The goal of this article is to make the reader aware of a recent decision in the Southern District of New York (“SDNY”) regarding the ability to compel discovery from independent forensic accountants retained by the law firm representing one of the parties to a litigation. In this case, AlixPartners, LLP (“Alix”) a forensic accounting firm, was retained by the Simpson Thacher & Bartlett LLP (“Simpson”) law firm, in connection with Simpson’s representation of L-3 Communications Holdings, Inc. (“L-3” or the “Company”).
Background
On August 1, 2014 a federal securities class action complaint was filed against L-3 in the SDNY (Patel v. L-3 Communications Holdings, Inc. et al., 1:14-cv-06038-VEC).
L-3 is a prime contractor in aerospace systems and national security solutions. L-3 is also a leading provider of a broad range of communication and electronic systems and products used on military and commercial platforms. Through its subsidiary, L-3 Communications Corporation, L-3 provides command, control, communications, intelligence, surveillance, and reconnaissance systems; aircraft modernization and maintenance; and national security solutions in the United States and internationally.
The Complaint alleges that throughout April 25, 2013 and July 30, 2014 (the “Class Period”), Defendants made materially false and misleading statements regarding the Company’s Aerospace Systems segment, by failing to disclose that: (1) L-3’s financial statements contained errors related to the improper deferral of cost overruns on a fixed-price maintenance and logistics support contract resulting in overstatement of operating income; (2) net sales with respect to the fixed-price maintenance and logistics support contract were overstated; (3) the Company lacked adequate internal controls over financial reporting; and (4) as a result of the foregoing, the Company’s financial statements were materially false and misleading at all relevant times.
This matter continues to be in litigation, although the Court did issue and Order and Opinion on July 25, 2016 as to the Plaintiffs’ motion to compel discovery of certain Alix materials.
Plaintiffs’ Letter Brief to Compel Discovery
On July 5, 2016, Plaintiffs’ counsel, Robbins Geller Rudman & Dowd LLP (“Robbins Geller”) wrote a letter brief to Judge Caproni in support of its position to compel discovery from Alix with regard to their investigation into L-3’s Army Sustainment Division (“ASD”). Plaintiffs’ requested (1) Alix’s workpapers (and drafts) relating to L-3, (2) Alix’s internal and external communications relating to the ASD investigation and revision, and (3) communications between Alix and L-3 from July 23, 2014 to November 1, 2014. Plaintiffs’ argue that these requests are not shielded from discovery since they “would have been created in essentially similar form irrespective of litigation. See United States v. Adlman, 134 F.3d 1194, 1202 (2d. Cir. 1998) (holding work-product protection is withheld from documents that “would have been created in essentially similar form irrespective of the litigation”).”
Plaintiffs’ also argue that the additional discovery from Alix is highly relevant to Plaintiffs’ allegations. Plaintiffs’ further argue that, as per documents reviewed by them, it is their belief that Alix’s internal investigation into L-3 would have occurred regardless of whether litigation was anticipated. Additionally, once the wrongdoing was uncovered by L-3, Plaintiffs’ argue, L-3 “was legally obligated to conduct an investigation to determine if its prior statements were false and needed to be updated, irrespective of its anticipation of any litigation. See, e.g., In re Beacon Assoc. Litig., 745 F. Supp. 2d 386, 410 (S.D.N.Y. 2010) (defendant had a “continuing duty to update or correct past statements when they became known to be misleading”). Accordingly, since an internal forensic accounting review would have been conducted in any event, Plaintiffs respectfully submit that Alix’s production of relevant documents – that show the who, what, when, and how of the alleged fraud – are not protected and are discoverable.”
