Thursday, October 1, 2009
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Court Says Irell Attorneys Can Testify Against Ex-Broadcom CFO
By SHERRI M. OKAMOTO, Staff Writer
The Ninth U.S. Circuit Court of Appeals yesterday threw out an evidentiary ruling which would have prevented two Irell & Manella attorneys from testifying at former Broadcom Corporation Chief Financial Officer William Ruehle’s criminal trial regarding statements he made during the firm’s investigation of stock options backdating at the company.
Reversing the decision of U.S. District Judge Cormac J. Carney of the Central District of California, which harshly rebuked the attorneys for committing “ethical misconduct” in disclosing the statements to outside auditors, the panel said Ruehle lacked an expectation of confidentiality to support invocation of the attorney-client privilege.
Broadcom came under intense public scrutiny in 2006 based on speculation by the media that the Irvine-based technology company had engaged in the wrongful backdating of stock options.
Internal Review
The company retained Irell, which had a longstanding relationship with Broadcom, to conduct an internal review of the company’s stock option granting practices.
Irell partners Ken Heitz and Dan Lefler testified that they met Ruehle in June 2006 as part of the firm’s investigation. Heitz could not be reached for comment yesterday and Lefler said he did not think it was appropriate for him to comment since he was involved in the case.
Shortly after Ruehle’s interview with Heitz and Lefler, Irell advised Ruehle to secure independent counsel with respect to the internal investigation and pending civil suits which named Ruehle, among other Broadcom officers and directors, as an individual defendant.
Ruehle retained Wilson Sonsini Goodrich & Rosati to represent him individually but he remained heavily involved in the company’s internal review.
Irell’s investigation revealed several accounting irregularities connected to certain stock option grants, and in August 2006 Irell disclosed information obtained from its investigation, including the substance of Ruehle’s interview with Heitz and Lefler, to Broadcom’s outside independent auditors, Ernst & Young LLP. Ruehle was present for at least some of the meetings between Irell and the Ernst & Young auditors.
Broadcom eventually restated its earnings as reported in its financial disclosure statements to include a total of $2.2 billion in previously undisclosed compensation expenses in 2007.
Earlier this month, Broadcom’s insurers agreed to pay $118 million to settle consolidated derivative lawsuits against the company. The proposed deal, subject to approval by U.S. District Judge Manuel Real of the Central District of California, would be one of the largest settlements in a derivative shareholder action to date.
Criminal proceedings were also initiated against Ruehle and Henry T. Nicholas III, Broadcom’s co-founder and former president and chief executive officer. Last year, a grand jury indicted both men on charges of conspiracy, securities and wire fraud, and various other violations of Title 15 of the U.S. Code.
In January of this year, the government moved for a hearing to determine whether Ruehle’s June 2006 statements to Heitz and Lefler were privileged communications, as Ruehle claimed.
‘Reasonable Belief’
Following a three-day hearing, Carney found that Ruehle “had a reasonable belief that Irell and Manella were his lawyers prior to the June 1, 2006 interrogation by Irell, and that he never gave informed written consent, either to the dual representation by Irell or the disclosure of privileged information to third parties, including Ernst & Young and the government.”
Based on this reasoning, Carney ordered suppression of Ruehle’s statements and referred Irell to the California State Bar for possible discipline.
The government filed an interlocutory appeal and the appellate court, which heard the matter on an expedited basis, upheld Carney’s factual finding that Ruehle reasonably believed Irell represented him individually with respect to the ongoing civil lawsuits when the June 2006 meeting took place.
But Judge Richard C. Tallman explained in his decision for the appellate panel that although such a reasonable belief may create an attorney-client relationship, it is insufficient to create a personal attorney-client privilege.
As the party asserting the privilege, Ruehle was obliged by federal law to establish the privileged nature of his communications with the Irell attorneys, Tallman said, noting that Carney had erred in applying state law to define both the attorney-client relationship and the attorney-client privilege, thereby inverting the burden of proof to place the onus on the government to show what information was not privileged.
With the burden properly on Ruehle, Tallman concluded that Ruehle could not establish the existence of a privilege because his statements to Heitz and Lefler had not been made “in confidence.”
As Ruehle had “frankly admitted that he understood the fruits of Irell’s searching inquiries would be disclosed to Ernst & Young in order to convince the independent auditors of the integrity of Broadcom’s financial statements to the public, or to take appropriate accounting measures to rectify any misleading reports,” Tallman reasoned that Ruehle had no expectation that his statements would be kept confidential.
“The salient point from a privilege perspective is that Ruehle readily admits his understanding that all factual information would be communicated to third parties, which undermines his claim of confidentiality to support invoking the privilege,” he said, emphasizing that Ruehle’s subsequent “shock and surprise” at having those statements used against him in his criminal trial was “frankly of no consequence.”
Tallman, joined by Judges Raymond C. Fisher and Ronald M. Gould, also rejected Ruehle’s argument that clear breaches of an attorney’s professional duties should warrant suppression in a criminal prosecution.
“[I]t is the protected nature of the information that is material, not the ethical violation by counsel,” Tallman wrote. Thus, absent privilege protection, Irell’s allegedly unprofessional conduct, while “troubling,” did not provide an independent basis for suppression, the jurist concluded.
Assistant U.S. Attorney Daniel B. Levin argued the appeal against Matthew D. Umhofer of Skadden, Arps, Slate, Meagher & Flom LLP. Levin did not return a request for comment and Umhofer declined to comment.
Ruehle is currently scheduled for trial Oct. 20 in Santa Ana.
The case is United States v. Ruehle, 09-50161.
Copyright 2009, Metropolitan News Company