Regulation

McKesson Must Share Internal Probe

Company shared findings of an internal investigation with the SEC and federal prosecutors, but now it must surrender them to civil plaintiffs, too.
Stephen TaubFebruary 26, 2004

The First District Court of Appeals has ruled that if a company shares the results of an internal investigation with the government, it must also share it with plaintiffs who have brought civil lawsuits against the company, according to The Recorder, a legal newspaper published in San Francisco.

A three-judge panel unanimously decided that an internal investigation by McKesson HBOC, once it had been shared with the Securities and Exchange Commission and federal prosecutors, was no longer protected by attorney-client privilege, the paper reported.

In 1999, several months after health services giant McKesson Corp. closed its $12 billion acquisition of HBO & Co., a provider of health-care software, McKesson announced that it had discovered bogus sales at HBO dating back to 1997. McKesson had to restate its earnings, and the ensuing scandal sliced $9 billion from its market capitalization.

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As is usually the case, the disclosure sparked a slew of shareholder lawsuits, as well as investigations by the U.S. Attorney’s Office and the SEC. In 2001 the commission filed fraud charges against HBO’s former chief financial officer and five other HBO executives.

McKesson had hired Skadden, Arps, Slate, Meagher & Flom to defend against federal and state securities fraud suits and to conduct an internal investigation. According to the Recorder, Skadden agreed to share its findings with the government, which took no action against McKesson.

The state lawsuits were consolidated in San Francisco Superior Court, where Judge Donald Mitchell granted a plaintiff’s motion that McKesson should turn over the results of the investigation. According to the newspaper, the judge ruled that McKesson waived its attorney-client privilege when it shared those results with the government.

McKesson appealed, arguing in part that giving up the information would chill future investigations into alleged wrongdoing because companies would be discouraged from cooperating with the government. Indeed, both the SEC and the Securities Industry Association filed friend-of-the-court briefs on behalf of McKesson.

However, “given the various incentives for cooperating with government investigations,” wrote Presiding Justice Laurence Kay in his decision for the plaintiffs, “we are not sure if future investigative targets will be reluctant to share protected documents.” Added Kay, “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.”

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