); for the President to refuse to

produce materials in a criminal proceeding, see Nixon,

418 U.S. at 713; [**55]and for legislative aides to refuse

to testify before a grand jury about actions not related to

legislative activities, see Gravel v. United States, 408

U.S. 606, 627, 92 S. Ct. 2614, 33 L. Ed. 2d 583 (1972);

see also Rubin v. United States, 525 U.S. 990, 119 S. Ct.

461, 464, 142 L. Ed. 2d 413 (1998) (Breyer, J., dissenting

from denial of certiorari in case in which the appellate

court rejected a privilege for Secret Service agents for

information learned while protecting the President).

A notable exception to this trend is Jaffee v.

Redmond, where the Court recognized a federal

psychotherapist-patient privilege under Rule 501. 518

U.S. 1, 9-15, 116 S. Ct. 1923, 135 L. Ed. 2d 337 (1996).

Noting that the possibility of disclosure might impede

successful treatment, it concluded the privilege promoted

the important public interest in the treatment of mental

and emotional problems. Id. at 11. The Court weighed the

significant benefits of the rule with the "modest"

evidentiary detriment, finding that in the absence of the

privilege, much [*1198] of the evidence that would

otherwise be discoverable would not come into existence.

Id. at 11-12. Importantly, though, [**56] it also relied

upon a consensus of "reason and experience"reflected in

the adoption of a psychotherapist privilege, in some form,

in all fifty states and the District of Columbia. Id. at 12 &

n.11, 13 . In addition, it noted that a psychotherapist

privilege was among the nine privileges originally

proposed to be included in the Federal Rules of Evidence.

Id. at 14-15.

In this case, there are no grounds to buck the trend of

declining to create a new privilege. There is no

groundswell in the state legislatures for a privilege for

materials produced in a government investigation. 8Nor

was such a privilege among the nine originally proposed

for inclusion in the Federal Rules of Evidence. Further,

the Supreme Court has indicated it is "especially reluctant

to recognize a privilege in an area where it appears that

Congress has considered the relevant competing concerns

but has not provided the privilege itself."Univ. of Pa.,

493 U.S. at 189. In 1984, Congress rejected a

SEC-proposed amendment to the Securities and

Exchange Act of 1934 that would have established a

selective waiver rule. See Westinghouse, 951 F.2d at

1425 [**57](citing [*1199] 16Sec. Reg. & L. Rep. 461

(Mar. 2, 1984)). More recently, the SEC withdrew a

proposed regulation implementing selective waiver in

light of questions about its authority to adopt such a

regulation under the Sarbanes Oxley Act. See SEC

Release Nos. 33-8185, 34-47276, Implementation of

Standards of Professional Conduct for Attorneys, 68 Fed.

Reg. 6296, 6312 (Feb. 6, 2003) (explaining withdrawal of

17 C.F.R. Part 205.3(e)(3)). All of these factors counsel

against establishing a new government-investigation

privilege and correspondingly counsel against adopting

Qwest's proposed rule regardless of whether it be

characterized as a new privilege or a new rule governing

waiver.

8 It does not appear that any state has

implemented, by statute or rule, a general

government-investigation privilege, and this type

of privilege does not appear in the Uniform Rules

of Evidence (Uniform Rules). The closest

equivalents recognized in the states appear to be a

privilege for reports required to be made by law,

which has been adopted by only a small minority

of states, see Alaska R. Evid. 502; Haw. Rev. Stat.

§626-1, R. 502; Nev. Rev. Stat. §49.025; N.M. R.

Rev. Rule 11-502; Tex. R. Evid. 502; Wis. Stat. §

905.02, and self-critical analysis privileges

recognized for specified situations in a minority

of states, see, e.g., Alaska Stat. § 09.25.450

(environmental audit); Colo. Rev. Stat. §

13-25-126.5(environmental audit); 215 Ill. Comp.

Stat. 5/155.35 (insurance compliance); Kan. Stat.

Ann. § 60-3351 (insurance compliance); id. §



60-3333(environmental audit); Miss. Code Ann. §

49-2-71(environmental audit); N.D. Cent. Code

§§6-13-02 to 6-13-04 (financial institutions); id.

§§ 26.1-51-02 to 26.1-51-04 (insurance

compliance); Or. Rev. Stat. §731.761 (insurance

compliance); Tex. Rev. Civ. Stat. Ann., art.

4447cc, §5 (Vernon) (environmental audit); Utah

R. Evid. 508 (environmental audit). Neither of

these privileges is included in the Uniform Rules.

Notably, the Uniform Rules are hostile to

both the creation of new common law privileges,

see Unif. R. Evid. 501 (limiting the creation of

privileges to constitution, statute, or state supreme

court rule), and the idea of selective waiver, see

Unif. R. Evid. 510 (stating that a privilege is

waived if a privilege holder "voluntarily discloses

or consents to disclosure of any significant part of

the privileged matter"). A majority of states have

adopted forms of Uniform Rules 501 and/or 510.

See Uniform Rules of Evidence Locator,

http://www.law.cornell.edu/uniform/evide

nce.html (last visited May 31, 2006) (identifying

states that have adopted the Uniform Rules).

In addition, our research indicates that where

state legislatures have adopted selective waiver

theories, they have done so not in the general law

enforcement context, but in particularized

circumstances not present here. See, e.g., Cal.

Gov't Code § 13954(h) (disclosures to verify

claims on victims'compensation fund); Conn.

Gen. Stat. § 19a-127o(f) (health providers'

submission of patient safety work product to

patient safety organization); Fla. Stat. §

633.175(6) (insurance company providing

information to State Fire Marshal); La. Rev. Stat.

Ann. § 40:31.66(D) (state Parkinson's Disease

Registry); Neb. Rev. Stat. § 44-1107(5)(f)

(examinations under Viatical Settlements Act);

Ohio Rev. Code Ann. § 1753.38(A) (risk-based

capital plans, reports and information). Most

commonly, state legislatures have allowed

selective waiver in connection with environmental

self-audits, see, e.g., Alaska Stat. §09.25.455(b);

Kan. Stat. Ann. §60-3334(c); Tex. Rev. Civ. Stat.

Ann., art. 4447cc, §6(b) (Vernon), and reports to

insurance commissioners, see, e.g., Ind. Code §

27-1-15.6-15(e)(4); Ky. Rev. Stat. Ann. §

304.47-055(4); S.C. Code Ann. §38-43-55(G)(4);

Vt. Stat. Ann. tit. 8, § 4813m(f)(4); Wash. Rev.

Code §§48.02.065(4), (6).

[**58]7.Culture ofWaiver

Amici curiae, Association of Corporate Counsel and

the Chamber of Commerce of the United States of

America, support Qwest's position by suggesting their

employers and members, respectively, now litigate in a

"culture of waiver" instituted by federal prosecutors.

They argue that companies facing federal investigations

do not choose to waive their privileges; under current

enforcement standards, companies cannot risk being

labeled as uncooperative; and cooperation, as defined by

federal officials, requires producing privileged

documents. 9Amici state that "the demand for privilege

waivers by the government as a pre-requisite to fair

treatment by prosecutors is now routine."Amici Br. at

10. They urge the court "to note with disapproval this

culture of waiver as a matter of policy that should be

reversed."Id. at 8.

9 The DOJ's enforcement position stems from

certain DOJ memoranda. The 1999 "Holder

Memorandum" written by Deputy Attorney

General Eric Holder directed federal prosecutors

to consider the company's willingness to waive

privileges in evaluating cooperation. The

currently controlling memorandum is the January

20,2003"Thompson Memorandum"authored by

Deputy Attorney General Larry D. Thompson. On

October 21, 2005, Acting Deputy Attorney

General Robert D. McCallum, Jr. issued a

memorandum supplementing the Thompson

Memorandum that directs United States Attorneys

to establish a written waiver review process

prosecutors must follow in seeking privilege

waivers.

The SEC's position is encapsulated in the

"Seaboard Report,"Securities Exchange Act of

1934Release No. 44969 (Oct. 23, 2001). That

report listed a company's desire to provide

information as one of the criteria for assessing

cooperation, and it noted that such a desire may

cause companies to waive the attorney-client

privilege, work-product doctrine, or other

applicable privileges. "In this regard, the

Commission does not view a company's waiver of

a privilege as an end in itself, but only as a means

(where necessary) to provide relevant and



sometimes critical information to the Commission

staff."Id. at n.3.

[**59] Amici's position is supported by

commentators. See, e.g., Ronald C. Minkoff, A Leakin

the Dike:Expanding the Doctrine of Waiver of the

Attorney-Client Privilege, 154 PLI/NY 165, 178(2005);

see also Kathryn Keneally, New Life for Selective

Waiver, 30 Champion 42 (2006). It is not, however,

supported by the record. Aside from the anecdotal

material serving as the foundation for the purported

"culture of waiver," the record is silent regarding its

existence, significance, and longevity. More specifically,

the record is silent about Qwest's particular dealings with

the agencies and whether it experienced the tactics

deplored by amici. Even though common sense and

human nature suggest there is some level of pressure for

companies to satisfy the government by disclosing as

much as possible, including even privileged and protected

material, this court cannot rely on such a sparse record to

recognize a new doctrine of selective waiver or to create

a new privilege for government investigations.

[*1200] A similar argument has been

unsympathetically received by at least one other circuit.

The Second Circuit stated:

Whether characterized as forcing a party

in between a Scylla [**60] and

Charybdis, a rock and a hard place, or

some other tired but equally evocative

metaphoric cliche, the "Hobson's choice"

argument is unpersuasive given the facts

of this case. An allegation that a party

facing a federal investigation and the

prospect of a civil fraud suit must make

difficult choices is insufficient

justification for carving a substantial

exception to the waiver doctrine.

Steinhardt Partners, 9 F.3d at 236. In Branzburg, the

Supreme Court found similar arguments about changing

policies and practices insufficient to support the creation

of a journalist's privilege:

It is said that currently press subpoenas

have multiplied, that mutual distrust and

tension between press and officialdom

have increased, that reporting styles have

changed, and that there is now more need

for confidential sources . . . . These

developments, even if true, are treacherous

grounds for a far-reaching interpretation of

the First Amendment fastening a

nationwide rule on courts, grand juries,

and prosecuting officials everywhere.

408 U.S. at 699 (footnote omitted).

At least to the degree exhorted by amici, "the culture

of waiver" appears [**61] to be of relatively recent

vintage. Whether the pressures facing corporations in

federal investigations present a hardened, entrenched

problem suitable for common-law intervention or merely

a passing phenomenon that may soon be addressed in

other venues is unclear. For example, certain language in

Application Note 12 to Sentencing Guideline §8C2.5 can

be read to tie cooperation to a waiver of applicable

privileges. The Sentencing Commission, however,

recently promulgated an amendment deleting that

language because "the sentence at issue could be

misinterpreted to encourage waivers." Sentencing

Guidelines for the United States Courts, 71 Fed. Reg.

28063, 28073 (May1, 2006). This amendment will take

effect on November 1, 2006unless Congress intervenes.

Id. at 28063. Congress also appears concerned about

these issues; the House Judiciary Committee's

Subcommittee on Crime, Terrorism, and Homeland

Security recently took oral testimony at an oversight

hearing on corporate privilege waivers. White Collar

Enforcement (Part I): Attorney-Client Privilege and

Corporate Waivers:Oversight Hearing Before the H.

Comm. on the Judiciary, Subcomm. on Crime [**62] ,

Terrorism and Homeland Security, 109th Cong. D193

(Mar. 7, 2006). Finally, the Advisory Committee on

Evidence Rules recently voted to recommend publication

of a proposed Rule 502, providing for selective waiver to

the Committee on Rules of Practice and Procedure (the

Standing Committee) of the Judicial Conference of the

United States. The Standing Committee is expected to

take up the issue at its June 2006meeting.

Rule 501 places responsibility for development of the

common law of testimonial privilege on the federal

courts. Each decision along the path of the common law

is directed by the discrete, underlying facts developed in

the record. As decisions accrue, the process is facilitated

by the accumulation of experience, but it remains

dependent on the factual foundation of each constituent

decision. Legislative and rule-making processes,

however, are not confined by the same gradual,



brick-by-brick progression. Legislatures and rule-making

bodies are endowed with tools to marshal evidence, facts,

and experience from numerous and diverse sources that

can support more dramatic and immediate creation of

new rules or modifications of old [*1201] rules. Cf. In

re Subpoena Duces Tecum, 738 F.2d at 1375 [**63] ("If

a change is to be made because it is thought that such

voluntary disclosure programs are so important that they

deserve special treatment, that is a policy matter for the

Congress, or perhaps through the SEC (through a

regulation). Courts are not the appropriate forum-for one

thing, courts do not know enough-to decide on policy

grounds to treat those programs (or others like them) in

an exceptional way."); see also Branzburg, 408 U.S. at

706 ("Congress has freedom to determine whether a

statutory newsman's privilege is necessary and desirable

and to fashion standards and rules as narrow or broad as

deemed necessary to deal with the evil discerned and,

equally important, to refashion those rules as experience

from time to time may dictate.").

Whether a rule-making or legislative venue is

appropriate to address the issues raised by Qwest and

amici is a question for the Standing Committee and

Congress. The rule-making and legislative processes,

however, need not proceed wholly independent of the

common law. The accumulated experience of federal

common law in the area of attorney-client privilege and

work-product protection is but another source for the

legislative [**64] and rule-making bodies to draw on to

inform their deliberations concerning the need for and

parameters of selective waiver or a new privilege.

III.Conclusion

For the reasons discussed above, the record in this

case does not justify adoption of selective waiver.

Consequently, the district court did not abuse its

discretion in ordering Qwest to produce the Waiver

Documents to the Plaintiffs. Qwest has not shown a clear

and indisputable right to a writ of mandamus, and

therefore its petition is DENIED.



LEXSEE

Caution

As of: Jun 22, 2015

UNITED STATES OF AMERICA -v- JAMES J. TREACY, Defendant.

S2 08 CR 366 (JSR)

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF

NEW YORK

2009 U.S. Dist. LEXIS 66016

March 23, 2009, Decided

March 24, 2009, Filed

SUBSEQUENT HISTORY: Decision reached on ap-

peal by, Remanded by United States v. Treacy, 2011

U.S. App. LEXIS 4623 (2d Cir. N.Y., Mar. 9, 2011)

PRIOR HISTORY: United States v. Treacy, 603 F.

Supp. 2d 670, 2009 U.S. Dist. LEXIS 23678 (S.D.N.Y.,

2009)

CORE TERMS: interview, presentation, disclosure,

work product, attorney-client, privileged, waived, selec-

tive, handful, relayed, subject matter', automatically,

undisclosed, misleading, advisory, furnish, directly at-

tributable, legal position, substantial part, handwritten

notes, overwhelming, impressions, effectuate, subpoena,

waiving, somehow, orally, bulk

COUNSEL: [*1] For James J. Treacy, Defendant: Da-

vid Matthew Fragale, LEAD ATTORNEY, Steptoe &

Johnson LLP (DC), Washington, DC; Evan T. Barr,

Sandra Elaine Cavazos, Steptoe & Johnson, LLP (NYC),

New York, NY.

For Fulbright & Jaworski L.L.P., Movant: Kelly E. Gar-

rett, Richard Craig Smith, Stephen McNabb, Fulbright &

Jaworski, L.L.P., Washington, DC.

For Akin Gump Strauss Hauer & Feld LLP, Movant:

James Joseph Benjamin, Jr, LEAD ATTORNEY, Akin

Gump Strauss Hauer & Feld LLP(NYC), New York,

NY.

For Charles Forelle, Interested Party: Rachel Fan Stern

Strom, Slade R. Metcalf, LEAD ATTORNEYS, Hogan

& Hartson L.L.P.(NYC), New York, NY.

For USA, Plaintiff: Deirdre Ann McEvoy, LEAD AT-

TORNEY, U.S. Attorney's Office, SDNY, New York,

NY; Joshua Aaron Goldberg, LEAD ATTORNEY, U.S.

Attorney's Office, SDNY (St Andw's), New York, NY.

JUDGES: JED S. RAKOFF, UNITED STATES DIS-

TRICT JUDGE.

OPINION BY: JED S. RAKOFF

OPINION

MEMORANDUM ORDER

JED S. RAKOFF, U.S.D.J.

Non-party Akin Gump Strauss Hauer & Feld LLP

("Akin Gump") Moves to quash on grounds of attor-

ney-client privilege and/or work product protection a

subpoena served on it by defendant James J. Treacy,

which seeks the production of Akin Gump's memoranda

of interviews of certain employees of Monster [*2]

Worldwide, Inc. ("Monster"), namely, Ronald Kramer,

Michael Kaufman, Margaetta Noonan, Steven Pogor-

zelski, Lee Dewey, and Maria Karalis. The interviews

were conducted by Akin Gump as Counsel to a Special

Committee of Monster's Board of Directors that was in-

vestigating Monster's prior practices relating to the

granting of stock options. In opposing Akin Gump's mo-

tion, defendant argues that Akin Gump waived any claim

2009 U.S. Dist. LEXIS 66016, *

Page 2

of attorney-client privilege or work product protection as

to the interview memoranda here sought, either (1) by

furnishing certain other interview memoranda to the

Government that related to the same subject matter' or

(2) by making oral presentations to the Government of

certain statements made by some of these witnesses, as

well as, more generally, its overall findings.

It is well-established that the disclosure of privileged

or otherwise protected materials to the Government may,

in certain circumstances, result in a waiver of the privi-

lege or protection. See In re Steinhardt Partners, L.P., 9

F.3d 230, 236 (2d Cir. 1993). However, the Second Cir-

cuit has declined "to adopt a per se rule that all voluntary

disclosures to the government" automatically result in

such a waiver. [*3] Id. Instead, "rules relating to privi-

lege in matters of governmental investigations must be

[crafted] on a case-by-case basis," id., and "applied in a

common sense way in light of reason and experience." In

re Six Grand Jury Witnesses, 979 F.2d 939, 944 (2d Cir.

1992).

Turning to defendant's first argument, it is true that,

in the course of reporting its overall findings to the Gov-

ernment, Akin Gump, on behalf of the Special Commit-

tee, furnished the Government with memoranda of inter-

views of certain witnesses other than those here in issue,

all of which the Government then furnished to the de-

fense. Akin Gump also gave detailed oral recitations to

the Government of another witness's interview, and this

Court thereafter ordered Akin Gump to furnish the

memorandum of that interview to the defendant. 1 But the

Court's own in camera review of the Government's de-

tailed notes of the Akin Gump presentations confirms

that no comparable disclosure was made to the Govern-

ment with respect to the, interviews or interview memo-

randa now here sought. In analogous situations, courts

have routinely declined to find that waiver has occurred.

See, e.g., SEC v. Beacon Hill Asset Mgmt. LLC, 231

F.R.D. 134, 143 (S.D.N.Y. 2004) [*4] (holding that the

disclosure of certain analyses to the SEC did not "operate

as a total waiver of the attorney-client privilege with

respect to all documents, regardless of whether they are

directly related to the communications with the SEC");

see also In re Qwest Commc'ns Int'1 Inc., 450 F.3d 1179,

1181, 1196 (10th Cir. 2006) (finding waiver with respect

to privileged documents produced to the Government,

and recognizing absence of waiver with respect to doc-

uments not produced to the Government). By contrast,

defendant has failed to point to any authority (controlling

or otherwise) that stands for the broad proposition that

the disclosure of a handful of interview memoranda to

the Government automatically results in a general waiver

of privilege and work product protection over different

memoranda were not provided to the Government.

1 Additionally, as discussed below, the Gov-

ernment, without, waiving any legal position and

at the suggestion of the Court, also turned over to

the defendant a few snippets of its notes of its

meetings with Akin Gump in which certain

statements of other interviewees were briefly

quoted or paraphrased.

Further, although defendant contends that Akin

Gump [*5] was using the privilege as both a "sword

and a shield" by choosing which memoranda it disclosed

to the Government, such a concern is not implicated

where, as here, the holder of the privilege is not a party

to the action and seeks no advantage against its adver-

sary. See In re von Bulow, 828 F.2d 94, 101 (2d Cir.

1987) (noting that the goal of the so-called "fairness doc-

trine" is to "prevent prejudice to a party and distortion of

the judicial process that may be caused by the privi-

lege-holder's selective disclosure during litigation of

otherwise privileged information") (emphasis added).

Indeed, neither the Government nor defendant is in pos-

session of the interview memoranda here sought.

Recently-enacted Fed. R. Evid. 502(a) further sup-

ports a finding that no waiver has occurred. Pursuant to

that rule, if privileged material is disclosed to the Gov-

ernment, any waiver that occurs only extends to addi-

tional, undisclosed material if, in the case of an inten-

tional waiver, the disclosed and undisclosed materials

concern the same subject matter and "ought in fairness to

be considered together." Fed. R. Evid. 502(a). As the

Advisory Notes to Rule 502(a) make clear, a finding of

waiver in such [*6] circumstances should be "reserved

for those unusual situations in which fairness requires a

further disclosure of related, protected information, in

order to prevent a selective and misleading presentation

of evidence to the disadvantage of the adversary." Fed.

R. Evid. 502 advisory committee's note. Here, Akin

Gump and its client, the Special Committee have no ad-

versary in this action, and there is no suggestion of "se-

lective" or "misleading" conduct. To the contrary, all of

the interview memoranda that were disclosed to the

Government have now been provided to defendnt. Ac-

cordingly, the instant case does not present any of the

"unusual circumstances" that otherwise would require a

finding of waiver.

As to defendant's second argument, viz., that the

Government's oral presentations waived any claim of

privilege, the Court, as noted above, previously deter-

mined, after hearing oral argument on Akin Gump's mo-

tion, that the contents of the interview memorandum for

Erin Barriere had been orally relayed in substantial part

to the Government, and thus ordered Akin Gump to fur-

nish defendant with a copy of that memorandum. As to

the remaining interview memoranda, however, the Court

directed [*7] the Government to submit, on an ex parte

2009 U.S. Dist. LEXIS 66016, *

Page 3

basis, its handwritten notes from Akin Gump's presenta-

tions so that the Court could determine whether and to

what extent Akin Gump had disclosed to the Govern-

ment the statements of witnesses contained therein. 2

Based on its review of the Government's notes, the Court

then concluded that the overwhelming bulk of the state-

ments made by Akin Gump to the Government were

summaries, impressions, and conclusions that did not

effectuate any general waiver. See 3/6/09 Order. The

Court further observed, however, that the notes revealed

that at a few points, Akin Gump relayed to the Govern-

ment what appeared to be substantially verbatim state-

ments made by Michael Kaufman, Ronald Kramer, and

Margaretta Noonan that arguably could qualify as

"Brady" "Giglio," or Jencks Act material. In response to

that observation, on March 10, 2009, the Government

without waiving any legal position voluntarily provided

defense counsel with those portions of the Government's

notes.

2 The Court is today docketing the originals of

the Government's notes under seal, in case they

are needed for any appellate review.

Notwithstanding the Court's previous determination

that Akin Gump's [*8] oral presentations did not effec-

tuate any general waiver, defendant now argues that the

Government's handwritten notes demonstrate that Akin

Gump waived the attorney-client privilege and work

product protection with respect to the interview memo-

randa of Kaufman, Kramer, and Noonan, because the

notes somehow reveal that Akin Gump conveyed the

substance of its interviews with these individuals to the

Government. The Court is not persuaded.

As noted, the overwhelming majority of Akin

Gump's statements to the Government amounted to gen-

eral summaries, impressions, and conclusions that did

not convey any specific information directly attributable

to any of these witnesses. The presentations themselves

were not organized in a witness-specific fashion, and the

few statements that were directly attributable to Kauf-

man, Kramer, and Noonan were woven into broad, the-

matic presentations that in no way amounted to a sum-

mary of the totality of the statements made by each wit-

ness. Thus, unlike the interview of Erin Barriere -- which

Akin Gump orally relayed to the Government in substan-

tial part, see Tr. 2/26/09 at 97 -- the great bulk of the

statements made by Kaufman, Kramer, and Noonan

played no [*9] specific role in the oral presentations at

issue here. To the limited extent that Akin Gump did

disclose to the Government a handful of statements made

by these individuals, defendant is now in possession of

such statements. Moreover, as noted above, defendant

has failed to point to any authority that warrants a find-

ing that Akin Gump's brief reference to a handful of

statements somehow waived the privilege with respect to

all statements made by these three witnesses to Akin

Gump.

Accordingly, for all of the foregoing reasons, Akin

Gump's motion to quash defendant's Rule 17(c) subpoe-

na is hereby granted as to the interview memoranda for

Ronald Kramer, Michael Kaufman, Margaretta Noonan,

Steven Pogorzelski, Lee Dewey, and Maria Karalis.

SO ORDERED.

Dated: New York, New York

March 23, 2009

/s/ Jed S. Rakoff

JED S. RAKOFF, U.S.D.J.

Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)


Synopsis

Background: Shareholder brought action against corporation

seeking production of documents in connection with demand

made on corporation for documents related to alleged

bribery scandal involving a Mexican subsidiary. The Court

of Chancery identified specific steps corporation had to

take in searching for documents, and specific categories of

documents corporation had to produce in response to demand.

Holdings: On cross-appeals, the Supreme Court, Holland, J.,

held that:

[1] officer-level documents were subject to disclosure;

[2] Court of Chancery properly exercised its discretion in

setting the range of dates for production;

[3] Court of Chancery did not abuse its discretion in ordering

corporation to produce disaster recovery tapes for two

additional records custodians;

[4] Court of Chancery did not abuse its discretion by ordering

production of documents “known to exist by the Office of the

General Counsel”;

[5] production of documentary information protected by

attorney-client privilege was warranted pursuant to Garner

fiduciary exception to attorney-client privilege;

[6] shareholder demonstrated substantial need for information

protected by work product doctrine; and

[7] Court of Chancery did not abuse discretion by ordering

shareholder to return certain privileged documents that were

delivered to shareholder by anonymous source.

Affirmed.

West Headnotes (18)

[1] Corporations and Business Organizations

Books and Records Subject to Inspection

For purposes of a shareholder's action seeking to

inspect corporate books and records, documents

are “necessary and essential” if they address the

crux of the shareholder's purpose and if that

information is unavailable from another source.

8 West's Del.C. § 220.




Whether documents are necessary and essential

for purposes of a shareholder's action seeking

to inspect corporate books and records is fact

specific and will necessarily depend on the

context in which the shareholder's inspection

demand arises. 8 West's Del.C. § 220.


[3] Appeal and Error

Allowance of remedy and matters of

procedure in general

Supreme Court reviews the Court of Chancery's

determination of the scope of relief available in a

shareholder's action seeking to inspect corporate

books and records for abuse of discretion. 8

West's Del.C. § 220.



Effect in Equitable Actions

The standard of review the Supreme Court

applies to the Court of Chancery's exercise



of statutorily conferred discretion is highly

deferential.



Equitable proceedings

Supreme Court reviews de novo Court of

Chancery's determination of questions of law,

such as the applicability of the attorney-client

privilege and the work-product doctrine.




Officer-level documents were subject to

disclosure in shareholder's action against

corporation seeking inspection of corporate

records related to bribery scandal involving

Mexican subsidiary; documents were necessary

and essential to determining whether and to

what extent mismanagement occurred and what

information was transmitted to corporation's

directors and officers. 8 West's Del.C. § 220.




Court of Chancery properly exercised its

discretion in setting the range of dates for

production of documents related to shareholder's

action seeking to inspect corporate books and

records relating to bribery scandal involving

Mexican subsidiary, which range went from

September 1, 2005 to the present; documents

within that range reflected changes in the wake

of the investigation that would bear on director

and officer knowledge of the investigation,

and corporation's privilege log confirmed that

responsive documents existed from September

2005 through at least May 2012. 8 West's Del.C.

§ 220.




Court of Chancery did not abuse its

discretion in ordering corporation to produce

disaster recovery tapes for two additional

records custodians in action by shareholder

seeking to inspect corporate records related to

bribery scandal involving Mexican subsidiary;

corporation by voluntarily collecting disaster

tape recovery data for nine custodians implicitly

recognized that it may be a source of responsive

documents. 8 West's Del.C. § 220.




Court of Chancery did not abuse its discretion

in action by shareholder seeking to inspect

corporate records related to bribery scandal

involving Mexican subsidiary by ordering the

production of responsive documents “known to

exist by the Office of the General Counsel”; the

term “Office of the General Counsel” in the final

order replaced the “in-house counsel” term used

by corporation in its proposed order. 8 West's

Del.C. § 220.



Necessity of presentation in general

When the interests of justice so require, Supreme

Court may consider and determine any question

not presented to the trial court.



Nature or subject-matter in general

Although corporation failed to argue before the

Court of Chancery, in action by shareholder

seeking to inspect corporate records, that

exception to attorney-client privilege articulated

in Garner v. Wolfinbarger had not been

adopted by Delaware and was not applicable

to shareholder's action, the interests of justice

warranted the Supreme Court's consideration of

the issues. 8 West's Del.C. § 220.





Confidentiality

Fiduciary exception

The Garner v. Wolfinbarger doctrine, which

recognizes a fiduciary exception to the attorney-

client privilege, should be applied in plenary

stockholder/corporation proceedings.



Confidentiality

Fiduciary exception



client privilege, is applicable in a shareholder's

action against corporation seeking inspection

of corporate records; however, in such a

proceeding, the necessary and essential inquiry

must precede any privilege inquiry because the

necessary and essential inquiry is dispositive of

the threshold question, the scope of document

production to which the plaintiff is entitled. 8

West's Del.C. § 220.



Confidentiality

Fiduciary exception

Production of documentary information

protected by attorney-client privilege was

warranted in shareholder's action seeking

production of corporate records regarding

bribery scandal involving Mexican subsidiary

pursuant to the Garner v. Wolfinbarger fiduciary

exception to the attorney-client privilege; the

privileged information was necessary and

essential to shareholder's investigation into

the corporation's handling of the scandal,

and shareholder demonstrated good cause in

that shareholder sought specific documents,

the material did not risk the revelation of

trade secrets, and the shareholder's allegations

implicated criminal conduct. 8 West's Del.C. §

220.




Pretrial Procedure

Corporate records

Shareholder that sought to inspect corporate

records relating to bribery scandal involving

Mexican subsidiary demonstrated substantial

need for information protected by work product

doctrine given that documents sought were

essential to shareholder's investigation into

corporation's handling of incident, and the

information was not available from non-

privileged sources. 8 West's Del.C. § 220;

Chancery Court Rule 26(b)(3).


[16] Pretrial Procedure

Work-product privilege


Confidentiality

Fiduciary exception



client privilege, applies to information protected

by the attorney-client privilege, but not to work

product.



Remedy at law or in equity

Shareholder waived on appeal its argument

that Court of Chancery erred in not requiring

corporation to collect documents from additional

records custodians in action seeking inspection

of corporate records, where shareholder did not

raise the issue in its opening post-trial brief.





Confidentiality

Determination

Court of Chancery did not abuse its discretion

in shareholder's action seeking inspection of

corporate records relating to bribery scandal

involving Mexican subsidiary by ordering

shareholder to return to corporation certain

privileged documents that were delivered to

shareholder's counsel by an anonymous source;

although a number of documents had lost their

privilege due to being published by the media

or elected representatives, the unpublished

documents remained privileged and had to be

returned to corporation. 8 West's Del.C. § 220.


*1266 Court Below–Court of Chancery of the State of

Delaware, C.A. No. 7779.

Upon appeal from the Court of Chancery. AFFIRM ED.


Donald J. Wolfe, Jr., Esquire, Stephen C. Norman, Esquire,

Tyler Leavengood, Esquire, Potter Anderson & Corroon LLP,

Wilmington, Delaware, Theodore J. Boutrous, Jr., Esquire,

Gibson Dunn & Crutcher LLP, Los Angeles, California,

Jonathan C. Dickey, Esquire, Brian M. Lutz, Esquire, *1267

Gibson Dunn & Crutcher LLP, New York, New York, Mark

A. Perry, Esquire (argued), Gibson Dunn & Crutcher LLP,

Washington, DC, for appellants.

Stuart M. Grant, Esquire (argued), Michael J. Barry, Esquire,

Nathan A. Cook, Esquire, Bernard C. Devieux, Esquire, Grant

& Eisenhoffer, P.A., Wilmington, Delaware, for appellees.

Before HOLLAND, BERGER, and RIDGELY, Justices and

BUTLER and WALLACE, Judges, 1 constituting the Court

en Banc.

1 Sitting by designation pursuant to Del. Const. art. IV, §

12 and Supr. Ct. R. 2 and 4.

Opinion

HOLLAND, Justice:

The Defendant Below/Appellant–Cross Appellee Wal–Mart

Stores, Inc. (“Wal–Mart” or the “Company”) appeals from a

final judgment of the Court of Chancery identifying specific

steps Wal–Mart must take in searching for documents, and

specific categories of documents Wal–Mart must produce,

in response to a demand made by Plaintiff Below/Appellee–

Cross Appellant Indiana Electrical Workers Pension Trust

Fund IBEW (“IBEW” or “Plaintiff”) pursuant to title 8,

section 220 of the Delaware Code.

The Court of Chancery conducted a Section 220 trial on

the papers to determine whether Wal–Mart had produced

all responsive documents in reply to IBEW's demand. The

Court of Chancery entered a Final Order and Judgment, which

required Wal–Mart to produce a wide variety of additional

documents, including ones whose content is privileged or

protected by the work-product doctrine.

Wal–Mart appeals the Court of Chancery's Final Order with

regard to its obligations to provide additional documents.

IBEW filed a cross-appeal, arguing that the Court of

Chancery erred in failing to require Wal–Mart to correct

the deficiencies in its previous document productions and in

granting in part Wal–Mart's motion to strike its use of certain

Whistleblower Documents.

We conclude that all of the issues raised in this appeal and

cross-appeal are without merit. Therefore, the judgment of the

Court of Chancery must be affirmed.

Facts

IBEW is a retirement system that provides retirement

benefits to electrical workers in Indiana. Wal–Mart is a

Delaware corporation that has its headquarters in Bentonville,

Arkansas. Wal–Mart operates stores in 27 different countries

and employs about 2.2 million people worldwide. The

Company's stock is listed on the NYSE. Wal–Mart de

Mexico, S.A. de C.V. (“WalMex”) is a subsidiary of Wal–

Mart in which Wal–Mart owns a controlling interest. WalMex

is not a party to this action. At all times IBEW has been a

stockholder of appellant, Wal–Mart.

On April 21, 2012, The New York Times, in an article

titled Vast Mexico Bribery Case Hushed Up by Wal–Mart

After Top–Level Struggle (the “Times Article”), 2 described a

scheme of illegal bribery payments made to Mexican officials

at the direction of then-WalMex CEO, Eduardo Castro–



Wright, between 2002 and 2005. The Times Article revealed

that Wal–Mart executives were aware of the conduct no

later than September 21, 2005, and suggested that Wal–

Mart's responses were deficient. IBEW summarized the

Times Article in its answering brief, as follows:

2 Appendix to Wal–Mart's Opening Br. at A96–116.

In exchange for the bribes, WalMex received benefits

ranging from zoning changes to rapid and favorable

processing *1268 of permits and licenses for new stores.

The Company was aware of this illegal conduct by no later

than September 21, 2005, when an executive of WalMex,

Sergio Cicero Zapata (“Cicero”), informed the general

counsel of Wal–Mart International, Maritza I. Munich

(“Munich”), of “ ‘irregularities' authorized by ‘the highest

levels' at [WalMex].”

Munich initiated the investigation (the “WalMex

Investigation”), first hiring a Mexican attorney to

interview Cicero and evaluate his allegations, and then

working with Willkie Farr & Gallagher LLP (“Willkie

Farr”) to develop an independent investigation plan.

Wal–Mart's senior leadership in the U.S., however,

rejected Willkie Farr's November 2005 proposal for

a “thorough investigation,” and instead chose a

“far more limited” internal two-week “Preliminary

Inquiry” involving Wal–Mart's Corporate Investigations

Department and International Internal Audit Services

(“IAS”) departments. The “Preliminary Inquiry” work-

plan provided that, among other things, a progress report

would be given to Wal–Mart's management and the

Chairman of the Audit Committee, Roland Hernandez

(“Hernandez”), on November 16, 2005.

Munich kept senior Wal–Mart officials in Arkansas

apprised of the preliminary inquiry in a series of emails

and detailed memoranda. In December 2005, an internal

Wal–Mart report on the preliminary inquiry's findings

was sent to Wal–Mart executives describing evidence

“corroborat[ing] the hundreds of gestor payments

[i.e., payments to ‘fixers'], the mystery codes, the

rewritten audits, the evasive responses from [WalMex]

executives, the donations for permits, the evidence

gestores [i.e., ‘fixers'] were still being used.” The report's

conclusion was grave: “There is reasonable suspicion to

believe that Mexican and USA laws have been violated.”

Rather than expand the investigation, Wal–Mart

executives chastised the investigators for being “overly

aggressive....” On February 3, 2006, Scott 3 ordered

the prompt development of a “modified protocol”

for internal investigations. As a result, control over

the WalMex Investigation was transferred to “one

of its earliest targets,” José Luis Rodríguezmacedo,

WalMex's general counsel (“Rodríguezmacedo”).

Munich complained to senior Wal–Mart executives,

noting that “[t]he wisdom of assigning any investigative

role to management of the business unit being

investigated escapes me,” and resigned from the

Company shortly thereafter. Rodríguezmacedo quickly

cleared himself and his fellow WalMex executive of any

wrongdoing, “wrapp[ing] up the case in a few weeks,

with little additional investigation[,]” and concluding

that “[t]here is no evidence or clear indication of

bribes paid to Mexican government authorities with the

purpose of wrongfully securing any licenses or permits.”

3 H. Lee Scott has been a director of Wal–Mart since 1999,

Wal–Mart's CEO from 2000 to 2009, and a Wal–Mart

executive officer until January 31, 2011.

On June 6, 2012, Wal–Mart received a letter from IBEW

(the “Demand”). The letter requested inspection of broad

categories of documents relating to the bribery allegations

described in the Times Article (the “WalMex Allegations”).

The purpose of the Demand, as explained in the letter,

was to investigate: (1) mismanagement in connection with

the WalMex Allegations; (2) the possibility of breaches

of fiduciary duty by Wal–Mart or WalMex executives in

connection with the bribery allegations; and (3) whether a pre-

suit demand on the *1269 board would be futile as part of

a derivative suit.

On June 13, 2012, Wal–Mart responded to the Demand,

agreeing, subject to certain conditions, to make available

to IBEW Board materials such as minutes, agendas, and

presentations, relating to the WalMex Allegations, as well

as existing policies relating to Wal–Mart's Foreign Corrupt

Practices Act (“FCPA”) compliance. Wal–Mart declined to

provide documents that it determined were not necessary and

essential to the stated purposes in the Demand or that were

protected by the attorney-client privilege and work-product

doctrine.

On August 1, 2012, Wal–Mart produced over 3,000

documents to IBEW, consisting of: policies relating to FCPA

compliance, all Board and Audit Committee minutes and

materials referencing the WalMex Allegations dating back

to when those allegations arose in 2005, and Board and

Audit Committee minutes and materials relating to Wal–



Mart's FCPA policy and compliance program. However,

most of those documents were highly redacted without any

explanation for the redactions.

On August 13, 2012, IBEW filed a Complaint in the

Court of Chancery pursuant to Section 220, alleging

various deficiencies relating to Wal–Mart's confidentiality

designations and redactions in its production, and asserting

that certain documents falling within the scope of the Demand

had not been produced. In an attempt to satisfy IBEW, Wal–

Mart provided an additional production on August 28, 2012,

which included additional documents, less redacted material,

and provided the reasons for the redactions that remained.

On September 10, 2012, IBEW noticed depositions of certain

Wal–Mart records custodians to gain information about

documents that it believed should have been disclosed. IBEW

noticed depositions of a current senior officer, a former senior

officer, and a Rule 30(b)(6) witness. In response, Wal–Mart

moved for a protective order, alleging that the deposition

notices encompassed virtually every document that might

relate in any way to the WalMex Allegations.

At an October 12, 2012 hearing, the Court of Chancery

granted Wal–Mart's motion for a protective order in part and

restricted the scope of the depositions noticed by IBEW. To

comply with the Court of Chancery's October 12 ruling, Wal–

Mart reviewed more than 160,000 documents. To locate any

additional responsive documents, Wal–Mart also interviewed

a number of current and former employees, officers, and

directors, and it searched the data of eleven custodians.

Wal–Mart then provided IBEW with a further supplemental

production and an updated privilege log. On December 6,

2012, IBEW conducted a Rule 30(b)(6) deposition.

Months earlier, in May 2012, IBEW's counsel received

an anonymous package containing high-level Wal–Mart

documents that were mentioned in the Times Article and

pertained to the WalMex Investigation (the “Whistleblower

Documents”). Pursuant to the ethics rules, IBEW's counsel

immediately notified Wal–Mart's counsel, who stated that the

documents were stolen by a former employee. Wal–Mart took

no other action regarding the Whistleblower Documents, but

moved to strike the documents and prevent IBEW from using

them.

IBEW advised the Court of Chancery that Wal–Mart's

document production did not comply with its October 12

ruling. The parties agreed to conduct a Section 220 trial on the

basis of a paper record. The sole issue presented for judicial

determination was whether Wal–Mart had produced all of the

documents that were responsive to IBEW's Demand.

*1270 Final Order

On May 20, 2013, the Court of Chancery heard oral argument

and ordered Wal–Mart to produce all documents in the

custody of eleven custodians whose data Wal–Mart had

previously searched relating to (1) the WalMex Allegations,

(2) policies and procedures regarding FCPA compliance, and

(3) policies and procedures relating to internal investigations.

The Court of Chancery's ruling also required Wal–Mart to

produce documents in the files of Roland A. Hernandez, a

former director and former Chairman of Wal–Mart's Audit

Committee. In addition, the Court of Chancery ordered Wal–

Mart to search the files of any person who served as an

assistant to any of the twelve custodians. The Court of

Chancery further held that IBEW was entitled to documents

protected by the attorney-client privilege, invoking the

exception articulated in Garner v. Wolfinbarger 4 (the

“Garner doctrine”). The Court of Chancery also ordered

Wal–Mart to produce documents protected by the attorney

work-product doctrine.

4 430 F.2d 1093 (5th Cir.1970).

At a June 4, 2013 hearing on the parties' competing forms

of order, the court also addressed IBEW's request for

production of documents from Wal–Mart's disaster recovery

(or “backup”) tapes, which was made for the first time at the

June 4 hearing.

On October 15, 2013, the Court of Chancery entered the

Final Order and Judgment. 5 The Final Order requires Wal–

Mart to produce: (1) officer (and lower)-level documents

regardless of whether they were ever provided to Wal–Mart's

Board of Directors or any committee thereof; (2) documents

spanning a seven-year period and extending well after the

timeframe at issue; (3) documents from disaster recovery

tapes; and (4) any additional responsive documents “known

to exist” by the undefined “Office of the General Counsel.”

The Final Order also requires the production of, among other

things, “contents of Responsive Documents that are protected

by the attorney-client privilege ... and the contents that are

protected by the attorney work-product doctrine under Court

of Chancery Rule 26(b)(3),” but subject to the condition that

IBEW “take appropriate steps to protect the confidentiality



of [Wal–Mart's] privileged documents, including filing and

maintaining any such document as confidential.”6

5 Ex. A to Wal–Mart's Opening Br. at *5 [hereinafter Final

Order].

