No. 98 Civ. 7161 VMDFE
United States District Court, S.D. New York
January 02, 2003
MEMORANDUM AND ORDER
*1 Judge Marrero has referred this case to me for general pretrial supervision. He received a December 12 letter from the lead plaintiffs and a December 18 letter from one of the defendants, Deloitte & Touche Chartered Accountants (“Deloitte”), and he forwarded them to me for decision. I hereby make the following rulings on the five disputed issues. If there be any other disputes about discovery or scheduling, the attorneys should present them to me by following my Standing Order for Discovery Disputes (copy enclosed). I direct plaintiffs' counsel to supply a copy of my Standing Order to all of the parties (and to any non-party who objects to discovery), and to send me a current list of all counsel, including their telephone and fax numbers.
Issue 1: Documents Pertaining to Revenue Recognition
1Deloitte refuses to produce documents relating to the 1997 Dundee transaction. Deloitte points out that it insisted that Livent remove the revenue from the Dundee transaction “and Livent ultimately agreed to reverse the recognition.” In re Livent Noteholders Sec. Litig., 151 F.Supp.2d 371, 427 (S.D.N.Y.2001). Nevertheless, the Dundee transaction is relevant to the jury's assessment of whether Deloitte (and other defendants) ought to bear Section 11 liability for the November 1997 registration statement for the Livent Notes. For example, in determining whether Deloitte was negligent in overlooking Livent's other accounting practices, the jury should be able to look at “a relevant backdrop of allegations concerning [inter alia
] the repeated difficulties [Deloitte] had encountered with the Inside Directors' dubious financial practices manifest in the revenue-generating transactions....” Id. at 429. Accordingly, I direct Deloitte to produce the documents relating to the Dundee transaction by January 20, 2003.
Deloitte also refuses to produce documents relating to the 1996 Pace transaction and the 1996 Dewlim transaction. It appears to be undisputed that the side agreements to these two transactions were concealed from Deloitte. “In the absence of the side agreements, the non-refundable fees could properly be recognized under Canadian GAAP....” Id. at 427. Deloitte's 12/18/02 letter, at n. 2, says: “Documents relating to the ‘secret’ side agreements ... are undoubtedly in the possession of Livent. We understand that plaintiffs recently obtained an order from a Canadian court which allows them access to Livent's documents.” But the plaintiffs may need documents from Deloitte to be able to build their Section 11 case against the insider defendants. Plaintiffs should confer with Deloitte, in person or by telephone, about what documents are needed and why. If the parties are unable to reach a resolution, they should send me a single joint letter pursuant to my Standing Order.
Issue 2: Deloitte's Audit Manuals
2Deloitte refuses to produce its audit manuals, arguing that they contain proprietary trade secrets. Deloitte relies on precedents that are more than seven years old. (It does cite General Elec. Capital Corp. v. DirecTV, Inc., 184 F.R.D. 32, 36–37 (D.Conn.1998), but there Magistrate Judge Margolis emphasized that Deloitte was a non-party in that lawsuit.) The more recent authority is contrary to Deloitte's position. In 2001, Judge Brieant ruled:
*2 ... KPMG's Audit Manual and materials are likely the best source of information available to Plaintiffs regarding how KPMG conducted the Oxford audit. Understanding these materials could be vital to conducting meaningful depositions of the accountants who worked on the Oxford audit....
The Court need not reach the issue of whether KPMG's audit materials constitute trade secrets because the Confidentiality Order ... will serve to protect any proprietary information contained in KPMG's audit manual and materials.
Issue 3: The Self–Evaluative Privilege
3Deloitte has withheld 13 documents on the ground of the self-evaluative privilege. The privilege log (Exh. C to plaintiffs' Dec. 12 letter) indicates that these documents include performance reviews of several of the Deloitte employees who audited Livent. The self-evaluative privilege has never been recognized by the Supreme Court or any circuit court. In re Nieri, 2000 WL 60214, *2 (S.D.N.Y. Jan.24, 2000) (Knapp, J.). In the specific context of an auditor's self-evaluation, the more recent authority is contrary to Deloitte's position. Ten years ago, Judge Nickerson affirmed a discovery ruling by then Magistrate Judge Carter in favor of Peat Marwick, but Judge Nickerson noted that he was “somewhat skeptical of a claim of chilling effect.” In re Crazy Eddie Sec. Litig., 792 F.Supp. 197, 206 (E.D.N.Y.1992). More recently, Judge Brieant rejected the same claim from KPMG Peat Marwick:
... Plaintiffs' substantial need for the documents requested outweighs KPMG's claims of the so-called self-evaluative privilege. Documents concerning evaluations, reviews and resumes of KPMG personnel who performed work on the Oxford audit would enable Plaintiffs to obtain information including whether those employees were properly trained for the audit, [and] whether they followed appropriate accounting and auditing procedures.
Issue 4: Addresses and Telephone Numbers of Former Deloitte Employees
4Deloitte provided the names of 25 people who participated in the Livent audits, and advised that 11 of them were no longer employed by Deloitte. Deloitte has refused to supply contact information for the 11 former employees, but says it “is prepared to consider a specific request for any particular individual.” I direct Deloitte to provide, by January 20, 2003, the most recent known addresses and telephone numbers for each of its former employees who participated in the Livent audits.
Issue 5: E–Mails
Deloitte has produced approximately 25 pages from the e-mail files of Tony Powers, plus at least 14 e-mails involving other Deloitte employees. Plaintiffs suspect this is incomplete, and ask for two orders:
*3 (a) “directing Deloitte to make a thorough search of all its computer systems, servers and other storage devices, back-up tapes, and the individual hard drives of employees who worked on the Livent audits.”
(b) directing Deloitte “to produce all responsive materials found with 30 days, along with a written explanation of all the steps it has taken to find responsive materials.”
Instead, I direct Deloitte to fax to plaintiffs, by January 7, 2003, a written explanation of all the steps it has taken to find responsive e-mails. As to any further steps, the attorneys should read Magistrate Judge Francis's opinion in Rowe Entertainment v. William Morris Agency, 205 F.R.D. 421, 428–33 (S.D.N.Y.2002). Then Deloitte and plaintiffs should confer, in person or by telephone, and discuss the eight factors listed in that opinion. If they are unable to reach a resolution, they should send me a single joint letter pursuant to my Standing Order.
End of Document.