In the Courts

This case involved an ongoing grand jury investigation into alleged violation of the FCPA by a consulting firm headquartered in Pennsylvania. The investigation stemmed from $3.5 million in payments allegedly made to a the sister of an employee of a UK bank that was owned by a number of foreign countries. Id. at *1-2. The government served a grand jury subpoena on a former outside counsel for the target of the investigation. Id. at *1. It moved to compel the attorney's testimony based on the crime-fraud exception to the attorney-client privilege; the former client intervened, seeking to quash the subpoena. Id. “After questioning the attorney in camera, the district found that the crime-fraud exception applied, and ordered the attorney to testify before the grand jury.” Id.

According to the court's recitation of the facts, which was necessarily sparse given the constraints of grand jury secrecy and the nature of the in camera review, the client approached the attorney, who periodically provided advice in exchange for working out of the client's office rent-free, and “explained that he planned on paying Banker in order to ensure that the project progressed swiftly, as Banker was threatening to slow down the approval process.” Id. at *2. After some preliminary research, the attorney identified the FCPA as potentially applicable and asked the client whether the bank was a state-owned entity ' a critical factor in application of the FCPA. Id. While the attorney indicated that, based on his research, he could not state definitively whether a payment to the banker would violate the FCPA, he advised the client not to make the payment. The attorney provided no other advice with respect to the matter. Id.

Acknowledging that this was a “close case,” the court held that the crime-fraud exception applied. Id. at *7. The court was persuaded that the timing of the payments and the benefit received from the bank by the client suggested that he intended to make the payment when he consulted with the attorney and also that the questions posed by the attorney to the client could have given the client information that he then used to structure the transaction to circumvent detection. Id.

Noting that the exception does not apply where “the attorney merely informs the client of criminality of a proposed action,” the court distinguished this case, explaining that “[i]n addition to the advice Attorney provided to Client that he should not make a payment, Attorney also provided information about the types of conduct that violate the law' . Specifically, Attorney's questions about whether or not the Bank was a governmental entity and whether Banker was a government official would have informed Client that the governmental connection was key to violating the FCPA. This would lead logically to the idea of routing the payment through Banker's sister, who was not connected to the Bank, in order to avoid the reaches of the FCPA or detection of the violation.” Id. at *9.

Thus, despite the minimal nature of the attorney's involvement and the fact that the attorney ultimately advised the client not to make the payment, the court held that the crime-fraud exception applied and upheld the district court's order that the attorney to testify before the grand jury. Id.

In the Courts and Business Crimes Hotline were written by Associate Editors Jamie A. Schafer and Matthew J. Alexander, respectively. Both are Associates at Kirkland & Ellis LLP.

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Third Circuit Applies Crime-Fraud Exception to Attorney-Client Privilege in Close FCPA Case

On Feb. 12, 2014, the U.S. Court of Appeals for the Third Circuit upheld a district court's order compelling an attorney to testify during a grand jury investigation of alleged violations of the Foreign Corrupt Practices Act (FCPA). In re Grand Jury Subpoena, —F.3d—, 2014 WL 541216 (3rd Cir. 2014). Describing the matter as a “close case,” the appellate court agreed with the district court's holding that the crime-fraud exception applied to defeat the attorney-client privilege. Id. at *7, *9.

As the court noted, the attorney-client privilege is the “oldest of the privileges for confidential communications known to the common law.” Id . at *4 (citing Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 66 L.Ed.2d 584 (1981). However, its protection “ceases to operate ' where the desired advice refers not to prior wrongdoing, but to future wrongdoing.'” Id . (citing United States v. Zolin , 491 U.S. 554, 562-63, 109 S.Ct. 2619, 105 L.Ed.2d 469 (1989) (internal citations omitted)). Under well-established precedent, the attorney-client privilege may be defeated on the basis of the crime-fraud exception where “the party seeking to overcome the privilege … make[s] a prima facie showing that (1) the client was committing or intending to commit a fraud or crime, and (2) the attorney-client communications were in furtherance of that alleged crime or fraud.” Id. (internal citations omitted).

This case involved an ongoing grand jury investigation into alleged violation of the FCPA by a consulting firm headquartered in Pennsylvania. The investigation stemmed from $3.5 million in payments allegedly made to a the sister of an employee of a UK bank that was owned by a number of foreign countries. Id. at *1-2. The government served a grand jury subpoena on a former outside counsel for the target of the investigation. Id. at *1. It moved to compel the attorney's testimony based on the crime-fraud exception to the attorney-client privilege; the former client intervened, seeking to quash the subpoena. Id. “After questioning the attorney in camera, the district found that the crime-fraud exception applied, and ordered the attorney to testify before the grand jury.” Id.

According to the court's recitation of the facts, which was necessarily sparse given the constraints of grand jury secrecy and the nature of the in camera review, the client approached the attorney, who periodically provided advice in exchange for working out of the client's office rent-free, and “explained that he planned on paying Banker in order to ensure that the project progressed swiftly, as Banker was threatening to slow down the approval process.” Id. at *2. After some preliminary research, the attorney identified the FCPA as potentially applicable and asked the client whether the bank was a state-owned entity ' a critical factor in application of the FCPA. Id. While the attorney indicated that, based on his research, he could not state definitively whether a payment to the banker would violate the FCPA, he advised the client not to make the payment. The attorney provided no other advice with respect to the matter. Id.

Acknowledging that this was a “close case,” the court held that the crime-fraud exception applied. Id. at *7. The court was persuaded that the timing of the payments and the benefit received from the bank by the client suggested that he intended to make the payment when he consulted with the attorney and also that the questions posed by the attorney to the client could have given the client information that he then used to structure the transaction to circumvent detection. Id.

Noting that the exception does not apply where “the attorney merely informs the client of criminality of a proposed action,” the court distinguished this case, explaining that “[i]n addition to the advice Attorney provided to Client that he should not make a payment, Attorney also provided information about the types of conduct that violate the law' . Specifically, Attorney's questions about whether or not the Bank was a governmental entity and whether Banker was a government official would have informed Client that the governmental connection was key to violating the FCPA. This would lead logically to the idea of routing the payment through Banker's sister, who was not connected to the Bank, in order to avoid the reaches of the FCPA or detection of the violation.” Id. at *9.

Thus, despite the minimal nature of the attorney's involvement and the fact that the attorney ultimately advised the client not to make the payment, the court held that the crime-fraud exception applied and upheld the district court's order that the attorney to testify before the grand jury. Id.

In the Courts and Business Crimes Hotline were written by Associate Editors Jamie A. Schafer and Matthew J. Alexander, respectively. Both are Associates at Kirkland & Ellis LLP.

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