Securities and Exchange Commission v Collins _ Aikman by keara

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									               Securities and Exchange Commission v. Collins & Aikman Corp.,
                           2009 WL 94311 (S.D.N.Y., Jan. 13, 2009)

United States District Court, S.D. New
York.                                           The Complaint alleges that the defendants
      SECURITIES and EXCHANGE                   were involved in a securities fraud from late
         COMMISSION, Plaintiff,                 2001 through early 2005. The SEC asserts
                      v.                        that C & A perpetrated various accounting
 COLLINS & AIKMAN CORP., et al., De-            frauds “designed in part to create the ap-
                  fendants.                     pearance that C & A's financial performance
          No. 07 Civ. 2419(SAS).                was improving under Stockman's direc-
                                                tion.”FN2 In 2001, C & A solicited a three
               Jan. 13, 2009.                   million dollar loan that would be represented
                                                for accounting purposes as income. The
         OPINION AND ORDER                      lender transferred the money to C & A in
                                                January 2002, and C & A recognized it as a
SHIRA A. SCHEINDLIN, District Judge.            reduction of costs that had the effect of in-
                                                creasing income. Pursuant to its understand-
I. INTRODUCTION                                 ing with the lender, C & A later transferred
                                                three million dollars in equipment to the
*1 Several discovery disputes have arisen in    lender. In late 2002, C & A further inflated
the context of a large securities fraud case    its reported income by purchasing assets
brought by the Securities and Exchange          from the same lender at a price exceeding
Commission (“SEC”) against the Collins &        their market value in return for “rebates” of
Aikman Corporation (“C & A”) and a num-         the excess.
ber of individual defendants. Specifically,
defendant David A. Stockman-former CEO          FN2. Complaint ¶ 20.
of C & A-has challenged the SEC's response
to his requests for production. These dis-      Supply contracts sometimes provide for
putes present important questions concern-      suppliers to pay rebates if the parties con-
ing the Government's discovery obligations      duct a specified volume of business. How-
in civil litigation.                            ever, Generally Accepted Accounting Prin-
                                                ciples (“GAAP”) permit customers to take
I. BACKGROUND FN1                               such rebates into account as purchase price
                                                reductions only when the specified business
FN1. The following facts, drawn from the        has been affected. In 2002, C & A's purchas-
Complaint, are taken from this Court's deci-    ing department arranged for suppliers to
sion denying defendants' motion to dismiss      create documents that tied rebates to past
the Complaint. See SEC v. Collins & Aik-        purchases so that the rebates would have the
man Corp., 524 F.Supp.2d 477, 479-82            immediate effect of increasing reported in-
(S.D.N.Y.2007). The repetition of these         come.
facts here is in no way a finding as to their
accuracy.                                       A variation of the false rebate transaction
involved purchases of capital equipment.           Violation of section 20(e) of the Exchange
Under GAAP and federal income tax law,            Act by aiding and abetting C & A's violation
the purchase price of capital equipment can-      of section 13(a) of the Exchange Act, which
not be immediately deducted as an expense         requires issuers of registered securities to
in the period it is incurred but can be depre-    file accurate reports with the SEC;
ciated over a time period that bears some
relation to the expected lifetime of the           Aiding and abetting C & A's violation of
equipment. GAAP specifies that because            section 13(b)(2) of the Exchange Act, which
rebates on capital equipment affect the pur-      requires issuers of registered securities to
chase price of the equipment, they cannot be      maintain accurate financial books and record
recognized as immediate income. Neverthe-         transactions in accordance with GAAP;
less, C & A improperly characterized re-
bates received on capital purchases as in-         Violation of section 13(b)(5) of the Ex-
come. Stockman and others produced false          change Act, which prohibits circumvention
documentation to support the fraudulent ac-       of internal controls;
counting treatment.
                                                   Violation of Exchange Act Rule 13b2-1,
C & A also misstated its earnings in the          which prohibits falsification of books sub-
Forms 10-Q and 10-K that it filed with the        ject to section 13(b)(2)(A);
SEC from 2001 through 2004 and repeatedly
misrepresented its financial condition to in-      Violation of Exchange Act Rule 13b2-2,
vestors. It additionally misstated its finances   which prohibits directors and officers and
to the General Electric Capital Corporation       those acting under their direction from inter-
in order to enhance its ability to borrow         fering with the investigation of an indepen-
money. The SEC alleges that Stockman              dent auditor; and
made each of these misstatements or that
they were made at his behest.                      Violation of Exchange Act Rule 13a-14,
                                                  which requires certain officers to file certifi-
*2 In connection with these and other trans-      cates in connection with reports filed pur-
actions, the SEC asserts that all defendants      suant to section 13(a).
violated section 10(b) of the Securities Ex-
change Act of 1934 (the “Exchange Act”)           II. THE DISCOVERY DISPUTES
and Exchange Act Rule 10b-5. The SEC al-
so asserts a variety of other claims against      This opinion addresses four distinct but re-
defendants. FN3                                   lated discovery disputes. Stockman served a
                                                  document request pursuant to Rule 34, ask-
FN3. The SEC makes the following addi-            ing the SEC to “produce for inspection and
tional claims against Stockman:                   copying the documents and things identi-
                                                  fied” in fifty-four separate categories.FN4In
Violation of section 17(a) of the Securities      response, the SEC produced 1.7 million
Act of 1933, which prohibits the offering of      documents (10.6 million pages) maintained
securities by means of false statements;          in thirty-six separate Concordance databas-
                                                  es-many of which use different metadata
protocols. FN5 Stockman raises the follow-
ing objections. First, the SEC failed to iden-     FN5. The databases do not match Stock-
tify documents responsive to requests for          man's individual requests. Neither party has
documents supporting particular factual al-        explained what each database contains.
legations in the Complaint, preferring in-
stead to “dump” 1.7 million potentially res-       FN6. 7/16/08 Letter from SEC to Stock-
ponsive documents on Stockman and then             man's attorney at 7-10, Ex. D to Def. Let.
suggesting that he is capable of searching
them to locate those that are relevant.            FN7. 8/29/08 Letter from SEC to the Court
Second, the SEC failed to perform a reason-        (“SEC Let.”) at 15.
able search for documents relating to ac-
counting principles governing supplier re-         FN8. I have already referenced Stockman's
bates-both in general and with respect to the      August 15, 2008 letter and the SEC's August
automobile industry. Instead, the SEC unila-       29, 2008 response. Stockman sent the Court
terally limited its search to three of its divi-   a reply on September 12, 2008
sions-and only if those divisions possessed        (“Def.Reply”). While an apology from a
“centralized compilations of non-privileged        court is a rare-possibly unprecedented-event,
documents dealing specifically with rebates        I hereby publicly apologize to the parties for
or accounting for rebates in the automobile        the lengthy delay in resolving these disputes.
