who performed services for Sabratek, (3) KPMG documents referring or relating to
Sabratek, and (4) documents concerning similar lawsuits against KPMG.
L KPMG’s Audit Manuals & Guidelines
Sabratek LLC requests production of KPMG’s audit manuals and guidelines.
KPMG objects to this request on the grounds that it is vague and overly broad and
seeks documents that are not relevant and that contain trade secrets. Sabratek LLC’s
Document Request 55 states:
Any and all audit guides of KPMG LLP, including, but not limited to,
audit. guides regarding SEC procedures, general audit guides, and
accounting and auditing guides for in house services.
Sabratek LLC’s Document Request 57 states:
All documents related to internal policies, including technical
policy/guidance with respect to all questioned accounting and auditing
areas and independence, engagement/client management policy guidance,
forms, programs, procedures manuals, file retention, staff assignment, and
quality control.
KPMG cites these two document requests in support of its argument that the
documents Sabratek LLC seeks are vague and overly broad. Sabratek LLC, however,
does not move to compel all of these categories of documents. Sabratek LLC “clarified
that the documents it is seeking” are those “that contain KPMG’s audit practices,

policies, procedures, and guidelines.” Pl. Reply at 2. The current request is not vague

or overly broad. See In re Mercury Fin. Co. of Illinois, 1999 WL 495903, *2 (N.D. Ill.


Sabratek LLC’s request would require the production of every document at
KPMG simply because it refers to Sabratek. Clearly, Sabratek LLC has cast its net so
wide that it is certain to catch documents not relevant to any claim or defense in the
instant litigation. Moreover, Sabratek LLC has offered no case law in support of such
a broad request.

Apparently as a backup position, Sabratek LLC offers an alternative, less
inclusive request for documents. That request solicits “copies of all documents in
KPMG’s possession relating to Sabratek’s accounting practices ....” Pl. Memo. at 10.
This lawsuit is based on Sabratek’s allegedly deficient accounting practices resulting
from KPMG’s services. Thus, documents relating to Sabratek’s accounting practices
are clearly relevant.

IV. Documents From Similar Lawsuits

Sabratek LLC requests production of “documents concerning other lawsuits in
which KPMG was a party involving claims for professional malpractice” and “copies
of all settlement agreements for such litigation.” Pl. Memo. at 10. KPMG objects to
this request on the grounds that it is vague and overly broad and that it seeks irrelevant
material. Sabratek LLC counters that the documents sought may contain admissions
that can be used against KPMG or information useful for impeachment purposes.

While we agree that the information sought may contain information useful for gaining


495903 at *5. Although Jn re Mercury dealt with a motion to compel in a fraud
allegation context, we find it instructive as to instant action grounded in negligence,
negligent misrepresentation, and breach of contract.

To the extent that KPMG claims that the audit manuals and guidelines constitute
trade secrets and proprietary materials, the protective order already executed by both
parties will provide adequate protection once entered by this court. See In re Mercury,
1999 WL 495903, *6 (compelling production of internal audit manuals over a trade
secret objection since a protective order prevented disclosure of trade secrets outside
the context of the litigation). Moreover, the involvement of trade secret and proprietary
information in this action was a specific motivating factor for the protective order in
the first place:

WHEREAS, the parties in this action may deem certain non-public

documents requested in discovery in this action to be confidential insofar

as they embody or reveal confidential commercial information,

confidential and sensitive personal information, proprietary information,

or trade secrets... ..

Stipulated Protective Order at 1.
II. Personnel Files of Relevant KPMG Employees

Sabratek LLC requests production of the personnel records, performance

reviews, and resumes of every KPMG employee who provided services to Sabratek.


July 12, 1999) (compelling production of “{aJll accounting and auditing manuals,
guides, reference materials and literature that were prepared or generated by KPMG”
and maintained during the relevant time period). We will, however, limit the
production of KPMG’s audit practices, policies, procedures, and guidelines to those
that were maintained during some portion of the time frame in which Sabratek was a
client of KPMG.

KPMG also asserts that the audit practices, policies, procedures, and guidelines
are not relevant because the standard of care in this litigation is an objective standard,
based on Generally Accepted Auditing Standards (“GAAS”) and Generally Accepted
Accounting Principles (“GAAP”). In Jn re Mercury, the court compelled production
of similar documents over this same irrelevancy objection, stating:

To [(prove fraud)], as well as to conduct probing depositions of

accountants who performed the audit, thus acquiring information which

will have a direct bearing on the outcome of this case, plaintiff is entitled

to learn the accounting firm’s procedures.