6 Del.Code Ann. tit. 8, § 220(c) (2014) (“The Court

[of Chancery] may, in its discretion, prescribe

any limitations or conditions with reference to the

inspection.”).

The Court of Chancery also granted Wal–Mart's motion to

strike IBEW's use of the Whistleblower Documents in part,

allowing IBEW only to use those documents that were posted

on The New York Times website or to the congressional

website, or referenced in Wal–Mart's public filings. The Court

of Chancery ruled that IBEW's request for Wal–Mart to

correct the deficiencies in its previous productions had been

waived.

Parties' Contentions

In its appeal, Wal–Mart contends that the Court of Chancery

erred in ordering Wal–Mart to produce documents that “far

exceed” the proper scope of a Section 220 request. Wal–Mart

cites four ways in which the Court of Chancery's Final Order

is beyond the proper scope of a Section 220 proceeding: first,

it requires Wal–Mart to produce officer-level documents;

second, it requires Wal–Mart to produce *1271 documents

spanning a seven-year period, which is longer than the period

in which the wrongdoing is alleged to have occurred; third,

it requires Wal–Mart to search disaster recovery tapes for

data from two custodians; and fourth, it requires Wal–Mart to

produce documents “known to exist” by Wal–Mart's Office

of the General Counsel.

Wal–Mart further submits that the Court of Chancery

improperly and incorrectly applied the Garner doctrine to

documents that it asserts are protected by the attorney-client

privilege. Additionally, Wal–Mart contends that the Court of

Chancery erred by improperly applying the Garner doctrine

to other documents that Wal–Mart asserts constitute protected

attorney work product.

In its cross-appeal, IBEW argues that the Court of Chancery

erred by not ordering Wal–Mart to correct deficiencies in its

search for, and collection of, books and records. The Court

of Chancery held that IBEW waived this argument. IBEW

submits, however, that because there was no prejudice to

Wal–Mart, the issue should be decided on the merits.

In its cross-appeal, IBEW also contends that the Court of

Chancery's conclusion that the Whistleblower Documents

are subject to conversion is not supported by the record.

According to IBEW, Wal–Mart bore the burden of proof

on this conversion theory and did not provide the Court

of Chancery with any record to support its ruling. IBEW

argues that the Court of Chancery's inference that because

the Whistleblower Documents were sent anonymously, the

individual must have stolen them, is unsupported by the

record.

Standard of Review

Wal–Mart does not dispute that the Court of Chancery

recognized that the proper standard to be applied to Section

220 actions is “necessary and essential.”7 Wal–Mart also

does not dispute that IBEW stated at least one proper

purpose. 8 However, Wal–Mart challenges the scope of the

Final Order directing Wal–Mart to take specific steps to

search for and to produce documents responsive to the

Demand. According to Wal–Mart, IBEW failed to meet its

burden of showing that the scope of production ordered by the

Court of Chancery was “necessary and essential” to IBEW's

proper purposes and that the Final Order provides IBEW with

the type of discovery that is reserved for plenary proceedings.

7 Saito v. McKesson HBOC, Inc., 806 A.2d 113, 116

(Del.2002) (quoting Del.Code Ann. tit. 8, § 220(b)).

8 See, e.g., Appendix to Wal–Mart's Opening Br. at A297

(“The only issue in dispute in this case is the extent of

the corporate books and records to which Plaintiff is

entitled and whether it extends beyond those documents

the Company has already provided.”).

[1] [2] Documents are “necessary and essential” pursuant

to a Section 220 demand if they address the “crux of the

shareholder's purpose” and if that information “is unavailable

from another source.” 9 Whether documents are necessary

and essential “is fact specific and will necessarily depend

on the context in which the shareholder's inspection demand

arises.” 10

9 Espinoza v. Hewlett–Packard Co., 32 A.3d 365, 371–72

(Del.2011).



10 Id. at 372.

[3] [4] [5] The plain language of Section 220(c) provides

that “[t]he Court [of Chancery] may, in its discretion,

prescribe any limitations or conditions with reference to the

inspection.” 11 Accordingly, this Court *1272 reviews the

Court of Chancery's “determination of the scope of relief

available in a Section 220 books and records action for abuse

of discretion.” 12 The standard of review this Court applies

to the Court of Chancery's exercise of statutorily conferred

discretion is highly deferential. 13 However, questions of law,

such as the applicability of the attorney-client privilege and

the work-product doctrine, are reviewed de novo. 14

11 Del.Code Ann. tit. 8, § 220(c) (2014) (emphasis added).

12 Espinoza, 32 A.3d at 371; see also Security First Corp.

v. U.S. Die Casting and Dev. Co., 687 A.2d 563, 569

(Del.1997).

13 See, e.g., Remco Ins. Co. v. State Ins. Dept., 519 A.2d

633, 637–38 (Del.1986) (“In view of the established

facts and because it is the Court of Chancery in which

the statute [18 Del. C. § 5905] vests discretion, this

Court will not attempt to substitute its own notions

on the matter for those carefully articulated by the

Court of Chancery.”) (citing Chavin v. Cope, 243 A.2d

694 (Del.1968)). See also Chavin, 243 A.2d at 695

(“When an act of judicial discretion is under review the

reviewing court may not substitute its own notions of

what is right for those of the trial judge, if his judgment

was based upon conscience and reason, as opposed to

capriciousness or arbitrariness.”).

14 Espinoza, 32 A.3d at 371.

Officer–Level Documents

[6] Wal–Mart argues that the Court of Chancery abused

its discretion and committed legal error by requiring it “to

produce documents that were never presented to or created by

members of [Wal–Mart's] Board of Directors” and by creating

a “presumption” that “officer-level knowledge should be

imputed wholesale to the Board.” These arguments are not

supported by the record for two reasons: first, IBEW's

Demand had three proper purposes; and second, the Court of

Chancery's ruling did not create a presumption.

Wal–Mart contends that it is “undisputed that the purpose

of IBEW's inspection here is limited to determining whether

demand on the current Board with respect to the WalMex

Allegations would be futile” and that, accordingly, officer-

level documents are not “necessary and essential to [IBEW's]

stated purpose.” The Court of Chancery acknowledged that

the purpose of IBEW's Demand “was primarily to look for

facts to determine whether demand is, in fact, excused.” 15

However, the other stated purposes of IBEW's Demand were

to investigate the underlying bribery and how the ensuing

investigation was handled.

15 Appendix to Wal–Mart's Opening Br. at A512.

The Court of Chancery acknowledged these other purposes.

In its bench ruling ordering Wal–Mart to produce documents,

the Court of Chancery explained that this information could

be used for two purposes:

[T]he core information that the

petitioners probably most legitimately

need in order to plead demand

excusal or— and I want to be very

clear about this— or to conclude that

the appropriate action is an actual

very strongly written demand, that

why are these seven people still

compliance people at Wal–Mart or

in executive positions when they

knew material information about legal

violations, which they apparently

did not share with higher-ups, and

deprived the board of its ability to take

effective remedial action to protect the

company's reputation and interests?16

16 Id. at A609–10.

As the Court of Chancery explained:

I believe ... that core information

regarding the WalMex bribery,

construction-permitting situation and

how it was handled within Wal–Mart

by high-level officers and directors,

that information *1273 about that

is essentially central to the plaintiff's

request. That is the wrongdoing they're

dealing with, is did Wal–Mart deal

appropriately with that? Did Wal–

Mart have effective internal controls to

address situations like that and did it



take appropriate remedial action when

it was faced with that?17

17 Id. at A582–83.

In fact, Wal–Mart's Opening Brief to this Court states

that “the plaintiff's Section 220 purpose was to investigate

allegations in [The ] New York Times concerning corrupt

payments supposedly made by WalMex employees in

Mexico, and how Wal–Mart investigated those allegations.”

Therefore, Wal–Mart's argument that officer-level documents

are not “necessary and essential” to one of IBEW's three

proper purposes is not supported by the record.

Moreover, Wal–Mart does not dispute that key officers were

involved in the WalMex Investigation. Accordingly, officer-

level documents are necessary and essential to determining

whether and to what extent mismanagement occurred and

what information was transmitted to Wal–Mart's directors

and officers. 18 In McKesson Corp. v. Saito, 19 this Court

affirmed a Court of Chancery ruling that permitted inspection

of officer-level documents. In doing so, we noted that

“generally, the source of the documents in a corporation's

possession should not control a stockholder's right to

inspection under § 220.” 20

18 See Saito v. McKesson HBOC, Inc., 806 A.2d 113, 118

(Del.2002).

19 818 A.2d 970 (Del.2003) (Table) (affirming a Court of

Chancery opinion that required the disclosure of officer-

level documents).

20 Saito, 806 A.2d at 118.

Wal–Mart acknowledges officer-level documents that

“refer[ ] to communications with members of the Board”

regarding the WalMex Investigation are necessary and

essential to the demand futility inquiry. However, the

Court of Chancery's ruling was not limited to officer-level

communications with directors. The Court of Chancery held

that officer-level documents from which director awareness

of the WalMex Investigation may be inferred are also

necessary and essential to IBEW's Demand and must be

produced.

Wal–Mart argues that the Court of Chancery erred by

adopting a presumption that “officer-level knowledge should

be imputed wholesale to the Board.” The record reflects that

the Court of Chancery did not adopt such a presumption.

The Court of Chancery held that officer-level documents

are necessary to Plaintiff's inspection because Plaintiff may

establish director knowledge of the WalMex Investigation

by establishing that certain Wal–Mart officers were in a

“reporting relationship” to Wal–Mart directors, that those

officers did in fact report to specific directors, and that those

officers received key information regarding the WalMex

Investigation.

The Court of Chancery concluded that the reasonable

inference from such facts would be that those officers

passed the information on to the directors. The Court of

Chancery's acknowledgment that a reasonable inference

can be established by circumstantial evidence is not the

functional equivalent of creating a presumption. The record

reflects that the Court of Chancery properly exercised its

discretion in ordering Wal–Mart to produce certain officer-

level documents.

Relevant Dates for Production

[7] Wal–Mart asserts that the Court of Chancery abused its

discretion with respect *1274 to the date range of production

required by the Final Order. The Demand identified the

relevant time period as “September 1, 2005 to the present.”

Wal–Mart did not object to this time period in responding to

the Demand and, in fact, agreed that it was appropriate:

The Company believes that board

minutes and agendas and Company

policies regarding compliance with the

Foreign Corrupt Practices Act, for

the period of 2005 to the present,

satisfy the necessary and essential

requirement imposed by Section 220

and is therefore willing to produce

them to your client. 21

21 Appendix to IBEW's Answering Br. on Appeal/Opening

Br. on Cross–Appeal at B35–36 (emphasis added).

Consistent with this representation, Wal–Mart then produced

documents to IBEW dated into 2012. However, at trial and in

its September 2013 proposed final order, Wal–Mart sought to

limit the relevant time period at December 31, 2010. IBEW

argues that:

a key category of responsive

documents essential to Plaintiff's



proper purpose are documents

concerning the Company's ongoing

compliance activities and changes

to its operative compliance

procedures, such as changes to the

Audit Committee's charter. These

documents, including documents

reflecting changes in the wake of

the WalMex Investigation, will bear

on director and officer knowledge of

the investigation, and thus liability.

Indeed, Wal–Mart's privilege log

confirms that responsive documents

exist from September 2005 through at

least May 2012.

The Court of Chancery agreed with IBEW's argument and

found that it was supported by the record. We agree.

Therefore, we hold that the Court of Chancery properly

exercised its discretion in setting the range of dates for

production.

Disaster Recovery Tapes for Two Custodians

[8] Wal–Mart argues that the Court of Chancery abused

its discretion and “committed legal error in requiring the

Company to collect and search the data from disaster recovery

tapes for two additional custodians, or to explain why such

collection would not be feasible.” Some of the events relating

to the WalMex Investigation occurred over seven years

ago. The record reflects that Wal–Mart voluntarily collected

disaster tape recovery data for nine custodians but not for the

two custodians at issue.

IBEW argues that by collecting backup data for nine

custodians, Wal–Mart implicitly recognizes that it may be

a source of responsive documents. The Final Order requires

Wal–Mart to search this data for two additional custodians

or, “[i]f it is not feasible ... provide a detailed explanation for

this inability to collect [the] data.” 22 The record reflects that

the Court of Chancery properly exercised its discretion with

regard to the production of disaster recovery tapes for the two

additional custodians.


General Counsel Documents

[9] Wal–Mart contends that the Court of Chancery

committed legal error by ordering the production of

documents “known to exist by ... the Office of the General

Counsel of Wal–Mart.” 23 According to Wal–Mart, the

requirement that Wal–Mart produce documents “known to

exist by” that undefined and unidentified “Office” is vague

and ambiguous. In addition, *1275 Wal–Mart submits “this

type of sweeping, indiscriminate production order flies in the

face of Section 220's mandate that the Court of Chancery

narrowly circumscribe Section 220 relief to serve only the

plaintiff's stated purpose.” Accordingly, Wal–Mart asserts

that the Court of Chancery's Final Order, with respect

to the Office of the General Counsel, lacks the requisite

“precision.” 24

23 Final Order at *3.

24 See Espinoza v. Hewlett–Packard Co., 32 A.3d 365, 372

(Del.2011); Sec. First Corp. v. U.S. Die Casting and Dev.

Co., 687 A.2d 563, 570 (Del.1997).

The record reflects that Wal–Mart's proposed order stated,

“Defendant shall produce or log on its privilege log 1) all

Relevant Data of the Identified Sources and 2) all Relevant

Data of which its Litigation Counsel or its in-house counsel

charged with responding to the Demand are aware, regardless

of how such Relevant Data was identified.” 25 The term

“Office of the General Counsel” in the Final Order replaced

the “in-house counsel” term used by Wal–Mart in its proposed

order. Wal–Mart contends the term “the Office of the General

Counsel” is ambiguous.


In Saito, this Court affirmed the Court of Chancery's

use of descriptive terminology, such as “representatives,”

“management,” “employees,” and “advisors.” 26 Therefore,

the Court of Chancery did not abuse its discretion by ordering

the descriptive production of responsive documents “known

to exist by ... the Office of the General Counsel....” The

appropriate forum for relief from an allegedly ambiguous

term is in the Court of Chancery by filing a motion for

clarification. 27

26 See Saito v. McKesson HBOC, Inc., 806 A.2d 113

(Del.2002).



27 See, e.g., New Castle County v. Pike Creek Recreational

Services, LLC, 2013 WL 6904387, at *2 (Del.Ch. Dec.

30, 2013) (“A motion for clarification may be granted

where the meaning of what the Court has written

is unclear.”); Naughty Monkey LLC v. MarineMax

Northeast LLC, 2011 WL 684626, at *1 (Del.Ch. Feb.

17, 2011) (same).

Garner Doctrine Adopted

In this appeal, Wal–Mart raises two arguments regarding

the Garner doctrine that it did not present to the Court of

Chancery. First, Wal–Mart submits that the Garner doctrine

has never been adopted by this Court and therefore the

availability of the Garner doctrine to litigants in Delaware

is an open question. Second, Wal–Mart contends that,

regardless of whether the Garner doctrine is generally

available to litigants in a plenary proceeding, the doctrine

should not be available to stockholders in the context of

Section 220 litigation.

[10] [11] These two arguments are new to this litigation,

neither having been presented to the Court of Chancery.

Below, Wal–Mart argued only that IBEW had not shown

“good cause” as required by the factors set forth in the Garner

decision. 28 Although Wal–Mart failed to preserve either

of its Garner arguments for appeal, “when the interests of

justice so require, [this] Court may consider and determine

any question not” presented to the trial court. 29 We have

determined that the interests of justice require this Court to

consider both of Wal–Mart's Garner arguments.

28 See Appendix to Wal–Mart's Opening Br. at A332–40.

29 Supr. Ct. R. 8.

In Garner v. Wolfinbarger, 30 the Fifth Circuit Court of

Appeals recognized a fiduciary *1276 exception to the

attorney-client privilege when it held:

30 430 F.2d 1093 (5th Cir.1970).

The attorney-client privilege still has viability for the

corporate client. The corporation is not barred from

asserting it merely because those demanding information

enjoy the status of stockholders. But where the corporation

is in suit against its stockholders on charges of acting

inimically to stockholder interests, protection of those

interests as well as those of the corporation and of the

public require that the availability of the privilege be

subject to the right of the stockholders to show cause why

it should not be invoked in the particular instance. 31

31 Id. at 1103–04.

The Fifth Circuit then listed several factors that should be

considered when evaluating whether the plaintiff has met its

“good cause” burden. 32 Thus, the Garner holding allows

stockholders of a corporation to invade the corporation's

attorney-client privilege in order to prove fiduciary breaches

by those in control of the corporation upon showing good

cause.

32 The Fifth Circuit listed the following factors as relevant

to the good cause inquiry:

There are many indicia that may contribute

to a decision of presence or absence of good

cause, among them the number of shareholders

and the percentage of stock they represent; the

bona fides of the shareholders; the nature of the

shareholders' claim and whether it is obviously

colorable; the apparent necessity or desirability

of the shareholders having the information and

the availability of it from other sources; whether,

if the shareholders' claim is of wrongful action

by the corporation, it is of action criminal, or

illegal but not criminal, or of doubtful legality;

whether the communication is of advice concerning

the litigation itself; the extent to which the

communication is identified versus the extent to

which the shareholders are blindly fishing; the risk

of revelation of trade secrets or other information in

whose confidentiality the corporation has an interest

for independent reasons.

Id. at 1104.

The Court of Chancery relied on the fiduciary exception to

attorney-client privilege described in Garner to require the

production of certain documents by Wal–Mart. In the trial

transcript the Court of Chancery stated:

And under Garner, to me, it's a classic application of

Garner, because it's a situation where, you know, has there

been—I think the shareholders—and I take them—given

their role in the thing, I think they've got enough skin in the

game to qualify under Garner.

....

So for the documents for which attorney-client solely

has been sought, I'm ordering their production under

Garner. 33



33 Appendix to Wal–Mart's Opening Br. at A586–89.

Wal–Mart argues that the Court of Chancery erred in applying

the Garner doctrine because this Court has never endorsed

the doctrine in a plenary proceeding, much less in a summary

Section 220 proceeding. This Court has, on two occasions,

tacitly endorsed, in dicta, the Garner doctrine. Two decades

ago, in Zirn v. VLI Corp.,34 this Court acknowledged that

the attorney-client privilege “is not absolute and, if the legal

advice relates to a matter which becomes the subject of a

suit by a shareholder against the corporation, the invocation

of privilege may be restricted or denied entirely.” 35 Our

decision in Zirn specifically cited the Court of Chancery's

application of the Garner doctrine requiring *1277 “good

cause” for the disclosure of privileged communications and

explained that this Court “[did] not share the [Court of

Chancery's] conclusion that there was no showing of good

cause based on direct conflict of interest....”36 Nevertheless,

in Zirn, this Court did not ultimately rely on the Garner

doctrine in concluding that the privilege was waived through

partial disclosure. 37

34 621 A.2d 773 (Del.1993).

35 Id. at 781 (citing Valente v. Pepsico, Inc., 68 F.R.D. 361

(D.Del.1975)).

36 Id.

37 See id. at 781–82.

In the context of a Section 220 action in Espinoza v. Hewlett–

Packard Co., 38 this Court was presented with the question of

the applicability of the Garner doctrine, but did not reach that

issue. In Espinoza, we ultimately cited the plaintiff's failure

to show that the documents requested were “essential” to

his proper purpose as the reason for affirming the Court of

Chancery's ruling, rather than the applicability of Garner.

This Court explained: “The ‘essentiality’ inquiry should

logically precede any privilege or work product inquiry,

because the former inquiry is dispositive of a predicate

question—the scope of inspection relief to which a plaintiff

is entitled under § 220.” 39

38 32 A.3d 365 (Del.2011).

39 Id. at 374.

Thus, Garner still has not been explicitly adopted by this

Court in the context of either a plenary proceeding or a

Section 220 action. On at least three occasions, however, the

Court of Chancery has expressly adopted Garner as a valid

exception to attorney-client privilege in the context of Section

220 books and records actions. 40 Of particular relevance is

Grimes v. DSC Communications Corp., 41 where the Court

of Chancery relied on the Garner doctrine to compel the

production of documents in a Section 220 action, despite

“the different posture of [the] action from those in which

courts normally analyze whether to invoke the exception to

application of the attorney-client privilege.” 42 In Grimes,

the Court of Chancery explained why its use of Garner was

appropriate in the Section 220 demand context as follows:

40 See Khanna v. Covad Communications Group, Inc., 2004

WL 187274, at *7 (Del.Ch. Jan. 23, 2004) (discussing

Garner and Grimes for the various factors to consider

under the court's “good cause” analysis in a Section

220 action); Saito v. McKesson HBOC, Inc., 2002

WL 31657622, at *12–13 (Del.Ch. Nov. 13, 2002)

(applying the Garner factors for “good cause” in a

Section 220 books and records proceeding); Grimes v.

DSC Communications Corp., 724 A.2d 561, 568–69

(Del.Ch.1998) (same).

41 724 A.2d 561 (Del.Ch.1998).

42 Id. at 568.

In the present action, the plaintiff seeks access to DSC's

books and records in order to determine whether the board

wrongfully refused his demand, and if so to assist him in

meeting the particularized pleading requirements of Rule

23.1. Plaintiff is looking down the road to a demand-

refused case where the focus will be on whether or not

he can establish sufficient facts to overcome the decision

made by the Special Committee and the board of directors

in rejecting his demand. Thus, while as of yet no action has

been filed, the current posture of the case contemplates the

possible filing of a derivative suit sometime in the future.

Thus, it is appropriate to analyze whether the plaintiff has

demonstrated “good cause” under the factors set forth in

Garner. 43

43 Id. at 568–69.

In Grimes, the Court of Chancery then applied the

Garner factors and concluded *1278 that the plaintiff had

demonstrated “good cause” and was entitled to receive the

disputed documents as part of its Section 220 books and

records demand. 44 In summarizing its conclusion, the Court

of Chancery in Grimes noted, “[o]f particular import is the



fact that the documents sought are unavailable from any other

source while at the same time their production is integral to

the plaintiff's ability to assess whether the board wrongfully

refused his demand—the stated purpose of his Section 220

demand.” 45

44 Id. at 569.

45 Id.

The attorney-client privilege can be traced back to Roman

times and is the oldest privilege recognized by Anglo–

American jurisprudence. 46 Delaware courts have agreed

with the United States Supreme Court's characterization of

the attorney-client privilege as “critical” to “encourag [ing]

full and frank communication between attorneys and their

clients and thereby promot[ing] broader public interests in the

observance of law and administration of justice,” including

where the client is a corporation. 47 Accordingly, the Garner

doctrine fiduciary exception to the attorney-client privilege is

narrow, exacting, and intended to be very difficult to satisfy.

It achieves a proper balance between legitimate competing

interests.

46 See 8 John Henry Wigmore, Evidence in Trials at

Common Law § 2290 (McNaughton rev. ed. 1961); see

also Upjohn Co. v. United States, 449 U.S. 383, 389, 101

S.Ct. 677, 66 L.Ed.2d 584 (1981).

47 In re Lyle, 74 A.3d 654 (Del.2013) (Table); see also Zirn

v. VLI Corp., 621 A.2d 773, 781 (Del.1993) (quoting

Upjohn, 449 U.S. at 389, 101 S.Ct. 677); Moyer v. Moyer,

602 A.2d 68, 72 (Del.1992); Deutsch v. Cogan, 580 A.2d

100, 104 (Del.Ch.1990).

[12] [13] We hold that the Garner doctrine should be

applied in plenary stockholder/corporation proceedings. 48

We also hold that the Garner doctrine is applicable in a

Section 220 action. However, in a Section 220 proceeding,

the necessary and essential inquiry must precede any privilege

inquiry because the necessary and essential inquiry is

dispositive of the threshold question—the scope of document

production to which the plaintiff is entitled under Section

220. 49

48 See Garner v. Wolfinbarger, 430 F.2d 1093 (5th

Cir.1970).

49 Espinoza v. Hewlett–Packard Co., 32 A.3d 365, 374

(Del.2011).

Garner Doctrine Properly Applied

[14] Wal–Mart contends that the Court of Chancery erred in

holding that IBEW met its burden of showing the predicate

necessity of the privileged information sought. The record

reflects that IBEW's proper purposes sought information

regarding the handling of the WalMex Investigation, whether

a cover-up took place, and what details were shared with the

Wal–Mart Board. The Court of Chancery explained that the

documents IBEW sought under Garner “go to those issues”:

There is evidence in this record

of indications within Wal–Mart

itself by internal audit and legal

staff of Wal–Mart policies, to not

entrust investigations to the business

unit being investigated; indications

of concern about entrusting the

investigation to people within the

legal department at WalMex, who are

actually subjects of the investigation,

or should have been subjects;

indications when their reports came

back from WalMex that this wasn't

really a good-looking report, didn't

seem up to snuff, and yet *1279

nothing being done to remedy it. 50


After finding that the privileged documents were necessary

and essential to IBEW's proper purposes, the Court of

Chancery considered the panoply of factors set forth

in Garner in determining whether good cause existed

to order the privileged documents to be produced. The

Court of Chancery began by examining whether IBEW

had demonstrated a colorable claim against Wal–Mart and

whether the information was available via other means at this

point in the litigation. The Court of Chancery concluded that

a colorable claim existed based on “Wal–Mart's own public

statements about this [which] suggest that there were some

real concerns about what was going on in Mexico and whether

it was legal.” 51 As for the availability of the information

from other, non-privileged sources, the Court of Chancery

concluded:

51 Id.



[I]n a circumstance where judgments were made, which

appear to be at odds with Wal–Mart's own internal

documents in terms of how you go about things, about

avoiding going to the head of a business unit—as I said, this

is just not a situation where they did something internal.

....

There wasn't a way to do it without outside counsel that

doesn't involve having the business unit itself do the

investigation. I don't understand how you would probe

these decisions through other means.

....

[B]ut where there is a colorable basis that part of the

wrongdoing was in the way the investigation itself

was conducted, I think it's very difficult to find those

documents by other means. 52

52 Id. at A588–89.

Wal–Mart argues that the Court of Chancery “misconstrued

Garner's ‘necessity’ factor....” Wal–Mart asserts that the

Court of Chancery “merely found that [Plaintiff's] task would

be made ‘more difficult’ without the production of such

privileged documents.” Wal–Mart's support for this assertion

is one sentence where the Court of Chancery stated that,

“where there's a colorable basis that part of the wrongdoing

was in the way the investigation itself was conducted, I think

it's very difficult to find those documents by other means.”

However, the entire ruling reflects that the Court of Chancery

found IBEW demonstrated that the privileged information

sought was “necessary and essential” to one of its proper

purposes:

I'm going to start with what would ordinarily, I think, be ...

the more sensitive ruling, which is the documents which

are actually on the privilege log.

In my view, in terms of this 220 action ... whether these

are necessary to the plaintiff's purpose and not tangential

—that's how I read “necessary and essential.” Necessary

and essential, I think just emphasizes because they're

redundant. I mean, usually if something is necessary, I

suppose it's usually essential. But my sense is it's saying is

this the core stuff? Is this out there? 53

53 Id. at A582 (emphasis added).

Wal–Mart argues that the Court of Chancery “committed

legal error by expressly conflating” the Section 220 necessary

and essential standard and the Garner good cause standard.

In fact, however, the Court of Chancery properly first made

the predicate Section 220 *1280 finding that the privileged

information was necessary and essential before it then applied

the Garner doctrine and found that IBEW had demonstrated

good cause. This paradigm was exactly in accordance with

our holding in Espinoza.

Garner also directs a trial judge to analyze “whether the

communication is of advice concerning the litigation itself;

[and] the extent to which the communication is identified

versus the extent to which the shareholders are blindly

fishing.” 54 The Court of Chancery addressed these factors,

as follows:

54 Garner, 430 F.2d at 1104.

And I think the information is particularized. It's not just

a broad fishing expedition. There are specific documents.

And whether the communication is advice concerning the

litigation itself, no, this is not after those litigations. So I

don't think it's trying to get into anybody how to defend

against what the plaintiffs are doing. This is during the real-

time of Wal–Mart dealing with this thing. 55


With regard to the other Garner good cause factors,

the record reflects that disclosure of the material would

not risk the revelation of trade secrets (at least it has

not been argued by Wal–Mart); the allegations at issue

implicate criminal conduct under the FCPA; and IBEW is

a legitimate stockholder as a pension fund. Accordingly,

the record supports the Court of Chancery's conclusion that

the documentary information sought in the Demand should

be produced by Wal–Mart pursuant to the Garner fiduciary

exception to the attorney-client privilege.

Work–Product Documents

[15] Wal–Mart withheld certain documents based on the

work-product doctrine, to which the Court of Chancery

responded:

The work product documents fall out

the same way, because the core—you

know you have to have this heightened

need. Are they really important and

urgent to what you're trying to get at



and then the unavailability showing

as core to that. For the same reason

I mentioned with respect to Garner,

I believe the work product doctrine

documents also have to give way. 56

56 Id. at A590.

[16] Wal–Mart argues that the Court of Chancery committed

legal error by purportedly applying the Garner doctrine

to documents over which Wal–Mart invoked the work-

product doctrine. The Garner doctrine applies to information

protected by the attorney-client privilege, but not to work

product. 57 Instead, pursuant to Court of Chancery Rule

26(b)(3), a party may obtain access to non–opinion work

product “upon a showing that the party seeking discovery

has substantial need of the materials in the preparation of

the party's case and that the party is unable without undue

hardship to obtain the substantial equivalent of the materials

by other means.” 58

57 Saito v. McKesson HBOC, Inc., 2002 WL 31657622,

at *11 (Del.Ch. Oct. 25, 2002) (“this Court has held

that there is no Garner exception to the work product

privilege.”).

58 Ct. Ch. R. 26(b)(3).

Wal–Mart asserts that the Court of Chancery erroneously

applied Garner, rather than Court of Chancery Rule 26(b)(3),

to the work-product issue. A careful reading of the Garner

factors demonstrates that they overlap with the required

showing under the Rule 26(b)(3) *1281 work-product

doctrine. One factor under Garner is “the apparent necessity

or desirability of the shareholders having the information

and the availability of it from other sources.” 59 In fact, this

Court has utilized the Garner factors in the context of a

work-product analysis in the past. 60 When addressing the

defendant's work-product argument in Zirn v. VLI Corp., this

Court stated:

59 Garner, 430 F.2d at 1104.

60 See Zirn v. VLI Corp., 621 A.2d 773 (Del.1993).

[We] are satisfied that Zirn has demonstrated “good cause”

for production of documents prepared in anticipation of

the patent litigation. Of the factors set forth in Garner

v. Wolfinbarger, which support the requisite showing of

“good cause” that a shareholder must demonstrate to

overcome a corporation's claim of privilege, the following

appear present here. 61

61 Id. at 782.

The Court of Chancery in this case recognized this overlap

and utilized the same reasoning for its decision regarding the

work-product doctrine. In Grimes v. DSC Communications

Corp., 62 the Court of Chancery also discerned the overlap

in required showings and overruled a similar work-product

claim: “For the same reasons that the plaintiff has shown

‘good cause’ to overcome the claim of attorney-client

privilege, I conclude he has also shown a substantial

need for the information for purposes of the work-product

doctrine.” 63 In this case, the record reflects that the Court

of Chancery's work product ruling was properly and solely

based upon Rule 26(b)(3) and only referred to the privilege

rationale of Garner as overlapping with its own separate work

product analysis.

62 724 A.2d 561 (Del.Ch.1998).

63 Id. at 570.

Cross–Appeal

[17] IBEW's first argument in its cross-appeal is that

the Court of Chancery should have required Wal–Mart to

collect documents from additional custodians. The Court

of Chancery found that IBEW waived this argument by

not raising it in its opening post-trial brief in that court.

IBEW concedes its waiver 64 but asks this Court to consider

its arguments on the merits. We have concluded that such

consideration is not required “in the interests of justice.” 65

64 See, e.g., Emerald Partners v. Berlin, 2003 WL

21003437, at *43 (Del.Ch. Apr. 28, 2003), aff'd, 840

A.2d 641 (Del.2003) (citations omitted) (finding an

argument waived when it was not included in the party's

opening post-trial brief).

65 Supr. Ct. R. 8.

[18] IBEW's second argument in its cross-appeal challenges

the Court of Chancery's order requiring IBEW to return to

Wal–Mart certain privileged documents that were delivered

to IBEW's counsel by an anonymous source. The record

reflects that a number of documents included in the

anonymous mailing were publicly available on The New York



Times website and a congressional website. Approximately

three documents were not publicly available, including one

document IBEW wanted to use as evidence that Wal–

Mart conducted an inadequate search or previously failed to

disclose all relevant documents.

Wal–Mart moved to strike all of the Whistleblower

Documents, including those available to the public.

According to Wal–Mart, these materials were stolen from it

by a former employee and had been disseminated without

Wal–Mart's consent. *1282 Wal–Mart revealed the name of

the former employee it suspected of removing the documents.

It also stated that the former employee worked in the IT

department and that Wal–Mart had sought an order to

keep him from disseminating further information. Wal–Mart

sought the Court of Chancery's assistance in securing the

return of its stolen property from IBEW.

The Court of Chancery ruled that the privilege had been lost

by Wal–Mart as to certain Whistleblower Documents that had

been posted on websites maintained by The New York Times

and members of Congress. However, the Court of Chancery

applied a conversion theory and held that the remaining

Whistleblower Documents—that is, those that have not been

published by the media or elected representatives—remain

privileged and therefore must be returned to Wal–Mart. The

Court of Chancery determined that the anonymous nature of

the mailing was strong circumstantial evidence of conversion.

The Court of Chancery stated, “I'll tell you what's a really

strong evidence in favor of that it was unauthorized, is

that—did the person who sent it to you identify him or

herself?” 66 According to the Court of Chancery, even if the

“whistleblower” was in a position of authority, the fact that

he or she chose to remain anonymous indicated that they did

not have authority to disseminate the information.


The Court of Chancery ruled that IBEW had to return the

Whistleblower Documents that were not otherwise publicly

available. In arriving at its conclusion, the Court of Chancery

explained:

I look at it as if you have someone else's stuff and you

shouldn't have that, then you got to give it back. We're

not going to do that in a way where the entire world has

the stuff, but the entire world does not have these other

documents.

So I'm requiring those to be given back and I'm requiring

the references to those to be stricken. I don't believe that the

—the defendants—I mean, the company waived anything

by proceeding in the way it did.

....

Now, it might be a momentary return in a sense that that

is certainly without prejudice to any argument in the—

on the merits that there are responsive documents that the

company didn't produce. 67

67 Id. at A479–80.

The record reflects that the Court of Chancery properly

discharged its equitable discretion in crafting a remedy

for Wal–Mart, while still leaving an avenue for IBEW to

ultimately obtain the returned Whistleblower Documents.

The Court of Chancery's ruling was made without prejudice

and allowed IBEW to address the returned Whistleblower

Documents “on the merits that there are responsive

documents that the company didn't produce.” Thus, IBEW

may still be entitled to the Whistleblower Documents it has

been ordered to return if those documents should have been

otherwise disclosed by Wal–Mart within the scope of the

information already ordered to be produced by the Court of

Chancery.

Scope of Relief

The Court of Chancery carefully assessed the scope of

documents that should have been made available to IBEW.

During the colloquy with the parties, the Court of Chancery

addressed the number of custodians, the chain of corporate

communications, the internal investigation policy, the issue

of duplication of documents coming from different sources,

and the 30(b)(6) *1283 depositions, among other issues. The

record supports the Court of Chancery's conclusion that the

documents it ordered to be produced satisfied the necessary

and essential standard in the context of this Section 220 case.

The Court of Chancery's ruling is consistent with Saito

v. McKesson HBOC, Inc., 68 in which this Court held

that, upon meeting the requirements of Section 220, the

stockholder “should be given access to all of the documents

in the corporation's possession, custody or control, that

are necessary to satisfy that proper purpose.” 69 “[W]here

a [Section] 220 claim is based on alleged corporate



wrongdoing, and assuming the allegation is meritorious,

the stockholder should be given enough information to

effectively address the problem....” 70 Whether or not a

particular document is essential to a given inspection

purpose is fact specific and will necessarily depend on

the context in which the stockholder's inspection demand

arises. In determining that “scope of relief,” our courts

must circumscribe orders granting inspection “with rifled

precision.” 71

68 806 A.2d 113 (Del.2002).

69 Id. at 115.

70 Id.

71 Id. at 117 n. 10 (citing Brehm v. Eisner, 746 A.2d 244,

266–67 (Del.2000)) (emphasis added).

Wal–Mart contends that the Final Order was not

circumscribed “with rifled precision.” However, “rifled

precision” also requires a fact specific inquiry and can

only be determined in the context of a specific case. The

term “rifled precision” requires the Court of Chancery to

make a qualitative analysis of documents demanded. “Rifled

precision” is not a quantitative limitation on the stockholder's

right to obtain all documents that are necessary and essential

to a proper purpose. 72 In this case, the Court of Chancery

understood that “rifled precision” is a qualitative standard

and must be applied contextually: “you have to—you actually

have to interpret it sensibly and contextually. And in a

situation like this, it's not like you're talking about a board

minute or two.” 73

72 See Saito, 806 A.2d 113.


Wal–Mart argues that “[t]he scope of production ordered by

the Chancery Court is unprecedented....” In fact, however,

following this Court's remand in Saito, the Court of Chancery

entered an implementing order substantially broader in scope

than the Final Order entered in this case. 74 In Saito,

the defendant-corporation appealed the implementing order,

and this Court affirmed, holding that the order “was an

appropriate implementation of the [stockholder's] entitlement

to discovery established under this Court's decision in Saito v.

McKesson, HBOC, 806 A.2d 113 (Del.2002),” and involved

“no abuse of discretion.” 75 Comparing the order entered

in Saito and specifically approved by this Court with the

significantly more limited scope of the Final Order entered

here, we hold that the Final Order constituted an appropriate

exercise of discretion.

74 Compare Saito v. McKesson HBOC, Inc., C.A. No.

18553 (Del. Ch. Sep. 20, 2002) (ORDER), with the Final

Order.

75 McKesson Corp. v. Saito, 818 A.2d 970 (Del.2003)

(Table).

Conclusion

For the reasons set forth in this Opinion, the judgment of the

Court of Chancery is AFFIRMED.


U.S. v. LeCroy, 348 F.Supp.2d 375 (2004)


Synopsis

Background: Defendants were indicted with wire fraud

for allegedly soliciting and obtaining a false invoice for

legal services and presenting it to their employer. A hearing

was held to determine whether certain evidence obtained in

grand jury investigation was protected by the attorney-client

privilege and/or a joint defense agreement.

[Holding:] The District Court, Baylson, J., held

that defendants knowingly and intelligently agreed to

modification of joint defense agreement with respect to

employer's interview notes.

Ordered accordingly.

West Headnotes (7)


Confidentiality

Presumptions and Burden of Proof

Person claiming joint defense privilege has

burden of demonstrating existence of joint

defense agreement.



Confidentiality

Common Interest Doctrine; Joint Clients or

Joint Defense

A party seeking to assert the “joint defense

privilege” must demonstrate that: (1) the

communications were made in the course of a

joint defense effort; (2) the statements were made

in furtherance of that effort; and (3) the privilege

has not been waived.



Confidentiality


Joint Defense


Confidentiality

Waiver of Privilege

In the absence of a joint defense agreement, when

the party asserting the joint defense privilege

is a corporate officer, the individual corporate

officer's assertion of attorney-client privilege

cannot prevent the disclosure of corporate

communications with corporate counsel when

the corporation's privilege has been waived.



Confidentiality


Joint Defense

Person need not be litigant to be party to

joint defense agreement, and protected by joint

defense privilege.



Confidentiality


Joint Defense


Confidentiality

Confidential Character of Communications

or Advice

Even in the context of joint defense agreements,

in order for privilege to attach to a

communication, the party asserting the privilege

bears the burden of demonstrating that the



communication was given in confidence and that

the client reasonably understood it to be so given.



Confidentiality

Waiver of Privilege

When a party discloses a portion of otherwise

privileged material but withholds the remainder,

the privilege is waived only as to those

communications actually disclosed, unless a

partial waiver would be unfair to the party's

adversary.


[7] Grand Jury

Privilege

Defendants knowingly and intelligently agreed

to modification of joint defense agreement

entered into by defendants and their employer,

stemming from grand jury investigation into an

alleged wire fraud scheme, and thus defendants

waived the protections of the joint defense

agreement as to those interview notes taken by

employer's counsel following the modification

of the agreement, where, prior to the interviews,

employer insisted on its right to turn over the

notes of its interviews with defendants to the

government, and defendants, with their counsel's

advice, agreed to be interviewed by employer's

counsel.



*376 Michael A. Schwartz, Richard J. Zack, Robert A.

Zauzmer, Joan L. Markman, William B. Carr, Jr., United

States Attorney's Office, Philadelphia, PA, for Plaintiff.

Catherine M. Recker, Lisa A. Mathewson, Welsh & Recker,

P.C., Thomas H. Suddath, Jr., Lathrop B. Nelson, III,

Montgomery, McCracken, Walker and Rhoads, L.L.P.,

Philadelphia, PA, for Defendants.

MEMORANDUM

BAYLSON, District Judge.

Defendants Charles LeCroy and Anthony C. Snell are

charged in Counts 26 and 27 of this indictment with wire

fraud under 18 U.S.C. §§ 1343 and 2, for allegedly soliciting

and obtaining from Philadelphia attorney Ronald White

(originally a named co-defendant in this case but now

deceased) a false $50,000 invoice presented to J.P. Morgan

Chase (“JPMC”) for legal services purportedly performed by

White's law firm.

The issue presented is whether this Court should preclude

the government from using certain notes and memoranda it

has in its possession, which were taken by JPMC counsel

during interviews held with JPMC employees LeCroy and

Snell by JPMC counsel, or whether these notes and interviews

are protected by either the attorney-client privilege and/or a

joint defense agreement entered into by counsel for LeCroy,

Snell and JPMC.

I. Procedural History

During the grand jury investigation which preceded the return

of the indictment *377 in this case on June 29, 2004,

JPMC, as well as Defendants LeCroy and Snell, received

grand jury subpoenas. As set forth in further detail below,

JPMC's internal counsel questioned LeCroy and Snell about

their knowledge of the facts underlying the grand jury

subpoena, recognized their need for individual counsel, and

JPMC itself retained outside counsel in Philadelphia. LeCroy

and Snell were then given recommendations for lawyers

and retained their own individual counsel. A Joint Defense

Agreement arose, and during the discussions among counsel

for JPMC, LeCroy and Snell, JPMC counsel indicated a

desire to interview LeCroy and Snell at various times. As

the government had requested, JPMC subsequently decided

that it would produce, pursuant to its grand jury subpoena,

the notes and/or memoranda of the meetings between JPMC

counsel and LeCroy and Snell.

Following the return of the indictment, LeCroy and Snell

asserted claims of privilege with respect to notes and

memoranda of interviews created by counsel for JPMC.

