U.S. V. Ruehle: Ninth Circuit Revisits the “Treacherous Path” of Internal Investigations by Public Companies
Kelley Drye Client Advisory
On September 30, 2009, in United States v. Ruehle, No. 09-50161, 2009 WL 3152971 (9th Cir. 2009), the Ninth Circuit Court of Appeals held that statements made by Broadcom’s Chief Financial Officer to outside counsel hired to conduct an internal investigation are not protected by attorney-client privilege, even if he did not receive an Upjohn-type warning. Reversing the district court, the court of appeals found that the “statements were not ‘made in confidence’ but rather for the purpose of outside disclosure,” specifically to the company’s independent auditors. In its ruling, the Court held that the plaintiff knew or should have known his statements would not be protected by attorney-client privilege.
Background and the Lower Court DecisionIn 2006, the audit committee of Broadcom Corporation, a California-based, publicly traded semiconductor supplier, asked its regular outside counsel to investigate allegations of stock options backdating. During the internal investigation, the law firm interviewed William Ruehle, Broadcom’s then-Chief Financial Officer. At the time, Mr. Ruehle was represented in a related securities litigation by the same law firm that represented the company in the backdating investigation. About one month later, Ruehle was advised to and did obtain separate counsel.
The review prompted the company to restate its earnings to include $2.2 billion in previously undisclosed stock-based compensation expenses. Federal prosecutors investigated and interviewed the attorneys about their conversations with Mr. Ruehle. In 2008, Mr. Ruehle was indicted on charges of conspiracy and securities fraud for allegedly secretly backdating options. In his criminal case, Mr. Ruehle challenged the government’s use of the statements he made to the law firm during the internal review, arguing that they were protected by attorney-client privilege.
Applying state law, the district court ruled in favor of Ruehle, stating that the law firm had breached its ethical duties to its client by not obtaining his written consent before disclosing the substance of his interview to outside parties. The court suppressed all evidence reflecting Mr. Ruehle’s statements, finding that Mr. Ruehle had a “reasonable belief” that his statements to the lawyers would be protected by attorney-client privilege. The government appealed on an expedited basis.
The Ninth Circuit’s OpinionThe Ninth Circuit unanimously reversed the lower court. First, it held that the district court was wrong to apply state law, which presumes that attorney-client communications are confidential. Pursuant to federal common law, the burden of proof was on Mr. Ruehle to establish the privileged nature of his communications and, if necessary, to distinguish privileged information from non-privileged information.
Next, the appeals court concluded that the “overwhelming evidence” shows that Mr. Ruehle’s statements to the attorneys during the internal review were not protected by a personal attorney-client privilege belonging to Ruehle because they were not made in confidence. Though accepting that he had an attorney-client relationship individually with the law firm, the Ninth Circuit highlighted the following facts:
- Mr. Ruehle “was no ordinary Broadcom employee”; he had primary responsibility for the company’s financial affairs, and was the primary contact with the outside auditors.
- Ruehle participated in meetings where the audit committee directed the law firm to disclose its findings to outside auditors to convince them of the integrity of the financial statements. He received regular updates from the lawyers about their review.
- Mr. Ruehle was present when the law firm disclosed the information to the auditors.
- In his testimony at the evidentiary hearing, Mr. Ruehle confirmed his awareness that the substance of his interviews with the law firm would not be held in confidence.
- Even after obtaining independent legal counsel, Mr. Ruehle did not object to his statements being shared with outside auditors.
The lower court’s findings to the contrary were dismissed as clearly erroneous.
On this point, the Ninth Circuit opined that as the “senior corporate executive charged with primary responsibility for Broadcom’s financial affairs,” who was “intimately involved” in the investigation and its disclosures, he cannot “credibly claim ignorance” that his interview with the law firm would be disclosed. The court of appeals disagreed with the lower court that it made a difference whether Ruehle knew that his statements might also be disclosed to the government, not just to the company’s auditors. Nor was the court persuaded that Ruehle intended some of his statements to kept confidential, since he never identified which ones.
The Ninth Circuit accepted the district court’s finding that Ruehle did not receive an Upjohn-type warning from the lawyers, notwithstanding the lawyers’ testimony to the contrary. The court did not reach the issues raised in the In re Bevill, Bresler & Schulman Asset Mgmt. Corp. or In re Grand Jury Subpoena (Newparent) line of cases, related to establishing or waiving attorney-client privilege in a situation where both the executive and the corporation assert that they are dually represented by the law firm.
The Ninth Circuit remanded the case for further proceedings. It did not reach the merits of the law firm’s alleged breaches of professional responsibility, rejecting Ruehle’s argument that they provided grounds for suppressing his statements.
Practical AdviceThe court of appeals in Ruehle reminds us that internal investigations can be “treacherous.” One can think of many variations on the facts in Ruehle that could have led to a different result (e.g., if Ruehle had insisted that his information only be used by the law firm as background, not disclosed to the auditors for attribution). So corporate officers and other employees asked to be interviewed need to clearly understand their rights and how their statements may be used.
At the same time, there are several steps that company personnel running the investigation should consider:
- Get experienced outside counsel involved, at least in an advisory capacity.
- Retain separate counsel for any employee likely to be a material witness or to cause a potential conflict of interest.
- Make it clear to employees that counsel represents the company, not the employees, and therefore the attorney-client privilege rests only with the company.
- Recognize that the employee’s position, experience, and level of sophistication may be relevant in an analysis of his/her understanding of the privilege.
- Give employees who will be interviewed written corporate Miranda/Upjohn warnings, and have the employees sign a copy of the warnings as proof.