Over-Assertion of Attorney-Client Privilege

Recently, however, the attorney-client privilege has come under attack by the U.S. Department of Justice (DOJ). In criminal investigations of corporations, the DOJ has aggressively pushed companies to waive the privilege as a precondition to consideration for a deferred prosecution, non-prosecution agreement, or some other favorable treatment. This policy was notably articulated in the January, 2003 Memorandum of then-Deputy Attorney General Lawrence Thompson, which stated that, while the DOJ does not consider waiver of the privilege an absolute requirement of adequate corporate cooperation, “prosecutors should consider the willingness of a corporation to waive such protection when necessary to provide timely and complete information as one factor in evaluating the corporation's cooperation.”

The superseding indictment in Stein may have further weakened the privilege. It charges 19 individuals (“the KPMG Defendants”) with conspiracy, tax evasion, and obstruction arising out of allegedly fraudulent tax shelters designed, marketed, and implemented by KPMG and others. Significantly, the indictment alleges – in both the conspiracy and substantive counts — that certain conspirators attempted to shield unprivileged communications with the attorney-client privilege. In other words, the KPMG Defendants' assertion of the attorney-client privilege constituted part of the crimes for which they were indicted.

In particular, paragraph 58 alleges: “The conspirators also attempted to conceal their fraudulent tax shelter activities by attempting to cloak communications regarding those activities and certain of the activities themselves with the attorney-client privilege, although the communications in question were not privileged.”

As an example of the sham assertion of attorney-client privilege, the indictment describes the scenario whereby one defendant purported to have KPMG clients engage a law firm, which would in turn engage KPMG. Under United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), cited in the superseding indictment, communications between attorneys and non-lawyer professionals such as accountants or investigators are privileged when the non-lawyer professional is working under the direction of the attorney. In the case of the KPMG Defendants, the DOJ says the KPMG clients did not engage the law firm directly and, in many cases, never spoke to anyone at the law firm. The alleged purpose of the purported engagement, therefore, was simply to conceal the fraudulent tax shelter from the IRS under the cloak of the attorney-client privilege.

Analysis

Of course, there is a long-standing exception to the attorney-client privilege, the crime-fraud exception, where communications that would otherwise be protected by the attorney-client privilege lose their protected status if they were made for the purpose of committing a fraud or crime. As one court has stated, “The crime-fraud exception applies where the party attempting to circumvent the privilege can meet the following test: 1) a prima facie showing of [crime or] fraud; and 2) the communications in question are in furtherance of the misconduct.” Vardon Golf Co. v. Karsten Mfg. Corp., 213 F.R.D. 528, 535 (N.D. Ill. 2003). In the superseding KPMG indictment, however, the DOJ does not simply assert that the crime-fraud exception vitiated the attorney-client privilege to obtain the underlying communications. Rather, the DOJ takes it one step further, claiming that the assertion of the privilege itself was part of the crime.

Some commentators have ex-pressed a fear that the DOJ's aggressive policy of pursuing privilege waivers in the course of internal investigations has had a chilling effect on employee candor, thereby hindering internal investigations and compliance programs. In response to this perceived assault on the attorney-client privilege, the ABA Task Force on Attorney-Client Privilege has passed a resolution opposing “policies, practices, and procedures of governmental bodies that have the effect of eroding the attorney-client privilege and work product doctrine … ” Criminal allegations that the KPMG Defendants made sham attorney-client privilege claims may well result in a further chill if lawyers and clients must consider the risk of indictment when they aggressively assert the privilege.

Charging privilege assertions as fraud or obstruction could turn a defense lawyer into a defendant or, at the least, make the attorney's intent a discoverable issue. When determining whether to apply the crime-fraud exception to the attorney-client privilege, courts look to the communication itself to determine whether the communication furthers the misconduct. In the charge made by the superseding KPMG indictment, the critical aspect of the crime is not the fact or substance of the communication but the assertion of the privilege to protect that communication from disclosure. To determine whether the assertion of the privilege constitutes a continuation of the underlying fraud, as in the superseding KPMG indictment, a fact-finder would have to determine whether it was the intent of the parties to defraud when the attorney asserted the privilege.

