Court Analyzes Protections for Materials Generated During an Internal Corporate Investigation: Part I

August 26, 2009

Most clients (and many lawyers) would assume that the attorney-client privilege and the work product doctrine protect communications involving, and materials generated during, a lawyer-conducted investigation into a company’s possible options backdating. However, neither protection applies automatically — they must be supported by evidence that the investigation was primarily motivated (1) by the need for legal advice (to deserve privilege protection) and (2) by anticipated litigation (to deserve work product protection).

In SEC v. Microtune, Inc., No. 3-08-CV-1105-B, 2009 U.S. Dist. LEXIS 47091, at *4 (N.D. Tex. June 4, 2009), Microtune’s Audit Committee retained the law firm of Andrews Kurth to conduct an internal corporate investigation of the company’s stock option practices — “amid extensive press coverage” of alleged stock option backdating, and evidence of such improper backdating at Microtune itself. Andrews Kurth and its forensic accountant Grant Thornton claimed privilege protection when two former Microtune executives attempting to defend themselves from SEC charges sought the materials generated during the internal investigation. In defending its attorney-client privilege claim, the company supplied declarations from an Andrews Kurth lawyer and the head of Microtune’s Audit Committee. However, the court held that neither declaration explained “how any particular document falls within the ambit” of the privilege because they were made “for the primary purpose of securing either a legal opinion, legal services, or assistance in the legal proceeding.” Id. at *13. The court pointed to “this stunning lack of evidence” in the declarations of the lawyer and the Audit Committee head in rejecting Microtune’s privilege claim. Id. at *14.

Even communications occurring during a lawyer-driven internal corporate investigation will deserve privilege protection only if supported by evidence that the “primary purpose” of the communication involved legal advice. Next week’s “Privilege Point” will discuss this court’s analysis of Microtune’s work product claim.