ABA Section of Business Law
ABA Section of Business Law
Business Law Today
May / June 2000
Under the microscope Business lawyers are being probed as never before
By J. BRADLEY BENNETT and JODY MANIER KRIS
D o you think your actions on behalf of a client could withstand the hot light of a government probe?
For years, the professional conduct of litigation lawyers has been scrutinized by law-enforcement officials investigating potential criminal violations by clients. Business lawyers may now find themselves in a similar position, as a trend of lawyer indictments is emerging in insurance, health care, securities and banking cases.
Prosecutors seem to believe that targeting transactional lawyers will curb aggressive business practices in regulated industries. If the threat of prosecution can make the lawyers more conservative in their advice, the thinking goes, then business executives will necessarily follow suit.
In this environment, transactional lawyers must be aware of the circumstances that have prompted criminal prosecutions of their colleagues. By identifying the seemingly innocent — yet potentially criminal — missteps of others, a lawyer can learn to take protective measures to reduce the chance of becoming the target of a criminal investigation.
However, recognition of potential pitfalls is not enough. The practitioner must also slavishly adhere to certain common-sense legal practices discussed below. And, nonlitigators must have an understanding of the typical tools used by a prosecutor to pin liability on a lawyer and the strategic benefits of keeping files and billing records in a manner that is likely to put a quick end to any criminal inquiry.
One possible motivation for prosecuting business lawyers is to prevent them from assisting in the client’s defense. The government recently indicted two highly respected health-care lawyers — the first in their profession to be indicted under the Medicare/Medicaid anti-kickback statute, which prohibits payments by providers to induce patient referrals. United States v. Anderson, C.A. No. 98-20030 (D. Kan. 1999).
The lawyers had drafted contracts providing that a hospital client would pay doctors an annual fee for consulting and administrative services. An investigation of the hospital began when a whistleblower employee advised the FBI that the doctors were not performing the services under the contracts. The government believed that the hospital executives intended to buy patient referrals instead of services and wrote sham contracts to disguise this aim. After failing to secure the voluntary cooperation of the lawyers, the government obtained the lawyers’ files as a condition of a global criminal and civil settlement with the hospital.
Although the files contained evidence that they gave comprehensive and generally conservative advice, the government relied on snippets of notes and memos that, taken out of context, might suggest that the lawyers knew that the doctors never intended to perform the services called for in the contracts. The court took the extraordinary step of acquitting the lawyer-defendants based only on the government’s case, finding no evidence whatsoever of unlawful intent on the part of the lawyers.
Other prosecutions have surfaced when a lawyer made the mistake of representing multiple parties to the same transaction and practicing outside his or her area of expertise by representing the client during a criminal investigation. United States v. Adams, No. 94-377 (E.D. La. 1999). Adams represented an insurance company and drafted agreements that benefited the owners of the company to the detriment of the policyholders. An investigation began and Adams did not recommend that his client retain expert defense counsel. Adams was indicted for conspiracy as well as mail and wire fraud for drafting the agreements and for his response to the investigation. The company’s general counsel testified against Adams, who was convicted.
Sometimes, criminal prosecutions are simply the result of a failure to exercise due diligence. In United States v. Scheer, 168 F.3d 445 (11th Cir. 1999), a lawyer’s absence from a critical meeting put him in the defensive posture of having to show that he did not know of his client’s unlawful aims. Defendant Scheer, an associate in a law firm, handled real estate closings on behalf of a savings and loan.
In 1994, the S&L’s auditors instructed the S&L to collect $4 million in overdrafts amassed by a developer. At a meeting from which Scheer was apparently absent, S&L insiders agreed to extend loans to acquaintances or relatives of the overextended developer. The government contended that the loans were shams, enabling the extension of unauthorized credit to the developer. The bank’s president, who was previously convicted of these offenses, testified — presumably in exchange for leniency in sentencing — that Scheer knew about and assisted the shams. The defendant was convicted, but the appellate court reversed the convictions because of discovery violations.
Even in those instances where the lawyer avoids criminal liability, he or she may face an enforcement action by the Securities and Exchange Commission. In 1999, the SEC brought charges of securities fraud against Jerald Banks, the general counsel of Livent Inc., a Canadian-based theater owner and producer. SEC v. Banks, 99 Civ. 8855 (S.D.N.Y.) The SEC’s complaint alleged that Banks was involved in a scheme whereby Livent inflated reported revenues by entering into revenue-generating agreements that ultimately required the company to refund the revenue. Banks drafted some of these agreements for Livent, dealt with the legal representatives of the counter-parties, and allegedly helped conceal the agreements from Livent’s outside auditors.
