- SEC Cooperation Leads to Waiver of Privilege
- December 14, 2017 | Authors: Amelia Toy Rudolph; Bruce M. Bettigole; Peter J. Anderson; Patricia A. Gorham; Ronald W. Zdrojeski; Olga Greenberg; Brian L. Rubin; Gregory S. Kaufman
- Law Firms: Eversheds Sutherland (US) LLP - Washington Office; Eversheds Sutherland (US) LLP - Atlanta Office; Eversheds Sutherland (US) LLP - Washington Office; Eversheds Sutherland (US) LLP - Washington Office
On December 5, 2017, a Florida federal magistrate judge ordered a law firm to turn over interview notes and memoranda from an internal investigation, finding that any applicable privilege had been waived when attorneys gave an “oral download” of their specific witness interview memoranda to the US Securities and Exchange Commission (SEC).1
While the order may face an appeal, the judge’s determination will nonetheless likely impact the analysis of those companies weighing the pros and cons of cooperation with a regulator. The government touts potential credit or mitigation of penalties in exchange for cooperation, but the risk of waiver may dis-incentivize many directors and executives from cooperating as extensively as appears to have been the case in this matter.
The decision arose in a case brought by two former executives being sued by the SEC for accounting fraud. The company’s outside law firm had conducted an internal investigation on behalf of the executives’ former company, which included witness interviews. The attorneys provided oral summaries of the substance of their interview notes and memoranda to the SEC when the agency conducted its own investigation.
US Magistrate Judge Jonathan Goodman found that the summaries provided by the law firm to the SEC constituted a waiver, because the SEC was an adversary to the company: “work-product protection is waived when protected materials are disclosed in a way that substantially increases the opportunity for potential adversaries to obtain the information.” Magistrate Judge Goodman found that the oral summaries were the “functional equivalent” of the notes and memos sought by the executives, and the Order noted that the law firm had not argued that “only detail-free conclusions or general impressions were orally provided.” Rather, the court that found the “substance” of the witness interview notes and memos had been disclosed, which waived the privilege.
The scope of the waiver was limited to those interview memoranda and notes actually summarized for the SEC, not all such documents for all witnesses interviewed. Magistrate Judge Goodman also declined to order the firm to turn over interview notes and memos given to the company’s auditor because it was determined that the auditor was not an adversary. The Magistrate Judge rejected an argument that the auditor was adverse to the company because it later signed a tolling agreement with the SEC, Theoretically the auditor could have blamed the company for not providing it with accurate and timely information if the SEC had pursued an action against the auditor (no such action was ever filed).
Here are some key takeaways from the decision for companies and their counsel to consider:
- Companies should carefully consider whether to cooperate with the SEC—or any other regulator—from the outset. Cooperation credit is given at the government’s discretion, which leads to uncertainty on whether cooperation will actually result in a reasonable outcome for the company.
- When companies do decide to cooperate, counsel should be cautious about what information is provided to the regulators—either in writing or orally. The court distinguished between a substantive download of information and a disclosure containing “detail-free conclusions and general impressions.” While the government will expect a disclosure of “all relevant facts,” the decision suggests a very fine line to tread to avoid waiver.
- In-house and outside counsel should carefully consider the value of memorializing meetings in formal memos. Often what is written down—particularly early in the investigation—includes “facts” that have not been confirmed and issues that ultimately do not become relevant to the investigation or a government inquiry. When memos are written, great care must be taken on how detailed they are, and how much of the witness-by-witness detail is shared with the government.
- Counsel may be wise to consider, as part of their Upjohn warnings, putting each witness on notice that what is being said may not only be turned over to the regulators but also that cooperation with the government may constitute waiver of the privilege and may therefore lead to disclosure to others—including third-party litigants.