The US District Court for the Southern District of New York recently granted a motion to compel the production of documents gathered during an internal investigation, finding that neither the attorney-client privilege nor the work product doctrine protected the documents from disclosure. This case provides important lessons for organisations carrying out internal investigations.  

Introduction and background

On January 21, 2015, in Wultz v. Bank of China, 2015 WL 362667 (S.D.N.Y.), the US District Court for the Southern District of New York (the “Court”) granted a motion to compel Bank of China ( “BOC”) to produce documents gathered during the course of an internal investigation. This decision followed the receipt of a demand letter (“Demand Letter”) from the plaintiffs advising their intention to file a lawsuit against the bank. The Court held that attorney-client privilege did not protect these documents from disclosure. The principal reasons for the decision were that BOC (i) failed to demonstrate that collection of the information went beyond the non-lawyer collectors’ mere expectation to later provide the information to an attorney; and (ii) failed to demonstrate that the documents were produced at the direction of an attorney in order to allow the attorney to provide legal advice. The Court also found that the work product doctrine would not protect the documents from disclosure because the bank had failed to show that the documents would not have been created in “essentially similar form irrespective of the litigation.”

The suit followed the death of Daniel Wultz in a suicide bombing in Tel Aviv in 2006. The Palestine Islamic Jihad (“PIJ”) claimed responsibility for the bombing and BOC had allegedly executed dozens of wire transfers on behalf of the PIJ. Family members of the victim issued a Demand Letter to BOC in January 2008 and commenced a suit in August 2008. The claims against BOC are currently pending before the Southern District of New York.

Following receipt of the Demand Letter, BOC compliance personnel in New York, Beijing and Guangzhou commenced an internal investigation. None of the employees conducting the investigation were licensed attorneys in China or the US, nor was a written litigation hold memorandum issued when the investigation began. The preliminary findings of the investigation were subsequently reported to regulators in the US and China. BOC claimed that it had contacted US counsel when the preliminary investigation commenced, but US counsel was only formally retained in March, 2008. US counsel did not direct the investigation.

In the course of discovery, plaintiffs sought, among other things, documents generated during the internal investigation, but limited the request to documents on the bank's privilege logs that did not reflect communications involving a US lawyer. BOC sought to assert privilege over these documents under both attorney-client privilege and the work product doctrine.

Attorney-client privilege

BOC argued that the documents were protected from disclosure because they related to an internal investigation of the allegations in the Demand Letter, and that this investigation was conducted for the purpose of seeking legal advice from licensed attorneys, whom it had subsequently retained.

Magistrate Judge Gorenstein rejected BOC's argument, noting that in the context of an internal investigation the party asserting privilege bears the burden of showing that the documents in question were produced at the direction of an attorney in order to allow the attorney to provide legal advice. Absent the “direction” of an attorney, the mere expectation of a corporate employee that documents created during an investigation would be shared with an attorney at some future date was insufficient for the Court to recognise attorney-client privilege.

Work product doctrine

Turning to the work product doctrine, Magistrate Judge Gorenstein ruled that, while the doctrine does not necessarily require the involvement of counsel, BOC had failed to satisfy the “in anticipation of litigation” element needed for the doctrine to apply.

In determining whether a document was created “in anticipation of litigation,” the Magistrate Judge applied a “counterfactual” test. The Court asked (i) whether the party asserting the privilege contemplated litigation when it generated the materials, and (ii) whether the party claiming privilege had shown that the materials would not have been prepared in essentially similar form “irrespective of litigation.” The Magistrate Judge acknowledged the challenges associated with applying the “counterfactual” test in hypothetical situations, but noted that it had been adopted in previous judgments.

The Court found that BOC had failed to show that the documents in dispute would not have been created in “essentially similar form irrespective of litigation.” In reaching this decision, Magistrate Judge Gorenstein suggested a situation where BOC had learned of identical facts regarding the PIJ accounts in circumstances where it did not foresee litigation – for example, from internal monitoring or an external source that was unlikely to commence litigation, such as the media. She noted that BOC had not provided any evidence of what it “would have” done under these circumstances. The Court observed that while the plaintiffs did not bear the burden of proof, they had provided evidence to suggest that BOC would have conducted a similar investigation even without the threat of litigation, in particular given BOC's obligation to report such matters to the banking regulators.

Lessons from Wultz

The Wultz case raises a number of issues for organisations conducting internal investigations. The decision is of particular importance for foreign companies that are facing US litigation and do not employ US attorneys as in-house counsel. Organisations are well-served to take the following steps before commencing and during the course of an internal investigation:

  • Ensure the investigation is conducted by counsel. This is the key holding of the Wultz decision. Non-lawyers can be involved in an investigation but records should be maintained that clearly show they were working at the direction, and under the supervision, of a lawyer. Records of the initial instructions to counsel and any subsequent communications should also be preserved in order to demonstrate the involvement of counsel at each stage of the investigation.
  • Engage external counsel to direct the investigation. In-house lawyers who assume compliance or risk control functions in an organisation face potential uncertainties regarding the privilege status of documents communicated with them. A recent DC Circuit decision granted in-house counsel the same privileges as external counsel, but the practical reality is that external counsel are generally viewed more favorably as operating within the confine of privileges.
  • Maintain records to demonstrate the litigation purposes of the investigation. An organisation may instruct its regular regulatory counsel to conduct the investigation. In these cases, a specific engagement letter should detail the scope of the investigation. The letter should clearly state that the instruction is for litigation purposes, to distinguish the scope from any general retainer for other compliance or regulatory work. At the onset of the investigation, a litigation hold memorandum should also be issued. This will assist the organisation in asserting that all documents generated from that point onward are protected under the work product doctrine. 
  • Protection of privileged documents generated in the investigation. All documents generated in the investigation should be clearly marked “Privileged and Confidential,” “Attorney-Client Communications” and “Work Product Prepared in Anticipation of Litigation”. Distribution of these documents to external parties should be carefully monitored to avoid inadvertently waiving privilege.