The government designated two attorneys who were not

connected with the prosecution of the indictment to maintain

custody and control of these notes and memoranda, and



constructed a “Chinese wall” between the government

attorneys who were the prosecutors on the indictment, and the

government attorneys designated to represent the government

in connection with the claims of privilege by LeCroy and

Snell, pursuant to a similarly suggested procedure in United

States v. Weissman, 22 F.Supp.2d 187 (S.D.N.Y.1998), aff'd,

195 F.3d 96 (2d Cir.1999).

On August 17, 2004, the government filed a motion

for a hearing to resolve claims of privilege; following

briefs, a hearing was held on September 29, 2004.

Although most of the testimony was taken in open court,

certain testimony relating to the substantive communications

between Defendants and their own personal counsel, and

with JPMC counsel, was taken in camera and sealed, along

with the exhibits used at the closed portion of the hearing.

The parties filed extensive (and excellent) briefs on the

issues and further argument was held on December 13, 2004,

following which certain notes and memoranda were held

protected by the claims of privilege, but certain other notes

and memoranda were not, with a brief statement of reasons.

See Tr. of 12/13/04 at pp. 31–35. An Order was filed, Docket

No. 282. 1

1 This Memorandum Opinion is being filed because

Defendants Snell and LeCroy have filed a notice of

appeal from the Court's Order. The Court advised

defense counsel at the hearing that if they sought a stay

of the Order or of the trial itself, they could represent

that the stay had been denied. The trial of LeCroy, Snell

and a third Defendant, Carlson, is scheduled to begin on

January 18, 2005. Also, on December 13, 2004, LeCroy

and Snell filed a separate motion for continuance of the

trial, asserting that some delay in discovery from the

government warranted a continuance. The Court held

a hearing on this motion on December 16, 2004 and

ordered the government to expedite its production of

certain documents.

For the reasons extensively stated in the Court's prior

Opinion of December 2, 2004, and at the hearing on

December 16, 2004, the Court believes that defense

counsel have had adequate time to prepare for trial

and that the trial start date of January 18, 2005 is,

under all circumstances, fair and will not deprive

any LeCroy and Snell of a fair trial. As to the

documents as to which this Court has now rejected

the privilege claims of LeCroy and Snell, it must be

noted that their use at trial is, at this point, entirely

hypothetical and theoretical, if only because the

government prosecutors have not seen the documents.

It is unknown whether they will be used at all, and

if so, whether they would be used as admissions

during the government's case in chief, or only for

impeachment. If it is the latter, that would not be

known until and unless either Defendant testified, and

if he testified, whether his testimony was inconsistent

with the statements he had made to JPMC counsel in

January or March 2004.

*378 II. Factual Background

At issue are seven different categories of notes and/

or documents, identified as being in the government's

possession, received from JPMC counsel as follows:

A. Scott Campbell's notes of discussions with Snell, dated

10/20/03, 10/21/03, 10/27/03, 10/29/03.

B. Scott Campbell's notes of discussions with LeCroy,

dated 10/20/03, 10/27/03, 10/29/03, 12/11/03.

C. Dodds' notes of his 10/27/03 discussions with Snell and

LeCroy.

D. April 19, 2004 memorandum regarding January 7, 2004

interview of Snell.

E. April 19, 2004 memorandum regarding January 14,

2004 interview of LeCroy.

F. April 19, 2004 memorandum regarding March 4, 2004

interview of Snell.

G. April 19, 2004 memorandum regarding March 4, 2004

interview of LeCroy.

Defendant Snell was served with a grand jury subpoena at

his JPMC office in Atlanta, GA on or about October 17,

2003, and promptly advised Scott Campbell, JPMC's Senior

Vice President and Associate General Counsel. Campbell was

aware that JPMC itself had received a grand jury subpoena at

or about the same time. Campbell had discussions with Snell

and his supervisor, LeCroy, on October 20, 2003. At that time,

the Court finds Snell and LeCroy were speaking to Campbell

in their capacity as JPMC employees. Campbell was acting

as JPMC counsel, and there were no discussions about either

Snell or LeCroy having individual counsel. The discussions

were preliminary and purely exploratory.

As a result of further discussions with Snell on the following

day, October 21, 2003, and with both Snell and LeCroy on

October 27, 2003, JPMC recognized the need for both of these

individuals to have individual counsel and so advised them of

this fact. At this time JPMC itself retained outside counsel,



Jack Dodds, Esquire, a Philadelphia lawyer with experience

as both a prosecutor and a defense counsel. Up to and

including October 27, 2003, Snell and LeCroy did not seek

personal legal advice from Campbell; they had no expectation

of getting personal legal advice from Campbell and they did

not ask for it. JPMC made recommendations to LeCroy and

Snell of certain Philadelphia attorneys to represent them in

connection with the grand jury investigation. As previously

established in another proceeding in this case, JPMC agreed

to pay the legal fees of Snell and LeCroy, and the Court

has previously determined that those arrangements did not

present any conflict of interest issue. (See Tr. of 8/6/04).

Snell retained his counsel, Thomas H. Suddath, Jr., Esquire

on or about October 30, 2003 (Tr. p. 41). 2 LeCroy retained

his counsel, Catherine M. Recker, Esquire, in the time period

of November 10–13, 2003. 3 Both Suddath and Recker

are Philadelphia *379 lawyers experienced in grand jury

investigations.

2 References to the record refer to the pages of the

transcript of the hearing in open court held on September

29, 2004. Certain testimony was taken from the

individual defendants and their counsel in camera, as

it pertained to specific attorney-client communications,

and that in camera testimony will be referred to

separately.

3 The slight delay in the retention of counsel for LeCroy

occurred because another attorney, whose name had

been given to LeCroy, was unable to accept that

representation.

The Court finds that JPMC intended to form a Joint Defense

Agreement (“JDA”) prior to LeCroy and Snell retaining

personal counsel. Campbell's handwritten notes for the

meeting of October 27, 2003, state “we will work going

forward on a joint defense basis.” See Exhibit A to LeCroy's

response and in camera transcript, p. 72. Campbell testified

that at the October 27 meeting he informed LeCroy and

Snell that he was speaking to them in his capacity as counsel

for JPMC and that he was going to “recommend counsel

to represent their personal interests.” (Tr. p. 41) As soon

as Suddath and Recker were retained, they confirmed the

existence of the JDA with Dodds.

The government does not dispute the existence of a JDA in

this case. The JDA was verbal, and although its terms were

never specifically articulated, Recker accurately described

her understanding of the JDA as follows:

The joint defense arrangement,

primarily the focus is twofold. One,

that the lawyers are able to investigate

facts and share the results of

their investigation with each other,

keeping everything under the cloak

of privilege. The second important

part in the understanding of a joint

defense arrangement is that none of

that information that has been shared

pursuant to the privilege can be

disclosed to a third party without the

consult—consent of all the parties

involved.

(Tr. p. 12).

Suddath testified that he had a similar understanding of the

JDA (Tr. p. 44). From these facts, the Court concluded that

the discussions which took place between JPMC counsel and

LeCroy and Snell after October 27, 2003, specifically on

October 29, 2003 as to both, and on December 11, 2003 with

LeCroy, are protected by the JDA. During these meetings,

both LeCroy and Snell had reason to believe that their

discussions with either their own counsel or JPMC counsel

were protected from disclosure.

Recker testified that her understanding of the contents of the

JDA, when entered into with Dodds, had a basis in a prior

matter in 2000, in which they had been participants in a

written JDA entered into with respect to their representation

of separate clients in a different government investigation.

See Exhibit marked LeCroy 1 at the hearing. 4 This

“template” for the present JDA is significant because it

explicitly contains two provisions that would allow one party

to unilaterally, but only prospectively, withdraw from the

JDA, as follows:

4 Although all of the exhibits at the hearing were

impounded, this document can be released because all of

the names of the clients involved have been redacted.

9. In the event any undersigned counsel determines

that his or her client no longer has, or will no longer

have, a mutuality of interest in a joint defense, such

counsel will promptly notify the other undersigned counsel

of his or her withdrawal from this Agreement, which

will thereupon be terminated as to that client; provided,



however, that such termination shall not affect or impair

the obligations of confidentiality with respect to Defense

Materials previously furnished pursuant to this Agreement.

11. Should any client desire to withdraw from this

Agreement, his or her counsel shall provide prior written

notice to the other undersigned counsel, in which case

this Agreement shall no longer be operative as to the

withdrawing client and his or her counsel, but shall

continue to protect all Defense Materials disclosed to

the withdrawing client and *380 his or her counsel

prior to such withdrawal. The withdrawing client and

his or her counsel shall promptly return all written

Defense Materials and shall continue to be bound

by the obligations of confidentiality with respect to

Defense Materials previously furnished pursuant to this

Agreement.

The present dispute graphically arose in discussions between

Recker and Suddath, representing their individual clients, and

Dodds, representing JPMC, in January 2004. JPMC counsel

wanted to interview both LeCroy and Snell again. Dodds,

outside counsel for JPMC, notified Recker and Suddath that

government counsel advised JPMC that it was interested in

seeing the notes of JPMC counsel's interviews with LeCroy

and Snell. Dodds informed Recker and Suddath that JPMC

would turn the notes over to the government if it insisted.

(Tr. pp. 84–86). On January 7, 2004, Suddath testified he

spoke with Campbell and Dodds about the government's

interest in seeing the notes, and that he advised JPMC counsel

that JPMC could not turn the notes over because it would

violate the JDA (Tr. p. 51–52). Snell also understood JPMC's

position. (Tr. in camera p. 67–68). Despite the disagreement,

Snell was interviewed by Campbell and Dodds on January 7,

2004.

Recker testified that she had a similar conversation with

Dodds on January 13, 2004 (Tr. p. 20) and that Dodds

advised her that although JPMC counsel would resist such

requests for production, JPMC “would waive the privilege

if the government pushed, and [Recker] disagreed that he

had the ability to do that.” (Tr. p. 21). Recker advised

LeCroy of JPMC's position. (Tr. in camera p. 9). Despite her

disagreement with Dodds, Recker and her client LeCroy went

to New York City where JPMC counsel interviewed LeCroy

on January 14, 2004.

W hen Recker was advised by Dodds that JPMC was reserving

its right to turn over the notes, she believed that under the

relevant case law, JPMC could not do so. She testified as

follows:

A party [to the JDA] couldn't do so.

They would not be able to do so

pursuant to the terms of the agreement,

or under the case law, or under the

ethics rules unless they received the

written consent of all the parties to the

agreement.

(Tr. p. 18). Suddath testified similarly (Tr. p. 48).

The testimony is undisputed that Dodds, on behalf of JPMC,

was consistent and insistent to both Suddath and Recker that if

the government pushed, JPMC would turn over the interview

notes taken by JPMC counsel, to the government. Despite

this clear warning, LeCroy and Snell went to New York

on separate dates in January 2004 and were interviewed by

JPMC counsel with their own counsel present. 5

5 The facts related by the various counsel who testified at

the hearing on September 29, 2004 on this matter were

essentially consistent. There was a slight variation in the

recollections of Recker and Dodds as to their telephone

call, which took place on approximately January 13,

2004, just prior to the New York City meeting on January

14, 2004. Recker had a clear recollection that she told

Dodds that JPMC had no legal authority to turn over

the notes of its counsel (Tr. p. 38–39); Dodds did not

deny that she said that, but could not recall it (Tr. p. 86).

The Court will give Recker's distinct recollection full

credibility in assessing the issue, but under the Court's

analysis, the dispute is not material.

The March 4, 2004 interviews of Snell and LeCroy were

taken without their individual counsel present, and they did

not know that the meeting was going to occur.

*381 III. Legal Principles of a Joint Defense Agreement

Although the Third Circuit has not specifically ruled on

the applicability of a joint defense agreement in any

similar factual situation, it has described a joint defense

agreement. 6 See Matter of Bevill, Bresler & Schulman

Asset Management Corp., 805 F.2d 120, 126 (3d Cir.1986)

(holding under the facts of that case, no joint defense

privilege was established, but stating that the joint defense

privilege protects communications between an individual

and an attorney for another when the communications are

part “of an ongoing and joint effort to set up a common

defense strategy” (quoting Eisenberg v. Gagnon, 766 F.2d

770, 787 (3d Cir.1985)), and noting that “communications to



an attorney who established a common defense strategy are

privileged even though the attorney represents another client

with some adverse interests.”).

6See generally PAUL S. DIAMOND, FEDERAL

GRAND JURY PRACTICE AND PROCEDURE §

7.02(B) (4th ed.2001).

[1] [2] [ 3] “Because the privilege sometimes may apply

outside the context of actual litigation, what the parties call

a ‘joint defense’ privilege is more aptly termed the ‘common

interest’ rule.” In re Grand Jury Subpoena, A. Nameless

Lawyer, 274 F.3d 563, 572 (1st Cir.2001). The burden of

demonstrating the existence of a joint defense agreement falls

on the person claiming it. United States v. Weissman, 195 F.3d

96 (2d Cir.1999). A party seeking to assert the joint defense

privilege must demonstrate that: 1) the communications

were made in the course of a joint defense effort; 2) the

statements were made in furtherance of that effort; and 3)

the privilege has not been waived. Bevill, 805 F.2d at 126.

Likewise, the party asserting privilege, both in the context of

joint defense agreements and otherwise, bears the burden of

proving the applicability of the privilege. Id. (citing Grand

Jury Empanelled February 14, 1978, 603 F.2d 469, 474 (3d

Cir.1979)). In the absence of a JDA, when the party asserting

privilege is a corporate officer, the individual corporate

officer's assertion of attorney-client privilege cannot prevent

the disclosure of corporate communications with corporate

counsel when the corporation's privilege has been waived.

Bevill, 805 F.2d at 124–25. See also Nameless Lawyer,

274 F.3d at 573 (holding that in the absence of a JDA,

“a corporation may unilaterally waive the attorney-client

privilege with respect to any communications made by a

corporate officer in his corporate capacity, notwithstanding

the existence of an individual attorney-client relationship

between him and the corporation's counsel”).

[4] Although “privileges should be narrowly construed and

expansions cautiously extended,” Weissman, 195 F.3d at 100,

courts have found that an oral joint defense agreement may

be valid. See Nameless Lawyer, 274 F.3d at 569–70. A

person need not be a litigant to be a party to a joint defense

agreement. See Russell v. General Electric, 149 F.R.D. 578

(N.D.Ill.1993) (noting that the joint defense privilege applies

to parties or potential parties sharing a common interest in the

outcome of a particular claim).

[ 5] It is axiomatic that in order for a communication to be

privileged that communication must be made in confidence.

See Grand Jury Empanelled February 14, 1978, 603 F.2d

469, 474 (3d Cir.1979) (specifying that a communication

be “made in confidence” as one of the eight elements for

assertion of the privilege). Even in the *382 context of

joint defense agreements, in order for privilege to attach to

a communication, the party asserting the privilege bears the

burden of demonstrating that “the communication was given

in confidence and that the client reasonably understood it to

be so given.” United States v. Schwimmer, 892 F.2d 237, 244

(2d Cir.1989) (emphasis added). 7 Additionally, the burden is

on the party asserting a joint defense privilege to demonstrate

that the clients reasonably believed that their statements

were being made within the context and in furtherance of

their joint defense. Higgins v. Eichler, 1997 W L 325779,

*1 (E.D.Pa.1997) (citing In re Grand Jury Subpoena Duces

Tecum, 406 F.Supp. 381, 389 (S.D.N.Y.1975)).

7 In an analogous situation, the Eleventh Circuit recently

addressed the effect of a joint defense agreement in the

criminal context, where one defendant cooperated with

the government after the joint defense agreement had

been entered into. In that case, the court held that when

communications are made by one defendant to another

defendant's attorney, “such communications do not get

the benefit of the attorney-client privilege in the event

that the co-defendant decides to testify on behalf of the

government ...” United States v. Almeida, 341 F.3d 1318,

1326 (11th Cir.2003).

IV. Application of Legal Principles to the Facts of this

Case

As agreed at the hearing on December 13, 2004, no reported

decision on a JDA appears to address or even come close

to the facts presented in this case. Therefore, the Court

must apply the basic principles surrounding attorney-client

privilege and joint defense privilege in coming to a decision.

A JDA is not an escape-proof prison. Indeed, public policy

mandates that a participant in a JDA must be free to withdraw

from it, unilaterally, but the withdrawal or waiver must be

prospective only—and the duty of the Court in the present

dispute is to determine whether there was such a withdrawal

or waiver, and if so, precisely what notes and memoranda the

government is entitled to retain and use at trial, and which

notes and memoranda are protected by the JDA that was in

existence.

A JDA without the right of prospective withdrawal would be

void, if only because it would prevent one party to the JDA

determining, as JPMC did in this case, that its own interests



required it to cooperate with the government, rather than

cooperate exclusively with its employees and their counsel.

A participant in a JDA may also decide that it wants to

“go it alone” and that doing so outweighs the benefits of

continuing in the JDA. One party may decide that he, she or

it wants to plead guilty to the charges that appear inevitable

and that continuance in the JDA would deprive that party of

the benefits which would come from negotiating an early plea

agreement with the government.

As the Court indicated at the hearing, there are elements of

withdrawal, modification and waiver involved in applying the

legal principles to the facts.

A. Waiver

[6] As to the issue of waiver of the attorney-client privilege,

there is no waiver of the individual privilege between LeCroy

and his counsel, and Snell and his counsel. The only issue

of waiver relates to certain protections of the JDA. The

leading case in the Third Circuit on waiver of privilege

is Westinghouse v. Republic of the Philippines, 951 F.2d

1414, 1423 (3d Cir.1991), holding that voluntary disclosure

to a third party of purportedly privileged communications

has long been considered inconsistent with the privilege.

It is well settled that when a party voluntarily discloses

privileged communications to a third party, *383 the

privilege is waived. Id. at 1424. Similarly, when a party

discloses a portion of otherwise privileged material but

withholds the remainder, the privilege is waived only as

to those communications actually disclosed, unless a partial

waiver would be unfair to the party's adversary. Id. at 1426.

Disclosure alone, without intent, may constitute waiver of

the attorney-client privilege. Id. at 1427. The Westinghouse

court indicated that “under traditional waiver doctrine a

voluntary disclosure ... to a third party waives the attorney-

client privilege even if the third party agrees not to disclose

the communications to anyone else.” Id. (citing United

States v. Rockwell International, 897 F.2d 1255, 1265 (3d

Cir.1990)) (“The attorney-client privilege does not apply to

communications that are intended to be disclosed to third

parties or that in fact are so disclosed.”).

Defendants rely on In re Grand Jury Subpoenas (89–3 and

89–4), 902 F.2d 244, 248 (4th Cir.1990), for the proposition

that the joint defense privilege cannot be waived without

the consent of all the parties to the joint defense agreement.

That case involved a dispute between a parent company

and its wholly owned subsidiary—both of whom had been

summoned before a grand jury—regarding the production of

records. The Fourth Circuit held that the subsidiary could not

unilaterally waive a joint defense privilege, and that the joint

defense privilege may attach irrespective of whether an action

is criminal or civil, and regardless of whether an action is

ongoing or contemplated. Id. at 249.

The First Circuit recently made the following observation:

“[T]he existence of a joint defense agreement does not

increase the number of parties whose consent is needed

to waive the attorney-client privilege; it merely prevents

disclosure of a communication made in the course of

preparing a joint defense by the third party to whom it was

made.” Nameless Lawyer, 274 F.3d at 572–73.

Applying these waiver principles to the present case, the

Court finds that LeCroy and Snell waived some protections

of the JDA by proceeding with the interviews with JPMC

counsel in January 2004 and March 2004. Specifically, they

voluntarily and knowingly waived the protection of the JDA

to the extent that JPMC would be allowed to turn over the

notes of those interviews to the government.

B. Withdrawal

Concerning the theory of withdrawal, neither the Court nor

counsel have been able to find a case in which a court has

specifically articulated a theory of withdrawal from a JDA.

However, as the “template” agreement that Recker and Dodds

had entered into in a prior case demonstrates, it is clearly

contemplated by the parties to a JDA that one party could

withdraw prospectively. Similarly, as the Court has noted

above, any prohibition on withdrawal would be decidedly

contrary to the public interest. There are some cases where

courts have discussed the necessity of one party being able to

withdraw from a JDA on a prospective basis.

In United States v. Stepney, 246 F.Supp.2d 1069, 1086

(N.D.Cal.2003), the court required that each joint defense

agreement entered into by the defendants “must explicitly

allow withdrawal upon notice to the other defendants.” The

court in Stepney elaborated on the risks inherent in a joint

defense arrangement and emphasized that the protections

afforded therein are not identical to the protections generally

enjoyed under the attorney-client privilege:

*384 Although a limitation on

confidentiality between a defendant

and his own attorney would pose a

severe threat to the true attorney-client

relationship, making each defendant



somewhat more guarded about the

disclosures he makes to the joint

defense effort does not significantly

intrude on the function of joint

defense agreements.... Co-defendants

may eliminate inconsistent defenses

without the same degree of disclosure

that would be required for an attorney

to adequately represent her client.

Id.

In United States v. Salvagno, 306 F.Supp.2d 258

(N.D.N.Y.2004), a co-defendant agreed to cooperate with the

government subsequent to entering into a JDA with another

co-defendant. The JDA expressly permitted withdrawal and

the court allowed the withdrawing defendant to disclose only

“information he learned prior to the beginning or independent

of the joint defense effort.” Id. at 273. The court further relied

on the averments by counsel for the withdrawing defendant

that “he and the government took affirmative steps to ensure

that information provided to the government ... did not violate

the joint defense arrangement.” Id. at 274.

C. Modification

As to modification, there can be no dispute that parties to

an agreement have the right to modify it. While one party

to a contract cannot modify its terms without the assent of

the other parties, the fact of agreement as to a modification

may be implied from a course of conduct in accordance

with its existence. 17A C.J.S. Contracts § 410. See also

International Business Lists, Inc. v. AT & T, 147 F.3d 636, 641

(7th Cir.1998) (“A contract is validly modified if the party

which did not propose the changes is shown to acquiesce in

the modification through a course of conduct consistent with

acceptance.”).

D. Analysis

[7] Although it may seem incongruous to discuss contractual

modification principles in the context of a grand jury

investigation, the theory of modification seems most

analogous to the present situation. However, the Court also

finds partial withdrawal by JPMC and a partial waiver by

LeCroy and Snell. The Court is not obliged to shoehorn its

decision into any particular single legal doctrine, but rather, to

pragmatically apply the law to the facts and make a decision

as to what evidence may be used by the government at the

trial.

It is also important to note that although the Court finds

that there was a significant modification of the JDA as of

January 2004, the JDA nonetheless continued in existence,

as modified, throughout the balance of the investigation

and indeed continues in existence today, during the pretrial

preparation stages.

In finding that JPMC did partially withdraw from the JDA

prior to its January meetings with LeCroy and Snell, the

Court is not being critical of JPMC, its counsel, or counsel

for LeCroy and Snell. All counsel are skilled advocates with

outstanding reputations in this Court. However, JPM C had

determined for its own good and sufficient reasons—one

of which is the fact that it is a highly regulated financial

institution, and another may have been that it realized it may

have been a victim of a fraudulent scheme—that it would, if

the government “pushed,” turn over the notes and memoranda

of its meetings with LeCroy and Snell. JPMC thought it

had the right to do so because LeCroy and Snell had their

own counsel, and thus their meetings with JPMC counsel

were not covered by their own personal *385 attorney-client

privilege. 8 However, the Court finds that JPMC counsel

was mistaken in this belief, because having joined the JDA,

JPMC was bound by it until and unless it withdrew. Similarly,

counsel for LeCroy and Snell strongly assert that JPMC

could not turn over the notes and memoranda because of the

JDA, and their expressions of this belief to JPMC counsel

in January 2004 were credible and good advocacy, but not

binding on this Court as a matter of law.

8 The government likewise asserted that the interviews

which JPMC counsel had with Snell and LeCroy were

in the latter's capacity as corporate employees to a

corporate counsel and thus JPMC had the unilateral

right to waive its privilege. The government cites

Bevill in support. In Bevill, two corporate officers

objected to a district court order requiring disclosure

of substantive communications with corporate counsel.

Both the officers and the two corporations involved

were the subjects of criminal investigations. The officers

asserted that their communications were protected by the

attorney-client privilege, but the district court disagreed,

finding that the corporation had effectively waived the

privilege. The Third Circuit affirmed the holding of

the district court, finding that the communications were

made in their roles as corporate officials:

[The officers] contend that because their personal

legal problems were inextricably intertwined with

those of the corporation, disclosure of discussions



of corporate matters would eviscerate their personal

privileges.... The appellants' argument, however,

does not pay sufficient attention to the fact that

under existing law, any privilege that exists as

to a corporate officer's role and functions within

a corporation belongs to the corporation, not

the officer ... Because a corporation can act

only through its agents, a corporation's privilege

consists of communications by corporate officials

about corporate matters and their actions in the

corporation. A corporate official thus may not

prevent a corporation from waiving its privilege

arising from discussions with corporate counsel

about corporate matters.

Bevill, 805 F.2d at 124–25 (citing Commodity Futures

Trading Commission v. Weintraub, 471 U.S. 343, 349,

105 S.Ct. 1986, 85 L.Ed.2d 372 (1985)). As noted

above, the Court in Bevill held that no JDA existed,

and thus the holding of Bevill does not apply in a case

in which a JDA exists, as it did exist in the present

case. The Court rejects the understanding of JPMC

and the advocacy of the government, because it is

tantamount to negating the ability of an individual

and a corporation, and each of their counsel, to enter

into any JDA, if the corporate counsel can nonetheless

unilaterally waive the corporate privilege any time the

individual corporate employee speaks to the corporate

counsel. In this regard, see U.S. v. Stepney, 246

F.Supp.2d 1069 (N.D.Cal.2003), holding “the joint

defense privilege was adopted as an exception to [the

general] waiver rule, under which communications

between a client and his own lawyer remain protected

by the attorney-client privilege when disclosed to co-

defendants or their counsel for purposes of a common

defense.”

The Court believes that the most important facts on this

issue relate to the discussions which Dodds had with Recker

and Suddath prior to the January meetings in which Dodds

explained to them that JPMC was retaining the right to

turn over the notes of the interviews. Also significant is the

fact that Recker and Suddath clearly made JPMC's intent

known to their clients, LeCroy and Snell, respectively. With

these facts, there is no dispute that LeCroy and Snell, and

their counsel, were thoroughly advised of JPMC's intent

and nonetheless decided to proceed with the January 2004

interviews with JPMC counsel. LeCroy and Snell had the

option, knowing in advance that these notes may be turned

over to the government by JPMC counsel pursuant to the

grand jury subpoena, to decline to be interviewed by JPMC

counsel. What would have been the risks and detriments of

having done so? The Court does not know and does not

believe the answer to that question is determinative. There

are risks for every decision in a grand jury investigation, but

*386 the right of the grand jury to get the facts, and the right

of JPMC, as a recipient of a grand jury subpoena, to decide to

cooperate with the grand jury, are paramount.

There were good and abundant reasons why LeCroy and

Snell, with the advice of their counsel, rationally, intelligently

and knowingly decided to allow JPMC and its counsel to

interview them, knowing that the notes of the interviews

may be turned over to the government, but also knowing the

JDA would continue, as modified. Under the JDA, the parties

could continue to share information, documents, and access to

witnesses without fear that any party continuing with the JDA

would divulge that information. The only change in the terms

of the JDA was that the notes of the interviews of LeCroy

and Snell by JPMC could be turned over to the government.

Assuming LeCroy and Snell were telling JPMC counsel the

truth, their counsel wisely advised them to proceed with the

interview even though the notes may be turned over to the

government. This may have been the best possible strategy

to avoid indictment. This Court intends to uphold the JDA

to the extent that it was not modified. However, it is clear

that JPMC initiated a modification of the JDA, or a partial

withdrawal from it, and that LeCroy and Snell, with their

counsel's advice, by agreeing to be interviewed by JPMC's

counsel, and knowing that the notes and memoranda of such

interviews may be turned over to the government, knowingly

and intelligently agreed to the modification and thus waived

the protections of the JDA as to those notes and memoranda

on a prospective basis.

The provisions in the prior 2000 written agreement between

Recker and Dodds regarding withdrawal were quoted above

because it is clear to this Court that, notwithstanding and

not necessarily inconsistent with the terms of the JDA—and

the understanding of the lawyers who entered into it—there

was indisputably, in January 2004, a partial withdrawal, or a

modification, or a partial waiver by LeCroy and Snell, of the

protections of the JDA to the extent that JPMC could turn over

the notes of its counsel's interviews with LeCroy and Snell to

the grand jury pursuant to the grand jury subpoena.

Modification took place by JPMC insisting that it would have

to have the right to turn over the notes of its interviews of

LeCroy and Snell to the government pursuant to the grand

jury subpoena. By Dodds communicating this to counsel

for LeCroy and Snell prior to the interviews, and counsel

repeating this to their clients, and all parties proceeding



with the interviews, there was an acknowledgment by all

parties that the JDA had been modified to allow JPMC

to produce the notes to the government. Notwithstanding

Recker's and Suddath's dispute with Dodds as to whether

JPMC had the right to do this, by the conduct of LeCroy

and Snell (with their counsel's advice) of going to New

York and submitting themselves to interviews with the

knowledge that the notes of the interviews may be turned

over to the government, the Court finds that this constituted

a modification by their explicit conduct, done on a knowing

and voluntary basis. LeCroy and Snell were not obliged to

submit to the JPMC interviews. They could have refused to

do so; what the consequences of their refusal may have been

are undetermined but irrelevant.

The Court has also found, as to the March 2004 interviews,

that although they were taken without advance knowledge of

their counsel, LeCroy and Snell were business executives and

were represented by very competent counsel. They already

knew that there was a chance the notes of the January 2004

interviews would be turned over to the grand jury and by

*387 nonetheless going ahead with the interviews in March

2004, their prior knowing waiver of the protection of the JDA

against JPMC turning over the notes of its counsel during that

interview continued.

A key ingredient in the Court's analysis is the public policy

factor that the investigating grand jury receive any and all

information that a subpoenaed party is willing to provide.

The institution of the grand jury “in our Constitution as the

sole method for proffering charges in serious criminal cases

shows the high place it held as an instrument of justice.”

Costello v. U.S., 350 U.S. 359, 362, 76 S.Ct. 406, 100

L.Ed. 397 (1956). The right to information is critical to the

functioning of a grand jury, and “[b]ecause its task is to

inquire into the existence of possible criminal conduct and to

return only well founded indictments, its investigative powers

are necessarily broad.” Branzburg v. Hayes, 408 U.S. 665,

688, 92 S.Ct. 2646, 33 L.Ed.2d 626 (1972). As noted in

Branzburg, although the powers of the grand jury are subject

to certain limitations, the longstanding principle that “the

public ... has a right to every man's evidence,” except for

those persons protected by a constitutional, common law, or

statutory privilege, is particularly applicable to grand jury

proceedings. 408 U.S. at 688, 92 S.Ct. 2686 (citing United

States v. Bryan, 339 U.S. at 331, 70 S.Ct. 724; Blackmer v.

United States, 284 U.S. 421, 438, 52 S.Ct. 252, 76 L.Ed. 375

(1932)).

The grand jury may compel the production of evidence

or the testimony of witnesses as it considers appropriate,

and its operation generally is unrestrained by the technical

procedural and evidentiary rules governing the conduct of

criminal trials. “It is a grand inquest, a body with powers of

investigation and inquisition, the scope of whose inquiries

is not to be limited narrowly by questions of propriety

or forecasts of the probable result of the investigation, or

by doubts whether any particular individual will be found

properly subject to an accusation of crime.”

United States v. Calandra, 414 U.S. 338, 349–50, 94 S.Ct.

613, 38 L.Ed.2d 561 (1974) (quoting Blair v. United States,

250 U.S. 273, 282, 39 S.Ct. 468, 63 L.Ed. 979 (1919)). See

also United States v. Nixon, 418 U.S. 683, 707–713, 94 S.Ct.

3090, 41 L.Ed.2d 1039 (1974).

V. Conclusion

The facts of this case demonstrate that although entering into

a JDA is often, indeed generally, beneficial to its participants,

like skating on thin ice, dangers lurk below the surface. When

JPMC insisted on its right of turning over the notes of its

interviews with Snell and LeCroy to the government, Snell

and LeCroy had the option to reject JPMC's terms and refuse

to submit to the interviews. By proceeding the way they did,

LeCroy and Snell waived the protections they had under the

existing JDA and, by their conduct, agreed to a modification

of the JDA. For this Court to refuse the government use of

the interview notes which JPMC turned over to the grand jury

would amount to judicial suppression of evidence that the

recipient of a grand jury subpoena legitimately turned over to

the grand jury.

This Court believes that such a holding would not only be

contrary to the application of settled principles of JDA law

to the facts of this case, but also would result in LeCroy and

Snell evading responsibility for their knowing and voluntary

decisions to continue with the JDA under the modified terms

as proposed by JPMC and agreed to by their own conduct.

For these reasons, the Court entered the Order protecting the

interview notes while the JDA existed, and refused to protect

*388 the interview notes under the modification of the JDA

proposed by JPMC and accepted by the conduct of LeCroy

and Snell.



ORDER

AND NOW, this 10th day of January, 2005, it is hereby

ORDERED as follows:

1. The Motion Of Defendants Anthony C. Snell And Charles

LeCroy For Permission to File Motion for Reconsideration

Of, And/Or To Correct, Memorandum Opinion Of December

17, 2004 (Doc. No. 319), is GRANTED.

2. The Motion Of Defendants Anthony C. Snell And Charles

LeCroy For Reconsideration Of Memorandum Opinion Of

December 17, 2004 (Doc. No. 320), which is unopposed

by the government, is GRANTED. The sentence on page 2

that reads “[f]ollowing return of the indictment, LeCroy and

Snell asserted claims of privilege with respect to notes and

memoranda of interviews created by counsel for JPMC” is

hereby amended to read “[b]oth before and after return of

the indictment, LeCroy and Snell asserted claims of privilege

with respect to notes and memoranda of interviews created by

counsel for JPMC.”


2015 U.S. Dist. LEXIS 42686, *

Page 1

LEXSEE

SECURITIES AND EXCHANGE COM M ISSION, Plaintiff, v. JOHN PATRICK

O'NEILL and ROBERT BRAY, Defendants.

Civil Action No. 14-cv-13381-ADB

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHU-

SETTS

2015 U.S. Dist. LEXIS 42686

April 1, 2015, Decided

April 1, 2015, Filed

CORE TERM S: discovery, criminal cases, civil case,

intervene, civil discovery, deposition, criminal proceed-

ings, pled guilty, tactical advantage, sentencing, answer-

ing, assents, discovery requests, pending resolution, se-

curities fraud, disclosure, pendency, deposed, criminal

actions, insider trading, grand jury, indictment, conspir-

ing, scheduled, charging, tactical, commit, impair, gov-

ernment notes, ability to defend

COUNSEL: [*1] For Securities and Exchange Com-

mission, Plaintiff: David H. London, Securities and Ex-

change Commission - MA, Boston, MA.

For John Patrick O'Neill, Defendant: David J. Apfel,

Nicholas A. Reider, Goodwin Procter, LLP, Boston, MA.

For Robert Bray, Defendant: Joseph W. Monahan, III,

LEAD ATTORNEY, Monahan & Padellaro, Medford,

MA.

For USA, Intervenor: Eric P. Christofferson, US Attor-

ney's Office - MA, J. Joseph Moakley U.S. Courthouse,

Boston, MA.

JUDGES: ALLISON D. BURROUGHS, DISTRICT

JUDGE.

OPINION BY: ALLISON D. BURROUGHS

OPINION

MEMORANDUM AND ORDER

BURROUGHS, D.J.

I. INTRODUCTION

The United States Department of Justice ("govern-

ment") has moved to intervene in this action for the lim-

ited purpose of moving to stay discovery, and has further

moved for a stay of discovery pending the conclusion of

parallel criminal proceedings (Docket No. 16). Defend-

ant John Patrick O'Neill ("Mr. O'Neill") has moved to

stay all proceedings as to him (Docket No. 17). As more

fully set forth below, the motion to intervene is granted.

Both motions to stay are denied, although any deposition

of Defendant Robert Bray ("Mr. Bray") is stayed, and the

government retains the right to object to particular dis-

covery requests, which objections will be [*2] dealt

with by the Court as they arise.

II. RELEVANT PROCEDURAL HISTORY

The Securities and Exchange Commission ("SEC")

filed the instant action against Mr. O'Neill and Mr. Bray

on August 18, 2014, alleging violations relating to insid-

er trading activities (Docket No. 1). This is a civil case.

There are also parallel criminal cases pending against

Mr. O'Neill and Mr. Bray arising out of the same alleged

insider trading activity. See United States v. O'Neill,

Criminal No. 14-10317-WGY; United States v. Bray,

Criminal No. 14-10356-WGY. On December 4, 2014,

Mr. O'Neill waived indictment and pled guilty to an In-

formation charging him with conspiring to commit secu-

rities fraud in violation of 18 U.S.C. § 371. Shortly

thereafter, on December 10, 2014, Mr. Bray was charged

by a grand jury with conspiring to commit securities

fraud in violation of 18 U.S.C. § 371, and securities

fraud in violation of 15 U.S.C. §§ 78j(b), 78ff(a) and 17

C.F.R. § 240.10b-5. Trial against Mr. Bray is scheduled

to begin on October 19, 2015.

On February 2, 2015, the government filed the in-

stant Motion for Leave to Intervene and for a Stay of

Discovery Pending Resolution of Parallel Criminal Pro-

ceedings (Docket No. 16). Mr. O'Neill assents to the

government's requests to intervene and for a stay [*3]

of discovery. The SEC assents to the request to intervene

2015 U.S. Dist. LEXIS 42686, *

Page 2

and takes no position on the request for a stay of discov-

ery. On February 11, 2015, Mr. O'Neill filed his Motion

to Stay All Proceedings as to him (Docket No. 17). Nei-

ther the government nor the SEC opposes Mr. O'Neill's

motion. Mr. Bray has not responded with his position as

to either the government's motion or Mr. O'Neill's mo-

tion.

III. GOVERNM ENT'S M OTION FOR LEAVE TO

INTERVENE

Pursuant to Rule 24 of the Federal Rules of Civil

Procedure, the government has moved to intervene in

this action for the limited purpose of moving for a stay of

discovery pending resolution of the parallel criminal

cases against Mr. Bray and Mr. O'Neill. The Court has

discretion to grant permissive intervention pursuant to

Rule 24(b) where the prospective intervenor "has a claim

or defense that shares with the main action a common

question of law or fact." Fed. R. Civ. P. 24(b)(1)(B).

Here, where the same facts underlie both the civil and

criminal actions, the government arguably has an interest

sufficient to warrant intervention in the civil action.

Thus, the government's motion to intervene is granted

pursuant to Rule 24(b).

IV. GOVERNM ENT'S M OTION FOR A STAY OF

DISCOVERY PENDING RESOLUTION OF PAR-

ALLEL CRIM INAL PROCEEDINGS

The government makes [*4] four general argu-

ments in support of its motion to stay discovery. The

Court finds none of them persuasive. In essence, the

government believes that it will have to give up a tactical

advantage if the defendants are allowed civil discovery

during the pendency of the criminal cases. Although

there are situations where this argument would prevail,

this isn't one of them. The grand jury investigation ap-

pears to be over; one of the defendants, Mr. O'Neill, has

pled guilty, and the other, Mr. Bray, is scheduled for trial

in October 2015. Since an indictment has been returned

against Mr. Bray, the government is already obligated to

produce Brady and other materials covered by the auto-

matic discovery rules and will shortly have to produce

more generalized discovery as well. At this point in the

proceedings, the government should be preparing to

share its theory of the case and the evidence in support of

it, rather than looking for ways to delay the disclosure of

relevant information. The Court will look very critically

at any effort that appears designed to give the govern-

ment an unwarranted tactical advantage or to otherwise

have a trial by ambush in its criminal case against Mr.

Bray.

To [*5] address the government's arguments more

specifically:

First, the government argues that without a stay, Mr.

Bray could use the civil discovery process to obtain in-

formation that could help him in his criminal case and to

which he otherwise would not be entitled at this stage of

the criminal proceeding. In support of its motion, the

government cites no concrete concerns, but simply states

that Mr. Bray "could use the civil discovery process in a

manner that impairs proper administration of the criminal

case" (Docket No. 16) (emphasis added). The govern-

ment then avers that "[t]his is not a theoretical concern"

and goes on to say that allowing civil discovery to pro-

ceed would "nullify" the Jencks Act and other criminal

rules; reveal the government's case which would allow

Mr. Bray to tailor his defenses to the anticipated proof;

and harass and intimidate witnesses. The government is

essentially saying that allowing civil discovery to go

forward could give a criminal defendant information

earlier than the government would otherwise be required

to disclose, and that this premature disclosure could, in

effect, cost the government a tactical advantage to which

it believes it is entitled. As has [*6] been recognized in

other cases:

[T]o the extent that the defendants'

discovery requests simply result in the

happenstance that in defending them-

selves against the serious civil charges

that another government agency has cho-

sen to file against them they obtain certain

ordinary discovery that will also be help-

ful in the defense of their criminal case,

there is no cognizable harm to the gov-

ernment in providing such discovery be-

yond its desire to maintain a tactical ad-

vantage.

SEC v. Oakford Corporation, 181 F.R.D. 269, 272-73

(S.D.N.Y.1998); see also SEC v. Saad, 229 F.R.D. 90, 91

(S.D.N.Y. 2005) ("It is strange[] . . . that the U.S. Attor-

ney's Office, having closely coordinated with the SEC in

bringing simultaneous civil and criminal actions against

some hapless defendant, should then wish to be relieved

of the consequences that will flow if the two actions

proceed simultaneously.").

The Court would be more inclined to issue a stay if

the pendency of the two investigations threatened to

compromise the integrity of the government's investiga-

tion, or if having to defend both matters compromised a

defendant's ability to defend himself in either proceed-

ing. In the instant case, however, the government's inves-

tigation is complete and charges have been brought. Civil

discovery might reveal aspects of the [*7] government's

criminal case or result in inconsistent statements if wit-

nesses are questioned more than once, but exposing the

2015 U.S. Dist. LEXIS 42686, *

Page 3

government's case or testing witness recollections will

not fundamentally compromise an ongoing investigation

or prosecution. Moreover, these are the risks that the

government and the SEC run when they elect to pursue

parallel investigations and prosecutions. In any event, the

government has not made a sufficient showing to warrant

a stay in this instance.

Further, neither defendant has asserted that the pen-

dency of a civil case and a related criminal case will im-

pair his ability to defend himself. In fact, Mr. O'Neill can

make no such argument since the criminal case against

him is effectively over now that he has pled guilty. Mr.

Bray is in the more difficult position, but the Court is

prepared to take steps to preserve his rights, as more ful-

ly set forth below.

The cases cited by the government in support of its

first argument are largely inapposite. For example, in

Board of Governors of Federal Reserve System v. Phar-

aon, 140 F.R.D. 634 (S.D.N.Y. 1991), the court stayed

discovery in a civil case for approximately 30 days until

the grand jury had a chance to hear all of the evidence

and make a decision. This was thus a stay of very limited

duration [*8] and narrowly tailored to ensure that the

government had the opportunity lock in relevant testi-

mony prior to the civil discovery. United States v.