In re Mercury, 1999 WL 495903 at *5 (quoting Gohler v. Wood, 162 F.R.D. 691, 695
(D. Utah 1995) (citing Rosen v. Dick, 1975 WL 357 (S.D.N.Y. Feb. 20, 1975))). In
that decision, the court dismissed the GAAS and GAAP objective standard argument
and declined to follow the very cases (Davis v. Cooper & Lybrand, 1992 WL 159504

(N_D. Ill. June 25, 1992) and In re ContiCommodity Servs., Inc. Sec. Litig., 1988 WL

56172 (N.D. Ill. May 25, 1988)) on which KPMG now relies. Jn re Mercury, 1999 WL

-5-


claim). Accordingly, pursuant to Rule 501, any privileges asserted with respect to this
action are also governed by Illinois law. KPMG does not cite, and we cannot locate,
any case applying a self-evaluation privilege (or self-critical privilege as it is
sometimes called) under Illinois law.

Even assuming the privilege did exist, KPMG has not established that it is
entitled to its protection. To be privileged under the self-evaluation privilege, “the
materials must have been prepared for mandatory government reports.” Resnick v.
American Dental Ass'n, 95 F.R.D. 372, 374 (N.D. Ill. 1982). KPMG has not
established, or even argued, that the documents sought were prepared for mandatory
government reports.

KPMG also objects to producing the documents on the grounds that the request
is overly broad. On the contrary, the request is straight forward and concise. The
request asks for the personnel records, performance reviews, and résumés of whatever
KPMG employees provided services to Sabratek. The request is not overly broad. See
In re Mercury, 1999 WL 495903, *2 (compelling production of similar documents).
II. Documents Referring or Relating to Sabratek

Sabratek LLC requests “copies of all documents that refer to Sabratek that
KPMG has in its possession.” Pl. Memo. at 10. KPMG objects to this request as

overly broad and pertaining to documents that are not relevant.


Minute Order Form (06/97)

United States District Court, Northern District of Illinois

peters ai sate Charles P. Kocoras Sth Aseied Sedge 8
CASE NUMBER 01 C 9582 DATE 11/12/2002
CASE Sabratek Liquidating vs. KPMG
TITLE
[In the fotlowings box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.)
DOCKET ENTRY:
q) Oo Filed motion of [ use listing in “Motion” box above.]
(2) oO Brief in support of motiondue
(3) a Answer brief to motion due___. Reply to answer briefdue__
(4) oO Ruling/Hearingon___setfor___—_at
(5) Qo Status hearing[held/continued to} [set for/re-set for] on setfor____at
(()) o Pretrial conference[held/continued to] [set for/re-set for]on__—setfor_ at.
(e) Oo Trial[set for/re-set for]on__at
(8) ia} [Bench/Jury trial] [Hearing] held/continuedto att
(9) oO This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}

OFRCP4(m) CLocal Rule 41.1 OFRCP41(aX1) GO FRCP41(a){2).

qo) ow {Other docket entry) ENTER MEMORANDUM OPINION: Plaintiff's motion (Doc 16-1) to
compel is granted in part and denied in part. KPMG is ordered to produce: 1. KPMG documents
containing KPMG’s audit practices, policies, procedures, and guidelines that were maintained during any
portion of the time period in which Sabratek was a client of KPMG; 2. KPMG’s personnel records,
performance reviews, and resumes for every KPMG employee that provided services to Sabratek; and 3.
KPMG documents relating to Sabratek’s accounting practices.

(ij ff [For further detail see order attached to the original minute order.]
No notices required, advised in open court.

No notices required, number of notices
Notices mailed by judge’s staff.
Notified counse! by telephone. on NOV,1,3.2002

/ | Docketing to mail notices. ‘ _ — Ss .
Mail AO 450 form. 09 LoINLsia sn wy)
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Copy to juge/fagistrate judge.

courte gp :@ Hd 21 AON ZO dare nse
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central Clerk’s Office mailing deputy initials



admissions and impeaching testimony, we do not believe this justifies such a
potentially enormous amount of production on the part of KPMG. See Fed. R. Civ.
P. 26(b)(2){iii) (allowing court to limit discovery if “the burden or expense of the
proposed discovery outweighs its likely benefit”). Moreover, most, if not all, of the
information sought is publicly available. Accordingly, we will not compel KPMG to
produce this information.
CONCLUSION

Based on the foregoing analysis, we grant the motion to compel in part and deny
it in part. KPMG is ordered to produce:

1. KPMG documents containing KPMG’s audit practices, policies, procedures, and
guidelines that were maintained during any portion of the time period in which
Sabratek was a client of KPMG;

2. KPMG’s personnel records, performance reviews, andresumes for every KPMG
employee that provided services to Sabratek; and

3. KPMG documents relating to Sabratek’s accounting practices.

Pe Ou Geer eo

Charles P. Kocoras
Chief Judge
United States District Court

Dated: Nov12 2002


KPMG objects to this request on the grounds that it seeks irrelevant and privileged
documents and that it is overly broad.

The documents sought are clearly relevant as they pertain to the qualifications
of the KPMG employees that performed the allegedly deficient work giving rise to the
claims for negligence, negligent misrepresentation, and breach of contract. Cf In re
Mercury, 1999 WL 495903, *2 (in action for fraud, compelling disclosure of personnel
files and performance evaluations for every accountant who performed services for the
client during the relevant time frame).