industry.” FN6 Third, the SEC improperly           I have no good excuse-other than the usual
asserted the deliberative process privilege        press of business-but I recognize that a fail-
with regard to certain documents. Fourth,          ure to resolve disputes promptly impedes the
the SEC failed to search its own e-mails,          “just, speedy, and inexpensive determina-
attachments thereto, and other records             tion” of an action, as required by Rule 1 of
created and maintained solely in an electron-      the Federal Rules of Civil Procedure.
ic format that related to either “(i) the inves-
tigation and litigation of this matter or (ii)     These disputes raise four important ques-
the handling of several large cases unrelated      tions concerning the responses of a govern-
to C & A and the Commission's regulatory           ment agency to routine discovery requests.
role in matters relating to rebates and rebate     (1) Whether identifying responsive docu-
accounting.” FN7 The objections were               ments that have been organized by the pro-
raised in a series of letters rather than by       ducing party invades the protection accorded
formal motion. FN8                                 to attorney work-product and how a gov-
                                                   ernment agency-acting in its investigative
FN4. See Defendant David A. Stockman's             capacity-must respond to a request for the
First Set of Requests for Production of Doc-       production of documents. (2) Whether a
uments and Things (“Stockman Request”),            government agency may unilaterally restrict
Ex. A to 8/15/08 Letter from Andrew B.             the scope of its search based on an assertion
Weissman, Stockman's attorney, to the              of an “undue burden” on limited public re-
Court (“Def.Let.”). Twenty-five of those           sources. (3) How much information the
requests are for documents that support fac-       Government must disclose in order to allow
tual allegations in the complaint. See Re-         an adversary-and the court-to assess an ob-
quests 1-6, 11-24, and 27-31.                      jection based on the deliberative process
privilege. (4) Whether a government agency
may unilaterally exclude its own e-mail         Stockman notes that the SEC has in fact al-
from document production on the ground          ready segregated documents into “ „approx-
that most-but not all-will be privileged.       imately 175 file folders' “ that correlate to
                                                specific factual contentions and that these
III. PRODUCTION OF RESPONSIVE                   documents are now maintained in the usual
DOCUMENTS                                       course of agency business.FN12Stockman
                                                argues that by refusing to produce previous-
A. Request and Response                         ly identified documents, the SEC has pro-
                                                vided an impermissible “document dump”
*3 The SEC responded to each request for        that buries the relevant evidence. FN13 The
documents supporting a factual allegation in    SEC contends that the “compilation itself is
the Complaint by claiming that it “does not     attorney work product and its disclosure
maintain a document collection relating spe-    would reveal the „mental impressions, con-
cifically to the subject adressed.”FN9Rather    clusions, opinions, and legal theories' of
it provided an omnibus collection of indices,   Commission counsel.” FN14 The SEC also
investigative documents, scanned paper          concedes that the documents are not inac-
documents, and audio/video media.FN10It         cessible, as review of massive document da-
also provided the location within Concor-       tabases is routinely conducted in large-scale
dance document databases of documents           commercial litigation and presumably has
identified in the Complaint. The SEC con-       occurred or will occur in this case. Rather,
tends that this production comports with the    the SEC claims that Stockman seeks to de-
manner in which the documents “ „are kept       termine the its litigation strategy through
in the usual course of business.‟ “ FN11        this production.

FN9. Commission's Response to Stockman's        FN12. Def. Let. at 3 (quoting 8/1/08 Letter
First Set of Requests for Production (“SEC      from SEC to Stockman's attorney (“Aug. 1
Response”), Ex. B to Def. Let, at 6-12, 17-     Let.”), Ex. C to Def. Let.).
24, 26-32, 35-39. The responses note that
“Stockman will have the same capacity as        FN13. Id. Part of the parties' problem is se-
the Commission to search for documents          mantic. Stockman writes that he does “not
responsive to this request.” Id.                ask for any compilation of materials from
                                                the Commission, only underlying fact doc-
FN10. The SEC acknowledges that it pro-         uments that can easily be removed from any
vided Stockman with its complete file con-      such compilation.” Id. at 5.Accord id. at 3,
cerning C & A (with the exception of privi-     n. 4; Def. Reply at 2. Nonetheless, in its let-
leged documents), rather than the more li-      ter brief the SEC asserts privilege over “
mited universe of documents responsive to       „Selection and Compilation‟ Work Product.”
Stockman's requests for production. See         SEC Let. at 4. Not surprisingly, legal argu-
SEC Let. at 2.                                  ment by both parties then focused on wheth-
                                                er document “compilations” are discovera-
FN11. Id. at 3 (quoting Fed.R.Civ.P.            ble, despite Stockman's prior disclaimer. See
34(b)(2)(E)(i)).                                id. at 4-7; Def. Reply at 1-6. To the extent
that the “underlying fact documents” are one      ception” FN19 aimed at preventing requests
and the same as the existing compilations,        with “the precise goal of learning what the
the claim of work-product protection cannot       opposing attorney's thinking or strategy may
be overcome by semantics alone. This Opi-         be.”FN20Moreover, equity favors rejection
nion will address the requested materials as      of work product protection to a compilation
compilations.                                     of documents that are otherwise unavailable
                                                  or “beyond reasonable access.” FN21The
FN14. SEC Let. at 4 (quoting Fed.R.Civ.P.         Circuit has suggested that a court may per-
26(b)(3)(B)).Accord SEC Response at 5.            mit ex parte communication of the strategy
                                                  the withholding party wishes to conceal and
Moreover, Stockman demands access to a            in camera review of documents, so that the
collection of approximately 1,500 docu-           court may make an educated assessment
ments tagged by an SEC accountant using           whether production of the compilation will
forty-five subject and witness designations       reveal a party's litigation strategy.FN22
FN15 and two collections of documents pre-
viously assembled by Davis Polk & Ward-           FN18. See Gould Inc. v. Mitsui Mining &
well (“DPW”) during an internal investiga-        Smelting Co., 825 F.2d 676, 679-80 (2d
tion of C & A.FN16 The SEC objects that           Cir.1987) (citing Sporck v. Peil, 759 F.2d
the inclusion of those collections in the files   312 (3d Cir.1985)).See generally United
maintained by its lead litigation attorney is a   States v. Bryan, 339 U.S. 323, 331 (1950) (“
result of “the same independent judgment”         „For more than tliree centuries it has now
of the attorney and therefore subject to work     been recognized as a fundamental maxim
product protection. FN17                          that the public ... has a right to every man's
                                                  evidence.”) (quoting John Henry Wigmore,
FN15.See Def. Let. at 3 (citing Aug. 1 Let.       A Treatise on the Anglo-American System
at 2).                                            of Evidence in Trials at Common Law, In-
                                                  cluding the Statutes and Judicial Decisions
FN16.See id. at 5.                                of All Jurisdictions of the United States and
                                                  Canada, § 2192 (3d ed.1940)).
FN17. SEC Let. at 4 n. 9.
