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California Earthquake Authority v. Metropolitan West Securities

August 1, 2012


The opinion of the court was delivered by: Gregory G. Hollows United States Magistrate Judge


Presently before the court is plaintiff California Earthquake Authority's ("CEA") motion to quash a subpoena duces tecum, which was originally filed on June 21, 2012 and, after a joint request to continue the hearing, came on for hearing on July 26, 2012. (Dkt. Nos. 58, 61, 63, 74.) Defendants Metropolitan West Securities, LLC and Wells Fargo Bank, N.A., successor by merger to Wachovia Bank, N.A. (collectively, "Wells Fargo") filed an opposition on July 10, 2012, and CEA filed a reply brief on July 19, 2012. (Dkt. Nos. 67, 72.)

At the hearing, Michael Strumwasser and Patricia Pei appeared on behalf of CEA, and Jesse Miller and Christopher Foster appeared on behalf of Wells Fargo. After considering the papers in support of and in opposition to the motion, the oral arguments of counsel, the court's record in this matter, and the applicable law, the court now issues the following order. BACKGROUND

The background facts are taken from the operative pleadings and the parties' briefing related to the instant motion and previous discovery motions.

Background Facts Giving Rise to the Litigation Plaintiff CEA, a publicly run, privately funded insurer, was specially created by the Legislature following the Northridge Earthquake in 1994 when earthquake insurance for homeowners became very difficult to obtain. See Cal. Ins. Code § 10089.6(a). The statutes that created CEA set forth certain restrictions on CEA's permitted investments, limiting them "to those securities eligible under Section 16430 of the Government Code." Cal. Ins. Code § 10089.6(b)(1).*fn1

Shortly after CEA's formation, Metropolitan West was retained by the California Department of Insurance to provide financial and investment services to CEA. Pursuant to that agreement, a set of Investment Policies was drafted, setting forth certain rules directing and limiting the manner in which CEA's funds were to be invested. The Investment Policies were ultimately approved by CEA's Governing Board on October 7, 1996, with subsequent revisions approved on several later dates. Following the initial drafting of the Investment Policies, CEA continued to engage Metropolitan West's services, and around July 1, 1998, Metropolitan West entered into an agreement directly with CEA to act as CEA's investment and financial advisor. In 2004, Wachovia Bank acquired Metropolitan West, all of Metropolitan West's rights and obligations under the 1998 agreement were assigned to Wachovia Bank, and Wachovia Bank thereafter continued to serve as CEA's financial and investment advisor until 2008. Subsequently, Wachovia was acquired by Wells Fargo. For the sake of convenience only, the court refers to all defendants as Wells Fargo.

On August 8, 2007, Wells Fargo invested approximately $62.25 million of CEA's funds in commercial paper issued by Mainsail II LLC ("Mainsail"), a structured investment vehicle-lite ("SIV-lite") managed by Solent Capital Partners. CEA claims that the investment was backed primarily by sub-prime residential mortgage-backed securities. The investment was scheduled to mature on September 10, 2007, and was to earn around $309,000 in interest for CEA. However, around August 20, 2007, Mainsail breached a market-value compliance rule, as a result of which its assets were frozen. More than a year later, after Mainsail went into a receivership and underwent a restructuring process, CEA recovered some of its principal investment, but over $47 million of its original $62.25 million investment was ultimately lost. According to CEA, this was the first and only investment loss sustained by CEA to date.

Subsequently, on December 31, 2009, CEA filed the instant action against Wells Fargo in the Sacramento County Superior Court, alleging causes of action for breach of contract, breach of fiduciary duty, constructive fraud, and unfair business practices, and seeking to recover its loss on the Mainsail investment with interest as well as punitive damages and civil penalties.

CEA contends that Wells Fargo is liable on essentially two theories. First, CEA claims that the Mainsail investment was illegal, because the Mainsail investment was neither permitted by law under Cal. Gov't Code § 16430 nor in keeping with CEA's Investment Policies. CEA asserts that, to the extent Wells Fargo relied solely on CEA's Investment Policies to make its investment decisions, Wells Fargo remains at fault for failing to draft a set of policies that fully incorporated section 16430's requirements. Wells Fargo disputes this, arguing that Mainsail was a suitable investment for CEA and complied with the Investment Policies, which it contends were developed in conjunction with CEA and which CEA's board ultimately adopted. Second, CEA contends that the Mainsail investment was imprudent, i.e. that Wells Fargo knew or should have known, based on both the characteristics of the Mainsail investment itself and the prevailing market conditions at the time, that Mainsail was a highly risky and inappropriate investment for CEA. Wells Fargo also disputes this characterization of the Mainsail investment.

Wells Fargo ultimately removed the action to this court on February 4, 2010. (Dkt. No. 1.)

Background Facts Related to the Discovery Dispute

This particular discovery dispute arises from a subpoena duces tecum issued by Wells Fargo to non-party PricewaterhouseCoopers LLC ("PwC"). Around December 2007, after CEA came to the conclusion that it was unlikely to recover its losses on the Mainsail investment, it decided to initiate an inquiry into the events and circumstances leading up to the Mainsail investment. After initial negotiations, CEA entered into an agreement with independent auditing firm PwC to conduct such an investigation and analysis and prepare a report to the CEA's Governing Board. In the course of its work in the first half of 2008, PwC interviewed key CEA employees and received and reviewed copies of relevant internal CEA documents and correspondence. Although the CEA-PwC agreement recognized that third parties such as Wells Fargo had no obligation to cooperate with the investigation, Wells Fargo nevertheless agreed to do so, and PwC actually interviewed various Wells Fargo employees and received and reviewed copies of relevant Wells Fargo documents. On June 13, 2008, PwC provided CEA with a draft report, which was forwarded to the CEA Governing Board and CEA's outside counsel but for some reason never finalized. PwC retained documents related to the Mainsail investigation in a single engagement file known as the "Mainsail Engagement File."

Around June 5, 2012, Wells Fargo served a subpoena duces tecum on PwC, essentially requesting, for purposes of this motion, all documents in PwC's possession relating to the Mainsail investigation, i.e. those documents contained in the Mainsail Engagement File. (See Dkt. No. 60, Ex. 2.) According to CEA, the Mainsail Engagement File contains the following categories of documents:

(1) Background documents provided by CEA to PwC as potentially relevant to its investigation, including (a) correspondence (i) internally between CEA staff, (ii) between CEA and Wells Fargo, (iii) between CEA staff and CEA's General Counsel or outside counsel; (b) CEA account statements; and (c) other miscellaneous background documents;

(2) Background documents provided by Wells Fargo to PwC as potentially relevant to its investigation;

(3) PwC correspondence, including correspondence (a) between PwC and CEA's General Counsel and (b) internally between PwC staff; and

(4) Work papers generated by PwC in the course of its investigation, including (a) notes from interviews with CEA individuals; (b) notes from interviews with Wells Fargo individuals; (c) graphs, charts, and memos reflecting PwC's own research into the facts underlying the Mainsail transaction; and (d) report drafts.

CEA brings the instant partial motion to quash the subpoena on the grounds that it requires production of protected attorney work product and/or attorney-client communications with respect to ...

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