managing civil litigation against the backdrop of a ... · managing civil litigation against the...
TRANSCRIPT
���������
�
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
���������
��
� 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
20
���������
��
� Federal Rule of Evidence 410:
- 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)
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.
Admissions/Admissibility (cont’d)
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.”
Admissions/Admissibility (cont’d)
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).
Admissions/Admissibility (cont’d)
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).
Admissions/Admissibility (cont’d)
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);
• 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?
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
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
independent professional judgment in behalf of a client will be or is likely
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
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.
Page 2 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
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
Page 3 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
‹ 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]
Page 4 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
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
[2] Internal Revenue
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
[3] Internal Revenue
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).
Cases that cite this headnote
[4] Internal Revenue
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).
Cases that cite this headnote
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. 2
[5] Internal Revenue
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.
Cases that cite this headnote
[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.
Cases that cite this headnote
[7] Privileged Communications and
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.
1 Cases that cite this headnote
[8] Privileged Communications and
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.
Cases that cite this headnote
[9] Privileged Communications and
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.
Cases that cite this headnote
[10] Internal Revenue
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.
1 Cases that cite this headnote
[11] Internal Revenue
Work Product Privilege; Tax Practitioner
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.
2 Cases that cite this headnote
[12] Internal Revenue
Work Product Privilege; Tax Practitioner
Privilege
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. 3
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.
2 Cases that cite this headnote
[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.
Cases that cite this headnote
[14] Federal Civil Procedure
Work Product Privilege; Trial Preparation
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.
1 Cases that cite this headnote
[15] Federal Civil Procedure
Work Product Privilege; Trial Preparation
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.
Cases that cite this headnote
[16] Internal Revenue
Work Product Privilege; Tax Practitioner
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.
1 Cases that cite this headnote
[17] Internal Revenue
Work Product Privilege; Tax Practitioner
Privilege
Privileged Communications and
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.
Cases that cite this headnote
[18] Federal Civil Procedure
Work Product Privilege; Trial Preparation
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
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. 4
work product privilege. Fed.Rules Civ.Proc.Rule
26(b)(3), 28 U.S.C.A.
2 Cases that cite this headnote
[19] Federal Civil Procedure
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.
Cases that cite this headnote
[20] Federal Civil Procedure
Work Product Privilege; Trial Preparation
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.
Fed.Rules Civ.Proc.Rule 26(b)(3), 28 U.S.C.A.
2 Cases that cite this headnote
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
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. 5
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
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. 6
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)).
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. 7
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-
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. 8
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
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. 9
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
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. 10
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
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. 11
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
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. 12
[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
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. 13
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
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. 14
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)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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)
[1] Federal Civil Procedure
Work Product Privilege; Trial Preparation
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.
Cases that cite this headnote
[2] Federal Civil Procedure
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.
7 Cases that cite this headnote
[3] Federal Civil Procedure
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.
5 Cases that cite this headnote
[4] Federal Civil Procedure
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.
16 Cases that cite this headnote
[5] Federal Civil Procedure
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.
24 Cases that cite this headnote
Attorneys and Law Firms
*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.
Medinol, Ltd. v. Boston Scientific Corp., 214 F.R.D. 113 (2002)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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.
Medinol, Ltd. v. Boston Scientific Corp., 214 F.R.D. 113 (2002)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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
Medinol, Ltd. v. Boston Scientific Corp., 214 F.R.D. 113 (2002)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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.
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D. 441 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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)
[1] Federal Civil Procedure
Injustice or prejudice
Federal Civil Procedure
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.
1 Cases that cite this headnote
[2] Federal Civil Procedure
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
Civ.Proc.Rule 15(a), 28 U.S.C.A.
1 Cases that cite this headnote
[3] Federal Civil Procedure
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
Civ.Proc.Rule 15(a), 28 U.S.C.A.
2 Cases that cite this headnote
[4] Federal Civil Procedure
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.
Cases that cite this headnote
[5] Federal Civil Procedure
Counterclaim
Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D. 441 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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
Civ.Proc.Rule 15(a), 28 U.S.C.A.
