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Allied Irish Banks, p.l.c. v. Bank of America

January 23, 2007

ALLIED IRISH BANKS, P.L.C. PLAINTIFF,
v.
BANK OF AMERICA, N.A. AND CITIBANK, N.A., DEFENDANTS



The opinion of the court was delivered by: Gabriel W. Gorenstein, Magistrate Judge

OPINION AND ORDER

Allied Irish Banks, p.l.c. ("AIB") has sued Citibank, N.A. and Bank of America, N.A. for claims arising out of a rogue trading scheme perpetrated by one of AIB's traders. The scheme is alleged to have resulted in $691 million in losses to AIB. When the scheme came to light, AIB hired an independent banking expert and a law firm to investigate the scheme and make recommendations for changes. Their report was released to the public. Citibank and Bank of America have now moved to compel production of documents generated during the preparation of the report. For the reasons stated below, AIB has not shown that these documents are protected by the attorney-client privilege or constitute attorney work product. Accordingly, defendants' motion to compel is granted.

I. BACKGROUND

A. Facts

John Rusnak was employed as a foreign currency trader for AIB's United States subsidiary Allfirst Bank*fn1 for nine years. See Report to the Boards of Directors of Allied Irish Banks, P.L.C., Allfirst Financial Inc., and Allfirst Bank Concerning Trading Losses (capitalization omitted) ("Report" or "Ludwig Report") (reproduced as Ex. A to Declaration of Tanisha L. Massie In Support Of Citibank, N.A. and Bank Of America's Motion To Compel Production Of Documents, filed Sept. 15, 2006) ("Massie Decl.") (attached to Notice of Motion to Compel Production of Documents by Citibank, N.A. and Bank of America, N.A.) (Docket #41), at 7 (Rusnak hired in 1993). During his employment, Rusnak perpetrated a scheme in which he created bogus transactions to disguise losses he had incurred while engaging in foreign exchange trading. See Declaration of Gregory K. Thoreson, dated Oct. 12, 2006 ("Thoreson Decl.") (attached to Declarations in Support of Plaintiff's Memorandum of Law in Opposition to Defendants' Motion to Compel Production of Documents) (Docket #45) ("Declarations"), ¶ 2; Allied Irish Banks, P.L.C. v. Bank of America, N.A., 2006 WL 278138, at *1-4 (S.D.N.Y. Feb. 2, 2006). This scheme is alleged to have resulted in $691 million in losses for Allfirst. Compl. ¶ 1. That Rusnak had committed a significant fraud became clear to AIB on February 4, 2002. See Thoreson Decl. ¶ 2. In the days immediately following, both the Central Bank of Ireland and the United States Federal Reserve Board announced that they were launching investigations. See Declaration of Michael Buckley, dated Oct. 6, 2006 ("Buckley Decl.") (attached to Declarations), ¶ 4.

The Federal Bureau of Investigation began a criminal investigation, which included a search for Rusnak.*fn2 Buckley Decl. ¶ 3. Meanwhile, AIB had already begun its own internal investigation, which was conducted by Allfirst and AIB employees, with the help of PriceWaterhouseCoopers. Thoreson Decl. ¶¶ 3-5.

On February 6, 2002, AIB announced to the public that it was undertaking a "full investigation" of the fraud, that it had reported the fraud to the FBI, and that it had suspended certain high-level managers at Allfirst. See Press Release, dated Feb. 6, 2002 (reproduced as Ex. E of Massie Decl.) ("Feb. 6 Press Release"). It also indicated that AIB would take a "once off reduction of 596 million [Euros] after tax," but that Allfirst's "capital ratios remain strong by international financial standards." Id.

The next day, February 7, 2002, AIB issued another press release announcing that the Board of Directors had met that evening and had decided that it would approve "comprehensive terms of reference for the investigation currently underway." See Press Release, dated Feb. 7, 2002 (reproduced as Ex. F of Massie Decl.) ("Feb. 7 Press Release"). The investigation was to ascertain the facts regarding the foreign trading activities, to describe the policies and controls in place and how they operated, and to make recommendations on "any improvements which may appear necessary or desirable to the policies and controls." Id. The Board stated that it would appoint "an eminent person with standing and expertise in the financial services industry" to conduct this investigation and that this person "will be appointed by and report directly to the board on the adequacy and scope of the review and its findings." Id. The report was to be presented within 30 days. Id.

On February 8, 2002, the Group Chief Executive of AIB contacted Eugene A. Ludwig, former Comptroller of the United States Currency, to discuss his potential engagement by AIB for this project. Buckley Decl. ¶ 10. During their conversation, it was decided that Ludwig's consulting firm, Promontory Financial Group ("Promontory") would "jointly investigate" with the law firm of Wachtell, Lipton, Rosen & Katz ("Wachtell"). Id. ¶ 10.

On February 10, 2002, AIB announced to the public that it had appointed an "independent expert" to "direct and report" to the Board on the investigation into the Allfirst losses. See Press Release, dated Feb. 10, 2002 (reproduced as Ex. G of Massie Decl.) ("Feb. 10 Press Release"). The person identified was Ludwig. Ludwig was characterized as "an eminent US banking figure," who had been "credited with restoring the financial health of the American national banking system." Id. At the time of his appointment, Ludwig was the managing partner of Promontory, a Washington based consulting firm for financial services companies. See Ex. R. of Reply Declaration Of Tanisha L. Massie In Further Support Of Citibank, N.A. and Bank of America N.A.'s Motion To Compel Production Of Documents, filed Nov. 3, 2006 (Docket #51) ("Massie Reply Decl.").

