U.S. v. Nicholas
| Decision Date | 01 April 2009 |
| Docket Number | Case No. SACR 08-00139-CJC. |
| Citation | 606 F.Supp.2d 1109 |
| Parties | UNITED STATES of America, Plaintiff, v. Henry T. NICHOLAS, III and William J. Ruehle et al., Defendants. |
| Court | U.S. District Court — Central District of California |
Robb Christopher Adkins, Gregory W. Staples, Andrew D. Stolper, AUSA—Office of U.S. Attorney, Criminal Division, Santa Ana, CA, for Plaintiff.
Jack P. DiCanio, Lavanya Mahendran, Richard Marmaro, Matthew Eric Sloan, Matthew Donald Umhofer, Skadden Arps Slate Meagher and Flom LLP, Los Angeles, CA, Kevin M. Downey, Malachi B. Jones, Tobin J. Romero, Barry S. Simon, Brendan V. Sullivan, Jr., Negar Tekeei, Lance A. Wade, Marcie R. Ziegler, Williams and Connolly LLP, Washington, DC, James D. Riddet, Stokke and Riddet, Santa Ana, CA, for Defendants.
ORDER SUPPRESSING PRIVILEGED COMMUNICATIONS
The California Rules of Professional Conduct protect clients, promote public confidence in the legal profession, and ensure the fair administration of justice. The most fundamental of these rules is a lawyer's duty of undivided loyalty to his client. A lawyer must do everything legally possible to protect a client. A lawyer can never assume a position adverse to the client or disclose client confidences without the client's knowing, intelligent, and voluntary consent in writing. Unfortunately, in this case, a law firm breached its duty of loyalty to a client in several respects.
In May 2006, Irell & Manella LLP ("Irell") undertook three separate, but inextricably related, representations of Broadcom Corporation ("Broadcom") and its Chief Financial Officer, Defendant William J. Ruehle. More specifically, Irell represented Broadcom in connection with the company's internal investigation of its stock option granting practices. At the same time, Irell also represented Mr. Ruehle in connection with two shareholder lawsuits filed against him regarding those same stock option granting practices. Prior to undertaking these representations of clients with adverse interests, Irell failed to obtain Mr. Ruehle's informed written consent.
In June of 2006, Irell lawyers met with Mr. Ruehle at his office to discuss the stock option granting practices at Broadcom. During this meeting, Mr. Ruehle told the Irell lawyers about Broadcom's stock option granting practices and his role in them. Before questioning Mr. Ruehle, however, the Irell lawyers never disclosed to him that they were representing only Broadcom at the meeting, not him individually, and that whatever he said to them could be used against him by Broadcom or disclosed by the company to third parties. Subsequently, Broadcom directed Irell to disclose statements Mr. Ruehle made to the Irell lawyers about Broadcom's stock option granting practices to Broadcom's outside auditors, Ernst & Young, as well as to the Securities and Exchange Commission ("SEC") and the United States Attorney's Office (the "Government"). Prior to making these disclosures, Irell never obtained Mr. Ruehle's consent.
The Government now argues that it can use Mr. Ruehle's statements to the Irell lawyers against him at the trial in this criminal case. The Government is mistaken. Mr. Ruehle's statements to the Irell lawyers are privileged attorney-client communications. Mr. Ruehle reasonably believed that the Irell lawyers were meeting with him as his personal lawyers, not just Broadcom's lawyers. Mr. Ruehle had a legitimate expectation that whatever he said to the Irell lawyers would be maintained in confidence. He was never told, nor did he ever contemplate, that his statements to the Irell lawyers would be disclosed to third parties, especially not the Government in connection with criminal charges against him. Irell had no right to disclose Mr. Ruehle's statements, and Irell breached its duty of loyalty when it did so. Accordingly, the Court must suppress all evidence reflecting Mr. Ruehle's statements to the Irell lawyers regarding stock option granting practices at Broadcom.
But the Court has a further obligation in this case. The Court must also ensure the fair administration of justice and promote the public's confidence in the legal profession. By failing to comply with its duties under the Rules of Professional Conduct, Irell compromised these important principles. The Court simply cannot overlook Irell's ethical misconduct in this regard and must refer Irell to the State Bar for appropriate discipline.
Both Broadcom and Mr. Ruehle had long-standing relationships with Irell.1 Beginning in 2002, Irell represented both Broadcom and Mr. Ruehle personally in several securities-related actions ("Warrants Litigation"). (Ex. A.)2 Irell represented Mr. Ruehle in a deposition taken in connection with the Warrants Litigation. (Tr. 36:12-16 Feb. 24, 2009.) In the course of this representation, Irell informed Mr. Ruehle in writing of the potential for conflicts inherent in dual representation and obtained Mr. Ruehle's informed written consent to proceed with the representation. (Exs. A, B.) The Warrants Litigation concluded at the end of 2005. (Ex. E.)
