Risk Management

Waiving Secrecy Goodbye

Does sharing material with an auditor force companies to waive their right to protect confidential information? An ongoing court case may provide a...
Marie LeoneMarch 9, 2007

Does sharing a document with your auditor destroy your right to keep that document confidential?

Buried in a rancorous court fight that pits an institutional investor against a defense contractor and its auditor is the issue of whether companies can successfully use the “work product doctrine” to shield confidential information once they’ve shared with an outside party — in this case, their auditor. At a hearing taking place Friday in Virginia’s Fairfax County District Court, Judge Randy Bellows will have a chance to render his opinion on the topic.

According to its filings, institutional investor Costa Brava Partnership will assert that it should have access to 15 documents currently in the hands of Virginia audit firm Goodman & Co. The documents are board and audit committee minutes of defense contractor Telos Corp., a Goodman audit client and Costa Brava portfolio company.

Costa Brava, which owns 16 percent of Telos, is suing the defense contractor and certain directors and officers in Maryland state court, alleging, among other things, accounting fraud. As part of the discovery process for the suit, which is scheduled to be heard in June, Costa Brava asked Goodman for all documents related to Telos. After an aggressive 10-month legal campaign by Costa Brava to obtain the documents, Goodman turned over most of the material. Under instructions from Telos, it did not release the board minutes.

According to a Telos court filing, the board minutes are protected by a federal rule known as the work product doctrine. In general, work product immunity applies to information collected in anticipation of a court battle. In practice, the doctrine gives parties to a lawsuit the ability to keep certain information under wraps until it is used in court.

Telos says the board minutes requested by Costa Brava include a record of discussions about the pending lawsuit, including conversations between in-house attorneys and company directors and officers. The discussion of the lawsuit, notes Telos, is what characterizes the material as work products. Furthermore, the company insists the board minutes “will unfairly prejudice Telos” in the Maryland suit, and therefore should not be disclosed to Costa Brava.

Telos spokesman Warren Jones notes the company has nothing to add to its publicly filed court documents. Both Goodman and Costa Brava officials referred CFO.com to their attorneys for comment. The attorneys did not return phone calls.

In its court filings, however, Costa Brava scoffs at the Telos claims. The investor contends the doctrine does not shield the board minutes from discovery, explaining that Telos waived its work product protection when it shared the board minutes with a third party — its external auditor. In Costa Brava’s view, an independent auditor should be considered “an adversary or a conduit to a potential adversary” whose interests are not necessarily aligned with management.

Costa Brava further argues that the primary motivation for generating board minutes was not to prepare for litigation, but rather to comply with Maryland corporate law that requires public companies to keep a “correct and complete” record of board meetings.

The argument between Costa Brava and Telos is not unusual. The case law on the subject is “split,” says William Ide, chairman of the American Bar Association’s task force on attorney-client privilege and a partner at McKenna, Long & Aldridge. He explains that there is a “mechanical approach” to the issue, which says that protection is waived if it is made clear that the information is being released to a third party.

A more “thoughtful approach,” however, and one the ABA supports, is the concept of common interest. Ide opines that, in many cases, there is a business justification for sharing material with a third party, such as an auditor. He says public companies generally have a “rational business purpose” for wanting to cooperate with external auditors — who represent the public — by furnishing privileged information to assist with an audit.

“We take a broad view [of the work product doctrine]; that is, auditors should not seek privileged material or work product material because they don’t need it to do their job,” says Ide. However, he notes that if a client chooses to share privileged or work product information with an auditor, the courts will have to decide if the doctrine applies.

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