Banks settled the action without admitting or denying the charges and consented to the entry of a permanent injunction against future violations, payment of a monetary penalty of $25,000, and a five-year bar against practicing before the SEC.
While these case studies illustrate some of the facts that may give rise to prosecution, the best way for a business lawyer to learn to protect himself or herself from law-enforcement scrutiny is to understand how the government goes about proving its case.
The star witness will almost certainly be your client. The business lawyer must learn that when trouble comes, the lawyer and the client will likely not march out to meet it shoulder to shoulder. The client may well be the government’s principal witness against the business lawyer. The client’s testimony is likely to be secured through plea bargains and cooperation agreements that offer the client the possibility of a dramatically reduced sentence in return for testimony against the lawyer. Indeed, many federal prosecutors view the waiver of the lawyer-client privilege as an essential part of any cooperation agreement.
The client’s testimony will provide evidence of the business lawyer’s criminal intent. Even where the client is a co-defendant, rather than a cooperating witness for the government, the government will try to pit the lawyer and client against each other, to its own advantage. A client will likely claim to have acted only on the lawyer’s approval of the legality of the challenged transaction, while the lawyer may be left only to the defense of asserting that the advice given was a result of the client’s failure to tell all relevant facts. When this happens, both the client and the lawyer become witnesses for the government against the other.
It is no mystery that the key to a successful criminal prosecution of a professional is showing that the professional knew of the client’s wayward scheme and sought to advance it. Thus, the client will be called on to recount conversations between client and lawyer in which the client hinted at, disclosed or suggested unlawful intentions and enlisted the lawyer’s aid in furthering the scheme.
This evidence may be difficult to rebut, particularly if there were no other witnesses to the conversations and they were not documented in any way. Oftentimes, the only evidence the business lawyer can offer in rebuttal is his or her own testimony. The lawyer’s fate often rests on the jury’s decision as to whether to credit the client or the lawyer.
The prosecution will emphasize red flags and willful blindness. In many cases, it is the questions that the business lawyer did not ask of the client that determine the verdict. The lawyer who soldiered on without questioning the client’s goals or strategy will find his or her own credentials and training used as a weapon. How is it, the government will ask the jury, that a highly trained and professionally gifted lawyer could not have known that he or she was assisting a criminal enterprise? This type of argument can be extremely persuasive, for while the public may hold lawyers in low regard, they invariably believe that lawyers are highly intelligent. Juries are often given "ostrich" instructions, which permits them to find guilt if they conclude that the defendant was willfully blind or deliberately ignorant of criminal activity.
Lawyers’ fees are always presented as the motive. One of the benefits of the legal profession is the generous remuneration. This otherwise fortunate fact presents a ready-made explanation as to why the defendant lawyer, a respected member of the bar, would offer legal services in aid of a criminal endeavor. Lucrative fees, the jury will be told, caused the lawyer to cross the line.
This evidence is hard to defuse, as the fees of $200 to upwards of $500 an hour typically charged by transactional lawyers will no doubt appear extraordinary to some jurors. The total amount billed to an institutional client, which can run into the seven figures on large transactions or complicated matters, may strike many as astronomical.
A jury may believe that the fees were too high for legitimate work and must, therefore, have been a pay-off for the lawyer’s assistance. Inexplicably, some courts have even allowed the prosecution to compound this evidence with proof of the lawyer’s lavish lifestyle, under the rationale that the lawyer’s spendthrift habits made him or her dependent on the large fees received from the client.
The business lawyer’s own files provide the documentary evidence. The client’s waiver of the lawyer-client privilege provides a treasure trove of documents to the government, including the lawyer’s own working files. Every note, memo and draft will be combed for evidence of guilty knowledge, misstatements and questions unasked or unanswered. Of particular interest to both the prosecution and the defense will be notes and memos reflecting conversations with the client. While it is unlikely that these documents will present a definitive view of what was said in the lawyer-client conversations, they could very well be the thumb on the scale that persuades the jury whether it is the client’s or the lawyer’s version of events that should be believed.
Another fertile source of evidence is billing records. In addition to reflecting the fees, the records are easily understandable evidence of the services provided, the lawyers involved in the representation and the issues examined. They may even allow the government to identify the parties to, and dates of, key conversations. For example, it is easy for the government to paint a picture of criminality if the billing records reflect that immediately after a meeting with a client on a submission to the government, the lawyer spent two hours researching the elements of criminal liability for making false statements.
Fortunately for the business lawyer, the key to a successful defense against criminal charges is adherence to the same common-sense principles that should be an inherent part of every successful transactional practice.
