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Plaintiffs lawyers who target securities fraud scored a major victory Friday, when a state appeal court ruled that if a company shares an internal investigation with the government, it has to give it up to plaintiffs, too. In a unanimous opinion, a three-judge panel of the 1st District Court of Appeal decided that an internal investigation by McKesson HBOC — shared with both the Securities and Exchange Commission and federal prosecutors — was not protected by attorney-client privilege. The case, McKesson v. San Francisco Superior Court, A103055, has been closely watched by plaintiffs attorneys who prosecute securities fraud, as well as by corporations that try to reduce the damage from fraud allegations by cooperating with the government. The SEC and the Securities Industry Association filed amicus curiae briefs supporting McKesson. “Though McKesson and amicus curiae advance policy arguments for allowing sharing of privileged materials with the government — no one suggests that a defendant facing multiple plaintiffs should be able to disclose privileged materials to one plaintiff without waiving the attorney-client privilege as to the other plaintiffs,” wrote Presiding Justice Laurence Kay. The opinion was also signed by Justices Timothy Reardon and Patricia Sepulveda. The case began in 1999, when McKesson announced that a company it acquired, HBO & Co., improperly recorded revenues. The disclosure prompted a spate of shareholder suits, as well as investigations by the U.S. Attorney’s Office and the SEC. McKesson hired Skadden, Arps, Slate, Meagher & Flom to defend the suits and conduct an internal investigation. Skadden then agreed to share what it found with the government, which took no action against the company. Several former executives at HBO have been indicted by the Justice Department and sued by the SEC. Both federal and state securities fraud suits were filed. In state court, the cases were consolidated in San Francisco Superior Court, and attorneys moved to obtain the internal investigation. Judge Donald Mitchell granted the motion, ruling that McKesson had waived attorney-client privilege when it shared with the government. McKesson then appealed. The company argued that “providing documents to the government furthered a common interest or purpose” and so were protected, according to the opinion. Further, McKesson and amici said that giving up the information would chill future investigations into alleged wrongdoing because companies will be discouraged from cooperating with the government. Appellate justices aren’t as worried. “Given the various incentives for cooperating with government investigations — we are not sure if future investigative targets will be reluctant to share protected documents,” Kay wrote. “McKesson did not need to disclose the audit report and interview memoranda to prepare its case for trial, and McKesson’s adversaries are not taking undue advantage of Skadden’s efforts because the documents would have remained protected had not McKesson disclosed them to third parties.” A lawyer at Skadden did not want to comment on the case Friday because he was still digesting the opinion. A similar case, also closely watched, is winding its way through federal courts.

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