A recent district court ruling could push banks and other companies to be more careful with what they share with regulators, including compliance efforts on certain regulations.
Earlier this month, U.S. District Court Judge Shira Scheindlin for the Southern District of New York ruled that conversations and documents that banks, and potentially other companies, share with federal regulators don't fall under attorney-client privilege and work product protection in all cases and, thus, could be subject to discovery.
“The ruling is causing some ripples in the compliance community, because many banks had assumed that protection around privilege were broader than the judge in our case has said that it is,” says Lee Wolosky, a partner of the law firm Boies Schiller Flexner who is representing the plaintiffs in the lawsuit.
The ruling is especially relevant in cases that involve information banks turn over to regulators on compliance with economic sanctions and anti-money laundering rules. In recent years, plaintiffs have filed lawsuits with increasing frequency against financial institutions accused of facilitating the financing of terrorism, says Wolosky. “Previously, plaintiffs in these cases had a much harder time obtaining discovery of those types of documents,” he says.
“It's a very thorough opinion that discusses a lot of issues relating to regulatory provisions,” says Maria Patterson, co-founder of the law firm Patterson & Aschheim and former in-house counsel for The Bank of New York. For that reason, legal and compliance officers in the financial services industry ought to pay close attention to it, she says.
The case, Wultz v. Bank of China, stems from a lawsuit filed by the family of Daniel Wultz, who was killed in a 2006 suicide bombing in Israel. The family sued the Bank of China (BOC) over allegations that it knew its U.S. bank accounts were being used to finance terror attacks in violation of U.S. sanctions, despite warnings from both Israeli security officials and U.S. counter-terrorism officials.
As part of the lawsuit, the plaintiffs filed a motion to compel the bank and its federal regulator, the Office of the Comptroller of the Currency (OCC), to produce various investigative files and communications. The materials requested included:
· BOC's Shurafa Investigative files. The files relate to an internal investigation BOC conducted in response to a plaintiffs' demand letter dated January 2008.
· BOC's anti-money laundering and counter–terrorism financing communications. These communications concern periodic risk reports, self-analyses of its compliance systems, proposed actions and changes to its compliance procedures, and other communications with the OCC.
· General information about the bank's Suspicious Activity Report (SAR) filing practices, including the aggregate number of SARs filed during the relevant years, and the compliance areas to which those SARs relate.
The bank refused to produce the materials, arguing that they were subject to certain privileges. Regarding the Shurafa files, in particular, the bank argued that such documents and communications were protected by attorney-client and work-product privileges because the files were prepared in connection with an investigation and led by in-house and outside counsel.
“It's been a very contentious battle to obtain discovery in this case against the Bank of China, including communications with regulators,” stresses Wolosky. In this case, Scheindlin ruled that, because the bank has branches in New York, it falls under U.S. jurisdiction. The broader lesson for other banks, Wolosky says, is that, “even if you're a global bank, if you're doing business in the United States, you're subject to our rules.”
“The ruling is causing some ripples in the compliance community, because many banks had assumed that protection around privilege were broader than the judge in our case has said that it is.”
—Lee Wolosky,
Partner,
Boies Schiller Flexner
In rejecting the bank's argument for why it should not produce the requested materials, the judge ruled that attorney-client and work product privileges did not apply to this case. “These materials do not show that any attorneys were involved in the preparation of the Shurafa files, or that the files contain attorney work-product or attorney-client communications,” Scheindlin wrote.
According to the opinion, the bank called outside counsel only after its chief compliance officer received the demand letter from the plaintiffs, and then proceeded to perform an internal investigation within the compliance department—“without the involvement of any counsel, and not for the purpose of obtaining legal assistance,” Scheindlin wrote.
In a new court order, issued April 17, the judge found that the bank failed to comply with the previous order to produce the documents and directs the bank to produce the OCC report without redactions. “It's unusual for a bank not to comply with a federal court order to turn over documents,” says Wolosky.
Tom Sporkin, a partner with law firm BuckleySandler, says the bigger lesson for the BOC and other financial institutions is to have a "good and clear line of communication" with their regulators, "so that expectations about how these types of materials will be protected in court proceedings will be clear."
In some cases, communications with regulators may be covered by the bank examination privilege, a privilege that can only be invoked by the regulator. "Here the regulator seems to have not clearly invoked the privilege before the court and thus the court does not recognize the assertion of the privilege," says Sporkin.
In this case, the bank could have improved its chances of protecting its communications with regulators had it obtained in-house or outside counsel from the start. “Certainly, if legal counsel had directed the investigation and the report, that would have likely made a big difference,” agrees Patterson.
“The way you defend these cases is by putting in place proper procedures,” says Wolosky.