Cases that cite this headnote
[6] Federal Civil Procedure
Work Product Privilege; Trial Preparation
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
Civ.Proc.Rule 26(b)(3), 28 U.S.C.A.
4 Cases that cite this headnote
[7] Federal Civil Procedure
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.
Fed.Rules Civ.Proc.Rule 26(b)(3), 28 U.S.C.A.
18 Cases that cite this headnote
[8] Federal Civil Procedure
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
Civ.Proc.Rule 26(b)(3), 28 U.S.C.A.
14 Cases that cite this headnote
Attorneys and Law Firms
*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.
Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D. 441 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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.
Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D. 441 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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
Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D. 441 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
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
Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D. 441 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
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
Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D. 441 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
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,
Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D. 441 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
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
Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D. 441 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9
ORDERED that the Clerk of the Court close this motion.SO ORDERED.
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
U.S. v. Kordel, 397 U.S. 1 (1970)
90 S.Ct. 763, 25 L.Ed.2d 1, 13 Fed.R.Serv.2d 868
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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.
49 Cases that cite this headnote
[2] Federal Civil Procedure
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.
48 Cases that cite this headnote
[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.
146 Cases that cite this headnote
[4] Federal Civil Procedure
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)
90 S.Ct. 763, 25 L.Ed.2d 1, 13 Fed.R.Serv.2d 868
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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.
72 Cases that cite this headnote
[5] Criminal Law
Compelling Self-Incrimination
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.
174 Cases that cite this headnote
[6] Criminal Law
Compelling Self-Incrimination
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.
54 Cases that cite this headnote
[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.
Cases that cite this headnote
[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.
41 Cases that cite this headnote
[9] Criminal Law
Compelling Self-Incrimination
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.
6 Cases that cite this headnote
Attorneys and Law Firms
**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)
90 S.Ct. 763, 25 L.Ed.2d 1, 13 Fed.R.Serv.2d 868
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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)
90 S.Ct. 763, 25 L.Ed.2d 1, 13 Fed.R.Serv.2d 868
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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)
90 S.Ct. 763, 25 L.Ed.2d 1, 13 Fed.R.Serv.2d 868
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
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)
90 S.Ct. 763, 25 L.Ed.2d 1, 13 Fed.R.Serv.2d 868
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
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)
90 S.Ct. 763, 25 L.Ed.2d 1, 13 Fed.R.Serv.2d 868
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
**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
90 S.Ct. 763, 25 L.Ed.2d 1, 13 Fed.R.Serv.2d 868
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
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.
Further Information:
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.”
85
Further Information:
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).
86
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.
87
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
88
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.
89
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;
90
(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.
91
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
92
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
93
same conduct, and so that SEC staff are alerted to any determination by the PCAOB not to pursue its investigation.
Further Information:
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
� 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
20
���������
��
� Federal Rule of Evidence 410:
- 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)
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.
Admissions/Admissibility (cont’d)
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.”
Admissions/Admissibility (cont’d)
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).
Admissions/Admissibility (cont’d)
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).
Admissions/Admissibility (cont’d)
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
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
independent professional judgment in behalf of a client will be or is likely
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-
2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503
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-
2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503
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
2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503
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")
2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503
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
2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503
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
2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503
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
2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503
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
2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503
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
2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503
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-
2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503
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
2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503
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).
2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503
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-
2015 U.S. Dist. LEXIS 54059, *; Fed. Sec. L. Rep. (CCH) P98,503
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
Page 3192 F.3d 295, *299; 1999 U.S. App. LEXIS 22815, **6;
Fed. Sec. L. Rep. (CCH) P90,646
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
Page 4192 F.3d 295, *300; 1999 U.S. App. LEXIS 22815, **10;
Fed. Sec. L. Rep. (CCH) P90,646
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
Page 5192 F.3d 295, *301; 1999 U.S. App. LEXIS 22815, **14;
Fed. Sec. L. Rep. (CCH) P90,646
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,
Page 6192 F.3d 295, *303; 1999 U.S. App. LEXIS 22815, **18;
Fed. Sec. L. Rep. (CCH) P90,646
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,
Page 7192 F.3d 295, *304; 1999 U.S. App. LEXIS 22815, **22;
Fed. Sec. L. Rep. (CCH) P90,646
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
Page 8192 F.3d 295, *305; 1999 U.S. App. LEXIS 22815, **26;
Fed. Sec. L. Rep. (CCH) P90,646
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
Page 9192 F.3d 295, *306; 1999 U.S. App. LEXIS 22815, **31;
Fed. Sec. L. Rep. (CCH) P90,646
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
Page 10192 F.3d 295, *308; 1999 U.S. App. LEXIS 22815, **35;
Fed. Sec. L. Rep. (CCH) P90,646
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.
