Disclosure to SEC Didn’t Waive Work Product Protection

By Joan C. Rogers

Oct. 25 — Documents that outside counsel generated during a company’s internal investigation of accounting irregularities don’t have to be turned over to the plaintiffs in a securities class action, a federal magistrate judge in New York ruled Sept. 30 ( In re Symbol Techs., Inc. Sec. Litig. , 2016 BL 334855, E.D.N.Y., No. CV 05-3923 (DRH) (AKT), 9/30/16 ).

The work product privilege applies to the documents, and the company didn’t waive that protection by sharing them with the Securities and Exchange Commission, according to Magistrate Judge A. Kathleen Tomlinson of the U.S. District Court for the Eastern District of New York.

Protection for internal investigations is a big concern these days, especially since the SEC has stepped up its efforts to ferret out accounting fraud via a task force launched in 2013. Financial reporting fraud is a key focus for the commission’s enforcement efforts, chair Mary Jo White told a Senate committee in June 2016.

At the same time, securities class action filings are on the rise, and nearly all of these cases allege misrepresentations in financial documents, according to a January 2016 report issued by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.

The discovery dispute here centered on documents relating to an internal investigation that Symbol Technologies Inc. launched after discovering a revenue overstatement for third quarter 2004.

The lead plaintiff—the Iron Workers Local #580 Pension Fund—demanded production of documents that the now-defunct Swidler Berlin Shereff Friedman LLP created or collected in the course of investigating accounting issues underlying the revenue misstatement.


Plaintiff’s memorandum in support of motion to compelDefendant’s memorandum in oppositionPlaintiff’s reply

‘Anticipation of Litigation.’

The plaintiff argued that the materials didn’t fall within the ambit of the work product privilege because business reasons motivated Symbol to investigate the accounting discrepancy.

The magistrate disagreed, holding that under the particular circumstances here, the material was prepared because of the prospect of litigation and thus qualified as work product even though Symbol had a business purpose for conducting the investigation.

Symbol already had a checkered history of accounting noncompliance and shareholder litigation at the time of the 2004 earnings misstatement, and the company had every reason to believe that it would face additional shareholder suits and further investigations by the SEC and the U.S. Attorney’s Office once the issues were publicly disclosed, the magistrate said.

Also, the engagement agreement with Swidler referenced “possible litigation” and highlighted the likelihood of litigation, the magistrate noted.

Tomlinson rejected or distinguished several New York federal district court cases cited by the plaintiff. In light of United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998), the test for work product is no longer whether the material was prepared principally or exclusively for litigation, she said.

No Waiver Here

The magistrate also ruled that under the circumstances Symbol didn’t waive work product protection by disclosing the documents to the SEC.

Symbol had previously entered into a consent judgment with the SEC to settle earlier accounting improprieties, so the company and the agency shared a common interest in ensuring that Symbol remained in compliance with those terms and maintained sound accounting practices, the magistrate said.

The magistrate also said the company’s confidentiality agreement with the SEC showed that the company recognized the importance of safeguarding the material from disclosure to its adversaries. After In re Steinhardt Partners LP, 9 F.3d 230 (2d Cir. 1993) , district courts within the Second Circuit give confidentiality agreements weighty consideration in making decisions about waiver, Tomlinson said.

The magistrate likewise ruled that Symbol didn’t lose work product protection by sharing the materials with an independent examiner that it agreed to retain when it settled the previous accounting improprieties. The independent examiner shared the same common interest with Symbol and was subject to the confidentiality agreement, Tomlinson said.

Pomerantz LLP represented the Iron Workers Local #580 Pension Fund. Dechert LLP represented the defendants.

To contact the reporter on this story: Joan C. Rogers in Washington at jrogers@bna.com

To contact the editor responsible for this story: S. Ethan Bowers at sbowers@bna.com

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