In re the Leslie Fay Companies, Inc.

Citations: 152 F.R.D. 42; 1993 WL 533858Docket: No. 92 Civ. 8036 (WCC)

Court: District Court, S.D. New York; December 21, 1993; Federal District Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

A class action lawsuit has been filed on behalf of individuals who purchased Leslie Fay Co. Inc. stock between February 4, 1992, and April 5, 1993, alleging violations of the Securities Exchange Act of 1934 and Rule 10b-5, including claims of aiding and abetting securities fraud against several officers, directors (collectively termed "Individual Defendants"), and external auditor BDO Seidman. The Court previously denied motions to dismiss from BDO and the Individual Defendants. The current matter involves plaintiffs' motion to compel the production of a report generated by Leslie Fay’s Audit Committee following the discovery of accounting irregularities on January 31, 1993. The Audit Committee, composed of four outside directors, initiated an investigation with assistance from Weil, Gotshal & Manges and Arthur Anderson & Co. On February 1, 1993, Leslie Fay publicly announced this investigation, which coincided with the filing of the first of thirteen shareholder class action lawsuits against the Company and associated parties. Additionally, the SEC and U.S. Attorneys initiated their investigations into the irregularities. The Audit Committee agreed to share the Report with these government entities and later completed it on September 29, 1993, disclosing it while requesting confidentiality from the SEC and U.S. Attorneys. The Report was also shared with the Creditors Committee in the bankruptcy proceedings, which Leslie Fay entered on April 5, 1993, resulting in a stay of all litigation against the Company. Plaintiffs are now seeking access to this Report. The Court has granted the plaintiffs’ motion to compel production of the Report.

The Audit Committee argues that the Report is protected from discovery as attorney work product, a doctrine established in Hickman v. Taylor and outlined in Rule 26(b)(3) of the Federal Rules of Civil Procedure. This doctrine protects documents prepared in anticipation of litigation from being discoverable unless the requesting party demonstrates a substantial need and undue hardship in obtaining the materials. After an in camera review, the court is inclined to agree that the Report qualifies as attorney work product due to its creation following interviews conducted during an ongoing investigation against Leslie Fay. However, the court determines that the Audit Committee waived this immunity by voluntarily disclosing the Report to the SEC without securing a confidentiality agreement. The court references the Second Circuit's ruling in In re Steinhardt Partners, L.P., which established that disclosing attorney work product to an adversary, such as the SEC, constitutes a waiver of that protection. In Steinhardt, the disclosure was deemed voluntary and made to an adversary, as the SEC was investigating Steinhardt at the time, despite no formal proceedings having commenced. This precedent underscores that the adversarial nature of the relationship persists even with voluntary cooperation, leading to the conclusion that such disclosures do not create exceptions to the waiver doctrine.

The Court of Appeals rejected the Eighth Circuit's ruling in Diversified Industries, which allowed for an exception to non-disclosure based on concerns that corporations would hesitate to cooperate in government investigations without such an exception. The Second Circuit argued that voluntary disclosures are typically made when a corporation perceives a benefit from doing so. In the context of SEC investigations, voluntary cooperation can help avoid prolonged investigations and may result in leniency for past misconduct, as well as facilitate the narrowing of litigation issues.

In the present case, the Audit Committee claimed that its submission of a Report to the SEC was voluntary and aimed at uncovering fraud at Leslie Fay, asserting collaboration with the SEC. However, the Court found that the Committee and the SEC were in an adversarial position at the time of the Report's production, as Leslie Fay itself was under SEC investigation. The Committee's belief that the SEC was not an adversary due to shared interests in fraud detection was deemed unconvincing, given that Leslie Fay was the subject of inquiry.

Despite the Audit Committee's argument that a confidentiality agreement with the SEC distinguished this case from Steinhardt, the Court concluded it was unnecessary to evaluate the impact of such an agreement on waiver, as the SEC had not agreed to keep the Report confidential.

On October 4, 1993, the Audit Committee requested the SEC to maintain the confidentiality of its report. The SEC responded on October 6, 1993, rejecting the request for confidentiality and stating that the report would be treated in accordance with specific regulatory provisions. The SEC's letter clarified that it would not agree to any terms beyond those outlined in the regulations, although it consented not to assert that the submission of the report waived any attorney-client or work-product privileges. However, the court viewed this concession as irrelevant since the SEC cannot determine what constitutes a waiver, especially given its lack of an amicus brief regarding the issue. 

As a result, the court granted the plaintiffs' motion to compel production of the Audit Committee's report, ordering its release within one week, while also limiting its use to the current securities action. The court indicated its willingness to issue a protective order if necessary. Leslie Fay was not a defendant in this case, and the Audit Committee's claims of obtaining confidentiality agreements from other parties were deemed unnecessary since the lack of an agreement with the SEC had already waived any privilege. The court did not address further arguments from the Audit Committee regarding attorney-client and self-analysis privileges, finding those waived as well. Finally, the court dismissed the Audit Committee's claim that the plaintiffs needed to seek relief from a bankruptcy stay, as Leslie Fay was not a named defendant, and producing the report would not incur costs for the company.