The terms of Ludwig's engagement required that he "report[] directly to the Board . . ." and conclude the investigation by March 9, 2002. See Engagement Letter, dated Feb. 8, 2002 (reproduced as Ex. P in Massie Reply Decl.) ("Engagement Letter") (stamped page 645374). Specifically, the AIB Board explained that the investigation was charged with the following responsibilities:

(1) Ascertaining the facts concerning the foreign exchange activities in the Treasury Operations of Allfirst Bank which led to the loss referred to in the AIB Stock Exchange Announcement of 6 February 2002; (2) Describing the policies and controls, which applied to those operations during the period in which these activities took place; (3) Reporting on the manner in which such policies and controls operated (or may have failed to operate) in relation to these activities; and (4) Making recommendations on any improvements which appear necessary or desirable to the policies and controls.

Feb. 10 Press Release; see also Engagement Letter (stamped page 645374).

The Engagement Letter states that Ludwig would be entitled to retain the assistance of any "legal, accountancy, or other advisory services" as Ludwig deemed necessary. Engagement Letter (stamped page 645375). The Engagement Letter also reflects that, at the suggestion of Ludwig, AIB would retain Wachtell to "report to the Board" and to "provide privileged, legal advice on the basis of the joint investigation." Id. The hiring of Wachtell was "[o]ne of "[Ludwig's] first recommendations." See Transcript of AIB Press Conference, dated Mar. 14, 2002 (reproduced as Ex. U of Massie Reply Decl.) ("Press Conf.") (stamped page 623239). In a sur-reply affidavit, a member of the Wachtell firm asserts that the firm was "retained to provide legal advice to the AIB and Allfirst boards, and to assist the Promontory investigation." Affidavit of Robert B. Mazur, filed Dec. 5, 2006 (Docket #53) ("Mazur Aff."), ¶ 3. He further asserts that "[d]uring the course of this engagement, we also provided legal advice to AIB and Allfirst managers . . . ." Id.; see also Buckley Decl. ¶ 10 (purpose of including Wachtell was "so that AIB could receive confidential legal advice, particularly with respect to the likelihood of criminal and regulatory proceedings and potential civil litigation both by and against AIB and/or Allfirst."). It appears, however, that there was no letter of engagement between the Wachtell firm and AIB. See Massie Reply Decl. ¶ 3. Also, neither AIB nor Wachtell has provided any evidence regarding the manner in which Wachtell's purported legal advice was provided to AIB -- for example, orally or in writing -- or on what dates.

In a February 20, 2002 press release, AIB stated that Ludwig was the "head[]" of the investigation. Press Release, dated Feb. 20, 2002 (reproduced as Ex. N of Massie Decl.). In its motion papers, AIB characterizes Wachtell's role as "assist[ing] in leading the investigation and jointly author[ing] the investigation report with Mr. Ludwig." Thoreson Decl. ¶ 12.

During the course of the investigation, Ludwig and his company, along with Wachtell, interviewed "approximately 55 present and former employees of AIB and Allfirst" and "reviewed a substantial volume of electronic records and thousands of pages of printed documents." Report at 1. This included "thousands of pages of documents, . . . e-mails[,] . . . telephone logs and computerised trading records." Press Conf. (stamped page 623239). Wachtell lawyers "worked closely with Promontory" and "communicated on a daily basis with Mr. Ludwig" and other Promontory personnel. Mazur Decl. ¶ 4. AIB states that Wachtell personnel "attended" the witness interviews, Thoreson Decl. ¶ 13, though it does not state that Wachtell personnel conducted any of the questioning.

On March 12, 2002, the final draft of the Report was presented to the AIB Board. Thoreson Decl. ¶ 16. The Report indicates that it was submitted by "Promontory Financial Group and [Wachtell]." See Ludwig Report at i, 1. A day later, AIB publicly released the Report, see Thoreson Decl. ¶ 16, and on March 15, 2002, filed it with the Securities and Exchange Commission as part of Allfirst's Form 8-K. See Form 8-K (reproduced Ex. H of Massie Decl.). The Report contained, inter alia, the following finding: although Rusnak was "the principal culprit behind the[] losses, . . . there was a major breakdown in controls, and in particular by Rusnak's immediate superiors in the Treasury Section." Press Conf. (stamped page 623237). It ended with a series of recommendations, including reconsideration of AIB's business strategy in the trading areas, a review of its risk management architecture, and improvements in the control environment. See Ludwig Report at 46-56. AIB's board "fully accept[ed]," the Report's conclusions and "adopt[ed] those recommendations." See Press Release, dated Mar. 14, 2002 (reproduced as Ex. I of Massie Decl.) ("Mar. 14 Press Release"), at 2; Press Conf. (stamped page 623241). AIB fired six individuals and accepted the resignation of two others. Mar. 14 Press Release at 3. Thereafter, the board implemented changes to its strategy, structure and corporate governance. Id. at 4-6.

At a press conference held on March 14, 2002 to announce the Report's findings, AIB executives were joined by Ludwig and a Promontory executive -- though not Wachtell. See Press. Conf. The AIB Chairman announced that it was the "priority of our board" to build value for AIB shareholders "[a]nd [of] course after this event in Baltimore, to restore the confidence of customers and employees." Press Conf. (stamped page 623236). Ludwig discussed the circumstances under which he had been commissioned to do the report. He indicated that the AIB Chairman had told him that the report had to be completed within 30 days because "it was in the best interests of the board, AIB shareholders, customers ...


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