Act always as if the attorney-client privilege will be breached. It is essential for lawyers to treat their files as if they may later be exhibits in a criminal trial. It is therefore important to document the facts on which any legal opinion or transaction is based and the source of those factual assumptions.
If the business lawyer has given a client the go-ahead to proceed with a transaction on the assumption that the parties to the transaction are bona fide purchasers or that the terms of the written documentation reflect the actual agreement of the parties to perform, the lawyer’s files should contain a written record of these caveats.
All significant conversations with the client should be memorialized in a memorandum to the file setting forth with precision the representations made by the client and the lawyer’s responses.
These common-sense practices ensure that the documentary record tells a complete story, and will allow a lawyer confronted with allegations that he or she was informed of the client’s unlawful scheme to produce contemporaneous documentary evidence of innocence.
Keep matter-specific billing records. One effective way to rebut the "fees as motive" argument is to be able to winnow down the overall fees to those related to the matter in controversy. This effort is aided substantially if the business lawyer breaks the billing down to specific matters and includes task-specific descriptions in the billing records. In some prosecutions, detailed billing has led the courts to exclude evidence of some fees paid as irrelevant and prejudicial where the billing records showed that the fees earned on the disputed matters were but a tiny part of the overall fees.
Detailed billing records also permit the business lawyer to make an objective showing of the minimal amount of time spent on the disputed transaction. In Anderson, the defense used billing records to show that the lawyer spent less time on the contracts over many years of service than the jury had spent hearing the case.
Be willing to walk away from a dubious client. Many prosecutions can be traced to a myopia caused either by the business lawyer’s goal of zealously representing a client or by the tremendous pressure put on lawyers to attract and retain clients. Unfortunately, this nearsightedness plays right into the government’s argument that the business lawyer chose to remain willfully blind, or deliberately ignorant, of a client’s unlawful schemes.
The lesson here is that the business lawyer must periodically step back and take a careful look at what is happening in the representation. Most important, the lawyer must be willing to withdraw from a representation when it becomes clear that the client is intent on crossing the line. The loss of business will be more than balanced by the peace of mind that comes from never having to undergo a government investigation.
Think twice before representing opposing parties to a transaction. Frequently, a client seeks to economize on fees by asking his or her business lawyer to represent both parties in an arm’s length transaction. Although multiple representations may be ethical in certain circumstances, it is more prudent to suggest that independent counsel advise the party on the other side of the table.
The government is much more likely to claim that a lawyer has participated in a sham transaction when the lawyer agrees to prepare the paperwork on behalf of both parties to a transaction. If it later comes to light that the transaction was not at arm’s length, or involved side deals not contemplated by the written terms of the agreement, it is easier to assume that the lawyer knew these facts than it would be if another lawyer had been involved. This is especially so when dealing with transactions among corporations that are related by ownership or through common officers or directors.
Although many transactions between related parties are perfectly permissible, when such transactions incur losses to the detriment of the shareholders or other protected parties after having conferred benefits on corporate insiders, it will be easier for a lawyer to claim the transaction was properly structured to account for the best interests of both sides of the transaction if both sides are represented by counsel.
Get advice in helping a client respond to a government investigation. A business lawyer’s reflexive reaction when the government inquires about a client is often to assuage the government’s curiosity by advocating on behalf of the client. A far more prudent course when a civil or criminal investigation starts is to recommend that the client retain experienced defense counsel. It is easier for the government to argue that a transactional lawyer acted to cover up previous misdeeds if he or she acts beyond the lawyer’s expertise in defending a client against civil or criminal allegations of wrongdoing associated with transactions in which the lawyer participated as counsel.
One reason that led the judge to acquit the lawyer in Anderson was the lawyer’s prompt suggestion that independent counsel be retained to advise the hospital about its defense to the government investigation.
In contrast, a critical factor in the Adams case was that he personally represented the corporation under investigation in its responses to grand jury inquiries for information, and in so doing failed to disclose certain information. Given his general lack of expertise in responding to grand jury investigations, it made the inference more likely that Adams had so acted in order to cover his client’s (and his own) tracks.
In short, every practitioner must recognize that a significant product of today’s heightened regulatory environment is the increasing willingness of prosecutors to expand their cases to include the business lawyer. As a result, practices that may have been understood and accepted several years ago now give rise to serious risks of indictment and conviction.
Fortunately, these risks can be all but eliminated if the business lawyer takes to heart some of the common-sense lessons to be learned from recent law-enforcement initiatives.
Bennett is a partner with Miller, Cassidy, Larroca & Lewin, LLP, in Washington. Kris is an associate.
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