                                                  FN19. In re Grand Jury Subpoenas Dated
B. Applicable Law                                 Mar. 19, 2002 & Aug. 2, 2002, 318 F.3d
                                                  379, 386 (2d Cir.2003).Accord In re Grand
1. Attorney Work Product Protection               Jury Subpoenas Dated Mar. 19, 2002 &
Applied to Selection and Compilation              Aug. 2, 2002, No. M 11-189, 2002 WL
                                                  31040322, at *3 (S.D.N.Y. Sept. 12, 2002),
The Second Circuit has recognized that the        aff'd, 318 F.3d 379 (2d Cir.2003) (holding
selection and compilation of documents may        that the burden of proof lies on the party as-
fall within the protection accorded to attor-     serting the protection of the work product
ney work product, despite the general avail-      doctrine).
ability of documents from both parties and
non-parties during discovery.FN18However,         FN20. In re Grand Jury Subpoenas Dated
it has labeled this protection a “narrow ex-      Oct. 22, 1991 & Nov. 1, 1991, 959 F.2d
1158, 1166-67 (2d Cir.1992).Accord Gould,        Sept. 12, 2002).
825 F.2d at 680 (noting that protection “de-
pends upon the existence of a real, rather       Several cases that found a compilation of
than speculative, concern that the thought       documents subject to work product protec-
processes of [opposing] counsel in relation      tion addressed requests for compilations
to pending or anticipated litigation would be    prepared to assist witnesses, rather than re-
exposed”).                                       quests for information already arranged by
                                                 subject matter.FN26 Those requests focused
FN21. Gould, 825 F.2d at 680. These factors      on the attorney's thought process concerning
are largely redundant of the showings neces-     witness preparation and strategy, rather than
sary to overcome the assertion of work           the broader facts of the case. On the other
product protection itself. SeeFed.R.Civ.P.       hand, Second Circuit cases rejecting applica-
26(b)(3).                                        tion of work product protection addressed
                                                 compilations of documents not otherwise
FN22. See In re Grand Jury Subpoenas             available FN27 or large compilations.FN28
Dated Mar. 19, 2002 & Aug. 2, 2002, 318
F.3d at 386.                                     FN26. See, e.g., Berkey Photo, Inc. v.
                                                 Eastman Kodak Co., 74 F.R . D. 613
*4 If a court does find that work product        (S.D.N.Y.1977); Sporck, 759 F.2d at 312.
protection applies to a document compila-        Cf. SEC v. Morelli, 143 F.R.D. 42, 47
tion, the requesting party must show “sub-       (S.D.N.Y.1992) (prohibiting deposition of
stantial need” for the materials and inability   SEC attorney based on the work product
to obtain the substantial equivalent by other    doctrine where defendant's Rule 30(b)(6)
means without “undue hardship.” FN23The          notice was intended to “ascertain how the
showing of need must be “ „highly persua-        SEC intends to marshall the facts, [discover
sive‟ “ when discovery of “core work prod-       the] documents and testimony in [the SEC's]
uct is sought.” FN24“Core work product” is       possession, and to discover the inferences
defined as an attorney's “mental impres-         that [the SEC] believes properly can be
sions, conclusions, opinions, or legal theo-     drawn from the evidence it has accumu-
ries” and is contrasted with “ordinary fact      lated”).
work product.” FN25
                                                 FN27. See, e.g., In re Grand Jury Subpoe-
FN23.Fed.R.Civ.P. 26(b)(3).                      nas Dated Mar. 19, 2002 & Aug. 2, 2002,
                                                 318 F.3d at 387.
FN24. McGrath v. Nassau Co. Health Care
Corp., No. 00 Civ. 6454, 2001 WL 1549260,        FN28. See Grand Jury Subpoenas Dated
at *3 (E.D.N.Y. Nov. 30, 2001) (quoting In       Oct. 22, 1991 & Nov. 1, 1991, 959 F.2d at
re Grand Jury Proceedings, 219 F.3d 175,         1167.
190 (2d Cir.2000)).
                                                 2. Form of Document Production
FN25. In re Grand Jury Subpoenas Dated
Mar. 19, 2002 & Aug. 2, 2002, No. M 11-          Under Rule 34 of the Federal Rules of Civil
189, 2002 WL 31040322, at *4 (S.D.N.Y.           Procedure, a party has two options for the
production of documents in response to a         es, documents produced pursuant to Rule 34
discovery request. The litigant may either       will be organized by subject matter or cate-
produce documents “as they are kept in the       gory.FN33The provision prohibits “simply
usual course of business or must organize        dumping large quantities of unrequested ma-
and label them to correspond to the catego-      terials onto the discovering party along with
ries in the request.”FN29The Advisory            the items actually sought.”FN34
Committee Note states that the purpose of
this new rule language added in 1980-was to      FN32. Pass & Seymour, Inc. v. Hubbell Inc.,
eliminate the practice of “ „deliberately        No. 07 Civ. 945, 2008 WL 4240490
[mixing] critical documents with others in       (N.D.N.Y. Sept. 12, 2008) (citing, inter alia,
the hope of obscuring significance.‟ “ FN30      Johnson v. Kraft Foods N. Am., 236 F.R.D.
Allowing the production of documents as          535, 540-41 (D.Kan.2006)).
they “are actually kept in the usual course of
business” was intended to minimize the bur-      FN33. See, e.g., Estate of Townes Van
den of production while maintaining the “in-     Zandt v. Eggers, No. 05 Civ. 10661, 2007
ternal logic reflecting business use.” FN31      WL 3145097, at *2 (S.D.N.Y. Oct. 26,
                                                 2007); Morgan v. City of New York, No. 00
FN29. Fed.R.Civ.P. 34(b)(2)(E)(ii).              Civ. 9172, 2002 WL 1808233, at *4
                                                 (S.D.N.Y. Aug. 6, 2002).
FN30. Fed.R.Civ.P. 341980 Advisory
Committee Note (quoting Section of Litiga-       FN34. 8A Charles Alan Wright, Arthur R.
tion, Am. Bar Ass'n, Report of the Special       Miller, and Richard L. Marcus, Federal
Committee for the Study of Discovery             Practice & Procedure, § 2213 (2008) (citing
Abuse, at 22 (1977), reprinted in 92 F.R.D.      Rothman v. Emory Univ., 123 F.3d 446 (7th
149 (1982)).                                     Cir.1997)).

