Ninth Circuit Ruling Highlights Treacherous Path For Attorney-Client Privilege For Counsel Conducting Internal Investigations

William J. Ruehle, the former Chief Financial Officer of Broadcom Corporation, a California-based, publicly traded semiconductor supplier that came under intense scrutiny for its suspected backdating of company stock options, was criminally indicted for his involvement in an alleged stock options backdating scheme that ultimately resulted in Broadcom’s restatement of its earnings to account for approximately $2.2 billion in additional stock-based compensation expenses. After a hearing, a federal district judge issued an order suppressing all evidence reflecting Ruehle’s statements to attorneys from Irell & Manella, Broadcom’s outside counsel, regarding the stock option granting practices at Broadcom. The district court found that at the initial stages of the inquiry by Irell (called the “Equity Review”) an attorney-client relationship also existed with the CFO individually and not just with Broadcom.

 
The U.S. Court of Appeals for the Ninth Circuit has now reversed that ruling. The circuit court found that the “overwhelming evidence” demonstrated that Ruehle’s statements were not “made in confidence” but rather were made for the purpose of disclosure to Ernst & Young, which was investigating stock options issues. Accordingly, it ruled that Ruehle had failed to meet “his” burden of establishing the existence of an individual attorney-client privilege with respect to the information he had provided to the Irell attorneys during the investigation.
 
This decision should be a wake up call for all senior corporate executives – and outside counsel conducting internal investigations – that they absolutely must keep the attorney-client privilege firmly in mind during these kinds of investigations.
 
The decision is United States v. Ruehle, No. 09-50161 (9th Cir. Sept. 30, 2009). Attorneys involved in this case include: Daniel B. Levin, Gregory W. Staples, Andrew D. Stopler, Robb C. Adkins, Thomas P. O’Brien, United States Attorney's Office; and Matthew D. Umhofer, Richard Marmaro, Matthew E. Sloan, Skadden, Arps, Slate, Meagher & Flom.