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Case 1:01-cv-01451-REB-KLM

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EXHIBIT 4

Case 1:01-cv-01451-REB-KLM

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1994 U.S. Dist. LEXIS 16683,

LEXSEE 1994 U.S. DIST. LEXIS 16683 IN RE: INFORMATION RESOURCES, INC. SECURITIES LITIGATION Case No. 89 C 3772 UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION 1994 U.S. fist. LEXIS 16683 November 17, 1994, Decided November 21, 1994, Docketed

CASE SUMMARY: PROCEDURAL POSTURE: Inter aim, plaintiff investors brought a class action that alleged securities fraud in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), and the S.E.C. Rule 1 Ob-5 on behalf of all persons, other than defendants, who purchased the common stock of defendant corporation on the open market. OVERVIEW: Inter alia, the investors filed a class action against defendant corporation and defendant corporate officers that complained of fraudulent conduct in violation of § 10(b) of the Securities Exchange Act of 1934, 15 USC'S, § 78](b), and S.E.C. Rule lob-5 against defendants, a corporation and its officers. The investors filed a motion that sought a declaration that the attorney-client privilege was not available to any defendant to resist discovery of any information in any way related to public disclosures made by the corporation or the corporate officers with respect to the corporation's investment in the subsidiary. The court denied the investors' motion. The court found that counsel for the parties had a tacit agreement to the effect that the corporation preferred to assert the privilege, even if it prevented asserting the advice of counsel defense, while the investors preferred not to press for attorneyclient privilege material, resting assured that they could prevent the corporation from asserting the advice of counsel as a scienter defense. OUTCOME: The court denied the investors' motion for an order declaring that the attorney-client privilege was not be relied upon by any of the defendants to resist discovery, denied the investor's motion to reopen discovery regarding any documents reflecting attorney-

client communications concerning advice of counsel with respect to public disclosures about a subsidiary's financial condition, and denied the corporate officer's motion to amend. LexisNexis(R) Headnotes Civil Procedure > Disclosure & Discovery > Privileged Mailers [HNI] Individual officers should not be allowed to rely on advice of counsel while asserting attorney-client privilege on behalf of a corporation. Attorney-client privilege should be waived where a corporate officer asserts the reliance on the advice of counsel defense, but seeks to assert the privilege on behalf of the corporation. When an essential element of a party's defense rests upon the advice of counsel, that party waives the attorneyclient privilege regarding all communications to or from counsel concerning the transactions for which advice was sought. JUDGES: [*1] Williams OPINIONBY: ANN CLAIRE WILLIAMS OPINION: MEMORANDUM OPINION AND ORDER This class action securities fraud suit was brought on behalf of all persons, other than defendants, who purchased the common stock of Information Resources, Inc. ("IRJ") on the open market between Febrnary 6, 1989 and May 2, 1989. Approximately two weeks before the trial was scheduled to begin, plaintiffs filed a motion to limit the attorney-client privilege and for an order permitting additional discovery. Defendants John Malec,

