Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_08-cv-01510/USCOURTS-cand-3_08-cv-01510-93/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:77 Securities Fraud

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

IN RE: 

CHARLES SCHWAB CORPORATION

SECURITIES LITIGATION.

This Document Relates

To All Cases. /

No. C 08-01510 WHA

ORDER RE ATTORNEY-CLIENT

PRIVILEGE WITH RESPECT TO

DEFENDANT KIMON DAIFOTIS

Defendant Kimon Daifotis — who was terminated from Schwab in June 2008 and is

being represented by separate counsel — intends to raise the statutory “reasonable care”

affirmative defense for the Section 12 claim asserted against him. Part of his intended defense is

that he knew that key documents at Schwab were routinely reviewed by both in-house attorneys

and outside attorneys. Additionally, Daifotis claims that for most (but not all) of the subjects at

issue in this action, he had no contact with Schwab’s lawyers and received no legal advice. For

these subjects where he had no communication with Schwab attorneys, he simply “took comfort”

from the fact that lawyers familiar with securities laws were reviewing Schwab materials.

Former employees cannot waive the attorney-client privilege held by their former

employers. Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 348 (1985);

United States v. Chen, 99 F.3d 1495, 1502 (9th Cir. 1996). This applies to former management

as well. Weintraub, 471 U.S. at 349. As such, given that Mr. Daifotis no longer works at

Schwab, any authority he may have had to waive defendant Schwab’s attorney-client privilege

— assuming he even had this authority to begin with when he did work there — has vanished.

Case 3:08-cv-01510-WHA Document 612 Filed 04/14/10 Page 1 of 4
United States District Court

For the Northern District of California

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Given this reality, defendant Daifotis is placed in an usual position. As this Court’s

February 23 order explained, by raising a “reasonable care” affirmative defense, Mr. Daifotis

places in issue his subjective state of mind as to the contested disclosures at the time in question. 

Accordingly, all information, whether privileged or not, received by him on those matters during

or before the time in question should be discoverable (see Dkt. No. 424). This is because all

information received by him on those matters would have, or at least arguably should have,

informed his belief as to the reasonableness of his investigation and the accuracy of the

registration statement. Unlike the Schwab defendants, however, Mr. Daifotis has no authority to

waive — whether intentionally or not — the attorney-client privilege that may apply to the

information he received while working at Schwab. Moreover, even if Mr. Daifotis chose to

disclose attorney-client communications to effectuate his defense (notwithstanding any duty of

confidentiality he might owe to Schwab), this would not amount to a waiver of Schwab’s

privilege. See Chen, 99 F.3d at 1502. 

Because of this predicament, plaintiffs take issue with defendant Daifotis’s intention to

raise any defense relying on the advice (or perhaps, even the mere presence) of counsel. As

argued by plaintiffs, it would be unfair if Mr. Daifotis was allowed to elaborate on the

circumstances underlying his “reasonable care” defense if there were reasonable and relevant

privileged communications that plaintiffs would not have access to — especially those as to

which Schwab claims a privilege, and elects not to waive it. On the other hand, defendant

Daifotis claims that it would be unfair to him if he were prevented from asserting a statutorily

authorized affirmative defense because his former employer refuses to produce the necessary

documents. Both sides make valid points.

Here’s the answer: Since Mr. Daifotis does not own, and therefore cannot waive,

defendant Schwab’s attorney-client privilege, it cannot be said that Mr. Daifotis is using the

privilege as both a “sword and a shield.” True, defendant Daifotis is using the involvement of

counsel as a sword in his defense, but the law is clear that the privilege surrounding his

communications with counsel is not his shield to raise — it is Schwab’s, and Schwab’s alone. 

As such, this order is inclined to allow Mr. Daifotis to testify as to his personal knowledge of

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For the Northern District of California

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Schwab’s processes for reviewing key documents, as well as other matters relevant to his

statutory “reasonable care” defense.

To ensure fairness to both sides, however, unless Schwab waives the privilege and

produces all relevant privileged communications pertaining to Mr. Daifotis’s “reasonable care”

defense, plaintiffs would be entitled to a jury instruction similar to the one proposed by the

undersigned on February 9 with respect to Mr. Daifotis (see Dkt. No. 368). For example, the

jury would be told something along the following lines (subject to change, of course, depending

upon how the evidence actually comes in):

* * *

JURY INSTRUCTION

(For Discussion Only)

Defendant Kimon Daifotis has placed before you evidence that lawyers were involved in

the process of preparing the registration statements. The Schwab defendants (who are separate

defendants from Mr. Daifotis), however, have asserted and still assert the attorney-client

privilege as to what Mr. Daifotis told Schwab’s lawyers, if anything, and what Schwab’s lawyers

told Mr. Daifotis, if anything. Mr. Daifotis has no authority to overrule the Schwab defendants’

decision to assert this privilege. Additionally, there is nothing improper in the Schwab

defendants’ assertion of the attorney-client privilege. But I must instruct you concerning the

effect of this evidence and the assertion of the privilege. Under Section 12, the burden is on Mr.

Daifotis to prove that he “did believe” in the accuracy of the registration statement. If lawyers

were involved in the preparation and filing process, you may not assume that the lawyers blessed

the documents or that the lawyers ever learned all of the facts necessary properly to vet the

registration statements. Although that sometimes occurs in such circumstances, it also

sometimes occurs that lawyers advise caution or suggest revisions or state that the registration

statements are not as accurate as they should be, in which case it is the client’s final decision

whether to follow the advice or to run risks.

In this trial, due to the assertion of the privilege, we do not know the actual

communications between Mr. Daifotis and the lawyers at Schwab, so it is impossible to know

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United States District Court

For the Northern District of California

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how those communications affected or should have affected his belief as to the accuracy or

inaccuracy of the registration statement. If, for example, a defendant knew of facts and

circumstances that should have been revealed to counsel but failed to reveal them, then that

defendant should not have relied on lawyers being involved in the process. Or, if counsel

advised giving a different level of disclosure, then a defendant being so advised could hardly

claim that he relied on the presence of lawyers to stay in compliance. Due to the assertion of the

privilege, which is legitimate and proper, we do not have the answers on these particulars.

On the other hand, that a defendant had no communications directly or indirectly with

counsel yet was aware that competent lawyers had been engaged for the preparation and filing

process, may be considered by you, along with all other facts and circumstances known to the

defendant, in evaluating that defendant’s good-faith belief.

IT IS SO ORDERED.

Dated: April 14, 2010. WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

Case 3:08-cv-01510-WHA Document 612 Filed 04/14/10 Page 4 of 4