Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_07-cv-03798/USCOURTS-cand-5_07-cv-03798-3/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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NOT FOR CITATION

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

SECURITIES AND EXCHANGE

COMMISSION,

Plaintiff,

 v.

KENNETH L. SCHROEDER,

Defendant. /

No. C07-03798 JW (HRL)

ORDER GRANTING KLA-TENCOR’S

MOTION FOR PROTECTIVE ORDER

[Re: Docket No. 45, 49, 56]

This is a civil enforcement action for alleged improper stock option backdating at KLATencor Corporation (“KLA”). Defendant Kenneth Schroeder is KLA’s former Chief Executive

Officer. The SEC contends that he was a key participant in a fraudulent scheme to backdate

stock options, resulting in the concealment of millions of dollars in executive and employee

compensation and significant overstatement of the company’s income.

Before filing the instant action, the SEC investigated KLA’s option granting practices. 

In that investigation, the SEC obtained memoranda of approximately 55 witness interviews

conducted by a Special Committee of KLA-Tencor’s Board of Directors. The SEC reportedly

produced these memoranda to Schroeder as part of its initial disclosures in the instant action. 

The Skadden, Arps, Meagher & Flom law firm (“Skadden”) served as counsel for the Special

Committee.

Schroeder has filed a motion to dismiss which is set for hearing before Judge Ware on

*E-FILED 2/20/2008*

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March 24, 2008. In that motion, he essentially argues that, because of KLA’s assertion of the

attorney-client privilege and work product protection, he has been prevented from obtaining key

discovery and preparing an adequate defense against the SEC’s allegations.

This matter presently is before this court on KLA’s expedited motion for protective

order. KLA, a non-party, argues that the deposition of its officer, John Kispert – as well as the

depositions of all current and former KLA directors, officers and employees – should, at the

very least, be postponed until after Judge Ware rules on Schroeder’s motion to dismiss. Even

assuming that the case survives dismissal, KLA argues that the depositions should be

postponed, in any event, until after this court resolves the privilege disputes that have arisen in

connection with this discovery.

Non-parties Kenneth Levy, Edward Barnholt and Gary Dickerson – all current or former

KLA-affiliated deponents – join in KLA’s motion. Skadden also filed a “joinder,” requesting

that this court postpone the depositions of all Skadden attorneys and suspend Skadden’s

obligation to respond to Schroeder’s written discovery until after the court resolves his motion

to dismiss and all associated privilege issues. Defendant opposes KLA’s motion and objects to

Skadden’s purported joinder.

Upon consideration of the papers filed by the parties, as well as the arguments presented

at the February 12, 2008 expedited hearing, this court grants KLA’s motion as follows:

The court declines to postpone the depositions of KLA’s current and former officers,

directors and employees merely because a motion to dismiss is pending. As discussed at the

motion hearing, it finds that the more salient question is whether the depositions at issue should

be postponed in view of apparent disputes which have arisen over KLA’s privilege and work

product assertions.

Although the precise number of KLA depositions in question has been somewhat of a

moving target, there appear to be fourteen individuals whom Schroeder wishes to depose in the

near term (i.e., before the March 24, 2008 hearing on his motion to dismiss). He intends to

proceed with the previously noticed February 22, 2008 deposition of Edward Barnholt

(identified as a member of KLA’s Board of Directors who also served on the Compensation

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Committee). Additionally, Schroeder says that he plans to serve deposition subpoenas on some

thirteen other current or former KLA-affiliated individuals, with the depositions to take place

(as schedules permit) before March 24, 2008. Those deponents are:

• Jane Butler (identified as a current KLA employee who worked in the Human

Resources Department during the relevant period with knowledge pertaining to

KLA’s stock option granting procedures);

• Tracy LaBoy (identified as a current KLA employee who worked in the Finance

Department during the relevant period with knowledge of KLA’s stock option

granting procedures);

• Cynthia Mangan (identified as a current KLA employee who worked as Gary

Dickerson’s administrative assistant during the relevant period);

• Leo Chamberlain, Lida Urbanek, James Bagley, Robert Bond and Raymond

Bingham (identified as members of the Compensation Committee);

• Peter Campagna, Kathryn Cross, Pat Marshall, Sharon Orlando and Arthur

Schnitzer (identified as former KLA employees).

Schroeder notes that, in addition to these fourteen deponents, there may be several

(unidentified) others that he will seek to depose “as schedules permit.” (See Opp. at p. 9). (As

for other previously noticed depositions, Schroeder says that he has no plans to reconvene or

continue the depositions of Stuart Nichols and Lars Samson until after the court rules on his

pending motion to dismiss. Nor does he intend to schedule the depositions of Levy and

Dickerson until after disputes over KLA’s privilege assertions are resolved.)