In the spring of 2006, after a series of articles related to the stock option granting practices both at Broadcom and other corporations, Broadcom was aware that it might be investigated by the Government or sued on the basis of its stock option granting practices. (Tr. 8:10-13, Feb. 25, 2009.) In mid-May 2006, Broadcom retained Irell to investigate its stock option granting practices on behalf of the corporation. (Tr. vol. 2, 4:19-21, Feb. 23, 2009.) Shortly thereafter, on May 25, 2006, a group of shareholders filed a derivative action against Mr. Ruehle and other current and former officers of Broadcom ("Derivative Action") concerning the corporation's stock option granting practices. (Ex. 18.) On May 26, 2006, an amended complaint was filed in Jin v. Broadcom Corp., et al. ("Jin Action"), naming Mr. Ruehle personally and asserting substantially similar claims regarding stock option practices at Broadcom. (Ex. 14.) In addition to its representation of Broadcom in connection with the internal investigation, Irell accepted individual representation of Mr. Ruehle in both the Jin Action and the Derivative Action, accepting service on his behalf and appearing as counsel of record until September 2006.3 (Tr. vol. 2, 26:15-27:25, Feb. 23, 2009.) During the entire period of these representations, Irell never obtained Mr. Ruehle's informed written consent to its dual representation of him and the company as required by Rule 3-310(C) of the Rules of Professional Conduct. (Id. 36:5-11.)
In late May of 2006, Mr. Ruehle received several emails regarding Irell's representation of him and Broadcom in connection with stock option practices at the company. (Exs. F-K.) On May 30, 2006 at 5:28 p.m., David Dull, General Counsel of Broadcom, sent an email to several people at Broadcom, including Mr. Ruehle, and on which David Siegel, an Irell litigation partner, was copied. (Ex. G.) The email provided information about the nature of the Jin Action and the Derivative Action and assessed the relative strengths and weaknesses of the judge assigned to the case. (Id.) Confirming Mr. Ruehle's understanding that Irell would represent Broadcom's officers individually as they had in past litigation, Mr. Dull directed "anyone who has any concerns" to "contact me or any of the Irell lawyers." (Id.) Four minutes later, at 5:32 p.m. on May 30, 2006, Kenneth R. Heitz, a litigation partner at Irell, sent Mr. Ruehle an email, on which Mr. Siegel, Mr. Dull, and Daniel P. Lefler, another Irell litigation partner, were copied. (Ex. F.) In the email, Mr. Heitz updated Mr. Ruehle about the progress of Irell's interviews of other witnesses with knowledge of the stock option granting practices at Broadcom and requested a time to discuss these issues with Mr. Ruehle. (Id.)
On May 31, 2006, the day before his first interview with the Irell lawyers, Mr. Ruehle received three emails from Mr. Heitz. (Exs. I-K.) The first, on which Mr. Lefler and Mr. Siegel were copied, updated Mr. Ruehle on the Irell lawyer's progress in their interviews of witnesses with knowledge of the stock option granting practices at Broadcom. (Ex. I.) The next, asked Mr. Ruehle to review his personal records for information related to a stock option grant in 2000 and advised him of the relevance of such information to Irell's investigation. (Ex. J.) In the final email Mr. Ruehle received from Mr. Heitz on May 31, 2006, Mr. Heitz provided a further update on Irell's fact-gathering with respect to Broadcom's stock option granting practices. (Ex. K.)
On June 1, 2006, Mr. Heitz and Mr. Lefler met with Mr. Ruehle and interviewed him regarding Broadcom's stock option granting practices. (Tr. vol. 2, 9:15-20, Feb. 23, 2009.) The Irell lawyers did not tell Mr. Ruehle that they were not his lawyers. (Id. 15:5-10.) The Irell lawyers did not suggest that Mr. Ruehle might want to consult with his own lawyer before speaking with them. (Id. 17:21-23.) After their meeting, Mr. Heitz had subsequent conversations with Mr. Ruehle in June 2006 about Broadcom's stock option granting practices and never disclosed to Mr. Ruehle in any of these conversations that his statements to him would be disclosed to third parties. (Id. 33:7-25.)
On June 13, 2006, the SEC commenced its investigation of the stock option granting practices at Broadcom. Throughout June and July 2006, Mr. Ruehle continued to receive legal advice from Irell. (Exs. L-O.) On June 13, 2006, Mr. Ruehle sent an email to Mr. Siegel, on which he copied Mr. Dull, seeking legal advice regarding the SEC's investigation. (Ex. L.) On the same day, Mr. Lefler sent an email to Mr. Ruehle asking him to consent to Irell's acceptance of process on his behalf in the Jin Action. (Ex. M.) On June 28, 2006, Mr. Ruehle received an email from Mr. Siegel, on which Mr. Heitz was copied,...
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