FN31 .Report of the Special Committee for        C. Discussion
the Study of Discovery Abuse, 92 F.R.D. at
177. Accord CooperVision, Inc. v. CIBA           1. Work Product Protection
Vision Corp., No. 06 Civ. 149, 2007 WL
2264848, at *4 (E.D.Tex. Aug. 6, 2007)           It is first necessary to determine the level of
(“Clearly, the underlying assumption was         protection afforded to the selection of doc-
that production of records as kept in the        uments by an attorney to support factual al-
usual course of business ordinarily will         legations in a complaint. Such documents
make their significance pellucid.”).             are not “core” work product. Core work
                                                 product constitutes legal documents drafted
Rule 34 does not elaborate on the term           by an attorney-her mental impressions, con-
“usual course of business .” A party choos-      clusions, opinions, and legal theories. This
ing to produce documents as maintained in        highest level of protection applies to a com-
the ordinary course of business “bears the       pilation only if it is organized by legal
burden of demonstrating that the documents       theory or strategy. The SEC's theory-that
made available were in fact produced con-        every document or word reviewed by an at-
sistent with that mandate.”FN32In most cas-      torney is “core” attorney work product-
leaves nothing to surround the core. FN35          (N.D. Cal. June 21, 2005). While the SEC
The first step in responding to any document       correctly notes that the defendants in
request is an attorney's assessment of relev-      Plumbers & Pipefitters had not asked for a
ance with regard to potentially responsive         pre-existing compilation, see SEC Let. at 6
documents. It would make no sense to then          n. 13, the substance of the request in that
claim that an attorney's determination of re-      case-“documents actually referenced in the
levance shields the selection of responsive        [Complaint] or which otherwise constitute
documents from production.                         evidence supporting or relating to those al-
                                                   legations”-is identical to the disputed re-
FN35. While I am not aware of how the              quests here. Compiling responsive docu-
SEC identified the documents for its compi-        ments prior to a proper request cannot shield
lations, if this was achieved through the use      them from discovery.
of digital search techniques, it is even less
likely that true “work product”-attorneys'         Even if this compilation were entitled to any
analysis and litigation strategy-would be          work product protection-on the tenuous
gleaned from document compilations.                theory that the compilation was prepared in
                                                   anticipation of litigation-Stockman has
*5 Moreover, the selection of documents            demonstrated that he has a “substantial need
according to facts alleged in a pleading does      for the materials ... and cannot, without un-
not elevate the compilation to core work           due hardship, obtain their substantial equiva-
product. Although a complaint includes             lent by other means.” FN38 The need for the
some amount of legal theory and strategy,          material is obvious. While the responsive
Rule 11 of the Federal Rules of Civil Proce-       documents exist somewhere in the ten mil-
dure requires all parties to have “evidentiary     lion pages produced by the SEC, the produc-
support” for the factual contentions in their      tion does not respond to the straightforward
pleadings. FN36 Given that requirement,            request to identify documents that support
producing the compilations of documents            the allegations in the Complaint, documents
that support the factual allegations of a          Stockman clearly must review to prepare his
complaint reveals no more than that already        defense.
revealed by the filing of the complaint. Thus
is it no surprise that in one recent case out-     FN38. Fed.R.Civ.P. 26(b)(3).
side the Circuit, a court required plaintiffs to
provide the location of documents that sup-        The question of “undue hardship” is more
ported factual allegations in the complaint,       interesting. The SEC contends that Stock-
even when the documents were already in            man can search through the ten million pag-
defendants' possession in an omnibus pro-          es and find substantially the same docu-
duction similar to the one in this case. FN37      ments identified by the SEC without imping-
                                                   ing on the thought processes of the SEC at-
FN36. Fed.R.Civ.P. 11(b)(3).                       torneys. Indeed-at significant expense and
                                                   delay-Stockman could search the document
FN37. See Plumbers & Pipefitters Local             databases using appropriate search terms,
572 Pension Fund v. Cisco Systems, Inc.,           but the inaccuracy of such searches is by
No. C01-20418, 2005 WL 1459555, at *6              now relatively well known.FN39A page-by-
page manual review of ten million pages of       did note that the “equities might not favor
records is strikingly expensive in both          the application of the ... exception if the files
monetary and human terms and constitutes         from which documents had been culled ...
“undue hardship” by any definition.FN40          were ... beyond reasonable access .... “
                                                 FN42 It is patently inequitable to require a
FN39. See George L. Paul and Jason R. Ba-        party to search ten million pages to find
ron, Information Inflation: Can the Legal        documents already identified by its adver-
System Adapt?, 13 Rich. J.L. & Tech. 10, at      sary as supporting the allegations of a com-
*36-*40 (2007); Jason R. Baron, David D.         plaint. Thus, under either the undue hardship
Lewis, and Douglas W. Oard, TREC-2006            analysis of Rule 26 or the equities suggested
Legal Track Overview, available at http://       by the Second Circuit, the 175 file folders
trec.nist.gov/pubs/trec15/papers/LEGAL06.        prepared by the SEC's attorney are not pro-
OVERVIEW.pdf (noting in a sophisticated          tected by the work product doctrine.
study that compared to more complex and
costly techniques, Boolean searching located     FN41. Gould, 825 F.2d at 680.
only 57% of known relevant documents,
while expert manual searching located            FN42. Id.
68%). Such a search would be further fru-
strated by the differing metadata protocols      *6 By the same token, neither the set of
used in the numerous Concordance databas-        documents labeled by an SEC accountant
es.                                              nor the documents provided by DPW are
                                                 entitled to any work product protection.
FN40. The SEC believes that Stockman can         These compilations do not reflect the “men-
undertake this search without incurring an       tal impressions, conclusions, opinions, and
“undue cost and burden” and that he likely       legal theories” of counsel for the SEC. The
will undertake such a search even if the SEC     SEC's claim that the documents were only
is required to identify which documents in       retained as a collection because of the deci-
its collection support the various specific      sion of counsel is not enough to place them
factual allegations in its Complaint. This       within the realm of its attorney's work prod-
belief-while perhaps accurate-is disputed by     uct. FN43 Permitting a party to shield pro-
Stockman and is essentially irrelevant. Even     duction of a compilation simply because an
if Stockman is willing to assume the cost of     attorney makes the decision to continue to
this search, in this Court's view it is unduly   hold the documents in the same manner
burdensome and wholly unnecessary.               would result in impermissible gamesman-
                                                 ship and an unwarranted expansion of the
Moreover, the Second Circuit has expressly       work product doctrine.
stated that equitable considerations may be
weighed when determining the scope of the        FN43. Given that the Office of the United
“narrow exception” protecting the “selection     States Attorney for the Southern District of
and compilation of documents by counsel          New York produced the DPW binders in the
for litigation purposes” based on the work       parallel criminal prosecutions-presumptively
product doctrine.FN41While not deciding          to Stockman, along with his three co-
the question in that case, the Second Circuit    defendants-and withdrew its prior objection
to this production, see 7/30/08 Letter from
Marc P. Berger, Assistant United States At-       FN44. Surprisingly, this term is neither de-
torney, to the Court, Ex. F to Def. Let., the     fined nor explained in the advisory commit-
Court is somewhat baffled as to why the           tee notes. Nor are there records of congres-
SEC continues to object to their production       sional debate or cases defining the term. In
in this case.                                     contrast, there is substantial background
                                                  concerning Federal Rule of Evidence
2. Form of Production                             803(6), which addresses “regularly con-
                                                  ducted business activity.” I will discuss this
The SEC contends that even if the compila-        provision below. As Federal Rule of Evi-
tions are not protected as work product, it       dence 803(6) predates the relevant provision
has the option of producing the complete,         in Federal Rule of Civil Procedure 34 by six
unfiltered, and unorganized investigatory         years, the history of the evidentiary rule is
file, as this is how the documents are main-      instructive-albeit non-binding-to the inter-
tained in the usual course of its business. As    pretation of the procedural rule.
