Law & order
The Crime-Fraud
Exception to Attorney-Client Privilege
Hayes
Hunt and Michael P. Zabel, The Legal Intelligencer
December
17, 2014
Facebook's campus at
1601 Willow Road in Menlo Park, CA
The
crime-fraud exception to attorney-client privilege: As an attorney, you may not
anticipate it applying to your emails, your letters or your advice to your
client. But even if you never see it coming, your client's intentions in
obtaining legal advice may expose your communications to disclosure. A law firm
is experiencing this problem firsthand in a series of high-profile cases involving
Facebook, Mark Zuckerberg and a former business partner.
The
cases present an interesting study in how the crime-fraud exception can
operate.
But
first, what is the crime-fraud exception? Simply stated, it is an exception to
the attorney-client privilege that applies to communications when two
conditions are met: (1) the client is committing or intends to commit a fraud
or crime and (2) the attorney-client communications are in furtherance of that
alleged crime or fraud. Importantly, the crime-fraud exception can apply even
if counsel is unaware that the advice is being sought for an improper purpose.
It is the client's intent, not the attorney's, that controls the analysis.
Consider
this hypothetical: You represent a client who is suing a former business
partner. In support of his suit, your client has produced an old written
contract that appears to be signed by both the client and the former partner.
As further support, he has emails between the partner and himself that appear
to support the agreement's authenticity.
But
there's also a problem: Your client's former counsel, who withdrew from the
same case, informs you that he did so because he found evidence that the old
written contract was fabricated. You wind up withdrawing from the case a few months
later.
Now
imagine that the court hearing the civil case determines that your former
client's written agreement, as well as those supporting emails, are flat-out
fakes. Federal prosecutors bring criminal fraud charges against your former
client, and, invoking the crime-fraud exception, move the criminal court to
compel the production of your communications with your former client.
Is
the government's position correct? Has attorney-client privilege been vitiated
by your former client's alleged fraud?
A
law firm is facing just such a situation in New York federal court, where
prosecutors are pursuing wire and mail fraud charges against Paul Ceglia, the
man who notoriously sued Facebook and Zuckerberg four years ago. DLA Piper
represented Ceglia for only about two-and-a-half months in the middle of his
civil suit, but a federal judge is now reviewing over 1,000 of the firm's
documents to determine whether they should be turned over to the prosecutors in
Ceglia's criminal case.
The
basis for Ceglia's prosecution arose in 2010 when he filed a civil suit against
Facebook and its founder, Zuckerberg, in New York court. In the suit, Ceglia
claimed he was the rightful owner of at least 50 percent of the social
networking site. Attached to Ceglia's complaint was a written contract between
Zuckerberg and himself dating back to 2003, pursuant to which Zuckerberg would
do programming for Ceglia's website and Ceglia would fund the development of
Zuckerberg's yet-to-be-launched Facebook. Zuckerberg's initials were purportedly
on the first page, and his signature was on the second page of the two-page
contract.
Zuckerberg
and Facebook removed the case to federal court and immediately challenged the
authenticity of the contract, asserting that the first page of the document,
which contained the language regarding Facebook terms, had been fabricated. The
actual written agreement, they asserted, had been a simple one: Zuckerberg (who
was then still a student at Harvard University working on his own website)
would perform programming work for Ceglia's website in exchange for $18,000.
It
was during the discovery period in the civil suit that DLA Piper was involved
in Ceglia's representation. The firm entered its appearance April 11, 2011. Two
days later, one of Ceglia's former attorneys, Aaron Marks, wrote to Ceglia's
lawyers, including the law firm, and advised that he had withdrawn from
representation of Ceglia because he had seen evidence that the first page of
Ceglia's contract was fabricated. By late June 2011, DLA Piper was discussing
its own withdrawal from the case, according to a privilege log produced by the
firm itself. The firm ultimately withdrew from representation of Ceglia on June
29, 2011.
On
March 26, 2012, Zuckerberg and Facebook asked the court to dismiss the case on
the grounds of Ceglia's fraud. In support of their allegation that the contract
proffered by Ceglia was a fake, Zuckerberg and Facebook offered evidence from,
among other things, a handwriting expert, a document dating specialist,
forensic chemists, forensic document examiners, and a digital forensics firm.
