The Eshe Fund v. Fifth Third Bancorp et al

Filing 167

REPORT AND RECOMMENDATIONS IT IS THEREFORE RECOMMENDED THAT: 1. The Federal Reserve Boards Motion to Intervene (Doc. #146 ) be GRANTED; the Motion of the Ohio Superintendent of Financial Institutions to Intervene for Limited Purposes (Doc. #147 ) be GRANTED; and the Michigan Office of Financial Insurance Regulations Motion to Intervene (Doc. #156 ) be GRANTED; 2. The Federal Reserve Board, the Ohio Department of Financial Institutions, and the Michigan Office of Financial Insurance Regulation be permitted to intervene as of right under Fed. R. Civ. P. 24(a) for the limited purpose of litigating, if necessary, the bank examination privilege; 3. Plaintiffs Motion to Compel (Doc. #143) be DENIED without prejudice to renewal in the event the Federal Reserve or the state banking regulators advance the bank examination privilege concerning the approximately 4,500 withheld documents currently at issue; and 4. The parties shall meet and confer and file a proposed plan, by February 21, 2012, addressing, at a minimum, (i) the time frame in which the banking regulators will complete their document reviews, and (ii) the deadline by which the banking regulators will produce responsive documents and/or provide Plaintiffs with a privilege log (if necessary). Objections to R&R due by 2/21/2012. Signed by Magistrate Judge Sharon L Ovington on 02/02/12. (pb1)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION AT DAYTON
LOCAL 295/LOCAL 851 IBT
EMPLOYER GROUP PENSION
TRUST AND WELFARE FUNDS
AND DISTRICT NO. 9, et al.,

:
:
:

Case No. 1:08cv00421

:

District Judge Sandra S. Beckwith
Magistrate Judge Sharon L. Ovington

Plaintiffs,
vs.
:
FIFTH THIRD BANCORP, et al.,
:
Defendants.

REPORT AND RECOMMENDATIONS1

I.

INTRODUCTION
This case, brought in part under the Securities Act of 1933, emerged from

instability in the subprime lending market. Plaintiffs are individuals and entities who
purchased or acquired certain stock of Defendant Fifth Third Bancorp from October 19,
2007 through June 17, 2008. One central allegation in Plaintiffs’ Amended Complaint is
that Defendants falsely represented to their stockholders that Fifth Third Bancorp did not
participate in subprime lending and used conservative underwriting and documentation
standards. See Doc. #119, PageID #s 3900-3909.

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Attached hereto is a NOTICE to the parties regarding objections to this Report and Recommendations.

In response to Plaintiffs’ requests to produce certain documents, Defendant Fifth
Third and others (see Doc. #143, PageID #4344 at n.1) invoked the bank examination
privilege and declined to produce over +4,500 documents, by Plaintiffs’ estimate.
Plaintiffs recently filed a Motion to Compel seeking to force Defendants to produce the
purportedly privileged documents. Plaintiffs contend, in part, that the bank examination
privilege does not apply because the Federal Reserve and state regulators – “the only
entities with actual standing to assert the [p]rivilege over the documents” – have not
asserted the privilege. (Doc. # 143, PageID #4362).
Not surprisingly, the Federal Reserve and state (Ohio and Michigan) banking
regulators heard Plaintiffs’ contention as a call to argument. The non-party banking
regulators now seek to intervene for the limited purpose of opposing Plaintiffs’ Motion to
Compel based on the bank examination privilege.2

II.

DISCOVERY BACKGROUND
On December 30, 2010, Defendant Fifth Third objected Plaintiffs’ First Request

for Production of Documents (requests numbers 49 and 56) “to the extent that
documents produced in connection with bank regulatory activities are privileged.” (Doc.
#143, Exhibit A at PageID #s 4407-4411). Fifth Third provided Plaintiffs with a privilege
log, and a few weeks later a revised privilege log, documenting its application of the bank

2

The case is presently pending upon Plaintiffs’ Motion to Compel (Doc. #s 143, 144),
non-party banking regulators’ Motions to Intervene (Doc. #s 146, 147, 156, 157), the parties’
memoranda, and the record as a whole.

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examination privilege. The Board of Governors of the Federal Reserve System (the
Federal Reserve) notes that Defendant Fifth Third provided it with a copy of the letter
attached to the privilege logs, but not the privilege logs themselves. (Doc. #149, PageID
# at 5275). Similarly, Ohio and Michigan banking regulators did not receive the withheld
documents, at least as of the date they filed their Motions to Intervene. The Ohio
Superintendent of Financial Institutions notes that the Federal Reserve and state
regulators “have not yet inspected the withheld documents to determine whether any
privilege applies.” (Doc. #149, PageID # 5251).
The Federal Reserve adds that, contrary to federal banking regulations, it has not
received a written administrative request directly from Plaintiffs concerning the
documents Fifth Third has not produced in this case.

