In re International Systems & Controls Corp. Securities Litigation

91 F.R.D. 552, 32 Fed. R. Serv. 2d 1473
CourtDistrict Court, S.D. Texas
DecidedSeptember 25, 1981
DocketNo. MDL-440
StatusPublished
Cited by13 cases

This text of 91 F.R.D. 552 (In re International Systems & Controls Corp. Securities Litigation) is published on Counsel Stack Legal Research, covering District Court, S.D. Texas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
In re International Systems & Controls Corp. Securities Litigation, 91 F.R.D. 552, 32 Fed. R. Serv. 2d 1473 (S.D. Tex. 1981).

Opinion

MEMORANDUM AND ORDER

NORMAN W. BLACK, District Judge.

Pending before the Court is Plaintiff Koenig’s motion to compel Defendant Arthur Young (“AY”) to produce its “Special Review” binders containing the material resulting from AY’s employment by ISC’s1 Special Audit Committee2 to assist that committee in the investigation of questionable foreign payments. By letter to the Court dated June 10, 1981, Plaintiff Harry Lewis joined in this motion. The production of these binders has been vigorously resisted by Defendant ISC, who has raised both the attorney-client privilege and the work product doctrine.

BACKGROUND

In deciding close questions of privilege, a chronology of the pertinent events must be kept in mind.

1. On March 3, 1976, the Securities and Exchange Commission sent a letter to ISC requesting information from ISC and its subsidiaries regarding any falsely described funds and assets, fraudulent accounting entries, improper payments to foreign government personnel and political contributions during the period from January 1, 1970, to that date.

2. On May 24, 1976, the ISC Board of Directors appointed a Special Audit Committee composed of two outside directors to review ISC operations during the relevant period. The Board resolution authorized the committee to retain outside legal counsel and an accounting firm to assist in this investigation. The Kansas City law firm of Watson, Ess, Marshall & Enggass (“Watson, Ess”) was retained on June 11, 1976. By letter dated June 15, 1976, Arthur Young confirmed their own special engagement. Arthur Young was also the independent auditor for ISC from approximately 1973 through the fiscal year 1976 audit.

The Special Audit was seemingly undertaken in an effort to comply with the requirements of the SEC’s Voluntary Disclosure Program.

[555]*5553. The Special Audit was conducted throughout the remainder of 1976 and 1977. It appears that during 1976, AY and Watson, Ess worked side by side, each examining ISC and subsidiaries’ records and accounts, conducting interviews, and making interim reports to ISC’s Special Audit Committee. Along the way, and certainly by the Spring of 1977, Arthur Young’s role in the investigation was redefined to provide assistance to Watson, Ess. By letter dated May 23, 1977, AY acknowledged this new role and agreed to make their special review workpapers available to both ISC and Watson, Ess, and to submit a company-by-company status report of their special review work.

A draft report on the Special Audit was prepared in late 1977. There is no “final” AY report, nor a “final” Special Audit report. The entire investigation spanned at least eighteen months and cost 1.5 million dollars. (Surrey letter of March 30, 1978).

4. On February 17,1978, ISC was served with an SEC subpoena. The next few months were filled with attempts to negotiate a consent agreement between ISC and the SEC. Various letters reveal that there is serious doubt as to whether ISC was ever accepted as a participant in the Voluntary Disclosure Program. Throughout these negotiations, counsel for ISC insisted there was no intent by ISC to waive the attorney-client privilege.

5. On April 27, 1978, a shareholder’s derivative suit was filed in the Southern District of Texas, Lewis v. Kenneally, et al., No. H-78-777, naming the individual members of the Board of Directors and ISC as defendants.

6. On July 15, 1978, the SEC filed a complaint against ISC in the District of Columbia. A consent decree was eventually entered in that case.

7. On January 29, 1979, Benjamin Koe-nig filed suit against ISC in the Southern District of New York, alleging shareholder fraud and violation of the federal securities laws, Koenig v. Kenneally, et al., now No. H-81-124.

These two suits were subsequently consolidated with three others for pretrial purposes by the Multidistrict Panel into the case at bar, MDL-440.

Plaintiffs Koenig and Lewis have moved to compel production of the AY Special Review workpapers. , There are approximately 16,000 pieces of paper involved, contained in several binders. These binders are in the actual possession of AY, to whom they belong. AY itself has asserted no work product immunity and is not opposed to producing the material. ISC insists that these workpapers constitute work product protected from production under Fed.R. Civ.P. 26(b)(3). Their contention is based on three premises: (a) Since Watson, Ess was in charge of the investigation, all of these files contribute attorney work product; and/or (b) the papers were all prepared by or for another party, or by or for the other party’s representative, within the meaning of Rule 26(b)(3); and (c) all of the Special Review work was done in anticipation of litigation.

Plaintiffs maintain (a) that AY was not working under the direction of Watson, Ess and AY’s work papers are therefore not attorney work product; but (b) that even if the AY files do constitute work product, Plaintiffs have demonstrated substantial need and undue hardship sufficient to overcome the work product immunity. They further assert that Defendants have waived their attorney-client privilege as to much of the material in AY’s Special Review files in disclosures to the SEC and because it “impacted” on the ISC 1976 Annual Report prepared by AY as the independent auditor. Plaintiff Lewis further relies on Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970).

Both sides have filed numerous briefs on this motion. A lengthy deposition was taken of Robert F. Teague, the AY partner in charge of the ISC Special Review. A hearing was held on July 8,1981, with testimony by John F. Marvin, a partner with Watson, Ess, and oral argument by the attorneys for both sides. Counsel for ISC has submitted for in camera inspection an abstract of the 123 items in AY’s Special Review binders, [556]*556constituting almost 2,000 pages, which he believes are immune from discovery. His list includes a description of the document as to sender, recipient, and contents, the date, and whether ISC is asserting the attorney-client privilege and/or work product protection as to each.

This Court has carefully considered the relevant pleadings, particularly the amended complaints in both Koenig and Lewis, the deposition of Mr. Teague, and the testimony of Mr. Marvin. The facts and allegations distilled therefrom have been examined in light of the cases cited by both sides. As is often the case, the “truth” of the matter seems to be somewhere between the positions so staunchly defended by the two adversaries. The Court finds that some of the documents listed by ISC are indeed protected by the attorney-client privilege, some by the work product doctrine, and many documents by neither.

LAW

It is now accepted that a corporation may assert the attorney client privilege. See Upjohn v. United States, 449 U.S. 383, 101 S.Ct. 677, 683, 66 L.Ed.2d 584 (1981), citing United States v. Louisville & Nashville R. Co., 236 U.S. 318, 336, 35 S.Ct. 363, 369, 59 L.Ed.

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