United States District Court, S.D. New York
GLENN FREEDMAN, Individually and On Behalf of All Others Similarly Situated, Plaintiff,
WEATHERFORD INTERNATIONAL LTD., BERNARD J. DUROC-DANNER, and ANDREW: P. BECNEL, Defendants.
MEMORANDUM AND ORDER
JAMES C. FRANCIS, IV, Magistrate Judge.
The plaintiffs in this putative class action are investors who contend that Weatherford International Ltd. ("Weatherford") and certain of its officers made false and misleading statements in violation of the federal securities laws. At issue here are three motions submitted by the plaintiffs, seeking to compel the defendants to produce certain reports comparing the electronic search results from discovery in this action to the results from prior searches (Docket no. 65), to produce documents concerning an investigation undertaken by Weatherford's Audit Committee (Docket no. 66), and to produce documents concerning an investigation undertaken by the law firm Latham & Watkins, LLP (Docket no. 67). For the following reasons, the plaintiffs' motions are denied.
The full factual background of this litigation has been described in prior opinions in this case as well as in decisions in a related case in this district. See Freedman v. Weatherford International Ltd., No. 12 Civ. 2121, 2013 WL 5299137 (S.D.N.Y. Sept. 20, 2013); Dobina v. Weatherford International, Ltd. , 909 F.Supp.2d 228 (S.D.N.Y. 2012). In brief, the plaintiffs allege that Weatherford engaged in securities fraud by issuing false earnings statements between 2007 and 2010. The claims in this action focus on a series of restatements intended to correct errors in the 2007-2010 earnings statements; the plaintiffs allege that Weatherford continued to fraudulently understate its tax expenses in three separate restatements, announced in March 2011, February 2012, and July 2012. Freedman, 2013 WL 5299137, at *1-4.
The events at issue here were set in motion by a February 2012 phone call placed by a senior employee in the Weatherford Tax department to Weatherford's whistleblower hotline. (Memorandum and Order dated Nov. 5, 2013, Dobina v. Weatherford, No. 11 Civ. 1646 (S.D.N.Y. Nov. 5, 2013) ("Nov. 5 Order") at 2-3; Plaintiffs' Motion to Compel the Production of Documents Concerning the Latham Investigation ("Pl. Latham Memo.") at 1-2). That employee reported that the head of Weatherford's Tax department had engaged in a number of improper practices. In response, Weatherford hired Latham & Watkins ("Latham") to conduct an independent review (the "Latham Investigation"). (Defendants' Opposition to Lead Plaintiffs' Motion to Compel Documents Concerning the Latham Investigation ("Def. Latham Memo.") at 1; Pl. Latham Memo. at 1). Latham's review found no evidence of intentional misconduct, and it reported this to Weatherford's auditors, Ernst & Young LLP ("E&Y"). (Pl. Latham Memo. at 1). "The [Latham] Investigation culminated in a meeting in March 2012 between Latham attorneys and SEC personnel at which the investigation's findings were communicated." (Nov. 5 Order at 3). E&Y subsequently issued a clean audit opinion (Pl. Latham Memo. at 1), and Weatherford issued a second restatement on March 15, 2012 (Consolidated Amended Class Action Complaint ("Am. Compl."), ¶ 8). Several months later, in July 2012, Weatherford announced that it would issue a third restatement. (Am. Compl., ¶ 12).
A second investigation ensued, headed by Davis Polk & Wardwell, LLP (the "Audit Committee" investigation). (Nov. 5 Order at 3-4). The plaintiffs allege that in August 2012, Latham admitted to E&Y that it had known of intentional fraud at Weatherford despite its official conclusion to the contrary. (Pl. Latham Memo. at 1). The plaintiffs base their allegations on the statements of a Weatherford employee, who had indicated to both Weatherford and Latham that he had made a series of intentional adjustments to income tax calculations during 2007 to 2010 in order to reach a particular effective tax rate. (Pl. Latham Memo. at 1-2; Def. Latham Memo. at 3).