III.

INTERVENTION AS OF RIGHT
A.

Applicable Standards

The non-party banking regulators seek to intervene as a matter of right under Fed.
R. Civ. P. 24(a).
To establish the right to intervene under Rule 24(a), non-parties must establish
four elements: “(1) that the motion to intervene was timely; (2) that they have a
substantial legal interest in the subject matter of the case; (3) that their ability to protect
that interest may be impaired in the absence of intervention; and (4) that the parties
already before the court may not adequately represent their interest.” Grutter v.

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Bollinger, 188 F.3d 394, 397-98 (6th Cir. 1999)(citing Jansen v. City of Cincinnati, 904
F.2d 336, 340 (6th Cir.1990)). “‘The proposed intervenor must prove each of the four
factors; failure to meet one of the criteria will require that the motion to intervene be
denied.’” United States v. Michigan, 424 F.3d 438, 443 (6th Cir. 2005) (quoting Grubbs
v. Norris, 870 F.2d 343, 345 (6th Cir. 1989)); see Blount-Hill v. Zelman, 636 F.3d 278,
283 (6th Cir. 2011) (same).

B.

The Federal Reserve’s Right To Intervene

The Federal Reserve filed its Motion to Intervene about three weeks after Plaintiffs
filed their Motion to Compel. If viewed as procedurally similar to a memorandum in
opposition to Plaintiffs’ Motion to Compel, the Federal Reserve filed its Motion to
Intervene within the time set by S.D. Ohio Civ. R. 7.2(a)(2). Given this, and in the
absence of any circumstances indicating tardiness or prejudice, the Federal Reserve
timely filed its Motion to Intervene.
***
Plaintiffs argue that the Federal Reserve should not be permitted to intervene
because it does not have a substantial legal interest in this case. This contention lacks
merit.
The Federal Reserve has a substantial legal interest in advancing the bank
examination privilege when its application is warranted by law. This is seen in both the
substance and purpose of the privilege. First, the privilege:

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[T]he bank examination privilege protects only agency opinions and
recommendations from disclosure; purely factual material falls outside the
privilege and, if relevant, must be produced. The agency asserting the
privilege has the burden of establishing its applicability to the documents at
issue. If the agency fails to establish the privilege with respect to the
subpoenaed material, then the documents must be produced.
Schreiber v. Society for Sav. Bancorp, Inc., 11 F.3d 217, 220 (D.C. Cir. 1993) (internal
citations omitted); see In re Bankers Trust Co., 61 F3d 465, 471-72 (6th Cir. 1995).
Because the burden of establishing the bank examination privilege falls on the Federal
Reserve, it holds a substantial legal interest in determining – before potentially
confidential documents are produced – whether it must advance the privilege. Bankers
Trust bolsters this through the specificity of its remand instructions:
[W]e note that the district court on remand must provide the Federal
Reserve with notice and allow the Federal Reserve the opportunity to
intervene. The bank examination privilege belongs to the Federal Reserve,
and therefore, where a claim of the privilege is appropriate, the Federal
Reserve must be allowed the opportunity to assert the privilege and the
opportunity to defend its assertion.
Bankers Trust, 61 F.3d at 472. The substantial nature of the Federal Reserve’s legal
interest is underscored by the bank examination privilege’s purpose – “to preserve candor
in communications between bankers and examiners, which those parties consider
essential to the effective supervision of banking institutions.” Bankers Trust, 61 F.3d at
471.
Bank safety and soundness supervision is an iterative process of
comment by the regulators and response by the bank. The success of the
supervision therefore depends vitally upon the quality of communications
between the regulated banking firm and the bank regulatory agency. . . .
Because bank supervision is relatively informal and more or less
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continuous, so too must be the flow of communication between the bank
and the regulatory agency. Bank management must be open and
forthcoming in response to the inquiries of bank examiners, and the
examiners must in turn be frank in expressing their concerns about the
bank. These conditions simply could not be met as well if communications
between the bank and its regulators were not privileged.
Bankers Trust, 61 F.3d at 471 (quoting In re Subpoena Served upon the Comptroller of
the Currency, and the Secretary of the Bd. of Governors of the Fed. Reserve Sys., 967
F.2d 630, 634 (D.C. Cir. 1992)(other citation omitted).
Both the substance and purpose of the bank examination privilege, as well as the
Federal Reserve’s goal of stabilizing and building the national economy,3 the Federal
Reserve has established its substantial legal interest determining whether the bank
examination privilege applies before any of the requested documents are produced.
Plaintiffs argue that the Federal Reserve’s interest in the withheld documents is
merely hypothetical, not substantial, because the Federal Reserve has yet to see and
evaluate the withheld documents. This contention misses the mark. The Federal
Reserve’s substantial and actual – not hypothetical – interest does not derive from the
possibility that the bank examination privilege might or might not apply to any particular
document. The Federal Reserve’s substantial interest derives from the authority to
ascertain – in the first instance – whether or not to apply the privilege. Even if the
Federal Reserve ultimately determines not to advance the privilege in this case, the
3

