Firm's Internal Probe at Heart of Court Battle Struggle

Portions of the securities fraud trial of a former McKesson Corp. executive could be closed to the public -- and to plaintiff attorneys -- if a federal judge grants a motion filed by the beleaguered health care giant. The bench trial of Richard Hawkins, once McKesson's CFO, is scheduled to begin Monday before U.S. District Judge Martin Jenkins. Hawkins' former employer, which is not a party to the criminal case, wants to close Jenkins' courtroom if witnesses discuss a controversial internal investigation.

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Portions of the securities fraud trial of a former McKesson Corp. executive could be closed to the public — and to plaintiff attorneys — if a federal judge grants a motion filed by the beleaguered health care giant. The bench trial of Richard Hawkins, once McKesson’s chief financial officer, is scheduled to begin Monday before U.S. District Judge Martin Jenkins. Hawkins’ former employer, which is not a party to the criminal case, wants to close Jenkins’ courtroom if witnesses discuss a controversial internal investigation. McKesson hired Skadden, Arps, Slate, Meagher & Flom to conduct the inquiry after allegations of corporate wrongdoing surfaced in 1999. McKesson turned over the audit to federal investigators in an effort to avoid charges in a government probe. Keeping the courtroom open, McKesson argues, would infringe on its right to keep the material confidential. McKesson claims that the report is protected by attorney-client privilege. Plaintiff attorneys, who have sued on behalf of shareholders in federal and state court, want full access to the internal document to bolster their claims that executives defrauded stockholders of millions of dollars. McKesson’s motion to close an otherwise public trial is the latest twist in litigation over the audit. White-collar attorneys are closely following the battle because it is setting precedent over who gets access to companies’ internal investigations. Debate over McKesson’s report has already gone all the way through state appeal courts — which ruled it was not protected by attorney-client privilege — and the Ninth Circuit U.S. Court of Appeals, which has not yet ruled on whether defense attorneys in federal court cases get unrestricted access to internal investigations. Companies want the internal reports to remain confidential. And if they hand them over to government investigators, as McKesson did, they want courts to keep them out of plaintiff attorneys’ hands. Hawkins’ defense attorneys already have a copy of the audit. Melinda Haag, a partner at Orrick, Herrington & Sutcliffe and a member of Hawkins’ defense team, did not take a position on the closure request “because we are not a party to that motion.” Plaintiff lawyers who have filed civil securities fraud cases against McKesson oppose the motion, which is scheduled to be argued Thursday. “I think there’s pretty strong interest in people’s right to know,” said Joy Kruse, a partner at Lieff Cabraser Heimann & Bernstein, which represents mutual funds in a state court case against McKesson. Plaintiffs won access to the report at the First District Court of Appeal with McKesson HBOC v. Superior Court, 115 Cal.App.4th 1229. But that doesn’t necessarily mean plaintiffs in federal court will get it. Kruse said she also wants to hear McKesson executives testify about the report in court. She hasn’t been able to depose them yet because of the criminal trial. A federal grand jury indicted Hawkins on conspiracy and securities fraud charges for his alleged role in a series of accounting irregularities at McKesson. He is accused of participating in a scheme to illegally book revenues from a $20 million deal between McKesson and Data General Corp. The problems came to light in 1999 after McKesson announced that a company it had acquired, HBO & Co., improperly recorded revenues. McKesson’s stock market value plummeted. Since then, the Securities and Exchange Commission and the U.S. attorney’s office in San Francisco have hit at least a dozen people with civil and criminal charges of conspiracy and fraud. Several pleaded out and are cooperating with the government. In the motion to close the courtroom, Skadden partner Keith Krakaur argues that McKesson meets the burden, set by precedent, to close the court in order to “preserve higher values.” “Discussion of the report in open court would directly subvert McKesson’s compelling interest in and ongoing legal efforts to preserve the privilege and work product protections relating to the report,” Krakaur wrote. Kruse was joined in her opposition to McKesson’s motion by other plaintiff attorneys, including Joseph Tabacco Jr. of Berman DeValerio Pease Tabacco Burt & Pucillo. Assistant U.S. Attorney Timothy Crudo said the government “does not consent” to closing the courtroom. The case is U.S. v. Hawkins, 04-0106.

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