1. Attorney-Client Privilege

Plaintiffs claim that the attorney-client privilege does not protect the WilmerHale documents
from disclosure because the law firm's investigation “was a fact-finding mission and did not
contemplate or involve the rendering of legal advice.” (Pl. WCP Mot., at 3 (citing Osterneck v. E.T.
Barwick Indus., Inc., 82 F.R.D. 81 (N.D. Ga. 1979).) In Osterneck, the SEC commenced an action
against defendant E.T. Barwick Industries, Inc. and certain of its officers and directors alleging that
it issued materially false and misleading financial statements in violation of federal securities laws.
82 F.R.D. at 82. The litigation was terminated by a Consent and Undertaking agreement that
provided, among other things, that Barwick’s Board of Directors would appoint a Special Review
Committee (“SRC”) “to investigate and report to the full Board of Directors on the matters alleged
in the [SEC's] Complaint.” /d. at 82-83. The SRC, in turn, would appoint an individual to act as
Special Counsel to the SRC. The SRC ultimately prepared and submitted its report to the Board
of Directors. /d. at 83. Thereafter, the plaintiffs issued subpoenas for deposition testimony and
documents relating to the SRC's report. Defendants asserted the attorney-client privilege, but the
court held that the SRC did not provide any legal advice to the Board of Directors. Rather, the SRC
“investigate[d] and report[ed]” factual information, including reviewing the practices complained of
in the SEC Complaint, interviewing witnesses, compiling documénts, and evaluating data. /d. at
83, 85-86.

Plaintiffs argue that the Restructuring Report, similarly, was designed to address only
factual questions, such as (1) How did HMS actually restructure delinquent loans during 20027; (2)
What did public disclosures and company policies say about HMS's restructuring of delinquent
loans during the same period?; and (3) What were the differences, if any, between HMS’s practices
and either its policies or the Company's public disclosures? (Pl. WCP Mot., at 4; Ex. 2 to Pl. Mot.,

20



are seeking to recover for, and have charged Household with, injuries sustained by the investing
public, not the corporation. Cf. Garner, 430 F.2d at 1103 (addressing situation “where the
corporation is in suit against its shareholders on charges of acting inimicailly to stockholder interests
.+..”) (emphasis added). Notably, Plaintiffs have not raised any breach of fiduciary duty claims
in this lawsuit. Cf. In re Transocean Tender Offer Sec. Litig., 78 F.R.D. 692, 697 (N.D. Ill. 1978)
(applying Garner in case alleging securities fraud and breach of fiduciary duty owed to minority
shareholders); Panter v. Marshall Field & Co., 80 F.R.D. 718 (N.D. Ill. 1978) (applying Garner
where shareholders filed suit against corporation alleging breach of fiduciary duty and violations
relating to tender offer).)

Nevertheless, unlike the plaintiffs in in re Omnicom Group, Plaintiffs have presented
evidence — and Defendants do not dispute — that the Class represents a substantial majority of
shareholders who owned stock at the time of the communications in question. (PI. Reply, at 7.7.)
Thus, it appears that Household did owe a majority of Plaintiffs a fiduciary duty. Cf. inre Omnicom
Group, 233 F.R.D. at 412 (“[T]he transactions that are at the heart of the complaint and that formed
the trigger for the targeted attorney-client communications were undertaken in the absence of a
fiduciary relationship to a substantial portion of the class members.”) In addition, Plaintiffs have
established good cause to overcome the privilege. Specifically, Plaintiffs have a colorable claim
that has withstood a motion to dismiss; there do not appear to be any trade secrets at risk; there
is a Protective Order in place in any event; and the requested information concerns past actions
that are the subject of this litigation. See in re General Instrument Corp. Sec. Litig., 190 F.R.D.
527, 529 (N.D. Ill. 2000); (Ex. A to Pl. E&Y Mot., at 2.) On the limited facts of this case, the court
finds that the fiduciary exception applies to the communications between E&Y and Household.

The court stresses that this holding should be narrowly construed. Significantly, E&Y is not
a law firm and was not acting as outside counsel on behalf of Household. In addition, though E&Y

was acting as an agent of in-house counsel, its investigation did not require separate legal analysis

14



i.e., Markell’s threatened lawsuit and the SEC’s formal investigation. See National Jockey Club,
2006 WL 733549, at *1; Lawrence E. Jaffe Pension Plan, 237 F.R.D. at 181. In addition, as
explained earlier, WilmerHale provided Household with legal advice and analysis. The fact that
Household was also being represented by other counsel in those actions does not alter the court’s
assessment. Nor does Household's use of the Restructuring Report to assist in consummating a
merger with HSBC Holdings pic. The court remains satisfied that the report was prepared in
anticipation of litigation. As for Plaintiffs’ remaining arguments, the court has already rejected the
assertions that the work product doctrine does not extend to dual-purpose documents and/or
applies only to documents created for use against the party seeking their production. (Pl. WCP
Mot., at 6 n.6; Pl. WCP Reply, at6n.7.) See Lawrence E. Jaffe Pension Plan, 237 F.R.D. at 181-
82. The court will not revisit either argument here.

Plaintiffs claim that they should receive the requested information in any event because they
have a substantial need for the materials and will not be able to obtain their substantial equivalent
without undue hardship. (Pl. WCP Mot., at 6.) As a preliminary matter, it is not clear to the court
that Plaintiffs seek only fact, as opposed to opinion work product under this exception. In any
event, with respect to fact work product, Plaintiffs argue that the Restructuring Report and its
underlying evidentiary bases “go to the heart of this case” and “establish the falsity of Household’s
public disclosures respecting its restructure policies and statistics; scienter in that Household knew
its public disclosures to be false; and materiality because Household’s reage statistics were key
indicators of the value of the Company's assets . . . and were crucial to the Company's ability to
sell large blocks of its loans (securitizations) to fund its business model.” (/d. at 6-7.) According
to Plaintiffs, they need the Restructuring Report materials “to cross-examine Household's reliance
on any of these materials at trial.” (/d. at 7.) To the extent Defendants do not intend to introduce
the Restructuring Report at trial, however, Plaintiffs have no substantial need for the information

for cross-examination purposes. (Def. WCP Resp., at 15.)

24



investigate Markell’s allegations, as well as “the extent to which the loan restructuring practices of
HMS were inconsistent either with public disclosures of HI [Household International, Inc.] and HFC
[Household Finance Corporation] regarding those matters or with HMS internal policies for
restructuring.”' (Ex. 2 to Pl. WCP Mot., at 2.)

In conducting its investigation, WilmerHale (1) reviewed more than 2,000 documents,
including email messages, draft and final policy and procedure manuals, internal audit files,
financial information, and several SEC transcripts; and (2) interviewed more than 40 Company
personnel, including Markell. (/d.) On March 17, 2003, WilmerHale provided the Audit Committee
with a draft of its loan “Restructuring Report.” (Ex. 7 to Pl. WCP Mot.) Defendants apparently
mistakenly produced a copy of this draft report to Plaintiffs during the course of discovery, even
though two other copies of the same document appear on Defendants’ privilege log. (Ex. E to Beer
Decl., Nos. 2626 and 3913.) In any event, WilmerHale submitted its final Restructuring Report on
March 24, 2003. Defendants produced this report - and the Bankruptcy Report — to Plaintiffs in
or about February 2005 pursuant to a detailed non-waiver agreement that permits the use of the
reports in this litigation. (Ex. 6 to Pl. WCP Mot.)

On March 28, 2006, Plaintiffs deposed Per Eckholdt, former Group Director of Credit Risk
for HMS. During the deposition, Defendants’ counsel directed Mr. Eckholdt not to answer, on the
grounds of privilege, questions regarding “Exhibit 13,” a document Mr. Eckholdt had given to
WilmerHale to assist in its investigation. On April 3, 2006, Defendants withdrew the privilege
objection and agreed that Mr. Eckholdt, who resides overseas, would answer written deposition
questions about the document. Plaintiffs served those questions on September 5, 2006, and

Defendants responded on September 29, 2006. Plaintiffs object that Defendants have still refused

1 WilmerHale also investigated and submitted a report regarding the bankruptcy

allegations (the “Bankruptcy Report’) which is not at issue here.
5



CONCLUSION
For the reasons stated above, Plaintiffs’ Motion to Compe! Documents Pertaining to
Household’s Consultations with Ernst & Young LLP [Doc. 708] is granted, but their Motion to
Compel Further Responses to the Class’ Questions for Per Eckholdt Concerning Exhibit 13 and

the Production of Documents Underlying Wilmer, Cutler & Pickering Reports [Doc. 712] is denied.