It is not difficult to imagine, in the course of a DOJ investigation, an attorney in the position to make a judgment call as to whether or not a document is privileged and erring on the side of foregoing the privilege for fear he will have his motives scrutinized or find himself accused of concealing the underlying fraud. In U.S. v. KPMG LLP, 316 F. Supp. 2d 30 (D.D.C. 2004), the DOJ sought to enforce an IRS summons served on KPMG requesting information related to the tax shelters. The district court stated that KPMG's privilege log was “inaccurate, incomplete, and even misleading.” If prosecutors suspected an intent to defraud the DOJ on the part of KPMG or its counsel during the investigation of the conspiracy, could such actions be alleged to have been in furtherance of the conspiracy? As the privilege belongs to the client, most lawyers are conditioned as an ethical matter to err on the side of protecting the privilege. Defense lawyers may find themselves torn between their duties to their client and the threat of prosecution.

In the case against the KPMG Defendants, the concealment itself was the crime – the concealment of the fraudulent tax shelters and the failure to notify the IRS of the existence of the shelters as required by statute. The sham attorney-client privilege claim was a continuation of this concealment, and thus such a claim may be limited to the facts of this particular case. On the other hand, since the allegations about attorney-client privilege are cumulative in a long laundry list of alleged wrongdoing and were not necessary to establish the conspiracy or tax evasion claims, their inclusion in the indictment may signal the DOJ's intent to send a broader message to the defense bar about the assertion of the attorney-client privilege.

Buried deep within the 69-page superseding indictment in the KPMG tax fraud case lies a development with the potential to chill the assertion of the attorney-client privilege by defense attorneys in criminal conspiracy cases. In the conspiracy count in United States v. Stein et al., S1 05 Cr. 888 (LAK) (S.D.N.Y., Oct. 19, 2005), the wrongful assertion of the attorney-client privilege has been charged as a central aspect of the crime itself, both as part of the means and methods of the conspiracy and as an overt act in furtherance. This aggressive charging decision may cause some members of the defense bar to think twice about asserting the privilege in close cases — even where it is being asserted legitimately — for fear that their claim of privilege may overreach, thus inadvertently implicating them in the underlying conspiracy.

There is no dispute that the attorney-client privilege is one of the pillars of the U.S. legal system. The benefit of the privilege is that it encourages “full and frank communications between attorneys and their clients,” Upjohn Co. v. United S tates, 449 U.S. 383 (1981), enabling lawyers to counsel their clients better and promoting compliance with the law through such counseling. In the criminal context, the privilege allows clients to speak to their attorneys with confidence that their words will not later be disclosed to prosecutors and used against them.

Under Attack

Recently, however, the attorney-client privilege has come under attack by the U.S. Department of Justice (DOJ). In criminal investigations of corporations, the DOJ has aggressively pushed companies to waive the privilege as a precondition to consideration for a deferred prosecution, non-prosecution agreement, or some other favorable treatment. This policy was notably articulated in the January, 2003 Memorandum of then-Deputy Attorney General Lawrence Thompson, which stated that, while the DOJ does not consider waiver of the privilege an absolute requirement of adequate corporate cooperation, “prosecutors should consider the willingness of a corporation to waive such protection when necessary to provide timely and complete information as one factor in evaluating the corporation's cooperation.”

The superseding indictment in Stein may have further weakened the privilege. It charges 19 individuals (“the KPMG Defendants”) with conspiracy, tax evasion, and obstruction arising out of allegedly fraudulent tax shelters designed, marketed, and implemented by KPMG and others. Significantly, the indictment alleges – in both the conspiracy and substantive counts — that certain conspirators attempted to shield unprivileged communications with the attorney-client privilege. In other words, the KPMG Defendants' assertion of the attorney-client privilege constituted part of the crimes for which they were indicted.

In particular, paragraph 58 alleges: “The conspirators also attempted to conceal their fraudulent tax shelter activities by attempting to cloak communications regarding those activities and certain of the activities themselves with the attorney-client privilege, although the communications in question were not privileged.”

