The crime-fraud exception in the wake of 'Gorski,' et al.

Dana M. McSherry and Karen Eisenstadt, 
The Daily Record Newswire

U.S. District Court Judge F. Dennis Saylor's recent decision applying the crime-fraud exception in United States v. Gorski, No. 12-10338-FDS, 2014 U.S. Dist. LEXIS 127915 (D. Mass. Sept. 12, 2014), highlights the surprisingly low showing necessary to pierce the attorney-client privilege and the flimsy limitations on the scope of the exception.

Unfortunately, it is clear that the government increasingly appreciates this low threshold and is pushing for expansive application of the exception. Transactional and defense attorneys alike must take heed and guard against the trend both while engaging in communications that may one day be the subject of a crime-fraud motion and eventually in vigorously opposing such a motion.

Crime-fraud exception

The crime-fraud exception to the attorney-client privilege withdraws protection from communications where the client sought or employed legal representation to commit or facilitate a crime or fraud.

Courts have recognized a two-pronged test for those seeking to pierce the privilege on that basis. Specifically, the privilege challenger must show that: (1) the client was engaged in or planning a crime or fraud at the time of the communication; and (2) the communication was intended by the client to facilitate or conceal the crime or fraud.

The necessary standard of proof varies among the circuits, but it is a low one. Courts have variously referred to the standard as a "prima facie" showing, a "reasonable basis," or "probable cause." No matter the formulation, the standard is always something less than a preponderance of the evidence.

Because the standard of proof is so low, the first prong of the test tends to offer little assistance to privilege defenders. Often, by the time a privilege issue is being litigated, the client already has been charged with a crime or fraud. The government then finds little difficulty in providing the court with a reasonable basis to conclude that the client engaged in a crime.

The second prong of the test provides a scope limitation on the exception. It considers the client's intent in consulting his lawyer: Did the client aim to use his lawyer to foster the crime or fraud? If the answer is yes, the crime-fraud exception applies to the communications that were so intended.

The exception should not, however, apply to the client's other communications with his lawyers, even if those communications were on the same topic and could provide the government with helpful evidence.

That intent limitation is crucial because it aligns the scope of the exception with the policy reason for the exception; courts withdraw the protection they typically accord to the attorney-client relationship when the government can show the client abused that relationship.

Gorski, however, provides a warning to privilege defenders of just how flimsy the scope limitation can be.

'United States v. Gorski'

In Gorski, the government alleged that the defendant used the services of the law firm Mintz, Levin, Cohn, Ferris, Glovsky & Popeo to carry out a corporate restructuring that would make his company appear to be a Service-Disabled Veteran Owned Small Business Entity, which it was not.

After indicting the defendant, the government issued a subpoena to Mintz for documents relating to the restructuring, including emails between Mintz and the defendant and drafts of various corporate documents. Mintz withheld many of the documents as privileged.

The government then moved the court for an in camera examination of the documents to determine if they fell within the crime-fraud exception to the privilege.

After conducting the in camera review, Judge Saylor found that the crime-fraud exception applied and ordered Mintz to produce the documents. Saylor reasoned that the first prong of the test was met because the defendant had already been indicted by the grand jury for the fraud.

With regard to the second prong, Mintz argued that the defendant had sought Mintz's assistance because he wanted help complying with the regulations, not because he wanted to thwart them.

The government took the position that the scope of the crime-fraud exception should coincide with the full scope of the charged conspiracy, stating: "The government is unaware of any case law that stands for the proposition that - once a judicial finding is made that the crime fraud exception applies to an ongoing fraud - the privilege is only partially waived by the defendant."

Saylor concluded that there was "a reasonable basis to believe that the purpose of the restructuring was to try to maintain Gorski's control over Legion without drawing any suspicion from the SBA."

He acknowledged that "there is certainly an argument to be made that the lawyers were simply attempting to construct a framework that would permit Legion to qualify as a technical matter - in other words, to fall literally within the wording of the regulations - even if the spirit and purpose of the regulations may have been violated."

However, after noting that the defendant could make those arguments at trial, Saylor said "the fact that other inferences might be reasonably drawn from the facts is not enough, under the circumstances, to negate the 'reasonable basis' finding."

Both sides are appealing aspects of Saylor's decision.

Warning to privilege defenders

Saylor's reasoning in Gorski highlights the risks that lurk in the crime-fraud exception's very low "reasonable basis" standard of proof.

The government proposed an analysis that would have collapsed the crime-fraud exception's two-prong test into a de facto one-prong test. The government urged the court to resolve the scope question based on the scope of the alleged crime or fraud, without any consideration of the defendant's intent in engaging in the communications. That interpretation essentially would render the scope limitation on the crime-fraud exception illusory.

Even though Saylor did not adopt the government's analysis, the application of the reasonable basis standard to the second prong of the test left him in pretty much the same place.