“Hans Ke Nebannrs

NAN R. NOLAN
United States Magistrate Judge

Dated: December 6, 2006

35



at 4.) Nowhere in that Report, Plaintiffs argue, did WilmerHale provide any legal analysis or
recommendations that could be subject to the attorney-client privilege. (/d.; Pl. WCP Reply, at 3-4.)

The mere fact that WilmerHale’s report included some factual findings does not establish
that the entire report falls outside the scope of the attorney-client privilege. As Defendants note,
“fact-gathering is an essential element in an attorney's formation of legal conclusions.” (Def. WCP
Resp., at 7.) See also Upjohn Co. v. United States, 449 U.S. 383, 390-91 (1981) (“The first step
in the resolution of any legal problem is ascertaining the factual background and sifting through the
facts with an eye to the legally relevant.”) The court has reviewed the Restructuring Report and
finds that WilmerHale was retained to provide legal analysis and advice. It is true that unlike the
simultaneously-prepared Bankruptcy Report, which “summarizes the relevant facts we have
uncovered regarding Ms. Markell's allegations, assesses the pertinent law, [and] considers the
potential exposure to HMS (and its parent HI) with respect to possible claims that might be asserted
against it by mortgage customers who filed for bankruptcy,” the Restructuring Report “sought to
address three separate but related factual questions.” (Compare Ex. 1 to Pi. WCP Mot., at 1 with
Ex. 2 to WCP Mot., at 4.) Within the Restructuring Report, however, WilmerHale considered both
the quantitative and qualitative materiality of variances from disclosed restructuring policies, and
provided legal advice as to whether Household should take corrective action. (Ex. 2 to Pl. WCP
Mot., at 7, 11.) Cf Osterneck, 82 F.R.D. at 85 (no privilege where attorneys “were employed not
for their legal acumen but for their skill as investigators.”)

Plaintiffs make much of the fact that a Report to the Board of Directors on 2003 Audit
Committee Activities stated that the Committee retained WilmerHale to investigate “the allegations
made by Ms. Markell, in order to comply with the requirements of Section 10A of the Securities Act
of 1934.” (Ex. A to Brooks Decl.) See also 15 U.S.C. § 78)-1. Section 10A requires that ‘“[iJf, in
the course of conducting an audit . . . [auditors] become[] aware of information indicating that an
illegal act . .. may have occurred, the firm shall. . . determine whether it is likely that an illegal act

21



work product shield, the court notes that Defendants do not intend to use the Restructuring Report,
or any of the underlying privileged documents, in its defense of this case.
b. Production to KPMG

Plaintiffs also seek a finding of waiver based on the fact that Household produced the
Restructuring Report and related documents to its outside auditor, KPMG. (PI. WCP Mot., at 11.)
The court has already addressed and rejected Plaintiffs’ arguments regarding disclosure to an
auditor. See Lawrence E. Jaffe Pension Plan, 237 F.R.D. at 183 (“[T]he fact that an independent
auditor must remain independent from the company it audits does not establish that the auditor
also has an adversarial relationship with the client as contemplated by the work product doctrine.
Disclosing documents to an auditor does not substantially increase the opportunity for potential
adversaries to obtain the information.”) The court will not revisit this ruling here.

c. Production to the SEC

Plaintiffs finally seek waiver of the privilege based on Household’s production to the SEC
of “documents summarizing the Restructuring Report.” (Pl. WCP Mot., at 11.) Defendants argue
that they only provided the SEC with documents “which transmit pre-existing factual material that
did not become privileged merely by virtue of having been provided to WilmerHale.” (Def. WCP
Resp., at 11-12.) Defendants also emphasize that Household expressly withheld any privileged
materials pursuant to a privilege log and agreed to the SEC’s request for access to the
Restructuring Report only on condition that the SEC enter into a written confidentiality agreement.
(/d, at 4, 11-12; Exs. G and H to Beer Decl.) That July 16, 2003 confidentiality agreement
specifically stated that “neither the Committee nor Household intend to waive the protections of the
attorney work product doctrine, attorney-client privilege, or any other privilege applicable as to third

parties.” (Ex. H to Beer Decl.)

27



communications between the corporate client and its counsel,” and found the law firm's report to
be “the equivalent of a confidential communication between an attorney and his client.” /d. at *23.

In this case, similarly, Household’s Audit Committee retained WilmerHale to provide legal
analysis and advice regarding threatened litigation. WilmerHale’s client was the entire corporation,
and not just the Audit Committee. Plaintiffs disagree, noting that the Engagement Letter confirms
that WilmerHale’s “client in this matter will be the [Audit] Committee in its role as the audit
committee of the Company's board of directors.” (Ex. A to Wrathall Decl., ] 1.) In addition, the
Engagement Letter contains a “conflicts” section advising that the firm is “representing, and will
continue to represent, the Company with respect to a number of other matters including advice
related to areas that may be within the scope of our work for the Committee.” (/d. 3.) That same
conflicts section, however, also states that “[t]he Committee and the Company agree that we may
continue to represent, and may undertake in the future to represent, existing or new clients in any
matter that is not substantially related to our work for the Committee and the Company ....” (/d.)
The letter further provides that “our representation of the Committee will terminate upon our
sending the Company our final statement for services rendered in this matter.” (/d. 4) (emphasis
added.) The court concludes that all communications and documents relating to the WilmerHale
investigation are privileged.*

2. Work Product Privilege

The WilmerHale documents and communications are also protected by the work product

privilege. Household’s Audit Committee retained WilmerHale because of the prospect of litigation;

3 Plaintiffs assert, in a footnote with no explanation, that the attorney-client privilege

is nonetheless inapplicable under the Garner exception. (Pl. WCP Mot., at 4.n.5.) The court
disagrees. Unlike E&Y, discussed above, the law firm of WilmerHale was retained to provide direct
legal advice and analysis. In addition, Plaintiffs have a copy of the Restructuring Report and are
free to prioritize a WilmerHale witness as one of their 55 deponents. In light of the fact that
Plaintiffs have not filed a derivative action; have interests that are clearly personal; and seek to
recover for, and have charged Household with, injuries sustained by the investing public, not the
corporation, the court declines to apply the Gamer exception to the WilmerHale communications.

23



O'Malley, 786 F.2d 786, 794 (7th Cir. 1986) (internal quotations omitted). See also Avery Dennison
Corp. v. UCB Films PLC, No. 95 C 6351, 1998 WL 703647, at *4 (N.D. Ill. Sept. 30, 1998).

Nor will the court find waiver based on Household’s inadvertent production of certain E&Y
documents to Plaintiffs during discovery. Courts must balance five factors to determine whether
waiver has occurred under such circumstances: (1) the reasonableness of the precautions taken
to protect the document; (2) the time taken to rectify the error; (3) the scope of discovery; (4) the
extent of the disclosure; and (5) the overriding issue of fairness. Urban Outfitters, Inc. v. DPIC
Companies, Inc., 203 F.R.D. 376, 380 (N.D. Ill. 2001). The court is aware that Defendants’
inadvertent productions in this case have complicated discovery and prompted numerous motions.
Nevertheless, as the court recently noted, “Defendants have produced some four million pages of
documents in this case . . . . It was not unexpected that Defendants and their agents would
inadvertently produce some privileged materials and, indeed, the parties’ agreed protective order
outlines a procedure for returning such materials.” Lawrence E. Jaffe Pension Plan, 237 F.R.D.
at 183.

Plaintiffs argue that Defendants waited too long, until June 29, 2006, to assert the privilege.
(Pl. E&Y Mot., at 9.) The court agrees that Defendants have been somewhat careless in their
document production. For example, Defendants affirmatively produced some of the E&Y
documents, but they claim that “[ijt was not until Defendants learned of the subpoena issued to
€&Y that Defendants’ counsel had occasion to inquire into the potentially privileged nature of the
Compliance Engagement and to review its production for potentially privileged documents relating
to that engagement.” (Def. E&Y Resp., at 16.) Given the volume of documents at issue in this
case, however, the court declines to find that Defendants waived the privilege. See, e.g., Abbott
Labs. v. Andrx Pharmaceuticals, inc., No. 05 C 1490, 2006 WL 2092377, at *4 (N.D. Ill. July 25,

2006) (citing Beneficial Franchise Co. v. Bank One, N.A., 205 F.R.D, 212, 216 (N.D. Ill. 2001))

(‘[Waivers of the attorney-client privilege are to be narrowly construed.”)

