In Bennett v. Sprint Nextel Corp., Case No. 11-9014-MC-W-ODS, 2012 U.S. Dist. LEXIS 145902 (W.D. Mo. Oct. 10, 2012), the plaintiffs, shareholders of Sprint Nextel Corp. (“Sprint”), filed a motion to compel KPMG, Inc. (“KPMG”), a non-party to the suit, to release certain documents presumed to support allegations of securities fraud in connection with Sprint’s acquisition of Nextel. The court granted, in part, the plaintiffs’ motion to compel on the ground that some of the information intentionally withheld by KPMG was privileged pursuant to 105 U.S.C. § 7215(b)(5)(A) (“Section 105(b)(5)(A)”), which protects information involved with Public Company Accounting Oversight Board (“PCAOB” or “Board”) inspections of registered accounting firms.
To maintain its administrative oversight authorized by the Sarbanes-Oxley Act, the PCAOB conducts regular inspections of accounting firms that perform independent audits of publicly traded companies. From 2004 to 2009, KPMG performed independent audit work for Sprint, and assisted with the accounting for Sprint’s acquisition of Nextel in 2005. In 2006, the PCAOB initiated a customary inspection of KPMG’s auditing practices. Of particular interest to the plaintiffs were aspects of the inspection that involved KMPG’s Sprint audit.
Section 105(b)(5)(A) protects against discovery “all documents and information prepared or received by or specifically for the Board, and deliberations of the Board.” This excludes from discovery such information “directed to targets of the Board’s investigations.”
First, the plaintiffs contested KPMG’s claim of privilege for internal communications not necessarily transmitted to the PCAOB but created for the sole purpose of responding to inquiries made during the course of the inspection. The plaintiffs argued that the privilege should not apply to information not “specifically for the Board.” However, the court reasoned that the internal “communications that discuss confidential questions or comments made by the Board or reflect KPMG’s development of responses to Board inquiries are also protected.” The court held that the internal information was “specifically for the Board,” because “absent the inspection, these documents and communications would not exist.”
Second, the plaintiffs challenged KPMG’s assertion that the statutory privilege covered internal documentation that could potentially divulge information regarding the PCAOB’s deliberations. The plaintiffs maintained that the deliberations privilege should not apply since KPMG was not involved with the PCAOB’s actual deliberations. The court agreed that the deliberations privilege was intended to protect the PCAOB and its “consideration and analysis of the evidence,” not the evidence itself. As a result, the deliberative privilege did not extend to the documents submitted to the PCAOB.
Finally, the plaintiffs contended that KPMG specifically waived its statutory privilege by informing Sprint’s CEO of the upcoming inspection and by sharing a presentation used to organize preparations for the inspection with Sprint personnel. Analogizing to other privileges, the court reasoned that the partial disclosure of privileged documents does not destroy the protection of other privileged documents. The court held that KPMG never revealed the “details or substance of the investigation,” and that the limited amount of detail disclosed was not enough to warrant a complete waiver of privileged information.
Accordingly, the court granted, in part, the plaintiffs’ motion to compel and denied the plaintiffs’ contentions of waiver. We have previously discussed the underlying suit here.
The primary materials for this case may be found on the DU Corporate Governance website.