Page 11192 F.3d 295, *309; 1999 U.S. App. LEXIS 22815, **39;
Fed. Sec. L. Rep. (CCH) P90,646
U.S.S.E.C. v. Citigroup Global Markets, Inc., 752 F.3d 285 (2014)
Fed. Sec. L. Rep. P 97,983
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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.
Cases that cite this headnote
[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.
1 Cases that cite this headnote
[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).
1 Cases that cite this headnote
[4] Federal Courts
Interlocutory and Collateral Orders
Unless a litigant can show that an interlocutory
order of the district court might have a serious,
U.S.S.E.C. v. Citigroup Global Markets, Inc., 752 F.3d 285 (2014)
Fed. Sec. L. Rep. P 97,983
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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).
Cases that cite this headnote
[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).
Cases that cite this headnote
[6] Federal Civil Procedure
On Consent
Federal Civil Procedure
Compliance; enforcement
Strong federal policy favors the approval and
enforcement of consent decrees.
Cases that cite this headnote
[7] Federal Civil Procedure
Approval hearing; entry
When the district judge is presented with a
proposed consent judgment, he is not merely a
“rubber stamp.”
1 Cases that cite this headnote
[8] Federal Civil Procedure
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.
8 Cases that cite this headnote
[9] Federal Civil Procedure
Form and requisites; validity
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.
4 Cases that cite this headnote
[10] Federal Civil Procedure
Approval hearing; entry
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.
Cases that cite this headnote
[11] Federal Civil Procedure
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.
U.S.S.E.C. v. Citigroup Global Markets, Inc., 752 F.3d 285 (2014)
Fed. Sec. L. Rep. P 97,983
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
Cases that cite this headnote
[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.
1 Cases that cite this headnote
[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.
4 Cases that cite this headnote
[14] Federal Civil Procedure
Approval hearing; entry
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.
Cases that cite this headnote
[15] Federal Civil Procedure
Form and requisites; validity
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.
6 Cases that cite this headnote
[16] Federal Civil Procedure
Approval hearing; entry
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.
Cases that cite this headnote
[17] Federal Civil Procedure
On Consent
Federal Civil Procedure
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.
Cases that cite this headnote
Attorneys and Law Firms
*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.
U.S.S.E.C. v. Citigroup Global Markets, Inc., 752 F.3d 285 (2014)
Fed. Sec. L. Rep. P 97,983
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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.
U.S.S.E.C. v. Citigroup Global Markets, Inc., 752 F.3d 285 (2014)
Fed. Sec. L. Rep. P 97,983
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
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
U.S.S.E.C. v. Citigroup Global Markets, Inc., 752 F.3d 285 (2014)
Fed. Sec. L. Rep. P 97,983
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
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:
U.S.S.E.C. v. Citigroup Global Markets, Inc., 752 F.3d 285 (2014)
Fed. Sec. L. Rep. P 97,983
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
*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
U.S.S.E.C. v. Citigroup Global Markets, Inc., 752 F.3d 285 (2014)
Fed. Sec. L. Rep. P 97,983
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
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,”
U.S.S.E.C. v. Citigroup Global Markets, Inc., 752 F.3d 285 (2014)
Fed. Sec. L. Rep. P 97,983
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9
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
U.S.S.E.C. v. Citigroup Global Markets, Inc., 752 F.3d 285 (2014)
Fed. Sec. L. Rep. P 97,983
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 10
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.