Mellon Bank, N.A., 545 F.2d 869 (3d Cir. 1976), in-

volved a civil suit aimed at seizing a safe deposit box to

satisfy a levy against the taxpayer who was also charged

in a criminal case. The considerations in this sort of case

are significantly different from those in a civil case

where the SEC is charging an actual human being with

serious violations.

Second, the government asserts that a stay of the

SEC case would create "efficiencies," presumably

meaning that a conviction in the criminal case would

estop a defendant from contesting the civil case. This no

doubt would create efficiencies for the SEC, which

would then be able to bring and win a case without actu-

ally having to try it or even go through the discovery

process. However, the Court will not in any way abridge

Mr. Bray's procedural rights simply to preserve SEC

resources or allow the SEC to defer its case so as to more

efficiently capitalize on a successful criminal prosecu-

tion.

Third, the government maintains that staying the

civil case will save litigation costs for the defendants

rather than prejudicing them. The role of the Court is to

ensure [*9] that once a party brings a criminal or a civil

case, the case is administered impartially and efficiently

to ensure a fair outcome. The idea of the federal gov-

ernment asking for the SEC's case to be stayed to save

the defendants money is troubling--particularly where

the government's request could have the ancillary effect

of giving the government a strategic advantage in its own

case.

Fourth, the government notes that Mr. O'Neill as-

sents to the stay, the SEC takes no position, and Mr.

Bray has not responded with his position. It is no surprise

that Mr. O'Neill assents to the stay. He is awaiting sen-

tencing and is no longer in a position, in light of his

guilty plea, to meaningfully contest the civil case. He has

an interest in appeasing the government, which has ex-

pressed its interest in a stay, as the government will ulti-

mately make a sentencing recommendation in his crimi-

nal case. Further, he is likely hopeful that the passage of

time will lessen the SEC's interest in extracting a maxi-

mum financial penalty from him. Similarly, the SEC has

much to gain and little to lose from the requested stay.

As discussed above, the SEC stands to benefit from a

criminal resolution which could allow [*10] it to effec-

tively win its case without having to do the work of dis-

covery and then trial. Mr. Bray, on the other hand, is

between the proverbial rock and hard place. He may

have an interest in having the civil case move forward,

but that outcome would run the risk of his having to be

deposed (and thereby, risk compromising his criminal

defense), or having to accept an adverse inference if he

chooses not to answer questions in a civil deposition.

All of this being said, the Court remains concerned

about preserving Mr. Bray's rights. He is entitled to de-

fend both the civil and criminal cases without the defense

of either prejudicing his rights in the other. Therefore,

the Court orders that Mr. Bray may not be deposed at

this time. He will thereby avoid facing the dilemma of

either choosing to make statements that could be used

against him in the criminal case, or suffering an adverse

inference if he refuses to answer questions at a deposi-

tion. The parties may notify the Court when all discovery

is complete but for the deposition of Mr. Bray. If, at that

time, his deposition is requested, a status conference will

be held to determine scheduling.

As a final note, the government cites a number [*11]

of cases in which courts have been willing to grant the

sort of stay it requests here. The Court will always eval-

uate such requests with an eye toward the facts and cir-

cumstances of individual cases and defendants. But in

this case, the government is largely concerned about

having to reveal discovery earlier than it might otherwise

have to do. This is a strategic and tactical consideration

that has little to do with the public interest or the interests

of the defendants. If the government and the SEC choose

to bring parallel civil and criminal cases close in time to

each other, then each entity must be prepared to go ahead

with its case on a usual schedule. The SEC and the gov-

ernment cannot pursue a strategy that allows them to take

advantage of the benefits of dual prosecutions, but then

complain when the defendants, too, find ways to benefit

2015 U.S. Dist. LEXIS 42686, *

Page 4

from the otherwise very burdensome task of having to

defend on two fronts at the same time. Further, the evi-

dence supporting an indicted criminal case ought to be

able to survive scrutiny, and the government should not

be so invested in withholding information until disclo-

sure is required--after all, the goal is a just resolution in

both the civil [*12] and criminal cases, and there is no

doubt that confidence in an outcome is highest where the

evidence is known and can be tested.

V. DEFENDANT O'NEILL'S M OTION TO STAY

ALL PROCEEDINGS

Mr. O'Neill asks for a stay of all proceedings as to

him (Docket No. 17). He has not yet answered the SEC

complaint and avers that he and the SEC are engaged in

settlement discussions. He further states that he is strug-

gling financially and that the requested stay would avoid

his having to incur additional legal expenses. Finally, he

claims that having to answer the complaint could poten-

tially prejudice his rights.

Mr. O'Neill has had four prior extensions of time to

respond to the complaint (Docket Nos. 8, 10, 12, 14).

After the last, Judge Casper indicated that no further ex-

tensions would be granted (Docket No. 15). For this rea-

son alone, Mr. O'Neill's request, at least with regard to

answering the complaint, would be denied.

The issue, however, merits some further discussion.

It is difficult to see how answering the complaint could

prejudice his rights. He has pled guilty to the criminal

offense and has thus already incriminated himself. As the

government notes, his plea, which is tantamount to a

conviction, [*13] estops him from contesting the civil

allegations in any meaningful way. In this posture, he is

not entitled to avoid answering a civil complaint merely

to insulate himself from the effects of potentially incon-

sistent statements.

It is not a surprise that the SEC, the government and

Mr. O'Neill are either implicitly or explicitly in favor of

the stay requested by Mr. O'Neill. No doubt, the gov-

ernment would prefer that Mr. O'Neill not answer or be

deposed, which could result in statements that are incon-

sistent with his plea or that might have to be disclosed in

connection with the prosecution of Mr. Bray. Likewise,

Mr. O'Neill is almost certainly interested in currying

favor with the government, which ultimately will have to

make a sentencing recommendation in the criminal case;

for that reason alone, he would probably agree to the

request for a stay. Similarly, for Mr. O'Neill, the outcome

of the civil case is no longer really in doubt and there-

fore, he has no incentive to push the case forward. Final-

ly, the SEC might prefer to defer the resolution of the

civil case against Mr. O'Neill until after the criminal

cases, or it might be reluctant to settle now on terms that

could look too [*14] favorable to a jury or sentencing

court. Given the likely outcome of the civil case at this

point, the SEC, too, has no need to hurry its resolution.

None of these tactical interests warrants staying the civil

case as to Mr. O'Neill. If he wants to avoid answering or

the costs of discovery, the SEC case will either need to

be settled or dismissed.

VI. CONCLUSION

For the foregoing reasons, the government's Motion

for Leave to Intervene and for a Stay of Discovery

(Docket No. 16) is GRANTED IN PART AND DENIED

IN PART. Specifically, the government's request to in-

tervene is GRANTED. The government's request for a

stay of discovery pending the resolution of the parallel

criminal proceedings is DENIED, with the exception of a

deposition of Mr. Bray, which is stayed until further

Court order. Also, the government may object to partic-

ular discovery requests, which the Court will deal with

on a case-by-case basis. Mr. O'Neill's Motion to Stay All

Proceedings as to Defendant John Patrick O'Neill (Dock-

et No. 17) is DENIED, and Mr. O'Neill is ORDERED to

answer the SEC complaint within 10 days of the date of

this Order.

SO ORDERED.

Dated: April 1, 2015

/s/ Allison D. Burroughs

ALLISON D. BURROUGHS

DISTRICT [*15] JUDGE

FOCUS - 13 of 16 DOCUMENTS

Analysis

As of: May 29, 2015

InreComplaintastotheConductofBARNESH. ELLIS,Accused. InreComplaint

astotheConductofLOISO. ROSENBAUM ,Accused.

SC S061385

SUPREM E COURT OFOREGON

356Ore.691;344P.3d 425;2015Ore.LEXIS130

M arch4,2014,ArguedandSubmitted,atLewisandClarkLaw School,Portland,

Oregon

February20,2015,Decided

PRIOR HISTORY: OSB No. 09-54. OSB No. 09-55.

On review of the decision of the trial panel of the

Disciplinary Board. [***1]*

* Trial Panel Opinion May 7, 2013.

United States v. Stringer, 408 F. Supp. 2d 1083, 2006

U.S. Dist. LEXIS 3435(D. Or., 2006)

DISPOSITION: The amended complaints are

dismissed.

COUNSEL: W. Michael Gillette, Schwabe Williamson

& W yatt PC, Portland, argued the cause and filed the

briefs for the Accuseds.

Mary A. Cooper, Assistant Disciplinary Counsel, Tigard,

argued the cause and filed the brief for the Oregon State

Bar.

JUDGES: Before Balmer, Chief Justice, and Walters,

Linder, Landau, Brewer, and Baldwin, Justices.**

** Kistler, J., did not participate in the

consideration or decision of this case.

OPINION

[**427] [*693] PER CURIAM

This lawyer disciplinary proceeding involves several

allegations under the former Code of Professional

Responsibility.1 The accuseds (also individually referred

to as Ellis or Rosenbaum in this opinion) represented a

public company involved in various protracted

proceedings over several years and also represented some

company directors, officers, and managers during some

of those same proceedings. The Bar charged the accuseds

in separate complaints with multiple violations of several

former Disciplinary Rules, including former DR

5-105(C) (waivable former-client conflicts with

insufficient disclosure); former DR 5-105(E)

(nonwaivable [***2] current-client conflicts and

waivable current-client conflicts with insufficient

disclosure); and former DR 1-102(A)(3)

(misrepresentation by omission). A trial panel of the

Page 1

Disciplinary Board concluded that, although the Bar had

not proved most of the charged violations, it did

sufficiently prove that some client conflicts of interest

had existed, that the accuseds had made insufficient

disclosures as to those conflicts, and that the accuseds

had made related misrepresentations by omission in a

particular conflict disclosure letter. The panel determined

that a public reprimand was the appropriate sanction. The

accuseds sought review as to all allegations that the panel

determined that the Bar had proved, and the Bar sought

review as to some additional allegations that the panel

determined had not been proved. For the reasons

explained below, we dismiss the amended complaints.

1 The Oregon Rules of Professional Conduct

replaced the former Oregon Code of Professional

Responsibility effective January 1, 2005. In re

Balocca,342Ore 279,281n1,151P3d154

(2007).

I. FACTS

We review the record de novo. Bar Rule of

Procedure (BR)10.6. The Bar must prove its allegations

by clear and convincing evidence. BR 5.2. "Clear and

convincing evidence"means that "the truth of the facts

asserted is highly [***3] probable."Inre Phinney,354

Ore 329,330,311P3d517(2013)(internal quotation

marks omitted). We set out a general factual summary

below and discuss later in this opinion additional facts

that relate to particular issues on review. We [*694]

draw all facts from the testimony and record before the

trial panel, and from public court records in related

proceedings.2

2 We take judicial notice of additional facts

drawn from judicial opinions and court dockets in

a related criminal case prosecuted in the United

States District Court, District of Oregon, and

appealed to the Ninth Circuit. See Inre Fitzhenry,

343Ore 86,109n17,162P3d260(2007)(taking

judicial notice of fact in public record).

A. CompanyBackground,AccountingIssues,andClass

ActionLitigation

FLIR Systems, Inc. (FLIR) is a publicly traded

Portland, Oregon, company that manufactures and sells

thermal imaging equipment and broadcast camera

systems, including to governmental entities. In early

2000, key FLIR directors, officers, and managers

included Daltry (Board of Directors Chair), Wynne

(board member), Stringer (President and Chief Executive

Officer (CEO)), Samper (Chief Financial Officer (CFO)),

Martin (Vice President of Sales (Worldwide)), Fitzhenry

(General Counsel), and Eagleburger (Director of Sales

Operations and Senior [***4] Vice President for Sales

and Marketing). As CFO, Samper was responsible for

FLIR's [**428] accounting and preparation of its

financial statements.

As the 1990s ended, FLIR's corporate accounting

grew more complicated, in part due to recent mergers and

acquisitions, and installation of a new enterprise reporting

system. In 1999, FLIR had difficulty completing its

financial statements on time. At a February 2000 Board

of Directors meeting, Samper reported that FLIR's

financial statements again would not be prepared on time.

By that point, at least some board members began to

doubt the competency of management, including

Samper's ability to serve as CFO. Samper resigned

shortly thereafter.

FLIR then discovered several accounting errors,

including improperly claimed revenue in 1998and 1999

for several transactions that appeared to be without

sufficient foundation.3 As a result of that review, FLIR

decided [*695] to restate certain 1998 and 1999

financial statements previously filed with the Securities

and Exchange Commission (SEC). In doing so, FLIR's

independent auditor instructed FLIR to apply

retroactively to the past 1998 and 1999 transactions a

new SEC directive, which dictated a delay as to when

[***5] certain revenue could be recognized in a

company's financial statements. The underlying

restatement calculations, combined with retroactive

application of the new directive, ultimately caused a

notable drop in FLIR's reported revenue for the identified

time frame.

3 In general, the accounting issues concerned

FLIR's "revenue recognition" practices--that is,

the point in time at which FLIR could confirm

with certainty that it could include revenue

derived from a particular transaction in its

financial statements. Several transactions later

identified as problematic had involved revenue

recognized either prematurely or without

sufficient supporting documentation.

FLIR publicly announced its intent to restate. FLIR's

stockprice dropped, and, in early March 2000, several

Page 2356Ore. 691, *693; 344P.3d 425, **427;

2015 Ore. LEXIS 130, ***2

shareholders filed class action securities litigation against

FLIR, Stringer, Samper, and eventually Daltry.

Later in March 2000, FLIR retained the accuseds,

both partners at Stoel Rives LLP, in the class action

litigation, and it informed Stringer and Samper that it

would pay for their representation by the accuseds or

other counsel. The accuseds sent engagement letters to

FLIR, Stringer, and Samper, stating that a unified [***6]

defense was advantageous and that they did not anticipate

that any conflict would arise, but that each individual

defendant might wish to consult with independent

counsel for monitoring purposes; the letter also

recommended consultation before consenting to the joint

representation. Stringer declined and retained outside

counsel. Samper already had retained outside counsel,

Glade and Kaner, but decided in consulting with them to

agree to have the accuseds serve as co-counsel. Glade

accepted the joint representation on Samper's behalf,

noting that--in the unlikely event that an actual conflict

arose--Samper reserved his rights regarding his consent

to the accuseds'continued representation of FLIR. After

Daltry became a defendant in the class action, he also

agreed to the joint representation, and he signed a similar

consent letter. Fitzhenry consented on FLIR's behalf.

When the accuseds began representing FLIR, Daltry, and

Samper in the class action, they understood FLIR's

accounting issues to be the result of possible management

competency issues and an overworked and underesourced

accounting staff, but not fraudulent actions by any FLIR

officer or manager.

[*696] FLIR ultimately filed three [***7] SEC

restatements between April 2000 and March 2001. The

class action litigation eventually settled in April 2001,

before discovery, with payment by both FLIR's insurer

and FLIR. No allegations in this proceeding concern the

class action litigation.

At about the time that FLIR retained the accuseds,

FLIR's board appointed a special committee, which

included Wynne, to examine more closely the 1998and

1999financial misstatements and underlying accounting

problems. In working with a prospective new

independent auditor, the committee determined that it

should assess the integrity of current management, which

at that time included Daltry and Stringer (but not Samper,

who had resigned, although the board had approved

retaining him as an independent [**429] consultant to

assist with the restatements). The committee determined

that Stringer had engaged in misrepresentations, and the

board later decided that he should resign. Stringer was

placed on administrative leave in May 2000 and later

terminated; Daltry also resigned. By then, Wynne had

come to question Stringer's integrity, but not Samper's;

instead, he continued to view Samper as having

competency issues only, and he did not thinkat this time

[***8] that FLIR's management had engaged in any

fraud.

B. SECInvestigation

Meanwhile, the SEC had begun investigating FLIR's

accounting, arising from the same general facts and

issues alleged in the class actions. The SEC began issuing

subpoenas to FLIR officers, managers, and employees in

late June 2000. At FLIR's request, the accuseds'joint

representation--initially formed for the class action

litigation--expanded to include any current or former

FLIR officer, manager, or employee who received an

SEC subpoena and who consented to be included in the

joint representation. The accuseds continued their joint

representation of FLIR, Daltry (for purposes of his SEC

interview only), and Samper (who also continued to be

separately represented by Glade and Kaner); they also

began representing Wynne, Fitzhenry, and Eagleburger

for purposes of the SEC investigation. The accuseds

ultimately represented about 35 to 40 [*697]

individuals, slightly more than half the witnesses that the

SEC examined.

Although the accuseds represented many individuals

in the SEC investigation, they sent only eight engagement

letters, directed to the individual clients who they thought

had the greatest potential for future possible [***9]

conflicts, including members of the board, Daltry, and

Eagleburger. Those letters requested consent to the joint

representation by using similar wording as the earlier

class action letters; they did not include any new wording

relating to the SEC investigation. The accuseds did not

send a letter to Samper, because he only recently had

signed a similar letter in the class action involving the

same facts. For his part, Glade did not necessarily expect

the accuseds to send a separate engagement letter to

Samper, because he assumed that the SEC representation

would proceed in the same fashion as the class action

litigation--that is, he and Kaner would remain

knowledgeable so as to provide independent advice to

Samper and be available to take over responsibility for

him as necessary.4The accuseds agreed with each other

Page 3356Ore. 691, *695; 344P.3d 425, **428;

2015 Ore. LEXIS 130, ***5

to watch for emerging conflicts between their clients.

4 The evidence conflicts as to whether the

accuseds sent a separate SEC engagement letter to

Fitzhenry. Rosenbaum thought that they had sent

him such a letter, but Ellis recalled that they had

not, because they had no expectation that the SEC

investigation posed any riskto him.

The joint representation strategy in the SEC [***10]

investigation was purposeful. According to the testimony

of several witnesses before the trial panel, rules

governing SEC investigations limit information available

to subject companies and witnesses, while maximizing

the SEC's ability to acquire information. A lawyer is

permitted to attend a witness interview only if

representing the witness, and the ability to examine

transcripts and exhibits shown to witnesses during

interviews is similarly limited. Joint representation

therefore permits the company's attorneys to act as a

central clearinghouse to obtain, consolidate, and

disseminate material information--such as subpoenaed

documents and the content of other witness interviews--to

the joint clients, so as to maximize the amount of

information flowing to all represented individuals. That

global collection of information, in turn, helps the

company and all involved individuals to [*698] clarify

the nature and focus of the investigation, and to provide

useful information to the SEC. Also, unless the nature of

the investigation lends itself to blame-shifting--such as

cases involving insider trading, embezzlement, or

obstruction of justice--the interests of the company and

the various witnesses [***11]tend to be aligned during

the investigation phase, because both the company and

the witnesses seek to provide the SEC with truthful

information so as to understand more fully the scope and

direction of the investigation, and to ameliorate the need

for any continued investigation. Joint representation

therefore [**430] is a common practice during the SEC

investigation phase, when appropriate under the

circumstances. As part of a joint representation, it also is

common for some individual witnesses to have their own,

independent lawyers, who monitor the proceedings to

evaluate whether any conflict arises and who later may

serve as lead counsel for their clients if needed.

During the SEC investigation, subpoenaed witnesses

typically sent requested documents to Fitzhenry, and he

sent them to the accuseds. The accuseds maintained all

the documents in a room at Stoel Rives in part for SEC

staff review; if SEC staff then marked a document for

production, Stoel Rives would catalogue the document in

a FLIR database and produce it to the SEC. Also as part

of the joint representation, either Ellis or, more often,

Rosenbaum attended all their clients'SEC interviews.

Rosenbaum took extensive notes during [***12] the

interviews that she attended, and she provided to

individual witness clients or the lawyers of represented

witness clients written summaries of all information that

she learned during the interviews that was relevant to that

client. The accuseds also provided several interview

transcripts to their individual clients or their lawyers.

Part of the SEC's investigation explored Samper's

involvement, as CFO, in FLIR's accounting problems that

had prompted the restatements. Either Glade and

Rosenbaum or Kaner and Rosenbaum attended all

Samper's SEC interviews, and Rosenbaum provided to

Glade and Kaner comprehensive written summaries of all

other witness testimony and other documentation that, in

her judgment, was [*699] material to Samper's

involvement.5 The accuseds, Glade, and Kaner

continuously conferred through the course of the SEC

investigation regarding the transactions at issue and the

SEC's inquiries touching on Samper. For example, early

in the investigation, a FLIR employee, Chambers, stated

that Samper had directed the destruction of a document

that she had created to track inventory. Rosenbaum,

Glade, and Kaner thereafter provided information to the

SEC, through Samper, showing that [***13] Chambers

did not have a full understanding of the situation and that

the destruction request had been appropriate. By the later

part of 2001, Glade and Kaner continued to think that

Samper did not have any conflicting interest with FLIR

of which the accuseds would have been aware,6and they

continued to think that Samper's and FLIR's interests

aligned.

5 The record shows that Rosenbaum sent Glade

and Kaner a significant volume of documentation

and also provided their law firm with a copy of

Stoel Rives's FLIR database.

6 Samper and FLIR had a dispute about the

terms of an earlier agreement between them,

concerning Samper's exercise of stock options

following termination of employment. That

dispute prompted Samper to think that his

relationship with FLIR was becoming more

adverse through the course of the SEC

investigation. The accuseds were not aware of that

Page 4356Ore. 691, *697; 344P.3d 425, **429;

2015 Ore. LEXIS 130, ***9

issue, however; indeed, Glade testified that he did

not involve Rosenbaum in any options dispute

discussion because he did not want to taint her

relationship with Samper or FLIR for purposes of

the SEC investigation. Glade further testified that

Samper ultimately decided to continue the joint

representation notwithstanding the options

[***14] dispute.

The SEC focused on numerous specific transactions

during its investigation, including a $4.6million 1999

transaction--the "Swedish Drop Shipment"--that had

prompted FLIR's second SEC restatement. Samper had

mentioned that transaction to the SEC, and the SEC

questioned both Samper and Stringer about its underlying

entries. Samper told the SEC that Stringer had directed

him to make certain entries and therefore he had done so,

but FLIR later changed those entries in its second

restatement.

Also during the SEC interviews, several of the

accuseds' individual clients offered statements that

arguably could be construed as unfavorable to other

clients, particularly Samper. The accuseds continued to

evaluate whether any conflict among various clients had

arisen, but they determined that their clients'interests

remained [*700] aligned and therefore made no

additional disclosures during the investigation phase.7

7 The SEC interviewed many other witnesses

who were not the accuseds'clients, including

Stringer, a previous FLIR controller, the previous

and current FLIR auditors, and a previous FLIR

Vice President of Manufacturing, who some

inside FLIR suspected had initiated the SEC

investigation. [***15]More than half the SEC's

interview time in its investigation was devoted to

witnesses who were not the accuseds'clients.

Under the SEC's investigation rules, the accuseds

were not privy to any information provided by

witnesses whom they did not represent and

therefore did not know the extent to which those

witnesses might have testified unfavorably as to

Samper or their other clients.

[**431 ] As the SEC investigation progressed,

Wynne worked with a new FLIR controller, Muessle,

who had reviewed multiple earlier recorded transactions

and determined that many should not have been entered

due to insufficient supporting documentation. By spring

2001, Wynne concluded that FLIR's former management

had engaged in securities fraud. As to Samper

specifically, Wynne concluded that Samper had made

entries and submitted financial statements that contained

figures manipulated as a result of fraud, which, in

Wynne's view, satisfied the definition of securities fraud,

even if Samper himself had not manipulated any figures.

The accuseds were unaware until several years later that

Wynne had reached that general conclusion about

Samper.

Meanwhile, in July 2001, Stringer sued FLIR for

wrongful termination, and [***1 6] the accuseds'firm,

Stoel Rives, represented FLIR in that action. The

complaint eventually was dismissed with prejudice in

2003.

The SEC investigation effectively concluded near the

end of 2001. Typically, at the close of an SEC

investigation phase, the SEC decides whether to send a

"Wells Notice"to the company or other individuals. A

Wells Notice is an official notification that outlines the

SEC's potential case against the recipient, laying the

groundwork for a possible civil enforcement action.

During the "Wells phase,"each Wells Notice recipient

typically meets separately with the SEC to discuss the

SEC's theory of its case against that recipient. A Wells

Notice recipient then may file a "Wells Submission"that

offers a specific response to the Wells Notice. Often, the

Wells process frames ensuing settlement negotiations

between the SEC and a Wells Notice recipient.

[*701 ]In February 2002, the SEC issued Wells

Notices to FLIR and Samper, indicating its intention to

recommend separate civil enforcement actions against

them. The SEC also issued similar Wells Notices to

Fitzhenry and Eagleburger,8which the accuseds had not

anticipated, and to others who were not the accuseds'

clients, including [***1 7] Stringer; Martin (FLIR's

former Vice President of Sales (Worldwide), who

effectively had been terminated in spring 2000); and

FLIR's previous auditor. Ellis immediately advised

Fitzhenry and Eagleburger to obtain independent counsel,

and they both did so. Wilson began representing

Fitzhenry, and Neil began representing Eagleburger; as to

both clients, the accuseds remained available as

supporting co-counsel. As to Samper, Glade and Kaner

tookthe lead in his representation during the Wells phase,

with the accuseds moving to a supporting co-counsel role

as needed. The accuseds continued to represent FLIR.

8 The SEC issued Eagleburger's Wells Notice in

Page 5356Ore. 691, *699; 344P.3d 425, **430;

2015 Ore. LEXIS 130, ***13

mid-March 2002, after FLIR filed its Wells

Submission, as described later in the text.

In early March 2002, FLIR had its Wells meeting

with the SEC, which included Wynne, the accuseds, and

FLIR's then-current CEO, Lewis. At that meeting, FLIR

emphasized its remediation efforts. Also at the meeting,

SEC staff questioned both Samper's and Fitzhenry's

truthfulness, based on their investigation. After the

meeting, Rosenbaum reported the general discussion to

Glade and Kaner, and also to Neil, once he began

representing Eagleburger. Among other [***1 8] things,

Rosenbaum told Kaner that the SEC thought that Samper

had not been forthcoming.

Samper's Wells meeting was scheduled for the

following week. Before that meeting, Ellis left a long

voicemail message for Glade that emphasized the SEC's

strident tone in FLIR's Wells meeting; emphasized the

SEC's certitude that wrongdoing had occurred, including

by Samper; and recommended possible approaches for

Samper. Glade and Kaner--but not the accuseds--attended

Samper's Wells meeting. Even with Ellis's forewarning,

they were shocked by the SEC's tone and negative view

of [**432] Samper. In the course of discussing its case

against Samper, the SEC told Glade and Kaner that

Rosenbaum had represented most of [*702] the

witnesses who purportedly had implicated Samper in

problematic transactions.

Rosenbaum was out of the country during Samper's

Wells meeting, but she e-mailed Glade afterwards to ask

how it had gone. Glade responded that it was "what you

would expect"and had involved familiar transactions,

that the SEC was relying on FLIR employees who did not

have firsthand knowledge of key events, and that the SEC

thought that Samper had been disingenuous at best.

Rosenbaum and Glade then exchanged thoughts about

[***19]Samper preparing a Wells Submission; Glade's

side of the communication acknowledged that

Rosenbaum had been supplying him with her witness

notes all along, suggesting that he already had been privy

to statements about Samper from Stoel Rives-represented

witnesses on which the SEC had relied in Samper's Wells

meeting.

The accuseds, Wynne, and Fitzhenry drafted FLIR's

Wells Submission, filed in March 2002. FLIR's Wells

Submission purposefully focused on current

management's remediation efforts since discovery of the

1998and 1999accounting issues. FLIR emphasized a

near-complete turnover of management and auditors, and

its expansion and strengthening of its accounting

personnel and controls, including removal of senior

management responsible for FLIR's troubles. FLIR

described the earlier accounting issues as "errors" or

"problems,"not "fraud."FLIR also stated that, to the

extent that any wrongdoing might have occurred, FLIR

understood that the SEC was "pursuing fraud claims

against one or more individuals who may have been

responsible." In crafting its Wells Submission, FLIR

intended to refer to only Stringer and Martin as the senior

management who had been "removed"and against whom

[***20] the SEC was "pursuing"further action. FLIR's

Wells Submission did not expressly take any position or

make any characterization about Samper, Daltry, or

Eagleburger, although it did comment favorably on

Samper's cooperation with the SEC; it also included an

expressly favorable statement about Fitzhenry, who was

the only member of the current senior management team

who had worked at FLIR in 1998and 1999, and so the

drafters thought it important to offer a positive comment

about his ongoing employment. [*70 3] At the time that

FLIR prepared its Wells Submission, the accuseds had

concluded that Stringer and Martin--but not Samper or

any of their other clients--had acted fraudulently in

relation to FLIR's 1998and 1999accounting errors.

Upon receipt of FLIR's Wells Submission, Glade

reviewed it and construed it as inferentially referring to

Samper as a bad actor. Ellis, however, assured Glade that

FLIR had not intended to identify Samper as a culpable

actor; instead, FLIR's Wells Submission focused on

forward-looking remediation only. Glade and Kaner

continued to represent Samper through the Wells phase,

with the accuseds continuing as supporting co-counsel,

communicating almost daily with Glade [***21] and

Kaner. Samper ultimately did not file a Wells

Submission.

Fitzhenry and Eagleburger also each had Wells

meetings with the SEC, attended by their respective

independent counsel and Ellis. Ellis worked on a draft

Wells Submission for Eagleburger at Neil's request.

Individual negotiations with the SEC commenced

thereafter, resulting in separate settlement orders,

finalized in judgment form by October 2, 2002, between

the SEC and FLIR, Samper, and Eagleburger; an order as

to Fitzhenry issued later, in November 2002.9 The

accuseds represented [*704] [**433] FLIR in its

Page 6356Ore. 691, *701; 344P.3d 425, **431;

2015 Ore. LEXIS 130, ***17

negotiations, but did not participate in negotiations

involving the three individual clients, who instead

continued to be represented by their respective

independent counsel. Following finalization of the SEC

settlements, the accuseds considered their representation

of Samper, Fitzhenry, and Eagleburger--and of Daltry,

who had not received a Wells Notice--to be at an end.

Stringer did not settle with the SEC, and the SEC later

filed a complaint against him.

9 Among other things, the SEC's judgment

against FLIR set out several SEC findings of

fraud--which FLIR neither admitted nor

denied--relating to FLIR's revenue recognition

practices and other accounting [***22] and

related activities. The order included a "cease and

desist"provision, respecting future violations of

federal securities law, and, because of the fraud

findings, it also removed for a five-year period

FLIR's "safe harbor" protection under federal

securities law. (Witnesses testified that, when in

place and when predicate conditions are met, the

"safe harbor"protection shields a public company

from legal actions based on incorrect financial

projections.) As a result of its SEC judgment,

FLIR also was later required to defend against a

costly debarment proceeding, which--had

debarment been ordered--would have prohibited

FLIR from selling its products to the federal

government, a key customer.

The SEC's judgment against Samper

permanently enjoined him from engaging in

several particular actions in violation of federal

securities law; imposed a civil penalty of

$110,000 and a disgorgement order of $52,500

plus interest; and permanently prohibited him

from serving as an officer or director of a

company that issued securities or was required to

file SEC reports. The SEC's judgment against

Eagleburger contained several injunction

provisions similar to the judgment against Samper

and imposed [***23] a civil penalty of $25,000.

The SEC order against Fitzhenry precluded him

from practicing before the SEC for five years. The

settlements with all three individual clients

incorporated consents to entry of judgment or

order, in which the clients neither admitted nor

denied the allegations in the SEC complaints

against them.

In the same general timeframe as the SEC Wells

process and settlements, FLIR continued to defend

against Stringer's wrongful termination action. Wynne,

who by now had replaced Fitzhenry as FLIR's General

Counsel, determined that the SEC's open Stringer

investigation might be helpful to FLIR in defending

against his wrongful termination action. After the SEC

settlements against FLIR and Samper had been finalized,

Wynne reviewed the SEC's complaint against Stringer

and was surprised that it did not include any allegation

about the Swedish Drop Shipment entry, which Wynne

thought was the most egregious example of financial

irregularity tied directly to Stringer. Wynne also thought

that that entry--which never had identified either an

underlying transaction or product--was critical to FLIR's

defense against Stringer's pending wrongful termination

action because it tended [***24] to justify Stringer's

termination. Wynne therefore asked Rosenbaum, in her

capacity as FLIR's counsel, to contact the SEC and

inquire about the absence of that entry from the SEC's

complaint against Stringer. At that time, Rosenbaum

considered her representation of all the joint

representation clients other than FLIR to be over; also,

both she and Ellis thought that the Swedish Drop

Shipment entry implicated Stringer, but not Samper, who

no longer had a pending action before the SEC.

Rosenbaum called the SEC on October 3, 2002,

conveying Wynne's offer that FLIR would assist the SEC

in its case against Stringer and noting Wynne's surprise

that the SEC's complaint against Stringer did not mention

the Swedish Drop Shipment.

[*705]C. Fitzhenry'sBar Matter

Also in October 2002, Fitzhenry asked Ellis to

self-report to the Bar on Fitzhenry's behalf, regarding an

acknowledgment in Fitzhenry's Wells Submission and

SEC settlement order that he had signed an inaccurate

management representation letter in 1999, in reliance on

prior signatures from Stringer, Samper, and others.10

Ellis notified the Bar and sent a confirming letter in

November 2002, explaining that Fitzhenry by his

signature had intended [***25] to verify only the

legal--not accounting--representations made in the

management representation letter and that he otherwise

had relied on FLIR's CEO (Stringer), CFO (Samper), and

outside auditors for verification that a particular sale

referred to in the letter could be recorded and that the

accounting representations were therefore accurate. The

next month, Ellis sent the Bar additional materials and a

Page 7356Ore. 691, *704; 344P.3d 425, **433;

2015 Ore. LEXIS 130, ***21

longer letter that, among other things, reiterated that

Samper, as CFO and also a signatory on the letter, was a

person directly responsible for accounting issues at FLIR

and that Samper had assured Fitzhenry that the

representations in the letter were accurate. The Bar filed a

complaint against Fitzhenry in November 2003, and Ellis

thereafter represented [**434] him in his Bar matter.

This court ultimately suspended Fitzhenry for 120 days,

for violating former DR 1-102(A)(3) (conduct involving

misrepresentation). Inre Fitzhenry,343Ore 86,162P3d

260(2007).

10 The letter was a negative assurance letter to

FLIR's independent auditor, intended to represent

that its contents--which concerned several

transactions--were accurate to the best of each

signatory's belief. Daltry, Stringer, Samper, and

others had signed the letter before Fitzhenry.

D. Department[***26] of Justice Investigation

In January 2003, an Assistant United States

Attorney, Garten, told Ellis that the Department of Justice

(DOJ) was opening a criminal investigation into FLIR's

accounting. None of the involved lawyers who testified at

the trial panel hearing--including the accuseds--had

anticipated a criminal investigation, and they all were

surprised to learn about it.11 Over the next several weeks,

Garten and [*706] the accuseds either met or

communicated several times, and the accuseds produced

FLIR documents to the DOJ or the FBIat Garten's

request. As discussed below and later in this opinion, the

nature of the conversations and extent of the document

production underlie some of the Bar's conflict of interest

and misrepresentation allegations.

11 According to testimony in the record, in the

early 2000s, if the DOJ became interested in the

target of an SEC investigation, then the SEC

investigation typically would be stayed and the

DOJ would commence its own investigation. That

practice began to change after the Enron scandal

that began in 2001, with its ensuing criminal

prosecutions that continued for years afterward.

Here, unbeknownst to the accuseds and other

participants in the SEC [***27] proceeding, the

SEC and the DOJ had been communicating about

the FLIR investigation since summer 2000.

As to Samper specifically, the accuseds,

Glade, and Kaner all thought throughout the SEC

investigation that Samper had not acted

fraudulently and did not think at the time of

Samper's SEC settlement that he would need a

criminal attorney.

Garten initially told the accuseds that he did not

intend to target FLIR, but he pressed for both FLIR and

the accuseds personally to cooperate with the DOJ in

building a case against all potential defendants. In a

subsequent meeting that Ellis attended, Lewis assured

Garten that FLIR would cooperate, but the accuseds did

not thinkthat they ethically could assist in a case against

their former clients.

Garten later wrote to the accuseds and reiterated his

request that they cooperate; his letter also suggested that

FLIR had requested immunity.12 Garten eventually

withdrew his request for the accuseds' personal

cooperation, although he continued to request assistance

with document production and witness scheduling.

Garten also told the accuseds in his last meeting with

them that, as to Daltry and Fitzhenry but not Samper, he

might not pursue individual [***28] criminal cases if

they cooperated. Garten later sent a confirming e-mail

that continued to request the accuseds'assistance in

witness scheduling and reiterated an earlier document

request. Thereafter, the accuseds had no direct contact

with Garten other than document production--which by

this time was ongoing--and witness scheduling.

12 As explained later in this opinion, other

evidence in the record--including testimony from

various witnesses and a subsequent declaration

from Garten--showed that the DOJ did not make

any immunity arrangement with FLIR.

On the same day as the accuseds'last meeting with

Garten, Rosenbaum told Glade--and later confirmed in

writing--that FLIR was not a DOJ target and that Samper

[*707] and others, including Daltry, Fitzhenry, and

Eagleburger, might need lawyers in connection with the

DOJ investigation. Her confirming letter to Glade also

stated that the accuseds expected to continue to assist

FLIR with document production and witness scheduling.

Rosenbaum sent a similar letter to Eagleburger's

independent counsel, Neil. Rosenbaum also eventually

reached Daltry; on her recommendation, Daltry

immediately retained criminal defense counsel, Myers.

Rosenbaum told Myers about[***29]Garten's document

requests, that FLIR was not a DOJ target, and that Garten

was inclined to give Daltry immunity if he cooperated;

Page 8356Ore. 691, *705; 344P.3d 425, **433;

2015 Ore. LEXIS 130, ***25

Ellis reiterated several of those points to Myers the next

day. By about this time, Stoel Rives had sent numerous

FLIR documents to either the DOJ or the FBI--many

were part of the public record, and many, but not all, had

been produced to the SEC previously.

In late February 2003, after meeting with Garten to

reiterate FLIR's intent to cooperate, Wynne proposed to

the accuseds that FLIR retain separate counsel as to the

DOJ [**435] investigation but that the accuseds

continue to produce FLIR documents as needed and to

schedule witness interviews.13 The accuseds tentatively

agreed and determined that they were not obligated to

make any disclosure about the arrangement to Daltry,

Samper, or Eagleburger. They nonetheless decided, in the

exercise of caution, to send a disclosure letter and obtain

consent.

13 The accuseds characterize that arrangement

as "Stoel Rives's ministerial role."We refer to the

arrangement as the accuseds' limited

representation of FLIR during the DOJ

investigation.

On March 3, 2003, Rosenbaum sent a disclosure

letter to FLIR and also, in care of their [***30]

individual counsel, to Daltry, Samper, and Eagleburger.

The letter explained that FLIR was cooperating with the

DOJ and did not expect to be a defendant; that Stoel

Rives had been asked to advise FLIR and assist in

producing documents and scheduling witness interviews;

that the investigation related to the accuseds'earlier

representations of Daltry, Samper, and Eagleburger, and

had potentially adverse consequences to them; and that

Stoel Rives would not voluntarily disclose either client

confidences or information or materials arguably subject

[*708] to confidentiality claims. The former clients all

consented. In the meantime, the accuseds scheduled

further witness interviews and had produced more

documents to the DOJ. For its part, FLIR retained other

counsel to represent it in other aspects of the DOJ

investigation.

In September 2003, Stringer, Martin, and Samper

were indicted in United States District Court for criminal

securities violations. They moved to dismiss, asserting

violations of due process and self-incrimination

protections stemming from surreptitious cooperation

between the SEC and the DOJ. Samper further argued

that the government had taken unfair advantage of the

accuseds'[***31]purported conflict of interest. The

District Court agreed with the defendants'arguments and

dismissed the indictments in 2006, but the Ninth Circuit

vacated the dismissals in 2008.14 United States v.

Stringer,535F3d929,942(9thCir 2008). The Ninth

Circuit decision brought the case to the Bar's attention.

None of the clients or lawyers involved complained to the

Bar about the accuseds'conduct.

14 The DOJ eventually moved to dismiss most

of its charges against Stringer and Samper, but

ultimately obtained one misdemeanor conviction,

for receiving stolen money, as to each of them.

E. Bar ComplaintsandTrialPanelHearingandDecision

The Bar filed amended complaints against the

accuseds in February 2012, alleging violations of former

DR 1-102(A)(3) (misrepresentations by omission) (one

cause and one alternative cause as to each); former DR

5-105(C) (former-client conflict) (one alternative cause as

to each, and one additional cause as to Ellis); and former

DR 5-105(E) (current-client conflict) (nine causes as to

Rosenbaum, and 10 as to Ellis). The amended complaints

were identical, except that the complaint against Ellis

contained two additional allegations concerning his

representation of Fitzhenry in the latter's Bar matter.

The trial panel conducted a hearing in 2012 and

concluded [***32] in 2013 that the Bar had not proved

most of the alleged violations, but had proved some

violations, and further determined that the appropriate

sanction was a public reprimand. The accuseds requested

review of all the panel's conclusions that violations had

occurred, and the Bar raised [*709] additional

challenges to several panel conclusions that no violation

had occurred. We summarize the panel's decisions at

issue on review in our discussion below.

II.DISCIPLINARYRULES

As noted, the Bar's complaints alleged misconduct

under the former Code of Professional Responsibility.15

Former DR 5-105 set out the client-conflict rules and

provided, in part:

"(A) Conflict of Interest. A conflict of

interest may be actual or likely.

[**436] "(1) An 'actual conflict of

interest'exists when the lawyer has a duty

to contend for something on behalf of one

Page 9356Ore. 691, *707; 344P.3d 425, **434;

2015 Ore. LEXIS 130, ***29

client that the lawyer has a duty to oppose

on behalf of another client.

"(2) A 'likely conflict of interest'

exists in all other situations in which the

objective personal, business or property

interests of the client are adverse. A 'likely

conflict of interest' does not include

situations in which the only conflict is of a

general economic or business nature.

"* * * *

"(B) [***33] Knowledge of Conflict

of Interest. For purposes of determining a

lawyer's knowledge of the existence of a

conflict of interest, all facts which the

lawyer knew, or by the exercise of

reasonable care should have known, will

be attributed to the lawyer.

"(C) Former Client

Conflicts--Prohibition. Except as

permitted by [former] DR 5-105(D), a

lawyer who has represented a client in a

matter shall not subsequently represent

another client in the same or a

significantly related matter when the

interests of the current and former clients

are in actual or likely conflict. Matters are

significantly related if either:

"(1) Representation of the present

client in the subsequent matter would, or

would likely, inflict injury or damage

upon the former client in connection with

any proceeding, claim, controversy,

transaction, investigation, charge, [*710]

accusation, arrest or other particular matter

in which the lawyer previously

represented the former client; or

"(2) Representation of the former

client provided the lawyer with

confidences or secrets as defined in

[former]DR 4-101(A), the use of which

would, or would likely, inflict injury or

damage upon the former client in the

course of the subsequent matter.

"(D) Former Client [***34]

Conflicts--Permissive Representation. A

lawyer may represent a client in instances

otherwise prohibited by [former] DR

5-105(C) when both the current client and

the former client consent to the

representation after full disclosure.

