Federal Evidence Review

The company Chief Financial Officer failed to meet his burden show the communications to outside counsel during the internal company investigation were “made in confidence” and protected by the attorney-client privilege; instead the communications were made “for the purpose of disclosure to the outside auditors” and therefore could be used by the government in the subsequent criminal prosecution, in United States v. Ruehle, 583 F.3d 600 (9th Cir. Sept. 30, 2009) (No. 09-50161)

When corporate officers provide statements during an internal investigation, under what circumstances are these communications protected by the attorney-client privilege? When may the communications given during an internal investigation be waived and used in a subsequent criminal proceeding? In a recent backdating options case, the Ninth Circuit reviewed what it characterized as “the treacherous path which corporate counsel must tread under the attorney-client privilege when conducting an internal investigation to advise a publicly traded company on its financial disclosure obligations.” Ruehle, 583 F.3d at 602.

In the case, defendant William J. Ruehle served as the Chief Financial Officer (CFO) of Broadcom Corporation, a semiconductor supplier. The outside counsel firm of Irell & Manella LLP (“Irell”) conducted an internal investigation concerning the backdating of stock options, which was to be shared with the Audit Committee and auditors “to fully cooperate with government regulators, and, if necessary, to self-report any problems with Broadcom’s financial statements.” Ruehle, 583 F.3d at 603. The outside counsel met with the CFO and others. At some point, the CFO was advised to retain independent counsel. Ultimately, the outside counsel reported the findings of the internal investigation to auditors, which included a number of irregularities. The company then restated its earnings based on more than $2 billion in additional stock-based compensation expenses,

During a subsequent government investigation concerning the backdating of company stock options, the company authorized the government to interview the two outside counsel concerning their communications with the CFO, which was summarized in an investigative report of interview. The CFO claimed that the communications were covered by the attorney-client privilege. The defendant was charged in a criminal backdating scheme along with the founder and Chief Executive Officer. The defendant moved to exclude his communications made to outside counsel during the internal investigation. After a three-day evidentiary hearing, the district court excluded the statements made by the CFO to outside counsel.

The outside counsel claimed to have provided the CFO with an Upjohn (or corporate Miranda) warning advising that “the corporate lawyers do not represent the individual employee; that anything said by the employee to the lawyers will be protected by the company’s attorney-client privilege subject to waiver of the privilege in the sole discretion of the company; and that the individual may wish to consult with his own attorney if he has any concerns about his own potential legal exposure.” Ruehle, 583 F.3d at 604 n.3 (citing Upjohn Co. v. United States, 449 U.S. 383, 393–96 (1981)). Outside counsel apparently “took no notes nor memorialized their conversation on this issue in writing.” Ruehle, 583 F.3d at 604 n.3. The CFO said he did not recall receiving one. The court concluded no warning had been given. The court found that an attorney-client relationship existed between the CFO individually and the company. The outside counsel breached their duty of non-disclosure by sharing the communications with the government. The government challenged the exclusion of the communication in an interlocutory appeal.

The Ninth Circuit reversed. Initially, the circuit noted that the privilege under the attorney-client relationship between Irell and Broadcom was waived when the information from the internal investigation was disclosed to the accounting firm and government. The circuit further stated that the district court’s findings that the CFO “reasonably believed” the outside counsel represented him on related civil lawsuits and that no Upjohn warning was given were not clearly erroneous. Ruehle, 583 F.3d at 604 n.3, 607.

The CFO failed to meet his burden to establish the communications were protected by the attorney-client privilege. The Ninth Circuit applies an eight-part test to establish the application of the attorney-client privilege:

“(1) Where legal advice of any kind is sought
(2) from a professional legal adviser in his capacity as such,
(3) the communications relating to that purpose,
(4) made in confidence
(5) by the client,
(6) are at his instance permanently protected
(7) from disclosure by himself or by the legal adviser,
(8) unless the protection be waived.”

Ruehle, 583 F.3d at 607-08 (citing In re Grand Jury Investigation, 974 F.2d 1068, 1071 n.2 (9th Cir. 1992) (quoting United States v. Margolis (In re Fischel), 557 F.2d 209, 211 (9th Cir. 1977))).

The district court committed legal error in applying “reasonable belief” standard under the California attorney-client privilege instead of the eight-part standard attorney-client privilege under federal law. Ruehle, 583 F.3d at 608 (citing United Statesv. Bauer, 132 F.3d 504, 510 n.4 (9th Cir. 1997) (quoting Clarke v. Am. Commerce Nat. Bank, 974 F.2d 127, 129 (9th Cir. 1992)). As the circuit explained,

“By approaching the exclusion question with a presumption that the privilege attached, the district court inverted the burden of proof, improperly placing the onus on the government to show what information was not privileged. See Gordon v. Superior Court of L.A. County, 65 Cal. Rptr. 2d 53, 59 (Cal. Ct. App. 1997) (“[C]ommunications between a lawyer and his client are presumed confidential, with the burden on the party seeking disclosure to show otherwise.” (citations omitted)).As the party asserting the privilege, Ruehle was obliged by federal law to establish the privileged nature of the communications and, if necessary, to segregate the privileged information from the non-privileged information. See Bauer, 132 F.3d at 507.

Ruehle, 583 F.3d at 609.

Under the federal standard, the CFO failed to show the communications met the fourth element, that the communications were “made in confidence” but instead were made “for the purpose of disclosure to the outside auditors.” The district court’s factual finding that a reasonable expectation of confidentiality was clearly erroneous. According to the circuit, the record showed that the CFO and others understood the results of the investigation would be provided to the auditors “to convince the independent auditors of the integrity of Broadcom’s financial statements to the public, or to take appropriate accounting measures to rectify any misleading reports.” Ruehle, 583 F.3d at 609. As the head of the finance department, defendant Ruehle was aware of the disclosure obligations concerning financial matters to the outside auditors. The circuit concluded:

“Ruehle freely and voluntarily disclosed the information in June 2006 and did not mention an individualized privilege until nearly two years later, after having sat in on the very meetings where his allegedly-privileged information was disclosed. Ruehle’s assertion about his subjective intent in 2006 cannot sustain his privilege claim when he has freely admitted that the disclosure to Ernest & Young was planned. In sum, the overwhelming evidence demonstrates that Ruehle’s statements to [outside counsel] Heitz and Lefler were not “made in confidence” but rather for the purpose of outside disclosure. Accordingly, we hold that Ruehle has failed to meet his burden of establishing the existence of an individual attorney-client privilege with respect to the information provided to the Irell attorneys in the June 2006 time frame.

Ruehle, 583 F.3d at 612 (citation omitted).

As the Ruehle case notes, federal privilege and not state law governed resolution of the waiver issue. The case is useful for considering how the circuit framed and considered the issues. On the facts of the case, the communications given during the internal investigation were waived and could be used in the subsequent criminal prosecution.