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One lawyer calls it a corporate fraud case that has everything — federal indictments of corporate officers, a securities investigation, federal and state class actions, individual shareholder suits, employee suits and derivative suits. But the main reason corporate and government attorneys are focused on the case lies in the answer to a question that looms large in a business world scarred by one huge scandal after another: 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 Judge Martin J. Jenkins in San Francisco in January, in a complex case involving McKesson Corp., the huge medical supply and information company. USA v. McKesson Corp., No. 03-10024. 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 and allowed McKesson to intervene in the criminal case to argue the privilege issue. McKesson’s appeal is pending before the 9th U.S. Circuit Court of Appeals, where final briefs are due in June. The last word, though, may come from the U.S. Supreme Court because other federal and circuit courts have split on the waiver issue. As more and more companies have come under investigation in the past two years, the privilege-waiver issue has grown in importance. The U.S. Securities and Exchange Commission and the Department of Justice have policies that consider corporate cooperation when deciding whether to take enforcement action or charge the company. The enhanced fraud penalties under the Sarbanes-Oxley Act heighten the cooperation dilemma for companies. The privilege issue is a growing problem, said Stanley A. Twardy Jr., a former federal prosecutor and partner at Day, Berry & Howard in Stamford, Conn., who is not involved in the McKesson case. “A few years ago, only big offices in big cases sought waiver of privilege,” he said. “Now it is almost routine to see each U.S. Attorney require it. They are forcing corporate counsel’s hand. For the last year I have counseled my corporate clients that they have to assume” that the Justice Department will see anything they put in writing. For McKesson, the 9th 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 get copies. “It is a clear-sailing road map as to exactly what happened and where the evidence is and who the bad guys are,” said Robert S. 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, No. 20 on the Fortune 500 with 2002 revenues of $50 billion, did not return calls seeking comment. In its most recent SEC filing, the company stated that it could not predict the outcome or its potential liability in the cases, but said that the resolutions “could include judgments against the Company or settlements that could require substantial payments by the Company, which could have a material adverse impact on McKesson’s financial position, results of operations and cash flows.” THE PROBLEM BEGINS According to court documents, McKesson’s problems began when it acquired the Atlanta-based HBO & Co. (HBOC) in January 1999. A few months later, McKesson announced that its auditors had 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 in California, Colorado, Delaware, Georgia, Louisiana and Pennsylvania, 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 DOJ in May before conducting its review. In late July 1999, McKesson turned over to the SEC and DOJ its final report along with memoranda on 55 interviews the attorneys conducted with 37 current or former McKesson employees. Using the internal report as what one prosecutor called a “road map” for the grand jury, U.S. Attorneys in September 2000 indicted the two former co-presidents of HBOC on 17 counts of securities, mail and wire fraud. It is this criminal case that is before Jenkins in San Francisco. USA v. Bergonzi and Gilbertson, No. CR-00-0505. The SEC also filed securities fraud charges against the former general counsel, senior vice president of finance, chief financial officer, senior vice president of sales and two other financial gatekeepers of HBOC. Four of the defendants settled these charges. The other three are pending, and, as was pointed out to Jenkins, these defendants also want access to the internal McKesson documents. McKesson’s cooperation appears to have paid off. McKesson faces no civil or criminal charges from the government. In its 2001 policy statement, the SEC cited McKesson as an example of a company that cooperated. THE DYNEGY EXAMPLE Dynegy Inc. of Houston knows the consequences of not cooperating. In 2002 the SEC imposed a $3 million penalty against Dynegy, saying the penalty “reflects the Commission’s dissatisfaction with Dynegy’s lack of full cooperation in the early stages of the Commission’s investigation [into energy trading].Just as the Commission is prepared to reward companies that cooperate fully and completely with agency investigations, the Commission will also penalize those who do not.” A Jan. 20 memo from Deputy Attorney General Larry D. Thompson reiterated the DOJ policy that one factor in determining whether to charge criminally a corporation is its willingness “to disclose the complete results of its internal investigation; and to waive attorney-client and work product protection.” Not surprisingly, the federal government is on the side of McKesson in the 9th Circuit case because it realizes future cooperation by companies could be at stake. “What the United States cares about is the next case,” said John H. Hemann, the Assistant U.S. Attorney in San Francisco who is prosecuting the two former HBOC executives, in court papers. “[W]hat 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 plaintiff’s class action lawyers who want it.’ “ Keith D. Krakaur — the Skadden Arps partner who helped conduct McKesson’s internal investigation, negotiated the confidentiality agreements with the SEC and DOJ, and argued McKesson’s case before Jenkins — declined to discuss the pending case. But in court papers he said McKesson’s total cooperation with the government “makes this as good a case as there could ever be for a court to hold” that there has been no privilege waiver. In waiving the attorney-client privilege, Jenkins, in his 23-page ruling, said, “By giving the government, whether the SEC or the [U.S. Attorney's Office], full discretion to disclose the report and interview memoranda in certain circumstances, the terms of the agreements run counter to the company’s assertion the communication was intended to remain confidential.” Jenkins 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,” waiving work-product protection as to all other adversaries. Since 1999, most of the federal civil suits against McKesson have been consolidated into one action pending before U.S. District Judge Ronald M. Whyte in San Jose, Calif. Whyte appointed the New York State Common Retirement Fund as lead plaintiff. One lead plaintiffs’ attorney, Robert S. Gans, a partner in the San Diego office of New York’s Bernstein Litowitz Berger & Grossmann, said his clients are seeking the confidential documents in discovery, and, regardless of the outcome in the criminal case, they believe they are entitled to those documents. Most of the state suits have either been dismissed or stayed awaiting the outcome of the federal cases. But in one state suit, the Delaware Chancery Court dismissed most shareholder claims and refused to waive the attorney-client privilege protecting McKesson’s internal report. A similar case in Georgia brought by 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.

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