"(E) Current Client

Conflicts--Prohibition. Except as provided

in [former]DR 5-105(F), a lawyer shall

not represent multiple current clients in

any matters when such representation

would result in an actual or likely conflict.

"(F) Current Client

Conflicts--Permissive Representation. A

lawyer may represent multiple current

clients in instances otherwise prohibited

by [former] DR 5-105(E) when such

representation would not result in an

actual conflict and when each client

consents to the multiple representation

after full disclosure * * *."

Former DR 10-101(B) established the requirements for

"full disclosure"under former DR 5-105; it provided, in

part:

"(1) 'Full disclosure' means an

explanation sufficient to apprise the

recipient of the potential adverse impact

on the recipient, of the matter to which the

recipient is asked to consent.

"(2) As used in * * * [former]DR

5-105 * * *, 'full disclosure'shall also

include a recommendation that the

recipient seekindependent legal advice to

determine if consent should be given

[***35] and shall be contemporaneously

confirmed in writing."

Finally, former DR 1-102(A) provided, in part:

"(A) It is professional misconduct for a

lawyer to:

"* * * * *

"(3) Engage in conduct involving

dishonesty, fraud, deceit or

misrepresentation."

Page 10356Ore. 691, *709; 344P.3d 425, **436;

2015 Ore. LEXIS 130, ***32

15 We quote the former disciplinary rules at

issue from the 2000 version of the former Code of

Professional Responsibility. The text from the

2000 versions of the rules remained the same

through 2004, which spans the years of the events

at issue in this case.

[*711]Below, we address each of the trial panel's

conclusions concerning the rules set out above that are at

issue on review. Our discussion is organized in the same

chronological order in which the underlying events

occurred.

III.FIRST CAUSE--FORMER DR 5-105(E),

CURRENT-CLIENT LIKELY CONFLICTS AT

OUTSET OFSEC INVESTIGATION

A. TrialPanelDecision,Parties'ContentionsonReview,

andGeneralDiscussion

The first cause alleged that the accuseds had violated

former DR 5-105(E) when they [**437] agreed to

represent FLIR on the one hand, and Daltry, Samper,

Fitzhenry, and Eagleburger on the other, at the outset of

the SEC investigation, with insufficient disclosure and

consent concerning likely conflicts of interest.16The trial

panel concluded that [***36] no likely conflict of

interest existed. The Bar challenges that conclusion on

review, arguing in part that the panel incorrectly applied

the "actual conflict" standard under former DR

5-105(A)(1), instead of the "likely conflict" standard

under former DR 5-105(A)(2). The Bar contends that,

under that latter standard, the interests of FLIR, Daltry,

Samper, Fitzhenry, and Eagleburger were adverse

because, although they all hoped that the SEC would find

no misconduct, they each had an interest in protecting

themselves if it did--including, to the extent necessary,

identifying and testifying against possible wrongdoers in

the group. The Bar continues that the SEC was likely to

share its information with other agencies for use in future

criminal, disciplinary, or other proceedings, in which

Fifth Amendment incrimination implications and

professional licenses might have been at stake. The Bar

also asserts that any self-protective step that an individual

client might have taken during the SEC investigation in

turn might have been adverse to FLIR, which had an

interest in setting a cooperative tone with the SEC. The

Bar then argues that the accuseds'disclosure letters did

[*712] not satisfy the "full disclosure" requirements

under former [***37] DR 10-101(B), to ensure informed

consent to the joint representation, and also that--because

they did not send him a letter--no disclosure at all had

been made to Samper.17

16 The complaint alleged additional clients, but

we address only those clients whom the Bar has

identified on review. Further, throughout this

opinion, we have addressed only particular

current or former clients and particular issues

that--in collective consideration of the complaint

allegations, the trial panel's opinion, and the

parties'arguments in their briefs--are properly at

issue on review.

17 The complaints refer in the first cause to

alleged conflicts arising only "[w]hen [the

accuseds]undertookto represent"all the clients in

the SEC joint representation and refer in the

second cause to further alleged conflicts arising

duringthe investigation stage, through the course

of witness interviews and ending with the Wells

phase. The trial panel concluded that the Bar had

not proved the allegations in the first cause, but,

in reaching that conclusion, it extensively

addressed facts arising during the SEC

investigation up to the Wells phase, not those in

existence at the outsetof the investigation. In its

brief, the Bar identifies both the first and second

causes as being at issue on review; however,

it--like the panel--primarily treats the first cause

as relating to activities during the SEC [***38]

investigation up to the Wells phase (with some

limited argument about conflicts at the outset of

the representation) and the second cause as

concerning the Wells phase.

Consistently with the amended complaints

and the Bar's identification of the causes and

issues on review, we consider allegations and

arguments about conflicts at the outset of the SEC

investigation as part of the first cause, and we

then consider the panel's determinations relating

to ongoing investigation issues before and during

the Wells phase--and the parties' respective

arguments about those determinations--as part of

the second cause.

The accuseds disagree that FLIR and the identified

individual clients had adverse interests at the outset of the

SEC investigation, and they assert that the trial panel

therefore correctly determined that no likely conflict of

interest existed. The accuseds point to evidence

Page 11356Ore. 691, *710; 344P.3d 425, **436;

2015 Ore. LEXIS 130, ***35

demonstrating--in their view--that the Bar's adversity

theories are incorrect and that, instead, their multiple

representation strategy in the context of the SEC

investigation was a common and widely accepted

practice that was both effective and ethical. The accuseds

relatedly argue that, even if any likely conflict [***39]

of interest existed, they disclosed all material information

to their clients so as to obtain their informed consent to

the joint representation.

The Bar is correct that its first cause focused on

"likely" current-client conflicts, rather than "actual"

conflicts, at the outset of the SEC investigation. The Bar

is also correct that the trial panel nonetheless concluded

that no "actual"conflict had existed because the accuseds

had no duty at that point in time to contend for a position

on behalf of one client that they had a duty to oppose on

behalf of another, under former DR 5-105(A)(1).

However, the panel [*713] also concluded that the

interests of FLIR and the individual clients were not

"adverse" or in likely conflict during the SEC

investigation process--amounting to an effective determi

[**438] nation that no such conflict had existed at the

outset of the SEC investigation. We proceed to address

the Bar's challenge under this cause by determining

whether a likely conflict existed.

Under former DR 5-105(A)(2), a likely conflict

exists when the "objective, personal, business or property

interests of the clients are adverse." Concerning a

multiple client representation, the specific question under

former DR 5-105(A)(2) is whether the client [***40]

interests "are adverse"(emphasis added) at the time that

the lawyer seeks to undertake the representation, not

whether they might be adverse in the future. See Inre

Hostetter,348 Ore 574,594,238 P3d 13 (2010)(so

stating; focus is whether respective interests were

"adverse from the outset,"not whether client injured later

as result of a conflict). Indeed, the fact that a conflict

develops later does not mean that adversity existed at the

outset. See Inre Samuels/Weiner,296Ore 224,230,674

P2d 1166 (1983) (court rejected Bar's prediction of

potential future conflicts in partnership and reliance on

ultimate breakdown of partners'relationship to support

allegations under earlier version of former DR 5-105(A)).

Respecting "adverse"interests, this court has noted

under an earlier version of former DR 5-105 that a

lawyer's independent judgment can be adversely affected

when two or more clients "have differing interests,

whether such interests be conflicting, inconsistent,

diverse, or otherwise discordant."18Inre Johnson,300

Ore 52,58n4,707P2d573(1985)(internal quotation

marks omitted); see also Webster's Third New Int'l

Dictionary31 (unabridged ed 2002) (defining "adverse,"

in part, as "acting against or in a contrary direction:

OPPOSING * * * : HOSTILE, OPPOSED,

ANTAGONISTIC * * * 2 a : in opposition to one's

interests : DETRIMENTAL, [***41]

UNFAVORABLE"). This court has identified many

scenarios involving readily identifiable client [*714]

interests that are adverse by their nature, such as

debtor-creditor relationships, Hostetter,348Ore at593;

spousal and similar relationships with opposing legal

interests, Inre Lawrence,337Ore 450,461,98P3d366

(2004)(alleged batterer and victim); In re Cohen,316

Ore 657,661-62,853 P2d 286 (1993)(spouses with

diverging interests in different proceedings--criminal

mistreatment case for husband, related juvenile case in

which children might be taken from wife); and criminal

coconspirators or codefendants, In re Jeffery,321Ore

360,370-71,898P2d752(1995); Inre O'Neal,297Ore

258,260-66,683P2d 1352 (1984). In those

circumstances, the court has explained that the conflicts

rules guard against a lawyer's impaired judgment or

divided loyalty arising from differing client interests. See

O'Neal,297Ore at264(lawyer who undertakes multiple

client representations involving differing interests must

carefully weigh possibility that the lawyer's judgment

might be impaired or loyalty divided); Inre Porter,283

Ore 517,521-22,584P2d744(1978)(to same general

effect).

18 Former DR 5-105(B) (1984) provided that

"[a]lawyer shall not continue employment if the

exercise of his independent professional judgment

in behalf of a client will be or is likely to be

adversely affected by his representation of another

client, except to the extent permitted under DR

5-105(C)."

By contrast, this court also has explained [***42]

that the interests of multiple clients might be

consistent--and therefore not adverse--at the time that the

lawyer seeks to undertake a new representation. In Inre

Cobb,345Ore 106,190P3d1217(2008), for example,

the accused lawyer represented several investors who

were part of investor partnerships in a company involved

in questionable taxdealings. The lawyer first represented

the investors in "test cases"against Internal Revenue

Page 12356Ore. 691, *712; 344P.3d 425, **437;

2015 Ore. LEXIS 130, ***38

Service (IRS) personnel and later represented the investor

partnerships in challenging the disallowance of certain

IRSdeductions. Id.at110-11. An entity associated with

the company later filed Chapter 11 bankruptcy, and the

investor partnerships retained the same lawyer to protect

their interests--including assets--in that proceeding. Id.at

111. Unrelated creditors later forced the entity and the

company into Chapter 7 bankruptcy, and the lawyer

represented the debtor company in that proceeding for the

sole purpose of raising a jurisdictional defense that might

[**439] have resulted in dismissal of the bankruptcy. Id.

at 112. The Bar argued that the lawyer had a

current-client likely conflict of interest when he

represented the investor partnerships in the Chapter 11

proceeding and the company [*715] in the Chapter 7

proceeding, asserting [***43] what the Bar contended

were adverse positions. This court disagreed, reasoning

that the lawyer's assertions in both proceedings were

consistent with each other.19Id.at133n18. The court

also explained, in the course of rejecting a related

conflicts argument on the Bar's part, that the interests of

the investor partnerships and the company were not those

of creditor-debtor at the time in question. Id.at133.

19 According to the court, in the Chapter 11

proceeding, the lawyer had argued on behalf of

the investor partnerships that they had financial

means to maintain the assets and that their

continuing payments to the company would

enable the company to meet other obligations.

Similarly, in the Chapter 7proceeding, the lawyer

had taken the position that the investor

partnerships'payments were made for purposes of

preserving the assets. Cobb,345Ore at133n18.

In sum, our task in determining whether the

accuseds'clients'interests were adverse at the outset of

the SEC investigation under former DR 5-105(A)(2)

involves determining from the record whether--at that

point in time--those interests were contrary or in

opposition to one another, or, instead, were consistent or

aligned. We now turn to the record to determine whether

the Bar proved by [***44] clear and convincing

evidence that the accuseds'clients'interests were adverse

at the outset of the SEC investigation.

B. No LikelyConflictsatOutsetof SECInvestigation

Several witnesses testified as to the nature of the

respective clients'interests at the outset of the multiple

representation. Ellis, who was experienced in the field,

testified that a public company subject to an SEC

investigation has two principal interests:to move the

process along quickly toward resolution, and to maintain

public confidence. The company's board has similar

interests, plus an additional interest in assuring itself that

current management maintains accurate financial

statements. Officers--who run the riskof liability for past

conduct--also share the same interests as the company

and have an additional interest in not being damaged by

speculative testimony. Employees have an interest in

avoiding workplace difficulties, such as fear of retaliation

at workor instability of the employer. And, all witnesses

have an interest in avoiding becoming embroiled in any

"process violation"during the investigation, such as SEC

accusations of untruthful testimony, failure to produce

[*716] requested documentation, [***45] or obstruction

of justice. Ellis continued that all those identified

interests are served by encouraging truthful,

nonspeculative testimony and cooperation with the

investigation. Ellis rejected the notion--advanced by the

Bar--that FLIR had an interest in restricting the flow of

information to the SEC, which would have invited a

process violation accusation and could have breached

FLIR's fiduciary duties as a public company; instead,

FLIR, like the other clients, had an interest in fully

cooperating.

Ellis further testified that individual clients did not

have the same risks, at the outset of this SEC

investigation, that they might have in other litigation

contexts. For example, under federal law, potential SEC

enforcement defendants at that time were not subject to

cross-claims for contribution or other proportionate fault

sharing arguments. And, insurance in the SEC

investigation context typically covered defense costs for

both the company and the individual directors and

officers, but not settlement costs, so the clients had no

conflicting settlement interests in a common insurance

fund.

Both Ellis and Rosenbaum (also experienced in the

field) explained that an SEC investigation differs [***46]

from private securities litigation in other ways, in that (1)

no formal charges or allegations have been made; (2) the

investigation is factual only--here, to determine if FLIR's

restatements were due to innocent errors or fraud--and

witnesses are expected only to answer questions to the

best of their ability, with no cross-examination; (3)

lawyers serve as counsel for witnesses to prepare for and

attend interviews, but do not [**440] sponsor the

Page 13356Ore. 691, *714; 344P.3d 425, **438;

2015 Ore. LEXIS 130, ***42

witnesses as a lawyer would in trial; and (4) lawyers do

not advocate in any way for any client. Relatedly, it was

not in any client's interest to project blame on other

clients during the SEC investigation stage. As Ellis put it,

in the context of an investigation concerning accounting

irregularities, a securities violation either occurred or did

not occur, and no client has an interest in encouraging the

SEC to pursue any particular individual.

Finally, Ellis and Rosenbaum both testified that each

of their clients had an interest in learning as much as

possible about the SEC's investigation, which the joint

[*717] representation--as arranged at the

outset--permitted them to do. By responding to document

requests, attending witness interviews, and reviewing

[***47] related documentation, the accuseds were able

to alert each client to particular transactions at issue and

witness testimony relevant to their own interview

preparation, so that they in turn could provide more

refreshed, forthright, and honest testimony. The Bar did

not effectively counter any of the above-summarized

testimony.

As to the individual clients, Glade and Kaner

confirmed that the accuseds'joint representation was

advantageous to Samper and that, at the outset of the SEC

investigation, Samper's interests were aligned with--not

adverse to--FLIR's interests. Glade also agreed that

Samper's primary interest in testifying was to be truthful

with the SEC, and Kaner agreed that all participants had

an interest in cooperating. Glade did not recall thinking

that the accuseds had any conflict of interest with Samper

during the course of the SEC investigation, and Kaner

also never concluded that any conflict existed.20 Wynne

and Fitzhenry similarly testified that FLIR had no interest

during the SEC investigation in projecting blame on

Samper or others.

20 In other parts of this opinion, we similarly

observe that independent counsel for certain

clients, with knowledge of the key facts, did

[***48] not think that any conflict of interest

existed as various events unfolded. Although

another lawyer's assessment of the existence of a

conflict is of course not dispositive, we find such

assessments here--made by several experienced

lawyers--to be a useful component for our

consideration of the Bar's alleged rule violations.

The accuseds also presented the testimony of an

expert witness, Maletta, who was a former SEC lawyer

with extensive experience in securities enforcement and

governmental investigations, and who had authored part

of a leading text that included discussion of ethical issues

involved in SEC joint representations. Maletta testified

generally about accepted and common practices during

an SEC investigation, including a joint representation

similar to that arranged here, which can be very

advantageous in certain circumstances and was the

presumptively preferred approach of many who practiced

in the field. Specifically, Maletta testified that it was

common practice for a single firm to individually

represent the company and subpoenaed company officers

and employees, provided that no [*718] identifiable

conflicts of interest exist and the company supports the

individuals'positions. [***49] 21 Maletta explained that

the interests of all such individuals are typically aligned

because they share an interest in ensuring that no

enforcement action is brought against anyone in the

group. Maletta testified, similarly to the testimony of the

accuseds, that all individuals involved typically have the

same objectives, such as cooperating, testifying

truthfully, and being forthcoming with the SEC. Maletta

added that it is important in the representation to prevent

projecting blame, which is counterproductive and not a

useful strategy during the investigation stage, when there

are no formal defendants, subjects, or targets. Maletta

also confirmed the testimony of the accuseds, Glade, and

Kaner that the principal benefit of joint representation is

that each client obtains access to information that

otherwise would not be available because the SEC has no

obligation to share it. To be sure, Maletta agreed with the

Bar that joint representation [**441] can present

potential perils for clients, depending on the

circumstances, and that joint representation of a company

and its managers and employees can involve tensions at

the outset--particularly if intentional wrongdoing appears

to have occurred. [***50]As noted, however, Maletta

also generally testified about the advantages of joint

representation and that the company's and represented

individuals'interests frequently are aligned at the outset

and during the investigation phase in the manner that he

described.22

21 Maletta contrasted the type of investigation at

issue here--in which, he explained, the interests of

the company and individual clients tend to be

aligned--with an investigation that by its nature

would typically involve intentional wrongdoing

by one or more persons, such as one involving

insider trading, embezzlement, or obstruction of

Page 14356Ore. 691, *716; 344P.3d 425, **440;

2015 Ore. LEXIS 130, ***46

justice.

22 In addition to Maletta's general testimony

about accepted and common practices during an

SEC investigation, the accuseds sought to

introduce additional testimony from Maletta to

the effect that the joint representation in this case

was consistent with general practice and that

FLIR's and the individual clients'interests had

been aligned at the outset of the SEC

investigation. The Bar objected, and the trial

panel ruled that Maletta could testify only in the

abstract as to SEC defense workgenerally, relying

on Inre Leonard,308Ore 560,570,784P2d95

(1989). The accuseds filed an offer of proof

containing Maletta's opinions on case-specific

[***51] issues and contend on review that the

panel's ruling in that regard was incorrect.

In light of our ultimate conclusion, after

reviewing the evidence in the record that the trial

panel admitted, that the Bar did not prove by clear

and convincing evidence the violations alleged in

this cause, it is not necessary to address the

accuseds'contention on review that the panel

erred in rejecting Maletta's case-specific

testimony.

[*719] The testimony summarized above comprises

the essential evidence in the record concerning the

propriety of the accuseds'joint representation at the

outset of the SEC investigation. The Bar presented no

contrary testimony--expert or otherwise--detracting from

the evidence showing that joint representation was a

common practice in SEC investigations of this kind, that

the clients'interests at the outset of such a representation

tend to be aligned, and that the joint representation in the

context of the SEC's investigation here was appropriate

under the circumstances.

Further, although the Bar raises several arguments

purporting to show why the accuseds'clients'interests

were adverse, those arguments effectively focus on the

potentialfor adversity to arise; they do not [***52] point

to evidence in the record showing that the clients'

interests were adverse at the outset. For example, the Bar

argues that the interests of FLIR, Daltry, Samper,

Fitzhenry, and Eagleburger were adverse because they

each had an interest in protecting themselves if the SEC

eventually found misconduct to have occurred, including,

to the extent necessary, identifying and testifying against

each other. As summarized earlier, however, the evidence

showed that no client had any interest at the outset of the

SEC investigation in projecting blame on others. The Bar

also did not prove that the SEC was likely to share its

information in this case with other agencies for use in

future criminal, disciplinary, or other proceedings:

Although the Bar did show that the lawyers and witnesses

knew that the SEC was permitted to share its information

with other agencies, none of the involved lawyers had

any reasonable expectation that the DOJ would involve

itself in this particular investigation. The record further

shows that, at that point in time, the DOJ typically did not

have a significant level of involvement in ongoing SEC

investigations, unless it chose to actively step in and stay

the SEC [***53] proceeding. Finally, the Bar did not

present evidence to support its argument that any

particular client's hypothetical efforts to take

self-protective steps during the SEC investigation in turn

might have been adverse to FLIR.

[*720] We conclude that the Bar did not prove by

clear and convincing evidence that the interests of FLIR

and the accuseds'individual clients Daltry, Samper,

Fitzhenry, and Eagleburger were adverse at the outset of

the SEC investigation and therefore did not prove the

existence of any current-client likely conflict of interest at

that time under former DR 5-105(A)(2) and former DR

5-105(E). Because we conclude that the Bar did not prove

the existence of such a conflict, we need not decide

whether the accuseds made sufficient disclosures so as to

obtain consent to the joint representation under former

DR 5-105(F) and former DR 10-101(B).23

23 We generally note, however, that a lawyer

taking on a similar joint representation should--in

the exercise of caution--consider following

applicable full disclosure rules as to the key

participants.

[**442] IV. SECOND CAUSE--FORMER DR

5-105(E), CURRENT-CLIENT ACTUAL AND

LIKELY CONFLICTS DURING SEC

INVESTIGATION, INCLUDINGWELLS PHASE

A. TrialPanelDecision and Parties'Contentionson

Review

The second cause [***54] alleged that the accuseds

had violated former DR 5-105(E) when they continued to

represent FLIR on the one hand, and Daltry, Samper,

Fitzhenry, and Eagleburger on the other, during the SEC

Page 15356Ore. 691, *718; 344P.3d 425, **441;

2015 Ore. LEXIS 130, ***50

investigation, once it became apparent that actual or

likely conflicts had arisen. The Bar's allegations under

this cause generally refer to SEC witness interviews and

also to the Wells phase. The trial panel rejected several

Bar theories under this cause and specifically disagreed

with the Bar that any actual conflict of interest arose

before the Wells phase, which the Bar challenges on

review. The panel did, however, determine that the Bar

proved its allegations of likely conflicts of interest and

insufficient disclosure under this cause in two respects.

First, the trial panel determined that FLIR's statement

in its Wells Submission that referred to the SEC

"pursuing fraud claims against one or more individuals

who may have been responsible" for the accounting

errors, "to the extent that wrong-doing may have

occurred,"established that FLIR's interest in the SEC

representation was adverse [*721] to those of Samper,

Fitzhenry, and Eagleburger. In the panel's view, that

statement told the SEC that FLIR had concluded [***55]

that wrongdoing had occurred and that fraud claims

perhaps were appropriate as to those individual

clients--who all ultimately had received Wells Notices

and who each had an interest in having FLIR refrain from

acknowledging that any wrongdoing had occurred.

Because the accuseds did not make full disclosure to or

obtain consent from those clients as to continuing the

joint representation, the panel concluded that the

accuseds had violated former DR 5-105(E). The accuseds

challenge that conclusion on review.

Second, the trial panel determined that Rosenbaum

had violated former DR 5-105(E) when she called the

SEC on October 3, 2002, to inquire about the lack of

reference to the Swedish Drop Shipment in the SEC

complaint against Stringer. According to the panel, that

phone call--made in behalf of FLIR and Wynne--had

been adverse to Samper's interests. The panel analyzed

the phone call under the Bar's sixth cause, which more

generally had alleged a current-client conflict between

Wynne and Samper (and others), and did not specifically

mention the phone call. On review, the Bar contends that

Rosenbaum's October 3, 2002, phone call to the SEC fell

within its general allegations under the second cause and

that the [***56] panel's conclusion was correct under

that cause. The accuseds, for their part, challenge on

review any determination that a rule violation occurred

based on Rosenbaum's phone call to the SEC.

We address the parties'arguments under this cause in

three parts:the SEC investigation leading up to the Wells

phase; the Wells phase; and Rosenbaum's October 3,

2002, phone call to the SEC.

B. No Current-ClientLikelyConflictsDuringPre-Wells

Phase

In disagreeing with the trial panel's conclusion that

the Bar did not prove any likely conflict of interest during

the SEC investigation up to the Wells phase, the Bar

argues that (1) as witnesses provided information to the

SEC, likely conflicts of interest under former DR

5-105(A)(2) arose between FLIR and the individual

clients; (2) during that time, any self-protective step that

any individual client took [*722] was arguably adverse

to other clients and to FLIR, which had an interest in

setting a cooperative tone with the SEC; and (3) as the

investigation progressed, FLIR's interest in remediation

grew stronger, which in turn was adverse to certain

individual clients'interests in remaining employed and in

preserving favorable professional reputations. In

response, [***57] the accuseds point to evidence in the

record that they assert supports the panel's conclusion

that no likely conflicts arose in this time frame.

As with our earlier discussion about alleged conflicts

at the outset of the SEC [**443] investigation, the Bar

bears the burden of proving by clear and convincing

evidence that the accuseds'clients'"objective personal,

business or property interests [were]adverse"at the time

in question. Former DR 5-105(A)(2). Also as part of our

analysis, we consider former DR 5-105(B), which

provided that, "[f]or purposes of determining a lawyer's

knowledge of the existence of a conflict of interest, all

facts which the lawyer knew, or by the exercise of

reasonable care should have known, will be attributed to

the lawyer."Again, on de novo review of the record, we

conclude that the Bar did not prove the existence of any

likely conflict of interest up to the Wells phase. We

address the Bar's arguments in turn, below.

Regarding witness testimony, the Bar in particular

cites SEC interviews of Fitzhenry, Wynne, Muessle

(FLIR's then-current controller), and Chambers (the

employee who testified about document destruction), and

argues that those witnesses offered testimony that was

adverse to Samper's [***58]interests. We consider four

aspects of that testimony and, as did the trial panel,

conclude that the Bar did not show that the testimony

demonstrated the existence of any likely conflict of

interest.24

Page 16356Ore. 691, *720; 344P.3d 425, **442;

2015 Ore. LEXIS 130, ***54

24 We focus on the four topic areas addressed in

greatest detail at the trial panel hearing. In the

facts section of its brief, the Bar generally states

that several clients commented unfavorably on the

credibility of others during their SEC interviews

and lists isolated factual assertions from several

witnesses'interviews, including witnesses other

than the four mentioned in the text above. In the

argument section of its brief, however, the Bar

states only very generally that the accuseds heard

all those witnesses offer SEC testimony that was

adverse to Samper, with no elaboration. The

record in this case--which includes lengthy

excerpts from several SEC transcripts--is almost

12,800pages long. We decline to examine each

isolated, separate factual statement set out in the

Bar's brief without further explication from the

Bar, such as providing context or a purported link

between each statement and the existence of a

current-client likely conflict.

[*723] As to Fitzhenry, the SEC asked him about

the [***59] 1999management representation letter that

he and Samper (and others) had signed, which had served

to confirm the accuracy of certain 1999FLIR quarterly

results. The letter had confirmed that FLIR had

recognized certain revenue properly, but that

representation later was determined to be incorrect.

Fitzhenry's practice had been to sign such letters, based

on representations from Samper or the former FLIR

controller that the accounting representations made

therein were true. Fitzhenry told the SEC in at least one

interview that he did not recall having any particular

conversation with Samper about the letter at

issue--concerning the specific accounting-related content

in the letter or otherwise--other than Samper asking him

to sign it. In response to questions about conversations

with Samper about the letter, Fitzhenry stated in that

interview that "the discussions that Iwould have had

were more general in nature, * * * representations from

either [Samper]or [the former controller], * * * someone

who was [also] a signatory of the letter, that the

representations were true. * * * [B]ased on those

representations, generally, Isigned the letter as well."For

his part, Samper did not recall [***60] any particular

conversation with Fitzhenry about the letter.25 In the

Bar's view, Fitzhenry's SEC testimony showed an

adversity of interest between Fitzhenry and Samper,

based on Fitzhenry's reliance on Samper's general

assurance that the contents of the letter had been accurate.

25 Fitzhenry later testified at his own trial panel

matter, as well as to the trial panel below, that he

recalled generally asking Samper if the contents

of the letter were accurate, and Samper indicated

that they were. Fitzhenry's SEC testimony in the

record that the Bar cites does not include that

specific recollection on his part. And, in any

event, Fitzhenry emphasized in both his Bar

matter and in this proceeding that Samper had a

different recollection, in that he did not recall any

particular conversation about the contents of the

letter.

We disagree. First, the record shows that Samper

reasonably would have expected Fitzhenry to rely on his

assurances about accounting representations in the letter

because Samper, as CFO, accepted responsibility for

FLIR's accounting. Nothing about Fitzhenry's stated

reliance on [*724] Samper established an adversity of

interests between the two clients. Second, we do not read

Fitzhenry's [***61] testimony--as does the Bar--to have

stated that he recalled having had a specific conversation

with Samper about the [**444] 1999management

representation letter in which Samper assured him as to

its accuracy; instead, Fitzhenry only generally described

the process that typically occurred when he was presented

with such letters. And, even if we read Fitzhenry's

testimony to mean that he had asked Samper for general

accounting assurances relating to that particular letter,

when Samper did not recall a similar conversation, such a

scenario does not prove by clear and convincing evidence

that an adversity of interest existed. The record

shows--through testimony from both the accuseds and

their expert witness, Maletta--that differing recollections

are common during the SEC interview phase. It also

shows that Fitzhenry and Samper shared the objective of

providing truthful testimony about their respective

recollections. Finally, it shows that the accuseds sent a

transcript of Fitzhenry's SEC testimony to Glade and

Kaner, and they did not thinkthat Fitzhenry's testimony

demonstrated any conflict with Samper.26 In short,

Fitzhenry's SEC testimony did not establish by clear and

convincing evidence that [***62] a likely conflict of

interest existed between either FLIR or Fitzhenry and

Samper during the SEC interview phase.

26 Fitzhenry testified in October 2000, and the

transcript was sent to Kaner in April 2001. Both

Glade and Kaner generally testified that they did

not think, through the entry of the SEC

Page 17356Ore. 691, *722; 344P.3d 425, **443;

2015 Ore. LEXIS 130, ***58

settlements in September 2002, that any conflict

existed between any of the accuseds'clients and

Samper.

As to Wynne, the Bar first focuses on Wynne's SEC

testimony that FLIR's new independent auditor had

concluded that a high percentage of FLIR's accounting

entries had been erroneous and had observed that, in

Wynne's words, "it's hard to imagine that you could get

more transactions wrong than you got right."The Bar

reads that testimony as an inference by the auditor that

some intentional wrongdoing had occurred, perhaps on

Samper's part, but Wynne denied in that same interview

that the auditor ever had communicated to FLIR any

conclusion about intentional wrongdoing. And, when

viewed in context, Wynne's testimony about the high

percentage of errors related to [*725] Stringer, not

Samper; he specifically identified the auditor's

assessment as a contributing factor in FLIR's decision to

ask Stringer [***63] to resign.27 That testimony

therefore does not provide a basis for concluding by clear

and convincing evidence that a likely conflict of interest

existed between FLIR and Samper during the SEC

interview phase.

27 We further note that, the day after Wynne's

SEC interview, the accuseds had a conversation

with Glade in which Ellis generally described

Wynne's testimony, including other testimony that

the FLIR board's concerns about Samper had

involved competence, not any integrity or honesty

problem.

The Bar also emphasizes Wynne's trial panel

testimony about his ultimate conclusion--while the SEC

investigation was ongoing--that Samper's actions had

amounted to securities fraud. Specifically, by spring

2001, Wynne had concluded that Samper had made

entries and submitted financial statements that contained

figures manipulated as a result of fraud; that is, that

Samper had filed financial statements with the SEC based

on entries that Samper by his own admission either knew

to be inaccurate or did not know their accuracy. In

Wynne's view, that conduct amounted to securities fraud

as legally defined, even though Wynne had not

necessarily concluded that Samper himself had

manipulated any figures. The [***64] record shows that

Wynne offered that testimony carefully, so as not to

assert any belief on his part that Samper had engaged in

intentional wrongdoing.28 And, in any event, neither

accused learned until several years later that Wynne had

reached that general conclusion. Nothing about that

testimony from Wynne demonstrated that FLIR had an

interest adverse to Samper's of which either accused

[**445] reasonably would or should have been aware

during the interview phase of the SEC investigation. See

former DR 5-105(B) (for purposes of determining

lawyer's knowledge of existence of conflict of interest, all

facts that lawyer knew or by exercise of reasonable care

should have known are attributed to lawyer).

28 The Bar also points to Wynne's trial panel

testimony as to his belief that Samper had

"manufactured"the $4.6million figure reflected

by the Swedish Drop Shipment. Wynne later

elaborated on that comment, however, testifying

to his understanding that Samper's figures had

originated with Stringer and that he had assessed

Samper as having engaged in securities fraud

based on Samper's entry of Stringer's figures into

FLIR's books, made while in his capacity as CFO,

when he might not have known with certainty

[***65] whether an underlying transaction had

occurred or whether sufficient documentation

supported such an entry.

[*726] As to Muessle, the Bar states that he

identified in an evaluation for FLIR and FLIR's new

independent auditor questionable transactions that

implicated Samper in wrongdoing, which FLIR--through

the accuseds--sent on to the SEC. Muessle testified at the

trial panel hearing about his evaluation, which had

explained to FLIR's auditor why certain transactions had

been restated due to lack of supporting documentation

and also discussed other problematic transaction reviews.

None of Muessle's evaluation documentation in the

record mentioned Samper in a negative light, and none of

Muessle's panel testimony suggests that he ever thought

that Samper had engaged in intentional wrongdoing.

Notably, also during the SEC interview phase,

Rosenbaum provided similar documentation on Muessle's

transaction reviews to Glade and Kaner; as noted above,

Glade and Kaner never concluded during the course of

the SEC investigation--based on information that they

received from the accuseds on an ongoing basis--that

Samper's interests were adverse to FLIR's. The Muessle

testimony and evaluation documentation [***66] did not

establish by clear and convincing evidence that any

adverse interest arose between FLIR and Samper during

the SEC interview phase.

Page 18356Ore. 691, *724; 344P.3d 425, **444;

2015 Ore. LEXIS 130, ***62

As to Chambers, the Bar focuses on her testimony

about document destruction and other questionable

representations on Samper's part about shipped inventory,

which the Bar views as having implicated Samper in

wrongdoing. The record shows, however, that Chambers

was a lower-level employee without sufficient

understanding of all the detail surrounding FLIR's

shipping arrangements and accounting processes, and so

her testimony did not demonstrate adversity with Samper

in the manner that the Bar contends. Indeed, Kaner

testified that she and Glade had discussed the possibility

that Chambers's testimony demonstrated a conflict, but

they agreed that a conflict had not arisen and that the

interests of FLIR and Samper remained aligned. In that

regard, we agree with the accuseds that Chambers's

testimony illustrated a benefit of the joint representation:

Because Rosenbaum represented both Chambers and

Samper for purposes of the SEC interview phase, she was

present for Chambers's interview and then was able to

confer with Glade and Samper, and adequately prepare

[***67] Samper, so as to provide the SEC with

explanations about [*727] issues arising from

Chambers's testimony--particularly concerning

circumstances about which Chambers had been unaware.

We disagree with the Bar that Chambers's testimony

showed an adverse interest between FLIR and Samper

during the SEC interview phase.

The Bar next contends that self-protective actions

taken by individual clients during the SEC interview

phase showed that those clients had interests adverse to

FLIR's. The Bar cites two examples, both of which

appear from the record to have been joint tactical

recommendations made to Samper by Glade, Kaner, and

the accuseds: (1) Samper participating in the SEC

interviews instead of asserting his Fifth Amendment

privilege against self-incrimination; and (2) Samper

testifying early in the proceedings, to clarify some SEC

factual misunderstandings and to further the joint strategy

of showing that only innocent errors, not intentional

wrongdoing, had occurred.

In the Bar's view, the lawyers'Fifth Amendment

waiver advice showed that Samper had individual

considerations that were adverse to FLIR's. The record

establishes, however, that the four lawyers agreed that it

was in Samper's best interest to cooperate with [***68]

SEC interview requests and that none of the lawyers

reasonably could have anticipated, during the SEC

interview phase, that a DOJ investigation was

forthcoming. As to the lawyers'early testimony advice,

the Bar asserts that that decision harmed Samper in the

ensuing DOJ investigation because the SEC viewed him

critically before all documentation was in order, later

giving the impression that he had not been honest. The

[**446] record does show that, in the end, the SEC

determined that Samper had been disingenuous at best

and had been trying to either mislead the SEC or distract

from the full truth of what had occurred. During the SEC

interview phase, however, Glade and Kaner continued to

thinkthat cooperation and forthcoming testimony was in

Samper's best interests, and both had concurred in the

decision to have Samper testify early.29We disagree that

those two tactical decisions [*728] showed an adversity

of interests between Samper and FLIR, and the Bar points

to no other evidence of individual clients'self-protective

steps that might have showed such an adversity.30

29 The Bar cites a letter that Kaner wrote to the

accuseds several years later, noting that Samper's

early testimony--intended to comply [***69]

with FLIR's efforts to cooperate with the

SEC--had put him on the spot before the

documentation was complete and gave the

impression that he had not acted honestly, which

may have contributed to his criminal indictment.

The question under former DR 5-105(A)(2),

however, is whether the accused lawyer

reasonably knew that the clients'interests were

adverse at the time in question. Kaner's hindsight

observation, following several years'worth of

additional developments including a criminal

prosecution, does not amount to clear and

convincing evidence that the accuseds knew that

any actual adversity existed during the SEC

interview phase. At that time, the possibility

continued that FLIR's and Samper's interests

might diverge, but, as explained above, none of

Samper's four lawyers ever concluded during that

period in time that any adversity in fact had

arisen, and nothing in the record counters that

assessment.

30 The Bar cites Am. Bar Ass'n, Section of Bus.

Law, The SecuritiesEnforcementManual477

(1997),for the proposition that company officers,

directors, and employees involved in an SEC

investigation have an opportunity to limit

individual exposure if they cooperate with the

SEC. However, the Bar [***70] cites to no

evidence in the record--other than that discussed

Page 19356Ore. 691, *726; 344P.3d 425, **445;

2015 Ore. LEXIS 130, ***66

above--showing that any of the accuseds'clients

in this case took any self-protective step that

established by clear and convincing evidence that

their interests were adverse to FLIR's.

The Bar also argues that FLIR's interest in adopting a

remediation strategy grew as the pre-Wells investigation

phase progressed, which was adverse to the individual

clients'interests in remaining employed and preserving a

sound professional reputation.31 The Bar further asserts

that FLIR positioned itself during the investigation to

seek favorable treatment at the expense of individual

clients Daltry, Samper, and Eagleburger. The record

shows, however, that FLIR's general strategy during the

SEC interview phase remained the same all along--that is,

to cooperate; to not admit that either FLIR or any of the

accuseds'individual clients had engaged in fraud; and,

eventually, to focus the SEC on FLIR's remediation

improvements since the 1998and 1999accounting errors.

Although, again, the potential for adversity existed, the

record does not show that the clients'interests were

adverse during the SEC interview phase and therefore

does not establish [***71] that any current-client likely

conflict of interest existed.

31 The Bar again cites The Securities

EnforcementManualat 477:"Corporations may

avoid or lessen liability by taking prompt action

to replace wrongdoers and showing that the

wrong was a matter of individual not corporate

fault. These possibilities create considerable room

for conflicts to develop."

[*729] C. No Current-ClientActualor LikelyConflicts

of InterestDuringWellsPhase

1. GeneralDiscussion

The trial panel concluded that a single statement in

FLIR's Wells Submission--that FLIR understood that the

SEC was pursuing fraud claims against one or more

people responsible for its accounting issues--established a

current-client likely conflict of interest between FLIR and

Samper, Fitzhenry, and Eagleburger, all of whom

received Wells Notices, and that the accuseds did not

disclose that conflict. On review, the accuseds challenge

that conclusion, arguing that FLIR's interests were not

adverse to those three individual clients during the Wells

phase. The Bar, for its part, contends that various parts of

FLIR's Wells Submission showed that current-client

actualconflicts of interest arose during the Wells phase

between FLIR and the identified clients, and those actual

conflicts [***72] could not be waived, even following

full disclosure, under former DR 5-105(F).32

32 We note that the trial panel specifically found

that the identified statement in FLIR's Wells

Submission amounted to a conflict of interest

between FLIR and several of the accuseds'

individual clients. The Bar clarifies--and we

agree--that the question is not whether that

statement itself constituteda conflict, but, rather,

whether that statement provided persuasive

evidence that a conflict existed.

[**447] The following facts are important to fully

address the parties'arguments. The SEC issued Wells

Notices to four of the accuseds'clients--FLIR, Samper,

Fitzhenry, and Eagleburger--and also to Stringer and

Martin (and others). Upon receipt of Samper's Wells

Notice, Glade and Kaner transitioned to lead counsel

during the Wells phase and ensuing negotiations, and the

accuseds transitioned to a supporting role. Upon receipt

of Fitzhenry's and, later, Eagleburger's Wells Notices,33

Ellis conferred with each of those clients, told them that

they immediately needed to retain independent counsel,

and then offered to serve as supporting co-counsel as

needed--ultimately providing some support for both

clients based on requests from their [***73] individual

lawyers. As for FLIR, the accuseds (mostly Ellis),

Wynne, and Fitzhenry worked on FLIR's Wells

Submission, [*730] which FLIR filed with the SEC

without first sending to the accuseds'other clients for

review.

33 Eagleburger's Wells Notice was not received

until after FLIR had filed its Wells Submission.

FLIR's Wells Submission focused on FLIR's

remediation efforts and stated that it had "removed"those

"senior managers who were responsible for the

accounting errors and the management problems,

including the President and CEO, Stringer." It next

referred by position (not by name) to other former

management personnel no longer with the company,

including Daltry and Samper (both identified as having

resigned earlier), and Eagleburger and Martin (both

identified as having been terminated). It continued that,

"[h]aving satisfied itself that it had identified and

removed all those in senior management who were

responsible for the Company's troubles, the Board

immediately turned its attention to assisting remaining

Page 20356Ore. 691, *728; 344P.3d 425, **446;

2015 Ore. LEXIS 130, ***70

management in rescuing and then improving the

Company."FLIR's Wells Submission later stated, under

"Remediation," that "[t]he individuals who were

responsible for the accounting errors have [***74] been

terminated, and the Company is under new executive and

financial management."In its final, "Offer of Settlement"

section, FLIR's Wells Submission stated that, "to the

extent wrong-doing may have occurred, we understand

that the SEC is pursuing fraud claims against one or more

individuals who may have been responsible,"

inferentially intended to refer to Stringer and Martin.

Throughout, FLIR's Wells Submission described the

1998and 1999 accounting issues as "errors" or

"problems," not "fraud," which carried a critical

distinction in the securities context.

The record shows that, in drafting and filing FLIR's

Wells Submission, the accuseds and FLIR did not seekto

cast a negative light on either Samper or Eagleburger, and

FLIR's Wells Submission objectively did not expressly

take any particular position or make any characterization

about either of them, other than noting the former CFO's

(Samper's) cooperation with the SEC investigation. It

included one express favorable reference to Fitzhenry, in

an effort to confirm his positive participation as part of

the new management team. At the time that FLIR

prepared its Wells submission, the accuseds had

concluded that only Stringer [***75] and Martin had

acted fraudulently. Also at that time, Eagleburger had not

[*731] yet received a Wells Notice. And, although Glade

initially thought that FLIR's Wells Submission reflected

poorly on Samper, he and Kaner continued to

communicate regularly with the accuseds as Samper's

co-counsel and also continued to think that FLIR's and

Samper's interests were aligned for purposes of the SEC

proceeding. During the Wells phase, the accuseds and the

other individual lawyers reasonably--but, as it turns out,

incorrectly--anticipated that no criminal investigation

would occur.

