United States: Challenges In Asserting The Advice Of Counsel Defense

Originally published in a New York Law Journal special section - White-Collar Crime

The post-recession increase in complex white-collar investigations and prosecutions1 may increase the chance that white-collar attorneys will encounter a vexing conflict that looms, often unexplored, in many corporate criminal investigations: What to do when an individual employee's defense to criminal charges rests upon her reliance on the legal advice she received from in-house or outside corporate counsel. As a recent U.S. Securities and Exchange Commission case makes clear, an individual employee may find herself hamstrung in her ability to defend against criminal fraud charges if her corporate employer determines that waiving its attorney client privilege on the issue would not be in its self-interest. The conflict between an individual's Sixth Amendment right to an effective defense and a company's right to the preservation of its attorney client privilege is one with astonishingly little developed case law and breathtakingly large implications for individuals, their corporate employers, and the government.

Recently, the conflict between an individual's right to assert a reliance on counsel defense and a corporation's right to refuse to waive its attorney client privilege and turn over its privileged documents essential to that defense, was the subject of a motion filed in the Southern District of New York by the SEC. In SEC v. Stoker,2 the SEC sought to compel Citigroup to produce documents relating to legal advice that one of its employees, Stoker, claimed was relevant to his defense of a securities fraud case the SEC filed against him. Citigroup identified those materials as protected by Citigroup's attorney client privilege and refused to turn them over. In its motion, the SEC requested that, in the event the court found that the documents the SEC itself described as "relating to legal advice" provided by Citigroup's legal counsel to its employees were covered by attorney client privilege, "the Court should preclude [Stoker] from asserting as a defense that he reasonably relied on advice of counsel and further preclude [Stoker] from presenting any evidence, documentary or testimonial, referring to reliance on advice of counsel."3

Unfortunately for this legal analysis, the SEC's underlying motion papers were filed and remain under seal, and in mid-April the parties resolved the issue in an undisclosed manner and the SEC withdrew the motion, without any decision by the court. This type of quiet, agreed-upon resolution appears typical of the manner in which this conflict is often handled, because these situations present dire consequences for all parties involved. The defendant may be prevented from fully defending herself, thereby increasing the chances that she will be convicted of a charge she did not have the intent to commit. The corporation may find itself subject to a privilege waiver that it does not want and has not caused, and that may be interpreted broadly by civil plaintiffs and the government. And the government may be thwarted in its ability to test the defendant's claims and ensure that any charges it brings against the defendant are appropriate. It is no wonder that parties strive to discover a resolution, rather than risk an adverse ruling in such situations.

Law on 'Advice of Counsel' Defense

The advice of counsel defense allows a party to show good faith and negate liability for any crime that requires fraudulent intent.4 To successfully assert advice of counsel, the defendant must show that she

  1. sought the advice of counsel in good faith;
  2. made a complete disclosure to counsel of all relevant facts she knew; and
  3. reasonably relied on and followed counsel's opinion.5

Once a defendant asserts that she relied on the advice of counsel, "fairness requires examination of protected communications" because a party cannot use privilege as "both a shield and a sword."6 Asserting the advice of counsel defense is the quintessential example of waiver because the party asserting the defense makes the confidential communications relevant to the proceeding, and therefore invites scrutiny of the privileged communications by the opposing party. Courts decide whether a party has asserted the defense and the scope of the attorney client privilege waiver on a case-by-case basis, taking into account the extent of the disclosure, when the disclosure occurred in the proceedings, and the prejudice caused to the opposing party.7 The waiver analysis may be somewhat straightforward where the party protected by the privilege invokes her reliance on counsel, but grows more complicated where the party is a corporate employee who received advice from corporate counsel.

It is axiomatic that legal advice provided to a corporation belongs to the corporation, not any individual employee who may have received that advice.8 As the Supreme Court noted in Commodity Futures Trading Commission v. Weintraub, principles of waiver are complicated when a corporate entity is involved. "As an inanimate entity, a corporation must act through agents. A corporation cannot speak directly to its lawyers. Similarly, it cannot directly waive the privilege when disclosure is in its best interest. Each of these actions must necessarily be undertaken by individuals empowered to act on behalf of the corporation."9 Therefore, while a corporation can only act and waive privilege through its agents, the corporation can also prevent such agents from waiving the privilege.10 The converse is also true: Agents of the corporation cannot prevent it from waiving privilege, as a corporation sometimes does in the context of cooperating with the government and attempting to forestall criminal charges.