noted above, Rule 34 mandates that docu-
ments must be produced organized by the           FN45. Black's Law Dictionary 211 (8th
subjects of the request or organized as they      ed.2004).
are kept in the usual course of business by
the producing party. The key to this dichot-      FN46. Id.
omy is the assumption that in either case the
documents will be organized-that records          Congress debated a similar issue in the con-
kept in the usual course of business would        text of Federal Rule of Evidence 803(6), the
not be maintained in a haphazard fashion.         exception to the hearsay rule for records of
Thus regardless of the form chosen, the pro-      regularly conducted business activity. The
duction will be useful to the requesting par-     original proposal for the Rule-submitted by
ty, and neither choice will inject unneces-       the United States Supreme Court to Con-
sary time and cost into litigation.               gress-would have permitted a record made
                                                  “in the course of a regularly conducted ac-
In order to determine what constitutes an         tivity” to be admissible in certain circums-
appropriate production of records as they are     tances. FN47 The House Judiciary Commit-
kept in the “usual course of business,” it is     tee concluded, however, that “there were
first necessary to define that term.FN44To        insufficient guarantees of reliability in
begin with, not every litigant is a business or   records made in the course of activities fall-
functions in the manner of a business.            ing outside the scope of „business' activities
Black's Law Dictionary defines a business         as that term is broadly defined in 28 U.S.C.
as “[a] commercial enterprise carried on for      § 1732.” FN48 The House Committee thus
profit; a particular occupation or employ-        amended the proposed Rule to limit its
ment habitually engaged in for livelihood or      scope to business records, defining “busi-
gain.”FN45Only as a secondary definition,         ness” to include “business, profession, oc-
business constitutes “[b]y extension, trans-      cupation and calling of every kind.”FN49
actions or matters of a noncommercial na-
ture.” FN46                                       FN47. Fed.R.Evid. 803(6), 1972 Advisory
Committee Note. The justification for the
Rule is found in the 1972 Advisory Commit-       By rough analogy to Rule 803(6), the option
tee Note to the proposed rule: “The element      of producing documents “as they are kept in
of unusual reliability of business records is    the usual course of business” under Rule 34
said variously to be supplied by systematic      requires the producing party to meet either
checking, by regularity and continuity which     of two tests. First, this option is available to
produce habits of precision by actual expe-      commercial enterprises or entities that func-
rience of business in relying upon them, or      tion in the manner of commercial enterpris-
by a duty to make an accurate records as         es. Second, this option may also apply to
part of a continuing job or occupation.” Id.     records resulting from “regularly conducted
The Committee noted that the key concepts        activity.” FN53Where a producing party's
in this exception are “routineness and repeti-   activities are not “routine and repetitive”
tiveness.” Id.                                   such as to require a well-organized record-
                                                 keeping system-in other words when the
FN48. 28 U.S.C. § 1732 refers in pertinent       records do not result from an “ordinary
part to “any business, institution, member of    course of business”-the party must produce
a profession or calling, or any department or    documents according to the sole remaining
agency of government.”                           option under Rule 34: “organize[d] and la-
                                                 bel[ed] ... to correspond to the categories in
FN49. Fed.R.Evid. 803(6), 1972 Advisory          the request.” FN54
Committee Note.
                                                 FN53. Cf. United States v. Feliz, 467 F.3d
*7 The Senate Judiciary Committee elimi-         227 (2d Cir.2006) (permitting autopsy re-
nated the business requirement inserted by       ports prepared by the Office of the Chief
the House, but the business provision was        Medical Examiner of New York to be ad-
eventually reinstated in the Conference          mitted as business records because this of-
Committee.FN50“The Conferees changed             fice conducts thousands of routine autopsies
the definition of „business' contained in the    every year); United States v. Doyle, 130
House provision in order to make it clear        F.3d 523 (2d Cir.1997) (distinguishing be-
that the records of institutions and associa-    tween records created in the course of “regu-
tions like schools, churches and hospitals are   larly conducted business activity” admissi-
admissible under [Rule 803(6) ].”FN51 In         ble under Rule 803(6) and “records of public
its final form, Rule 803(6) defines business     offices or agencies” admissible under Rule
as any “business, institution, association,      803(8).
profession, occupation, and calling of every
kind, whether or not conducted for profit.”      FN54. Fed.R.Civ.P. 34(b)(2)(E)(i).
FN52
                                                 The logic of Rule 34 supports this limitation.
FN50. See id.                                    When records do not result from “routine
                                                 and repetitive” activity, there is no incentive
FN51. Id.                                        to organize them in a predictable system.
                                                 The purpose of the Rule is to facilitate pro-
FN52. Fed.R.Evid. 803(6).                        duction of records in a useful manner and to
minimize discovery costs; thus it is reasona-      in large disorderly databases. The docu-
ble to require litigants who do not create         ments can only be provided in a useful man-
and/or maintain records in a “routine and          ner if the agency organizes or labels them to
repetitive” manner to organize the records in      correspond to each demand. Based on the
a usable FN55 fashion prior to producing           SEC's submission, it appears that this has
them.                                              already been done through the lead litigation
                                                   attorney's creation of the 175-plus file fold-
FN55. Cf.Fed.R.Civ.P. 34(b)(2)(E)(ii) (“[A]        ers at issue.
party must produce [electronically stored
information] in a form ... in which it is ordi-    *8 Therefore, the SEC must respond to
narily maintained or in a reasonably usable        Stockman's request for production by pro-
form ....”) (emphasis added).                      viding him with the documents that respond
                                                   to those requests. Stockman has not re-
How does this rule apply to the Govern-            quested the SEC file folders as such, but
ment? In many cases, the Government acts           many of them correlate with the factual alle-
in the manner of a commercial entity by-for        gations in the Complaint, the subjects of the
instance-purchasing equipment from defense         requests. Thus, to the extent that one or
contractors, selling maps to backpackers,          more of the 175 folders assembled by the
and executing contracts to construct build-        SEC's attorneys constitute the complete set
ings. In such cases, records will be generat-      of documents relevant to a particular re-
ed reflecting purchases and sales, employee        quest, they must be produced. Similarly, to
performance and salaries. Presumptively            the extent that compilations made by the
those records are created and maintained in        SEC's accountant and those contained in the
an efficient fashion such that production as       DPW binders are responsive to a request,
they are kept in the ordinary course of busi-      they also must be produced.