2. No Current-ClientActualConflict

The Bar first contends that the statement in FLIR's

Wells Submission about the SEC pursuing fraud claims

against those responsible for the accounting

issues--particularly [**448] when considered with other

components of FLIR's Wells Submission discussed

above--demonstrated an actual, nonwaivable conflict of

interest under former DR 5-105(A)(1) between FLIR and

the accuseds'individual clients Daltry, Samper, and

Eagleburger. See former DR 5-105(F) (only current-client

likely conflicts can be waived by client consent after full

disclosure). The Bar thinks it significant that, when the

SEC sent the individual Wells Notices, [***76] the

accuseds learned who the SEC considered to be

wrongdoers, giving weight to the argument that FLIR

itself should not be punished. At that point, the Bar

continues, the accuseds' duty to FLIR to admit

misconduct by Daltry, Samper, and also Eagleburger

(who received a Wells Notice later) became

irreconcilable with their duty to refrain from accusing

those three individual clients of wrongdoing.

Nonetheless, the accuseds then prepared and filed FLIR's

Wells Submission, which--in the Bar's view--inferentially

referred to Daltry, Samper, and Eagleburger as

wrongdoers.34

34 The Bar also contends on review that an

actual conflict of interest existed when the

accuseds negotiated FLIR's SEC settlement,

which resulted in a judgment that

included--without admitting or denying--a finding

of fraud by prior management. However, the Bar's

allegations in the second cause end with the filing

of FLIR's Wells Submission and do not mention

FLIR's settlement negotiations, and no other

allegation refers to FLIR's settlement

negotiations. We therefore do not discuss any Bar

argument relating to those negotiations or the

final SEC judgment against FLIR.

Former DR 5-105(A)(1) defines an actual conflict

for purposes of former DR 5-105(E) as [***77] a

scenario in which a [*732] lawyer "has a duty to

contend for something on behalf of one client that the

lawyer has a duty to oppose on behalf of another client."

Similarly to our earlier discussion about likely conflicts

of interest, such conflicting obligations often are readily

apparent from the nature of the representations and client

interests involved. See Inre Bristow,301Ore 194,204,

721P2d 437 (1986)(actual conflict of interest when

lawyer represented one client in action to enforce

franchise agreement while simultaneously representing

other client in action seeking to hold same agreement

invalid; citing cases for same proposition). The court also

has explained, however, that the clients'underlying

objective interests at the time in question determine the

nature of any obligation on the lawyer's part to contend

for or oppose a particular legal position on each client's

behalf. See Cobb,345Ore at133 (lawyer represented

Page 21356Ore. 691, *730; 344P.3d 425, **447;

2015 Ore. LEXIS 130, ***73

both investor partnerships and entity related to company

in which they had invested in complex bankruptcy

proceedings; at time in question, investor partnerships not

necessarily entity's creditors, and all parties shared goal

of dismissal; no actual conflict); Cohen,316Ore at662

(whether actual conflict exists depends on clients'

objective interests). [***78]

Here, the record does not establish the existence of

conflicting duties relating to the accuseds'representation

and protection of their respective clients'objective

interests during the Wells phase. The fact that Wells

Notices had issued and the clients then considered and

developed responses to them did not, standing alone,

mean that the accuseds had a duty to contend for a

particular position on FLIR's behalf that they had a duty

to oppose on behalf of Daltry, Samper, or Eagleburger.

Indeed, the record shows that FLIR would have been

responsible for fraud committed by its officers, managers,

and employees, in the context of the SEC's

investigation.35

35 As noted earlier, see 356Ore at 703 n 9, the

findings of fraud in the SEC's ultimate judgment

against FLIR--based on various individual

personnel actions--resulted in FLIR losing its safe

harbor protections under federal securities law.

As to FLIR's particular Wells strategy, the record

shows that FLIR had an objective interest in convincing

the SEC of the sincerity and significance of its

remediation [*733] efforts, including its transition to

new management. Nothing about that interest obligated

the accuseds to assert on FLIR's behalf a position that

they were [***79] obligated to oppose in representing

the interests of Daltry, Samper, or Eagleburger--such as,

as the Bar contends, asserting that one or more of those

clients had engaged in intentional wrongdoing. And,

although FLIR's new management did not include Daltry,

Samper, [**449] or Eagleburger, the accuseds were not

obligated on behalf of those clients to oppose FLIR's

focus on its remediation strategy. Indeed, expert

testimony in the record established that a remediation

defense, not unusual in an SEC proceeding of this kind,

focuses on the future as opposed to any action that

occurred in the past. And finally, none of the lawyers

involved--including the independent lawyers--thought

that a conflict existed; as to Samper specifically, Glade

continued to thinkthat no conflict existed even after he

had reviewed and considered FLIR's Wells Submission.

The trial panel correctly determined that no actual

conflict of interest existed between FLIR and the

accuseds' individual clients Daltry, Samper, and

Eagleburger during the Wells phase.

3. No Current-ClientLikelyConflict

Next, the accuseds contend that the trial panel erred

in concluding that the statement in FLIR's Wells

Submission about pursuit of fraud [***80] claims

against responsible individuals established an adversity of

interests, and therefore a likely conflict, between FLIR

and individual clients Samper, Fitzhenry, and

Eagleburger. The accuseds specifically argue that that

statement did not suggest or imply that those individual

clients had committed fraud or encouraged the SEC to act

against any client; instead, FLIR's Wells Submission

identified only Stringer and, inferentially, Martin, as

individuals who had been "removed"from employment

and (again, inferentially) were presently the subject of

SEC fraud claims. Otherwise, FLIR framed its response

in light of remediation, which accused no client of earlier

wrongdoing. The accuseds also emphasize that FLIR's

Wells Submission labeled FLIR's 1998 and 1999

accounting issues as "errors"and "problems"--words that

objectively and understandably did not admit, indicate, or

imply fraud on the part of anyone [*734] at FLIR. The

Bar, as noted (and rejected) above, responds by

contending that FLIR's Wells Submission showed an

actual conflict of interest between FLIR on the one hand,

and Samper and Eagleburger on the other. Here, we

consider the Bar's underlying arguments about an actual

conflict [***81]of interest to determine whether the Bar

proved a likely conflict of interest as to the three clients

that the panel identified (Samper, Fitzhenry, and

Eagleburger).

As already explained, a likely conflict of interest

existed if the "objective personal, business or property

interests"of FLIR and the accuseds'individual clients

"[we]re adverse,"former DR 5-105(A)(2)--that is, if their

objective interests were contrary or in opposition to one

another at the time in question. This court has explained

that the representation of multiple clients embroiled in the

same action often gives rise to likely (and sometimes

actual) conflicts, due to the clients'adversity of interests.

In the criminal context, for example, such an arrangement

typically results in an actual or likely conflict, due to the

potential interest of one client in obtaining a favorable

outcome in exchange for testifying or offering evidence

Page 22356Ore. 691, *732; 344P.3d 425, **448;

2015 Ore. LEXIS 130, ***77

against another client. Jeffery,321Ore at370-71; see

also id.at372-73(statements to police by one client that

implicated another client amounted to actual or likely

conflict); O'Neal,297 Ore at260-66 (likely conflict

when representing criminal codefendants, even where

lawyer limited representation to negotiating pleas).

Adverse interests of course can arise [***82] in other

contexts, as well. See Inre Barber,322Ore 194,200,

904P2d620(1995)(under earlier version of former DR

5-105, likely conflict when lawyer represented two

parties injured in same motor vehicle accident, where

insurance proceeds insufficient to cover injuries of both).

In determining whether the Bar proved that a likely

conflict existed at the time in question, we must identify,

based on evidence in the record, the objective interests

involved. See Cohen,316Ore at661-62(in determining

that husband and wife had adverse interests in husband's

criminal mistreatment proceeding and wife's pending

juvenile proceeding, court identified objective personal

interests of each at the time in question, notwithstanding

earlier client declarations that they shared a common

goal).

[*735] As noted earlier, the record shows that

FLIR's objective interest during the Wells phase was to

persuade the SEC that, from a forward-looking

perspective based on multiple [**450]changes that had

been made, FLIR should not be subject to any SEC

enforcement action. FLIR's actions in crafting its Wells

Submission advanced that interest; specifically, it sought

to frame the accounting events in a neutral manner and

then to focus the SEC on its remediation efforts--such as

new management, a larger, [***83] professional

accounting staff, a new independent auditor, and clean

audits following the years in question. By contrast, FLIR

did not have any objective interest in focusing on past

liability or engaging the SEC in any factual argument

about events underlying the 1998and 1999accounting

issues; the record shows that it would have been

counterproductive during the Wells phase for FLIR to

argue about those events. Additionally, as noted earlier,

FLIR had no interest in seeing any officer, manager, or

employee accused of fraud, for which FLIR ultimately

would have been responsible.

Like FLIR, clients Samper, Fitzhenry, and

Eagleburger each shared an objective interest during the

Wells phase in mitigating against a negative individual

outcome from the SEC proceedings, including an interest

in avoiding ancillary and collateral consequences that

might apply to them as individuals, but not to the

company. For example, in addition to a separate SEC

enforcement action, Samper was potentially subject to

disgorgement penalties, and Fitzhenry was potentially

subject to a sanction that would have prevented him from

practicing before the SEC.36 Also, as part of their

individual defenses, the clients--like [***84] FLIR--had

an interest in convincing the SEC that they had not

engaged in fraud. As the Bar argues (and the accuseds do

not disagree), those three clients also shared a general

interest in not having FLIR accuse them of wrongdoing.

36 In that regard, we note that concerns that

might have arisen in the civil action context--such

as joint and several liability, cross-claims, or

competing interests in insurance proceeds--did not

apply in the SEC context.

We conclude that the Bar did not prove by clear and

convincing evidence that FLIR's interests were adverse to

those of Samper, Fitzhenry, or Eagleburger during the

Wells phase. As explained, all the clients shared an

interest in [*736] mitigating against a negative outcome

in the SEC investigation. The fact that different

consequences could flow from negative outcomes--for

example, to FLIR as a company, to Samper as a former

officer, or to Fitzhenry as General Counsel--does not

mean that the respective clients'interests were necessarily

adverse to each other. And, as discussed above, the

record shows that none of the lawyers or individuals

involved anticipated, during the Wells phase, that any

DOJ investigation--which certainly carried at least the

potential [***85] for future adverse conflicts of

interest--might be forthcoming. See former DR 5-105(B)

(when determining lawyer's knowledge of existence of

conflict, all facts that lawyer knew or reasonably should

have known are attributed to lawyer).37

37 Additionally, unlike the Bar and the trial

panel, we read the statement in FLIR's Wells

Submission about the SEC "pursuing fraud claims

against one or more individuals who may have

been responsible"as a factual observation about

actions that the SEC had taken, not as a

recommendation on FLIR's part that the SEC

shouldpursue a fraud claim against any particular

individual.

As to FLIR's prospective remediation defense

specifically, expert testimony established that it was a

recognized strategy in SEC investigations of this kind,

Page 23356Ore. 691, *734; 344P.3d 425, **449;

2015 Ore. LEXIS 130, ***81

even where joint representation had occurred. Although

isolated statements in FLIR's Wells Submission arguably

could be read to inferentially cast a negative light on

Samper or Eagleburger, other evidence in the record

provides contrary context to those statements, regarding

FLIR's remediation defense and its objective interest in

persuading the SEC to lookforward, not backward. For

example, expert testimony showed that a remediation

defense [***86] typically involves differing arguments

for the company than for individuals, but that does not

necessarily mean that their interests are adverse. Indeed,

joint representation in SEC proceedings often continues

in the same fashion that it did here--with the company's

lawyers continuing to represent individual clients in a

supporting role during the Wells phase--because the

clients'various defenses can be synthesized with each

other, even if they are not identical. That is essentially

[**451] what transpired here. FLIR had an objective

interest in focusing the SEC on remediation, and FLIR's

Wells Submission therefore did not engage the SEC

about the earlier accounting issues; instead, it focused on

prospective remediation. By contrast, the individual

clients each defended their own interests, some by

[*737] focusing on earlier events as needed.38 The

record does not clearly and convincingly support the

Bar's theory that FLIR and the individual clients had

objective interests during the Wells phase that were

adverse to each other.39

38 Fitzhenry's Wells Submissions engaged the

SEC about past events relating to his signature on

the 1999 management representation letter.

Samper, for his part, opted not to file [***87] a

Wells Submission at all, and Eagleburger's Wells

Submission does not appear to be in the record.

Nothing in FLIR's Wells Submission was

inconsistent with the individual clients'objective

interests in convincing the SEC that they each had

not engaged in any intentional wrongdoing or in

mitigating against negative outcomes.

39 The Bar also argues that FLIR's Wells

Submission contained statements that showed

adverse interests between FLIR and Daltry. Daltry

did not receive a Wells Notice, however, and so

the accuseds'representation of him effectively

had ended when he completed his SEC testimony.

The Bar did not prove any current-client conflict

of interest between FLIR and Daltry during the

Wells phase.

D. Rosenbaum'sPhone Callto SECConcerningSwedish

DropShipmentNotWithinScope of SecondCause

The trial panel concluded that Rosenbaum's October

3, 2002, phone call to the SEC to inquire about the

Swedish Drop Shipment entry demonstrated the existence

of either an actual or likely conflict under former DR

5-105(E) between FLIR and Wynne on the one hand, and

Samper on the other, that Rosenbaum did not disclose. As

noted, the panel found that to be a violation under the

sixth cause, which had alleged [***88] current-client

actual or likely conflicts between Wynne and Samper.40

The Bar asserts on review that Rosenbaum's phone call to

the SEC fell under its second cause, which alleged similar

conflicts between FLIR and the accuseds'individual

clients, including Samper, during the SEC investigation

through the Wells phase. The accuseds disagree that

Rosenbaum's phone call fell within the scope of any

allegation and contend that the panel erred in determining

that any violation had occurred. As explained below, we

agree with the accuseds.

40 The Bar's sixth cause alleged that Wynne's

SEC testimony had implicated Daltry and Samper

as responsible for FLIR's 1998and 1999financial

misstatements and accounting errors; however,

Rosenbaum's phone call did not pertain to

Wynne's testimony. The trial panel acknowledged

that the Bar did not specifically allege

wrongdoing on Rosenbaum's part regarding the

information conveyed to the SEC in her phone

call but invoked ORCP23B in determining that a

violation had occurred. See ORCP 23B (when

issues not raised by pleadings are tried by parties'

express or implied consent, those issues shall be

treated as if they had been raised in the

pleadings).

[*738] An accused lawyer must be put [***89] on

notice "of the conduct constituting the violation,"as well

as the rule violation at issue. Inre Magar,296Ore 799,

806n3,681P2d93(1984). In that regard, BR 4.1(c)

provides, in part:

"A formal complaint shall * * * set forth

succinctly the acts or omissions of the

accused, including the specific statutes or

disciplinary rules violated, so as to enable

the accused to know the nature of the

charge or charges against the accused. "

Page 24356Ore. 691, *736; 344P.3d 425, **450;

2015 Ore. LEXIS 130, ***85

That rule "does not obligate the Bar to plead any fact

regarding a charge * * * beyond those that the * * *

[former]disciplinary rules identify."Inre Kluge,332Ore

251,262,27P3d102(2001). The Bar must, however,

sufficiently allege facts in connection with the charged

allegation. Compare Inre Albrecht,333Ore 520,544,

544n20,42P3d887(2002)(rejecting argument that

complaint insufficiently alleged conversion for lawyer's

own use because one aspect of allegation described and

alleged that type of conversion), withInre Spencer,355

Ore 679,689,330P3d538(2014)(court did not address

theory of "personal interest"not alleged as conflict of

interest violation), andMagar,296Ore at803,806n3

(Disciplinary Board erred in basing rule violation on

certain aspects of problematic client representation not

alleged or described in complaint), andInre Lasswell,

296Ore 121,128, [**452] 673P2d 855 (1983)

(Disciplinary Board erred in basing rule violation

concerning prosecutor's extrajudicial statements on

particular events not charged in [***90] complaint; only

factual event described in complaint provided basis to

analyze alleged rule violation). See also State ex rel

Currinv.Comm'nonJudicialFitness,311Ore 530,533,

815P2d 212 (1991) (adequate notice is necessary

component of due process); In re Chambers,292Ore

670,676,642P2d 286 (1982) (trial panel erred in

reaching guilt determination as to misrepresentation;

although proof supported panel's determination,

complaint contained no allegation putting lawyer on

notice that being charged with misrepresentation).

As discussed earlier, in this case, the Bar's second

cause alleged conflicts of interest among the accuseds'

current clients during the SEC investigation. That cause

contained one allegation that--in isolation--arguably

could be [*739] read to encompass Rosenbaum's

October 3, 2002, phone call to the SEC:

"Represented by [Rosenbaum]and Ellis,

FLIR agreed to cooperate fully with the

SEC in its investigation andrevealedto

the SECinformationthatimplicated***

Samper * * * as responsible for the

misstatementof FLIR's1998 and 1999

financialstatusandfor FLIR'saccounting,

record-keeping,and financial reporting

practicesin1998and1999."

(Emphasis added.) When read in its entirety, however,

the unmistakable purpose of the second cause was to

allege misconduct-- including FLIR's alleged revealing

[***91] to the SEC of information unfavorable to

Samper and others--occurring within a particular time

frame that began with the special committee's

determinations by summer 2000, continued through the

SEC investigation and interviews in 2000 and 2001, and

ended in March 2002 with FLIR's filing of its Wells

Submission. Rosenbaum's phone call to the SEC occurred

on October 3, 2002, after the SEC's judgments against

FLIR and Samper had been entered, and well after the

time frame referred to in the Bar's second cause. That

cause therefore did not sufficiently allege facts to permit

Rosenbaum "to know the nature of the charge * * *

against [her]," BR 4.1(c), respecting any implication

flowing from her phone call to the SEC. The trial panel

erred in concluding otherwise.41

41 As noted earlier, 356Ore at 737n 40, the trial

panel invoked ORCP 23B in determining that

Rosenbaum's October 3, 2002, phone call to the

SEC showed that a likely conflict of interest

existed between FLIR and Wynne, and Samper.

This court never has concluded that ORCP23B

applies in Bar proceedings, and nothing in the Bar

Rules of Procedure suggests that application of

ORCP 23 B is permitted or appropriate. By

contrast, as explained above, the Bar Rules

require that the complaint [***92] notify the

accused lawyer of the alleged misconduct at issue.

V. TENTH CAUSE (ELLIS ONLY)--FORMER DR

5-105(C), FORMER-CLIENT LIKELY CONFLICT

DURING FITZHENRYBAR MATTER

A. TrialPanelDecision and Parties'Contentionson

Review

The tenth cause against Ellis alleged that Ellis's

representation of Fitzhenry in his Bar matter after the

Daltry [*740] and Samper SEC representations had

ended--including continuing to assert on Fitzhenry's

behalf that he had relied on Daltry's and Samper's

assurances when signing the 1999 management

representation letter that also had been at issue in the SEC

proceeding--amounted to a former-client conflict of

interest under former DR 5-105(C) that Ellis had been

obligated to disclose to both Daltry and Samper, so as to

obtain their consent to his representation of Fitzhenry.

The trial panel concluded that the Bar did not prove that

Ellis's representation of Fitzhenry was or was likely to be

Page 25356Ore. 691, *738; 344P.3d 425, **451;

2015 Ore. LEXIS 130, ***89

adverse to Daltry's or Samper's interests in the DOJ

investigation, and, therefore, no conflict existed. The Bar

challenges that conclusion on review. Ellis first responds

by emphasizing that the Bar's allegation focuses on

Fitzhenry's trial panel hearing and review in this court,

which occurred after [***93] the Rules of Professional

Conduct replaced the former Code of Professional

Responsibility. Fitzhenry,343Ore at88n1. Because the

Bar charged only violations under the former Code of

Professional Responsibility, Ellis argues that we should

dismiss the allegations under this cause. Alternatively,

Ellis argues that the Bar failed to prove [**453] that any

former-client likely conflict of interest existed under

former DR 5-105(C) because it failed to prove that the

SEC and Bar matters were significantly related or that the

interests of the various clients were adverse.42

42 The Bar's complaint had alleged an "actual or

likely" former-client conflict under this cause.

The trial panel determined that the Bar did not

prove that Ellis's representation of Fitzhenry in

the Bar matter "was or was likely to be adverse to

the objective interests of Samper and Daltry"in

the DOJ investigation. On review, the Bar asserts

the existence of a "conflict."Because the Bar's

argument is limited to the question of adversity

and does not mention any obligation on Ellis's

part to contend for competing client positions, we

analyze only whether a likely conflict of interest

existed.

B. Adoptionof OregonRulesof ProfessionalConductin

2005NarrowedScope [***94] of MisconductAlleged

Under TenthCause

We begin with Ellis's argument about the scope of

the Bar's allegations under the former rules. We agree

that former DR 5-105(C) did not apply to misconduct

alleged to have occurred on or after January 1, 2005, the

effective date for the Oregon Rules of Professional

Conduct. See Inre [*741] Hartfield,349Ore 108,115n

4,239P3d992(2010)(although accused lawyer began

representing client in 2003, before effective date of Rules

of Professional Conduct, misconduct at issue occurred

after that date, so new rules applied); Hostetter,348Ore

at576n1(alleged misconduct occurred both before and

after January 1, 2005; former disciplinary rules applied to

conduct alleged before the date, and new rules applied to

conduct alleged on or after that date). We disagree,

however, that the entirety of the tenth cause alleged

misconduct occurring only after the effective date of the

new rules.

The ninth cause against Ellis--which is not at issue

here--alleged current-client conflicts between Fitzhenry,

on the one hand, and Daltry and Samper on the other,

arising from Ellis's representation of Fitzhenry in his Bar

matter from July 2002 up to the issuance of this court's

decision in Fitzhenry,343Ore 86,162P.3d260, in 2007.

That cause included an allegation that, as part of [***95]

Fitzhenry's defense, Ellis knowingly made

representations on Fitzhenry's behalf that conflicted with

the interests of former clients Daltry and Samper. The

tenth cause realleged and incorporated by reference those

same facts and then further alleged that (1) after late

September 2002, the accuseds'representation of Daltry

and Samper ended, but Ellis continued to represent

Fitzhenry in the Bar matter; (2) from the formal

prehearing phase through the appellate review

proceedings--which all occurred after January 1,

2005--Ellis knowingly made representations on

Fitzhenry's behalf that conflicted his former clients'

interests; and (3) throughout Ellis's continuing

representation of Fitzhenry once Daltry and Samper

became former clients, a former-client conflict existed.

Collectively, those allegations in the tenth cause asserted

continuing misconduct throughout the entirety of the

Fitzhenry Bar representation once Daltry and Samper

became former clients; the allegations were not limited to

Ellis's work relating to the trial panel hearing and

appellate review that occurred after January 1, 2005. We

therefore must determine whether the Bar proved by clear

and convincing evidence that Ellis's [***96]

representation of Fitzhenry in the Bar matter before that

date posed a likely conflict of interest with former clients

Daltry and Samper under former DR 5-105(C).

[*742] C. No Former-ClientLikelyConflictof Interest

DuringFitzhenryBar Matter

The central facts predating January 1, 2005, are as

follows. In late November 2002, at Fitzhenry's request,

Ellis wrote to the Bar, sending Fitzhenry's SEC

settlement order and reiterating Fitzhenry's position that

he had relied on FLIR's CEO (Stringer) and CFO

(Samper) in signing the 1999management representation

letter. Ellis wrote the Bar again in December 2002,

responding to a Bar inquiry and sending additional

materials, including Fitzhenry's Wells Submission and

SEC interview transcripts; that letter reiterated that

Page 26356Ore. 691, *740; 344P.3d 425, **452;

2015 Ore. LEXIS 130, ***92

Fitzhenry had intended to confirm only the legal

representations in the 1999management representation

letter and inferred that he had relied on Samper and

[**454] others as to the accounting representations. That

second letter to the Bar also stated that, before signing the

1999 management representation letter, Fitzhenry

specifically had confirmed with Samper that the

information in the letter was accurate. At the time that

Ellis sent those letters, [***97] the SEC settlements had

been finalized, and Ellis had no knowledge of any

pending DOJ investigation.

Former DR 5-105(C) prohibited representation of a

new client "in the same or a significantly related matter"

when the interests of the new client and a former client

"are in actual or likely conflict," unless consent is

obtained after full disclosure. As to the first requirement,

a matter is "significantly related"if representation of the

new client "would, or would likely, inflict injury or

damage upon the former client in connection with any

proceeding, claim, controversy, * * * investigation,

charge, accusation, * * * or other particular matter in

which the lawyer previously represented the former

client[.]"Former DR 5-105(C)(1).43 As to the second

requirement, as discussed earlier, former DR 5-105(A)(2)

defined a likely conflict as a situation in which the

current [*743] and former clients'objective personal,

business, or property interests "are adverse."44Here, the

Bar asserts that it satisfied the "same or significantly

related matter" requirement because the Fitzhenry Bar

matter arose out of the same facts and circumstances as

those at issue in the SEC proceeding, regarding the 1999

management representation letter. Ellis [***98]

disagrees that the Bar satisfied either the "same or

significantly related matter"requirement or the separate

"adversity"requirement.

43 The quoted definition refers to a

"matter-specific"conflict. Hostetter,348Ore at

586. Former DR 5-105(C)(2) alternatively

defined a "significantly related matter"in terms of

being "information-specific," that is, that the

former client representation provided the lawyer

with confidences or secrets, the use of which

"would, or would likely, inflict injury or damage

upon the former client in the course of the

subsequent matter."See Hostetter,348Ore at586

(so identifying that type of conflict). Here, the Bar

argues only that a matter-specific conflict existed.

44 We note that former DR 5-105(C)

particularly frames the former-client conflict

inquiry in terms of whether "the interestsof the

current and former clients are inactualor likely

conflict" (emphasis added), whereas former DR

5-105(A)(2) served to define a "likely conflict of

interest" in terms of a scenario in which the

objective interests of the clients "are adverse."

We agree with Ellis that the Bar did not prove by

clear and convincing evidence that the "significantly

related matter"requirement of former DR 5-105(C)(1)

was satisfied and, therefore, did not prove that the

former-client conflicts [***99] prohibition set out in

former DR 5-105(C) applied to Ellis's representation of

Fitzhenry in the Bar matter. On that point, the question is

not whether Fitzhenry's Bar matter involved many of the

same facts as the SEC investigation; it indisputably did.

Rather, the question is whether Ellis's representation of

Fitzhenry in the Bar matter would or would likely have

inflicted injury or damage on Daltry's or Samper's

interestsinconnectionwiththe SEC investigation. See

Hostetter, 348 Ore at 588 ("significantly related"

requirement focuses on injury or damage to former

client's interestsin connection with earlier representation,

not injury to former client in abstract sense).

Three factors prompt us to conclude that no such

likelihood existed here. First, at the time when Ellis wrote

his letters to the Bar on Fitzhenry's behalf, the SEC

investigation had ended, and Samper's settlement and the

SEC's judgment against him--which had incorporated

Samper's execution of a Consent to Entry of Judgment

that included SEC findings of fraud--had been entered;

Daltry, meanwhile, had no need to settle with the SEC,

because he had not been the subject of a civil

enforcement action. Nothing in the record supports a

determination that Ellis's [***100]representation of

Fitzhenry in the Bar matter--which concerned [*744]

solely a professional licensing consequence for Fitzhenry,

relating to his conduct as FLIR's General Counsel, and

had no implications for either Samper or Daltry--would

or would likely have inflicted injury or damage on those

former clients in connection with an SEC investigation

that had ended. Second, Ellis's letters to the Bar asserted

a general position on Fitzhenry's behalf that was

consistent with Samper's own SEC testimony, in that

Samper had acknowledged [**455]to the SEC that he

as CFO had been responsible for FLIR's accounting; that

position therefore was not likely to inflict on Samper any

injury or damage in connection with the SEC proceeding

Page 27356Ore. 691, *742; 344P.3d 425, **453;

2015 Ore. LEXIS 130, ***96

in any event. And third, Kaner testified that it was

customary and expected for General Counsel such as

Fitzhenry to rely on the representations of others--

including the CFO--in signing management

representation letters and that Kaner never had concluded

that Ellis's representation of Fitzhenry in the Bar matter

had inflicted any injury on Samper's interests. No

countering evidence in the record persuades us that Ellis's

representation of Fitzhenry in his Bar matter would or

would [***101]likely have inflicted injury or damage

on either Samper's or Daltry's interests in connection with

the SEC investigation. It follows that, because Fitzhenry's

Bar matter did not involve "the same or significantly

related matter"as defined in former DR 5-105(C)(1), the

trial panel correctly determined that no former-client

likely conflict of interest existed under former DR

5-105(C).

VI. TENTH AND TWELFTH CAUSES--FORMERDR

5-105(C) AND FORMER DR 1-102(A)(3),

FORMER-CLIENT LIKELY CONFLICTS AND

MISREPRESENTATION BY OMISSION DURING

DOJ REPRESENTATION

A. Former-ClientLikelyConflictsof Interest

1. AdditionalFacts

The Bar's tenth (Rosenbaum) and twelfth (Ellis)

causes alleged conflicts between FLIR on the one hand,

and Daltry and Samper on the other, during the DOJ

investigation. To more fully understand the parties'

arguments and the trial panel's decision under those

causes, we first provide a more detailed summary of the

underlying facts.

[*745] Shortly after learning about the DOJ

investigation, the accuseds met with Assistant United

States Attorney Garten on January 30, 2003. Garten told

the accuseds that he did not intend to target FLIR; he also

gave them a DOJ memorandum that, among other things,

noted that company cooperation with the DOJ [***102]

was one of many factors for the DOJ to consider in

deciding whether to seek corporate fraud charges. The

accuseds had told Glade, Kaner, and Neil about the

meeting beforehand; the day after the meeting, the

accuseds relayed the meeting discussion to Kaner, and

Rosenbaum faxed the DOJ memorandum to Kaner. The

accuseds attempted to contact Daltry but were unable to

reach him until late February.

The DOJ began requesting FLIR documents

immediately. On January 31, 2003, at FLIR's direction,

Stoel Rives sent to the FBI redacted documentation

relating to the 2000 FLIR special committee

investigation, which previously had been provided to the

SEC. Stoel Rives sent a second group of related

documents two weeks later that contained the redacted

material, which--consistently with Wynne's testimony in

the SEC investigation--had characterized FLIR's

accounting errors as involving some competence issues

on Samper's part, but not fraud.

On February 4, 2003, Garten and Rosenbaum met by

phone. Garten identified Stringer, Samper, Eagleburger,

and Martin as potential criminal defendants. Rosenbaum

relayed that conversation to Glade and Kaner. The

following week, in a meeting involving Garten, Ellis,

Wynne, [***103] and Lewis, Lewis told Garten that

FLIR would cooperate with the criminal investigation. In

addition to FLIR's cooperation, however, Garten wanted

the accuseds to help him develop evidence against

individual potential defendants. Afterwards, Ellis told

Wynne and Lewis that Stoel Rives ethically could not

cooperate in the manner that Garten had requested.

On February 14, 2003, Garten wrote to the accuseds,

requesting that FLIR provide its annual reports, certain

SEC filings, bankdocuments, and compensation history

for certain individuals, and also requesting that FLIR

coordinate DOJ interviews of current and former FLIR

personnel. [*746] Garten's letter also stated, consistently

with the DOJ memorandum, that the DOJ's "assessment

of the extent of [FLIR's]cooperation will be a function,

in part, of how proactive [the accuseds]are in assisting us

with our proof against the former employees identified in

[**456] the SEC complaint."45 That part of the letter

distressed both accuseds, because they understood it to

expressly request their personal assistance in developing

a criminal case against former clients. They theorized that

Garten's request ultimately might harm Garten's position

because, if such [***104] a course were pursued, the

federal prosecution could be tainted due to attorney-client

privilege and fiduciary obligation violations. Rosenbaum

wrote to Garten, stating that the accuseds'earlier client

representations limited their potential actions in the DOJ

investigation.

45 Garten's February 14, 2003, letter further

stated that, "[i]n this case, [FLIR]seeks immunity

from prosecution."At the trial panel hearing,

Page 28356Ore. 691, *744; 344P.3d 425, **455;

2015 Ore. LEXIS 130, ***100

however, the accuseds introduced an April 2011

declaration from Garten clarifying that that

statement was meant to express Garten's

understanding from Wynne that FLIR had been

willing at the outset to cooperate with the criminal

investigation. Garten's declaration also stated that,

to the best of his recollection, the issue of FLIR

seeking immunity never arose and was not

discussed either formally or informally.

We note that, generally speaking, an

immunity or nonprosecution agreement involves a

promise that the defendant will be immune from

prosecution "in exchange for providing

information or otherwise assisting the

government." Nancy Hollander, Barbara E.

Bergman, and Melissa Stephenson, 1 Wharton's

CriminalProcedure § 1:8 n 1 (14th ed 2010).

Such an arrangement is not the same [***105]as

a decision on the prosecution's part not to

prosecute a particular potential defendant; instead,

the former requires a meeting of the minds

between the parties. Cf.UnitedStatesv.Wilson,

392F3d1055,1059-60(9thCir 2004)(contract

principles apply to claimed immunity agreements,

including requirement that prosecution objectively

offered or promised immunity in exchange for

some consideration).

The accuseds did not send a copy of either Garten's

letter or Rosenbaum's response to Daltry, Samper, Glade,

or Kaner, because they did not intend to assist in the

manner requested, although they did send Garten's letter

to FLIR and began collecting the requested

documentation. The accuseds met with Garten on

February 19, 2003. Garten now acknowledged that the

accuseds'earlier representations limited their ability to

cooperate. Garten also stated that he might not pursue a

case against Daltry or Fitzhenry if they cooperated, but

the same was not true for Samper. He also stated that

Stringer, Martin, Samper, Fitzhenry, and Eagleburger all

would need lawyers, although [*747] he did not yet

knowabout Daltry. In discussing what FLIR could tell its

customers, Garten stated that they could be told that the

DOJ was focusing on individuals involved in the 1998

[***106]and 1999accounting issues, and that FLIR had

been assured that--provided that it cooperated--it would

not be subject to criminal prosecution. Neither accused

understood that statement to mean that FLIR effectively

had promised cooperation in exchange for immunity from

prosecution; instead, they understood it to be a direction

from Garten about what customers could be told.46

Garten sent the accuseds a confirming e-mail later that

day, essentially stating that he was abandoning his

request for their personal cooperation because upcoming

witness interviews might implicate their former clients

Daltry, Samper, and Eagleburger. His e-mail also

requested the accuseds'assistance in scheduling witness

interviews and reiterated his earlier document production

request. Thereafter, the accuseds had no direct contact

with Garten or any involvement in the criminal case other

than document production and witness scheduling.

Rosenbaum told Glade about their meeting with Garten

that same day. Also on that date, Stoel Rives sent a third

group of documents to the DOJ, consisting of pleadings

from the public record in the class action litigation.

46 As noted above, Garten's April 2011

declaration similarly [***107] confirmed that

Garten had no understanding in 2003 that the DOJ

had discussed any formal or informal immunity

arrangement for FLIR.

The next day, Rosenbaum wrote to Glade,

confirming that FLIR was not a DOJ target and that

Samper and others, including Daltry, Fitzhenry, and

Eagleburger, might need criminal lawyers. The letter also

stated that the accuseds expected to continue to assist

FLIR with document production and to make witnesses

available for interviews. Rosenbaum sent a similar letter

to Eagleburger's lawyer, Neil, the next day. The record

contains no indication that Glade, Kaner, or Neil objected

to the accuseds'ongoing document production and

assistance with witness scheduling.

[**457] The following day, Stoel Rives provided

Muessle's evaluation documentation to the DOJ

(previously provided to the SEC), as well as hundreds of

other documents, which appear to have consisted entirely

of public FLIR securities filings. And, a few days later,

Rosenbaum sent Garten the [*748] requested

compensation data for Daltry and Fitzhenry, obtained

from certain public FLIR filings. At some point, after

coordinating with Rosenbaum, Muessle also sent Garten

the requested compensation data for Samper, which

[***108]Muessle had separately compiled. It appears

from the record that, although the compensation data for

certain directors and officers other than Samper had been

publicly available, none of the compensation information

transmitted to Garten previously had been produced to

Page 29356Ore. 691, *746; 344P.3d 425, **456;

2015 Ore. LEXIS 130, ***104

the SEC by FLIR. The record also shows, however, that

Glade and Kaner previously had submitted Samper's

compensation information to the SEC in response to a

subpoena directed to Samper.

Meanwhile, Rosenbaum had been trying for several

weeks to reach Daltry. Rosenbaum and Daltry spoke on

February 24, 2003, and she recommended that he retain

criminal defense counsel. Daltry immediately retained

Myers, and Rosenbaum then told Myers that Garten was

requesting FLIR documents from the dates pertaining to

the SEC investigation, that some documents were beyond

the scope of the SEC investigation,47 that Garten did not

intend to charge FLIR, and that Garten was inclined to

give Daltry immunity if he cooperated. The next day,

Ellis reiterated to Myers that Garten had asked FLIR to

produce documents, and Myers understood that the

documents were being produced accordingly. Myers did

not object to the document production.

47 Myers testified [***109] that, although he

could not specifically recall, Rosenbaum also may

have told him that requested documents already

had been provided to the DOJ.

In late February 2003, Wynne met separately with

Garten, in part to reiterate FLIR's intent to cooperate.

Afterwards, Wynne proposed to the accuseds that FLIR

retain separate counsel as to the DOJ investigation but

that the accuseds continue to serve as FLIR's document

depository and to schedule witnesses. In proposing that

limited representation, which Garten had approved,

Wynne reasoned that the accuseds were the most familiar

with all the pertinent documentation and witness contact

information, and that FLIR could leverage Stoel Rives's

extensive prior cataloging of FLIR's documents--as well

as its FLIR document database--relating to the SEC

investigation, thereby [*749] significantly reducing the

cost to FLIR and ensuring a more timely and efficient

response to the DOJ.

The accuseds asked a partner and in-house ethics

expert whether Wynne's request for limited

representation required consent from their former clients.

The three determined that consent was unnecessary

because the arrangement did not involve any conflict of

interest that must be disclosed, [***110]but the partner

nonetheless suggested that the accuseds seek consent.

Rosenbaum drafted a disclosure and consent letter,

incorporating some input from the partner; Ellis also

reviewed and approved the letter.

Rosenbaum sent the disclosure letter, dated March 3,

2003, to FLIR and to Daltry, Samper, and Eagleburger, in

care of their individual counsel and also Samper's

separately retained criminal defense counsel. The letter

explained:

o FLIR had been told that it was not the

DOJ's focus and did not expect to be a

defendant, and it had waived its

attorney-client privilege with Stoel Rives

for an identified time period;

o Stoel Rives had been asked to

advise FLIR, which was cooperating with

the DOJ investigation, and to assist FLIR

in producing documents and arranging for

witnesses to be interviewed;

o The criminal investigation related to

the accuseds'earlier representations of

Daltry, Samper, and Eagleburger, and had

potentially adverse consequences to them;

o The accuseds had informed FLIR

and the DOJ that Stoel Rives could

cooperate only to the extent consistent

with obligations arising from their past

representations;

[**458] o The accuseds had met

with an Assistant United States Attorney

but [***111]did not intend to have

further contact, other than facilitating

document production and interview

scheduling;

o The accuseds would not voluntarily

disclose client confidences or

affirmatively assist the DOJ in developing

its case;

[*750] o Stoel Rives would not

voluntarily produce information or

materials arguably subject to claims of

confidentiality, and Stoel Rives would

inform the recipient's counsel of any DOJ

request for such materials so that counsel

could object if desired;

o In deciding whether to consent, the

recipients should consider how the

Page 30356Ore. 691, *748; 344P.3d 425, **457;

2015 Ore. LEXIS 130, ***108

accuseds' representation of FLIR

respecting the DOJ investigation would

affect them;

o In the accuseds'assessment, the risk

to the recipients from their limited

representation of FLIR was "very small";

and

o Each recipient should "review these

matters carefully and for yourself" and

seekadvice from independent counsel to

assist in determining whether to consent to

the limited representation.

Daltry consented after consulting with Myers,

conditioned on Myers's understanding that the accuseds

would only produce documents and arrange interviews.48

Eagleburger also consented, and Samper consented after

consulting counsel, although sixweeks elapsed between

[***112] the date of Rosenbaum's letter and receipt of

Samper's returned letter, signed by Samper and

confirmed by Glade. In confirming Samper's consent,

Glade further confirmed his understanding that Stoel

Rives already was producing documents to the DOJ. In

the meantime, the accuseds arranged for further witness

interviews and produced more documents. For its part,

FLIR retained other counsel to represent it in other

aspects of the DOJ investigation--specifically, FLIR's

ongoing cooperation therewith.

48 Myers expressly had conditioned Daltry's

consent because he wanted to confirm that the

representation would be narrow, limited to

document production and witness scheduling

only. In that regard, the Bar raises issues on

review about the note in Rosenbaum's letter that

the accuseds would be "advising" FLIR. On

review of the record as a whole, however, we find

that the accuseds'limited representation of FLIR

during the DOJ investigation was intended to--and

did--extend to document production and witness

scheduling only.

2. TrialPanelDecisionandParties'Contentions

In the ninth (Rosenbaum) and eleventh (Ellis)

causes, the complaints alleged violations of former DR

5-105(E) [*751] (current-client conflicts), arising

[***113] from the accuseds'limited representation of

FLIR during the DOJ investigation. The complaints

alternatively alleged, in the tenth (Rosenbaum) and

twelfth (Ellis) causes, that the same conduct violated

former DR 5-105(C) (former-client conflicts).

Specifically, the complaints alleged that FLIR's interests

at that time conflicted with the interests of current or

former clients Daltry and Samper, and that Rosenbaum's

March 3, 2003, letter insufficiently disclosed the nature

of those conflicting interests in seeking consent to the

limited representation.49

49 All those same causes further alleged that

Rosenbaum's letter violated former DR

1-102(A)(3) (misrepresentation by omission),

which we briefly discuss in the next section of the

opinion.

The trial panel addressed the identified conflict

allegations primarily under former DR 5-105(E) (current

clients), as set out in the ninth and eleventh causes. The

panel did not determine whether "actual,"as opposed to

"likely," conflicts existed and instead identified the

question as whether "an actual or likely conflict"existed

that required full disclosure under former DR 10-101(B).

The panel ultimately determined that the accuseds had

not made full disclosure to Daltry and Samper in

Rosenbaum's [***114]March 3, 2003, letter so as to

obtain those former clients'informed consent to the

accuseds' representation of FLIR in the DOJ

investigation. The panel expressly identified certain

information that--in its view--the accuseds should have

disclosed; we discuss that determination in greater detail

later in this opinion. In the panel's view, the [**459]

accuseds'failure to disclose the identified information

violated former DR 5-105(E) (current-client likely

conflicts, insufficient disclosure). The panel similarly and

briefly determined that the Bar also had proved the

alternatively alleged tenth and twelfth causes under

former DR 5-105(C) (former-client conflicts).

