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State Proceedings and Confidentiality Agreements with the Federal Government
When management or the Board of Directors suspects possible misconduct within the company, they cannot respond with sound business judgment unless they have good information about what happened. In serious cases, they probably need outside counsel to investigate, report, and recommend remedies. The government has long encouraged companies to disclose the results of these internal investigations by offering the hope of leniency in charging or sentencing. On Sept. 22, 2003, the Attorney General added a “stick” to this “carrot” approach when he announced the Justice Department's new policy of charging the most serious criminal offenses that are readily provable, with a limited exception in cases where a defendant provided substantial assistance.
While companies frequently elect to disclose to the federal government under these, and related, policies, whether or not third parties can get the information disclosed to the government is a rapidly evolving open question. The key issue in this debate is a company's ability to predict, and in actuality to control, the ultimate dispersion of its confidential information once disclosed to the federal government. In In re: WorldCom, Inc. Securities Litigation, 02 Civ. 3288 (DLC) (S.D.N.Y.) (WorldCom), one district court recently adopted a United States Attorney's Office (USAO) proposal creating tiers of disclosure of the company's work product. In U.S. v. Bergonzi, et al., No. 03-10024 (9th Cir.) (McKesson), the United States and the cooperating corporation appealed the lower court's decision to order disclosure of McKesson HBOC's work product to former employees who were under indictment.
While federal courts are struggling with the tension between cooperation and confidentiality, the state of Oklahoma indicted WorldCom despite the company's cooperation with the SEC and U.S. Attorney in New York. The trend toward parallel state proceedings means that federal courts may be powerless — absent new preemptive legislation – to protect confidentiality in return for cooperation with federal prosecutors and agencies.
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