KPMG also claims that these documents are not discoverable under the “‘self
evaluation’ privilege.” Def. Resp. at 6-7. This argument fails for two reasons:
(1) there is no self-evaluation privilege under Illinois law, and (2) even if the privilege
did exist, KPMG has not established that these documents would be protected under
it.

Federal Rule of Evidence 501states that “in civil actions and proceedings, with
respect to an element of a claim or defense as to which State law supplies the rule of
decision, the privilege ofa witness, person, government, State, or political subdivision
thereof shall be determined in accordance with State law.” Fed. R. Evid. 501. In this
diversity action, Sabratek’s claims are governed by Illinois law . See Compl. { 2; see

also April 26, 2002, Order at 4 (applying Illinois law to Sabratek’s breach of contract


LEGAL STANDARD

The Federal Rules of Civil Procedure provide a court with “broad discretion in
resolving discovery disputes.” Bobkoski v. Board of Educ. of Cary Consol. Sch. Dist.
26, 141 F.R.D. 88, 90 (N.D. I11.1992). In general, "[p]arties may obtain discovery
regarding any matter, not privileged, that is relevant to the claim or defense of any
party...." Fed. R. Civ. P. 26(b)(1). “In ruling on motions to compel discovery,
‘courts have consistently adopted a liberal interpretation of the discovery rules.’”
Meyer v. Southern Pac. Lines, 2001 WL 293999 (N.D. Ill. March 26, 2001) (quoting
Wilstein v. San Tropai Condo. Master Ass'n, 189 F.R.D. 371, 375 (N.D. Ill. 1999)).
Parties, however, are not entitled to discovery of privileged information. Fed. R. Civ.
P. 26(b)(1). Additionally, we may limit discovery that is “unreasonably cumulative or
duplicative," or if "the burden or expense of the proposed discovery outweighs its
likely benefit." Cook, Inc. v. Boston Scientific Corp., 2002 WL 406977, *1 (N.D. Ill.
2002) (citing Fed. R. Civ. P. 26(b)(2)). The burden rests upon the objecting party to
show why a particular discovery request is improper. E.E.0.C. v. Klockner H & K
Machines, Inc., 168 F.R.D. 233, 235 (E.D. Wis. 1996).

DISCUSSION
Sabratek LLC’s motion to compel is limited to four categories of documents:

(1) KPMG’ audit manuals and guidelines, (2) the personnel files of KPMG employees


2000). In the interest of brevity, we reiterate only the facts that pertain to today’s
motion.

Sabratek was a manufacturer of health care products. Defendant KPMG is an
auditing and accounting firm; from 1997 to 1999 it performed various auditing,
accounting, and consulting services for Sabratek. According to the complaint, in the
course of performing these services, KPMG concocted schemes to allow Sabratek to
improve the appearance of its corporate balance sheet. The claims allege that KPMG
advised Sabratek of ways to recast expenditures and assets to hide its true financial
status. These “inventory and revenue manipulation schemes,” which caused reports
of Sabratek’s earnings to be deficient by approximately $39 million, were eventually
tevealed, prompting the aforementioned suits by Sabratek investors and the speedy
bankrupting of Sabratek.

In December 2001 Sabratek LLC filed the present action against KPMG,
alleging negligence, negligent misrepresentation, breach of contract, and fraud on the
part of Sabratek’s former ally. Pursuant to a KPMG motion, we dismissed the fraud
claims. The negligence, negligent misrepresentation, and breach of contract claims
remain pending, and Sabratek LLC and KPMG are in the document discovery phase.

Sabratek now moves to compel production of documents by KPMG.


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
SABRATEK LIQUIDATING LLC, )
)
Plaintiff,
ainti: ) pocKeTeD
vs, ) 01 C 9582 Nov 3 nie
KPMG LLP, )
)
Defendant. )
MEMORANDUM OPINION

CHARLES P. KOCORAS, Chief District Judge:

This matter comes before the court on Plaintiff Sabratek Liquidating LLC’s
(“Sabratek LLC”) motion to compel production of documents. For the reasons set
forth below we grant the motion in part and deny it in part.

BACKGROUND

Sabratek LLC is a limited liability corporation formed under Delaware law. It
is the successor in interest to Sabratek Corporation (“Sabratek”), an ill-fated
corporation that folded in 1999. Sabratek’s woes have spawned several suits and
opinions prior to this one, which detail the story of Sabratek and its downfall. See
Geinko v. Padda, 2001 WL 1163728 (N.D. Ill. Sept. 28, 2001); Chu v. Sabratek, 100

F, Supp. 2d 815 (N.D. Ill. 2000); Chu v. Sabratek, 100 F. Supp. 2d 827 (N.D. Ill.

0