With this legal backdrop in mind, the problem becomes apparent: A corporation can prevent an individual from waiving privilege, but an individual cannot waive privilege without consent of the corporation. In other words, an individual accused of a crime whose defense rests on her lack of intent due to the advice she received from corporate counsel may be barred from asserting that defense without obtaining a waiver from the corporation. Worse yet, defense counsel may be unable to assess the strength or weakness of such a defense because they may be precluded from examining the relevant documents and interviewing the lawyers involved in providing the advice if the corporation refuses to make these privileged communications available. The resulting deadlock sets two well-grounded legal principles in conflict—the oldest category of confidential communications recognized by law and the Constitutional mandate that a defendant be equipped to defend himself against criminal charges. There is scant law in the Second Circuit, or elsewhere, to guide lawyers on how to resolve this conflict.

Second Circuit's 'Grand Jury' Decision

The Second Circuit has addressed a related issue: whether a corporate officer may unilaterally waive the corporation's privilege by invoking an advice of counsel defense during grand jury testimony.11 Before the grand jury, the CEO of an unnamed company, "Doe Corp.," testified that he relied on Doe Corp.'s attorney's legal advice that the transactions under investigation were legal. Even when reminded of his right to assert attorney client privilege and consult his attorney outside the grand jury room, the CEO again invoked Doe Corp.'s attorney's advice as the explanation for the transactions at issue. Thereafter, the government demanded that Doe Corp. produce the legal opinions and communications referenced in the grand jury testimony. Doe Corp. refused, maintaining that it would not, and had not, waived privilege. The district court disagreed and granted the government's motion to compel production of the privileged communications.

On appeal, the Second Circuit held that implied waiver might occur if a party attempts to use privilege as a "sword and a shield." The Second Circuit remanded the case to the district court, directing it to weigh a number of factors in determining whether the employee had caused an implied waiver of the corporate privilege: whether the government compelled the testimony that described the privileged communications; whether the witness spoke individually or for the corporation; whether the corporation explicitly asserted the attorney client privilege; and whether the disclosure prejudiced the opposing party. The Second Circuit also directed the district court to consider whether the witness' testimony and reliance on counsel served to exculpate the corporation or himself.

The Second Circuit's test appears to leave little room in its analysis for the witness' right to present a defense or for the government's ability to test that defense, with the critical questions turning mostly on the corporation's actions and intentions.12 Other courts, however, have been more willing to compel a corporation to disclose confidential documents, at least to a former corporate insider. For example, in Spitzer v. Greenberg, the New York State Attorney General charged the former CEO of AIG with violations of the Martin Act and common law fraud.13 In his defense, the former CEO sought to compel AIG to produce privileged documents so that he might evaluate the merits of an advice of counsel defense. When the trial court denied defendant's motion to compel AIG to produce the documents, the former CEO appealed. The appellate division held that the former CEO was within the circle of persons entitled to view the privileged materials and therefore AIG could produce them without waiving its privilege. While the court never addressed what would happen if the defendant subsequently asserted the advice of counsel defense (but the corporation refused to waive its privilege), the fact that the defendant was granted access to the privileged documents over the company's objections implies that the defendant would not be precluded from asserting such a defense.

Dealing With the Conflict at Trial

At trial, the admission of privileged materials over a corporation's objection proves an even more difficult issue. In United States v. W.R. Grace, a Montana district court faced the question of whether severance was required because individual defendants sought to assert an advice of counsel defense based on opinions given by corporate counsel, but the defendant corporation refused to waive its privilege regarding these opinions.14 The district court concluded that the attorney-client privilege must yield when its application "would significantly undermine fundamental elements of the defendant's defense," finding the privilege "abrogated over [the corporation's] objection."15

The district court, however, rejected the government's argument that this abrogation resulted in a privilege waiver, asserting that a level of confidentiality for the privileged communications could be maintained by preventing dissemination of the documents beyond the jury. The district court determined that there was no unfairness to the government, because the party asserting the privilege as a shield (the corporation) was different from the party asserting the defense as a sword (the individuals). The district court also concluded that a joint trial with all defendants—individuals and corporate—was permissible because there were no privileged materials that the defendants sought to introduce that would prejudice the corporation. It appears that this analysis was based on the court's in camera evaluation of the privileged materials.

