Plaintiffs say they recently discovered new information supporting the RICO claim against Peat Marwick. In their brief they say that depositions of defendants James Scott, Jr. and William Saltzman revealed for the first time that Peat Marwick partner Al Ferrara made what plaintiffs believe are affirmative misrepresentations to the Crazy Eddie Audit Committee of the Board of Directors relating to a purported investigation of transactions by Crazy Eddie. Plaintiffs also say in their brief dated December 13, 1991 that further investigation "within the last month" revealed that Ferrara discovered the fabrication of the product sales by category figures included in the prospectus for the March 1986 offering, but represented to defendants Bear Stearns, Wertheim, and Salomon that those figures were reliable and accurate.
Peat Marwick had notice of the facts that give rise to this alleged RICO claim because it relates to the fraud and other claims set forth in the Second Complaint. The only new fact is that Ferrara, a Peat Marwick partner, "actually knew" of the fraud committed by Eddie Antar and others yet made affirmative representations that the financial statements were clean. Whether plaintiffs can prove the scienter requirements of wire and mail fraud is not now at issue.
Although Peat Marwick will have to investigate the new fact of knowledge, it will not be unduly prejudiced by the addition of the RICO claim. See Kuczynski v. Ragen Corp., 732 F. Supp. 378, 381-383 (S.D.N.Y. 1989) (permitting addition of RICO claim after discovery had ended); Rodonich v. House Wreckers Union Local 95 of Laborers' International Union of North America, 624 F. Supp. 678, 686 (S.D.N.Y. 1985) (permitting addition of RICO claim on the even of trial).
Plaintiffs claim to have a good faith basis for their new allegations. They have not presented to the court the basis for their new assertion that Ferrara "actually knew" of the ongoing fraud. But the court may not require them to do more than meet the pleading requirements under the rules of procedure. See Mountain View Pharmacy v. Abbott Laboratories, 630 F.2d 1383, 1385-86 (10th Cir. 1980). Peat Marwick may move to dismiss or for summary judgment if appropriate.
Plaintiffs shall have twenty days from the date of this order to apply for leave to so amend.
OBJECTIONS TO DISCOVERY ORDER
Plaintiffs Entertainment Marketing Incorporated ("EMI") and Elias Zinn have appealed from two aspects of Magistrate Judge Carter's discovery order of December 18, 1991 in Oppenheimer-Palmieri Fund v. Peat Marwick, 88-CV-3481.
A. PRIVILEGE OF SELF-CRITICAL ANALYSIS
Magistrate Judge Carter excused Peat Marwick from producing an internal review of the 1987 Crazy Eddie audit conducted by Peat Marwick in August 1987 and a 1987 Peer Review report and letter of comments on internal quality controls. Plaintiffs argue that this ruling improperly recognized a "privilege of self-critical analysis."
A "privilege of self-critical analysis" or a "self-evaluative privilege" serves the public interest by encouraging self-improvement through uninhibited self-analysis and evaluation. Lasky v. American Broadcasting Cos., Inc., 5 Fed.R.Serv.3d 1366, 1986 WL 9223 (S.D.N.Y. 1986) (recognizing self-evaluative privilege in cases of violations of securities laws, medical malpractice, violations of civil rights and libel); New York Stock Exchange, Inc. v. Sloan, 22 Fed.R.Serv.2d 500 (S.D.N.Y. 1976).
The privilege is not absolute. It applies only to the analysis or evaluation itself, not to the facts upon which the evaluation is based, see Burka v. New York City Transit Authority, 110 F.R.D. 660, 667 (S.D.N.Y. 1986) (discussing government's deliberative privilege), and must be balanced against the party's need for discovery fully and fairly to determine the issues. Lasky, supra ; Gray v. Board of Higher Education of the City of New York, 692 F.2d 901, 904-906 (2d Cir. 1982).
Peat Marwick asserts that production of the materials would chill its attempt to monitor the quality of its work. The court is somewhat skeptical of a claim of a chilling effect, King v. Conde, 121 F.R.D. 180, 192-193 (E.D.N.Y. 1988), but it is not without weight.
In addition, Magistrate Judge Carter found that the information underlying the reviews is available for the parties' experts to consider. Plaintiffs have thus failed to demonstrate a need for the documents that outweighs defendants' claim of privilege.
The court affirms the order.
Magistrate Judge Carter also denied plaintiffs' December 5, 1991 request to redepose Teddy Chasnoff, the partner in charge of the 1987 audit. Because that ruling was not clearly erroneous it is affirmed.
The court decides the pending motions as follows:
i) The Securities Act Claims. Defendants' motion for summary judgment with respect to claims brought under Sections 11 and 12(2) is granted.
ii) The Fraud Claims. The court reserves decision on defendants' motions for summary judgment with respect to the Section 10(b), Rule 10(b)-5 and common law claims.
iii) The Complaints. The Third Complaint is stricken. Plaintiffs may seek leave within twenty days of the date of this order to amend the Second Complaint to plead a proper RICO claim against Peat Marwick. The motions to strike the New Complaint are denied. Plaintiffs may not consolidate the New Complaint with In re Crazy Eddie Securities Litigation.
iv) The Discovery Rulings. Magistrate Judge Carter's discovery orders are affirmed.
Dated: Brooklyn, New York, May 1, 1992
Eugene H. Nickerson, U.S.D.J.
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