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Although corporations have long relied on internal investigations by outside counsel to discover the scope of — and assess responsibility for — financial fraud, accounting irregularities and other forms of employee mischief, such inquiries have become de rigueur in the wake of the scandals that commenced with Enron in late 2001. The internal investigation reports that typically result from such inquiries often include a detailed history of the misconduct committed by now- or soon-to-be terminated employees and officers of the corporation, complete with documentary exhibits and witness interview memoranda. These days, the Justice Department and the Securities and Exchange Commission expect full disclosure of such reports as the price of admission for a corporation seeking to attain the status of “corporate cooperator” while avoiding a potentially disastrous, if not fatal, prosecution. Logically fearful of the collateral damage that an indictment can do to a corporation’s stock price and business prospects, most companies have acceded to the government’s demands and have voluntarily produced their internal investigative reports to an investigating U.S. Attorney’s office and to the SEC. In the absence of such production or other unusual circumstances, it is black-letter law that an internal investigative report prepared by counsel is protected from disclosure by both the attorney-client privilege and the attorney work product doctrine. The emerging disclosure trend thus raises an important question: does the “selective waiver” of the privilege and the work product doctrine for purposes of cooperating with a federal investigation constitute a waiver as to all other interested parties? Such parties include class action plaintiffs who likely believe that the internal report will, at a minimum, shortcut the discovery process and provide sufficient specific evidence of scienter to defeat a motion to dismiss under the federal Private Securities Litigation Reform Act. As explained below, several courts have reached markedly different conclusions in addressing this issue. For its part, the Ninth Circuit recently announced, in United States v. Bergonzi, 05 C.D.O.S. 2822, that the availability of selective waiver throughout the circuit “is an open question.” In light of this uncertainty, counsel must prepare (and prepare their clients) for the material risk that an internal investigative report confidentially produced to the government will also be the subject of compelled disclosure to adverse parties in related civil litigation. For corporations who would prefer to handle contested civil litigation the old-fashioned way — by not, for instance, disclosing a confidential litigation blueprint to one’s adversary — this unhappy result is virtually unavoidable given the Justice Department’s current policies on corporate cooperation and attorney-client privilege. In the current regulatory and law enforcement environment, the slightest whiff of internal malfeasance is likely to send responsible corporate officers and directors scrambling to find an “independent” law firm — independence being marked by not having previously represented the company — that has the resources and expertise to conduct an internal investigation. Increasingly, the primary expertise required for the job is a cadre of former federal prosecutors or SEC attorneys who now specialize, as they previously did for the federal government, in ferreting out fraud by asking tough questions and effectively locating and analyzing corporate documents and e-mails. The investigating counsel will be expected to get to the bottom of the problem as quickly as possible and then to report to the board of directors about what happened, who is responsible and what corrective measures, as well as new compliance programs, should now be instituted. Not surprisingly, federal prosecutors and SEC attorneys have long coveted the fruits of such internal investigative efforts. With the publication of the “Thompson Memorandum” on Jan. 20, 2003, however, the Justice Department made it clear that the disclosure of such reports to the government was essentially a condition precedent for any corporation endeavoring to avoid criminal prosecution. Authored by then-Deputy Attorney General Larry Thompson, the memorandum lists nine factors for prosecutors to consider “in reaching a decision as to the proper treatment of a corporate target.” The fourth factor requires an assessment of “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection.” The Thompson memo leaves no doubt that an important component of the anticipated privilege waiver is disclosure of the “complete results” of the corporation’s internal investigation. The memo acknowledges that such disclosures are not only necessary to test the completeness of the corporation’s cooperation, but are also likely to yield a cost-free road map to the prosecution of culpable corporate officers and employees. One factor the prosecutor may weigh in assessing the adequacy of a corporation’s cooperation is the completeness of its disclosure including, if necessary, a waiver of the attorney-client and work product protections, with respect to both its internal investigation and its communications between specific officers, directors and employees and counsel. Such waivers permit the government to obtain statements of possible witnesses, subjects and targets, without having to negotiate individual cooperation or immunity agreements. In addition, they are often critical in enabling the government to evaluate the completeness of a corporation’s voluntary disclosure and cooperation. The Thompson memo and its aggressive policy concerning privilege waivers created considerable controversy and concern for white-collar specialists