18



Plaintiffs also object that Household offered to make the E&Y compliance audit available
to the Multistate Working Group for their review, and that Household cannot now claim that it
intended to keep the documents confidential. (PI. E&Y Mot., at 5 (citing /n re Syncor ERISA Litig.,
229 F.R.D. 636, 645 (C.D. Cal. 2005) (“[DJocuments . . . created with the intent to disclose them
to the Government, if necessary, to benefit Syncor in any governmental investigation . . . were
never privileged.”).) This is not entirely accurate. The Settlement Agreement with the Attorneys
General provided that Household would retain an ‘independent monitor” whose future reports
generated in connection with the Settlement Audit would be provided to the Attorneys General upon
request. (Ex. 2 to Robin Decl.) (See also Ex. F to Baker Decl., at 5 (E&Y “will be retained to
monitor our ongoing compliance with the commitments incorporated into a Settlement Agreement.
We are amenable to sharing these audit results with the parties to the Settlement Agreement . .
. .”) (emphasis added).) There is nothing to indicate that Household was willing to, or did in fact
provide the Working Group with the audit results of the Compliance Engagement. Indeed,
Defendants confirm that Household never shared the results with “the Attorneys General, with the
S.E.C., or with any other governmental agency, authority, or entity, and has maintained the results
of that engagement in strictest confidence.” (Def. E&Y Resp., at 9.) Thus, the E&Y documents
in question are protected by the attorney-client privilege.

b. The Garner Exception

Even accepting that the attorney-client privilege applies, Plaintiffs argue, “there is a well-
recognized exception . . . that allows shareholders access to communications between the
corporation and its attorneys.” (PI. E&Y Mot., at 6.) In Gamer v. Wolfinbarger, 430 F.2d 1093 (Sth
Cir. 1970), shareholders filed a derivative action against a corporation and its officers seeking to
recover the purchase price that they and others similarly situated paid for their company stock. /d.

at 1095. The plaintiffs served the corporation with a subpoena for documents, but the corporation

10



In finding that the bank did not waive the attorney-client privilege, the court noted that the bank had
taken “substantial steps” to ensure the confidentiality of the materials; and there was no evidence
that the bank’s cooperation in the investigation was for its personal benefit. /d. at 696. See also
United States v. Bilimyer, 57 F.3d 31, 37 (1st Cir. 1995) (‘If there were ever an argument for limited
waiver, it might well depend importantly on just what had been disclosed to the government and
on what understandings. Without intending to preclude such an argument in a future case, we
think that it is enough in this one to say that no such claim of limited waiver has been argued to
us.”)

A New York district court similarly endorsed this compromise position in Teachers Ins. &
Annuity Ass'n of America v. Shamrock Broadcasting Co., 521 F. Supp. 638 (S.D.N.Y. 1981). The
court recognized a limited waiver where a party expressly reserved, at the time of disclosure, the
right to assert the privilege in other proceedings. The court reasoned that “a contemporaneous
reservation or stipulation would make it clear that . . . the disclosing party has made some effort
to preserve the privacy of the privileged communication, rather than having engaged in abuse of
the privilege by first making a knowing decision to waive the rule's protection and then seeking to
retract that decision in connection with subsequent litigation.” /d. at 646.

4. Application to this Case

This court cannot say with any certainty whether the Seventh Circuit would apply selective
waiver in this context, and the court declines to adopt a per se rule regarding waiver with respect
to government disclosures. In this case, Household voluntarily disclosed privileged documents to
the SEC. Notably, on or about July 3, 2003, Household recalled from the SEC several privileged
documents that had been inadvertently produced. (Ex. N to Brooks Decl.) On July 16, 2003,

however, Household agreed to produce the documents “[i]n light of the interest of the Staff of the

33



Fourth and Sixth Circuits also declined to find selective waiver in the context of work-product.
Westinghouse, 951 F.2d at 1429; Columbia/HCA Healthcare, 293 F.3d at 306; Martin Marietta, 856
F.2d at 625-26 (company waived non-opinion work product privilege by making testimonial use of
privileged matters in an effort to settle the government's criminal investigation); Massachusetts Inst.
of Tech., 129 F.3d at 687 (“[I]t would take better reason than we have to depart from the prevailing
rule that disclosure to an adversary, real or potential, forfeits work product protection.”)

Most recently, the Tenth Circuit declined to adopt the selective waiver doctrine where a
company chose not to produce some 390,000 pages of privileged documents to the SEC and the
Department of Justice (“DOJ”), but chose to produce 220,000 other pages of privileged documents
pursuant to subpoena and written confidentiality agreements with each agency (the “waiver
documents”). In re Qwest Communications Int'l inc., 450 F.3d 1179, 1181 (10th Cir. 2006). The
confidentiality agreement with the SEC stated that the agency would not disclose the documents
to third parties “except to the extent that the Staff determines that disclosure is otherwise required
by law or would be in furtherance of the Commission's discharge of its duties and responsibilities.”
ld, The DOJ agreement contained similar language, but further provided that the DOJ could share
the waiver documents with other state, local, and federal agencies, and could “make direct or
derivative use of the [waiver documents] in any proceeding and its investigation.” /d. In other
agreements with the DOJ, the company also agreed that the agency could “make full use of any
information it obtains under this agreement in any lawful manner in furtherance of its investigation,
including, without limitation, analyses, interviews, grand jury proceedings, court proceedings,
consultation with and support of other federal, state or local agencies, consultations with experts
or potential experts, and the selection and/or retention of testifying experts.” /d. at 1181-82.

In the course of a subsequent securities fraud case, the company argued that it should not
be required to produce the waiver documents to the plaintiffs, but the Tenth Circuit disagreed.
After conducting an extensive review and analysis of the current case law relating to selective

30



or other representative of a party concerning the litigation.”) In addition, it is well-established that
the work product privilege may be waived by disclosures to third parties “in a manner which
substantially increases the opportunity for potential adversaries to obtain the information.” Vardon
Golf Co. v. Karsten Mfg. Corp., 213 F.R.D. 528, 534 (NLD. Ill. 2003) (quoting Blanchard v.
EdgeMark Fin. Corp., 192 F.R.D. 233, 237 (N.D. Ill. 2000)).

Plaintiffs argue that the E&Y and WilmerHale documents at issue here are not protected
by the attorney-client or work product privileges, and that Defendants have waived any such
privileges in any event. The court addresses each argument in tun.

A. Ernst & Young LLP
1. Attorney-Client Privilege
a. E&Y Provided Necessary Legal Assistance

Plaintiffs insist that the E&Y documents are not covered by the attorney-client privilege
because they do not reflect communications between a lawyer and a client for the purpose of
obtaining or providing legal assistance. (PI. E&Y Mot., at 3.) In Plaintiffs’ view, E&Y performed
“what in essence was an independent factual evaluation, an audit, of Household’s lending
practices.” (/d. at 3-4.) They note, for example, that Household’s General Counsel's September
24, 2002 letter to the Multistate Working Group described factual findings E&Y would make in
conducting its evaluation, including: “(1) identify[ing] the root causes of noncompliance; and (ii)
recommend{ing] process improvements to enhance controls over compliance.” (/d. at 4; Ex. F to
Baker Decl., at 5.) Plaintiffs argue that Household could have conducted the evaluation internally,
did not need E&Y's assistance in order to obtain pertinent legal advice about its compliance
practices and, thus, cannot hide behind the attorney-client privilege. (/d. at 4-5; Pl. E&Y Reply, at

2.) The court disagrees.



to answer certain questions on privilege grounds, and move to compel complete responses and
production of all documents relating to the Restructuring Report.
DISCUSSION

The attorney-client privilege provides that (1) where legal advice of any kind is sought (2)
from a professional legal adviser in his capacity as such, (3) the communications relating to that
purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7)
from disclosure by himself or by the legal adviser, (8) except the protection be waived. United
States v. White, 950 F.2d 426, 430 (7th Cir. 1991). The purpose of the privilege is to “encourage
full disclosure and to facilitate open communication between attorneys and their clients.” United
States v. BDO Seidman, 337 F.3d 802, 810 (7th Cir. 2003). The privilege may be waived by
disclosing documents to third parties, or by submitting similar documents in response to a discovery
request. Evans v. City of Chicago, 231 F.R.D. 302, 312 (N.D. Ill. 2005). That said, an unintentional
disclosure to a third party does not necessarily waive the privilege, nor does an intentional
disclosure if (1) the disclosure is for the purpose of assisting the attorney in rendering legal advice,
or (2) the third party shares a common legal interest with the party claiming the privilege. United
States v. Seidman, 368 F. Supp. 2d 858, 861 (N.D. Ill. 2005).

