Originally published June 11, 2009
Keywords: Texas Federal Court, internal investigation materials, SEC, Microtune, stock option practices, enforcement action, intentional stock option backdating,
The U.S. District Court for the Northern District of Texas ordered Microtune, Inc. and its outside counsel to produce documents from an internal investigation into the company's historic stock option practices that were subpoenaed by two former Microtune executives who are defendants in a Securities and Exchange Commission ("SEC") enforcement action. Securities and Exchange Commission v. Microtune, Inc. et al., No. 3-08-cv-1105-B, 2009 WL 1574872 (N.D. Texas June 4, 2009). The court held that Microtune waived the attorney-client privilege protecting the documents by voluntarily disclosing investigation materials to a number of third parties (including the SEC). The court also determined that the work product privilege did not protect the subpoenaed documents because the primary purpose of the internal investigation was not to prepare for possible litigation.
In June 2006, Microtune's audit committee initiated an internal investigation of the company's stock option practices after the company's management reported finding evidence of intentional stock option backdating. The audit committee retained the Andrews Kurth law firm to assist with the investigation and to provide advice. Andrews Kurth retained Grant Thornton LLP, a forensic accounting firm, to assist.
Late the next month, based on the advice and preliminary findings of Andrews Kurth, Microtune notified the SEC about the investigation. The company subsequently provided the SEC with 30,000 pages of material related to the investigation and its stock option practices, including confidential reports, interview memoranda, and investigative work papers. On February 13, 2007, Andrews Kurth presented its investigation findings to the SEC and provided the agency with hundreds of pages of documents and other information that it had gathered during the investigation. Microtune also provided the SEC with confidential communications between the company and its outside counsel regarding its stock option practices.
On June 30, 2008 the SEC filed an enforcement action against Microtune and two of its former officers: Douglas Bartek (chief executive officer) and Nancy Richardson (chief financial officer and general counsel). Microtune settled while the case proceeds against the two former officers. During discovery Bartek and Richardson subpoenaed documents from Microtune, Andrews Kurth, Grant Thornton, and other law firms that provided professional services to the company. Microtune moved to quash the subpoenas on the grounds that certain documents were protected by the attorney-client and work product privileges. Bartek and Richardson moved to enforce the subpoena issued to Andrews Kurth.
The court denied Microtune's motion, and ordered the production of the documents subpoenaed by Bartek and Richardson from not just Andrews Kurth, but from the company, Grant Thornton, and three other law firms as well. In doing so, the court first addressed Microtune's attorney-client privilege claim. The court could not determine whether the privilege applied because it found that the only evidence that was presented (the declaration of an Andrews Kurth lawyer) and an in camera review of a sampling of the documents were insufficient to enable the court to reach a conclusion. Nonetheless, the court held that even if the attorney-client privilege applied, the privilege had been waived because Microtune, its audit committee, and Andrews Kurth had voluntarily disclosed significant amounts of confidential and privileged investigation information and materials to third parties. To the court, the numerous voluntary disclosures -- the production of the 30,000 pages of investigation documents to the SEC (which Andrews Kurth admitted likely contained privileged materials), the exposure of sensitive investigation communications to Microtune's outside auditor, the audit committee's disclosure of the results of the investigation to the Nasdaq Listing Qualifications Panel and the SEC -- all supported the finding of subject matter waiver "with respect to all documents relating to the internal investigation of the company's stock option practices."
The court then addressed and rejected Microtune's claim that the work product privilege protected the subpoenaed documents. According to the court, the "primary motivation" behind the internal investigation was not the possibility of litigation, therefore the subpoenaed documents were not created "in anticipation of litigation" as required to receive the protection of the work product privilege. The court relied on the deposition testimony of an Andrews Kurth lawyer and its in camera review of the sampling of the documents to conclude that the documents were prepared principally for business purposes, such as negotiating terms of insurance policies, addressing invalid stock option grants, developing new best practices, and restating the company's financials.
The risk of waiving the attorney-client privilege associated with disclosing privileged and confidential internal investigation materials to third parties is nothing new, and this case just adds to the varied approaches taken by courts. But the court's reasoning that the concern for possible impending litigation must be the "primary motivation" of an internal investigation for the work product privilege to protect investigation materials is something rarely seen and poses important considerations for any company contemplating an internal investigation.
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