In a case underscoring the complexities that companies conducting an internal investigation must navigate, a federal district court in California recently suppressed all statements made by a company’s chief financial officer to outside counsel during the course of the company’s investigation of its stock option granting practices. In United States v. Nicholas, the government sought to use statements made by Broadcom Corporation’s former CFO, which Broadcom had elected to disclose to its outside auditors, the Securities and Exchange Commission and the government. Unsurprisingly, the former CFO objected, arguing, among other things, that he believed that the company’s outside counsel also represented him personally and had not warned him of the risks inherent in speaking with them. In a sharply-worded opinion, the Court held that the former CFO legitimately expected that his statements to counsel were confidential and never contemplated that they “would be disclosed to third parties, especially not the [g]overnment in connection with criminal charges against him.” As a result, the Court suppressed all evidence reflecting the former CFO’s statements on Broadcom’s stock option practices and, moreover, referred Broadcom’s outside counsel to the state bar for disciplinary proceedings.
In United States v. Nicholas, Judge Cormac J. Carney found that, after Broadcom became aware in the spring of 2006 that it could be subject to government investigation and suits regarding its granting of stock options, Broadcom retained a prominent California law firm to conduct an internal investigation. Shortly thereafter, the law firm also agreed to represent William J. Ruehle, the former CFO, in connection with two related civil litigations. In June 2006, Ruehle was interviewed by outside counsel in person and in subsequent conversations regarding Broadcom’s stock option practices. In August 2006, Broadcom directed the firm to disclose the substance of Ruehle’s interviews to several third parties, including Ernst & Young, the SEC and the United States Attorney’s Office.
Because, among other reasons, Broadcom’s general counsel had e-mailed Ruehle to confirm that the California firm would represent him personally in the civil suits shortly before lawyers from that firm e-mailed Ruehle to schedule his interview, Judge Carney found that Ruehle reasonably believed he shared an attorney-client relationship with the firm and that the interviews were intended in part to gather information for Ruehle’s defense. Judge Carney further found, notwithstanding assertions that Ruehle was given an Upjohn warning, that Ruehle’s statements to counsel were confidential. As those involved in corporate investigations are aware, an Upjohn warning, so-called in light of the Supreme Court’s opinion in Upjohn Co. v. United States, 449 U.S. 383 (1981), generally cautions individual employees, among other things, that the lawyers represent the company and not the employees and that the company may, at its discretion, disclose the employees’ statements. In United States v. Nicholas, the Court dismissed any reliance on such a warning. First, the Court doubted, in the absence of any written record, that any Upjohn warning was given; second, even if one were given, the Court found the content “woefully inadequate” because Ruehle was never advised that counsel was not acting as Ruehle’s lawyer in the interviews, that Ruehle should consult another lawyer and that his statements could be shared; and third, an oral Upjohn warning simply was not, under the circumstances, sufficient.
In addition to the suppression of the statements that Broadcom had directed counsel to disclose to the government, Judge Carney vividly took the law firm to task for multiple violations of the lawyer’s duty of loyalty and referred the firm to the state bar for disciplinary proceedings.
As the Nicholas case reminds, a company and its counsel cannot pay enough attention to the scope, adequacy and documentation of Upjohn warnings given to employees, the implications of dual representations in multiple proceedings and the securing of appropriate waivers of conflicts resulting from such representations. For all of these reasons, this case only underscores the intricacies involved in simultaneously and successfully coordinating an internal investigation, civil suits and decisions to disclose information derived from company investigations to the government.
The district court’s full opinion can be found at United States v. Nicholas, et al., Case No. 08-00139-CJC, 2009 U.S. Dist. LEXIS 29810 (C.D. Cal. Apr. 1, 2009).