U.S. SECURITIES AND EXCHANGE COMMISSION
LITIGATION RELEASE NO. 17101 / August 13, 2001
Securities and Exchange Commission v. USA Detergents, Inc. and O'Sullivan Graev & Karabell, LLP, Misc. No. 01-326 (ES) (D.D.C. August 2, 2001)
U.S. DISTRICT COURT ISSUES ORDER TO SHOW CAUSE IN SEC SUBPOENA ENFORCEMENT ACTION AGAINST USA DETERGENTS, INC. AND ATTORNEYS IT HIRED TO CONDUCT SPECIAL INVESTIGATION
The Securities and Exchange Commission announced that on August 7, 2001 the U.S. District Court for the District of Columbia entered an Order To Show Cause, thereby granting the Commission's application for an order requiring USA Detergents, Inc. and the law firm of O'Sullivan Graev & Karabell, LLP to appear and show cause why they should not be required to comply fully with Commission subpoenas. On August 2, 2001, the Commission had initiated a subpoena enforcement action in the District Court against USA Detergents, Inc. and O'Sullivan Graev & Karabell, LLP, a law firm hired by a special committee of the company's board of directors to conduct an internal investigation of accounting errors and irregularities that caused USA Detergents to restate its 1996 financial statements. Following the company's announcement of the restatement, the Commission initiated a formal investigation to determine, among other things, whether the company, its officers, directors, employees or others may have violated the antifraud or other provisions of the federal securities laws in connection with, among other things, disclosures related to the company's financial condition. During the course of the Commission's investigation, the company refused to produce the report of the O'Sullivan law firm and underlying materials, including interview notes, compiled by the firm. USA Detergents asserted that the report and materials were subject to the attorney-client privilege and/or the attorney work product doctrine. At that time, the Commission staff deferred to the assertion of privilege and did not press for production of the report or other materials.
Subsequently, however, in arguments to the Commission staff, three of the company's current and former officers (with whom the O'Sullivan law firm report and underlying materials had been shared) cited extensively to and quoted selectively from the O'Sullivan firm's findings as well as the interview notes and other materials generated in the course of the firm's internal investigation. The Commission staff then renewed its request for the report and underlying materials on the ground that any previously applicable privilege protection had been waived as a result of citations to the report and the underlying materials, and the Commission issued a subpoena for the materials. In response, the company produced only a report outline and selected, redacted interview notes and refused to produce the bulk of the materials called for by the subpoenas. The Commission brought this action to enforce its subpoenas.