Summary
ruling that an unsigned, undated document with "tenuous" evidence of authorship does not fall under the residual exception to the hearsay rule
Summary of this case from Securities & Exchange Commission v. PattisonOpinion
CV-S-02-0537-PMP (LRL), BK-S-00-10533-LBR, ADV-02-1023-LBR.
March 2, 2005
ORDER
Presently before the Court is KPMG LLP's Motion to Strike Trustee's Summary Judgment Exhibits Containing the Wilson Sonsini Work Product Documents (Doc. #741), filed on September 13, 2004. Plaintiff Anthony H.N. Schnelling filed the Trustee's Response to KPMG LLP's Motion to Strike Trustee's Summary Judgment Exhibits Containing the Wilson Sonsini Documents (Doc. #762) on October 28, 2004. Defendant KPMG LLP ("KPMG") filed its Reply (Doc. # 781) on December 9, 2004.
I. BACKGROUND
AgriBioTech, Inc. ("AgriBioTech" or "ABT") originally was founded in 1983. (Third Am. Compl. (Doc. #328) ¶ 51.) As of 1998, AgriBioTech was the largest forage and turfgrass seed producer in the United States. (Id. ¶ 1.) "On January 25, 2000, ABT and three of its subsidiaries, L[as] V[egas] F[ertilizer Co.], Garden West [Distributors,] and [Geo. W.] Hill [ Co., Inc.] (collectively, the "Debtors") commenced jointly administered Chapter 11 cases by filing voluntary petitions under Chapter 11 of the United States Bankruptcy Code. . . ." (Id. ¶ 12.) The Debtors created a Creditors' Trust pursuant to the First Amended Joint Plan of Reorganization ("Reorganization Plan" or "Plan"), which United States Bankruptcy Judge Linda B. Riegle confirmed. (Id.; Trustee's Resp. to KPMG LLP's Mot. for Summ. J. on All Claims Purportedly Brought by Trustee on Behalf of Non-Debtor Third Parties, Ex. B.)
Plaintiff Anthony H.N. Schnelling ("Trustee"), as Trustee of the AgriBioTech Creditors' Trust, brought this lawsuit against certain former AgriBioTech professionals based on the rights assigned him pursuant to the Plan. (First Am. Compl. (Doc. #438) ¶¶ 1, 7.) The Trustee asserts against KPMG claims for professional negligence (count 8), participation in breach of fiduciary duty (count 9), actual and constructive fraud (count 16), and aiding and abetting actual and constructive fraud (count 18). (Third Am. Compl. ¶¶ 351-387, 393-97, 403-09.)
On July 20, 2004, KPMG filed a Motion for Summary Judgment (Imputation, In Pari Delicto, and Causation-Damages). (Doc. #691.) The Trustee filed its Response on August 13, 2004. (Doc. #704.) The Trustee also filed two additional volumes of exhibits supporting its Response. (Doc. ##705, 706.) Among these exhibits are witness interview memoranda and supporting declarations prepared by ABT's former outside counsel, Wilson Sonsini Goodrich Rosati P.C. ("Wilson Sonsini"). (Doc. #705, Exs. 12, 13, 18, 19; Doc. #706, Exs. 35, 37, 38, 39, 40, 41, 48, 49.)
Exhibit 12 consists of memos authored by Wilson Sonsini attorney Leo Cunningham ("Cunningham") of interviews of Johnny Thomas ("Thomas"), Kathleen Gillespie ("Gillespie"), John Francis, Randy Ingram, and John Busch. Exhibit 13 is Cunningham's declaration stating that he took notes during these interviews and that he tried to be accurate to reflect the substance of each interview. Attached to the declaration are copies of Cunningham's interview notes.
Exhibit 14 is a declaration by Donald E. Bradley, records custodian for Wilson Sonsini, indicating documents that Wilson Sonsini produced during discovery in this case, and stating that these records were kept in the course of the firm's regularly conducted law practice. Exhibit 18 is Wilson Sonsini attorney Peri Nielsen's ("Nielsen") memo from an interview with Henry Ingalls ("Ingalls"). Exhibit 19 is a declaration by Nielsen indicating she took notes during the interviews, that she tried to be accurate, and that she prepared the memos reasonably soon after the interviews.
Peri Nielsen's name at the time the memos were prepared was Peri Erlanger. (Mot. to Strike, Ex. 2 at 22.)
Exhibit 35 is Nielsen's interview memo with Gillespie. Exhibit 37 is typewritten notes from the Gillespie interview. Exhibit 38 is Nielsen's memo from an interview with Elliot Lutzker ("Lutzker"). Exhibit 39 is typewritten notes from an interview with Ingalls. Exhibit 40 is a memo prepared by Wilson Sonsini attorney David Lansky ("Lansky") entitled "Review of Documents Regarding AgriBioTech's use of `Effective Date Accounting.'" Exhibit 41 is a declaration from Lansky indicating he took interview notes, and that he reviewed ABT documents related to ABT's use of effective date accounting. Attached to this declaration are Lansky's memos from interviews with Curt Croshaw, Jim Jackson, Ruth Lytle, Jim McGarvey, Valerie Hodges, and Jackie Miner and the memo he prepared regarding ABT's use of effective date accounting. Exhibit 48 is Cunningham's memo from an interview with Randy Ingram. Exhibit 49 is Lansky's memo from an interview with Jim Jackson.