As an example of the sham assertion of attorney-client privilege, the indictment describes the scenario whereby one defendant purported to have KPMG clients engage a law firm, which would in turn engage KPMG. Under United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), cited in the superseding indictment, communications between attorneys and non-lawyer professionals such as accountants or investigators are privileged when the non-lawyer professional is working under the direction of the attorney. In the case of the KPMG Defendants, the DOJ says the KPMG clients did not engage the law firm directly and, in many cases, never spoke to anyone at the law firm. The alleged purpose of the purported engagement, therefore, was simply to conceal the fraudulent tax shelter from the IRS under the cloak of the attorney-client privilege.

Analysis

Of course, there is a long-standing exception to the attorney-client privilege, the crime-fraud exception, where communications that would otherwise be protected by the attorney-client privilege lose their protected status if they were made for the purpose of committing a fraud or crime. As one court has stated, “The crime-fraud exception applies where the party attempting to circumvent the privilege can meet the following test: 1) a prima facie showing of [crime or] fraud; and 2) the communications in question are in furtherance of the misconduct.” Vardon Golf Co. v. Karsten Mfg. Corp. , 213 F.R.D. 528, 535 (N.D. Ill. 2003). In the superseding KPMG indictment, however, the DOJ does not simply assert that the crime-fraud exception vitiated the attorney-client privilege to obtain the underlying communications. Rather, the DOJ takes it one step further, claiming that the assertion of the privilege itself was part of the crime.

Some commentators have ex-pressed a fear that the DOJ's aggressive policy of pursuing privilege waivers in the course of internal investigations has had a chilling effect on employee candor, thereby hindering internal investigations and compliance programs. In response to this perceived assault on the attorney-client privilege, the ABA Task Force on Attorney-Client Privilege has passed a resolution opposing “policies, practices, and procedures of governmental bodies that have the effect of eroding the attorney-client privilege and work product doctrine … ” Criminal allegations that the KPMG Defendants made sham attorney-client privilege claims may well result in a further chill if lawyers and clients must consider the risk of indictment when they aggressively assert the privilege.

Charging privilege assertions as fraud or obstruction could turn a defense lawyer into a defendant or, at the least, make the attorney's intent a discoverable issue. When determining whether to apply the crime-fraud exception to the attorney-client privilege, courts look to the communication itself to determine whether the communication furthers the misconduct. In the charge made by the superseding KPMG indictment, the critical aspect of the crime is not the fact or substance of the communication but the assertion of the privilege to protect that communication from disclosure. To determine whether the assertion of the privilege constitutes a continuation of the underlying fraud, as in the superseding KPMG indictment, a fact-finder would have to determine whether it was the intent of the parties to defraud when the attorney asserted the privilege.

It is not difficult to imagine, in the course of a DOJ investigation, an attorney in the position to make a judgment call as to whether or not a document is privileged and erring on the side of foregoing the privilege for fear he will have his motives scrutinized or find himself accused of concealing the underlying fraud. In U.S. v. KPMG LLP , 316 F. Supp. 2d 30 (D.D.C. 2004), the DOJ sought to enforce an IRS summons served on KPMG requesting information related to the tax shelters. The district court stated that KPMG's privilege log was “inaccurate, incomplete, and even misleading.” If prosecutors suspected an intent to defraud the DOJ on the part of KPMG or its counsel during the investigation of the conspiracy, could such actions be alleged to have been in furtherance of the conspiracy? As the privilege belongs to the client, most lawyers are conditioned as an ethical matter to err on the side of protecting the privilege. Defense lawyers may find themselves torn between their duties to their client and the threat of prosecution.

In the case against the KPMG Defendants, the concealment itself was the crime – the concealment of the fraudulent tax shelters and the failure to notify the IRS of the existence of the shelters as required by statute. The sham attorney-client privilege claim was a continuation of this concealment, and thus such a claim may be limited to the facts of this particular case. On the other hand, since the allegations about attorney-client privilege are cumulative in a long laundry list of alleged wrongdoing and were not necessary to establish the conspiracy or tax evasion claims, their inclusion in the indictment may signal the DOJ's intent to send a broader message to the defense bar about the assertion of the attorney-client privilege.