ness would allow for easy analysis of-for
example-a contract, False Claims Act, or a         IV. GENERAL SUBJECT-MATTER
Title VII claim.                                   DOCUMENTS

However conducting an investigation-which          A. Request and Response
is by its very nature not routine or repetitive-
cannot fall within the scope of the “usual         Stockman has also made six requests for
course of business.” While the SEC routine-        documents related to SEC enforcement ac-
ly collects and maintains regulatory submis-       tions involving rebates, SEC policy related
sions such 10-K reports, in its investigative      to rebates, rebate policy specific to the au-
capacity the agency conducts tailored probes       tomotive industry, a particular General Mo-
of a company or an industry, requiring the         tors filing, and testimony concerning auto-
gathering of records from diverse sources.         motive rebates. FN56 Stockman justified
Many if not most of the 1.7 million docu-          these requests by noting that a key allegation
ments in the SEC production here were like-        in the Complaint is that Stockman partici-
ly collected in the agency's investigatory         pated in C & A's improper accounting for
role. Thus it is no surprise that the complete     rebates received from suppliers. Stockman
collection is maintained as it was collected-      argues that such rebate transactions were
common in the automobile industry during          to Def. Let.). The SEC inquired within the
the relevant time period. Finally, Stockman       Division of Enforcement, the Office of the
asserts that “[b]ecause the accounting prin-      Chief Accountant, and the Division of Cor-
ciples applicable to C & A's rebate transac-      porate Finance.
tions play a central role in the Commission's
allegations ... [he is] seeking documents in      FN60. SEC Let. at 9.
the Commission's possession, custody or
control concerning principles governing ac-       FN61. Id. at 10.
counting for such rebate transactions and
specific accounting practices in the automo-      B. Applicable Law
bile industry for such transactions during the
relevant period[.]” FN57 The SEC objected         “A district court has wide latitude to deter-
to each of these requests as overbroad and        mine the scope of discovery.”FN62The gen-
unduly burdensome and to some as vague,           eral scope of discovery in civil litigation is
ambiguous, and lacking reasonable particu-        defined by Rule 26(b)(1).
larity. FN58 Moreover, the SEC has rejected
Stockman's proposal that it establish a           FN62. In re Agent Orange Product Liab. Li-
search protocol that would balance identifi-      tig., 517 F.3d 76, 103 (2d Cir.2008).
cation and disclosure of relevant documents
against a strain on agency resources. Rather,     Parties may obtain discovery regarding any
the SEC unilaterally limited its search to        nonprivileged matter that is relevant to any
“centralized compilations” in three selected      party's claim or defense.... For good cause,
divisions; these searches turned up noth-         the court may order discovery of any matter
ing.FN59It claims that the “massive endea-        relevant to the subject matter involved in the
vor” of manual searches of large collections      action. Relevant information need not be
of paper records from analogous cases is          admissible at the trial if the discovery ap-
“neither justified nor required.” FN60It also     pears reasonably calculated to lead to the
states that records concerning rebate policy      discovery of admissible evidence.
and regulatory enforcement are maintained
“by registrant, not topic” and primarily in       *9 A court must limit the “frequency or ex-
paper form, making the burden of produc-          tent of discovery” if one of three conditions
tion disproportionate to the value of the liti-   in Rule 26(b)(2)(C) is present. The third lim-
gation.FN61                                       its production when “the burden or expense
                                                  of the proposed discovery outweighs its like-
FN56. See Stockman Request at 12-14 (Re-          ly benefit, considering the needs of the case,
quests 42-43, 45-48).                             the amount in controversy, the parties' re-
                                                  sources, the importance of the issues at stake
FN57. Def. Let. at 11-12.                         in the action, and the importance of the dis-
                                                  covery in resolving the issues.”FN63The
FN58. See SEC Response at 47-49, 50-55.           burden or expense may be defined in terms
                                                  of time, expense, or even the “adverse con-
FN59. Id. at 14-15 (quoting 7/16/08 Letter        sequences of the disclosure of sensitive, al-
from SEC to Stockman's attorney at 9, Ex. D       beit unprivileged material.” FN64
                                                 about disclosure or discovery of electroni-
FN63. Fed.R.Civ.P. 26(b)(2)(C)(iii).             cally stored information .... “ FN67 Had this
                                                 been accomplished, the Court might not now
FN64. Johnson v. Nyack Hosp., 169 F.R.D.         be required to intervene in this particular
550, 562 (S.D.N.Y.1996) (citing Herbert v.       dispute. I also draw the parties' attention to
Lando, 441 U.S. 153, 177 (1979)).                the recently issued Sedona Conference Co-
                                                 operation Proclamation, which urges parties
C. Discussion                                    to work in a cooperative rather than an ad-
                                                 versarial manner to resolve discovery issues
The SEC's blanket refusal to negotiate a         in order to stem the “rising monetary costs”
workable search protocol responsive to these     of discovery disputes. FN68 The Proclama-
requests is patently unreasonable. Stockman      tion notes that courts see the discovery rules
has made a convincing case that he is seek-      “as a mandate for counsel to act coopera-
ing relevant information well within the         tively.” FN69Accordingly, counsel are di-
scope of discovery permitted by Rule             rectly to meet and confer forthwith and de-
26(b)(1) and that proportionality considera-     velop a workable search protocol that would
tions should not foreclose a broader search      reveal at least some of the information de-
effort than that already conducted by the        fendant seeks. If the parties cannot craft an
SEC. Although party resources must be tak-       agreement, the Court will consider the ap-
en into account under Rule 26(b)(2)(C),          pointment of a Special Master to assist in
these requests seem particularly reasonable      this effort.
in an action initiated by the SEC. Like any
ordinary litigant, the Government must ab-       FN66. Fed.R.Civ.P. 26(f)(3)(B).
ide by the Federal Rules of Civil Procedure.
It is not entitled to special consideration      FN67. Fed.R.Civ.P. 26(f)(3)(C).
concerning the scope of discovery, especial-
ly when it voluntarily initiates an action.      FN68. Shira A. Scheindlin, Daniel J. Capra,
FN65                                             & The Sedona Conference, Electronic Dis-
                                                 covery and Digital Evidence, Cases and Ma-
FN65. The calculus might differ where the        terials 454 (2008) (quoting The Sedona Con-
Government must defend against allegations       ference Cooperation Proclamation).Accord
that may have little merit but can be enorm-     Mancia v. Mayflower Textile Servs. Co.,
ously expensive to litigate.                     253 F.R.D. 354, 365 (D.Md.2008) (describ-
                                                 ing the unnecessary costs resulting from a
With few exceptions, Rule 26(f) requires the     failure to engage in cooperative discovery
parties to hold a conference and prepare a       practices).
discovery plan. The Rule specifically re-
quires that the discovery plan state the par-    FN69. Scheindlin, Capra, & The Sedona
ties' views and proposals with respect to “the   Conference at 455 (citing Board of Regents
subject on which discovery may be needed         of Univ. of Neb. v. BASF Corp., No. 04 Civ
... and whether discovery should be con-         3356, 2007 WL 3342423, at *5 (D.Neb.
ducted in phases or be limited to or focused     Nov. 5, 2007) (“[T]he overriding theme of
on particular issues”FN66 and “any issues        recent amendments to the discovery rules
has been open and forthright sharing of in-        See id. at 2 (noting document 8A, which had
formation by all parties to a case with the        not been included in the prior privilege log).
aim of expediting case progress, minimizing        See also Def. Let. at 19 n. 17 (noting the
burden and expense, and removing conten-           failure to identify responsive documents).
tiousness as much as practicable. If counsel
fail in this responsibility-willfully or not-      FN71. See Def. Let. at 19.
these principles of an open discovery
process are undermined, coextensively inhi-        FN72. See id. at 19-20.
biting the courts' ability to objectively re-
solve their clients' disputes and the credibili-   FN73. See id. at 20.
ty of its resolution.”).
