Sec. v. Vitesse Semiconductor Corp..
| Decision Date | 25 March 2011 |
| Docket Number | No. 10 Civ. 9239 (JSR).,10 Civ. 9239 (JSR). |
| Citation | 771 F.Supp.2d 310 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff,v.VITESSE SEMICONDUCTOR CORPORATION, Louis R. Tomasetta, Eugene F. Hovanec, Yatin D. Mody, Nicole R. Kaplan, Defendants. |
| Court | U.S. District Court — Southern District of New York |
OPINION TEXT STARTS HERE
Dean Michael Conway, Richard Edward Simpson, Terence Michael Healy, Securities and Exchange Commission, Washington, DC, for Plaintiff.Lawrence Gerschwer, Katie Louise Viggiani, Morrison & Foerster LLP, New York, NY, Dan Edward Marmalefsky, Morrison & Foerster, Los Angeles, CA, for Defendant Louis R. Tomasetta.Charles E. Clayman, Clayman & Rosenberg, New York, NY, Gary Stuart Lincenber, Peter Jeremy Shakow, Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg, Los Angeles, CA, for Defendant Eugene F. Hovanec.Laura–Michelle Rizzo, Gage, Spencer & Fleming, LLP, New York, NY, for non–party Nu Horizons Electronic Corporation.
On March 4, 2011, non-party Nu Horizons Electronic Corporation (“NuHo”) moved to quash the subpoenas issued by defendants Tomasetta and Hovanec to the extent that they sought disclosure of an internal report prepared at the direction of NuHo's independent audit committee. After carefully considering the parties' written submissions, the Court by “bottom-line” Order denied NuHo's motion on March 15, 2011. In that Order, the Court also indicated that the ruling was without prejudice to NuHo's submitting to the Court a proposed protective order to limit disclosure of the internal report to parties other than the parties to this lawsuit. This Memorandum explains the reasons for the Court's March 15, 2011 Order.
By way of background, the SEC's complaint in this action alleges that during the period in or about 1995 through April 2006, defendant Vitesse Semiconductor Corporation (“Vitesse”) engaged in fraudulent revenue recognition practices and stock options backdating misconduct. Compl. ¶ 1. These fraudulent practices were allegedly orchestrated by the four individual defendants: co-founder and CEO, Louis Tomasetta; Chief Financial Officer (“CFO”) and Executive Vice President, Eugene Hovanec; Controller and CFO, Yatin Mody; and Manager/Director of Finance, Nicole Kaplan. Id. ¶ 2. Among other things, the Complaint alleges that between September 2001 and April 2006, Tomasetta, Hovanec, Mody, and Kaplan materially inflated Vitesse's reported earnings by immediately recording as revenues the shipments made to Vitesse's largest distributor, NuHo, even though the distributor had an unconditional right to return the product. Id. ¶ 2. The right of return was allegedly accomplished through undisclosed side letters and oral agreements. The effect of this fraud was to materially inflate Vitesse's revenue in its financial statements.
On September 29, 2006, before the instant complaint was filed, the SEC notified NuHo that it was conducting a confidential investigation entitled In the Matter of Vitesse Semiconductor Corp. On April 13, 2007, the SEC issued subpoenas to NuHo for documents relating to Vitesse. Thereafter, the “Audit Committee” hired Gage Spencer & Fleming LLP (“GSF”) to conduct an internal investigation into NuHo's relationship with Vitesse. In conducting this investigation, GSF retained forensic accountants, FTI Consulting (“FTI”) which reported their findings to GSF pursuant to a “ Kovel ” privilege. See United States v. Kovel, 296 F.2d 918, 922 (2d Cir.1961) ().
On February 12, 2009, GSF concluded its internal investigation and issued a report to the Audit Committee (the “Internal Report”), which included: (i) a seventy-eight page written summary of GSF and FTI's conclusions; (ii) a Power Point Presentation prepared by GSF summarizing GSF and FTI's conclusions; and (iii) six tables prepared by FTI summarizing its conclusions. On March 19, 2009, NuHo produced the Internal Report to SEC staff pursuant to a non-waiver agreement (the “Non–Waiver Agreement”). This agreement states, in relevant part, that:
... by agreeing to the production of Confidential materials pursuant to this agreement, the Audit Committee does not intend to waive the protection of the attorney work product doctrine, attorney-client privilege, or any other applicable privilege as to third parties. The Audit Committee believes that the Confidential Materials are protected by at minimum, the attorney work product doctrine and the attorney-client privilege. The Audit Committee believes that the Confidential Materials warrant protection from disclosure. The Staff will maintain the confidentiality of the Confidential Materials pursuant to this agreement and will not disclose them to any third party, except to the extent that the Staff determines that disclosure is otherwise required by law or would be in furtherance of the Commission's discharge of its duties and responsibilities.
See Plaintiff's Response to Nu Horizons Electronic Corporations' Motion to Quash Subpoenas, Ex. 1 (emphasis supplied).
On January 27, 2011, defendants Tomasetta and Hovanec issued subpoenas to GSF and FTI seeking “[a]ll documents that you reviewed, prepared, used, sent or received in connection with or concerning the Internal Investigation.” Defendants issued a subpoena to NuHo with the same request on February 1, 2011.
On March 4, 2011, non-party NuHo moved to quash these subpoenas, arguing that the Internal Report was “classic work product material” that was protected from disclosure. While NuHo did disclose the Internal Report to the SEC, it did so pursuant to the Non–Waiver Agreement and thus, according to NuHo, it did not waive the privilege. Defendants Tomasetta and Hovanec opposed NuHo's motion, arguing that NuHo had not met its burden of showing that the Internal Report constituted privileged work product and that in any event NuHo waived work product protection by disclosing the Internal Report to the SEC as well as other parties.1 Tomasetta and Hovanec also argued that disclosure was required because of the defendants' substantial need for the Internal Report and the related materials. The...
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