Attorneys from Wilson Sonsini prepared these witness interview memoranda after being retained by ABT to defend it in a 1999 securities class action lawsuit filed by certain ABT shareholders. (KPMG LLP's Mot. to Strike Trustee's Summ. J. Exs. Containing the Wilson Sonsini Work Product Documents ("Mot. to Strike") (Doc. #741), Ex. 2 at 14-15; Ex. 4 at 10-12; Ex. 5 at 12.) Shortly after being retained by ABT in early 1999, three Wilson Sonsini attorneys, Boris Feldman, Cunningham, and Nielsen, met with various ABT personnel and conducted the witness interviews. (Mot. to Strike, Ex. 2 at 15-17, 24-26; Ex. 4 at 13-14; Ex. 5 at 15-16.)
Nielsen's regular practice in conducting interviews was to take notes by hand during the interview, draft the interview memo on her computer shortly thereafter, and then discard her notes. (Mot. to Strike, Ex. 2 at 28.) Nielsen believes she followed this practice for her interviews with ABT personnel in February 1999. (Id.) Nielsen then would send a copy of the memo to a file keeper. (Id. at 29-30.)
Cunningham could not recall taking notes at the interviews, and had no set practice for when or how he would take notes, whether by hand or on a computer. (Mot. to Strike, Ex. 5 at 32-33.) Cunningham stated that it was his usual practice to initial his final memos. (Id. at 40.) Cunningham recalls doing interview memos, and that the general practice was for such memos to be distributed to team members working on a particular case and to be filed in the working files on the case. (Id. at 47-48.)
The interviews were conducted in February 1999, and the memos were prepared the same day or several days later. (Id. at 31-32, 51.) The memos contain disclaimers stating that the memos summarize the interview, the attorney's thoughts, impressions and opinions of the same; are not verbatim transcripts; were not adopted by the witnesses; and were prepared in anticipation of litigation. (Trustee's Response to KPMG LLP's Mot. for Summ. J. (Imputation, In Pari Delicto, and Causation-Damages), Vols. II and III (Doc. ##705, 706), Exs. 12, 18, 35, 38, 41(B), 48, 49.) The interviews were not recorded. (Mot. to Strike, Ex. 2 at 72; Ex. 5 at 28-29.) The subjects of the interview were not under oath. (Id. at 74.) Neither Nielsen nor Feldman could recall providing the interview memo to the interviewee to review or make corrections. (Mot. to Strike, Ex. 2 at 73, 89-90; Ex. 4 at 29.)
At her deposition, Nielsen indicated she believed the memos accurately summarized the interviews. (Mot. to Strike, Ex. 2 at 37, 55.) Nielsen's memo from her interview with Gillespie contains several words or phrases which Nielsen placed in quotation marks. (Trustee's Response to KPMG LLP's Mot. for Summ. J. (Imputation, In Pari Delicto, and Causation-Damages), Vol. III (Doc. #706), Ex. 35.) At her deposition, Nielsen stated these words were the actual words used by Gillespie. (Mot. to Strike, Ex. 2 at 39-44.) Cunningham could not recall the interviews, and thus he could not comment on the memos' accuracy, although he stated that he tried to make his notes accurate at the time. (Mot. to Strike, Ex. 5 at 39-40; Trustee's Response to KPMG LLP's Mot. for Summ. J. (Imputation, In Pari Delicto, and Causation-Damages), Vol. II (Doc. #705), Ex. 13 at ¶ 4.)
For example, Nielsen's memo indicates Gillespie stated that "if ABT needed the truth `flowered up' or stretched . . . she would do it (like for the SEC comment process)." (Trustee's Response to KPMG LLP's Mot. for Summ. J. (Imputation, In Pari Delicto, and Causation-Damages), Vol. III (Doc. #706), Ex. 35 at 4.) Additionally Nielsen's memo indicates Gillespie stated that at a meeting with Teri Iannaconi from KPMG and Eliot Lutzker from Snow Becker, Gillespie told them `"so you don't want me to tell [the Securities and Exchange Commission] we put together a bunch of letters so we could get profits up front right? You basically want me to convince them that we did have control?'" (Id.)
KPMG moves to strike the Wilson Sonsini documents (Exs. 12, 13, 18, 19, 35, 37, 38, 39, 40, 41, 48, and 49) as hearsay under Federal Rule of Evidence 801. KPMG asserts the attorney work product memoranda are hearsay themselves, contain multiple levels of hearsay within them, and do not fall within a hearsay exception. Additionally, KPMG contends that even if the documents fall within a hearsay exception, they are more prejudicial than probative and should be inadmissible under Federal Rule of Evidence 403.
The Trustee responds that the Wilson Sonsini memos fall within Federal Rule of Evidence 803(6)'s business records exception to the hearsay rule. The Trustee also argues that to the extent KPMG challenges one interviewee's specific statements within the documents, those statements fall within the statement against interest exception under Federal Rule of Evidence 804(b)(3). The Trustee further argues the documents fall within the residual exception to the hearsay rule under Federal Rule of Evidence 807. Additionally, the Trustee contends it can state a conspiracy claim against KPMG and that the statements in the memos thus would fall under the hearsay exception for statements made by a co-conspirator under Federal Rule of Evidence 801(d)(2)(E). Finally, the Trustee contends the statements are admissible for purposes other than the truth of the matter asserted, such as to show KPMG's knowledge, motive and intent.
II. DISCUSSION
Hearsay is "a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted." Fed.R.Evid. 801©. Hearsay is not admissible absent an applicable exception. Fed.R.Evid. 802. Hearsay within hearsay is admissible so long as "each link in the hearsay chain conforms to a separate hearsay exception." Padilla v. Terhune, 309 F.3d 614, 621 (9th Cir. 2002); Fed.R.Evid. 805. The decision whether to admit evidence under an exception to the hearsay rule lies within this Court's discretion. U.S. v. Johnson, 297 F.3d 845, 862-63 (9th Cir. 2002).