                                                   FN74. See Revised Privilege Log.
V. DELIBERATIVE PROCESS
PRIVILEGE                                          B. Applicable Law

A. Request and Response                            *10 The deliberative process privilege pro-
                                                   tects from disclosure “ „documents reflect-
The SEC has refused to produce twenty-nine         ing advisory opinions, recommendations and
responsive documents based on assertions of        deliberations comprising part of a process by
the deliberative process privilege. FN70           which governmental decisions and policies
Twenty-five are responsive to Requests 33          are formulated.‟ “ FN75 The privilege is
through 37, which demand documents re-             intended “ „to enhance the quality of agency
lated to new accounting standards being            decisions, by protecting open and frank dis-
considered by the Emerging Issues Task             cussion among those who make them within
Force within the Financial Accounting Stan-        the Government.‟ “ FN76
dards Board. FN71 Three relate to Request
47, which concerned a restatement and new          FN75. National Council of La Raza v. De-
rebate accounting policy for General Mo-           partment of Justice (“NCLR”), 411 F.3d
tors. FN72 The last is responsive to Re-           350, 356 (2d Cir.2005) (quoting Tigue v. U
quests 40 and 42, which relate to accounting       .S. Dep't of Justice, 312 F.3d 70, 76 (2d
justifications used in other enforcement ac-       Cir.2002)).
tions concerning rebates. FN73 The SEC has
produced a privilege log that lists the type of    FN76. Tigue, 312 F.3d at 76 (quoting De-
document, the date, the document's length,         partment of the Interior v. Klamath Water
the author or authors, the addressees, and a       Users Protective Ass'n, 532 U.S. 1, 8-9
brief statement of the subject. FN74               (2001)).

FN70. See 8/19/08 Revised Privilege Log,           In order to qualify for the privilege, a docu-
Ex. 1 to SEC Let. One additional document          ment must be “predecisional” and “delibera-
was named but not produced in response to          tive.” FN77A document is predecisional if
Stockman's note in his initial letter that the     it was “ „prepared in order to assist an agen-
SEC had failed to identify any materials ad-       cy decisionmaker in arriving at his deci-
dressing a particular request for production.      sion.‟ “ FN78 The agency claiming privi-
lege “must be able to demonstrate that ... the     v. Sears, Roebuck & Co., 421 U.S. 132, 151
document for which ... privilege is claimed        n. 18 (1975)).
related to a specific decision, facing the
agency.” FN79 Moreover, the privilege              FN80. Grand Cent. P'ship, 166 F.3d at 482
does not extend to “ „purely factual‟ materi-      (quoting Hopkins v. U.S. Dep't of Housing
al” FN80 or subjective discussions insofar         & Urban Dev., 929 F.2d 81, 85 (2d
as they were later adopted or incorporated in      Cir.1991)).
a final agency opinion. FN81 A document is
deliberative if it is “ „actually ... related to   FN81. See NCLR, 411 F.3d at 356 (citing
the process by which policies are formu-           Sears, 421 U.S. at 161).
lated.‟ “ FN82 Factors used to determine
whether a document is deliberative include         FN82. Id. (quoting Grand Cent. P'ship, 166
“whether the document „(i) formed an essen-        F.3d at 482).
tial link in a specified consultative process,
(ii) reflects the personal opinions of the         FN83. Grand Cent. P'ship, 166 F.3d at 482
writer rather than the policy of the agency,       (quoting Providence J. Co. v. U.S. Dep't of
and (iii) if released, would inaccurately re-      the Army, 981 F.2d 552, 559 (1st
flect or prematurely disclose the views of         Cir.1992)).Accord Tigue, 312 F.3d at 80
the agency.‟ “ FN83                                (quoting Grand Cent. P'ship, 166 F.3d at
                                                   482) (requiring that a privileged document “
FN77. NCLR, 411 F.3d at 356 (quoting               „bear on the formulation or exercise of poli-
Grand Cent. P'ship v. Cuomo, 166 F.3d 473,         cy-oriented judgment‟ ”).
482 (2d Cir.1999)). The privilege also only
applies when invoked by the head of an             C. Discussion
agency or a designated subordinate. See
Resolution Trust Corp. v. Diamond, 137             As an initial matter, the privilege log that the
F.R.D. 634, 641 (S.D.N.Y.1991). Although           SEC has produced is deficient. The listings
the SEC failed to follow this formality in-        for documents 1 through 4 are good exam-
itially, it corrected this error after Stockman    ples. The SEC has provided Stockman and
noted it in his letter. See 8/27/08 Declaration    the Court with no more useful information
of Florence E. Harmon, Acting Secretary of         than the type of document (a memorandum),
the SEC, Attachment 2 to SEC Let.                  the addressees (various SEC staff), and the
                                                   subject matter (Issue 00-25, a policy state-
FN78. NCLR, 411 F.3d at 356 (quoting               ment superceded by Issue 01-09, the subject
Grand Cent. P'ship, 166 F.3d at 482). Such         of Request 33). Given this information, the
materials include “recommendations, draft          Court is unable to evaluate whether any or
documents, proposals, suggestions, and oth-        all of these four memoranda are privileged,
er subjective documents [that] reflect the         let alone understand why the SEC produced
personal opinions of the writer rather than        other memoranda on the same subject. The
the policy of the agency.” Grand Cent.             SEC asks the Court simply to take its word
P'ship, 166 F.3d at 482.                           that these particular documents were prede-
                                                   cisional, deliberative, purely subjective, and
FN79. Tigue, 312 F.3d at 80 (citing NLRB           neither adopted nor incorporated in the
agency's final decision. That cannot be suf-    lege assertion concerning some documents
ficient. FN84                                   and convinced the SEC to withdraw the as-
                                                sertion with regard to others, avoiding unne-
FN84. See Reino De Espana v. American           cessary motion practice.