Ceglia offered evidence from his own experts in support of the document's
authenticity.
Meanwhile,
on Nov. 26, 2012, as the civil motion to dismiss was still pending, federal
prosecutors filed a two-count indictment against Ceglia, alleging that Ceglia's
fabricated contract and accompanying civil suit constituted a scheme to defraud
Zuckerberg and Facebook.
A
few months later, on March 26, 2013, the federal civil court sided with
Zuckerberg and Facebook on their motion to dismiss. In an exhaustively detailed
155-page report, U.S. Magistrate Judge Leslie Foschio of the Western District
of New York concluded, "Based on the evidence in the record, it is highly
probable and reasonably certain that [Ceglia's purported contract] and the
supporting emails were fabricated for the express purpose of filing the instant
action." The judge also found "sufficient evidence of substantial
spoliation [on the part of Ceglia] to support dismissal as a sanction." On
March 25, U.S. District Judge Richard Arcara adopted the magistrate's report
and dismissed Ceglia's civil action with prejudice, which is now on appeal in
the U.S. Court of Appeals for the Second Circuit.
The
criminal prosecution of Ceglia continues. After Ceglia's indictment, the U.S.
Attorney's Office subpoenaed DLA Piper and Kasowitz, Benson, Torres &
Friedman for documents that could constitute evidence of Ceglia's fraud. Given
the obvious issues with attorney-client privilege, the government and Ceglia
came to an agreement on how to resolve the inevitable privilege disputes: An
assistant U.S. attorney who was not part of the prosecution team—called a
"wall AUSA"—would review the documents at issue to determine whether
the documents were subject to the crime-fraud exception to attorney-client
privilege and thus available to the prosecution. Ceglia, on the other hand,
could challenge such a determination before any documents were disclosed to the
prosecution.
After
review, the wall AUSA in the case determined that DLA Piper and Kasowitz
Benson's documents fell under the crime-fraud exception and moved the court to
make the documents available to the prosecution. Ceglia objected to production
of the documents on the ground of privilege (among other reasons).
As
the party opposing a privilege claim and invoking the crime-fraud exception, it
was then the government's burden of proof to establish probable cause that
Ceglia had committed fraud and that his communications with DLA Piper and
Kasowitz Benson were in furtherance of that fraud.
There
are two ways that a party can meet the probable-cause standard for the
crime-fraud exception. First, the party could show a factual basis for probable
cause exists independent of the communications themselves. In that instance, a
court could order direct disclosure of the documents. The second way that the
crime-fraud exception can be established is through an in camera review of the
challenged communications. A party cannot, however, simply request an in camera
review.
In United
States v. Zolin, 491 U.S. 554, 574-75 (1989), the U.S. Supreme Court
explained that "before a district court may engage in in camera review at
the request of the party opposing the privilege, that party must present
evidence sufficient to support a reasonable belief that in camera review may
yield evidence that establishes the exception's applicability." The
threshold "reasonable belief" showing, the court further explained,
can be met through any relevant, nonprivileged evidence.
On
Dec. 1, U.S. District Judge Andrew Carter of the Southern District of New York
decided that in camera review of the challenged documents was appropriate, and
ordered the firm to turn over a number of documents claimed as privileged by
Ceglia. Ultimately, if the court decides that Ceglia communicated with DLA
Piper in furtherance of a fraud, more than 1,000 documents may be subject to
disclosure to the prosecution.
Disclosure
of attorney-client communications is not the only issue that the firm has to
deal with. On Oct. 20, Zuckerberg and Facebook filed a malicious prosecution
lawsuit against the firm and a number of other attorneys who represented Ceglia
in his civil suit. One notable absence from the list of defendants in that case
is Marks, the attorney who withdrew his representation after he learned about
Ceglia's alleged fraud.
Hayes
Hunt is a member of Cozen O'Connor in the
firm's commercial litigation and criminal defense and government investigations
practice groups. Email him at hhunt@cozen.com. Michael P. Zabel is
an attorney in the commercial litigation group in the firm's Philadelphia
office. He joined the firm in 2010 and concentrates his practice in commercial
and complex litigation matters.
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