A document may be protected by the work-product privilege if it is created by an attorney
‘in anticipation of litigation.” Feb. R. Civ. P. 26(b)(3); Logan v. Commercial Union Ins. Co., 96 F.3d
971, 976 (7th Cir. 1996). An assertion of work-product privilege may be overcome upon a showing
of “substantial need” and “undue hardship,” but the courts are cautioned to give even greater
protection to attorney opinions which include mental impressions, conclusions, or legal theories
concerning prospective litigation. Logan, 96 F.3d at 976 n.4 (stating Feb. R. Civ. P. 26(b)(3)
“expressly admonishes courts to.give even greater protection against disclosure of opinion work

product, meaning ‘the mental impressions, conclusion, opinions, or legal theories of an attorney



Plaintiffs finally urge the court to find waiver based on Defendants’ failure to provide a
privilege log for the disputed documents for some three months between June 29 and October 16,
2006. (Pi. E&Y Mot., at 9 (citing Burlington Northern & Santa Fe Ry. Co. v. United States Dist.
Court, 408 F.3d 1142 (9th Cir. 2005).) In Burlington, the Ninth Circuit upheld the lower court's
finding of waiver where a privilege log “not only was not filed during the Rule 34 time limit [30 days],
but was filed five months later,” and there were no mitigating considerations. /d. at 1149. The
court rejected, however, a per se waiver rule in favor of “using the 30-day period as a default
guideline” in making a “case-by-case determination.” /d. Significantly, Defendants have now
provided privilege logs covering all documents in question as of September 8 and October 25,
2006. (Def. E&Y Resp., at 17; Exs. 12 and 13 to Buckley Decl.) Given that more than four million
pages of documents are at issue in this case, the court declines to find waiver based on the delay
in submitting a privilege log. Cf. Universal City Dev. Partners, Ltd. v. Ride & Show Eng’g, inc., 230
F.R.D. 688, 695-96 (M.D. Fla. 2005) (privilege waived due to three and a half month delay in
providing a privilege log where case involved “review and production of 13,000 pages of
documents”)

In sum, the E&Y documents are protected by the attorney-client and work product
privileges, but they are subject to the fiduciary exception and to Plaintiffs’ showing of substantial
need and undue hardship. Plaintiffs’ motion to compel is therefore granted.

B. Wilmer, Cutler & Pickering

As with the E&Y documents, Plaintiffs argue that the WilmerHale documents are not

protected by any privilege, and that Defendants have waived any such privilege in any event. The

court considers these arguments below.

19



Plaintiffs argue that E&Y's assistance was not necessary for Household’s in-house lawyers
to understand the Company's business practices or to calculate refunds. (PI. E&Y Mot., at 5 (citing
Celico P’ship v. Certain Underwriters at Lloyd’s London, No. Civ. A. 05-3158. (SRC), 2006 WL
1320067, at *2 (D.N.J. May 12, 2006) (“[W]hen the third party is a professional, such as an
accountant, capable of rendering advice independent of the lawyer's advice to the client, the
claimant must show that the third party served some specialized purpose in facilitating the attorney-
client communications and was essentially indispensable in that regard.”).) The court is satisfied,
however, that Defendants have demonstrated the necessity of E&Y’s services in this case.
Household retained E&Y to conduct complex quantitative analyses and extensive information-
gathering that was beyond Household counsel's resources and abilities, but was uniquely within
E&Y’s qualifications. Cf. Cavallaro, 284 F.3d at 249 (E&Y’s services not indispensable where
plaintiffs claimed only that the company “had the capacity to benefit the quality of the legal advice
that Hale and Dorr would render.”) As the Cavallaro court recognized, “the complexities of modern
existence prevent attorneys from effectively handling clients’ affairs without the help of others, [and]
the attorney-client privilege must include all the persons who act as the attorney’s agents.” 284
F.3d at 247 (quoting United States v. Kovel, 296 F.2d 918, 922 (2d Cir. 1961)).

Plaintiffs claim that “Household’s in-house counsel were not signing [the engagement letter]
as counsel, but on behalf of the corporate entities.” (PI. E&Y Mot., at 4, 0.4; Pl. E&Y Reply, at 3.)
In support of this argument, Plaintiffs cite a June 20, 2002 memorandum in which attorney Ken
Robin states that “Kay (Curtin, General Counsel of HFC] can sign in my absence on behalf of HFC.
and | will also sign upon my return on behalf of HI.” (Ex. K to Baker Decl.) Notwithstanding this
single internal memo, as explained earlier, the Compliance Engagement letter confirms that Mr.
Robin and Ms. Curtin intended to use E&Y’s work product to provide legal advice to Household ‘in

[their] capacity as General Counsel.” (Ex. 1 to Robin Decl., at 1.)



Nor have Plaintiffs demonstrated that they cannot obtain the equivalent information without
undue hardship. Plaintiffs insist that they cannot recreate the WilmerHale investigation because
they are only allowed to take 55 depositions and, thus, cannot depose all of the individuals
WilmerHale interviewed. (PI. WCP Mot., at 7.) Plaintiffs also lament that witnesses may have
forgotten crucial facts and Household may have deleted relevant email messages. (/d. at 7-8.)
Plaintiffs fail to explain, nor does the court see, why they need to depose every WilmerHale
interviewee in order to test the law firm’s conclusions, especially where Defendants do not intend
to make those conclusions part of their defense. (Def. WCP Resp., at 16.) Moreover, Plaintiffs
have deposed, or have scheduled depositions of nine current or former HMS employees who can
testify about the Markell allegations and the conclusions stated in the Restructuring Report. (/d.)
Notably, Plaintiffs have the underlying data KPMG used to test the accuracy of the Restructuring
Report, and the Report itself. Under these circumstances, Plaintiffs have not demonstrated undue
hardship for purposes of overcoming the work product privilege. See Eagle Compressors, 206
F.R.D. at 478 (quoting Trustmark Ins. Co., 2000 WL 1898518, at *3) (the burden of overcoming
the privilege for fact work product “is difficult to meet and is satisfied ‘only in rare situations, such
as those involving witness unavailability.”)

3. Waiver

Plaintiffs insist that even assuming the WilmerHale materials are privileged, Defendants
have waived the privilege by producing the requested information, or portions of it, to the Class,
KPMG, and the SEC.

a. Production to Plaintiffs

Plaintiffs first note that after Per Eckholdt’s deposition, Defendants affirmatively waived the

privilege with respect to Exhibit 13, an internal email transmitting a tabular arrangement of factual

data that had been requested by WilmerHale. The fact that Defendants withdrew the privilege as

25



UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
LAWRENCE E. JAFFE PENSION PLAN,
On Behalf of itself and All Others Similarly
Situated,
Plaintiffs,
v. No, 02 C 5893

HOUSEHOLD INTERNATIONAL, INC., et al.,

)
)
)
)
)
)
}
) Judge Nan R. Nolan
)

)

Defendants.
MEMORANDUM OPINION AND ORDER
Plaintiffs have filed this securities fraud class action alleging that Defendants Household
International, Inc., Household Finance Corporation, and certain individuals (collectively,
“Household’) engaged in predatory lending practices between July 30, 1999 and October 11, 2002
(the “Class Period”). Currently before the court are (1) Plaintiffs’ Motion to Compel Production of
Documents Pertaining to Household’s Consultations with Ernst & Young LLP, and (2) Plaintiffs’
Motion to Compel Further Responses to the Class’ Questions for Per Eckhoidt Concerning Exhibit
13 and the Production of Documents Underlying Wilmer, Cutler & Pickering Reports. For the
reasons set forth below, the motion regarding Ernst & Young is granted, but the motion regarding
Wilmer, Cutler & Pickering is denied.
BACKGROUND
A. Ernst & Young LLP
Sometime prior to July 1, 2002, the State of California filed a lawsuit against Household
alleging that the Company had overcharged, or charged excessive lending fees to California
customers. Household was concerned about the possibility of similar claims in other states and,
indeed, had already received formal inquiries from the Attorneys General of Arizona and

Washington. In response to this concern, Household retained Ernst & Young ("E&Y") on July 1,



tests create impermissible uncertainty and frustrate the very purpose of the privilege.” (Def. E&Y
Resp., at 12.)

