In re the Leslie Fay Companies, Inc. Securities Litigation

In January 1993, the board of directors of the Leslie Fay Companies, Inc. (Leslie Fay) (plaintiff) directed an audit committee to investigate potential accounting fraud at the company. The audit committee planned to use its investigation to determine who was at fault for any fraud and terminate their employment, and to establish new financial-reporting structures and guidelines. The audit committee hired Weil, Gotshal & Manges (Weil) as counsel. In February 1993, Leslie Fay publicly announced the investigation. At this point, shareholders (plaintiffs) began to bring class-action lawsuits against Leslie Fay. Soon after, the Securities and Exchange Commission (SEC) opened an investigation. The audit-committee report (ACR) concluded that Leslie Fay had fraudulently overstated its 1991 profits. Leslie Fay voluntarily submitted the audit report to the SEC. Leslie Fay filed for Chapter 11 bankruptcy. During the bankruptcy proceeding, Leslie Fay sued auditor BDO Seidman (BDO) (defendant) for negligence based on the conclusions of the ACR. BDO subpoenaed Weil, seeking production of memoranda and notes on Weil’s interviews of Leslie Fay employees prior to the completion of the ACR, other work product related to the ACR, and communications between Weil and the audit committee related to the ACR. Weil argued that the requested materials were protected by the work-product doctrine because they were prepared in anticipation of the shareholder litigation.