and corporate counsel. In the most fundamental sense, the memo was viewed by some as an assault on the right to effective advice of counsel because, it is argued, the government’s waiver policy effectively promised to punish exercise of the attorney-client privilege through the institution of a potentially devastating criminal prosecution. Notwithstanding the merits of such criticism, the controversy between the defense bar and the Justice Department is all but irrelevant to the practical considerations confronting a corporation whose agents may have engaged in financial fraud. Confronted with a choice between an indictment (or a guilty plea) and waiver of the attorney-client privilege and the work product doctrine, it is hardly surprising that most corporate boards will choose the latter course in an effort to protect shareholders and innocent employees from the harsh consequences of an institutional prosecution. The Eighth Circuit, in a 1978 opinion in Diversified Industries Inc. v. Meredith, 572 F.2d 596, 611, was the first to establish the selective waiver doctrine and protect from third party discovery work product disclosures made to the SEC during a private investigation even though the company had not entered into a formal confidentiality agreement with the agency. The Delaware Court of Chancery recently held, in Saito v. McKesson HBOC Inc., 2002 Del. Ch. Lexis 125 at 39, that the pre-disclosure execution of a confidentiality agreement with the SEC or U.S. Attorney’s office is sufficient to preserve the protections of the work product doctrine as to third parties. Most other courts, however, including California’s First District Court of Appeal, have squarely rejected the selective waiver doctrine under similar circumstances. While “the employment of outside counsel to investigate alleged corporate wrongdoing is a laudable practice,” adoption of a selective waiver theory in California must come from the Legislature, the court held in McKesson HBOC Inc. v. Superior Court, 115 Cal. App. 4th 1229 (2004). The most recent decision to examine the question was issued on March 31 by Judge Ronald Whyte of the Northern District of California. In In re McKesson HBOC Inc. Sec. Litig., 2005 U.S. Dist. Lexis 7098, Whyte considered the selective waiver doctrine in the context of an internal investigative report, known as the Skadden Report, that was prepared for McKesson by outside counsel and then disclosed to the SEC and the U.S. Attorney’s office pursuant to confidentiality agreements that precluded disclosure to third parties except to the extent the agencies determined that disclosure was required by law or necessary to discharge their official duties and responsibilities. (As is common, McKesson HBOC’s difficulties spawned litigation in several jurisdictions, and the Skadden Report was at the heart of the waiver-related decisions, discussed above, reached by the Delaware Court of Chancery, the California Court of Appeal and the Ninth Circuit.) Because the Skadden Report was not yet in existence at the time the confidentiality agreements were executed, and because McKesson expressly contemplated that its future communications with counsel would be disclosed to the government, Judge Whyte held that such communications, including the report itself, were never protected by the attorney-client privilege. “Where, as here, there is an agreement by the client that provides for the disclosure to a third party of the communications between a client and attorney in advance of those communications being made, the communications disclosed pursuant to that agreement are not confidential and the goals of the attorney-client privilege are not in play,” wrote Whyte. Turning to the work product doctrine, Whyte first rejected McKesson’s “common interest” theory, finding that the doctrine did not apply because both the SEC and the U.S. Attorney’s office were “adverse” to McKesson despite the company’s cooperation in the investigations. Notwithstanding this conclusion, the court found that the selective waiver doctrine was viable and properly applied here because “[p]ermitting disclosure to the government under a confidentiality agreement would not undermine the underlying principles of the work product doctrine,” especially in light of the “benefit to the public of permitting disclosure of work product.” Whyte reasoned that “[w]here the government otherwise has no access to the necessary work product, the choice between a disclosure to the government under a confidentiality agreement without waiver as to other parties and no disclosure at all clearly favors permitting the exception where the public clearly benefits from increased governmental enforcement capability that results from allowing disclosure.” The recognition by some courts of the selective waiver doctrine represents an important step towards reconciling the Thompson memo’s waiver demands with a corporation’s legitimate confidentiality concerns in the context of related civil litigation. The law in this area, however, is unsettled and different courts have reached strikingly different conclusions on similar facts. Thus, while awaiting resolution of this important issue by the Ninth Circuit or the U.S. Supreme Court, practitioners counseling corporations in internal investigations should presume that their investigative work product and client communications will ultimately be produced not only to the SEC and the U.S. Attorney’s office, but also to adverse civil plaintiffs who will seek to exploit the fruits of the company’s “confidential” cooperation. Michael A. Attanasio is a partner in the San Diego office of Cooley Godward, where he specializes in white collar criminal defense, internal investigations and complex business litigation.

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