Most courts, including the Seventh Circuit, have recognized the existence of a fiduciary
exception to the attorney-client privilege. In J.H. Chapman Group, Ltd. v. Chapman, No.95 C 7716,
1996 WL 238863 (N.D. Ill. May 2, 1996), for example, the court explained that “[t]he fiduciary duty
exception ‘is based on the notion that a communication between an attorney and a client is not
privileged from those to whom the client owes a fiduciary duty.” /d. at *1 (quoting Ferguson v.
Lurie, 139 F.R.D. 362 (N.D. Ill. 1991)). The exception applies upon a showing of a fiduciary relation
and good cause for overcoming the privilege. /d. To determine good cause, the court considers
several factors, including:

whether the party seeking the information asserts a colorable claim, whether the

information sought is not available elsewhere, whether the information sought is

related to past or present actions, and whether the information sought may risk a

revelation of trade secrets or other confidential information.

{d. (citing Heyman v. Beatrice Co., No. 89 C 7381, 1992 WL 245682, at *2 (N.D. Ill. Sept. 23,
1992)), See also Bland v. Fiatallis North America, Inc., 401 F.3d 779, 787 (7th Cir. 2005)
(recognizing fiduciary exception in the ERISA context).

The Seventh Circuit has not decided whether this fiduciary exception applies where
shareholders are suing a corporation in a non-derivative action. The Third and Fifth Circuits have
held that it does, as have several district courts. See, e.g., Fausek v. White, 965 F.2d 126, 130-31
(6th Cir. 1992) (applying Gamer to non-derivative claims against a corporation); Ward v.
Succession of Freeman, 854 F.2d 780, 786 (5th Cir. 1988) (same); RMED Int'l, Inc. v. Sloan's
Supermarkets, Inc., No. 94 Civ. 5587PKLRLE, 2003 WL 41996 (S.D.N.Y. Jan. 6, 2003) (applying
Gamerin securities fraud class action); /n re Pfizer Inc. Sec. Litig., No. 90 Civ. 1260 (SS), 1993 WL
561125, at *11-14 (S.D.N.Y. Dec. 23, 1993); in re int'l Business Machines Corp. Sec. Litig., No. 92

Civ. 9076 (GLG), 1993 WL 760214 (S.D.N.Y. Nov. 30, 1993) (applying Garner in securities fraud

12



objected on privilege grounds. /d. at 1096. The Fifth Circuit considered the attorney-client privilege
“in a particularized context: where the client asserting the privilege is an entity which in the
performance of its functions acts wholly or partly in the interests of others, and those others, or
some of them, seek access to the subject matter of the communications.” /d, at 1101. The court
concluded that “where the corporation is in suit against its stockholders on charges of acting
inimically to stockholder interests, protection of those interests as weil as those of the corporation
and of the public require that the availability of the privilege be subject to the right of the
stockholders to show cause why it should not be invoked in the particular instance.” /d. at 1103-04.
In reaching this conclusion, the Fifth Circuit cautioned that “[dJue regard must be paid to the
interests of nonparty stockholders, which may be affected by impinging on the privilege, sometimes
injuriously.” As the court explained, “[t]he corporation is vulnerable to suit by shareholders whose
interests or intention may be inconsistent with those of other shareholders, even others constituting
a majority.” /d. at 1101.17. The court further confirmed that “[t]he attorney-client privilege still
has viability for the corporate client,” and that “[t]he corporation is not barred from asserting it
merely because those demanding information enjoy the status of stockholders.” /d. at 1103.
Defendants argue that the Garner doctrine does not apply outside the context of derivative
actions. Defendants direct the court to Weil v. Investment/indicators, Research and Mgmt., Inc.,
647 F.2d 18 (9th Cir. 1981), in which the Ninth Circuit found Garner “inapposite” where the plaintiff
had filed a securities class action “to recover damages from the corporation for herself and the
members of her proposed class” and not a derivative suit seeking damages on behalf of the
corporation. /d. at 23. Defendants note that in Swidler & Berlin v. United States, 524 U.S. 399
(1998), the Supreme Court confirmed that “we have rejected use of a balancing test in defining the
contours of the [attorney-client] privilege.” /d. at 409. In Defendants’ view, “the Supreme Court has
made perfectly clear that, under the federal common law of privilege, balancing tests employed to
determine whether the attorney-client privilege should be honored are forbidden, because such

11



company argued that the government had waived its law enforcement privilege by playing the
tapes. /d. Without taking a formal position on the selective waiver issue, the Seventh Circuit noted
that courts generally have rejected it, explaining that “courts feel, reasonably enough, that the
possessor of the privileged information should have been more careful, as by obtaining an
agreement by the person to whom they made the disclosure not to spread it further.” /d. at 1127.
» The court found that the government had not deliberately waived its privilege but, rather, had made
a mistake in failing to obtain “a promise that none of the lawyers or directors would show the notes
to anyone else.” /d. at 1126, 1127. The court therefore held that the government had not waived
its law enforcement privilege in that case. /d. at 1127.

Other courts have affirmatively endorsed the theory of selective waiver where the parties
have entered into confidentiality agreements. In /n re Steinharat Partners, L.P., 9 F.3d 230 (2d Cir.
1993), for example, the Second Circuit declined to adopt a per se rule that all voluntary disclosures
to the government waive work product protection. The court explained that any such rigid rule
would fail to anticipate “situations in which the SEC and the disclosing party have entered into an
explicit agreement that the SEC will maintain the confidentiality of the disclosed materials.” /d. at
236. See also In re Leslie Fay Companies, Inc. Sec. Litig., 161 F.R.D. 274, 284 (S.D.N.Y. 1995)
(disclosures “made pursuant to confidentiality agreements intended to preserve any privilege
applicable to the disclosed documents” satisfied the standard set forth in Steinhardf).

In In re M & L Business Mach. Co., 161 B.R. 689 (D. Colo. 1993), a bank sought a
protective order for attorney letters and memoranda that had been previously provided to the
United States Attorney to assist in an investigation of one of the bank's clients, defendant M & L
Business Machine Co. /d. at 691-92. The bank had cooperated with the U.S. Attorney's
investigation “subject to the requirement that any information provided under the Letter Agreement
be treated as privileged, subject to protection under Fep. R. Crim. P. 16(a)(2) and not be

disseminated except as required under federal law or the rules of criminal procedure.” /d. at 691.

32



waiver, the court concluded that “[t]he record does not establish a need for a rule of selective
waiver to assure cooperation with law enforcement, to further the purposes of the attorney-client
privilege or work-product doctrine, or to avoid unfairness to the disclosing party.” /d. at 1192. The
court found that “[rJather than a mere exception to the general rules of waiver, one could argue that
Qwest seeks the substantial equivatent of an entirely new privilege, i.e., agovernment-investigation
privilege.” /d. The court was unwilling, on the record before it, to take such a giant leap in the
common law development of privileges. /d.

The Seventh Circuit has not yet determined whether it endorses the concept of selective
waiver, though courts in this district have not viewed it with particular favor. In /n re Bank One Sec.
Litig., for example, the court found that the defendant had waived the work-product privilege with
respect to documents produced to the Office of the Comptroller of the Currency (“OCC”). 209
F.R.D. at 424. The court acknowledged that the defendant had “complied with an OCC
investigation in which documents were ordered to be produced,” but held that “the voluntary nature
of the disclosure is not dispositive as to whether the work-product privilege has been waived.” /d.
The court also rejected any reliance on a confidentiality agreement between the defendant and the
OCC, finding that it “does not salvage the protection of the work-product doctrine due to the
adversarial nature of this relationship.” /d. See also In re Sulfuric Acid Antitrust Litig., 235 F.R.D.
407, 427 (N.D. Ill. 2006) (defendants waived any claim of privilege by producing ‘a raft of
documents to the Department of Justice pursuant to subpoena.”")