Practical Concerns

The lack of substantial case law addressing this conflict makes navigating the competing interests involved in raising an advice of counsel defense based on corporate legal advice very delicate. Defense counsel will often need to obtain access to privileged documents and interview the lawyers involved with the privileged communications to determine whether the advice of counsel defense will stand up to a government challenge. Before asserting an advice of counsel defense, it is essential for the lawyer to ensure that the defense does not boomerang and provide additional evidence against the client, as might happen if the client made incomplete or arguably misleading disclosures to corporate counsel.

The Greenberg case suggests certain practical steps that might be taken to allow at least some high level employees access to privileged documents without danger of waiver, in order to assess the validity of an advice of counsel defense. Given the legal uncertainties involved, it may often be in the corporation's interest to work collaboratively with the employee's counsel to allow for such a review, regardless of the employees position at the company and especially where there is uncertainty about the wisdom of asserting an advice of counsel defense.

The matter is trickier if the individual and corporate interests diverge. This may occur when a corporation refuses to waive privilege, despite an employee's reliance on counsel defense, because the corporation is concerned about preserving the privilege in parallel civil or criminal cases, or because it is concerned that the fuller set of privileged materials could expose more senior people at the company, or the company itself, to more scrutiny by the government.

The Second Circuit's Grand Jury framework, while dealing with waiver, was decided in a different context and fails to consider the employee's Sixth Amendment rights. If literally applied to resolve the conflict between these two competing principles, the test could easily result in a defendant's inability to present powerful exculpatory materials because the corporate employer refuses to waive privilege. But corporations should not take much comfort in this test, because a court concerned with the defendant's right to a defense might find the test inapplicable, and even if it applied the test, might find that a waiver has occurred, broadly exposing the company's communications with its lawyers not only to the individual employee, but also to the government and other third-parties. The attempt at a compromise, as in W.R. Grace, where the employee was allowed to assert the defense and the corporation was deemed protected from a broad waiver, is one approach, but that case has not been followed by others to date, and offers little guidance on how the limited waiver could be enforced against third parties, or how one might deal with such issues at the investigative stage.

Conclusion

As complex white-collar cases continue to be aggressively pursued by the government, the conflict that lurks between an employee's ability to assert a defense based on advice of counsel, and a company's ability to control and protect its privileged communications with legal counsel, is likely to be subject to judicial scrutiny that will provide more clarity on how this conflict can be managed.

Footnotes

1. White Collar Crime Prosecutions for January 2012, http://trac.syr.edu/tracreports/bulletins/white_collar_crime/monthlyjan12/fil/ (April 19, 2012) (finding a 9.4 percent increase in white collar prosecutions between 2007 and 2012).

2. 11-civ-0788(JSR) (S.D.N.Y. 2011).

3. Pl.'s Mot. to Compel 1, ECF No. 40.

4. United States v. Beech-Nut Nutrition, 871 F.2d 1181, 1195-96 (2d Cir. 1989).

5. Id.

6. In re Grand Jury, 219 F.3d 175, 182 (2d Cir. 2000).

7. Id.

8. Id. at 184.

9. 471 U.S. 343 (1985).

10. United States v. Int'l Brotherhood of Teamsters, 119 F.3d 210, 215 (2d Cir. 1997).

11. Grand Jury, 219 F.3d at 186.

12. For application of a similar analysis to a question of waiver in a collateral civil matter, see Dangler v. NYC Off Track Betting, 2000 WL 1510090, *5-6 (S.D.N.Y. 2000) (rejecting a civil party's demands for the production of privileged materials because it would be "unfair" to conclude that an employee, who claimed to rely on the corporation's attorney's advice in a government investigation, waived the corporate privilege).

13. 851 N.Y.S.2d 196 (App. Div. 2008).

14. 439 F. Supp. 2d 1125 (D. Mo. 2006).

15. Id. at 1138-40.

Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2012 Goodwin Procter LLP. All rights reserved.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Richard M. Strassberg
 
In association with
Related Video
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.