Exhibits 13, 14, 19 and 41 are declarations from the Wilson Sonsini attorneys and records custodian. These declarations are admissible on summary judgment because Federal Rule of Civil Procedure 56 "permits the use of affidavits in evaluating a motion for summary judgment." Hughes v. U.S., 953 F.2d 531, 543 (9th Cir. 1992). Accordingly, the Court will not strike these exhibits.
Exhibits 12, 13 attachments A and B, 18, 35, 37, 38, 39, 41 attachment A, 48 and 49 are interview notes and memos prepared by Wilson Sonsini attorneys. The interview memos are hearsay. Each memo is an out of court statement offered by the Trustee to prove the truth of the matter, i.e., the interviewee's statements to the attorneys. In some memos, the interviewees relay conversations they had with other people, thus adding another layer of hearsay. Accordingly, the memos are inadmissible unless they fall within an exception to the hearsay rule or are offered for purposes other than for the truth of the matter asserted.
A. Business Records
Federal Rule of Evidence 803(6) excludes from the hearsay rule records of regularly conducted activity. Under the Rule —
A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the ordinary course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record or data compilation, . . . unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness. The term "business" as used in this paragraph includes business, institution, association, profession, occupation, and calling of every kind, whether or not conducted for profit.
Fed.R.Evid. 803(6). The evidence thus must be "(1) made by a regularly conducted business activity, (2) kept in the `regular course' of that business, (3) `the regular practice of that business to make the memorandum,' (4) and made by a person with knowledge or from information transmitted by a person with knowledge." Clark v. City of Los Angeles, 650 F.2d 1033, 1036-37 (9th Cir. 1981) (quoting Fed.R.Evid. 803(6)). Additionally, the business record must be sufficiently trustworthy. U.S. v. Olano, 62 F.3d 1180, 1206 (9th Cir. 1995).
The business record exception is based on the theory that accuracy and trustworthiness are assured "by systematic checking, by regularity and continuity which produce habits of precision, by actual experience of business in relying upon them, or by a duty to make an accurate record as part of a continuing job or occupation." See Advisory Committee Note to Rule 803(6). In short, "businesses have incentives to keep accurate records."Timberlake Constr. Co. v. U.S. Fid. and Guar. Co., 71 F.3d 335, 341-42 (10th Cir. 1995).
To ensure this accuracy, the person furnishing the information to be recorded must have been acting "routinely, under a duty of accuracy, with employer reliance on the result." Advisory Committee Note to Rule 803(6). If the supplier of information does not act in the regular course of business, a separate hearsay exception must apply to the hearsay within hearsay statement. Id.; U.S. v. Ray, 930 F.2d 1368, 1370 n. 6 (9th Cir. 1990) ("Of course, if the person providing the information in the business record is not acting under a duty of accuracy in the regular course of business, a double hearsay problem may arise."). For example, a police officer's report will be considered a business record because he prepared it in the ordinary course of his business under a duty to report accurately, but a bystander's statement to the officer included within the report will not be admissible because the bystander was not acting in the ordinary course in making a statement to the officer. See Advisory Committee Note on Rule 803(6); Bemis v. Edwards, 45 F.3d 1369, 1372 (9th Cir. 1995) (911 tapes admissible as business record but because citizens who call in are not under a duty to report, their statements must meet a separate hearsay exception).
Additionally, records compiled in anticipation of litigation, including attorney work product, generally are not business records because they are not prepared in the ordinary course of business. Paddack v. Dave Christensen, Inc., 745 F.2d 1254, 1258-59 (9th Cir. 1984); Potamkin Cadillac Corp. v. B.R.I. Coverage Corp., 38 F.3d 627, 632 (2d Cir. 1994); Timberlake Constr. Co., 71 F.3d at 342 ("It is well-established that one who prepares a document in anticipation of litigation is not acting in the regular course of business."). This is so because "`where the only function that the report serves is to assist in litigation or its preparation, many of the normal checks upon the accuracy of business records are not operative.'" Paddack, 745 F.2d at 1259 (citing McCormick on Evidence § 308, at 877 n. 26 (E. Cleary 3d ed. 1984)).
As a result, few courts have been inclined to treat attorney witness interview notes or memos as business records, even though arguably such a record would fall within Rule 803(6)'s literal terms as having been made and kept in the ordinary course of the law firm's business. The United States Court of Appeals for the Third Circuit considered the possibility that attorney interview notes and a proffer of evidence could qualify as business records in U.S. v. Casoni, 950 F.2d 893 (3d Cir. 1991). In Casoni, the Third Circuit did not reject outright the possibility that the attorney's notes from an interview with his client and a proffer of evidence did not qualify for the business records exception. Id. at 909, 913 ("[W]e are reluctant to state that the notes a lawyer takes when he interviews a client can never be admitted as the lawyer's business records.") Instead, the Court analyzed the documents under the elements of Rule 803(6). Id. at 909-914. The Court found the first four elements of the Rule satisfied because (1) the notes were prepared by a person with knowledge because the attorney would know whether his client made the statements to the attorney; (2) the notes were sufficiently contemporaneous; (3) the attorney prepared notes of client interviews in the regular course of the practice of law; and (4) law offices regularly keep and retain those notes. Id. at 909 n. 7.