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Gian Fulgoni, Gerald Eskin and Leonard Lodish then moved to amend the pretrial order by adding an advice of counsel defense jury instrnction. In response, plaintiffs proposed their own jury instruction on advice of counsel. After extensive briefing and oral argmnent on these issues, the court denied all three motions in open court. For the purpose of completing the record, the court enumerates the rationale for these rulings more fully below. Background The pertinent facts are as follows. Plaintiffs sued defendant officers and directors of defendant IRI for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), [*2] and the Securities and Exchange Commission's Rule lob-5. In general, plaintiffs claimed that defendants made false and misleading statements from February 6, 1989 through April 1989 about IRIs finances and results from operations for 1988 and 1989. Plaintiffs also alleged that defendants made material omissions concerning serious management problems, the need to close certain product markets, the unprofitability of IRIs survey-based businesses, and IRIs problems with 1989 expenses and other financial commitments. (Id.) In particular, plaintiffs claimed that defendants made fraudulent misrepresentations and omissions concerning Medialink, a part of IRIs Retail Applications Division. Plaintiffs claimed: IRIs problems were compounded and, to a large extent created, by its investment in M/L [(Medialink)]. That investment consisted of: (a) a purchase of 19% of M/L capital stock for $ 1,750,000; (b) the guarantee of a bank loan to M/L for $ 3,000,000, (c) cash advances to cover operating losses many of which were made by Newbrough without the board's approval or knowledge; and (d) equipment lease guarantees, with a total investment of approximately $ 8,500,000. Unfortunately [*3] there were serious business and financial problems at M/L which had virtually no revenues. As a result, IRI faced a serious problem, the potential write off of over $ 8 million on its M!L investment which, after its poor 1987 results would have been crushing. It opted for another strategy. It assumed effective control of M/L, recorded only a $1.3 million loss, and booked $ 8 million in non existent good will thereby allowing a much better fiscal 1988 picture to be painted than actually existed.

(Pretrial Order P 96). Moreover, as the trial date approached, defendants' decision to book $ 8 million as Medialink goodwill became a central issue in plaintiffs' case and the focus of the alleged fraud. nl nI Plaintiffs argued that the significance of Medialink only became apparent when they reviewed newly-produced IN internal memoranda. On April 11, 1994, plaintiffs filed a substitute motion to amend the pretrial order to add eight additional exhibits involving Medialink. Defendants opposed this motion on the grounds that plaintiffs were using these newly produced documents "discussing old facts as an excuse to raise new issues." (Def. IRI's Mem. in Opp. at I). Defendants also correctly noted that plaintiffs' key document, Ex. 129, had been produced to them twice before. After carefully considering all of these arguments, the court granted plaintiffs' motion to amend the pretrial order because plaintiffs made a sufficient showing that Medialink was "relevant to and played a part in the allegedly fraudulent misrepresentations at issue." (April 16, 1994 Order at 4). [*4] Two weeks before trial, plaintiffs moved for an order precluding defendants from relying on the attorney-client privilege. The individual defendant directors and officers then moved to include a jury instruction on the advice of counsel defense. Plaintiffs responded with a request to add their own jury instruction explaining that the corporate defendant could not rely on an advice of counsel defense. After briefing and oral argument, these motions were denied in open court. Discussion Plaintiffs moved the court for an "order declaring that the attorney-client privilege [could not] be relied upon by any of the defendants to resist discovery of any information in any way related to public disclosures made by IRI and any of the defendants with respect to IRIs investment in Medialink, with respect to the financial condition or business prospects of Medialink, or with respect to accounting treatment of IRIs investment in Medialink. (Pis.' Motion to Limit Attorney-Client Privilege at I). Plaintiffs sought to reopen discovery, requesting inter alia, any documents reflecting attorney-client communications concerning Medialink's financial condition from August 1, 1988, [5] until April 1, 1990, and communications
. ."

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concerning advice of counsel with respect to public disclosures about Medialink. In support of this motion, plaintiffs argued that (1) the attorney client privilege did not apply to communications made for the purpose of preparing public disclosures; (2) if the privilege did apply to the communications in question, it had been waived; and (3) the attorney-client privilege could not be asserted because of the crime-fraud exception to the privilege. (PIs.' Mem. in Supp. of Motion at 8-14). Defendants opposed this motion on several grounds. Defendant officers and directors argued that if plaintiffs' motion had any merit, it should have been filed two years ago because the basis for the motion was known to them as early as July 13, 1992. n2 Defendant IRT agreed. In addition, IN argued that plaintiffs had failed to show that it had waived the attorney-client privilege. In addition, IN maintained that the additional discovery which plaintiffs requested at such a late date would surely delay the start oftrial.