Finally, Plaintiffs’ argue that the workpapers and communications they seek are not privileged work product. As per within the Second Circuit, “in instances where outside experts, accountants, or other consultants are retained by an attorney’s client, or even the attorney, to assist in an internal investigation, their work product protection is limited. See Adlman, 134 F.3d at 1204 (setting out the relevant test for determining work product); see also Allied Irish Banks v. Bank of Am., N.A., 240 F.R.D. 96, 107-108 (S.D.N.Y. 2007) (holding that mere fact that law firm directed and contributed to internal control/accounting investigation did not subject such documents to workproduct protection); Univ. Sports Publ’ns Co. v. Playmakers Media Co., 2011 U.S. Dist. Lexis 30675, at *20-*21 (S.D.N.Y Mar. 21, 2011) (“a party may not insulate itself from discovery by hiring an attorney to conduct an investigation that otherwise would not be accorded work product United States Fidelity & Guar. Co. v. Braspetro Oil Srvs. Co., 2000 U.S. Dist. Lexis 7939 (S.D.N.Y. June 8, 2000)); In re Kidder Peabody Sec. Litig., 168 F.R.D. 459, 465 (S.D.N.Y 1996) (holding that work-product privilege does not attach to reports generated in internal investigation by outside counsel, because counsel would have been retained even if litigation had not been threatened at the time).”
Simpson’s Letter Brief to Protect Alix’s
On July 13, 2016, Simpson wrote a letter brief to Judge Caproni in support of their position that the additional materials requested from Alix are protected independently by the attorney work product doctrine and the attorney-client privilege.
Specifically, Simpson argues that the investigation conducted in-house at L-3 was under the direction of their in-house counsel. It was not until June 19, 2014 that L-3 engaged Simpson to continue and complete the investigation. Simpson completed its investigation and L-3 made a public disclosure of the “misconduct and accounting errors.”
On July 25, 2014 Simpson engaged the forensic accounting firm Alix. At that time the investigation was largely complete as to the C-12 contract which was central to the dispute. Alix was brought in to investigate other potential wrongdoing and accounting errors. Alix was to not only look at ASD but 11 divisions in L-3’s Aerospace Systems segment for accounting errors.
Rule 26(b)(3) states that document are protected work product if they are “prepared in anticipation of litigation…by or for another party or its representative (including the other party’s attorney [or] consultant…).” Documents are “prepared in anticipation of litigation” when they are prepared ‘”because of’ existing or expected litigation.” United States v. Adlman, 134 F.3rd 1194, 1198 (2d Cir. 1998). If documents “would have been prepared irrespective of the expected litigation,” they not eligible for work product protection. See id. at 1204. Often protected work product is created for litigation related and business related purposes.
Simpson argues that they engaged Alix, after L-3 had identified potential accounting errors at 11 other divisions, and that L-3, very reasonably, could expect litigation (as happened soon thereafter). Therefore, the material and related communications by Alix with Simpson and L-3 all fall squarely within the attorney work product doctrine.
Simpson also argues that the materials from Alix are alternatively protected by the attorney-client privilege. “Where ‘a primary purpose’ of an investigation was legal, the attorney-client privilege attaches to related communication, even if the investigation was also done for other, purely business-related purposes. See In re Gen Motors LLC Ignition Switch Litig., 80 F. Supp. 3d 521, 530 (S.D.N.Y. 2015) (‘[A]n attorney-client privilege that fails to account for the multiple and often overlapping purposes of internal investigations would ‘threaten[] to limit the valuable efforts of corporate counsel to ensure their client’s compliance with the law.’).”
Opinion and Order
On July 25, 2016, the Court held the disputed materials, “although potentially relevant, are protected as attorney work product and are therefore protected from disclosure.”
The Court agreed with L-3 that the disputed materials were created because of anticipated litigation. The Court kind of tongue-in-cheek said, “[i]t did not take a fortune teller with a well-tuned crystal ball to know that the disclosure of…accounting misstatements would generate at least one private securities class action lawsuit…” Further, the Court agreed that Alix was clearly retained in anticipation of litigation.
The Court found that disputed materials to be attorney work product, and therefore, the Court did not answer the question as to whether the materials are also protected by the attorney-client privilege.
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