Although concluding attorney interview notes theoretically could fall within the business records exception, the Court excluded the notes and proffer. The Court found the proffer of evidence prepared by the attorney did not meet Rule 803(6)'s trustworthiness requirement. Id. at 912. Specifically, the Court noted that the attorney had a motive to minimize his client's criminal culpability and maximize his client's co-defendants' responsibility. Id. at 910. Additionally, the Court noted that the client had no business duty to report. Id. Further, the Court found the reasoning supporting the general rule that documents prepared in anticipation of litigation generally do not qualify as business records also undermined the trustworthiness of the proffer. Id. at 910-11. With respect to the attorney's interview notes, the Court concluded that although these notes were more trustworthy, the district court should not have admitted the notes themselves where the attorney who prepared the statement was available to testify and could use the notes to refresh his own recollection.Id. at 913.
The Court, in its discretion, will not admit the Wilson Sonsini interview notes and memos under the business records exception. The memos were authored and kept by Wilson Sonsini attorneys in the regular course of the law firm's business, and made by the attorneys who had knowledge of the statements made by the interviewees. Unlike typical business records, the substance of the memos contains information supplied by individuals who did not have a business duty to report. None of the interviewees had a duty to accurately convey information to outside counsel.
Furthermore, documents prepared in anticipation of litigation generally are not admissible as business records because they lack the ordinary controls for accuracy and trustworthiness upon which the business records exception rests. The interview memos were prepared by outside counsel retained to represent ABT in the 1999 shareholders' suit, and expressly state they were prepared in anticipation of litigation. Because Wilson Sonsini attorneys create such memos in the ordinary course of their law practice does not make the memos admissible as business records under Federal Rule of Evidence 803(6). The United States Court of Appeals for the Fourth Circuit rejected a similar argument about an outside investigative firm:
Litigants cannot evade the trustworthiness requirement of Rule 803(6) by simply hiring an outside party to investigate an accident and then arguing that the report is a business record because the investigator regularly prepares such reports as part of his business. If that were the case, parties that face litigious situations could always hire such nonaffiliated firms and investigators to prepare a report and then seek to admit the document over hearsay objection. The primary motive for preparing the report in the first place is a better indicator of trustworthiness than the form of the investigation or the identity of the investigator.Certain Underwriters at Lloyd's, London v. Sinkovich, 232 F.3d 200, 205 (4th Cir. 2000). The United States Supreme Court echoed this sentiment in Palmer v. Hoffman, 318 U.S. 109 (1943), in which the Court held that an accident report prepared in anticipation of litigation was not a business record of a railroad. The Court expressed its concern as follows:
[T]he fact that a company makes a business out of recording its employees' versions of their accidents does not put those statements in the class of records made "in the regular course" of the business within the meaning of the Act. If it did, then any law office in the land could follow the same course, since business as defined in the Act includes the professions. We would then have a real perversion of a rule designed to facilitate admission of records which experience has shown to be quite trustworthy.Palmer, 318 U.S. at 113.
The Act of June 20, 1936, 49 Stat. 1561, 28 U.S.C. § 695, using language similar to Federal Rule of Evidence 803(6) to allow admission into evidence certain business records. Palmer, 318 U.S. at 111 n. 1.
An examination of the circumstances surrounding the interview memos confirms the documents are not sufficiently trustworthy to qualify as business records. Although the memos were prepared contemporaneously with the interviews, the interviewees were questioned on events and conversations that took place months before. The interviews were not recorded, the interview notes and memos were not intended to be verbatim transcripts, and the interviewees were not under oath. Additionally, at the time of the interviews, the interviewees knew ABT was being sued by shareholders based on ABT's disclosure of effective date accounting, and that the Securities and Exchange Commission ("SEC") had conducted an investigation into ABT's use of effective date accounting. Consequently, those individuals had motives, including avoiding potential criminal or civil liability and protecting their employment, to fabricate, to shift blame, or to minimize their own role in events about which they were being interviewed.
The Trustee nonetheless argues the memos have indicia of reliability because they reflect interviews that were privileged communications. The Trustee maintains that because the interviewees thought their statements would be protected by attorney-client privilege, they had incentive to tell the truth, and the attorneys had incentive to accurately record the information to provide proper legal advice. Although these are indicia of trustworthiness, the purpose, manner, and motivations surrounding these memos and the statements within them are not marked by the accuracy-ensuring characteristics that underpin the business records exception. As a result, the Court will not admit the memos as business records.
B. Residual Hearsay Exception
Hearsay not otherwise falling with an exception in Federal Rules of Evidence 803 or 804 still may be admissible under the residual or "catch-all" hearsay exception in Federal Rule of Evidence 807. "Hearsay evidence sought to be admitted under Rule 807 must have circumstantial guarantees of trustworthiness equivalent to the listed exceptions to the hearsay rule." U.S. v. Sanchez-Lima, 161 F.3d 545, 547 (9th Cir. 1998). Additionally, the evidence must be of a material fact; must be more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts; and admission of the evidence must serve the interests of justice. Id.; Fed.R.Evid. 807.
The two cases the Trustee cites for the residual exception are distinguishable and of questionable authority. In Nat'l Western Life Ins. Co. v. Merrill Lynch, Pierce, Fenner and Smith, Inc., 213 F. Supp. 2d 331 (S.D.N.Y. 2002), the district court admitted into evidence attorney interview notes where attorneys for both parties interviewed the witness, the witness' statements were crucial to the issues in the case, and no more probative evidence was available. In reviewing this decision on appeal, the United States Court of Appeals for the Second Circuit expressed doubt about the notes' admissibility. Nat'l Western Life Ins. Co. v. Merrill Lynch, Pierce, Fenner Smith, Inc., 89 Fed. Appx. 287, 296 n. * * *, 2004 WL 57748, * * 8 n. * * * (2d Cir. 2004) (unpublished) (noting that evidence "arguably lacked substantial guarantees of trustworthiness").