U.S.S.E.C. v. Citigroup Global Markets, Inc., 752 F.3d 285 (2014)
Fed. Sec. L. Rep. P 97,983
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 11
[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
Fed. Sec. L. Rep. P 97,983
U.S.S.E.C. v. Citigroup Global Markets, Inc., 752 F.3d 285 (2014)
Fed. Sec. L. Rep. P 97,983
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 12
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
S.E.C. v. Citigroup Global Markets Inc., 34 F.Supp.3d 379 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
Attorneys and Law Firms
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)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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?
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
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
Page 3679 F.3d 1121, *1125; 2012 U.S. App. LEXIS 9691, **5
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
Page 4679 F.3d 1121, *1127; 2012 U.S. App. LEXIS 9691, **9
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).
Page 5679 F.3d 1121, *1128; 2012 U.S. App. LEXIS 9691, **13
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
Page 6679 F.3d 1121, *1129; 2012 U.S. App. LEXIS 9691, **17
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.
Page 7679 F.3d 1121, *1130; 2012 U.S. App. LEXIS 9691, **21
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;
70 Fed. R. Evid. Serv. (Callaghan) 492
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
Page 4450 F.3d 1179, *1183; 2006U.S. App. LEXIS 14937, **9;
70 Fed. R. Evid. Serv. (Callaghan) 492
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
Page 5450 F.3d 1179, *1184; 2006U.S. App. LEXIS 14937, **13;
70 Fed. R. Evid. Serv. (Callaghan) 492
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
Page 6450 F.3d 1179, *1186; 2006U.S. App. LEXIS 14937, **17;
70 Fed. R. Evid. Serv. (Callaghan) 492
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
Page 7450 F.3d 1179, *1187; 2006U.S. App. LEXIS 14937, **20;
70 Fed. R. Evid. Serv. (Callaghan) 492
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
Page 8450 F.3d 1179, *1188; 2006U.S. App. LEXIS 14937, **25;
70 Fed. R. Evid. Serv. (Callaghan) 492
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.
Page 9450 F.3d 1179, *1189; 2006U.S. App. LEXIS 14937, **29;
70 Fed. R. Evid. Serv. (Callaghan) 492
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
Page 10450 F.3d 1179, *1190; 2006U.S. App. LEXIS 14937, **33;
70 Fed. R. Evid. Serv. (Callaghan) 492
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
Page 11450 F.3d 1179, *1192; 2006U.S. App. LEXIS 14937, **37;
70 Fed. R. Evid. Serv. (Callaghan) 492
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
Page 12450 F.3d 1179, *1193; 2006U.S. App. LEXIS 14937, **41;
70 Fed. R. Evid. Serv. (Callaghan) 492
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
Page 13450 F.3d 1179, *1194; 2006U.S. App. LEXIS 14937, **45;
70 Fed. R. Evid. Serv. (Callaghan) 492
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
Page 14450 F.3d 1179, *1196; 2006U.S. App. LEXIS 14937, **49;
70 Fed. R. Evid. Serv. (Callaghan) 492
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. §
Page 15450 F.3d 1179, *1197; 2006U.S. App. LEXIS 14937, **53;
70 Fed. R. Evid. Serv. (Callaghan) 492
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
Page 16450 F.3d 1179, *1199; 2006U.S. App. LEXIS 14937, **57;
70 Fed. R. Evid. Serv. (Callaghan) 492
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,
Page 17450 F.3d 1179, *1199; 2006U.S. App. LEXIS 14937, **58;
70 Fed. R. Evid. Serv. (Callaghan) 492
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.
Page 18450 F.3d 1179, *1200; 2006U.S. App. LEXIS 14937, **62;
70 Fed. R. Evid. Serv. (Callaghan) 492
Page 1
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)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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.
3 Cases that cite this headnote
[2] Corporations and Business Organizations
Books and Records Subject to Inspection
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.
1 Cases that cite this headnote
[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.
Cases that cite this headnote
[4] Appeal and Error
Effect in Equitable Actions
The standard of review the Supreme Court
applies to the Court of Chancery's exercise
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
of statutorily conferred discretion is highly
deferential.
Cases that cite this headnote
[5] Appeal and Error
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.
1 Cases that cite this headnote
[6] Corporations and Business Organizations
Books and Records Subject to Inspection
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.
Cases that cite this headnote
[7] Corporations and Business Organizations
Books and Records Subject to Inspection
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.
