SDNY Limits a Corporate Executive’s Ability to Use the Advice-of-Counsel Defense

Thomas KlebestreifenThe advice-of-counsel defense is a powerful one. If you did something because your lawyer said it was legal, then you may have a winning defense against many white-collar crimes.

But all good things come with a price. To raise the defense, you must waive the attorney-client privilege. The government gets to see your private communications with your lawyer.

This sounds simple enough, right? To avoid being found guilty, you let the government see what you said to your lawyer. That’s a fair trade-off.

But what if the privilege isn’t yours to waive? What if you work for a company and the advice you received was from the company’s lawyer and the company refuses to waive the privilege?

The Southern District of New York recently held that the employee loses in this situation. Courts will not force the company to waive the privilege, even if that waiver may provide a defense to the employee. It is a civil case, but its holding is equally applicable to a criminal case.

The Advice-of-Counsel Defense

It’s a fact of corporate America that businesses push the envelope for profit. When you work with in-house counsel, you’ll hear all the time that the “business guys” don’t like to be told no. The law may be an impediment to maximizing profit.

Companies with strong compliance cultures make sure that the business units still run questions past the legal department. And the business units in those types of companies follow the legal department’s advice, even if they don’t like it.

If you want to raise the advice of counsel defense, you have to show four basic elements:

  1.  complete disclosure of relevant facts to the lawyer
  2.  the advice was about the legality of the conduct at issue
  3.  the lawyer told you the conduct was legal
  4.  good faith reliance on that advice.

To raise this defense, you have to turn over your communications with your lawyer on this topic. That waives the attorney-client privilege over them. It also allows the government to (fairly) challenge these elements, which is the point of requiring the waiver in the first place. The most common problem with raising this defense is that you may not have made a complete disclosure of all relevant facts to your lawyer.

The Facts of United States v. Wells Fargo

The government filed a civil False Claims Act case against Wells Fargo and one of its employees, Kurt Lofrano, related to alleged misconduct in residential mortgage loans.

In short, the U.S. Department of Housing and Urban Development (HUD), through the Federal Housing Administration (FHA), offers insurance to lenders for loans to certain borrowers. These borrowers normally wouldn’t qualify for a commercial loan but the FHA will insure the loans; if the borrower defaults, HUD will pay the lender the balance and assume ownership of the property.

According to the government, Wells Fargo and Mr. Lofrano (a vice president) are accused of participating in a scheme to recklessly underwrite certain loans and falsely certify to HUD that these loans were eligible for FHA insurance when they weren’t.

Mr. Lofrano’s Defense

Wells Fargo is not using an advice-of-counsel defense to these charges. Mr. Lofrano, on the other hand, insists that he relied on the company’s in-house counsel when he engaged in the alleged misconduct.

Mr. Lofrano says that he asked for advice from Wells Fargo’s in-house lawyers about the scheme. According to the opinion, if what Mr. Lofrano says is true, the advice-of-counsel defense could be a complete defense to the claims against him.

Prior to this ruling, Mr. Lofrano filed an ex parte submission that outlined the basis of his defense, and then served a letter on the government identifying certain witnesses and documents on which he would rely for the defense. The government filed a letter that described the scope of additional discovery it would request in the event that the court allowed Mr. Lofrano to rely on the privileged communications.

Wells Fargo then filed a motion for a protective order to prevent such disclosure. That’s how the issue was teed up here.

Due Process vs. Protection of Attorney-Client Privilege

Wells Fargo’s motion to prevent Mr. Lofrano from relying on its privileged communications was an issue of first impression in the Second Circuit.

The district court explained that it had to weigh two important principles:

On the one hand,

fundamental fairness and due process generally require that a person accused of wrongdoing — whether criminally or civilly — have “an opportunity to present every available defense.” Philip Morris USA v. Williams, 549 U.S. 346, 353 (2007).

On the other hand,

the attorney-client privilege is “one of the oldest recognized privileges for confidential communications,” and “promote[s] broader public interests in the observance of law and the administration of justice.” Swidler & Berlin v. United States, 524 U.S. 399, 403 (1998).

