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One lawyer calls it the corporate fraud case that has everything � from a securities investigation and federal indictments of corporate officers to class action, shareholder, and employee lawsuits. But the main reason corporate and government attorneys are riveted on a pending decision in the U.S. Court of Appeals for the Ninth Circuit is a question that looms large in a scandal-scarred business world: Does a corporation under investigation waive its attorney-client and work-product privileges if it turns over the results of its internal fraud probe to government investigators who signed a confidentiality agreement? Yes, answered U.S. district court judge Martin Jenkins in San Francisco in January, in a complex criminal case involving McKesson Corporation, a medical supply and information company with 2002 revenues of $50 billion. Jenkins ordered the company to turn over the results of a 1999 internal investigation to two former company officers who are criminal defendants. He stayed his order, pending an appeal. McKesson, which did not face criminal or civil charges, was allowed to intervene in the criminal case so that it could argue in favor of protecting its lawyer-client privilege. As Corporate Counsel went to press, McKesson’s appeal was pending. Because other federal and circuit courts have split on the waiver issue, however, the last word may well come from the U.S. Supreme Court. As more and more companies have come under investigation in the past two years, the privilege-waiver issue has grown in importance. The Securities and Exchange Commission and the U.S. Department of Justice have policies that consider corporate cooperation when deciding whether to take enforcement action or charge a company. Enhanced fraud penalties under the Sarbanes-Oxley Act heighten the cooperation dilemma for companies. A “Road Map” For McKesson, the Ninth Circuit case could have severe repercussions. If the court finds that the criminal defendants are entitled to McKesson’s report, the waiver could allow plaintiffs in 91 fraud suits against McKesson to obtain copies. “It is a clear-sailing road map as to exactly what happened and where the evidence is and who the bad guys are,” says Robert Plotkin, who represents one of the two defendants in the criminal case in San Francisco and is a partner in the Washington, D.C., office of Paul, Hastings, Janofsky & Walker. McKesson representatives did not return calls seeking comment. In its 2002 annual report, the company stated that it could not predict its potential liability, but warned of the possibility of judgments against it requiring “substantial payments . . . which could have a material adverse impact on McKesson’s financial position.” The Problem Begins According to court documents, McKesson’s problems began shortly after it acquired Atlanta-based HBO & Company in January 1999 and discovered accounting irregularities. Its shares immediately fell from about $65 to $34, slashing the company’s market value by more than $9 billion, the SEC said. Soon after, at least 67 shareholder suits were filed in federal courts against McKesson and other defendants. Another 24 were filed in state courts, according to McKesson’s latest annual report. McKesson quickly ordered an audit committee to review the situation, hired New York’s Skadden, Arps, Slate, Meagher & Flom, and entered into confidentiality agreements with the SEC and the Justice Department in May 1999, before conducting its review. In late July 1999 McKesson turned over to the SEC and the Justice Department its final report, along with memoranda on 55 interviews attorneys conducted with current or former employees of the company. Using the internal report as a road map for the grand jury, U.S. attorneys indicted the two former copresidents of HBOC on 17 counts of securities, mail, and wire fraud in September 2000. It is this criminal case that is now before Jenkins in San Francisco. McKesson’s cooperation appears to have paid off. The company faces neither civil nor criminal charges from the government. In its 2001 policy statement, the SEC cited McKesson as an example of a cooperating company. Future Cooperation At Stake Not surprisingly, the federal government supports McKesson in the Ninth Circuit case, because it realizes that future cooperation by companies could be at stake. “What the United States cares about is the next case,” writes John Hemann, the assistant U.S. attorney prosecuting the two former HBOC executives, in court papers. “What we care about is being able to go to the next McKesson and say, ‘Look, if you give us this report, we are not going to give it to the plaintiffs class action lawyers who want it.’ “ Keith Krakaur � a Skadden partner who helped conduct McKesson’s internal investigation, negotiated the confidentiality agreements with the SEC and Justice, and argued McKesson’s case before Jenkins � declined to discuss the pending case. But in court papers Krakaur says that McKesson’s total cooperation with the government makes this “as good a case as there could ever be” for a decision that there has been no privilege waiver. In waiving the attorney-client privilege, Jenkins, in his 23-page ruling, wrote: “By giving the government . . . full discretion to disclose the report and interview memoranda in certain circumstances, the terms of the agreements run counter to the company’s assertion [that] the communication was intended to remain confidential.” The judge also ruled that the work-product doctrine did not apply, because production of documents to the government “constituted a disclosure of the documents to an adversary,” thereby waiving work-product protection as to all other adversaries. The Civil Suits Most of the federal civil suits filed against McKesson since 1999 have been consolidated into one action, pending before U.S. district court judge Ronald Whyte in San Jose. Whyte appointed the New York State Common Retirement Fund as lead plaintiff. Robert Gans, one of the attorneys for the lead plaintiff and a partner in the San Diego office of New York’s Bernstein Litowitz Berger & Grossmann, says his clients are seeking the confidential documents in discovery. Regardless of the outcome in the criminal case, he says, they believe they are entitled to the documents. Most of the state suits have been either dismissed or stayed (awaiting the outcome of the federal cases). But the Delaware Chancery Court dismissed most shareholder claims and refused to waive the attorney-client privilege protecting McKesson’s report. In Georgia, a similar case brought by McKesson shareholder Melvin Adler went the opposite way. The trial court ruled, and the Georgia court of appeals upheld in March 2002, that the voluntary production of the documents to the government waived the attorney-client privilege. The SEC filed an amicus brief in the case, arguing in vain for the appeals court to overturn the ruling. McKesson settled the Adler case before further proceedings, so the documents were never released.
A version of this story originally appeared in The National Law Journal, a sibling publication of Corporate Counsel and a part of American Lawyer Media.

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