E.g., Texas State Bank v. United States, 423 F.3d 1370, 1372 (Fed. Cir. 2005) (“A principal
function of the Federal Reserve System has been to determine and implement monetary policy ‘so as to
promote effectively the goals of maximum employment, stable prices, and moderate long-term interest
rates.’” (quoting, in part, 12 U.S.C. § 225a)).

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possibility does not diminish (or render hypothetical) the Federal Reserve’s substantial
and actual interest in protecting its ability to assert the privilege, if and when it becomes
necessary.
***
The Federal Reserve’s right to intervene turns next on whether its absence from
the case impairs its ability to protect its interest the bank examination privilege. To
establish an impairment in its ability to protect its interest, the Federal Reserve must only
show “that there is a potential for inadequate representation.” Grutter, 188 F.3d at 400
(italics in original). The potential exists in this case because the “bank examination
privilege belongs to the Federal Reserve.” Bankers Trust, 61 F.3d at 472. The Federal
Reserve’s absence from the case would potentially, if not actually, eliminate adversarial
testing of whether the privilege applies to any of 4,500-plus withheld documents. Indeed,
Plaintiffs’ Motion to Compel seeks that very result by arguing that the privilege belongs
to the Federal Reserve and that Defendants may not assert it to avoid producing the
withheld documents. See Doc. #143, PageID#s 4359-4361. Similarly, Plaintiffs contend
in their Motion to Compel that federal regulations do not prohibit Defendants from
producing the requested documents. If so, no meaningful adversarial testing of the
privilege will occur unless the Federal Reserve is given an opportunity to intervene.
Lastly, as to the parties already before the court, Defendants lack the ability to
adequately represent the Federal Reserve’s interest because Plaintiffs assert that the bank
examination privilege belongs to the Federal Reserve. If so, the privilege would drop
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from the case and the Federal Reserve’s interest in the privilege would be unprotected.
***
Accordingly, the Federal Reserve has established its right to intervene under Fed.
R. Civ. P. 24(a) in this case for the limited purpose of determining whether to litigate the
bank examination privilege as to the 4,500-plus withheld documents.

C.

State Banking Regulators’ Respective Right To Intervene

The Ohio Superintendent of Financial Institutions (OSFI) and the Michigan Office
of Financial Insurance (MOFI) each seeks to intervene for largely the reasons and limited
purpose as the Federal Reserve.
Reviewing the state banking regulators’ respective Motions and Memoranda and
Plaintiffs’ Memoranda in Opposition reveals that their arguments are not significantly
different from those raised in relation to the Federal Reserve’s Motion to Intervene.
Consequently, the reasons previously discussed concerning the Federal Reserve’s right to
intervene under Rule 24(a) apply to the state regulators’ Motions and will not be repeated
in depth.
Beginning with timeliness, OSFI filed its Motion to Intervene about three weeks
after Plaintiffs filed their Motion to Compel. Its Motion was therefore timely filed.
MOFI filed its Motion to Intervene about four weeks later, but before briefing was
complete on OSFI’s Motion to Intervene. MOFI’s Motion thus caused no significant
delay and was therefore timely.

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As to the remaining Rule 24(a) criteria, for the reasons set forth above, supra,
§III(B), OSFI and MOFI have each established that it has a substantial legal interest in the
bank examination privilege; its ability to protect that interest may be impaired in the
absence of intervention; and the parties already before the court may not adequately
represent OFSI’s or MOFI’s interest.
Accordingly, OSFI and MOFI have each established its right to intervene under
Fed. R. Civ. P. 24(a) in this case for the limited purpose of determining whether to litigate
the bank examination privilege as to the 4,500-plus withheld documents.

D.

Remaining Issues

Plaintiffs maintain that even if the banking regulators are permitted to intervene,
the regulators have not shown that the bank examination privilege applies. This
argument, however, is premature because neither the Federal Reserve nor the state
regulators have yet to review the documents to ascertain whether to apply the privilege to
any of the documents.
Along a different line, the Federal Reserve contends that Plaintiffs’ Motion to
Compel is premature because they have not exhausted their administrative remedies as
required by banking regulations. The Federal Reserve thus asks the Court, based on
Bankers Trust, to deny Plaintiffs’ Motion to Compel. The Federal Reserve suggests that
Plaintiffs could then file a written document request with the Federal Reserve’s general
counsel, and “[t]he Board will work with the parties, the Court, and the States of Ohio and

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Michigan, to establish a workable time frame for the action on the request.” (Doc. #149,
PageID at #5284).