Mr. Lofrano first argued that his right to paint a complete picture for the jury trumped attorney-client privilege. However, the court found that this right was not absolute, pointing to the Supreme Court decision in Swidler.

In Swidler, the Court held that attorney-client privilege survived the client’s death, even if maintaining the privilege would result in “extreme injustice.” Discussing Swidler, the court noted:

Reasoning that “a client may not know at the time he discloses information to his attorney whether it will later be relevant to a civil or a criminal matter, let alone whether it will be of substantial importance,” the Court concluded that “[b]alancing ex post the importance of the information against client interests . . . introduces substantial uncertainty into the privilege’s application.” Id. at 409. It therefore explicitly “rejected use of a balancing test in defining the contours of the privilege.” Id.

The district court noted that there are several privileges that can be overcome in certain situations, such as the journalist’s privilege, deliberative process privilege, and the work-product doctrine. The attorney-client privilege, however, is not among that group, thanks to the Swidler decision.

Swidler left open the possibility that “exceptional circumstances implicating a criminal defendant’s constitutional rights might warrant breaching the privilege.” This was not enough for the district court. As it explained:

But this case is civil, not criminal, and therefore would not fall within such an exception even if it did exist. Additionally, the Court’s reasoning compels the conclusion that a balancing test would be as problematic in evaluating whether the privilege is overcome by the need for evidence as it would be in deciding whether the privilege applies in the first instance. That is, the use of a balancing test to determine whether a company, through no fault of its own, must forfeit its privilege based on an employee’s later assertion of an advice-of-counsel defense would render the privilege no less uncertain than the use of such a test to determine whether the privilege applies in the first instance. And as the Supreme Court has cautioned, “[a]n uncertain privilege, or one which purports to be certain but results in widely varying applications by the courts, is little better than no privilege at all.” Upjohn Co. v. United States, 449 U.S. 383, 393 (1981).

Mr. Lofrano tried to convince the court that it could strictly limit the scope of disclosures related to the privileged communications. This argument failed as well. The court was concerned about the amount of discovery that would need to take place, such as having the government depose Wells Fargo’s lawyers. Plus, even if the district court here could limit the scope, other courts may not do the same.

Is This a Bad Ruling for Criminal Defendants? 

The court tried to mitigate the damage of its opinion by pointing out three ways that it was not as harsh as it seems:

  1. Without privilege, the employee may not have even made the communications with the attorney in the first place.
  2. If the defense is viable, the corporation will likely waive the privilege. This is because if the advice-of-counsel defense works for the employee, it will likely work for the corporation as well.
  3. If the company decides that its institutional interests in keeping the communications out of the courtroom are worth the price of a verdict (in a civil case), then it can pay for the verdict itself through indemnification.

The court concluded:

No doubt, [this ruling] is cold comfort to Lofrano — who may well have taken actions on Wells Fargo’s behalf in the good-faith belief that he was acting in compliance with the law, and cannot make that argument at trial in light of Wells Fargo’s refusal to waive its attorney-client privilege. But the reality is that the privilege at issue here does not belong to Lofrano — it belongs to Wells Fargo, and only Wells Fargo can elect to waive it. Wells Fargo has refused to do so, and Lofrano is ultimately asking the Court to disregard — or do an end run around — that refusal. For the reasons stated above, the Court cannot do so.

The court did leave open the possibility that the interests in a criminal case might overcome the privilege. It noted that in in United States v. W.R. Grace, 439 F. Supp. 2d 1125 (D. Mont. 2006), the court there allowed individual defendants to overcome the privilege in an advice of counsel case. The holding in Grace was based on the Sixth Amendment. The decision in the Wells Fargo case can certainly be distinguished as a civil case and the language in the opinion helps in that regard.

So maybe, just maybe, there’s some hope for a criminal defendant.

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One Response to SDNY Limits a Corporate Executive’s Ability to Use the Advice-of-Counsel Defense

  1. Pingback: Top 10 Posts in 2015 (and My Other Favorites) | Grand Jury Target

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