No good deed goes unpunished? Establishing a self-evaluate privilege for corporate internal investigations.

Author:Lotchin, Theodore R.
 
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"Great corporations exist only because they are created and safeguarded by our institutions; and it is therefore our right and our duty to see that they work in harmony with these institutions.... The first requisite is knowledge, full and complete." (1)

INTRODUCTION

The public image of corporate America has taken a beating. (2) Arguably, no period of history has seen corporations struggle through such a widespread range of civil and criminal enforcement activities at the hands of government agencies. (3) On any given day the business sections of the country's newspapers are full of grand jury testimony, indictments, and settlement agreements between federal enforcement agencies and high-profile corporations or their boards of directors. According to the Washington Post, "[a] former top mutual fund executive pleaded guilty ... to tampering with evidence to thwart a probe of illegal trading and agreed to pay $400,000 to the Securities and Exchange Commission to settle allegations that he cut deals giving special trading privileges to certain wealthy customers." (4) On the same day, "[t]he New York Stock Exchange ... found evidence that the five largest of seven 'specialist' firms that control trading on the exchange regularly engaged in abusive practices.... [that] have cost investors as much as $150 million," (5) and "[a] former executive with the McKesson Corporation pleaded guilty ... to securities fraud charges in connection with an accounting scandal that cost shareholders of the company $9 billion." (6) While the New York Times affirmed that "Richard M. Scrushy, the founder and ousted chief executive of HealthSouth, refused to answer lawmakers' questions ... about his knowledge of a fraud scheme at the company," (7) the Wall Street Journal reported that "[j]ury deliberations in the fraud trial of a former Rite Aid Corp executive headed into a third day, after jurors failed to reach a verdict yesterday." (8) Although shockingly extensive, perhaps the most troubling aspect of these headlines is that they represent only one day in the life of corporate America.

In response to the increased pressure resulting from these public embarrassments, corporations have turned to internal investigations as a way of placating federal investigators and fulfilling their fiduciary responsibilities to their shareholders. (9) At the most basic level, internal investigations involve an extensive fact-finding effort on the part of either a corporation's general counsel or an independent legal professional. (10) Corporations may initiate an internal investigation "in response to an ongoing government investigation or agency subpoena, pursuant to a consent decree with the Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), or another government agency," (11) or "[a]n investigation may ... be prompted internally, through either a complaint or grievance from an employee or group of employees." (12) Once a threat to a corporation's stability becomes apparent, both directors and managers may hold an affirmative duty to investigate any potential irregularities. (13) Accordingly, the decision to conduct an internal investigation can have far-reaching impacts, both positive and negative. (14)

Regardless of the immediate motivation, a corporation may realize some important benefits from conducting an internal investigation. (15) First, a corporation that releases the results of an internal investigation to government regulators may be able to secure more lenient civil or criminal penalties. (16) Second, conducting an internal investigation allows a corporation to respond proactively to any potential litigation by controlling the flow of relevant information. (17) Third, even in the absence of litigation, an internal investigation may help improve corporate performance. (18) At the very least an internal investigation is concrete evidence that a corporation's directors have fulfilled their fiduciary duties to their shareholders. (19)

As with any business decision, corporate directors must balance these benefits against the potential risks of conducting an internal investigation. By definition, conducting an internal investigation presents the probability of discovering damaging information. (20) In addition, a corporation may be inviting a federal enforcement action by sharing the results of an internal investigation with government regulators in the absence of an immunity or confidentiality agreement. (21) Finally, and perhaps most importantly, a corporation that prepares an internal investigation always runs the risk that the final product may be discoverable in subsequent civil litigation. (22) In other words, even if an investigation is prepared in cooperation with an enforcement agency, potential plaintiffs may be able to gain access to a corporation's most sensitive information. In this scenario a corporation that has acted in good faith to discover evidence of its own wrongdoing, in essence, has created a litigation roadmap for any disgruntled shareholder or employee looking for a potential payday. (23)

Historically, courts have developed a number of mechanisms for keeping sensitive information confidential during the litigation process, including the attorney-client and work product privileges. There is a surprising lack of consensus, however, as to which theory, if any, is most effective for a corporation in the context of an internal investigation. Essentially, the problem boils down to whether a corporation waives its ability to keep an internal investigation confidential after voluntarily turning over the results to government enforcement agencies. (24) Considered in the contemporary context of increased public scrutiny and oversight, this question is more pressing than ever. (25) This Note will argue that, in light of the increasing pressure on corporations to cooperate with government agencies, as well as the significant expansion in investigative agencies and tactics, federal courts should give greater protections to the results of internal investigations that corporations disclose to a government agency voluntarily. In fact, the public's interest in holding corporations accountable for keeping their shops in order will be better served by establishing proactive incentives for internal investigations through the creation of a formal self-evaluative privilege for corporations that disclose the results of their investigation voluntarily.

This Note will address the arguments both for and against establishing a formal self-evaluative privilege in this context. Through the lens of United States v. Bergonzi, (26) Section I examines the federal courts' traditional approach to the confidentiality of internal investigations that are disclosed voluntarily. This Part relies on the facts of an ongoing criminal fraud prosecution to demonstrate both the shortcomings and consequences of the prevailing judicial treatment of corporations that disclose the results of an internal investigation to a government agency. Part II assesses the motivations, risks, and benefits of corporate internal investigations. Part III considers two recognized evidentiary privileges, namely, the attorney-client and work product privileges, that corporations often invoke in an attempt to protect the results of internal investigations. As this Part demonstrates, neither privilege provides sufficient protection for an internal investigation that a corporation discloses voluntarily to a government agency. Finally, Part IV introduces the concept of the self-evaluative privilege as a more appropriate response to this issue. As this Part demonstrates, the self-evaluative privilege, although controversial and not widely recognized, strikes the perfect balance between protecting the confidentiality of sensitive corporate information and promoting the public interest in full and fair disclosure of the information required for effective government oversight.

  1. THE DILEMMA OF DISCLOSURE: UNITED STATES V. BERGONZI

    Perhaps more notably than any case in recent memory, the order from the United States District Court for the Northern District of California in United States v. Bergonzi (27) highlights the pervasive problems with maintaining the confidentiality of corporate internal investigations that are submitted to government agencies voluntarily. Described as 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," (28) Bergonzi illustrates the prevailing judicial response to the question of whether a corporation waives the protections of the attorney-client and work product privileges if it voluntarily turns over the results of an internal investigation to government investigators who signed a confidentiality agreement. (29) According to Judge Martin J. Jenkins, the answer, quite simply, is yes. (30)

    In order to realize the full implication of this decision, it is necessary to understand the case's convoluted background. (31) Although the immediate controversy stems from the Department of Justice's (DOJ) indictment of two HBO & Company (HBOC) executives for securities fraud, mail fraud, and wire fraud, (32) the full story begins with the McKesson Corporation's (McKesson) decision to acquire HBOC. (33)

    On October 17, 1998, McKesson entered into a stock-for-stock merger agreement with HBOC. (34) The agreement eventually grew into a flat-out acquisition, with HBOC emerging as McKesson's wholly-owned subsidiary. (35) Beginning on April 28, 1999, the newly created corporation (36) announced a series of financial restatements due to pervasive accounting irregularities on the part of HBOC. (37) Initially, the corporation identified $42 million in improperly recorded revenue. (38) As its audits continued through July 1999, McKesson HBOC reduced its revenues by $327.4 million for the...

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