In Steinberg v. Obstetrics-Gynecological Infertility Group, P.C., 260 F. Supp. 2d 492, 494 (D. Conn. 2003), the district court admitted into evidence a letter from the plaintiff's first attorney to the plaintiff's second attorney. The court concluded the letter was explanatory rather than an advocacy piece, the attorney had incentives to accurately communicate information to her client's next attorney, and the letter was the most probative evidence available to the plaintiff.
Unlike the interviews in National Western, neither KPMG nor the Trustee had an opportunity to conduct interviews with the ABT personnel at the relevant time frame. In any event, the Second Circuit questioned the admissibility of the notes in that case, suggesting the notes lacked sufficient guarantees of trustworthiness. And unlike the attorney letter in Steinberg, the interviewees in the Wilson Sonsini memos had motives to fabricate or shade the truth. Additionally, the Trustee may be able to obtain more probative evidence on the point for which these documents are offered. Most of the interviewees will be available to testify at trial, and the Trustee can question them directly on the matters mentioned in the interview notes. Gillespie is the only witness the Trustee identifies as unavailable due to her invocation of the Fifth Amendment. However, the Trustee may call the Wilson Sonsini attorneys to testify as to what the interviewees, including Gillespie, stated at the interviews. The notes and memos themselves need not be admitted when other evidence as to the contents thereof are readily available.
C. Admissibility of Contents of Memos
On summary judgment, a party need not present evidence in a form admissible at trial because at this stage, courts focus on the admissibility of the evidence's contents rather than on the admissibility of its form. Fraser v. Goodale, 342 F.3d 1032, 1036-37 (9th Cir. 2003). Although the memos themselves are hearsay, the memos reflect matters that were within the personal knowledge of their authors. This evidence could be introduced at trial if the Trustee called the Wilson Sonsini attorneys as witnesses to testify directly about what occurred during the interviews. If the attorneys do not recall the details of the interviews, the Trustee may be able to use the memos to refresh their recollections. See Fed.R.Evid. 612. If the memos do not refresh the attorneys' recollections, the attorneys might be able to read the memos into evidence as a recorded recollection under Fed.R.Evid. 803(5), although the memos themselves would not be exhibits admitted into evidence.
Because the memos' contents could be presented in an admissible form at trial, the Court will consider the memos on summary judgment. This is not a ruling that the memos will be admissible at trial. It is merely a finding that because the Trustee could present the evidence in admissible form at trial, the Court may consider it at the summary judgment stage.
Exhibit 40 is Lansky's memo discussing effective date accounting. Because the Trustee could call Lansky at trial to testify to matters within his personal knowledge, the Court will consider the contents of the memo on summary judgment. KPMG makes no specific arguments that Exhibit 40 contains multiple levels of hearsay.
D. Hearsay Within Hearsay
Because the Court may consider the contents of the memos, the Court must consider KPMG's argument that even if the memos themselves are admissible they contain numerous levels of hearsay within them that do not fall within any exception. KPMG argues that even if each layer of hearsay falls within an exception, the layer upon layer of hearsay makes each statement progressively more unreliable, and the Court should exclude the statements as more prejudicial than probative under Federal Rule of Evidence 403. The Trustee asserts that KPMG does not identify specifically which statements are objectionable beyond some statements by Gillespie. The Trustee argues Gillespie's statements are admissible as statements against interest and statements of a co-conspirator.
Federal Rule of Evidence 103(a)(1) requires parties objecting to the admissibility of evidence to make a timely and specific objection. While KPMG refers to multiple levels of hearsay in all the memos, KPMG does not identify specifically to which statements it objects. The only direct reference to any specific statements within the memos that KPMG challenges are those statements set forth on pages 11-14 and 28-29 of the Trustee's Opposition to the Motion for Summary Judgment. The Court will not go line by line through each memo to determine whether it contains multiple levels of hearsay and whether any exceptions to the hearsay rule apply. Accordingly, the Court will consider only those statements to which KPMG specifically objected as containing multiple levels of hearsay.
The specific statements at issue were made by Gillespie, Lutzker, and Ingalls during the February 1999 interviews. The memos reflect the witnesses made the following statements:
1. Gillespie said that she did not always take control and that Thomas and Ingalls were aware of that fact. (Ex. 35 at 4.)
2. Gillespie stated that Ingalls said they had to show the SEC ABT was managing the acquired company. He asked her to write down the things she did at each acquired entity to justify the Effective Date. When she was asked to document control, she told Ingalls that ABT did not have control at all. Ingalls responded, "Yeah, I know, and ABT could lose them all." (Ex. 35 at 3.)
3. Gillespie had discussions with others, including Thomas, where she said ABT did not have control by the effective date. (Ex. 35 at 3.)
4. Prior to [the] meeting [with the SEC], Gillespie met with Teri lannaconi from KPMG and Elliot Lutzker from Snow Becker. She said she told them, "so you don't want me to tell them we put together a bunch of letters so we could get profits up front, right? You basically want me to convince them that we did have control?" (Ex. 35 at 4.)
5. Gillespie stated if ABT needed the truth "flowered up" or stretched . . . she would do it (like for the SEC comment process). (Ex. 35 at 4.)
6. Gillespie "had discussions with others, including Johnny, that we did not always have control. She stretched truth, flowered it up. The SEC documents are not totally accurate. She met before SEC meeting with Teri [Iannaconi from KPMG] and Elliot [Lutzker of Snow Becker Krauss]. She asked whether she should convince them of effective control. Yes. She said you don't want them to know we put together a bunch of letters to get profits up front." (Ex. 37 at 9-10.)