Schroeder contends that KLA’s motion should be denied because the testimony of these

deponents will not “significantly implicate” claimed privileged matters. KLA and Barnholt

disagree. They argue that the majority of the fourteen individuals will likely be asked for

information in a number of areas that KLA claims is privileged. They maintain that it will be

unduly burdensome for them to appear for deposition now and, possibly, again later if

Schroeder (eventually) successfully challenges KLA’s privilege assertions.

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On the record presented, there is no way for this court to meaningfully assess the degree

to which the testimony of these fourteen (or so) individuals will implicate KLA’s

privilege/work product assertions. The court is not anxious to preclude Schroeder from taking

discovery now. However, Schroeder does not say that no questions will be asked which will

draw a privilege objection. And, the court believes that the depositions should not proceed in

what may well be piecemeal fashion.

Schroeder asserts that he will be prejudiced if he is not permitted to proceed with this

discovery now. However, the predicament appears to be one of his own making. He has the

ability to move the court now to clarify the privilege issues which impact these depositions. (At

a recent discovery conference, Schroeder indicated to the court that he would be filing such a

motion shortly. According to the SEC, Schroeder has stated since December that he would be

bringing such a motion, and the SEC says that it agreed to postpone the deposition of Skadden

attorney Elizabeth Harlan for that reason.) But Schroeder has now changed his mind. He just

told this court at oral argument that he has no intention of seeking relief as to KLA’s asserted

privilege until after his motion to dismiss is resolved. Indeed, he indicated that he made a

deliberate and conscious decision not to challenge KLA’s asserted privilege now so that he

could pursue that request for dismissal. Schroeder certainly is free to pursue this strategy. 

However, after weighing competing legitimate interests and possible prejudice, this court finds

that it will not be fair or efficient to proceed with depositions in a manner which might well

require the KLA deponents to appear for examination more than once.

Accordingly, KLA’s motion for protective order will be granted as to depositions of its

current or former officers, directors and employees which will call for testimony falling within

the privilege asserted by KLA. Those depositions shall not proceed until after the related

privilege issues are resolved.

The court declines to entertain Skadden’s so-called “joinder,” which expands the scope

of KLA’s motion, and which need not have been heard on the truncated schedule set on KLA’s

motion. In any event, Schroeder says that no Skadden attorneys have been subpoenaed to give

testimony between now and March 24, 2008; and, Schroeder and the SEC agree that the one

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deposition that has been noticed (attorney Elizabeth Harlan) should be postponed until after

privilege issues are resolved by dismissal or otherwise.

IT IS SO ORDERED.

Dated:

 

HOWARD R. LLOYD

UNITED STATES MAGISTRATE JUDGE

February 20, 2008

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5:07-cv-3798 Notice has been electronically mailed to: 

Judith L. Anderson andersonju@sec.gov, alcairoe@sec.gov, johnstonj@sec.gov 

Jeffrey Bruce Coopersmith jeff.coopersmith@dlapiper.com, bradley.meissner@dlapiper.com,

kelly.hamilton@dlapiper.com, stephanie.tucker@dlapiper.com 

Jeffrey S. Facter jfacter@shearman.com, jae.ko@shearman.com, rcheatham@shearman.com 

Marc J. Fagel fagelm@sec.gov 

Mark Philip Fickes fickesm@sec.gov 

Jonathan B. Gaskin jgaskin@orrick.com, mticzon@orrick.com 

Stuart L. Gasner slg@kvn.com, dxc@kvn.com, efiling@kvn.com, mcianfrani@kvn.com 

Thomas R. Green tgreen@morganlewis.com, lbuda@morganlewis.com 

Alice L. Jensen ajensen@fenwick.com, cprocida@fenwick.com 

Susan F. LaMarca lamarcas@sec.gov, alcairoe@sec.gov, johnstonj@sec.gov 

Joni L. Ostler jostler@wsgr.com, pbaird@wsgr.com 

Elliot Remsen Peters epeters@kvn.com, aap@kvn.com, efiling@kvn.com 

David Allen Priebe david.priebe@dlapiper.com, stacy.murray@dlapiper.com 

Elena Ro roe@sec.gov 

Skadden, Arps, Slate, Meagher & Flom LLP matthew.sloan@skadden.com 

Matthew Eric Sloan Matthew.Sloan@skadden.com 

Steven Keeley Taylor skt@kvn.com, efiling@kvn.com, nsn@kvn.com 

Shirli Fabbri Weiss shirli.weiss@dlapiper.com

Counsel are responsible for distributing copies of this document to co-counsel who have

not registered for e-filing under the court’s CM/ECF program.

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