US v. David Stockman: Denying Stockman’s Request for Production of Audit Committee Report and Investigative Work Plan

On October 8, 2008, U.S. District Court Judge Barbara S. Jones filed an order finding that two documents requested by David Stockman’s defense team, (1) the final Audit Committee Report relating to the 2005 Audit Committee Investigation and (2) the Investigative Work Plan created by Davis Polk & Wardwell, were not discoverable either as Brady material or as documents material to defense preparation. Order Denying Stockman’s Request for Production of Audit Committee Report and Investigative Work Plan, US v. Stockman, 07 Cr. 220, SD NY, Oct. 8, 2008.

The documents for which discovery was denied relate to a 2005 internal investigation initiated by the Collins & Aikman board of directors and conducted by New York-based Davis Polk & Wardwell. Bloomberg reports that Collins & Aikman dismissed David Stockman after investigating lawyers discovered evidence pointing to Stockman’s alleged issuance of bogus earnings projections.

At a July 24, 2008 status conference, Stockman attorney Elkan Abramowitz argued that the documents from the Davis Polk investigation were critical to the defense’s theory that Davis Polk was misled by Collins & Aikman CFO Bryce Koth and that it was Koth's false information that caused the bankruptcy, not the conduct of David Stockman and the other defendants. Because the Davis Polk materials were the basis for the government’s allegations, Abramowitz also maintained that they were needed if the defense was to review the 12 ½ million documents already produced by the government in anything approaching a timely fashion or a reasonable cost. Status Conference, US v. Stockman, SDNY, July 24, 2008.

As we have discussed in previous posts, cost is a critical issue because Collins & Aikman’s $50 million D&O insurance policy was exhausted as of July 31, 2008. This means that defense costs are now coming out of the defendants’ own pockets or are being paid, at a greatly reduced rate, by the court out of public funds.

After an in camera review of the documents, the Court found that the report and work plan contained nothing that would significantly help the defendants uncover admissible evidence, prepare witnesses, corroborate testimony, or assist impeachment or rebuttal. Because the documents did not meet the Brady standards for exculpatory evidence and were not deemed material for defense preparation, the Government does not have to turn them over.

The Court is still reviewing 42 memoranda containing statements from government witnesses that the defendants argue should be produced now to “move the case along.” But, unless the memoranda contain Brady material, the Government does not have to produce them at this point in the discovery process. 18 U.S.C. § 3500 provides that no prior statements of government witnesses shall be discovered until the witness has testified on direct examination at trial.

In her order, Judge Jones stated, “I am not certain that early discovery of the 3500 material will speed up the Defendants’ review of discovery, but even so, I do not have the authority to order the Government to turn over its 3500 material before the statute requires it.”

However, the custom in the Southern District for New York is to turn over 3500 material to the defendant before trial and Judge Jones has directed the Government to advise the Court and counsel when they will produce the 3500 materials. In recognition of the unique circumstances of this case, Judge Jones has urged the Government to turn over the memoranda of statements well in advance of trial to give the defense counsel sufficient time to prepare.

For now though, the defendants’ attorneys must continue to review discovery documents without the aid of statements by prospective government witnesses or other materials from the Audit Committee investigation.

The primary materials for this case are available on the DU Corporate Governance website.