3. Courts Allowing Selective Waiver with Confidentiality
Agreement

As noted, the Seventh Circuit has not yet determined its position on selective waiver. It has,
however, left the door open for this theory. In Deliwood Farms, Inc. v. Cargill, Inc., 128 F.3d 1122
(7th Cir. 1997), the government played certain tapes for corporate defense counsel to persuade

the company to plead guilty. /d. at 1124. The plaintiffs in the ensuing civil litigation against the

31



It is clear from the Compliance Engagement letter that E&Y was acting as an agent of
Household's General Counsel's office: “[T]he Attorneys have retained Ernst & Young to assist the
Attorneys rendering legal advice to Household Finance Corporation and certain of its affiliates.”
(Ex. 1 to Robin Decl, Appendix B.) Cf. Cavallaro v. United States, 284 F.3d 236 (1st Cir. 2002) (no
privilege where “[e]veryone . . . agrees that Camelot hired Ernst & Young to provide financial
advice, not to assist any lawyers.”) Both Household and E&Y understood that the engagement was
to assist in-house counsel in providing legal advice regarding pending or anticipated litigation.
Indeed, at the time Household retained E&Y, it was preparing for a negotiation with the Multistate
Working Group regarding threatened claims arising from the Company's consumer lending
practices. (Def. E&Y Resp., at7.) See, e.g., Inre Grand Jury Proceedings, 220 F.3d 568, 571 (7th
Cir. 2000) (“[MJaterial transmitted to accountants may fall under the attorney-client privilege if the
accountant is acting as an agent of an attorney for the purpose of assisting with the provision of
legal advice.”)

Plaintiffs insist that the Compliance Engagement letter is “a sham.” (Pl. E&Y Reply, at 4.)
They note that a June 24, 2002 email from Stephen L. Hicks of Household’s Policy & Compliance
department states that “HI” (as opposed to counsel) “has engaged Ernst & Young to develop fair
lending and other models to identify patterns and practices in our lending process.” (Ex. B to Pl.
E&Y Mot.) In addition, Household’s counsel “worked with” E&Y for some two weeks to draft the
retention letter. (Ex. K to Pl. E&Y Mot., memo from K. Robin dated 6/20/02.) The mere fact that
it took Household’s counsel and E&Y a couple of weeks to finalize a retention agreement does not
demonstrate that the retention letter is a sham. Nor is the court persuaded that the arrangement
was false based on a single internal email stating generically that “HI” retained E&Y. Notably, the
same email states that Kenneth Robin, Household’s Senior Executive Vice President, General

Counsel, “indicated to E&Y that they expect progress on this project... .” (Ex. B to Pl. E&Y Mot.)



has occurred.” 15 U.S.C. § 78j-1(b)(1). This provision “expanded independent accountants’
watchdog duties,” such that KPMG was required to ascertain whether Household had engaged in
any illegal acts that would directly and materially affect the Company's financial statements. See
In re Enron Corp. Sec., Derivative & ERISA Litig., 235 F. Supp. 2d 549, 611 (S.D. Tex. 2002).
Nothing prohibited KPMG, however, from requesting legal assistance in meeting its obligations
under § 78)-1(b).

Plaintiffs also suggest that communications between WilmerHale and individual Household
employees, including Per Eckholdt, are not privileged because only the Audit Committee
constitutes the law firm’s “client.” (Pl. WCP Mot., at 4-5.) Under this theory, no attorney-client
relationship exists between Household employees and WilmerHale, so “any interview-related
documents, such as summaries, memoranda, or notes, and any documents prepared at the
request of [WilmerHale] (such as Mr. Eckholdt’s Exhibit 13 and similar documents), are
discoverable and should be produced immediately.” (/d. at 5.) The court disagrees that the
attorney-client relationship is so narrowly construed in the corporate context. The recent case of
SEC v. Brady, No. 3:05-CV-1416-M, 2006 U.S. Dist. LEXIS 74979 (N.D. Tex. Oct. 16, 2006) is
instructive in this regard.

In Brady, a corporation’s audit committee hired the law firm of Baker Botts to conduct an
internal investigation and give legal advice. concerning potential securities claims against the
corporation. /d. at “5. As part of its investigation, Baker Botts attorneys reviewed some 40,000
pages of documents and conducted 70 interviews with current and former company employees.
Baker Botts then submitted a lengthy report detailing the results of its investigation. /d. at*6. The
SEC ultimately filed suit against the company's former president and CEO, Gregory A. Brady.
During the course of discovery, Brady moved to compel production of documents relating to the
Baker Botts investigation. /d. at*10-11. Baker Botts objected on the grounds of privilege, and the
court sustained the objection. The court viewed the employee interviews as “confidential

22



Plaintiffs argue that Defendants cannot produce privileged material to a governmental
agency for their own benefit and then still assert the privilege here. In other words, Plaintiffs ask
the court to reject the “selective” or “limited” waiver theory, which provides that a party may disclose
documents to a government agency without waiving the privilege as to any other party. As
discussed below, the circuit courts are split as to the viability and application of this theory. Some
have found that selective waiver is always permissible; some have found that selective waiver is
never permissible; and others have found that selective waiver is permissible when the government
has signed a confidentiality agreement. The court finds this last approach most persuasive in this
case.

1. Courts Allowing Selective Waiver

The Eighth Circuit has adopted the theory of selective waiver in the context of the attorney-
Client privilege. In Diversified indus., Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1977), a company
voluntarily produced privileged material to the SEC pursuant to an agency subpoena. In a
subsequent lawsuit, the company denied that it had waived the attorney-client privilege by virtue
of that production. The Eighth Circuit agreed, finding that the SEC disclosure constituted only a
limited waiver. The court explained that a contrary holding “may have the effect of thwarting the
developing procedure of corporations to employ independent counsel to investigate and advise
them in order to protect stockholders, potential stockholders and customers.” /d. at 611.

2. Courts Rejecting Selective Waiver

Many other courts have rejected the concept of selective waiver of the attorney-client
privilege, finding that “[vjoluntary cooperation with government investigations may be a laudable
activity, but it is hard to understand how such conduct improves the attorney-client relationship.”
Permian Corp. v. United States, 665 F.2d 1214, 1220-21 (D.C. Cir. 1981). These courts explain

that “[t]he client cannot be permitted to pick and choose among his opponents, waiving the privilege

28



On July 13, 2006, Defendants sent Plaintiffs another letter confirming that the E&Y materials were
privileged and would not be produced. Approximately one week later on July 21, 2006, Defendants
recalled several privileged documents relating to the Compliance Engagement that “had been
inadvertently produced during the course of Defendants’ document production.” (Def. E&Y Resp.,
at 4.) Plaintiffs refused to return the documents and have now filed a motion to compel production
of all the E&Y documents.

B. Wilmer, Cutler & Pickering

In or about November 2002, Elaine Markell, Vice President of Default Services for
Household Mortgage Services ("HMS"), a division of Household Finance Corporation, threatened
suit against Household and submitted a draft complaint alleging that the Company had illegally
used loan restructures to manipulate financial performance data, and violated bankruptcy laws.
(Ex. 1 to Beer Decl.) Household’s Internal Audit Department promptly commenced an initial inquiry
into these allegations. On December 5, 2002, the Securities and Exchange Commission (“SEC”),
which was already conducting an informal, non-public inquiry into various Household practices, sent
the Company a letter request for documents relating to a number of subjects, including the loan
restructuring policies addressed in Markell’s complaint. (Ex. 2 to Beer Decl.)

Shortly thereafter, in mid-January 2003, the SEC changed its informal, non-public inquiry
into a formal, public one, and served a document subpoena on Household seeking, among other
things, information related to the Markell allegations. (Ex. 5 to Pl. WCP Mot.) At a January 27,
2003 Audit Committee meeting, Household’s outside auditor, KPMG, indicated that it “would be
unable to issue its audit opinion on Household’s consolidated financial statements as of and for the
year ended December 31, 2002 until Household engaged outside counsel and conducted an
independent investigation of the Markell Allegations.” (/d. at 2.) On February 13, 2003, the Audit

Committee retained the law firm of Wilmer, Cutler & Pickering (now known as “WilmerHale”) to



or expertise (though E&Y was assisting Household's counsel in forming its legal opinions).
Plaintiffs’ request is also limited to a particular topic and investigation, and it does not appear that
they could obtain from another source the underlying data E&Y utilized in conducting its
investigation.

This does not end the inquiry, however. Courts have declined to extend Garner to the work
product doctrine, so the court must still determine whether the documents in question here are
covered by that privilege as well. See, e.g., in re int? Sys. and Controls Corp. Sec. Litig., 693 F.2d
1235, 1239 (5th Cir. 1982); Cox v. Administrator U.S. Stee! & Carnegie, 17 F.3d 1386, 1423 (11th
Cir. 1994) (“[T}he Fifth Circuit has held that the Garner doctrine does not apply to attorney work
product... . We agree."); Lugosch v. Congel, 219 F.R.D. 220, 243 (N.D.N.Y. 2003).