In the opinion, Scheindlin then addressed whether the bank must produce the SAR information requested by plaintiffs. Under the OCC's SAR regulations, “any national bank, and any director, officer, employee, or agent of any national bank that is subpoenaed or otherwise requested to disclose a SAR, or any information that would reveal the existence of a SAR, shall decline to produce the SAR or such information.”
As a general matter, federal regulators are very protective about the release of SARs, says Sporkin. “I can tell you as a former regulator, we took great precaution not to let those SARs out of our hands,” he says. In this case, however, the judge concluded that the general information sought by plaintiffs is not covered by the SAR privilege, and must be produced by the bank.
DETAILS OF WULTZ CASE
Below is an excerpt from the case Wultz v. Bank of China regarding the court's view on attorney-client and work product privileges.
BOC argues that the Shurafa Files are covered by the attorney-client and work-product privileges. BOC's argument does not clearly distinguish between the two privileges, instead asserting generally that the Shurafa investigative material “is privileged because it was prepared in connection with a BOC investigation that was prompted by the receipt of Plaintiffs' demand letter.” BOC also states that the “investigation was led by in-house counsel at BOC, as well as [outside] counsel of BOC who were retained promptly after receipt of the demand letter.”
Plaintiffs note that BOC's submission to the Court, which addresses plaintiffs' second motion to compel, is the first time that BOC has raised either the attorney-client or work-product privileges:
BOC has waived any privileges by failing to assert that the Report is protected by privilege until now, nearly two years after Plaintiffs requested such documents, and after numerous letters to Plaintiffs and the Court purporting to state BOC's objections to producing the Report.
In addition, plaintiffs argue that even if the privileges were not waived, they would not apply to the Shurafa Investigative Files “because BOC's investigation of the Shurafa transactions was conducted by and at the initiative of the New York Compliance and Clearing Departments, not BOC's legal counsel.” According to plaintiffs, “BOC's counsel had no involvement beyond being notified of the investigation by BOC's Chief Compliance Officer.”
Plaintiffs have failed to carry their burden of establishing that the Shurafa Files contain “‘communications (1) between a client and his or her attorney (2) that are intended to be, and in fact were, kept confidential (3) for the purpose of obtaining or providing legal assistance,'” or “‘attorneys' mental impressions, opinions or legal theories concerning specific litigation.'” The evidence cited by both parties consists solely of an excerpt from the deposition of BOC's Chief Compliance Officer John Beauchemin as well as his declaration.
These materials do not show that any attorneys were involved in the preparation of the Shurafa Files, nor that the Files contain attorney work-product or attorney-client communications. As plaintiffs suggest, the cited materials indicate that after Beauchemin received plaintiffs' demand letter, he called outside counsel, then set about performing the investigation within the Compliance Department—without the involvement of any counsel, and not for the purpose of obtaining legal assistance.
Source: Wultz v. Bank of China.
Mitchell Berger, a partner with law firm Patton Boggs who is representing the bank in the case didn't respond to a request for comment. The Bank of China New York branch also could not be reached for comment.
OCC Communications
In addition to compelling the bank to hand over its internal documents, the plaintiffs demanded that the OCC produce its reports and communications with the bank. These include the OCC's bank examination reports, evaluations of BOC's policies and practices, recommendations to BOC, and other communications related to problems or deficiencies in BOC's anti-money laundering and counter–terrorism financing compliance functions.
In issuing the opinion, however, Scheindlin stopped short of assessing whether OCC had to produce such material. “Because it is unclear whether the OCC possesses any relevant and discoverable documents that are not in the possession of BOC, it is not yet necessary to confront the difficult issues that might be involved in reviewing the OCC's denials of plaintiffs' requests,” Scheindlin wrote.
Other than production of the OCC documents, “the court gave the plaintiffs just about everything they asked for,” says Sporkin.
Scheindlin went as far to rule that, if the bank concludes that certain material can only be obtained through the OCC, plaintiffs may move again to compel the OCC to produce the materials. “Other circuits may have a different opinion,” says Sporkin. “It could potentially be the luck of the draw, depending on the circuit you're dealing with.”
Historically, the courts have been split as to whether federal regulators should be compelled to produce communications in certain circumstances. The practical effect of the split among the courts is that the Second, Fourth, and Tenth Circuits, generally require litigants to exhaust their administrative remedies before moving to compel production from a government agency. In comparison, the D.C., Ninth, and Sixth Circuits generally have favored the Federal Rules of Civil Procedure, which authorizes parties of a lawsuit to obtain discovery regarding any non-privileged matter that is relevant to any party's claim or defense.
Legal experts say if more courts were to start compelling federal agencies to produce communications in certain cases, it may create disturbing consequences for financial firms and others. Concludes Patterson: “I would think, and hope, it's not going to happen regularly in civil private litigation.”
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