Bureau of Shipping, No. 03 Civ. 3573, 2005
WL 1813017, at *13 (S.D.N.Y. Aug. 1,            VI. E-MAIL
2005) (requiring “precise and certain rea-
sons for asserting confidentiality” over doc-   A. Request and Response
uments purportedly subject to the delibera-
tive process privilege).                        *11 The SEC's document production and its
                                                privilege log include no e-mails or attach-
Although the SEC's letter provides addition-    ments to e-mail.FN86The SEC notes that
al explanation for the assertion of privilege   several hundred thousand e-mails are con-
to broad categories of documents, it should     tained within its omnibus production, but it
not be necessary for a party to seek court      concedes that it has not produced e-mail
intervention in order to receive sufficient     “generated or received by the Commission
information to assess the strength of an ad-    itself.”FN87Stockman seeks production of
versary's privilege claim.FN85Even taking       e-mails related to the full breadth of his re-
into account the SEC's assertions that the      quests for production: (1) investigation and
documents uniformly address decisions con-      litigation concerning C & A, (2) the han-
cerning the position the SEC will take on       dling of other cases concerning rebate ac-
accounting matters or investigations, the       counting, and (3) the SEC's regulatory role
agency has not noted the extent to which the    concerning rebates and rebate accounting.
memoranda were adopted in the final agency      FN88
position (and thus provide additional back-
ground or analysis analogous to legislative     FN86. See Def. Let. at 24.
history). While the deliberative process pri-
vilege protects important government inter-     FN87. SEC Let. at 15.
ests, it still must be construed narrowly, as
sustaining any privilege prevents a party       FN88. See Def. Let. at 24; SEC Let. at 15.
from obtaining access to otherwise relevant
information. Accordingly, the SEC must          The SEC rebuts that nearly all responsive e-
submit these documents for in camera re-        mails will be privileged, protected, or non-
view, together with a short memorandum          substantive. The SEC additionally asserts
explaining why each document is entitled to     that e-mails concerning the C & A investiga-
protection. A redacted version of the memo-     tion will also be subject to this Court's non-
randum must be produced to Stockman.            disclosure order, which bars the SEC from
These materials must be submitted to the        disclosing the identity of witnesses subpoe-
Court within twenty days of receipt of this     naed or interviewed and the substance of
Opinion and Order.                              their testimony. FN89 The SEC concludes
                                                that Stockman has not made the “necessary
FN85. With adequate information, Stock-         showing” so as to require it to undertake the
man might have accepted the SEC's privi-        “costly and time-consuming search that
would be required to identify responsive
emails ....“ FN90 Finally, with respect to        FN92. See generally 2006 Amendments to
the remaining two categories, the SEC is          the Federal Rules of Civil Procedure.
critical of the lack of specificity in defen-
dant's request, noting-for example-that Re-       FN93. Fed.R.Civ.P. 26(b)(1).
quest 43 seeks all documents relating to “ac-
counting for rebates” without any limitation      FN94. Fed.R.Civ.P. 26(b)(3)(B).
for time period, industry, or other criteria.
FN91 Given this breadth, the SEC notes that       C. Discussion
it would be required to search through the e-
mails of hundreds of attorneys and accoun-        Because e-mails are inherently searchable,
tants over an indefinite period of time.          the SEC's blanket refusal to produce any in-
                                                  coming or outgoing e-mails is unacceptable.
FN89. See SEC Let. at 16. This order is like-     FN95 Without even an attempt to negotiate
ly to be vacated given the Government's de-       search terms that would weed out privileged,
cision to file a nolle prosequi in the parallel   protected, or irrelevant e-mails, the SEC
criminal prosecution. See Nolle Prosequi,         cannot reasonably assert that a routine as-
United States v. Stockman, No. 07 Cr. 220         pect of modern discovery-search and review
(S.D.N.Y. Jan. 9, 2009).                          of a party's e-mail-is beyond its capability.
                                                  Essentially, the SEC's position is that the
FN90. SEC Let. at 16-17.                          cost of such a search is simply too high, but
                                                  it has made no effort to document the cost or
FN91. See id. at 17 (quoting Stockman Re-         the likelihood that it would produce rele-
quests).                                          vant, nonprivileged material. The concept of
                                                  sampling to test both the cost and the yield
B. Applicable Law                                 is now part of the mainstream approach to
                                                  electronic discovery. FN96 However, the
It is by now well established that electroni-     SEC correctly notes that the some of the re-
cally stored information is subject to discov-    quests may be overbroad and unduly bur-
ery. FN92 Yet-as with all other discovery-        densome. In considering requests for cost-
the limitations of Rule 26(b)(2)(C) apply, as     shifting with respect to expensive and bur-
do the specific limitations of Rule               densome discovery, this Court has noted that
26(b)(2)(B) when a party asserts that such        the most important consideration is “[t]he
information is not reasonably accessible. It      extent to which the request is specifically
is also well established that discovery is on-    tailored to discover relevant informa-
ly permitted with respect to “nonprivileged       tion.”FN97A quick look at Request 43-
matter that is relevant to any party's claim or   discussed above-reveals that Stockman's re-
defense.”FN93Finally, the Rules recognize         quest is not specifically tailored and must be
the need to protect materials that would re-      revised.
veal the “mental impressions, conclusions,
opinions, or legal theories of a party's attor-   FN95. The SEC has acknowledged that
ney or other representative concerning the        some fraction of the e-mails “would be of
litigation.” FN94                                 substantive significance.” SEC Let. at 16.
                                                 legitimate concerns about the burdens im-
FN96. See, e.g., Zubulake v. UBS Warburg         posed by particular requests, it cannot unila-
LLC, 217 F.R.D. 309, 324 (S.D.N.Y.2003)          terally determine that those burdens out-
(noting the advantage of grounding discov-       weigh defendants' need for discovery. At the
ery disputes “in fact rather than guess-         very least, the SEC must engage in a good
work”); McPeek v. Ashcroft, 202 F.R.D. 31,       faith effort to negotiate with its adversaries
34-35 (D.D.C.2001) (authorizing a “test-         and craft a search protocol designed to re-
run” of costly data restoration).                trieve responsive information without incur-
                                                 ring an unduly burdensome expense dispro-
FN97. Zubulake, 217 F.R.D. at 322.               portionate to the size and needs of the case.
                                                 The parties are therefore directed to engage
*12 Once again, the parties are directed to      in a cooperative effort to resolve the scope
meet and attempt to negotiate a reasonable       and design of a search with respect to the
search protocol (considering the use of ap-      rebate issues and a search of e-mail created
propriate search terms and appropriate limi-     and maintained by the SEC. A conference is
tations of subject matter and date) and then     scheduled for February 13, at 5:00 pm, by
to consider applying this search protocol to a   which date the parties should have com-
segment of the SEC's e-mail collection to        pleted the meet and confer process in the
determine whether relevant nonprivileged         hope of establishing an acceptable discovery
material might be identified and produced        program. If the parties remain at an impasse,
considering all of the factors set forth in      the Court will be prepared to resolve further
Rule 26(b)(2)(C).                                disputes and will consider the appointment
                                                 of a Special Master to supervise the remain-
VII. CONCLUSION                                  ing discovery in this case.

When a government agency initiates litiga-       SO ORDERED.
tion, it must be prepared to follow the same
discovery rules that govern private parties
(albeit with the benefit of additional privi-
leges such as deliberative process and state
secrets). For the reasons set forth above, the
SEC is ordered to produce or identify docu-
ments organized in response to Stockman's
requests; to negotiate an appropriate search
protocol to locate documents responsive to
requests described above in Part IV; to sub-
mit materials allegedly covered by the deli-
berative process privilege to the Court for in
camera review, together with a supporting
memorandum within twenty days of the date
of this Order; and to negotiate an appro-
priately limited search protocol with respect
to agency e-mail. While the SEC has raised

								
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