On review, the accuseds first argue that the trial

panel erroneously concluded that they should have

disclosed certain information that the Bar did not identify

in its complaints. Otherwise, the accuseds argue

that--given the limited nature of their representation of

FLIR during the DOJ investigation--no conflict of

interest existed that [*752] required any disclosure and,

alternatively, even if a conflict did exist, their disclosure

in Rosenbaum's March 3, 2003, letter was sufficient. For

its part, the Bar agrees with the panel about the

Page 31356Ore. 691, *750; 344P.3d 425, **458;

2015 Ore. LEXIS 130, ***111

insufficient disclosure; [***115] it also more fully

argues why the accuseds'limited representation of FLIR

triggered the former-client likely conflict prohibition in

former DR 5-105(C) as to Daltry and Samper, as alleged

in the tenth and twelfth causes. (The Bar raises no

current-client conflict allegations on review.)

3. Assessmentof Former-ClientLikelyConflictArising

From LimitedRepresentationDuringDOJInvestigation

We begin with the threshold question whether former

DR 5-105(C) applied to the accuseds' limited

representation of FLIR in the DOJ investigation, so as to

trigger the "full disclosure"and consent requirements of

former DR 5-105(D) and former DR 10-101(B).50 As

explained earlier, among other things, former DR

5-105(C) prohibits a lawyer who previously represented a

former client from representing a new client when (1) the

new representation involves a "significantly related

matter"; and (2) the current and former clients'interests

are in likely conflict. Here, the accuseds do not dispute

that their limited representation of FLIR in the DOJ

investigation likely satisfied the "significantly related

matter"requirement; indeed, their March 3, 2003, letter

acknowledged as much.51 Instead, they argue that the Bar

did not satisfy the second requirement--that [***116]is,

the Bar did not show that the interests of FLIR and

former clients Daltry and Samper were in likely conflict

at the outset of the limited representation. As to that

question, the Bar was required to prove that the objective

personal, business, or property interests of FLIR, on the

one hand, and [*753] Daltry and Samper on the other,

were adverse at the time in question. Former DR

5-105(A)(2).

50 As the accuseds note on review, the trial

panel did not make any express finding about the

existence of a prohibited former-client conflict

under former DR 5-105(C). Instead, the panel

focused on the accuseds' March 3, 2003,

disclosure letter and determined that the accuseds

had violated former DR 5-105(C) because the

consent that they obtained under former DR

5-105(D), which permitted the representation, was

invalid due to lackof full disclosure.

51 We accept the accuseds'concession and do

not separately analyze whether the Bar satisfied

the "significantly related matter" requirement

under former DR 5-105(C).

In the context of assessing whether a former-client

likely conflict exists under former DR 5-105(C), this

court has set out the following analysis. First, a lawyer

faced with a potential conflict must assess "the former

client's interests thatpertainto the matter [***117]in

which the lawyer previously represented the former

client."Hostetter,348 Ore at584 (emphasis added).

After identifying the former clients' interests as

described, the lawyer must determine whether--at the

time of seeking to undertake the new representation--the

former client's interests "are adverse to the current client

during the subsequent representation."Id.at594. That is,

the question is not whether the former client has a

current, independent interest that is adverse to the current

client's interest in the new representation; instead, the

question is whether the former client's interest inrelation

to the earlier representation is adverse to the current

client's interest in the new representation.

This court's case law illustrates application of that

framework. For example, in Hostetter,348Ore 574,238

P.3d13, the accused lawyer had drafted loan documents

for a former client. The former client later died, [**460]

and the lawyer then represented the lender in a claim

against the former client's estate. Id.at577. The central

question as to adversity was whether the former client's

"interest"had survived her death, so as to establish a

likely conflict under former DR 5-105(C). Id.at581-82.

After determining that the former client's interest did

survive, the court identified [***118]her interest in the

earlier representation as being one of a debtor, with an

interest in minimizing her legal debt to the extent legally

possible and reasonable. By contrast, the lender's interest

in the new representation was to collect as much as

possible from the estate. Id.at593. By their nature, those

interests were "different"and "adverse,"and therefore

amounted to a likely conflict of interest. Id.

Similarly, in In re Brandsness,299Ore 420,702

P2d1098(1985), the lawyer previously had represented a

husband and wife in a business venture and also had

drafted [*754] their wills. After both the venture and the

marriage soured, the wife rewrote her will with the

assistance of a different lawyer and also hired her own

business lawyer. The husband subsequently asked the

original lawyer to represent him in a dissolution

proceeding, in which the use and division of assets and

liabilities from the business were at issue. Id.at422-23.

The court assessed the wife's interest in the context of the

earlier business representation and determined that the

dissolution proceeding--in which the necessary "focal

Page 32356Ore. 691, *752; 344P.3d 425, **459;

2015 Ore. LEXIS 130, ***114

point" had been the couple's business--"created an

adverse relationship" between the former and present

clients. Id.at429; see also Cobb,345Ore at133-34

(investor clients' interests [***119] not adverse to

principal company's interest at point in time when all

parties sought to dismiss underlying bankruptcy

proceeding to protect certain assets in which all shared an

interest; interests diverged later, when it became clear

that investors--now former clients--would become

company's creditors in bankruptcy).

Applying that framework to the Bar's allegations

here, we begin by identifying the interests of the

accuseds'former clients Daltry and Samper in relation to

the accuseds'earlier representation of them during the

SEC investigation. Daltry's and Samper's most pressing

interests during the SEC investigation had been to avoid

individual process violations, to avoid individual SEC

civil enforcement actions, and--as to Samper once the

SEC filed an enforcement action against him--to mitigate

the potential negative results of that action. Daltry and

Samper also shared an interest in having the accuseds

protect their client confidences obtained during the

course of the earlier representation. Additionally, Daltry

and Samper had an interest during the course of the SEC

investigation to minimize other potential negative

consequences that might flow to them as a result of the

investigation. [***120]

Next, we identify the interest of FLIR in the new,

limited representation in the DOJ investigation. As noted,

Garten told the accuseds at the outset that he did not

intend to target FLIR but instead was focused on

potential charges against several individuals, including

Samper and perhaps Daltry. In general, then, FLIR's role

at the outset of that representation was to serve as a

potential governmental [*755] witness in a criminal

investigation. In the context of the accuseds'agreed-upon

limited representation, however, FLIR's interest was

narrow: Essentially, FLIR had an interest in

demonstrating its willingness to cooperate with the DOJ

investigation by responding quickly and accurately to

documentation requests and efficiently assisting with

scheduling witness interviews. Relatedly, FLIR had an

interest in controlling its cost of cooperating by having

lawyers familiar with FLIR's extensive SEC

documentation and Stoel Rives's FLIR document

database facilitate the DOJ document production.52

52 As part of identifying the client interests at

stake, the Bar thinks it significant that FLIR had

secured some sort of immunity arrangement--even

if informal--with the DOJ, such that the DOJ

would not prosecute [***121]FLIR so long as it

cooperated in the investigation. The Bar did not

prove by clear and convincing evidence, however,

that any such arrangement was made. See 356Ore

at 746n 45 (noting requirements for immunity or

nonprosecution agreement). Indeed, the evidence

shows that Garten had told FLIR at the outset that

it was not a target, and Garten later attested that

no formal or informal immunity arrangement had

been discussed. See id. (discussing contents of

Garten declaration about nature of discussions

with FLIR).

[**461] Having identified the client interests

involved, we now discuss whether those interests were

adverse when the accuseds agreed to undertake the

limited representation of FLIR during the DOJ

investigation. On one hand--unlike the factual scenarios

in Hostetter and Brandsness--Daltry's and Samper's

self-protective interests in relation to the earlier

representation effectively had ended, because the new

representation commenced after the SEC proceeding had

ended and the ensuing judgments entered, thereby

resolving Daltry's and Samper's interests in avoiding

process violation charges and SEC enforcement actions.

And, nothing about FLIR's narrow interest in cooperating

with DOJ document requests and [***122] witness

interview scheduling, or in controlling its costs, was

adverse to those particular interests of Daltry and Samper

in the earlier SEC representation.53

53 As noted, Daltry and Samper also each had an

interest in protecting previously disclosed client

confidences, which continued to exist at the time

of the accuseds'limited representation of FLIR.

The Bar did not prove, however, that any aspect

of that personal interest was adverse to FLIR's

interest in the context of the accuseds'new limited

representation of FLIR. Indeed, the accuseds

expressly told the former clients in Rosenbaum's

March 3, 2003, letter that under no circumstances

would the limited representation involve

voluntary disclosure of former client confidences.

[*756] The same cannot necessarily be said,

however, as to Daltry's and Samper's interests during the

SEC investigation in mitigating against generally

Page 33356Ore. 691, *754; 344P.3d 425, **460;

2015 Ore. LEXIS 130, ***118

negative outcomes, such as the future criminal

investigation that materialized later based on the same

general facts. That particular interest arguably continued

even after the accuseds'SEC representation of Daltry and

Samper had ended, and it arguably was inconsistent with

FLIR's interest in demonstrating cooperation [***123]

with the DOJ through efficient and responsive document

production and witness scheduling.54

54 In making that observation, we reiterate that

the key inquiry under this cause is whether the

client's respective interests as described above

were adverse, therefore presenting a likely

conflict, at the outsetof the DOJ investigation.

The Bar in large part focuses on Samper's

interests during the DOJ investigation; for

example, it relies on multiple purported facts that

arose during that investigation--all occurring after

the date of any fact alleged in the complaints--that

purport to show that the accuseds' ongoing

representation of FLIR in fact harmed Samper in

the DOJ proceeding and therefore must have been

adverse to him.

As explained earlier, however, former DR

5-105(C) has two components:a determination

whether the new representation involves "the

same or a significantly related matter"; and a

determination whether the interests were adverse

so as to show a likely conflict. The Bar's

argument about injury or harm to Samper during

the DOJ investigation certainly might pertain to

the first requirement (which, as noted, the

accuseds concede was satisfied here for other

reasons), but does not pertain to [***124] the

second. See former DR 5-105(C)(1) (defining

"significantly related"matter as scenario in which

new representation would or would likely inflict

injury or damage on former client in connection

with earlier representation); Hostetter,348Ore at

594(cautioning against conflating "adversity"

with "injury" for purposes of adversity

requirement).

Ultimately, it is a close question whether, at the

outset, the interests of Daltry and Samper identified

above were adverse to FLIR's--particularly in the context

of the accuseds'limited representation of FLIR. After

reviewing the record and considering the remainder of the

parties'arguments, we assume without deciding that the

Bar proved an adversity of interests and, therefore, a

likely conflict, under former DR 5-105(C). We make that

assumption because, as explained below, our resolution

of the Bar's allegations about the accuseds'disclosure of

the purported conflict--so as to obtain their former clients'

consent to their limited representation of FLIR--resolves

these causes in the accuseds'favor.55

55 The Bar also argues that the accuseds cannot

rely on their characterization of their

representation of FLIR as a "ministerial role"so

as to be exempt from the disciplinary rules. The

accuseds [***125] do not argue, however, that

their limited representation rendered them exempt

from the rules; instead, they argue that the nature

of their limited representation narrowed the scope

of their client FLIR's interests in the DOJ

investigation for purposes of applying the "likely

conflict"requirement of former DR 5-105(C).

As a general matter, limited representation of

a client is permitted, see generallyCobb,345Ore

at111 (recognizing lawyer's representation of

individual investors for "specific limited

purposes,"contrasted against serving as general

business counsel), and the record demonstrates

that, after the accuseds agreed to undertake the

limited representation of FLIR, they accordingly

limited their involvement to document production

and scheduling witness interviews.

[**462] [*757] 4. Sufficient Disclosure of

Former-ClientLikelyConflict,so asto Obtain Client

Consent

As described earlier, the trial panel identified certain

information that it determined that the accuseds should

have disclosed in Rosenbaum's March 3, 2003, letter to

Daltry and Samper, so as to satisfy the full disclosure

requirements of former DR 10-101(B). That information

included (1) a copy of Garten's February 14, 2003, letter

requesting the accuseds'personal [***126] cooperation

with the investigation; (2) the fact that Ellis was

representing Fitzhenry in the latter's Bar matter; (3) the

fact that Garten had requested, and the accuseds had

produced, officer compensation information for Daltry

and Samper; and (4) the fact of an SEC

investigation--purportedly with the accuseds'

assistance--of transactions previously not alleged,

specifically involving Rosenbaum's October 2002 phone

inquiry about the Swedish Drop Shipment. The accuseds

Page 34356Ore. 691, *756; 344P.3d 425, **461;

2015 Ore. LEXIS 130, ***122

challenge the panel's determinations in two respects.

First, they argue that the Bar's complaints did not allege

that they had been obligated to disclose most of the

information that the panel identified and that they

therefore had no notice as to those allegations.

Alternatively, the accuseds argue that they satisfied all

full-disclosure requirements. The Bar responds that the

panel correctly determined that Rosenbaum's March 3,

2003, letter did not provide full disclosure to sufficiently

permit the accuseds'former clients to consent to the

accuseds'limited representation of FLIR during the DOJ

investigation.

We first briefly address the accuseds'contentions

that the complaints did not allege that they were required

[***127] to disclose to former clients Daltry and Samper

most of the information that the trial panel determined

should have been disclosed. We agree with the accuseds

that the [*758] complaints did not allege that they

should have provided Daltry and Samper with a copy of

Garten's February 14, 2003, letter, and that they therefore

had no notice of that specific purported misconduct. See

356Ore at 738 (describing notice requirements in Bar

proceedings). The complaints did, however, allege that

the accuseds should have disclosed to Daltry and Samper

"the nature or extent of Garten's demands for FLIR's

cooperation in the criminal case," as reflected in his

February 14, 2003, letter. Given the relationship between

that allegation and the panel's determination that the

accuseds should have provided Garten's letter to Daltry

and Samper, we think that the panel's determination

essentially amounted to a determination that the Bar had

proved its allegation about lackof disclosure respecting

the nature and extent of Garten's demands. The Bar

therefore has sufficiently raised that question, as stated in

its complaints, on review.

As to Ellis's representation of Fitzhenry in his Bar

matter, the accuseds emphasize that the [***128] trial

panel commented--in relation under the tenth and twelfth

causes--that Ellis should have obtainedconsentto that

new representation of Fitzhenry. The panel's opinion does

make that observation; however, it also states that the

accuseds should have disclosedin Rosenbaum's March 3,

2003, letter to Daltry and Samper the fact that Ellis was

representing Fitzhenry in the Bar matter arising from

related facts, so that Daltry and Samper had sufficient

information to consent to the accuseds' limited

representation of FLIR. The complaints contained that

same disclosure allegation, and it therefore is properly

before us on review.

As to the trial panel's determination that FLIR had

been asked to produce, and already had produced,

compensation information for Daltry and Samper, the

accuseds are correct that the tenth and twelfth causes did

not allege that they were required to disclose that specific

information. The complaints did, however, allege more

generally that the accuseds should have disclosed that

they already had produced FLIR documents to the FBI.

The panel's more specific determinations [**463] fell

within that general allegation, which is properly before us

on review. We proceed to consider [***129] whether

[*759] Rosenbaum's March 3, 2003, letter satisfied the

accuseds'full disclosure obligations.

Under former DR 10-101(B)(1), "'Full disclosure'

means an explanation sufficient to apprise the recipient of

the potential adverse impact on the recipient, of the

matter to which the recipient is asked to consent."This

court has explained that that rule requires an explanation

providing sufficient detail to permit the recipient to

understand why it may be desirable to obtain independent

counsel. Inre Boivin,271Ore 419,424,533P2d171

(1975). Generally, such an explanation must show the

nature of the likely conflict and apprise the client of the

potential adverse consequences of that conflict. In re

Brandt/Griffin,331Ore 113,137,10P3d906(2000). In

Brandt/Griffin, for example, the accused lawyers sent a

disclosure letter to a former client that contained certain

facts, but this court determined that the facts provided

suggested that no conflict existed, whereas additional

facts--had they been disclosed--would have shown the

true divergence of the respective clients'interests and

explained both the nature of the conflict and the adverse

consequences that might flow to the client being asked to

provide consent. Id.

The requirement in former DR 10-101(B)(1) that

sufficient facts be disclosed does not, however, extend

[***130]to "all facts known to [the lawyer]that could

be helpful to the former client."Cobb,345Ore at135. In

Cobb, discussed earlier, the lawyer had represented some

investor partnerships in a company and also an entity

associated with the company in different aspects of

complexbankruptcy proceedings, in which a trustee had

been appointed to represent the bankruptcy estate for the

entity. Id.at110-13. After it later became apparent to the

lawyer that he could not continue to represent all the

clients, he filed a motion to withdraw accompanied by an

Page 35356Ore. 691, *757; 344P.3d 425, **462;

2015 Ore. LEXIS 130, ***126

affidavit disclosing certain facts. Id.at113. The Bar

contended that the affidavit should have disclosed that the

investor partnerships had made certain payments to the

lawyer and other related entities that instead should have

been made to the entity in bankruptcy. This court

disagreed, reasoning that the lawyer's affidavit

sufficiently had notified the trustee "of the nature of the

conflict, [*760] i.e., that the interests of [the entity]and

the investor partnerships could diverge and that he could

not advocate for both."Id.at135. The court further

explained that, although the trustee might have

benefitted--for purposes of marshalling the entity's

assets--had the lawyer disclosed the [***131]payment

information at issue, "that [was]not information that the

[lawyer]was required to disclose to comply with conflict

of interest rules."Id.

Cobbalso demonstrates that, although "compliance

with the letter of the [disclosure]rule is required,"the

uniquecircumstances of a particular case may establish

satisfaction of certain aspects of the rule. Id.at135-36.

There, at an earlier juncture in the case than the events

described above, the creator of the entity in bankruptcy

instructed the lawyer to withdraw, but the bankruptcy

court wanted the lawyer to continue as local counsel. The

lawyer sent disclosure letters to all his clients, including

to the creator and the creator's independent counsel; those

letters did not formally advise the entity to seek the

advice of independent counsel under former DR

10-101(B)(2). All clients consented. Later, when the

lawyer realized that an actual conflict had arisen among

his clients, he again sought to withdraw from

representing the entity (which the bankruptcy court

allowed), although he continued to represent the

partnerships. Id.at132-35. The Bar raised two arguments

on review asserting insufficient disclosure, which, as

discussed below, this court rejected.

First, the [***132] Bar argued that the lawyer's

initial disclosure letter to the entity had been insufficient

because it had failed to confirm in writing the lawyer's

recommendation that the client seek independent legal

advice. This court disagreed, reasoning that the lawyer

had addressed his disclosure letter to not only the entity's

creator but also to three of the creator's independent

lawyers. When viewed in that context, the content of the

[**464] letter--including facts that explained the

potential conflict and its request for "advice and

assistance in determining the appropriate role for [the

lawyer]in these cases"--satisfied both the requirement

and purpose of the "written recommendation to seek

independent counsel advice"component of the disclosure

rule, former DR 10-101(B)(2). Id.at133.

[*761] Second, the Bar argued that, in the course of

moving to withdraw from representing the entity, the

lawyer should have advised the entity in writing--through

the bankruptcy trustee--to seekindependent legal advice

before consenting to the lawyer's withdrawal. Again,

even after acknowledging that compliance with "the letter

of the rule is required,"id.at135, this court disagreed. In

doing so, the court emphasized the "unique"

circumstances of the [***133] case, in which the

court-appointed trustee--who was an experienced

government lawyer (and who had not been a client of the

lawyer or relied on his advice)--was the only person with

authority to decide whether to consent on behalf of the

entity. In those circumstances, the court determined that

the lawyer had not been required to advise the trustee to

seek outside legal advice on the entity's behalf before

consenting to the lawyer's withdrawal. Id.at136.

We now apply the foregoing principles to determine

whether Rosenbaum's March 3, 2003, letter to Daltry and

Samper satisfied the full disclosure requirements of

former DR 10-101(B)(1). At the outset, we reiterate that

the nature of the accuseds'limited representation of FLIR

in the DOJ investigation consisted of only producing

documents and scheduling witnesses. Thus, the "matter to

which [Daltry and Samper were] asked to consent,"

former DR 10-101(B)(1), was only that limited

representation. It follows that the accuseds were required

to provide an explanation sufficient to both explain the

nature of the conflict and to apprise Daltry and Samper of

the potential adverse impact on them if the accuseds--on

FLIR's behalf--located FLIR documents requested by the

DOJ, reviewed [***134] them for privilege or

confidentiality issues, transmitted them to the DOJ or the

FBI, and scheduled witnesses for DOJ interviews. See

Brandt/Griffin,331Ore at136-37(disclosed facts must

show divergence of respective clients'interests and

potential adverse consequences).

We conclude that Rosenbaum's March 3, 2003, letter

complied with former DR 10-101(B)(1). By disclosing

that the DOJ was investigating Samper and possibly

Daltry in a matter "significantly related" to the SEC

investigation that had potential adverse consequences to

[*762] them,56 but that FLIR did not expect to be a

defendant and was cooperating with the investigation, the

Page 36356Ore. 691, *759; 344P.3d 425, **463;

2015 Ore. LEXIS 130, ***130

accuseds explained the divergence of interests between

their current and former clients, as well as the nature of

that conflict. By disclosing that they had been asked to

assist FLIR in producing documents and arranging for

witness interviews, the accuseds explained both the

nature of the limited representation and the potential

adverse consequences to Daltry and Samper:As a result

of the representation, the accuseds would assist in

producing FLIR documents that might help the DOJ

build its case, which ultimately might subject Daltry or

Samper to criminal prosecution and penalties.57Further,

the letter [***135] explained that the accuseds had

informed FLIR and the DOJ that they could cooperate

only as consistent with their earlier representational

obligations, that they would not voluntarily produce any

information or materials arguably subject to

confidentiality claims by Daltry or Samper, and that they

would inform Daltry's and Samper's counsel of such

requests so that counsel [**465] could object if desired.

Finally, the letter recommended that Daltry and Samper

seekthe assistance of independent counsel to determine

whether consent should be given, and the letter was

separately sent to those clients'independent counsel.

Collectively, those aspects of the letter satisfied the

requirements of former DR 10-101(B).

56 Rosenbaum's letter explained the

"significantly related matter" component of

former DR 5-105(C) and stated that the DOJ

investigation was a "related matter"for purposes

of that rule.

57 Of course, as Myers acknowledged before the

trial panel, FLIR itself would have been required

to produce the documents to DOJ in any event,

even if the accuseds had not been acting as its

counsel for that purpose at that time. (The same is

true for scheduling witness interviews.) It was the

document production itself--not necessarily

[***136] the accuseds' participation in the

production--that most clearly had potential

adverse consequences to the Daltry and Samper.

As noted, the accuseds'limited representation

ensured efficiency in both the document

production and witness scheduling processes--a

benefit that flowed to both FLIR and the DOJ, and

reduced FLIR's (and likely the DOJ's) costs.

As set out earlier, the trial panel determined that the

accuseds should have disclosed four additional points of

information, and the Bar--elaborating on the initial

disclosure allegations in its complaints--urges us to

affirm that determination on review. For the reasons

explained below, we do not agree that the accuseds were

required under [*763] former DR 10-101(B)(1) to

disclose the additional information that the panel

identified.

First, the complaints alleged that the accuseds should

have disclosed "the nature or extent of Garten's demands

for FLIR's cooperation in the criminal case,"apparently

referring at least in part to Garten's initial request that the

accuseds personally assist the DOJ. (As noted, the trial

panel determined that the accuseds should have sent

Garten's February 14, 2003, letter to Daltry and Samper.)

As discussed earlier, however, Garten [***137] soon

withdrew that request after further consideration.

Disclosure of that request--withdrawn shortly after it was

made--to Daltry and Samper was not necessary to apprise

them of the nature of the conflicting client interests or the

potential adverse impact on them flowing from the

accuseds'limited representation of FLIR in the DOJ

investigation.58

58 The Bar also argues on review that

Rosenbaum's March 3, 2003, letter to Daltry and

Samper failed to fully disclose facts regarding

FLIR's purported informal immunity arrangement

with the DOJ--that is, to cooperate in exchange

for avoiding prosecution. As noted earlier,

however, see 356Ore at 746n 45, 747n 46, the

facts in the record do not support the Bar's theory

that any such arrangement in fact had been made.

Second, the complaints alleged--and the trial panel

determined--that the accuseds should have disclosed that

Ellis was representing Fitzhenry in his Bar matter, arising

from alleged misrepresentations made in the 1999

management representation letter. At the panel hearing,

Myers briefly testified that his initial understanding in

conversations with Ellis had been that Fitzhenry was

perhaps a DOJ target to a lesser extent, and so he would

have liked to have known [***138]at the time of the

limited representation that Ellis also was representing

Fitzhenry in the Bar matter. As explained earlier,

however, former DR 10-101(B)(1) does not require a

lawyer seeking client consent to disclose "all facts known

to [the lawyer]that could be helpful to the former client."

Cobb,345Ore at135. Instead, the rule requires an

explanation sufficient to describe the nature of the

conflict between the clients--here, FLIR on the one hand,

Page 37356Ore. 691, *762; 344P.3d 425, **464;

2015 Ore. LEXIS 130, ***134

and Daltry and Samper on the other--and the potential

adverse consequences that could flow from the new

representation. See id.;Brandt/Griffin,331Ore at137

(both so explaining). [*764] As already described,

Rosenbaum's March 3, 2003, letter disclosed sufficient

facts to apprise their former clients for purposes of

obtaining consent; they were not required to further

disclose Ellis's representation of Fitzhenry in his Bar

matter--a proceeding with professional licensing

implications for Fitzhenry alone, based on facts

developed during the SEC investigation.

Third, the complaints alleged that the accuseds

should have disclosed that they already had produced

FLIR documents to the FBI (and, inferentially by

extension, to the DOJ); in that regard, the trial panel

determined that the accuseds should have disclosed

[***139] to Daltry and Samper that the DOJ had

requested, and the accuseds had produced, their

compensation information. As the facts summarized

earlier demonstrate, however, the accuseds already had

told Daltry's and Samper's independent counsel (Glade,

Kaner, and Myers)--before sending Rosenbaum's March

3, 2003, disclosure letter--that the DOJ was investigating

Samper and perhaps Daltry, that the DOJ had requested

FLIR documents, and that the accuseds were producing

FLIR documents on request on FLIR's behalf. And,

virtually all the documents produced in the timeframe

that the Bar has identified were either part [**466] of

the SEC proceeding or part of the public record.59Given

those facts, we decline to conclude that the accuseds were

required to disclose in Rosenbaum's March 3, 2003, letter

the fact of the ongoing document production.

59 As previously described, by March 3, 2003,

the accuseds on FLIR's behalf had produced FLIR

documents that previously had been provided to

the SEC, public FLIR securities filings, and

pleadings from the earlier class action litigation.

The accuseds had produced one nonpublic

document containing previously redacted material

that had not been produced to the SEC, but that

[***140] redacted material was consistent with

Wynne's (and Samper's) assertions made

throughout the SEC proceeding. As to the

compensation information that the accuseds

provided to the DOJ, Daltry's had been derived

from public FLIR securities filings, and Samper's

previously had been provided to the SEC by

Glade and Kaner's law firm.

Fourth, the complaints alleged that Rosenbaum's

March 3, 2003, letter should have disclosed that, with the

accuseds'assistance, the SEC was investigating FLIR's

accounting of transactions not previously alleged. As to

those allegations, the trial panel determined that the

[*765] accuseds should have disclosed that Rosenbaum

had contacted the SEC in October 2002 to askabout the

Swedish Drop Shipment, and the Bar seeks affirmance of

that determination on review.60 We conclude that the

accuseds were not obligated to disclose the fact of

Rosenbaum's SEC phone call--to the extent that it

arguably showed any "assistance" with an ongoing

investigation as alleged in the complaints--to Daltry and

Samper. As in Cobb,345Ore at135, and as with Ellis's

representation of Fitzhenry in his Bar matter, discussed

earlier, that information might have assisted Samper in

developing his defense in the DOJ investigation.

[***141] But its disclosure was not necessary under

former DR 10-101(B)(1) to apprise him of the nature of

his developing divergent interest and conflict with FLIR

in the context of the limited representation, or to advise

him of the potential adverse impact on him if he

consented to the accuseds'representation of FLIR in a

role limited to producing requested documentation and

scheduling witness interviews.

60 The trial panel also stated that Rosenbaum

had provided the SEC with documentation as to

that transaction and also should have advised

Daltry and Samper of that fact, but the panel's

earlier factual findings stated that FLIR--not

Rosenbaum herself--had provided follow-up

information to the SEC. The Bar limits its

argument on review to Rosenbaum's phone call.

In sum, we conclude that--assuming that a likely

conflict of interest existed between the accuseds'current

client FLIR and their former clients Daltry and Samper

under former DR 5-105(C) at the time of their limited

representation of FLIR in the DOJ

investigation--Rosenbaum's March 3, 2003, letter to

Daltry and Samper set out an explanation sufficient to

apprise them of the nature of the conflict and the potential

adverse impact flowing to them from the limited

representation, [***142] so as to obtain their consent to

the representation. The Bar has not proved by clear and

convincing evidence that the accuseds violated former

DR 5-105(C) or former DR 10-101(B).

B. MisrepresentationbyOmission

Page 38356Ore. 691, *763; 344P.3d 425, **465;

2015 Ore. LEXIS 130, ***138

The Bar also alleged in the tenth and twelfth causes that,

in failing to make sufficient disclosures in Rosenbaum's

March 3, 2003, letter, the accuseds engaged in

misrepresentation by omission, because they knowingly

failed to [*766] disclose facts that were material to

former clients Daltry's and Samper's decisions whether to

consent to the limited representation of FLIR during the

DOJ investigation, in violation of former DR

1-102(A)(3). See Inre Gustafson,327Ore 636,647,968

P2d 367 (1998) (rule requires that lawyer knowingly

engage in misrepresentation, including knowing failure to

disclose material fact that lawyer had in mind). Based on

its decision that the accuseds insufficiently had disclosed

identified facts about former-client likely conflicts so as

to obtain consent under former DR 5-105(D) and former

DR 10-101(B), the trial panel similarly concluded that the

accuseds had violated former DR 1-102(A)(3). The

accuseds challenge that conclusion on review; the Bar

responds that the panel was correct.

In light of our conclusion that Rosenbaum's March 3,

2003, disclosure letter complied [***143] with former

DR 10-101(B), we further conclude, without additional

discussion, that [**467] the Bar did not prove by clear

and convincing evidence that the accuseds engaged in

misrepresentation by omission in violation of former DR

1-102(A)(3).

VII. CONCLUSION

On de novo review, we conclude that the Bar has not

proved the allegations at issue on review by clear and

convincing evidence, and we therefore dismiss those

allegations. We otherwise uphold the trial panel's

determinations that the Bar also did not prove the

remaining allegations not at issue on review, and we

therefore dismiss those allegations as well.

The amended complaints are dismissed.

Page 39356Ore. 691, *765; 344P.3d 425, **466;

2015 Ore. LEXIS 130, ***142

Caution

As of:Jun 01, 2015

InreComplaintastotheConductofJAMES A.FITZHENRY,Accused.

SC S53443

SUPREME COURT OFOREGON

343 Ore. 86;162 P.3d 260;2007 Ore. LEXIS 592

March2,2007,ArguedandSubmitted

June28,2007,Filed

PRIOR HISTORY: [***1]

OSB No. 03-85. On review from a decision of a trial

panel of the Disciplinary Board.

UnitedStatesv.Stringer,408F.Supp.2d1083,2006

U.S.Dist.LEXIS3435(D.Or.,2006)

SEC v.Stringer,2003U.S.Dist.LEXIS25524(D.Or.,

Sept.3,2003)

DISPOSITION: The accused is suspended from the

practice of law for 120 days, commencing 60 days from

the effective date of this decision.

COUNSEL: Peter R. Jarvis, Hinshaw & Culbertson

LLP, Portland, argued the cause for the accused. With

him on the brief were David J. Elkanich, and Barnes H.

Ellis, Stoel Rives LLP, Portland.

Mary A. Cooper, Assistant Disciplinary Counsel, Lake

Oswego, argued the cause and filed the brief for the

Oregon State Bar.

JUDGES: Before, De Muniz, Chief Justice, and Gillette,

Durham, Kistler, Walters, and Linder, Justices. *

* Balmer, J., did not participate in the

consideration or decision of this case.

OPINION

[**262] [*88]PER CURIAM

In this lawyer disciplinary proceeding, the Oregon

State Bar (Bar) charged the accused with violating

Disciplinary Rule (DR) 1-102(A)(3) (prohibiting

dishonesty, fraud, deceit, and misrepresentation) of the

Oregon Code of Professional Responsibility. 1 A trial

panel of the Disciplinary Board concluded that the

accused had violated that rule as charged and that his

misconduct warranted a suspension from the practice of

law for 120 days. Pursuant to ORS9.536(1)and Bar Rule

of Procedure (BR)10.1, the [***2] accused sought this

court's review of the trial panel's decision.

1 The Oregon Rules of Professional Conduct

became effective January 1, 2005. Because the

conduct at issue here occurred before that date,

the Oregon Code of Professional Responsibility

applies.

We review a decision of the trial panel de novo.ORS

9.536(2); BR10.6. The Bar must establish misconduct by

Page 1

clear and convincing evidence, which "means evidence

establishing that the truth of the facts asserted is highly

probable."Inre Cohen,316Ore.657,659,853P.2d286

(1993). For the reasons that follow, we conclude that the

Bar has proved the alleged violation under that standard,

and we suspend the accused from the practice of law for

120 days.

I. FACTS

A. GeneralBackground

The accused, who was first admitted to practice in

Oregon in 1981, went to work for FLIR Systems, Inc.

(FLIR) in 1993. FLIR is a Portland-based company that

designs and manufactures thermal imaging and stabilized

camera systems for military and government use. The

company's stock is traded on NASDAQ and it is

regulated by the Securities and Exchange Commission

(SEC). Throughout the events relevant to this proceeding,

the accused was FLIR's general counsel. [***3] He also

was a senior vice president in charge of FLIR's export

activities, with management responsibility for the export

licensing process. Thus, the accused held a dual role at

FLIR: he was an executive member of FLIR's

management team as well as an in-house corporate legal

advisor.

[*89] The misconduct charge against the accused

relates to representations that the accused made to

auditors concerning a $ 4.1 million sale of goods by

FLIR. More specifically, the accused was one of several

corporate executives who signed a management

representation letter confirming, to the best of their

individual knowledge and belief, certain facts relating to

FLIR's 1998 business activities. The representations

included a statement that FLIR had a fixed commitment

as of the end of 1998for the $4.1 million sale. Based on

those representations, the auditor approved FLIR's 1998

financial statements, in which the $ 4.1 million was

treated as received revenue. In fact, however, FLIR did

not have a fixed commitment for the $4.1 million sale,

and FLIR's 1998 financial statements significantly

overstated FLIR's revenue as a result.

On appeal, the pertinent historical facts -- what

happened and when -- are largely [***4] undisputed.

What is disputed is the accused's mental state at the time

of certain events -- that is, whether the accused, when he

signed the management representation letter, did so

knowing that there was no fixed commitment for the $

4.1million sale. Below, we describe the facts as we find

them by clear and convincing evidence. In the context of

our analysis of the contentions on review, we discuss the

competing evidence pertaining to the accused's mental

state and our resolution of that disputed factual issue.

B.The $4.1MillionTransaction

In 1998, FLIR pursued two related deals to sell

camera equipment to the Colombian [**263]

government for installation on BlackHawkhelicopters,

which were to be purchased from Sikorsky Aircraft

Corporation. To facilitate the sale, Robert Coveny,

FLIR's then Director of International Business

Development, retained the family firm of Alfonso

Jaramillo y Cia. S. en C.S. (Jaramillo), located in Bogota,

Columbia, to be FLIR's independent sales agent;

Jaramillo would earn a 10 to 15 percent commission in

that role. The total purchase price for the transaction was

$4.1 million. That amount, together with the purchase

price for the helicopters, ultimately [***5]was to [*90]

be financed by the United States Congress as part of the

government's drug interdiction efforts. 2 Congress

approved the appropriation, at least in part, but was not

scheduled to release the funds until the spring of 1999.

FLIR, in turn, would not actually receive payment for the

$4.1 million for the sale until some time after that.

2 The record is not clear about who would

receive the $4.1 million (e.g., Sikorsky Aircraft

Corporation, some other private entity, or the

military and law enforcement entities of the

Columbian government purchasing the helicopters

equipped with FLIR's cameras) once the federal

government released the appropriation. In all

events, it is clear that the money would not be

paid directly to FLIR.

Although FLIR would not receive the payment until

1999,FLIR's management hoped to structure the

transaction so that it would qualify for accounting

purposes as revenue on its 1998financial statements. To

that end, in mid-December 1998, FLIR's then Vice

President of Sales, Bill Martin, obtained two "Letters of

Intention"from its Columbian sales agent, Jaramillo. The

letters were signed by Jaramillo's Vice President, Felipe

Jaramillo (Felipe). Each of them [***6] declared that its

purpose was to confirm that Jaramillo "intends to

purchase"FLIR equipment in a specific configuration at

a certain price so that FLIR could "make the necessary

plans to insure that systems are available"for delivery in

Page 2343Ore. 86, *88; 162 P.3d 260, **262;

2007Ore. LEXIS 592, ***2

March and April of 1999. Each letter of intent also

identified the "end user"of the equipment -- for one of

the two letters, the end user was the Colombian Air

Force; for the other, the end user was the National Police

of Columbia.

Shortly after Felipe signed those letters, and before

the end of 1998, FLIR moved the specified equipment to

a bonded warehouse in Portland. FLIR then reported the

$4.1 million on its 1998financial statements as a sale to

Jaramillo under a revenue recognition practice known as

"bill and hold." In general terms, a bill and hold

transaction is one in which "a customer agrees to

purchase the goods but the seller retains physical

possession until the customer requests shipment to

designated locations." 3 The revenue for such a

transaction may be "recognized" -- that is, treated as

received, even though neither money nor goods have

changed hands. The SEC, through its adherence to

generally accepted [*91] accounting principles (GAAP),

[***7] requires seven criteria to be met for a transaction

to be properly treated as a bill and hold transaction. 4In

combination, the criteria are designed to establish that

"the buyer has made an absolute purchase commitment,

but is un [**264] able to accept delivery."5 Particularly

important for present purposes are the first and second

criteria:that the risks of ownership have passed to the

buyer and the customer has made a "fixed commitment to

purchase the goods, preferably reflected in written

documentation."

3 In the Matter of Arthur Andersen & Co.,

Exchange Act Release No 17878, 1981 WL

30839,at *3 n 1 (June 22, 1981).

4 Under the GAAP used by the SEC, a bill and

hold transaction must meet the following

conditions:

"(1) The risks of ownership must

have passed to the buyer;

"(2) The customer must have

made a fixed commitment to

purchase the goods, preferably

reflected in written documentation;

"(3) The buyer, not the seller,

must request that the transaction be

on a bill and hold basis. The buyer

must have a substantial business

purpose for ordering the goods on

a bill and hold basis;

"(4) There must be a fixed

schedule for delivery of the goods.

The date for delivery must be

reasonable and must [***8] be

consistent with the buyer's

business purpose (e.g., storage

periods are customary in the

industry);

"(5) The seller must not have

retained any specific performance

obligations such that the earning

process is not complete;

"(6) The ordered goods must

have been segregated from the

seller's inventory and not be

subject to being used to fill other

orders; and

"(7) The equipment must be

complete and ready for shipment."

Inthe Matter of StewartParness, Exchange

Act Release No 23507, Accounting and Auditing

Enforcement Release No 108, 1986WL 712572,

at *10-11 (Aug 5, 1986).

5 Parness, 1986WL 712572 at *10 (citation

omitted).

C. The 1998FinancialStatementsAudit

Corporations under the jurisdiction of the SEC, such

as FLIR, are required to file annual financial statements

that reflect their financial health; those statements must

be audited for accuracy by an independent public

accountant. See Securities Exchange Act of 1934§13(a),

15 USC § 78m(a)(2000). FLIR's audit of its 1998

financial statements began in early 1999. It was

performed by the international accounting and consulting

firm PricewaterhouseCoopers (PwC), which had been

performing FLIR's annual audit for several years. PwC's

[***9] Senior Audit Manager, Matthew Clark, was in

charge of that year's audit, as he had been since 1994.

Clark's responsibility entailed coordinating the audit

generally, being a primary point of contact with FLIR

management, and [*92] performing the overall review

of the workconducted during the audit.

Page 3343Ore. 86, *90; 162 P.3d 260, **263;

2007Ore. LEXIS 592, ***6

In the course of the audit, Clark asked for and

received a list of customers with outstanding accounts

receivable. That list encompassed the bill and hold

transactions on FLIR's financial statements. Clark used

the list to send audit letters to a select group of those

customers asking them to confirm their monetary

obligations. Jaramillo was one of the customers selected,

and was asked to sign and return a letter confirming that

it owed FLIR $4.1 million for equipment that FLIR had

delivered to the bonded warehouse.

Jaramillo did not respond to the letter, which caused

Clark to become concerned. The Jaramillo transaction

was a particularly significant one for FLIR's 1998

financial statements -- it represented about 47percent of

FLIR's revenue for domestic bill and hold transactions for

the year and about 29percent of its worldwide revenue

for transactions of that type. FLIR's only documentation

[***10]of the transaction was the letters of intent signed

by Felipe; FLIR could not produce purchase orders for

that transaction. The lackof documentation for the $4.1

million sale, together with another customer's

unsatisfactory response to one of the audit letters,

prompted Clark to go to the accused "to give me a

perspective from a legal point of view and also his

perspective as a member of management of the company

whether the company had a valid claim against their

customer in these instances."

Clark could not recall if, in conferring with the

accused, he discussed the Jaramillo transaction

specifically with the accused, but he may have, because it

was one of the transactions prompting his concern. Clark

was sure, however, that he told the accused that his

concerns related to the bill and hold transactions

generally and the failure of some customers to return the

audit letters. Clarktalked to the accused more than once.

Clark had those discussions with the accused, because

many of the revenue recognition criteria for a bill and

hold transaction "had to do with the existence of legal

elements." As a result, Clark's discussions with the

accused centered on the "the company's ability [***11]

to enforce a claim against its customer,"which Clark

viewed to be "a legal question,"as well as the accused's

assessment of the point at [*93] which the risk of

ownership passes to the customer. The accused advised

Clarkthat FLIR thought that it had "an enforceable claim

against its customer when [the]product was completed

and shipped to a bonded warehouse." The accused's

position in that regard was consistent with the position

that he had taken previously. In particular, during the

prior year's audit, at Clark's request, the accused had

provided Clarkwith a formal letter opinion regarding the

point at which, for bill and hold transactions, he thought

that the risk of loss shifted to the customer and the

customer had a legally enforceable obligation for

payment. 6

6 In that letter, dated February 12, 1998, the

accused stated, in part:

"Because many of our shipments

are for international customers,

export licenses must be obtained

from the U.S. Government before

shipment is authorized. The

licensing process is complicated

and often time-consuming and

requires the customer to provide an

'end-user certificate'describing the

ultimate user of the system and the

purposes for which the system

[***12]will be used.

