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Ironing out a wrinkle in one of the biggest ongoing securities fraud cases, the Ninth Circuit U.S. Court of Appeals ruled Wednesday that McKesson Corp. cannot sue its own shareholders over a 1999 merger gone bad. The novel suit by McKesson alleged that the company’s large institutional investors were unjustly enriched when the San Francisco health care giant merged with Georgia-based software company HBO & Co. Shortly after the merger, McKesson reported major accounting problems at HBOC, leading to a dramatic decline in the value of the company. A unanimous three-judge panel turned aside McKesson’s attempt to sue the very investors who had sued the company after the alleged fraud caused McKesson’s market value to drop $9 billion in a single day. “The sanctity of the corporate entity, as well as the policies mitigating against subjecting individual shareholders of a public company to liability for a merger gone bad, defeat McKesson’s effort to turn corporate law inside out,” Judge M. Margaret McKeown wrote. Joining McKeown in McKesson HBOC v. New York State Common Fund, 03 C.D.O.S. 7259, were Senior Judge Warren Ferguson and Judge Johnnie Rawlinson. McKeown said it wouldn’t be fair to go after shareholders. “McKesson has potential legal claims against any number of parties who, unlike the former shareholders, actually played a substantial role in the decision to enter the merger agreement,” McKeown wrote. “Possible claims and remedies lie against the former HBOC officers and directors, as well as the phalanx of investment bankers, lawyers, auditors, accountants and other advisors associated with the transaction.” McKesson sued shareholders who exchanged more than 20,000 shares in HBOC for shares in the new company. The case was brought under the theory that the investors were unjustly enriched by trading flawed HBOC shares for “good” McKesson shares. The decision is the latest development in a securities fraud suit that was bare-knuckle from day one — first among the plaintiffs’ lawyers vying for lead counsel status and lately between McKesson and its various courtroom opponents. Both the SEC and the U.S. attorney’s office have cases pending in connection with the alleged fraud. Also pending at the Ninth Circuit is a potentially precedent-setting decision over whether McKesson waived its attorney-client and work-product privileges when it turned over the results of an internal investigation to regulators and criminal authorities. If the privilege is not upheld, it would give plaintiffs’ lawyers access to a virtual road map to the alleged fraud. They claim that McKesson was aware of the problems at HBOC prior to the merger, but earlier this year U.S. District Judge Ronald Whyte threw out some of the securities fraud claims against McKesson. The panel concluded by saying that protecting shareholders from this sort of liability is good policy. One of the policies behind the decision is that [ruling otherwise] would have wreaked real mischief in the public markets,” said David Stickney, an associate at Bernstein Litowitz Berger & Grossmann, which represents the New York common fund. The same firm represents the plaintiffs in the securities suit before Judge Whyte. “This was a very novel theory that didn’t work,” Stickney added, concluding that the decision is likely to quash any similar claims. McKesson spokesman Larry Kurtz said the company was considering what, if any, further action it might take. “No decision has been reached as to what that might be,” Kurtz said. McKesson is represented by Skadden, Arps, Slate, Meagher & Flom, which referred calls to the company.

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