Wednesday, February 9, 2005

Attorney-Client Privilege Ruling in Shareholder Suit Against Martha Stewart Living Omnimedia

Martha Stewart's sale of ImClone Systems stock has spawned a cottage industry of cases beyond the criminal prosecution (and now appeal), including the SEC's civil action alleging insider trading and a shareholder lawsuit against her company, Martha Stewart Living Omnimedia, alleging violations of Rule 10b-5 for failing to make proper disclosure about her legal situation.  The attorneys for the securities class action plaintiffs, the well-known Milberg Weiss firm, sought to discover otherwise privileged communications with Wachtell Lipton, the company's counsel during the period of the SEC/U.S. Attorney investigation into her stock sales in 2002.  An article in the New York Times (Feb. 8 here) discusses a ruling by U.S. District Judge John Sprizzo permitting discovery of the communications by the company with Wachtell Lipton but not Stewart's communications with her own lawyers.  The ruling appears to follow the shareholder exception to the privilege, which in limited circumstances allows shareholders to gain access to communications with the company's lawyers if there is "good cause" (see the venerable decision in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970)). Certainly, Stewart's communications with her personal attorney would not be subject to that exception, which is limited to corporate counsel.  An interesting question, which is not clear from the article but hinted at, is whether Wachtell Lipton represented both the company and Stewart personally during the government's investigation.  If the firm represented Stewart personally, that could create a potential conflict for the firm and, more importantly, a very sticky situation for analyzing whether her communications with corporate counsel were in her personal or corporate capacity.  The usual rule is that communications by a corporate officer are made on behalf of the company and only protected by the organization's attorney-client privilege, but personal representation of the officer changes the analysis. (ph)

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Martha Stewart, Privileges, Securities | Permalink

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