2. Work Product Privilege

Plaintiffs claim that the E&Y documents are not protected by the work product privilege
because they were not prepared “in anticipation of litigation.” (Pl. E&Y Mot., at 7.) This court has
already determined that “documents are protected by the work product privilege if they were
prepared ‘because of" the prospect of litigation.” Lawrence E. Jaffe Pension Plan v. Household
Inti, Inc., 237 F.R.D. 176, 181 (N.D. Ill. 2006) (citing Hollinger Int'l Inc. v. Hollinger Inc., 230 F.R.D.
508 514 (N.D. Ill. 2005) ("The standard . . . that the documents must be ‘created principally or
exclusively to assist in contemplated litigation’ is . . . not the applicable legal standard in the
Seventh Circuit.”)).? Here, E&Y conducted the Compliance Engagement in response to the lawsuit
filed by the State of California and in anticipation of other similar lawsuits from other states.

Plaintiffs deny this assertion, noting that Household settled the California lawsuit in January
2002, several months before the Company retained E&Y. (PI. E&Y Reply, at 8.) Plaintiffs

acknowledge, however, that Arizona and Washington had made formal inquiries, and that

2 Plaintiffs have appealed this court’s decision in Lawrence E. Jaffe Pension Plan to
the district court, where it remains pending. (See Doc. 612.)

15



(Def. E&Y Resp., at 13.) Opinion work product includes the “mental impressions, conclusions,
opinions, or legal theories of an attorney or other representative of a party concerning the litigation.”
Fep. R. Civ. P. 26(b)(3); Hollinger Int’, 230 F.R.D. at 511.

The court agrees that the E&Y documents constitute work product in that E&Y conducted
its evaluation as an agent of Household’s General Counsel's office. See, e.g., National Jockey
Club v. Ganassi, No. 04 C 3743, 2006 WL 733549, at *1 (N.D. Ill. Mar. 22, 2006) (“The work
product doctrine encompasses documents prepared in anticipation of litigation by a party’s
representative or agent.") The court is less certain that the documents constitute “opinion” work
product as contemplated by Rule 26, and finds that Household has not met its burden on this issue.
As for the fact work product, the court believes that Plaintiffs have met their burden of overcoming
the privilege. Eagle Compressors, Inc. v. HEC Liquidating Corp., 206 F.R.D. 474, 478 (N.D. Ill.
2002) (quoting Trustmark Ins, Co. v. General & Cologne Life Re of America, No. 00 C 1926, 2000
WL 1898518, at *3 (N.D. ill. Dec. 20, 2000)). Plaintiffs have demonstrated a substantial need for
the E&Y information in that it may assist Plaintiffs in establishing falsity, scienter, and materiality.
Plaintiffs do not have the underlying data E&Y utilized in preparing its report, and without this
information, it is not clear that witness depositions would provide Plaintiffs with the substantial
equivalent of the materials. Thus, Plaintiffs' motion to compel the E&Y materials is granted.

3. Waiver

Before leaving this topic, the court will briefly address Plaintiffs’ additional argument that
Househoid has waived any applicable privilege by voluntarily revealing the subject matter — though
not the specific details — of the Compliance Engagement to the Attorneys General. The court
declines to find such a broad waiver. Indeed, “a client does not waive his attorney-client privilege

merely by disclosing a subject which he has discussed with his attorney.” United States v.

17



(/d. at 5.) Household further explained that E&Y “will be retained to audit our ongoing compliance
with the commitments incorporated into a Settlement Agreement. We are amenable to sharing
these audit results with the parties to the Settlement Agreement, provided strictest confidentiality
can be maintained.” (/d.)

In conducting its study, E&Y focused on the following areas of Household’s lending
operations: administrative fees; involuntary unemployment insurance; late fees; prepayment
penalties; “points on points” arising from refinancing; and inaccurate/inconsistent information on
disclosure documents, especially regarding points and appraisal fees. (Ex. Ato Baker Decl., at 5.)
E&Y ultimately authored a number of documents, including Excel spreadsheets, using information
obtained from Household employee interviews and documents prepared by Household’s
Technology & Services Department of the Consumer Lending Business Unit. (Ex. C to Baker
Decl.)

On October 11, 2002, Household entered into a Settlement Agreement with the Multistate
Working Group, resolving the predatory lending allegations against Household. The Settlement
Agreement provided that Household would retain an “independent monitor” who would “ensure
compliance with the terms of the agreement” (the “Settlement Audit”). (Ex. 2 to Robin Decl.) The
reports generated by the independent auditor in connection with the Settlement Audit were to be
provided to the Attorneys General. This did not include, however, any of the materials relating to
the pre-existing Compliance Engagement.

On May 19, 2006, Plaintiffs served a subpoena on E&Y seeking documents relating to the
Compliance Engagement, and a witness to depose on that issue. E&Y objected to the subpoena
by letter dated June 6, 2006. On June 29, 2006, Defendants sent Plaintiffs a letter notifying them
that they were in the process of gathering information relating to the E&Y engagement to determine
whether the work was protected by the attorney-client and/or work product privileges. Defendants
indicated at that time that they believed both privileges did in fact apply. (Ex. 2 to Buckley Decl.)

3



to a strictly factual and non-privileged document, however, does not waive the privilege as to all
WilmerHale materials. Cf. in re Bank One Sec. Litig., First Chicago Shareholder Claims, 209
F.R.D. 418, 423 (N.D. Ill. 2002) (noting that waiver of attorney-client and work product privileges
occurs where party discloses actual attorney work product to an adversary). For similar reasons,
Defendants’ production of two other factual documents is insufficient to waive the privilege. The
first is an internal email forwarding an email addressed to an attorney, which “merely identifies and
attaches a tabular array of nonprivileged pre-existing factual information.” (Def. WCP Resp., at 10;
Ex. 11 to Pl. WCP Mot.) The second is an internal Household presentation that includes a
reference to “estimates” having been prepared at WilmerHale's request, but does not include or
describe those estimates. (/d.; Ex. 12 to Pl. WCP Mot.)

The court is also unpersuaded that a waiver occurred based on testimony Louis E. Levy,
former chair of Household’s Audit Committee, purportedly gave at his deposition. According to
Plaintiffs, Mr. Levy testified “as to the substance of discussions he had with [WilmerHale].” (PI.
WCP Mot., at 9.) The cited transcript pages, however, confirm that Mr. Levy was discussing the
substance of the SEC investigation, and not WilmerHale’s investigation. (Ex. 4 to Pl. Mot., Levy
Dep., at 188.)

Finally, the court declines to find waiver based on Defendants’ error in producing the March
17, 2003 draft Restructuring Report to Plaintiffs during the course of discovery. Two other copies
of the same draft report are included on Defendants’ privilege logs, indicating that Defendants did
not intend to produce the document, and Defendants have since recalled the document pursuant
to the Protective Order. (Def. WCP Resp., at 10-11.) Given the volume of documents at issue in
this case, the court declines to find that Defendants waived the privilege. See Abbott Labs., 2006
WL 2092377, at *4 (“[Waivers of the attorney-client privilege are to be narrowly construed.”)

As for Plaintiffs’ concern that Defendants are attempting to use favorable portions of the
WilmerHale materials as a sword while simultaneously withholding unfavorable portions under the

26



2002 to conduct a compliance study of its Consumer Lending operation (the “Compliance
Engagement"). At the time, Household was involved in negotiation sessions with a Multistate
Working Group of state Attorneys General (the “Working Group”) regarding threatened claims
arising from the Company’s consumer lending practices.

The Compliance Engagement letter explained that E&Y would review possible overcharges
associated with such loan features as administrative fees, late fees, and prepayment penalties.
The letter also stated that E&Y was assisting Household’s General Counsel in providing legal
advice regarding existing and threatened litigation relating to the compliance issues under review:

We understand that you will be utilizing the Work Product in order to provide legal

advice to your client, Household, in your capacity as General Counsel. As such, all

Work Product shall be deemed covered by the attorney-client privilege.

Furthermore, it is our understanding that Household companies are currently

involved in various types of litigation for which the Work Product may be used and

anticipate such litigation in the future. As such, all Work Product shall be treated

by E&Y as privileged under the attorney work product privilege.

(Ex. 1 to Robin Decl.) According to Defendants, Household's General Counsel needed E&Y's
assistance in conducting the compliance study because it required expertise in sophisticated
quantitative analyses and in identifying and addressing compliance issues, as well as a substantial
commitment of personnel. In Defendants’ view, “it would not have been possible for Household
personnel to have performed all of the tasks that E&Y performed.” (Def. E&Y Resp., at 2.)