7. Lutzker says Gillespie gave a 10-minute uninterrupted "unequivocable (sic: unequivocal)" presentation in which she essentially said that she took the keys, said "I'm in control. Anything you need out of the ordinary course, see me." 8. Ingalls stated Turner from the SEC "said it is only by the grace of god you are not being required to restate." (Ex. 39 at 6.)1. Hearsay Exceptions and Rule 403
Federal Rule of Evidence 804(b)(3) excludes from the hearsay rule statements against interest. Under the Rule, a statement against interest is a statement made by a declarant who is now unavailable "which was at the time of its making so far contrary to the declarant's pecuniary or proprietary interest, or so far tended to subject the declarant to civil or criminal liability, or to render invalid a claim by the declarant against another, that a reasonable person in the declarant's position would not have made the statement unless believing it to be true." Fed.R.Evid. 804(3). Accordingly, a statement is admissible under this exception if: (1) that the declarant is unavailable, (2) the statement is against the declarant's pecuniary, civil, or penal interest, and (3) a reasonable person would not have made the statement unless he believed it to be true. U.S. v. Beydler, 120 F.3d 985, 987 (9th Cir. 1997). The court must examine the statement at issue "in context, to see whether as a matter of common sense the portion at issue was against interest and would not have been made by a reasonable person unless he believed it to be true." U.S. v. Shryock, 342 F.3d 948, 981 (9th Cir. 2003) (quotation omitted). A declarant is unavailable if he is exempted from testifying on the ground of privilege. Fed.R.Evid. 804(a)(1). A declarant's assertion of her Fifth Amendment rights makes her unavailable for purposes of Rule 804. U.S. v. Benveniste, 564 F.2d 335, 341 (9th Cir. 1977).
Federal Rule of Evidence 801(d)(2)(E) defines as nonhearsay a statement offered against a party that is a statement by a co-conspirator of the party during the course and in furtherance of the conspiracy. To be "in furtherance," the statement "must advance a common objective of the conspiracy or set in motion a transaction that is an integral part of the conspiracy." U.S. v. Williams, 989 F.2d 1061, 1068 (9th Cir. 1993). To determine whether a statement was in furtherance, the court looks to the declarant's intent, not the statement's actual effect. Id.
Federal Rule of Evidence 403 provides that even relevant evidence may be excluded "if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury. . . ." The Rule is not designed to exclude any prejudicial evidence, only "unfairly" prejudicial evidence substantially outweighed by its probative value. U.S. v. Hankey, 203 F.3d 1160, 1172 (9th Cir. 2000). "[T]he application of Rule 403 must be cautious and sparing. Its major function is limited to excluding matter of scant or cumulative probative force, dragged in by the heels for the sake of its prejudicial effect." Id. Evidence is unfairly prejudicial when it has an "`undue tendency to suggest decision on an improper basis, commonly, though not necessarily, an emotional one.'"Id. (quoting Advisory Committee Notes to Federal Rule of Evidence 403). The balancing of the unfair prejudice and probative value lies within the district court's discretion.U.S. v. Larios, 640 F.2d 938, 941 (9th Cir. 1981).
2. Gillespie's Statements
None of Gillespie's statements to the Wilson Sonsini lawyers are admissible as statements of a co-conspirator. Gillespie's statements to the Wilson Sonsini lawyers were not made "during the course of" an alleged conspiracy. The Trustee's Response makes no attempt to establish the foundation of a conspiracy, and does not identify its participants, its time frame, or its objectives. Assuming a conspiracy existed, the Trustee does not explain how disclosing the existence and inner workings of that conspiracy to the Wilson Sonsini attorneys advanced a common objective of the conspiracy or set in motion a transaction that was an integral part of the conspiracy.
With respect to statements against interest, Gillespie is unavailable for the purposes of Rule 804. Gillespie has invoked her Fifth Amendment rights with respect to questions surrounding the Wilson Sonsini memos. (Trustee's Response to KPMG LLP's Mot. for Summ. J. (Imputation, In Pari Delicto, and Causation-Damages), Ex. 6, Vol. IV at 717-38.) The focus of the parties arguments therefore revolve around whether Gillespie's statements were against her interests such that a reasonable person would not have made the statements unless she believed them to be true.
a. Gillespie Statement 1
The first challenged statement is Gillespie's statement to the Wilson Sonsini attorneys that she did not always take control and that Thomas and Ingalls were aware of that fact. (Trustee's Response to KPMG LLP's Mot. for Summ. J. (Imputation, In Pari Delicto, and Causation-Damages), Vol. III, Ex. 35 at 4.) Only one level of hearsay is involved with this statement. At the time Gillespie made this statement, she was a defendant in the shareholders suit against ABT regarding ABT's use of effective date accounting. Consequently, an admission that ABT did not always take control tended to subject her to civil liability. Additionally, because Gillespie had attended and spoken at a meeting with the SEC regarding the SEC's investigation into ABT's use of effective date accounting, to the extent her statements to the SEC were not fully truthful, she may be subjected to criminal liability as well. See 18 U.S.C. § 1001 (criminalizing false statements in any matter within the jurisdiction of the executive, legislative, or judicial branch of the federal government). A reasonable person in these circumstances would not have stated that she did not have control over the companies unless she believed that to be true. The Court, in its discretion, will admit this statement under the statement against interest exception.