The discovery of documents associated with these investigations was already litigated in Dobina, a related, ongoing case dealing with Weatherford's statements from 2007 through 2010. There, the plaintiffs sought to compel production of all documents relating to the Latham and Audit Committee investigations. (Nov. 5 Order at 20-22); see also In re Weatherford International Securities Litigation, No. 11 Civ. 1646 , 2013 WL 6628964 (S.D.N.Y. Dec. 16, 2013) (clarifying scope of documents to be produced). I ruled that both attorney-client privilege and work product protection had been waived for any material physically or orally disclosed to the SEC, as well as any underlying factual material explicitly referenced therein. (Nov. 5 Order at 20, 22). In accordance with that order, the defendants have produced those documents to the plaintiffs both in Dobina and in this action.
A. Production of Results of Electronic Document Searches
The plaintiffs first seek the production of certain reports comparing the results of the defendants' document search and productions in this case with (1) the search terms proposed by the plaintiff; (2) the searches and productions related to the Audit Committee's investigation of the restatements; and (3) the searches and productions related to Latham's investigation of the restatements. (Plaintiffs' Motion to Compel Defendants to Produce the Results of Electronic Document Searches ("Pl. E-reports Memo.") at 1-2). The defendants categorically object to the plaintiffs' request, arguing that there is no legal basis for demanding documents not in their possession and that creating the reports would be hugely burdensome.
As of April 2012, the defendants had provided the search terms used in the related Dobina litigation, as well as those used in the Latham and Audit Committee investigations. (Pl. E-reports Memo. at 1-2). The plaintiffs allege, however, that without the requested reports they have no way of measuring the adequacy of the defendants' searches and productions in this case. (Pl. E-reports Memo. at 1). In April 2014, the plaintiffs asked the defendants to run the comparison reports according to technical specifications provided by a retained e-discovery expert. (Pl. E-reports Memo. at 2). The defendants created a sample report by running the plaintiffs' proposed search terms on a limited set of custodians. (Pl. E-reports Memo. at 3; Defendants' Opposition to Plaintiffs' Motion to Compel Reports on Electronic Document Searches ("Def. E-reports Memo.") at 2). This sample report, prepared in conjunction with an e-discovery vendor and a separate expert retained by the defendants, took several weeks, over 250 hours of vendor time, and 750 hours of computer processing time. (Def. E-reports Memo. at 2; Declaration of Sergio Riquelme dated May 30, 2014, ¶¶ 4-6). Otherwise, the defendants have not created the reports as requested, as "the task proved extremely burdensome and technically infeasible." (Def. E-reports Memo. at 2 n.3).
The plaintiffs' request is outside the bounds of Rule 26 of the Federal Rules of Civil Procedure. While parties may "obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense, " Fed.R.Civ.P. 26(b), the requested reports do not meet this standard. The burden of demonstrating relevance is on the party seeking discovery. Trilegiant Corp. v. Sitel Corp. , 272 F.R.D. 360, 363 (S.D.N.Y. 2010); Mandell v. Maxon Co., No. 06 Civ. 460 , 2007 WL 3022552, at *1 (S.D.N.Y. Oct. 16, 2007). Here, in essence, the plaintiffs seek discovery on discovery, on the asserted basis that they are "entitled to test the reasonableness and adequacy of [the] [d]efendants' production." (Pl. E-reports Memo. at 3).
There are circumstances where such collateral discovery is warranted. Here, however, the plaintiffs have not proffered an adequate factual basis for their belief that the current production is deficient. Their contention that the defendants' production is deficient because 85% of the pages produced relate to Dobina, despite the different class periods and false statements at issue here (Pl. E-reports Memo. at 2), is too conclusory to provide that basis. Furthermore, the use of "dramatically different" search terms in this action as compared to those utilized in either the investigations or the Dobina action (Pl. E-reports Memo. at 2), is not ...