While the plaintiffs demonstrated that the information they
sought was reasonably calculated to lead to the discovery of admissible
evidence regarding whether goodwill was properly stated by the company, said
the court, the documents were privileged pursuant to Section 105(b)(5)(A) of
Sarbanes-Oxley. This privilege provision addresses two circumstances. The
first, which was not at issue in this case, involves discovery requests
directed to the Board itself. The second circumstance involves discovery
requests directed to targets of the Board's investigations. The second aspect
of the privilege protects those who are under investigation from being required
to divulge their responses to that investigation.
Specifically,
the court found the following documents to be privileged under Section
105(b)(5)(A) because they were prepared by the Board, received by the Board, or
specifically for the Board: direct communications between the Board inspectors
and KPMG; forms labeled as "Public Company Accounting Oversight Board Inspection
Comment Form," including the Board's comments, KPMG's responses, and
drafts thereof; spreadsheets including data prepared specifically for the
Board; any information revealing specific questions or inquiries from Board
members and drafts and final versions of KPMG responses to those questions or
inquiries; drafts and final versions of the Engagement Profile; and the
kick-off meeting presentation file.
The court
found, however, that any substantive information, documents, spreadsheets, or
forms that were compiled specifically for the company, but nevertheless used to
respond to the Board's inquiries, are not privileged.
The court
rejected the argument that the privilege only covers documents in the hands of the Board and does
not protect documents in the hands of third parties, namely the audit firm,
KPMG. This argument is not supported by the plain language of the statute,
which extends the privilege to both materials "prepared . . . for"
and "received by" the Board. If only materials in the possession of
the Board (i.e. "received by") were protected, then the phrase
"prepared . . . for" would be rendered superfluous. Further, the
privilege not only protects the Board, but also those who are under
investigation from being required to reveal their responses to the Board's
inquiries. Thus, the privilege outlined in Section 105(b(5)(A) may be asserted
by KPMG.
Similarly rejected was the contention that the "Board" as used
in the statute only includes the five appointed Governing Members of the Board,
thus excluding the Board’s inspection staff. Sarbanes-Oxley defines
"Board" as the "Public Company Accounting Oversight Board,"
noted the court, and the Board's duties include registering and inspecting
audit firms, as well as conducting investigations and disciplinary hearings. The five appointed Board members must
necessarily rely on other PCAOB officials to conduct investigations and prepare
documents that relate to the investigation, reasoned the court, as well as
receive documents relating to the investigation. Thus, the Court found that the
"Board" as mentioned in Section 105(b)(5)A) includes the PCAOB's
inspectors who actually conduct the investigations.