The Court does not find admission of this statement to be unfairly prejudicial. Only one layer of hearsay is involved and the statement fits comfortably within a hearsay exception. The statement is probative on the issue of whether ABT properly used effective date accounting, the very fraudulent conduct in which the Complaint alleges KPMG was involved. (Third Am. Compl. at ¶¶ 393-97.) Accordingly, the Court will not exclude this statement on summary judgment.
b. Gillespie Statement 2
The next challenged statement by Gillespie is that she told the Wilson Sonsini attorneys that Ingalls said they had to show the SEC that ABT was managing the acquired company. He asked her to write down the things she did at each acquired entity to justify the effective date. When she was asked to document control, she told Ingalls that ABT did not have control at all. Ingalls responded, "Yeah, I know, and ABT could lose them all." This statement involves multiple levels of hearsay. First, the statement is hearsay because it is Gillespie's out of court statement to the Wilson Sonsini lawyers. It is hearsay within hearsay because Gillespie's statement further describes out of court statements by herself and Ingalls in a prior conversation.
For the reasons stated above with respect to the first statement, the Court finds Gillespie's statement to the attorneys is a statement against interest. The Court further finds Gillespie's and Ingalls' statements to be statements against interest. At the time Gillespie made her statement that ABT did not have control, Ingalls had just informed her ABT had to justify to the SEC the use of the effective dates. Gillespie was the Vice President of Acquisitions and Operations and Co-President during the relevant time frames. (Trustee's Response to KPMG LLP's Mot. for Summ. J. (Imputation, In Pari Delicto, and Causation-Damages), Ex. 6 at 81.) Gillespie performed the acquisitions. (Id. at 81-82.) She signed many of the letters of intent and set the effective dates through negotiation with the sellers. (Id. at 31-33.) It would be contrary to Gillespie's employment and pecuniary interests to state that ABT did not have the required control of the acquisitions she oversaw which would require restatement of ABT's financial reports. No reasonable person in Gillespie's position, confronted with the knowledge that the SEC was investigating ABT's control over the acquisitions, would indicate that ABT in fact did not have control unless she believed it to be true.
Additionally, at the time the statement was made Ingalls was ABT's Chief Financial Officer ("CFO"). (Trustee's Response to KPMG LLP's Mot. for Summ. J. (Imputation, In Pari Delicto, and Causation-Damages), Vol. II, Ex. 17 at 61-62.) Prior to working for ABT, Ingalls worked for KPMG and advised ABT on using effective date accounting. (Id. at 16-20, 34-44, 48-55.) Due to his prior experience at KPMG and in his position as CFO for ABT, Ingalls would have been aware of the proper use of effective date accounting and the significance of ABT's failure to have control by the effective date after it had reported to the SEC its financial information. It would be contrary to Ingalls' employment and pecuniary interests to state that ABT did not have the required control of the acquisitions as reported in the financial statements he oversaw and where he previously had advised ABT its use of effective date accounting was proper. No reasonable person in Ingalls' position, confronted with the knowledge that the SEC was investigating ABT's control over the acquisitions, would indicate that ABT in fact did not have control unless he believed it to be true.
The Court does not find admission of these statements for purposes of summary judgment to be unfairly prejudicial. Although the statements are hearsay within hearsay, each level of hearsay falls within an exception. The statements are probative on the issue of whether ABT properly used effective date accounting, the very fraudulent conduct in which the Complaint alleges KPMG was involved. (Third Am. Compl. at ¶¶ 393-97.) Ingalls is available to testify, and KPMG can question him on the conversation. KPMG also can argue to the jury what it perceives to be the unreliable nature of these statements. To the extent the multiple layers of hearsay makes admission of the statements unfairly prejudicial, that prejudice does not substantially outweigh the statements' probative value. The Court therefore will not exclude the statement on summary judgment. c. Gillespie Statement 3
The third challenged Gillespie statement is that Gillespie had discussions with others, including Thomas, where she said ABT did not have control by the effective date. This statement contains two levels of hearsay. The first is Gillespie's statement to the attorneys. The second is Gillespie's alleged statements to Thomas and others that ABT did not have control by the effective date. As with the statements above, Gillespie's statement to the Wilson Sonsini attorneys is a statement against interest.
But because it is unclear when Gillespie had these discussions about whether ABT had control by the effective date, the Court cannot determine that making such a statement would be so far against her interests as to fall within Rule 804(b)(3). If these discussions were before any SEC investigation or shareholders suit, it is not evident that a reasonable person would not have made the statements unless they believed them to be true. Accordingly, without information about the timing of her discussions with Thomas and others regarding ABT's lack of control, the Court declines, in its discretion, to find this statement meets the statement against interest exception. The Court will not consider this statement on summary judgment.
d. Gillespie Statement 4
The fourth challenged statement is that prior to the meeting with the SEC, Gillespie met with Teri Iannaconi ("Iannaconi") from KPMG and Lutzker from Snow Becker. She said she told them, "so you don't want me to tell them we put together a bunch of letters so we could get profits up front, right? You basically want me to convince them that we did have control?"
This statement has multiple levels of hearsay. The first level of hearsay is Gillespie's statement to the attorneys that just before she went into a meeting with the SEC about ABT's use of effective date accounting she indicated the goal was to convince the SEC that ABT had control rather than had simply put together letters to get profits. This is a statement against interest. Gillespie made this statement to the Wilson Sonsini attorneys at a time when she knew her activities surrounding effective date accounting and her statements to the SEC were under scrutiny in a civil suit and potentially subjected her to criminal liability if she lied to the SEC. Any suggestion she did not have control would be against her interests and tend to subject her to civil or criminal liability.
