(Reuters) - In 2012, when General Cable Corporation got wind of accounting irregularities at its Brazilian operation, it did just what most large, public companies would do in similar circumstances. The corporation, a global manufacturer of metal, aluminum and fiber optic wire and cables, brought in experienced outside counsel, Morgan Lewis & Bockius, to conduct an internal investigation. Morgan Lewis interviewed dozens of GCC employees, in both Brazil and the U.S. Eventually, GCC determined that it had overstated its inventory by nearly $50 million and its net income by more than 20 percent. In March 2013, the company issued a restatement of its accounting between 2008 and mid-2012.
Morgan Lewis, on GCC’s behalf, also informed the Securities and Exchange Commission of its internal investigation. The SEC promptly launched its own inquiry. GCC and its lawyers at Morgan Lewis cooperated with the SEC investigation, turning over documents and emails and, in April 2013, presenting to SEC lawyers a PowerPoint that provided a timeline of events, analysis of the problematic transactions and a summary of Morgan Lewis’ investigation and conclusions. In October 2013, Morgan Lewis met again with the SEC. This time, the firm gave SEC investigators what it has called “oral downloads” of its interviews with 12 GCC witnesses.
So far, the story of GCC, Morgan Lewis and the SEC is not particularly distinctive. There aren’t many options for corporations under SEC investigation. They can either cooperate or not. If they choose to cooperate (which is probably the wise course for a company that has confessed accounting problems in a financial restatement) the SEC is going to want to hear about the internal investigation.
For GCC, the strategy of cooperation culminated last December in a settlement agreement with the SEC that required the company to pay $6.5 million to resolve alleged accounting and disclosure violations. That was not the end of the problem, however, for two formerly high-ranking GCC executives in Florida. The SEC sued(2017 WL 36053) Mathias Sandoval Herrera and Maria Cidre in federal district court in Miami, accusing them of attempting to conceal the Brazilian scheme from GCC’s top executives for several months after Herrera and Cidre first learned about it late in 2011. The former executives brought in Susan Brune of Brune Law to defend the case alongside their Florida lawyers.
Here’s where the case gets interesting: In October, Brune and the other defense firms filed a motion to compel Morgan Lewis to disclose its internal notes and memos from the internal investigation, arguing that Morgan Lewis had waived work product privilege by disclosing details of its work for GCC to the SEC and to GCC’s outside auditor, Deloitte.
“This motion seeks to level the playing field,” the brief said. “For five years, the SEC has utilized work product generated and voluntarily provided by Morgan Lewis – including oral ‘downloads’ of witness interviews – to help focus its investigation, examine witnesses, and formulate the theory of the defendants’ liability in this case. The defendants now seek access to the same information through subpoena, yet Morgan Lewis is invoking the very work-product privilege it has already waived.”
Morgan Lewis, as you would expect, opposed the motion. It argued that its PowerPoint presentation to the SEC wasn’t a waiver because the presentation didn’t disclose the firm’s work product. “Facts are facts, not attorney mental processes,” the Morgan Lewis brief said. The firm also said its notes and memos on witness interviews remain shielded, despite its recounting of those interviews to the SEC, because “the oral conveyance of information derived from interviews does not waive the work product protection.”
The dispute went to U.S. Magistrate Judge Jonathan Goodman of Miami, to whom U.S. District Judge Joan Lenard had referred discovery matters in the case. On Tuesday, Judge Goodman ruled that Morgan Lewis waived work product privilege by telling the SEC what it learned from interviewing GCC witnesses. (The magistrate judge held the disclosures to Deloitte did not waive privilege so I’m not going to talk about that aspect of the decision.)
The key issue for the judge was whether Morgan Lewis’ ‘oral download’ to the SEC was equivalent to a written memo describing the firm’s interviews with GCC witnesses. As he explained, lawyers waive work product privilege when they reveal their thoughts and impressions to adverse parties. And there’s ample precedent, the judge said, citing 2008’s In re Initial Public Offering Securities Litigation (249 F.R.D. 457) to establish that the privilege is waived when lawyers give the government written materials from internal investigations.
Judge Goodman concluded there’s no reason to distinguish between written notes and memos and an oral recounting of the same substantive information. Morgan Lewis, he said, did not dispute that its “oral download” of 12 witness interviews provided the SEC with detailed accounts of the law firm’s thoughts and impressions. Like Manhattan U.S. District Judge Jed Rakoff in 2011’s SEC v. Vitesse Semiconductor (2011 WL 2899082), Judge Goodman concluded there is “little or no substantive distinction for waiver purposes between the actual physical delivery of the work product notes and memoranda and reading or orally summarizing the same written material’s meaningful substance to one’s legal adversary.”
The judge said Morgan Lewis must turn over written notes and memos on the witness interviews it discussed with the SEC. He also ordered the firm to file under seal “all attorney notes discussing or reflecting what information was disclosed to the SEC or the Department of Justice during meetings (or otherwise).” He said he will review the notes in camera to determine whether the defendants are entitled to see them.
So should lawyers who conduct internal investigations worry about waiving the work product privilege when they lobby the SEC to go easy on their clients? Brune, who represents the defendants who sought Morgan Lewis’ notes, said they should. Judge Goodman’s decision, she said, will probably reverberate in private securities class actions following SEC enforcement, in which plaintiffs frequently try to get access to materials defense lawyers presented to the SEC.
General Cable is facing just such a securities class action in federal court in Covington, Kentucky. I called lead counsel at Kessler Topaz Meltzer & Check to see if GCC shareholders would benefit from Judge Goodman’s decision but didn’t hear back.
I also emailed Alison Tanchyk and Christian Mixter of Morgan Lewis about Judge Goodman’s ruling but they didn’t respond. The judge said any appeal has to go to the 11th U.S. Circuit Court of Appeals without stopping before Judge Lenard.