The Federal Reserve explains that if the regulators do not assert the

bank examination privilege, the Court will not need to take further action. If the
regulators assert the privilege to withhold documents, the Court could review whether the
privilege applies.
The Federal Reserve’s regulations mandate: “Any person . . . seeking access to
confidential supervisory information. . . , whether by deposition or otherwise, for use in
litigation before a court. . . , shall file a written request with the General Counsel of the
Board. . . .” 12 C.F.R. §261.22(b)(1). By its plain language, this regulatory mandate
serves a significant notice function by, in essence, requiring parties in litigation to alert the
Federal Reserve of their interest in discovering potentially privileged information or
documents. Cf. Bankers Trust, 61 F.3d at 470, n.6 (“we think it advisable if not necessary
for a party in litigation that possesses ‘confidential supervisory information’ to inform the
Federal Reserve of any requests for production so the Federal Reserve will have notice
and the opportunity to intervene and protect any interests, arguments, or concerns.”). It is,
moreover, an irrefutable generality that “[a]t bottom, federal regulations should be
adhered to and given full force and effect of law whenever possible.” Bankers Trust, 61
F.3d at 469 (citing Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467
U.S. 837 (1984)).
In light of Bankers Trust and Chevron, strict adherence to 12 C.F.R. §261.22(b)(1)
would often seem warranted when a party seeks financial-examination documents held by
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the Federal Reserve. The present case, however, is atypical. The Federal Reserve has
received actual notice of Plaintiffs’ discovery requests and has sought to intervene for the
limited purpose of litigating the bank examination privilege. Because its Motion to
Intervene is well taken, supra, §III(B), the Federal Reserve is in the position where it can
advance the privilege in this case and litigate its interest in shielding any purportedly
confidential documents or information. The Federal Reserve, in essence, has been
provided with the actual notice §261.22(b)(1) requires. And, as in Bankers Trust, there is
“no compelling reason to discard relatively straightforward methods outlined in the
Federal Rules of Civil Procedure simply because the Federal Reserve has attempted to
mandate a different procedure.” 61 F.3d at 470-71.

IT IS THEREFORE RECOMMENDED THAT:
1.

The Federal Reserve Board’s Motion to Intervene (Doc. #146) be
GRANTED; the Motion of the Ohio Superintendent of Financial Institutions
to Intervene for Limited Purposes (Doc. #147) be GRANTED; and the
Michigan Office of Financial Insurance Regulation’s Motion to Intervene
(Doc. #156) be GRANTED;

2.

The Federal Reserve Board, the Ohio Department of Financial Institutions,
and the Michigan Office of Financial Insurance Regulation be permitted to
intervene as of right under Fed. R. Civ. P. 24(a) for the limited purpose of
litigating, if necessary, the bank examination privilege;

3.

Plaintiffs’ Motion to Compel (Doc. #143) be DENIED without prejudice to
renewal in the event the Federal Reserve or the state banking regulators
advance the bank examination privilege concerning the approximately 4,500
withheld documents currently at issue; and

4.

The parties shall meet and confer and file a proposed plan, by February 21,
2012, addressing, at a minimum, (i) the time frame in which the banking
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regulators will complete their document reviews, and (ii) the deadline by
which the banking regulators will produce responsive documents and/or
provide Plaintiffs with a privilege log (if necessary).

February 2, 2012
s/Sharon L. Ovington
Sharon L. Ovington
United States Magistrate Judge

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NOTICE REGARDING OBJECTIONS
Pursuant to Fed. R. Civ. P. 72(b), any party may serve and file specific, written
objections to the proposed findings and recommendations within fourteen days after being
served with this Report and Recommendations. Pursuant to Fed. R. Civ. P. 6(d), this period
is extended to seventeen days because this Report is being served by one of the methods of
service listed in Fed. R. Civ. P. 5(b)(2)(C), (D), (E), or (F). Such objections shall specify the
portions of the Report objected to and shall be accompanied by a memorandum of law in
support of the objections. If the Report and Recommendations are based in whole or in part
upon matters occurring of record at an oral hearing, the objecting party shall promptly
arrange for the transcription of the record, or such portions of it as all parties may agree
upon or the Magistrate Judge deems sufficient, unless the assigned District Judge otherwise
directs. A party may respond to another party’s objections within fourteen days after being
served with a copy thereof.
Failure to make objections in accordance with this procedure may forfeit rights on
appeal. See United States v. Walters, 638 F.2d 947 (6th Cir. 1981); Thomas v. Arn, 474 U.S.
140 (1985).

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