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Companies suspected of financial mischief may find themselves caught between accepting federal promises of leniency in exchange for a peek at internal corporate investigations and airing corporate dirty linen to the world. Corporations have tried to limit disclosure of internal reports by negotiating partial waiver of attorney-client privilege to share with government eyes only. The practice began after former U.S. Deputy Attorney General Larry Thompson indicated in his 2003 memorandum that one measure of a corporation’s cooperation in criminal investigations would be its willingness to share the results of internal investigations. Last year, the department said it would limit its request for waivers to the most serious cases. But that is little comfort to the companies that have already shared information with federal prosecutors, expecting that their deals to limit waivers to government investigators’s eyes would be honored, only to have individual criminal defendants or private plaintiffs’ lawyers clamoring for the reports. The latest twist came in San Diego on April 13, when the Judicial Conference Advisory Committee on Evidence Rules voted to reject protection for selective waivers under Federal Rule of Evidence 502. The conference’s Standing Committee on Evidence takes up the recommendation later this month. Meanwhile, with each new indictment of an individual corporate officer, those defendants want access to the reports, witnesses and notes from the report’s preparation. This has led to court fights over the legitimacy of selective attorney-client privilege waivers. The U.S. Securities and Exchange Commission indicated in October 2006 that it was investigating more than 100 instances of alleged stock-options manipulation. Companies large and small have restated earnings to account for options problems and have been sued by shareholders. Kent Roberts, former general counsel for McAfee Inc., was charged with fraud on Feb. 26. Monster Worldwide Inc. entered a guilty plea to securities fraud in New York in February. Other firms publicly identified as targets of federal probes have included KB Home, Broadcom Corp., and Apple Inc. Some private law firms, hired by a company or its board of directors, have made oral presentations to the government, eliminating a paper trail, in a practice that lawyers have dubbed “a puppet show,” according to Steven Hazen, secretary of the State Bar of California business law section, who advises on attorney-client privilege as a Los Angeles-based consultant. “People are paying attention to this,” said Matthew Jacobs, who leads McDermott, Will & Emery’s white-collar defense team from the firm’s Palo Alto, Calif., office. “[Waiver] is an issue for every company doing an internal investigation.” To date, only the 8th U.S. Circuit Court of Appeals, in Diversified Industries Inc. v. Meredith, 572 F.3d 596 (8th Cir. 1988), and a New York district court, in January’s ruling in In re Cardinal Health Inc. Securities Litigation, No. C2 04 575 ALM, 2007 WL 495150 (S.D.N.Y. Jan. 26, 2007), have recognized selective waiver of attorney-client privilege. Otherwise, the nearly uniform rejection of selective waivers in recent years throws into question the value of the sharing of reports as corporate get-out-of-jail-free cards and increases the potential that individual defendants and plaintiffs’ lawyers will get access to the confidential material. “We haven’t had this phenomenon before, of so many companies that have internal investigations done by independent counsel and then turn it over to the government,” Jacobs said. One case smack in the middle of the fight over selective privilege waiver is the San Francisco options-backdating prosecution of Gregory Reyes, the former chief executive officer of Brocade Communications Systems Inc. Reyes and Brocade’s former vice president of human resources, Stephanie Jensen, are accused of securities fraud, conspiracy and falsifying books in one of the first criminal indictments involving the alleged manipulation of stock-options grants. U.S. v. Reyes, No. CR06-556CRB (N.D. Calif.). The Brocade board of directors’ audit committee hired Morrison & Foerster to investigate Reyes’ practices. The law firm made an oral report to federal prosecutor’s under a limited waiver of attorney-client privilege. But the lack of a written report of the findings has done little to protect the company from claims of privilege waiver. Reyes also wanted records from Brocade’s outside counsel, Wilson Sonsini Goodrich & Rosati of Palo Alto, Calif., related to that firm’s review of alleged backdating in preparation for six class actions and seven derivative suits filed in 2005. U.S. District Judge Charles Breyer in San Francisco found that Reyes might have a right to use potentially exculpatory material from the reports to impeach government witnesses. In December, Breyer refused the two law firms’ request to quash Reyes’ subpoena and ordered them to produce documents, employee interviews and opinions in work product documents for his inspection. Douglas Young of the San Francisco firm Farella Braun + Martell, who is representing Morrison & Foerster in the matter, declined to comment on the subpoena fight or privilege waiver. Richard Marmaro of New-York based Skadden, Arps, Slate, Meagher & Flom’s Los Angeles office, representing Reyes, said that the rulings against selective waiver “mean companies can’t pick and choose to whom they disclose confidential information. In the Brocade case, anything the company shared with third parties is not privileged.” Ironically, it was the Skadden Arps internal investigation of alleged fraud in the McKesson/HBOC Inc. merger several years ago that launched one of the first major fights for release of an internal report since passage of the Sarbanes-Oxley Act of 2002, the tough post-Enron scandal corporate-governance reforms. The McKesson material ultimately was released. “The calculus in these investigations, when information is shared with the government, is to consider how it will affect collateral litigation,” said Haywood Gilliam Jr., a white-collar defense and securities specialist in the San Francisco office of Bingham McCutchen, and a former federal prosecutor who supervised the Brocade investigation. He made clear that he was not commenting on the specifics of the Brocade case. “Whether written or oral, companies have to think carefully if they present a summary report [to prosecutors]. The important thing to understand, as Judge Breyer found, [is that] for doctrinal purposes there is no difference between a waiver to turn over documents or an oral summary,” he said. For discovery, the test is likely to come down to what the government has in its possession, Gilliam said. “To the extent it has in its control material that will impeach a government witness, it [the government] has to produce it,” he said. “Some companies tried to use reports to obtain lenient treatment from the government,” said Hazen. “At that point they made a choice. If it was so significant to the company that it outweighs privilege, they can waive, but they don’t do it in a cost-free environment. A company that makes the decision is making a choice of what is more important � to get lenient treatment or preserve confidentiality.” Risk versus reward What this will mean to the internal reporting process as more cases are decided, “that is the $64,000 question,” Marmaro said. “Companies will have to make a careful balance; cooperating with the government fully versus the risk of waiver of attorney-client privilege. It is a risk versus reward calculation. Every case is fact-based and it is different for every company.” Hazen said that the use of selective waivers of privilege has been inconsistent with 400 years of judicial reasoning in protecting that privilege, but passage of Sarbanes-Oxley put pressure on companies to investigate and uncover fraud. One of the questions central to reviewing whether a defendant is entitled to the confidential material is whether it was “in the government’s control,” Jacobs said. Under the Supreme Court precedent in Brady v. Maryland, 373 U.S. 83 (1963), the government has an ongoing obligation to turn over exculpatory information immediately to the defense, Jacobs noted. A separate statutory obligation, known as the Jencks Act, requires the government to turn over to the defense any statements by government witnesses prior to their testimony at a trial. Both of these may provide avenues for the defense to get the internal report material they seek. Moreover, it’s not the government’s decision whether the material is exculpatory, Hazen said. It must deliver the material for the defense to decide.

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