"Because of the length of time

involved in obtaining an export

license, and in recognition of the

fact that [the] export licensing

process is not within the control of

the company, we occasionally ship

completed systems to a bonded

warehouse while awaiting export

approval. As a practical business

matter we will expend every effort

to satisfy our customers and

therefore we typically insure such

goods while in bonded storage.

Nonetheless, as a legal matter we

view shipment of our products to a

bonded warehouse as constituting a

transfer of title and risk of loss

from FLIR Systems to the

customer and the creation of a

legally enforceable obligation of

the customer for payment."

[**265] In response to PwC's concerns, FLIR's

management launched a campaign to document a fixed

commitment to the $4.1 million sale so that the revenue

Page 4343Ore. 86, *92; 162 P.3d 260, **264;

2007Ore. LEXIS 592, ***9

for the sale could remain "booked"as revenue for 1998.

The initial efforts focused on having Felipe, who had

signed the Jaramillo letters of intent, sign PwC's audit

letter. With that objective, Coveny accompanied Martin

and FLIR's then-CEO, Ken Stringer, to a helicopter

manufacturers'convention in Dallas, Texas, in February

1999,which Felipe also was [***13]attending. Coveny,

Martin, and Stringer all met with Felipe and tried to

persuade him to sign the audit letter prepared by PwC.

Felipe refused. They did not give up, however. Coveny

was dispatched to Bogota, Columbia, essentially

following Felipe there from the conference in Dallas.

Coveny was there for several days at the end of February.

His objective remained the same:to persuade Felipe to

sign PwC's audit letter. Felipe, again, refused.

[*94] While Coveny remained in Bogota, FLIR's

management shifted strategies. The goal became to

secure something akin to a purchase agreement -- one

that reflected a stronger purchase commitment than did

the letters of intent that Felipe had signed at the end of

December, but not as strong of a commitment as the audit

confirmation letter that Felipe was refusing to sign.

Stringer personally recruited the accused to assist. As

FLIR's general counsel, the accused was to workdirectly

with Jaramillo's lawyer, BeatrizJaramillo (Beatriz). The

accused knew at that point that PwC was specifically

scrutinizing the Jaramillo transaction and that Jaramillo

had not responded to PwC's audit letter. He also knew

that Stringer wanted a stronger written commitment

[***14] from Jaramillo for purposes of the 1998audit.

The accused described that stronger commitment as

"important enough" to Stringer that Stringer had sent

Coveny personally to Bogota to secure it. The accused

thought that Stringer, likewise, had imposed a "strong

expectation" on him to help secure that stronger

commitment, and the accused "felt the pressure."The

accused understood that Stringer was "keenly interested"

in the success of their efforts because it was important to

FLIR's ability to report the revenue on its 1998financial

statements.

Before speaking with Beatriz, the accused reviewed

Jaramillo's letters of intent so that he could draft

something stronger. He also was briefed by Coveny, who

told him that Felipe had refused to sign the audit letter

because Felipe thought it was "too firm" and "too

binding."The accused's negotiations with Beatriz took

place over a few-day period at the end of February 1999.

Coveny met personally with Beatrizand was in her office

in Bogota while the accused, who was in Portland, talked

to her by phone. Eventually, several draft documents

were faxed between the accused and Beatriz. They

engaged in a "dialogue of drafts"via an iterative process

[***15]that eventually led to something that the accused

thought Beatrizwould sign. Specifically, the accused first

drafted an agreement with a very strong commitment.

Beatrizresponded by countering it with one that was as

weakor weaker than the letters of intent themselves. The

negotiations continued in that way -- with the accused

proposing language reflecting a stronger commitment to

purchase and [*95] Beatrizproposing weaker language.

Ultimately, the accused agreed to go with Beatriz's

original proposal -- an agreement so weak that he

wondered if it added anything at all. But the accused

feared that it was that or nothing. As it turned out,

however, it was nothing. Others [**266] in the Jaramillo

family "got cold feet,"and Beatrizwas told not to sign

anything, not even the very weak document that she

originally had proposed. 7With that, the effort to obtain a

stronger commitment from Jaramillo collapsed, and

Coveny returned to Portland. The accused's direct

involvement came to an end with those negotiations,

which he understood to have failed because "the

language"of even the weakest version of the agreement

was "too strong."

7 The accused destroyed the drafts, as well as

deleted the electronic [***16] versions of them

from his computer, pursuant to what he described

as his long-standing "personal practice"for draft

documents of any kind.

D. The Favorable AuditReport

Clark's workon the PwC audit was ongoing while

Coveny, the accused, and others attempted to get stronger

documentation of Jaramillo's commitment to the $4.1

million purchase. Clark, however, was told nothing about

those efforts. Instead, Clarkwas told (not by the accused)

something that was not true -- that Jaramillo's failure to

return PwC's audit confirmation letter was simply a result

of language and cultural barriers. 8 Clark therefore did

not know the facts that the accused and other FLIR

management executives knew -- viz., that Jaramillo

considered itself to be only an agent for the sale and not

to be buying the equipment; that Felipe would not sign

the audit letter because there was not a binding

commitment; and, for the same reasons, the accused had

failed in his efforts to negotiate a stronger commitment

Page 5343Ore. 86, *93; 162 P.3d 260, **265;

2007Ore. LEXIS 592, ***12

than the letters of intent reflected. Had Clarkknown any

of those facts, he would not have approved the $4.1

million as recognized revenue in the 1998 financial

statements. FLIR then would have had to [***17]record

an adjustment to its 1998 [*96] financial statements or,

if it refused to do so, suffer an adverse audit opinion from

PwC for what PwC would have considered to be a

material misstatement.

8 The record does not establish who told Clark

that, except that the accused did not. Nor does the

record establish that the accused knew about that

misrepresentation to Clark. The record does

establish, however, that the representation was

patently untrue. The Jaramillos are fluent in

English and are very sophisticated business

people who have served for many years as

independent agents for American companies

doing business in Columbia.

Clarkbegan to wrap up PwC's audit in early April

1999,a little more than one month after the accused's

negotiations with Beatriz. One of Clark's final steps was

to prepare a management representation letter for the

signature of several of FLIR's top-level managers. 9Such

a letter is a usual procedure by which a corporation's

managers are asked to confirm certain critical

representations made during the audit. Clark, believing

that Jaramillo did not return the audit letter due to

language and cultural barriers, permitted management to

confirm through that letter [***18] certain facts

pertaining to a broad range of transactions that were

important to the audit. Among them were the facts that

had to be true for the $4.1 million sale to be recognized

as 1998revenue.

9 Two letters, identical in their substance, were

prepared and signed. The first, issued on April 12,

1999,did not have all the needed signatures. That

defect was remedied with the second letter, which

issued on April 20, 1999. The accused signed both

letters. We therefore treat the two letters

collectively as one.

The management representation letter was lengthy

(seven pages, single spaced) and detailed, and began with

a representation that the facts that it contained were being

confirmed by the managers "to the best of their

knowledge and belief."The bill and hold transactions

were the first specific transactions detailed -- they

appeared on the second page. Before the specific bill and

hold transactions were listed, the letter "confirm[ed]"that

each one met seven conditions. The conditions listed,

although slightly paraphrased, matched the seven criteria

that the SEC requires for a bill and hold transaction to be

treated as current revenue. See Ore. at n 4(slip op at

5 n 4) [***19] (listing bill and hold criteria). Of

particular significance, the letter confirmed that each bill

and hold transaction was one in which the riskof loss had

transferred to the customer and the customer had "made

(prior to the date of recording the revenue) a fixed

commitment to purchase the goods via a written purchase

order."The letter then listed nine domestic [**267] bill

and hold transactions, the first of which was identified as

the Jaramillo transaction for $ 4.1 million. It was the

single largest transaction on the [*97] list -- the others

ranged from $265,000 to $1.1 million. The accused was

one of five FLIR managers, including Stringer, who

signed the letter; he did so in his capacity as "Vice

President and General Counsel."The accused understood

that he needed to personally sign the letter before the

auditors would conclude their workand issue their audit

report. Relying on that letter, along with other

information gathered in the course of the audit, Clark

approved and PwC issued an "unqualified opinion"on

FLIR's 1998 financial statements, which is the most

favorable report that an auditor may give. 10

10 "An unqualifiedopinion, the most favorable

report an auditor may give, represents [***20]

the auditor's finding that the company's financial

statements fairly present the financial position of

the company, the results of its operations, and the

changes in its financial position for the period

under audit, in conformity with consistently

applied generally accepted accounting principles."

UnitedStatesv.Arthur Young& Co.,465U.S.

805,818n13,104S.Ct.1495,79L.Ed.2d826

(1984)(discussing hierarchy of audit opinions)

(emphasis in original).

E. FLIR'sFinancialImproprietiesSurface

As it turned out, FLIR lacked firm purchase

commitments for many of the bill and hold transactions.

Those transactions therefore failed to meet several of the

accounting criteria necessary to treat the purchase prices

as recognized revenue in advance of actually receiving

that revenue. Those and other improper revenue

recognition practices on FLIR's part later came to light.

When they did, the 1998financial statements -- as well as

Page 6343Ore. 86, *95; 162 P.3d 260, **266;

2007Ore. LEXIS 592, ***16

FLIR's 1999 financial statements -- were recalled,

restated, and reissued. FLIR's stockfell dramatically. In

response to those events, both the SEC and the United

States Department of Justice (DOJ) initiated

investigations into the company's dealings and [***21]

practices. Also, FLIR's board of directors appointed a

special committee to investigate the financial

improprieties. Among other things, that special

committee called for three management executives --

including then-CEO Stringer, but not the accused -- to

resign.

In connection with the SEC investigation, the

accused testified under oath about his knowledge of

FLIR's financial transactions. The accused's SEC

testimony established the following facts about his state

of mind during the events in question.

. [*98] The accused understood that his task in

negotiating with Beatriz was to secure an "actual

agreement to purchase" the equipment because the

Jaramillo letters of intent were not a strong enough

commitment to satisfy the auditors.

. The accused believed that the Jaramillo letters of

intent were "conditional"and did not create a binding

agreement. At one point, he suggested that he had formed

that belief in reviewing the letters in advance of his

negotiations with Beatriz. At another point in his

testimony, he said that he had not assessed, as of the

negotiations, the binding or conditional nature of the

letters of intent. He had done so since that time, however,

and he viewed them as too [***22] conditional to be

sufficient for revenue recognition.

. The accused believed that the stronger agreement

was needed so that the $4.1 million in revenue could be

recorded in 1998. That objective was "pretty clear"to

him from the timing and extent of the efforts to which he

and others in FLIR went to get a stronger commitment, as

well as from the involvement of the auditors.

. From his negotiations with Beatriz, the accused

concluded that there was no "meeting of the minds"

between FLIR and Jaramillo and that "fundamentally we

didn't seem to have an agreement"for the $4.1 million

purchase. He so advised then-CEO Stringer.

. The accused did not tell auditors that he thought

that there was no firm commitment from Jaramillo for the

purchase. He did not because he believed that obtaining a

stronger agreement was an "internal company effort"and

communications about that effort were limited to people

in the sales department and executive management.

In response to the SEC's investigation, FLIR agreed

to a settlement in which the [**268] SEC ordered it to

cease and [*99] desist from further SEC violations. 11

Some of the other FLIR managers -- ones whom the

FLIR special committee did not ask to resign --were

[***23] eventually charged with fraud by the SEC, see

SEC v.Stringer,No Civ.02-1341-ST,2003U.S.Dist.

LEXIS25524,2003WL23538011at*2-3(D Or,Sept3,

2003)(describing allegations), and were criminally

indicted by the DOJ, see UnitedStatesv.Stringer,408F.

Supp.2d1083(D Ore.2006)(dismissing indictment due

to government's "egregious behavior"). The SEC and the

accused, however, entered into a settlement. The accused

neither admitted nor denied the findings made by the

SEC; he stipulated to them only for purposes of the SEC's

jurisdiction and its proceedings against him. The findings

included:(1) that the accused "understood" [***24] that

the sale to its independent sales representative, Jaramillo,

was conditional and Jaramillo was under no obligation to

purchase the equipment; (2) that the accused attempted to

obtain a binding agreement from Jaramillo in connection

with the audit of FLIR's 1998financial statements; (3)

that the accused signed the management representation

letters without telling PwC of his negotiations with

Jaramillo or his understanding that the transaction was

conditional; and (4) that the accused made material

misrepresentations and omitted material information in

the management letters.

11 In the Matter of FLIR Systems, Inc.,

Exchange Act Release No 46537, Accounting and

Auditing Enforcement Release No 1637, 2002

WL 31159343 (Sept 30, 2002).

Based on those findings, the SEC concluded that the

accused "willfully"violated the SEC rule that prohibits

an officer or director of a company subject to the SEC's

jurisdiction from making materially false or misleading

statements or omissions in connection with an audit of

the company's financial statements. The SEC imposed the

sanctions proposed in the accused's settlement offer. In

addition to ordering the accused to cease and desist from

committing [***25] further SEC violations, the SEC

barred the accused from practice before the SEC for a

period of five years. Inthe Matter of JamesA.Fitzhenry,

Exchange Act Release No 46870, Accounting and

Page 7343Ore. 86, *97; 162 P.3d 260, **267;

2007Ore. LEXIS 592, ***20

Auditing Enforcement Release No 1670, 2002 WL

31617720(Nov 21, 2002).

[*100]F. The Bar'sDisciplinaryProceeding

The accused notified the Bar of the SEC and DOJ

investigations. After its investigation of the matter, the

Bar filed a complaint in November 2003 alleging that the

accused had violated DR 1-102(A)(3) (prohibiting

conduct involving dishonesty, fraud, deceit, or

misrepresentation). More specifically, the Bar alleged

that, in signing the management representation letter, the

accused had made material misrepresentations to PwC

because certain of the representations pertaining to the

Jaramillo transaction had been false. The accused's

hearing was held on October 3 and 4, 2005.

The evidence before the trial panel included the

accused's SEC testimony. The accused also personally

testified in the disciplinary hearing. In his testimony

before the trial panel, the accused contradicted his sworn

testimony before the SEC in several significant regards.

Of particular importance, the accused specifically

"disavowed" [***26] his SEC testimony that, based on

his negotiations with Beatriz, he had known that

Jaramillo considered the letters of intent to be conditional

rather than firm purchase commitments. The accused

maintained, instead, that he had no recall of Beatrizever

indicating that the letters of intent were conditional only.

Relatedly, and contrary to his unequivocal SEC

testimony, the accused testified to the trial panel that he

had not concluded from his negotiations with Beatrizthat

"fundamentally" there had been no agreement and no

"meeting of the minds"between FLIR and Jaramillo. The

accused maintained, instead, that he had not assessed the

strength of the existing understanding with Jaramillo and

had held no belief about it, one way or the other. When

asked why his testimony before the trial panel

contradicted his SEC testimony, the accused insisted his

memory in 2005 of the pertinent events was better than in

2001 because he had taken more time to review

documents and to refresh his recollection of what had

happened in advance of testifying at his disciplinary

hearing.

[**269] The trial panel issued a corrected opinion

on March 3, 2006, in which it concluded that the accused

knowingly had misrepresented [***27] the facts about

the Jaramillo transaction in the management

representation letter, in violation of DR 1-102(A)(3). In

so concluding, the trial panel believed the [*101]

accused's SEC testimony over his testimony at the

disciplinary hearing. The trial panel "flatly rejected"the

accused's explanation that his memory was more reliable

in 2005 than it had been in 2001, explaining:

"[A]lthough the accused may have

somehow believed that his testimony was

true, in many particulars it was not. It was,

at best, deceptive and at worst, patently

false. Giving the accused the benefit of

[the]doubt, the panel assumes that he was

acting on the advice of counsel, but was

nevertheless deceptive in disavowing his

earlier sworn testimony before the SEC,

and claiming that his memory is now

better than it was then."

As a sanction for violating of DR 1-102(A)(3), the

trial panel concluded that the accused's misconduct

warranted a suspension from the practice of law for 120

days. The accused sought this court's review.

II.DISCUSSION

DR 1-102(A)(3) provides that "[i]t is professional

misconduct for a lawyer to * * * [e]ngage in conduct

involving dishonesty, fraud, deceit or

misrepresentation[.]" Evaluating misrepresentation

[***28] involves a two-part inquiry:(1) whether the

lawyer knew that the lawyer's statement was a

misrepresentation; and (2) whether the lawyer knew that

it was material. Inre Gustafson,327Ore.636,648,968

P.2d 367 (1998). To establish an affirmative

misrepresentation, the Bar must prove by clear and

convincing evidence that the accused knowingly made a

false statement of material fact. Inre Kumley,335Ore.

639,644,75 P.3d 432 (2003). Unlike violations that

require a lawyer to act with intent, "[a]lawyer acts

knowingly by being consciously aware of the nature or

attendant circumstances of the conduct, but not having a

conscious objective to accomplish a particular result."In

re Lawrence,332Ore.502,513,31P.3d1078(2001). A

misrepresentation is material if it "would or could

significantly influence the hearer's decision-making

process."In re Eadie,333 Ore.42,53,36 P.3d 468

(2001).

For purposes of DR 1-102(A)(3), the initial focus is

on the truth or falsity of the fact asserted. Kumley,335

Ore.at[*102]644-45. In this case, there is no dispute

Page 8343Ore. 86, *99; 162 P.3d 260, **268;

2007Ore. LEXIS 592, ***25

that the representations concerning the Jaramillo

transaction in the management representation letter were

false. The trial panel particularly [***29] emphasized

that, for a proper bill and hold transaction, "a fixed

commitment to purchase by a bona fide buyer"was a

"fundamental requirement." The trial panel concluded

that Jaramillo was merely FLIR's commissioned sales

agent and, in 1998when FLIR treated the $4.1 million as

recognized revenue, "[c]learly, there was no purchaser,

and hence, no purchase."The accused does not argue

otherwise.

The accused does challenge, however, the trial

panel's conclusion that the accused signed the

management representation letter knowing that it

contained representations about the Jaramillo transaction

that were false. On that central issue, the trial panel

effectively drew two conclusions:(1) that the accused

knew when he signed the letter that there was no fixed

purchase commitment between Jaramillo and FLIR; and

(2) that the accused noticed and was consciously aware of

the Jaramillo transaction in the listing of bill and hold

transactions. The accused argues that the evidence

supports neither conclusion by clear and convincing

evidence.

In arguing that he lacked actual knowledge that

Jaramillo had not made a fixed commitment to the $4.1

million purchase, the accused largely relies on his

[***30] testimony at the disciplinary hearing. He urges

that he did not, in advance of or during the negotiations

with Beatriz, review the Jaramillo letters of intent to

determine whether they were conditional or binding. Nor,

he points out, did Jaramillo rescind or withdraw the

letters of intent. The accused's brief urges that some

letters of intent in fact qualify as binding contracts. Thus,

the accused reasons, he necessarily had no actual

knowledge that the Jaramillo letters of intent were

inadequate in this particular instance.

[**270] The accused's sworn testimony to the SEC

was to the contrary, however. In that testimony, the

accused repeatedly acknowledged that he entered into the

negotiations with Beatrizwith the understanding that the

letters of intent -- which he personally had reviewed --

were not sufficient for [*103]revenue recognition. He

also repeatedly acknowledged that his goal in the

negotiations was to get a stronger commitment from

Jaramillo and that the reason for doing so was so that the

$4.1 million transaction could be reported as revenue in

1998.In addition to describing his own understanding in

that regard, the accused described Beatriz as "clearly"

viewing the letters of intent [***31] to be conditional

only, rather than a firm agreement to purchase. 12 Finally,

the accused testified, without qualification, that he

concluded from his negotiations with Beatriz that

"fundamentally we didn't seem to have an agreement"

and there was no "meeting of the minds"between FLIR

and Jaramillo for the purchase, and that he told the CEO

(Stringer) as much. He also knew one fact that he did not

ever deny, not even at the disciplinary hearing -- he knew

that Jaramillo was not willing to sign the audit letter

confirming that it had made a fixed purchase

commitment.

12 The accused now contends that the court

reporter for the SEC hearing did not transcribe his

testimony correctly and that he stated that he

denied recalling a conversation in which Beatriz

had indicated that Jaramillo's agreement was

conditional only. As the Bar points out, however,

the accused has raised that contention for the first

time in his brief in this court. Suffice it to say that

the belated claim of a six-year-old transcription

error does not detain us.

The question of what the accused actually knew thus

hinges on whether we believe the accused's SEC

testimony or his later equivocations and retractions. For

[***32] two reasons, we believe his SEC testimony. We

do so, first, because the trial panel did so. The trial panel

in this case expressly found that the accused's testimony

at the disciplinary hearing "in many particulars * * * was,

at best, deceptive and at worst, patently false."Also, the

trial panel expressly rejected "as mendacious" the

accused's only explanation for his contradictory

testimony (i.e., that his memory had improved with the

passage of time). We are satisfied from the trial panel's

opinion that its assessment of the accused's credibility

was based, at least in significant part, on the accused's

demeanor and manner of testifying. To that extent, we

give weight to the trial panel's express credibility

assessments. See, e.g., In re Gustafson,333Ore.468,

470,41P.3d1063(2002)(observing that the court gives

weight to the express credibility findings of the trial

panel). 13

13 We note, for future guidance, that

disciplinary trial panels will aid this court greatly

in these cases if they explicitly identify the basis

Page 9343Ore. 86, *102; 162 P.3d 260, **269;

2007Ore. LEXIS 592, ***28

for their witness credibility assessments. When a

panel's assessment is based on the objective

factors involving the intrinsic believability of

competing inferences [***33] or evidence -- e.g.,

the inherent improbability of certain testimony,

the existence of corroboration, and so on -- this

court owes no deference to that assessment, but

the panel's discussion may be enlightening and

have persuasive force. When the panel's

assessment is based on subjective observations of

a witness's demeanor and the manner in which the

witness testifies, the trial panel explicitly should

state that its findings are demeanor-based,

because this court appropriately defers to the trial

panel's superior position to assess credibility on

that basis. When, finally, the panel's assessment is

based both on objective and subjective factors, the

trial panel should identify the role that both play

in the panel's credibility assessment so that this

court can determine how much weight to give to

the panel's findings.

[*104] Our second reason for believing the

accused's testimony before the SEC over his later

testimony in the disciplinary hearing is our own review of

the record. As part of our de novo review in disciplinary

cases, we can and do assess credibility based on objective

factors, such as the inherent probability or improbability

of testimony, whether testimony is internally consistent

[***34] or inconsistent, whether the testimony is

corroborated or contradicted, and so on. Here, the

accused's explanation to the SEC of what he knew and

understood -- and when he knew and understood it -- is

the more believable one, given the context of the

surrounding circumstances, including the flurry of special

efforts that the accused and others made to get a stronger

agreement from Jaramillo. Moreover, the accused's

testimony before the SEC appears to have been

searching, forthright, and thoughtful, even when the

accused could [**271] not remember certain events or

details. In contrast to that, even on a cold record, the

accused's testimony at the disciplinary hearing often

appeared evasive, hyper-technical, argumentative, and

guarded. 14Our review of the record therefore leads us to

the same credibility assessment as that made by the trial

panel. We find, as did the trial panel, that the accused had

actual knowledge that Jaramillo had not made -- and was

not willing to make -- a fixed commitment for the $4.1

million purchase. His contrary testimony was false.

14 At points, the chair of the panel had to

caution the accused to, for example, conduct

himself with courtesy toward counsel for the

[***35]Bar.

The next question is whether the accused was aware

of the false representations about the Jaramillo

transaction in the letter that he signed. Before both the

SEC and the trial panel, the accused claimed that he read

the management [*105] representation letter before

signing it, but that he did so only "to determine the

accuracy of the legal representations."He further claimed

that he had viewed the bill and hold transactions as purely

accounting matters. By the accused's count, only four of

the 31 numbered paragraphs in the letter related to legal

representations; all others were accounting

representations. As to those accounting representations

generally, and the bill and hold transactions in particular,

the accused believed that he could rely on the signatures

of the other managers signing the letters. That is, he did

not thinkthat the representations relating to the bill and

hold transactions were his responsibility, and he relied on

the fact that other FLIR managers had signed off on those

representations as true to the best of their knowledge and

belief. Additionally, in his brief, the accused describes his

negotiations with Beatriz as a mere "brief interaction"

and asserts that [***36] the Jaramillo transaction simply

was not memorable enough to have "in mind"when he

signed the letters.

The accused's arguments do not persuade us. Given

the circumstances, we simply do not believe that the

accused failed to notice the listing of the Jaramillo

transaction. By the accused's own account, he read the

entire letter with sufficient attention to distinguish legal

from accounting matters. The Jaramillo transaction was

conspicuously listed on the second page of the letter, as

the first of nine bill and hold transactions; the $ 4.1

million purchase amount was equally conspicuous. The

accused did not assert that he did not in fact see it, and we

do not believe that he could have failed to see it on even

the most cursory reading of the letter.

More fundamentally, we do not believe that the

accused considered the representations to be purely of an

accounting nature. The letter that the accused signed

confirmed that, with respect to the bill and hold

transactions, including the Jaramillo transaction, the risk

of loss had passed to the customer. The letter also

confirmed that "[t]he customer has made (prior to the

Page 10343Ore. 86, *103; 162 P.3d 260, **270;

2007Ore. LEXIS 592, ***32

date of recording the revenue) a fixed commitment to

purchase the goods [***37] via a written purchase

order[.]"In his capacity as FLIR's general counsel, the

accused had consulted with Clark in connection with

Clark's audit of bill and hold transactions. To determine

how to treat the matters as an accounting matter, Clark

needed [*106] the accused's legal perspective. During

the prior year's audit, in 1998, the accused had given

Clarkhis legal advice on riskof loss in a formal opinion

letter. During the 1998audit, Clarkspecifically conferred

with the accused to get his perspective on legal

components of the criteria for a bill and hold transaction.

15 Given those conversations with Clark, the accused

cannot credibly claim that, when he came to the

paragraph pertaining to the bill and hold transactions in

April 1999, he did not read it with any focus or care

because it had nothing to do with anything legal. 16

15 The accused categorically denied meeting

with Clarkon those matters during the 1998audit.

Clark's testimony on that point is more credible.

16 That point answers the accused's contention

that he was entitled to rely on the signatures of the

other managers for "accounting matters"and that

his signature was confirming only legal

representations that he had [***38]made through

the audit. But we note that, even if the bill and

hold representations were purely accounting in

nature, that fact would not permit the accused to

sign the letter confirming those representations if,

as we conclude, he knew them to be untrue. Here,

the accused signed the letter in his capacity as a

vice president of FLIR as well as general counsel.

He confirmed all representations in the letter. The

accused had a duty not to confirm even a purely

accounting representation if he had personal

knowledge -- and here, we find that he did -- that

it was not true. In other words, the accused was

not entitled to rely on the signatures of the other

managers without inquiry or further investigation

when he had personal knowledge, contrary to the

representation in the letter, that Jaramillo and

FLIR did not have a fixed purchase agreement.

[**272] Nor do we think that the accused would

have failed to recall what he knew -- i.e., that Jaramillo

had made no fixed purchase commitment. Despite the

accused's efforts now to minimize his role and his

activities, we are convinced that they were distinct and

memorable to him. Not much time had elapsed between

his negotiations with Beatrizand when [***39] he was

asked to sign the letter -- at most about sixweeks. The

accused acknowledged that his own involvement in those

negotiations was novel -- he never before had been asked

to intervene in a negotiation of that kind for FLIR. The

accused knew that the effort to get a stronger

commitment from Jaramillo was being made so that

auditors would approve recognizing the $4.1 million in

revenue. He knew that Stringer was "keenly interested"in

getting that agreement and recognizing that revenue in

1998,and that doing so was "important enough" to

dispatch Coveny personally to Bogota. The accused

personally "felt the pressure" when [*107] Stringer

made it the accused's job to negotiate a stronger purchase

commitment. It defies belief to suggest that the accused

could see the reference to the $ 4.1 million Jaramillo

transaction in the letter, as we conclude that he did, and

not have "in mind"what he knew from his personal

involvement -- that Jaramillo had not agreed to the deal.

That being so, the accused should not have signed the

management representation letter.

The final question is whether the accused's false

statement was material and the accused knew it was

material. Gustafson,327Ore.at648. [***40]In that

regard, the accused argues that, although PwC may not

have been aware of his interactions with Beatriz, that

interaction could not have "significantly influence[d][its]

decision-making process."Eadie,333Ore.at53. The

accused reasons that the auditors knew that FLIR had

tried to get Jaramillo to sign the audit confirmation letter

and that FLIR had been unsuccessful in doing so.

According to the accused, given what the auditors already

knew, the accused reasonably believed that disclosing the

failed negotiations to the auditors would not have

changed the outcome of the audit.

That argument falls of its own weight. Of course the

auditors knew that Jaramillo did not sign and return the

audit letter -- that was among the reasons that the FLIR

management had to confirm certain facts pertaining to the

bill and hold transactions, including the representation

that each customer had made a fixed commitment to the

purchase. What is important is what the auditors did not

know -- they did not know that Jaramillo had denied

making any such commitment and that the accused had

concluded that there was no "meeting of the minds"and

fundamentally no agreement on Jaramillo's part for the

[***41]purchase. The accused knew those facts, as we

have concluded. Had the auditors known those factsas

Page 11343Ore. 86, *105; 162 P.3d 260, **271;

2007Ore. LEXIS 592, ***36

well, instead of being misled to thinkthat Jaramillo did

not sign and return the audit letter as a result of language

and cultural barriers, the outcome of the audit would have

been entirely different, as Clarktestified before the trial

panel. The $4.1 million would either have had to come

off of the books for 1998or the audit opinion would have

been unfavorable. We are satisfied that the accused,

[*108]who testified that he knew the audit could not be

concluded favorably unless he signed the management

representation letter, knew the materiality of the

misstatements that the letter contained.

We therefore conclude that the accused's act of

signing the management representation letter in April

1999violated DR 1-102(A)(3) because, in that letter, he

knowingly confirmed, among other things, that Jaramillo

had made a fixed commitment to purchase FLIR

equipment prior to the date of recording the revenue,

which was both a [**273] false and material fact that the

accused had in mind when he signed the letter.

III.SANCTION

Having concluded that the accused violated DR

1-102(A)(3), we must determine the [***42] appropriate

sanction. In doing so, we recognize that the purpose of a

sanction is not to penalize the accused, but is, rather, to

protect the public and the integrity of the legal profession.

Inre Glass,308Ore.297,304,779P.2d612(1989).

Consistently with this court's well-established

methodology, we examine the American Bar

Association's Standardsfor ImposingLawyer Sanctions

(1991)(amended 1992) (ABA Standards) and Oregon

case law. Inre Huffman,331Ore.209,223,13P.3d994

(2000). We first determine, as a preliminary matter, the

appropriate sanction based on (1) the duty violated; (2)

the accused's mental state; and (3) the actual or potential

injury that the misconduct caused. ABA Standard 3.0.

We then examine any aggravating or mitigating

circumstances to determine whether we should adjust the

preliminary sanction, and, finally, we review our prior

case law for guidance in imposing the appropriate

sanction. Huffman,331Ore.at223.

A. PreliminaryAssessmentUnder ABAStandards

Under the ABA Standards, the accused's conduct as

described above violated his duty to the public "to

maintain the standards of personal integrity upon which

the community relies."ABA Standard [***43] 5.0. The

ABA Standards recognize three mental states:intentional,

knowing, and negligent. As we have explained, we

conclude that the accused [*109] violated DR

1-102(A)(3) knowingly -- that is, with the "conscious

awareness of the nature or attendant circumstances of the

conduct but without the conscious objective or purpose to

accomplish a particular result."ABA Standards at 7. The

ABA Standards suggest that, ordinarily, a public

reprimand is an appropriate sanction when a lawyer

knowingly engages in conduct that involves

misrepresentation and that adversely reflects on the

lawyer's fitness to practice law. ABA Standard 5.13.

Under the ABA Standards, the injuries caused by a

lawyer's professional misconduct may be either actual or

potential. See In re Williams,314Ore.530,547,840

P.2d1280(1992)("[A]n injury need not be actual, but

only potential, in order to support the imposition of a

sanction."). Actual "injury"is actual harm to a client, the

public, the legal system, or the profession that is caused

by a lawyer's misconduct. ABA Standards at 7. "Potential

injury"is harm that was reasonably foreseeable at the

time of the lawyer's misconduct but that ultimately did

not occur. Id.

Here, [***44] FLIR's improper revenue-booking

maneuvers, including making false representations in the

management representation letter at issue in this

proceeding, caused the need for its 1998 financial

statements to be recalled, restated, and reissued, which in

turn caused the price of its shares to plummet to a

fraction of their prior value. 17As a consequence of the

revenue misstatements, the SEC initiated an investigation

into FLIR's revenue recognition practices and ultimately

issued a cease and desist order against FLIR in 2002. The

drop in the value of FLIR's stock undoubtedly caused

actual injury to FLIR and its shareholders in the form of

economic loss, even if the exact amount of that loss is

difficult or impossible to quantify. The same is true of the

SEC investigation and regulatory efforts -- significant

public resources undoubtedly were used, even if they too

are not quantifiable.

17 The record does not contain information

about the degree to which the stockprice fell. We

take judicial notice that FLIR's price per share

closed at $5.81 on December 31, 1998, and fell

as low as 75 cents near the end of 2000. See

http://quotes.nasdaq.com (search ticker symbol

"FLIR").

There was also [***45]significant potentialpublic

Page 12343Ore. 86, *107; 162 P.3d 260, **272;

2007Ore. LEXIS 592, ***41

and private injury. The independent audit of financial

statements [*110]filed with the SEC by publicly traded

corporations is one of the most important features of the

SEC's regulatory oversight of those corporations. The

results of those audits, and the accuracy and integrity of

the audit process more generally, [**274] greatly

influence investor confidence in particular corporations,

as well as public confidence in the nation's economy as a

whole. In UnitedStatesv.Arthur Young& Co.,465U.S.

805,819n15,104S.Ct.1495,79L.Ed.2d826(1984),

the United States Supreme Court stressed that point:

"The SEC requires the filing of audited

financial statements in order to obviate the

fear of loss from reliance on inaccurate

information, thereby encouraging public

investment in the Nation's industries. It is

therefore not enough that financial

statements be accurate; the public must

also perceive them as being accurate.

Public faith in the reliability of a

corporation's financial statements depends

upon the public perception of the outside

auditor as an independent professional. * *

* If investors were to view the auditor as

an advocate for the corporate client,

[***46] the value of the audit function

itself might well be lost."18

(Emphasis in original.)

18 Official statements of the SEC make the same

point. The SEC describes its mission as one "to

protect investors, maintain fair, orderly, and

efficient markets, and facilitate capital formation."

www.sec.gov/about/whatwedo.shtml (emphasis

added). The SEC further explains that

comprehensive, accurate financial information is

critical to a sound investment decision:

"The laws and rules that govern

the securities industry in the

United States derive from a simple

and straightforward concept: all

investors, whether large

institutions or private individuals,

should have access to certain basic

facts about an investment prior to

buying it, and so long as they hold

it. To achieve this, the SEC

requires public companies to

disclose meaningful financial and

other information to the public.

This provides a common pool of

knowledge for all investors to use

to judge for themselves whether to

buy, sell, or hold a particular

security. Only through the steady

flow of timely, comprehensive, and

accurate information can people

make sound investment decisions."

Id.

To be sure, the accused was not directly and

personally [***47] responsible for FLIR's accounting

practices. Nor was the Jaramillo transaction the only

accounting impropriety that surfaced. Also, as the trial

panel observed, the accused was not the only FLIR

management executive who participated in the

misrepresentation at issue. But we do not view the

[*111]accused's role in causing the actual and potential

injury to have been minor. In many ways, the accused's

role was a pivotal one. Had he declined to sign the

management representation letter, PwC would have

wanted to know why. If the accused then had disclosed

what he knew about the Jaramillo transaction, the truth

about at least that transaction -- and probably the other

bill and hold transactions as well -- would have come to

light. In turn, PwC would not have approved the 1998

financial statements, and the improprieties would have

been exposed. Instead, FLIR continued its practices for

another year -- through the 1999financial statements and

the audit of those statements. In effect, the accused's

misrepresentation permitted FLIR's unlawful practices

not only to go undiscovered for 1998, but to continue for

a longer period than they otherwise would have.

The regulatory requirement of an independent

[***48]audit exists to prevent the precise type of actual

and potential injury that flowed from the misleading

accounting in FLIR's financial statements and from the

false confidence that investors were given when PwC

issued its favorable audit report. The accused, who signed

the management letter knowing that it would be used in

that independent audit of FLIR's 1998 financial

statements, shares responsibility for the ensuing actual

and potential injury in common with the other FLIR

Page 13343Ore. 86, *109; 162 P.3d 260, **273;

2007Ore. LEXIS 592, ***45

executives.

B. AggravatingandMitigatingFactors

"[A]ggravating circumstances are any

considerations, or factors that may justify

an increase in the degree of discipline to

be imposed." ABA Standard 9.21.

Conversely, "mitigating circumstances are

any considerations or factors that may

justify a reduction in the degree of

discipline to be imposed."ABA Standard

9.31.We agree with the trial panel that the

accused's substantial experience in the

practice of law, ABA Standard 9.22(i),

and his deceptive testimony, ABA

Standard 9.22(f), are the appropriate

aggravating factors to consider in

determining his sanction. We also give

weight to the trial [**275] panel's

credibility-bound assessment that the only

real remorse expressed [***49] by the

accused was "more for his predicament,

than for committing any violation of the

rules which govern his profession."

[*112]On the other side of the equation, we find

three mitigating factors. The most important one is that

the accused has no prior disciplinary record. ABA

Standard 9.32(a). Also, the record establishes that the

accused is otherwise of good character and has a good

reputation in the community. ABA Standard 9.32(g).

Finally, he has taken action to rectify his misconduct by

assisting FLIR to improve its accounting practices and by

becoming more knowledgeable about proper corporate

accounting practices. ABA Standard 9.32(d).

Unlike the trial panel, however, we give no weight to

the accused's speed in self-reporting to the Bar -- that

factor is more than offset by his deceptive testimony

before the trial panel. Nor do we give weight to the fact

that his conduct was also punished by the SEC

investigation through the cease and desist order. The

accused acknowledged that the SEC's order had no real

effect on him, because his day-to-day workfor FLIR does

not involve the SEC. He also acknowledged that he has

incurred no expense defending himself in the SEC or this

disciplinary [***50]proceeding; FLIR has paid for his

legal representation and related expenses. Finally, the

trial panel noted that the accused had no selfish motive

for his conduct. We do not find the opposite to be true,

but we are unable to affirmatively conclude that the trial

panel was correct in that regard. We therefore simply

give that factor no weight. 19

19 The accused testified that bonuses for the

executive management were set directly by

then-CEO Stringer based on the revenue

recognized in FLIR's annual financial statements

and Stringer's personal satisfaction with each

manager's performance. The trial panel was

apparently satisfied that the accused was not

influenced by that when he "felt the pressure"

from Stringer to get a stronger commitment from

Jaramillo, or when he signed the management

representation letter despite his knowledge that

there was no fixed commitment. Still, we find it

difficult to overlook the fact that the accused

personally received a bonus of $55,000 based on

the 1998financial statements. Also, at the end of

1988,the accused held FLIR stockoptions. For

those reasons, we are not persuaded that the

accused wholly lacked, at least on some

subconscious level, a selfish [***51]motive. But

neither do we affirmatively find the existence of

such a motive.

Our preliminary analysis under the ABA Standards

suggests that a suspension, rather than a public

reprimand, may be an appropriate sanction for the

accused's misconduct. That is so because of the

significant actual and potential [*113]injury caused by

the accused's misconduct, and our assessment that the

aggravating factors substantially outweigh the mitigating

ones in this instance.

C. OregonCase Law

The final step in our analysis of the sanction is to

determine whether a suspension is consistent with our

prior cases and, if it is, to determine the length of that

suspension consistently with those cases. The accused

argues that a public reprimand is appropriate because this

court usually does not impose a suspension for a violation

of DR 1-102(A)(3) except when the case involves

aggravating factors not present here, such as prior

discipline, multiple rule violations, and intentional

conduct. For its part, the Bar urges that a suspension of at

least 120 days is appropriate in this case because of the

foreseeable injury of the accused's misconduct. To

Page 14343Ore. 86, *111; 162 P.3d 260, **274;

2007Ore. LEXIS 592, ***48

support their respective views of the appropriate sanction,

both [***52] the accused and the Bar try to fact-match

the prior cases to the circumstances that this case

presents.

That exercise is understandable but, in this case, of

limited assistance. We agree with the Bar that this court's

prior cases support a suspension rather than a reprimand.

In general, the cases in which this court has imposed a

public reprimand have been ones involving private

misrepresentations. 20 On [**276] the other hand, this

court has generally have imposed a suspension when a

lawyer has, in some sort of professional capacity, made

misrepresentations that served to mislead governmental

or regulatory authorities. 21 Given the significance of the

management representation letter to the independent audit

and, in turn, the significance of that audit to [*114]the

SEC's regulatory oversight, we agree that the accused's

misrepresentation in this case justifies a suspension.

20 See, e.g., Inre Boardman,312Ore.452,822

P.2d709(1991)(imposing public reprimand for

misrepresenting to third party that accused's client

was personal representative of estate); In re

Miller,287 Ore.621,601 P.2d 789 (1979)

(imposing public reprimand for failing to advise

parties depositing bail that monies would be

[***53]returned to criminal defendant and not to

them and failing to advise same parties of

conversion in status from a court-appointed

attorney to retained attorney for a fee, which

would be payable only from bail deposited); Inre

Sims, 284 Ore. 37, 584 P.2d 766 (1978)

(imposing public reprimand for signing client's

name to verification of a response in a marriage

dissolution and notarizing client's signature).

21 See, e.g., Inre Spencer,335Ore.71,58P.3d

228(2002)(60-day suspension for registering

nonresident's RV in Oregon to avoid taxes and

fees); Inre Benson,317Ore.164,854P.2d466

(1993)(imposing six-month suspension for

preparing and recording false deeds of trust on

client's real property); Inre Dinerman,314Ore.

308,840P.2d 50 (1992) (imposing 63-day

suspension for knowingly making false statements

to assist client in obtaining straw loan from bank).

In setting the length of that suspension, however, this

court's prior cases are not helpful. The circumstances of

this case are unprecedented in terms of the actual injury

inflicted on shareholders and the gravity of the potential

injury to the shareholders and the public more generally.

Again, we emphasize, as we did [***54]earlier, that the

accused was not a lone actor in what ultimately became

FLIR's financial scandal. But the others involved were

not lawyers, and they are not held to the standards to

which lawyers are held. The accused's role was a

significant one, and the choice that he made to sign the

management representation letter containing material

false statements is the type of conduct that significantly

erodes public confidence in the integrity of the legal

profession. That much, alone, warrants a lengthy

suspension. We are also persuaded that a lengthy

suspension is warranted by the aggravating factor of the

accused's deceptive testimony in this proceeding.

Considering all the circumstances of this case, we

conclude that the appropriate sanction for the accused's

misconduct is a suspension from the practice of law for

120 days.

The accused is suspended from the practice of law

for 120 days, commencing 60 days from the effective

date of this decision.

Page 15343Ore. 86, *113; 162 P.3d 260, **275;

2007Ore. LEXIS 592, ***51