n2 On that date, defendant John Malec was deposed and asserted attorney-client privilege in response to questions regarding his communications with counsel on IRis disclosure obligations. (See Resp. of Defendants John Malec, Gian Fulgoni, Gerald Eskin and Leonard Lodish at 3-4). [*6] Further, IRI insisted that the attorney-client privilege issue had not been raised before because the parties had a tacit agreement: "IRI preferred to assert the privilege, even if it prevented asserting the advice of counsel defense, while plaintiffs preferred not to press for attorney-client privilege material, resting assured that they could prevent IN from asserting the advice of counsel as a scienter defense." (IRIs Opp. to P1's Motion at 8). However, despite this assertion, the individual defendants later sought to add a jury instruction asserting the advice of counsel defense, and plaintiffs responded by seeking to add their own new instruction emphasizing that the advice of counsel defense was not available to defendant IN. Nevertheless, at oral argument, it became clear that limitation of the attorney-client privilege had not been raised previously because counsel did, in fact, have some type of tacit understanding. Several times during oral argument, plaintiffs' counsel indicated that they had only brought the motion for additional discovery when it became apparent that defendants would rely on advice of counsel at trial to excuse their alleged fraud. n3 Also, the briefs [*7] and supporting documentation showed that plaintiffs could have raised these issues much earlier in

the case. For example, in their March 1991 depositions, both Eskin and Fulgoni had suggested that they relied on counsel's advice in deciding which disclosures to make. (IRIs Opp. at Ex. B). Also, at his July 13, 1992 deposition, Malec refused to answer questions regarding the substance of conversations with his attorney regarding IRI's disclosure obligations. Based upon the foregoing, the court agreed that plaintiffs' motion was untimely. n4 However, the individual defendants maintained that they were entitled to a "jury instruction on good faith reliance on advice of counsel irrespective of [the] court's ruling on plaintiffs' pending motion regarding IRIs attorney-client privilege." (Mot. of Defs. John Malec, Gian Fulgoni, Gerald Eskin and Leonard Lodish to Amend the Pretrial Order by Adding One Jury Instruction at 2). The court rejected this argument based upon persuasive authority holding that [HN1] individual defendant officers should not be allowed to rely on advice of counsel while asserting attorney-client privilege on behalf of a defendant corporation. See e.g., flvfoskowitz v. Lopp, 128 F.R.D. 624, 637-38 (ED. Pa. 1989) [*8] (reasoning that fairness dictates that the attorney-client privilege be waived where a corporate officer asserts the reliance on the advice of counsel defense, but seeks to assert the privilege on behalf of the corporation); Panter v. Marshall Field & Co., 80 F.R.D. 718, 721 (ND. IlL 1978) (holding that when an essential element of a party's defense rests upon the advice of counsel, that party waives the attorney-client privilege regarding all communications to or from counsel concerning the transactions for which advice was sought). Accordingly, defendants' motion to add its advice of counsel defense jury instruction was denied, and defendants were instructed to refrain from asserting such a defense at trial. Also, since plaintiffs' proposed jury instruction was meant to clarify the one proffered by the individual defendants, it was rejected. n3 However, plaintiff stated that they would not object to assertion of the advice of counsel defense as long as they were allowed the additional discovery regarding the substance of these communications with counsel. n4 The court also disagreed with plaintiffs' argument that the public disclosure and crimefraud exceptions to the attorney-client privilege were applicable to this case. [~9] Conclusion For the foregoing reasons, plaintiffs' motion to limit attorney-client privilege and for an order permitting certain additional discovery was denied. Also, the motion

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of defendants John Malec, Gian Fulgoni, Gerald Eskin and Leonard Lodish to amend the pretrial order by adding one jury instruction was denied. Lastly, plaintiffs' proposed instruction no. 50 was rejected. The parties will receive their next date by mail, with the entry of this Memorandum Opinion and Order. ENTER: Ann Claire Williams, Judge United States District Court Dated: November 17, 1994