Lawyers' botched internal investigation does not prevent prosecutors from using CFO's own statements against him
The Ninth Circuit recently issued a much-awaited opinion on the application of the attorney-client privilege in the area of a corporate internal investigation conducted amidst an options backdating scandal. The anticipation was enhanced because the district court had controversially concluded that the outside counsel who conducted the investigation had likely committed multiple ethics violations and spectacularly suppressed a number of incriminating statements made by the company's CFO to those attorneys. However, in an anticlimax, the court of appeals, finding that the lower court had made both factual and legal errors, reversed, allowing use of the statements, and failed to address the issue of ethical violations at all.
William Ruehle, the CFO of Broadcom Corp., was at the center of the company's practice of backdating stock options for select employees, a practice which the court of appeals noted was not intrinsically fraudulent unless misreported in the corporate books. When a storm swirled in 2006 over the practices, Broadcom engaged outside counsel, Irell & Manella, to conduct an investigation. As part of that investigation, Irell attorneys interviewed Ruehle; in a finding of fact critical to the outcome, it was found that Ruehle understood that his statements would be disclosed to third parties, at least to the company's outside auditors. There was a factual dispute, however, over whether the Irell attorneys had properly given Ruehle an Upjohn warning at the outset of the interview; that admonition, always good practice on the part of outside counsel, is intended to inform the interviewee that the attorneys questioning him are not his personal attorneys but attorneys solely for the corporation and that the individual is free to consult with his own counsel before proceeding.
Eventually, Ruehle's statements were disclosed to civil authorities and to the U.S. Attorney's Office in Los Angeles, which obtained Ruehle's indictment. Thereafter, the district court held a three-day evidentiary hearing, concluding that the Irell attorneys had not conducted themselves ethically and that Ruehle, who was surprised to learn that his statements were later provided to criminal authorities, held a reasonable belief that his statements were made to lawyers he believed represented him, and holding that the statements were privileged because he intended them to be confidential. His statements were suppressed.
The Ninth Circuit reversed. United States v. Ruehle, 2009 U.S. App. LEXIS 21450 (9th Cir., Sept. 30, 2009). First, the district court had applied the incorrect legal standard, substituting the more liberal California state formulation of the privilege, with its presumption of confidentiality, in place of the more severe federal common law test, which places the burden of proof on the party claiming privilege. Second, the district court had erred in finding that Ruehle's statements were made in confidence, one element of the federal test, since he admitted knowing they would be disclosed to third parties; his later shock and surprise that those third parties included the FBI was immaterial.
The court of appeals noted, but chose not to decide, more interesting questions, such as the proper test to apply when there is colorably a dual representation of both corporation and corporate officer (addressed in In re Bevill, Bresler & Schulman Asset. Mgt. Corp., 805 F.2d 120 (3d Cir. 1986)) or the standard to be used in determining, whether in a dual representation context, the corporation can waive the privilege against the will of the corporate officer (see In re Grand Jury Subpoena (Newparent), 274 F.3d 563 (1st Cir. 2001)). The court also skirted the issue of the Irell attorneys' ethics, since it was not presented in the appeal, but noted parenthetically that evidence obtained even in violation of attorney ethics rules was admissible, as long as neither the constitution nor federal law was violated.
The Ninth Circuit created no new precedent and arguably avoided addressing the most noteworthy issues raised by the short-lived district court opinion. Nevertheless, the case stands as a stark reminder of the problems created when outside counsel fail in the course of conducting an internal investigation to clearly inform individual officers that company counsel are not also their counsel and to document that advice of rights in the event of later litigation or prosecution.
[Fox Rothschild's White Collar Compliance and Criminal Defense group has extensive experience in conducting thorough internal investigations for corporate and institutional clients in numerous industries]
