SEC Stumbles on Privilege Waivers

Justin Scheck
The Recorder
September 10, 2007

By the middle of last month, Securities and Exchange Commission lawyers were growing frustrated with running into claims of attorney-client privilege in their probe of troubled chipmaker Marvell Technology. The company had investigated its past stock options grants and found a widespread pattern of misdating. But Marvell’s former general counsel told Marvell board members that the internal investigation was biased, and that accusation piqued the interest of the SEC.Lawyers there wanted to interview the former general counsel, Matthew Gloss, according to attorneys briefed on the case. But Marvell, they said, claimed that whatever Gloss had to say about the internal probe was covered by attorney-client privilege.That put SEC lawyers in a tough position: The commission adopted a policy late last year of not asking for privilege waivers, even in situations — like the Marvell case — in which they clearly expect them.Privilege waivers are on unsteady ground these days. More than ever, the commission is dependent on companies cooperating with SEC probes by conducting internal investigations — and waiving privilege to disclose the results. Yet intense criticism of government intrusion on attorney-client privilege has reached Capitol Hill, where pending legislation would prohibit the SEC from rewarding companies that turn over privileged material.

Afraid of losing that cudgel altogether, SEC lawyers and defense attorneys say, the commission has been trying to kill the perception that to cooperate, companies must waive privilege — especially since the U.S. Department of Justice issued a policy letter in December toning down its pursuit of privileged material in criminal cases.

Privately, lawyers at the SEC say they’re still trying to sort out how to negotiate with companies unwilling to give regulators the privileged information they seek.

It’s hard these days for the SEC to tread lightly because so much of its caseload — especially in the San Francisco Bay Area — involves probes of stock option grants. The 140 or so companies under scrutiny make up the most privilege-intensive wave of investigations the SEC has seen this decade.

“A lot of the options backdating cases do get into questions of whether you followed the advice of your general counsel or not,” said Robert Friese, a partner at Shartsis Friese in San Francisco and chairman of an American Bar Association securities enforcement committee.

In many cases, Friese said, it’s impossible for companies to cooperate with the SEC without opening a window into privileged communications.

So defense lawyers are skeptical of the SEC assertion that a company refusing to waive privilege won’t automatically be viewed as uncooperative.

“The official policy is to give you a credit for waiving,” said Jordan Eth, a securities litigator at Morrison & Foerster. “Not getting a credit is something quite close to a penalty.”

The Marvell case, said defense lawyers and SEC attorneys, is notable — perhaps singular — for the bias accusation accompanying its internal probe. But the tension is not: The attorneys said that with the SEC lawyers unable to demand waivers of privilege, the defense bar has become emboldened in other cases, especially with the hope of federal legislation that could altogether preclude waiver requests.


The Justice Department policy on privilege has been discussed ad nauseam since 2003, when a memorandum from then-Deputy Attorney General Larry Thompson outlined prosecutors’ expectation that companies broadly waive privilege to prove their cooperation in criminal probes.

That approach was exceedingly controversial because it intrudes on a basic tenet of the legal system. But while the debate over it generated much press coverage, there’s been relatively little attention given to the SEC’s adoption of similar procedures in its civil probes — even though the SEC pursues many more corporate fraud cases than the Justice Department.

Kathleen Bisaccia — a former SEC administrator who spent 14 years at the commission before joining the private investigation firm Kroll last year — said the advent of privilege waivers and internal corporate probes vastly altered the way civil securities probes were handled.

“When I joined the staff, we had to do all of this on our own,” she said. “We never had companies go out and say, ‘We’ll do a financial analysis for you.'”

The advent of internal investigations, Bisaccia said, also coincided with a new focus by the SEC on “gatekeepers” — the lawyers, accountants and other professionals whose job it is to make sure companies handle securities issues properly. Whereas in the past the commission had been “very hesitant to sue lawyers,” Bisaccia said, by the late 1990s, “lawyers sort of became an OK target.”

And when the options probes began in the spring of 2006, it quickly became clear that in-house and outside counsel would be witnesses and targets in many of the cases.

Six months later, the government’s criminal probes of those companies hit a snag when then-Deputy Attorney General Paul McNulty issued an eponymous memo saying Justice would back off on requesting privilege waivers, requiring assistant U.S. Attorneys to get clearance from Washington before making such demands.

There’s no such public document for the SEC. But attorneys there say there’s a policy in place in response to the McNulty memo to not ask for such waivers — and to explicitly tell lawyers that they’re not expected.

That guidance, though, wasn’t enough to satisfy corporate and defense lawyers; their push to get Congress to ban federal agencies from requesting or even rewarding privilege waivers worries SEC leaders and lawyers.


While companies bristle at the notion that they’d be expected to cough up privileged materials, cooperation, especially in cases in which companies are willing to fire executives they blame for wrongdoing, has obvious advantages.

For example, KLA-Tencor’s backdating problems were severe enough that it restated about $400 million in expenses and fired its CEO — yet managed to avoid SEC fines altogether. The company shared details of a notoriously aggressive internal probe by Skadden, Arps, Slate, Meagher & Flom partner Richard Marmaro with the SEC.

In revealing privileged communications between the company and its inside and outside lawyers, KLA gave the commission fodder to sue former CEO Kenneth Schroeder and ex-GC Lisa Berry for securities fraud, but escaped with only token injunctive relief.

Similarly, Juniper Networks — where Berry also served as GC, and which had a restatement of nearly $900 million — also got off with a settlement that didn’t include a fine. But Berry was charged by the SEC for behavior at Juniper as well, based on the company’s probe.

In those cases and others like them, said defense lawyers, companies willing to fire executives may want to waive privilege to convince SEC lawyers that problems have been rooted out. The same goes for individuals — like Marvell’s Gloss — who argue that information covered by a company’s privilege can help them out of trouble.

“When you represent an individual, you want to get that information in front of the SEC,” said Leigh Kirmsse, a partner at Howrey who represents executives in options cases.

She and other defense lawyers said companies have been trying, with some success, to navigate around privilege issues by presenting their internal probes as narrative or visual presentations to the SEC, and not providing documents.

One enduring concern, the lawyers said, is providing fodder for private civil suits — the cost of which can negate the benefit of dodging an SEC fine.

A broad privilege waiver, Friese said, means the documents are widely available. “It opens up the door for the private plaintiff bar,” he said.


In the case of Marvell, said lawyers briefed on the situation, the privilege dance between the SEC and a company hoping to keep its problematic investigation under wraps was eventually resolved, if only temporarily.

The company had already let Gloss tell the SEC about options problems that were the subject of the investigation, said people briefed on the case, but balked when the regulators wanted to question him about the probe itself.

After weeks of negotiations, Marvell’s lawyers at Wilson Sonsini Goodrich & Rosati agreed with the SEC on a carefully delineated waiver that specifies which questions Gloss would be asked.

Lawyers briefed on the case said that, with that hurdle in the past, the case is moving forward now. In recent weeks, they added, federal criminal prosecutors have also shown increasing interest in Marvell.

A Wilson Sonsini spokeswoman said Steven Schatz, the partner representing Marvell, couldn’t comment on the privilege discussions.

Gloss’ lawyer, Miles Ehrlich of Ramsey & Ehrlich, also wouldn’t get into details of the waiver issue. “Matt has been fully cooperating with the SEC, and will continue to do so, consistent with his ethical obligations as Marvell’s former general counsel,” he said.


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