Gillespie's statement contains within it another out of court statement by Gillespie of what she said to Lutzker and Iannaconi. The Court finds this statement also is a statement against interest. Gillespie made this statement just before the meeting with the SEC to convince the SEC that ABT in fact had control over the acquired entities as of the effective date. Gillespie's suggestion that she was going to testify that ABT had control when she knew it did not would be against her interests because any false statement to the SEC would be punishable as a crime. No reasonable person about to testify to the SEC on a matter would have made Gillespie's statement unless they believed it to be true.
The Court does not find admission of this statement for purposes of summary judgment to be unfairly prejudicial. Although the statement contains hearsay within hearsay, each level of hearsay falls within an exception. The statement is probative on the issue of whether ABT properly used effective date accounting, and whether Gillespie made misrepresentations to the SEC. This is the very fraudulent conduct in which the Complaint alleges KPMG was involved. (Third Am. Compl. at ¶¶ 393-97.) Further, it is probative as to whether KPMG had any knowledge that ABT's use of effective date accounting was suspect because Gillespie made the statement to Iannaconi from KPMG just before Iannaconi and Gillespie attended the meeting with the SEC to discuss the propriety of ABT's use of effective date accounting. Iannaconi will be available to testify and KPMG can question her regarding the contents of the conversation between Gillespie, Lutzker, and Iannaconi. Additionally, KPMG can argue to the jury the unreliable nature of these statements. To the extent the multiple levels of hearsay makes admission of the statements unfairly prejudicial, that prejudice does not substantially outweigh the statement's probative value. Consequently, the Court will not exclude this statement on summary judgment.
e. Gillespie Statement 5
The fifth challenged statement is Gillespie's statement that if ABT needed the truth "flowered up" or stretched, she would do it (like for the SEC comment process). This comment has only one level of hearsay, Gillespie's statement to the Wilson Sonsini attorneys. Gillespie's statement that she would flower up or stretch the truth as she did for the SEC comment process is a statement against interest. Gillespie made the statement at a time she was being sued for her participation in the use of effective date accounting, and to the extent she stretched the truth in front of the SEC, she faced criminal liability. No reasonable person in such circumstances would have stated they stretched the truth in front of the SEC unless they believed it to be true.
The Court does not find admission of this statement to be unfairly prejudicial. Only one layer of hearsay is involved and the statement fits comfortably within a hearsay exception. The statement is probative on the issue of whether ABT properly used effective date accounting, the very fraudulent conduct in which the Complaint alleges KPMG was involved. (Third Am. Compl. at ¶¶ 393-97.) Accordingly, the Court will not exclude the statement on summary judgment.
f. Gillespie Statement 6
The sixth challenged statement is Gillespie's statement that she had discussions with others, including Thomas, that ABT did not always have control. "She stretched truth, flowered it up. The SEC documents are not totally accurate. She met before SEC meeting with Iannaconi from KPMG and Lutzker of Snow Becker Krauss. She asked whether she should convince them of effective control. Yes. She said you don't want them to know we put together a bunch of letters to get profits up front."
This statement contains multiple levels of hearsay. The first is Gillespie's out of court statement to the Wilson Sonsini attorneys. As with the other statements, Gillespie's statement to the Wilson Sonsini attorneys that she stretched or flowered up the truth or that the SEC documents were not accurate are statements against interest for the reasons discussed above. The second layer of hearsay is Gillespie's recounting of a prior conversation she had with Lutzker and Iannaconi. As these notes reflect the same conversation as set forth in the memo, the Court will admit the notes as a statement against interest, and does not find unfair prejudice, for the same reasons.
3. Lutzker's Statement
The only statement made by Lutzker which KPMG specifically challenges is Lutzker's statement that Gillespie gave a 10-minute uninterrupted "unequivocable (sic: unequivocal)" presentation in which she essentially said that she took the keys, said "I'm in control. Anything you need out of the ordinary course, see me." Lutzker's statement to the Wilson Sonsini attorneys is hearsay. The Trustee offers no argument for why Lutzker's statement is admissible. Nothing about the statement establishes it was against Lutzker's interest at the time he spoke with the Wilson Sonsini attorneys. The Trustee offers no nonhearsay purpose for this statement. It could not affect KPMG's motive, intent, or knowledge as there is no evidence KPMG was aware of Lutzker's comments to the Wilson Sonsini attorneys. The statement is hearsay and the Court therefore will not consider Lutzker's statement on summary judgment.
4. Ingalls' Statement
The only statement by Ingalls which KPMG specifically challenges is Ingalls' statement that "Turner" from the SEC "said it is only by the grace of god you are not being required to restate." Ingalls' statement to the Wilson Sonsini attorneys is hearsay. The Trustee offers no argument for admitting this statement. Nothing about the statement suggests it was against Ingalls' interest when made. Ingalls was repeating another person's opinion as to ABT's good fortune in not having to restate its financials. Additionally, Ingalls' statement contains the hearsay statement of Turner. The Trustee offers no exception for admitting Turner's statement. The Trustee also offers no nonhearsay use of this statement. It could not demonstrate KPMG's knowledge, motive, intent, as there is no evidence anyone from KPMG ever heard Ingalls' or Turner's comment. Consequently, the statement is hearsay and the Court will not consider it on summary judgment.
III. CONCLUSION
IT IS THEREFORE ORDERED that KPMG LLP's Motion to Strike Trustee's Summary Judgment Exhibits Containing the Wilson Sonsini Work Product Documents (Doc. #741) is hereby GRANTED in part and DENIED in part. The Motion is GRANTED to the extent that the Court will not consider on summary judgment Gillespie's Statement 3, Ingalls' statement, and Lutzker's statement as detailed above. The motion is DENIED in all other respects.