Cases that cite this headnote
[8] Corporations and Business Organizations
Books and Records Subject to Inspection
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.
Cases that cite this headnote
[9] Corporations and Business Organizations
Books and Records Subject to Inspection
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.
Cases that cite this headnote
[10] Appeal and Error
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.
Cases that cite this headnote
[11] Appeal and Error
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.
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
Cases that cite this headnote
[12] Privileged Communications and
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.
Cases that cite this headnote
[13] Privileged Communications and
Confidentiality
Fiduciary exception
The Garner v. Wolfinbarger doctrine, which
recognizes a fiduciary exception to the attorney-
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.
Cases that cite this headnote
[14] Privileged Communications and
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.
2 Cases that cite this headnote
[15] Corporations and Business Organizations
Books and Records Subject to Inspection
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).
Cases that cite this headnote
[16] Pretrial Procedure
Work-product privilege
Privileged Communications and
Confidentiality
Fiduciary exception
The Garner v. Wolfinbarger doctrine, which
recognizes a fiduciary exception to the attorney-
client privilege, applies to information protected
by the attorney-client privilege, but not to work
product.
1 Cases that cite this headnote
[17] Appeal and Error
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.
Cases that cite this headnote
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
[18] Privileged Communications and
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.
Cases that cite this headnote
*1266 Court Below–Court of Chancery of the State of
Delaware, C.A. No. 7779.
Upon appeal from the Court of Chancery. AFFIRM ED.
Attorneys and Law Firms
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–
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
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–
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
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
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
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).
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
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
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9
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
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 10
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.
22 Appendix to Wal–Mart's Opening Br. at A727.
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.
25 Appendix to Wal–Mart's Opening Br. at A717.
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).
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 11
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
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 12
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
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 13
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
50 Appendix to Wal–Mart's Opening Br. at A586.
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.
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 14
[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
55 Appendix to Wal–Mart's Opening Br. at A587.
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
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 15
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
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 16
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.
66 Appendix to Wal–Mart's Opening Br. at A449.
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
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust..., 95 A.3d 1264 (2014)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 17
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.
73 Appendix to Wal–Mart's Opening Br. at A566.
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.
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
U.S. v. LeCroy, 348 F.Supp.2d 375 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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)
[1] Privileged Communications and
Confidentiality
Presumptions and Burden of Proof
Person claiming joint defense privilege has
burden of demonstrating existence of joint
defense agreement.
2 Cases that cite this headnote
[2] Privileged Communications and
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.
1 Cases that cite this headnote
[3] Privileged Communications and
Confidentiality
Common Interest Doctrine; Joint Clients or
Joint Defense
Privileged Communications and
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.
2 Cases that cite this headnote
[4] Privileged Communications and
Confidentiality
Common Interest Doctrine; Joint Clients or
Joint Defense
Person need not be litigant to be party to
joint defense agreement, and protected by joint
defense privilege.
2 Cases that cite this headnote
[5] Privileged Communications and
Confidentiality
Common Interest Doctrine; Joint Clients or
Joint Defense
Privileged Communications and
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
U.S. v. LeCroy, 348 F.Supp.2d 375 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
communication was given in confidence and that
the client reasonably understood it to be so given.
1 Cases that cite this headnote
[6] Privileged Communications and
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.
Cases that cite this headnote
[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.
3 Cases that cite this headnote
Attorneys and Law Firms
*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
U.S. v. LeCroy, 348 F.Supp.2d 375 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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,
U.S. v. LeCroy, 348 F.Supp.2d 375 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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,
U.S. v. LeCroy, 348 F.Supp.2d 375 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
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
U.S. v. LeCroy, 348 F.Supp.2d 375 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
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
U.S. v. LeCroy, 348 F.Supp.2d 375 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
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
U.S. v. LeCroy, 348 F.Supp.2d 375 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
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
U.S. v. LeCroy, 348 F.Supp.2d 375 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9
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
U.S. v. LeCroy, 348 F.Supp.2d 375 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 10
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.
U.S. v. LeCroy, 348 F.Supp.2d 375 (2004)
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 11
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.”
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
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