On September 24, 2002, Household’s General Counsel wrote a letter to the Working Group
regarding possible means of resolving the Group’s stated concerns and the threat of litigation.
Household views the letter as a confidential settlement negotiation and, indeed, the letter states
that it is “Confidential - For Settlement Discussion Purposes Only.” (Ex. F to Baker Decl.) The
letter expressly informed the Working Group about the E&Y study, explaining that:

The Emst & Young engagement is designed to monitor the company’s compliance

with certain company policies and state regulation. In addition, Ernst & Young shall

(1) identify the root causes of noncompliance; and (ii) recommend process
improvements to enhance controls over compliance.



U.S. Securities and Exchange Commission . . . in determining whether there have been any
violations of the federal securities laws ....” (Ex. H to Beer Decl.)

That said, Household insisted on a confidentiality agreement to protect the information. The
court agrees with those cases finding that selective waiver may be appropriate where the disclosing
party took steps to preserve its privilege. The agreement in this case expressly stated that “neither
the Committee nor Household intend to waive the protections of the attorney work product doctrine,
attorney-client privilege, or any other privilege applicable as to third parties.” (Ex. H to Beer Decl.,
at 1.) Plaintiffs make much of the fact that the agreement also allows the SEC to disclose the
confidential information “to the extent that the Staff determines that disclosure is otherwise required
by law or would be in furtherance of the Commission's discharge of its duties and responsibilities.”
(id. at 2.) Plaintiffs note that the Qwest Communications court found that identical confidentiality
language did not preclude waiver because it “gave the [SEC and DO\] broad discretion to use the
Waiver Documents as they saw fit.” 450 F.3d at 1181, 1194. The language in the DOJ’s
confidentiality agreement, however, was much broader than the language at issue here. In
addition, unlike in Qwest, there is no evidence that “any restrictions on [the documents’] use were
loose in practice.” /d. at 1194. Thus, the court finds the agreement sufficient for purposes of
applying selective waiver of the WilmerHate documents in this case. Household has not waived
the work-product privilege by its voluntary production to the SEC of otherwise-privileged

documents, and Plaintiffs’ motion to compel is denied.*

‘ The court notes that the Advisory Committee on Evidence Rules has proposed the
following amendment to Feo. R. Evin. 502:

Selective waiver. - In a federal or state proceeding, a disclosure of a
communication or information covered by the attorney-client privilege or work
product protection — when made to a federal public office or agency in the exercise
of its regulatory, investigative, or enforcement authority - does not operate as a
waiver of the privilege or protection in favor of non-governmental persons or
entities.

34



for some and resurrecting the claim of confidentiality to obstruct others, or to invoke the privilege
as to communications whose confidentiality he has already compromised for his own benefit.” /d.
at 1221. See also United States v. Massachusetts Institute of Tech., 129 F.3d 681, 686 (1st Cir.
1997) (“Anyone who chooses to disclose a privileged document to a third party, or does so
pursuant toa prior agreement or understanding, has an incentive to do so, whether for gain or to
avoid disadvantage. it would be perfectly possible to carve out some of those disclosures and say
that, although the disclosure itself is not necessary to foster attorney-client communications, neither
does it forfeit the privilege. With rare exceptions, courts have been unwilling to start down this path
- which has no logical terminus — and we join in this reluctance.”); Westinghouse Elec. Corp. v.
Republic of Philippines, 951. F.2d 1414, 1425 (3d Cir. 1991) (“[S]elective waiver does not serve the
purpose of encouraging full disclosure to one’s attorney in order to obtain informed legal
assistance; it merely encourages voluntary disclosure to government agencies, thereby extending
the privilege beyond its intended purpose.”); /n re Martin Marietta Corp., 856 F.2d 619, 623-24 (4th
Cir. 1988) (“The Fourth Circuit has not embraced the concept of limited waiver of the attorney-client
privilege.”)

The Sixth Circuit has similarly joined the First, Third, Fourth, and D.C. Circuits in rejecting
selective waiver. In /n re Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F.3d 289 (6th
Cir. 2002), the Sixth Circuit determined that courts view selective waiver in one of three ways: (1)
selective waiver is permissible; (2) selective waiver is not permissible in any situation; and (3)
selective waiver is permissible where the Government agrees to a confidentiality order. /d. at 295.
In rejecting any form of selective waiver, the court explained that the first approach “has little, if any,
telation to fostering frank communication between a client and his or her attorney.” /d. at 302. The
court also found that any form of selective waiver, even that which stems from a confidentiality
agreement, transforms the attorney-client privilege into “merely another brush on an attorney's

palette, utilized and manipulated to gain tactical or strategic advantage.” /d. The First, Third,

29



case); Cohen v. Uniroyal, inc., 80 F.R.D. 480 (E.D. Pa. 1978) (applying Garner in securities fraud
class action). These courts have not, however, adopted a uniform method of applying the
exception.

Some courts “appear to assume that in any securities fraud case, the plaintiff class - insofar
as it consists of current shareholders - will be entitled, on a showing of good cause, to pierce the
privilege . . . even if the communications predate plaintiffs’ status as shareholders.” In re Omnicom
Group, Ine. Sec. Litig., 233 F.R.D. 400, 411 (S.D.N.Y. 2006) (citing RMED Int'l, 2003 WL 41996,
at *4.) These courts view the distinction between a derivative action and a private securities fraud
lawsuit as “but one factor to be considered in assessing whether the plaintiffs have shown good
cause for piercing the privilege.” /d. Other courts, however, “have suggested that the rationale for
the fiduciary exception limits its application, at the very least, to plaintiffs who were shareholders
at the time of the privileged communication.” /d. (citing in re Kidder Peabody Sec. Litig., 168 F.R.D.
459, 475 (S.D.N.Y. 1996) and In re Atlantic Fin. Mgmt. Sec. Litig., 121 F.R.D. 141, 146 (D. Mass.
1988)).

The in re Omnicom Group court questioned whether the fiduciary exception should apply
routinely in securities fraud lawsuits, noting that the plaintiffs in such cases “are seeking personal
benefit and are not seeking to benefit the company,” and are “complaining of alleged misconduct
injurious to them as members of the investing public rather than injurious to the corporation.” /d.
at 412. See also Weil, 647 F.2d at 23 (finding Gamer inapplicable where the plaintiff “seeks to
recover damages from the corporation for herself and the members of her proposed class.") This
court has similar reservations about applying the fiduciary exception as a matter of course in
securities fraud cases and views the non-derivative nature of the claim as a strong factor to
consider in determining whether to prevent invocation of the attorney-client privilege.

In this case, Plaintiffs have not filed a derivative action and their interests are clearly

personal in that they seek to recover financially for Households alleged fraud. In addition, Plaintiffs

13



Household was involved in settlement talks with the Multistate Working Group at the time of E&Y's
retention. Plaintiffs insist that “[t]here are no objective facts as to why Household feared litigation
from .. . 20 [additional] states” when only two had made formal inquiries. Plaintiffs also question
why Household asked E&Y to review 20 states when only 11 states had participated in the initial
May 23, 2002 settlement discussion. (/d.) The fact that Household decided to conduct a more
expansive review does not, however, contradict its assertion that it retained E&Y because of the
prospect of litigation. The court is satisfied that Defendants have met their burden of showing that
the E&Y documents constitute privileged work product.

Plaintiffs argue that the documents constitute “fact” and not “opinion” work product, and
insist that they have overcome any qualified privilege. See Hobley v. Burge, 433 F.3d 946, 949-50
(7th Cir. 2006) (“The work-product privilege may be overcome ‘only upon a showing that the party
seeking discovery has substantial need of the materials in the preparation of the party's case and
that the party is unable without undue hardship to obtain the substantial equivalent of the materials
by other means.”) According to Plaintiffs, the documents “go to the heart of the substantive claims
in this case” by establishing the falsity of Household’s statements, Household’s knowledge that the
statements were false, and the materiality of revenues Household received from its alleged
predatory lending practices. (Pl. E&Y Mot., at 7-8.) Plaintiffs also claim that they cannot obtain the
documents from any other source without undue hardship, noting that the Class “does not have the
same unfettered ability to interview Household employees nor does the Class have access to the
specific data provided to E&Y." (/d. at 8.)

Defendants insist that the E&Y documents constitute “opinion” work product. As
Defendants explain, “[a]n analysis of documents created in connection with the Compliance
Engagement, even if those documents were not themselves prepared by an attorney, would
undoubtedly reveal to Plaintiffs the nature and focus of the work being conducted by E&Y at the
request of Household’s attorneys, thereby invading the inviolable area of opinion work product.”

16