The problem is, when a client consults his lawyer in relation to an alleged crime, and later commits that crime, it is usually not implausible to infer that the client had some intent to use the communication to further the crime, even if it is not true.

Because a plausible inference may be sufficient to sustain a reasonable basis finding, the fact that the client and his lawyer can offer alternative plausible inferences may not help.

In Gorski, the government alleged that the client actually utilized the law firm's services to help carry out the crime. Consider, however, the more common situation in which a client consults his lawyer to find out whether a proposed course of conduct is legal, such as asking for an opinion memo. If the attorney advises that the conduct may be illegal but the client does it anyhow, does that alone provide a reasonable basis to believe that the client intended all along to use his lawyer's advice to further the crime?

That is not far from the logic the 3rd Circuit upheld in In re Grand Jury Subpoena, 745 F.3d 681 (3d. Cir. 2014). In that case, the court noted - correctly - that the crime-fraud exception should not apply every time an attorney tells his client that something is illegal and the client does it anyway. However, the court more or less created a presumption to that effect through its application of the reasonable basis standard.

There, the client had asked his attorney for advice about a payment to a foreign bank official. The attorney alerted the client to the existence of the FCPA, said he could not tell whether the planned action was legal or not based on his limited research, and advised the client against making the payment. The client decided to make the payment anyhow, and did so through the bank official's sister.

The District Court found that the facts established "a reasonable basis to suspect that [the client] could have used the information gleaned from the consultation in furtherance of the crime."

The 3rd Circuit affirmed, reasoning that the attorney provided the client with "information about the types of conduct that violate the law," and the client could have used the helpful information to make his crime more sophisticated, such as choosing to route the payment through the official's sister.

As in Gorski, the facts in In re Grand Jury Subpoena clearly could have supported alternate, benign inferences. Perhaps the client consulted his lawyer because he wanted to comply with the law. After considering his attorney's advice, however, the client decided that the business reasons for making the payment outweighed the potential legal risks involved, and he made the payment.

However, when the government need only present a reasonable basis for believing that the client consulted his attorney with a wrongful intent, one plausible inference in support of the government's theory can win the day.

Protecting the privilege

The inferences of wrongful intent in Gorski and In re Grand Jury Subpoena may have been particularly strong based on the courts' in camera review of the documents. Nevertheless, the reasoning in the two cases as well as others has left a wide opening that government attorneys no doubt are eager to exploit.

So what's to be done?

First, transactional and regulatory attorneys should be thinking of this issue on the front end, before any alleged crime or fraud takes place:

- Educate clients about the crime-fraud exception and potential ways it could arise in the future as part of a given transaction. The subject easily can be mentioned during initial discussions of attorney-client privilege.

- Use the email "Subject" field to clearly delineate the topic of each attorney-client communication. It could prove helpful down the line if communications need to be parsed as part of an in camera review.

- If an opinion memo is provided, clearly set forth that the client requested the opinion memo because of his desire to comply with the law.

- Given the low showing necessary to pierce the privilege and the fact that your opinion memo may one day turn into a key piece of evidence, consider framing your advice in terms of what the government likely will argue violates the law, rather than making absolute statements that certain conduct does or does not violate the law.

Second, because privileged documents often can be critical pieces of evidence at trial and can have a particularly strong impact on a jury, litigators must be prepared to vigorously oppose crime-fraud motions. Consider the following tips:

- Set out a strong and favorable statement of the doctrine at the outset, and stick to it. Do not let the government define the doctrinal categories in a way that is unhelpful to your client.

- The second prong of the test can be incredibly powerful and can significantly limit what you are required to produce. Demand that the government produce some actual evidence of the client's intent. Otherwise, the government may be able to "prove" intent with little more than a temporal relationship between the alleged crime and the communication, which the D.C. Circuit held to be insufficient in In re Sealed Case, 107 F.3d 46 (D.C. Cir. 1997).

- If ordered to produce documents for in camera review, keep the universe of documents as narrow as possible, both substantively and temporally. Inform the court of the boundaries of your production and start advocating early on for a narrow scope in the event the court applies the exception.

- Always remind the court of the purpose for the crime-fraud exception, which is what animates the scope limitation. The purpose is not to punish a potential wrongdoer by exposing his privileged communications, but rather to withdraw the protection of the privilege where the client has abused the attorney-client relationship.

- Stress the wider policy concerns at risk, including the desire to encourage clients to seek legal advice, especially in heavily regulated fields such as health care and finance.

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Dana M. McSherry is a partner and Karen Eisenstadt is an associate in the Boston office of McDermott, Will & Emery. As a member of the white-collar and security defense practice group, McSherry focuses her practice on civil and criminal matters related to securities, health care and other government enforcement.

Published: Thu, Dec 11, 2014