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Central District of California Case Poses New Requirements for Internal Investigations

Expert Witness: Fulcrum Inquiry
In a recent Central District of California case, the judge suppressed evidence and referred the lawyers involved to the state bar for disciplinary action. The Court concluded that a written conflict waiver was needed before the results of an interview of the chief financial officer could be used/shared. A written waiver is not the current standard when performing internal investigations, which causes the case to have broad interest and concern.

In an April 2009 written Order following a three-day hearing, federal judge Cormac Carney criticized Irell & Manella for "ethical failures" arising from its internal investigation on behalf of Broadcom (in re: United States v. Nicholas, No. SACR 08-00139-CJC (C.D. CA, April 1, 2009)). The case pertains to criminal stock option backdating allegations from 2006 that include Broadcom’s then (but now former) Chief Financial Officer. As often occurs, the results of the internal investigation were shared with both Broadcom’s outside auditors and the FBI. In addition to suppressing the evidence at question, Judge Carney referred Irell to the California State Bar for discipline.

Irell lawyers testified they (i) did not believe they were the Chief Financial Officer’s legal counsel at the time of the interview, and (ii) warned the CFO (William Ruehle) that everything he told them would be disclosed to outside parties at Broadcom’s sole discretion. But the Court disagreed, based in part on Irell’s representation of the CFO jointly with his employer in connection with related securities class action litigation. In the Court’s ruling,

“Mr. Ruehle’s statements to the Irell lawyers are privileged attorney-client communications. Mr. Ruehle reasonably believed that the Irell lawyers were meeting with him as his personal lawyers, not just Broadcom’s lawyers. Mr. Ruehle had legitimate expectation that whatever he said to the Irell lawyers would be maintained in confidence.”

The Court held Irell to a standard of obtaining a written waiver of conflicts after providing an Upjohn warning (named after the Supreme Court’s decision in Upjohn Company v. United States, 449 U.S. 383 (1981)). A written waiver is not the current standard in such circumstances, which causes the case to have broad appeal to those performing internal investigations. The Court explained:

“The Government nonetheless suggests that because the Irell lawyers supposedly gave Ruehle an Upjohn warning, his statements to the Irell lawyers are not privileged communications. A so-called Upjohn warning or ‘Corporate Miranda’ is ordinarily given to inform a ‘constituent member of an organization that the attorney represents the organization and not the constituent member.’ The warning is intended to make clear to the individual being interviewed that the corporation, and not the individual employee, is the client, and therefore ‘controls the privilege and the confidentiality of the communication’.”

“An oral warning, as opposed to a written waiver of the clear conflict presented by Irell’s representation of Broadcom and Mr. Ruehle, is simply not sufficient to suspend or dissolve an existing attorney-client relationship and to waive the privilege. An oral warning to a current client that no attorney-client relationship exists is nonsensical at best – and unethical at worst. … Irell readily admits, however, that it did not apprise Mr. Ruehle of that conflict nor did it obtain his written waiver of the conflict. … Absent informed written consent and waiver of the conflict of interest, Irell should not have interviewed Mr. Ruehle on behalf of Broadcom alone.”

The government intends to appeal the Order.

ABOUT THE AUTHOR: David Nolte - Fulcrum Inquiry
Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials: CPA, MBA, CMA and ASA.

Fulcrum Inquiry is a forensic accounting firm.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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