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April 17, 2017

What exactly does it mean when a company’s attorneys represent the company, not the company’s executives?  Suppose an executive consults with company attorneys to determine if the company’s course of action is legally permissible.  Months after receiving the legal advice, the company files for bankruptcy.  The executive is also criminally prosecuted over the very actions for which he consulted counsel.  The executive wants to defend himself by arguing that the lawyers told him it was okay.  However, the new bankruptcy trustee objects and directs the executive not to divulge the company’s attorney-client privilege.  Can the executive exert control over attorney-client privilege and assert the defense?

The scenario seems common enough, but case law on the subject is sparse.  A recent opinion spawned by the bankruptcy of F-Squared Investments, Inc. (“F-Squared”) provides guidance — though executives might not be happy with the answer.[2]

Control of Corporate Attorney-Client Privilege In re F-Squared

Howard B. Present was the president of F-Squared, an investment management firm specializing in Exchange Traded Funds (“ETF’s”), from its founding in 2006 until late 2014.  Not long thereafter, F-Squared filed for chapter 11 bankruptcy.  The SEC conducted investigations of both F-Squared and Present regarding allegedly false statements made by F-Squared about the marketing of the ETF’s.  The SEC entered into a “consent decree” (similar to a settlement, with an admission of wrongdoing) with F-Squared.  But Present refused to settle, and the SEC initiated proceedings against him.

In his defense, Present asserted that he “reasonably relied upon the work, advice, professional judgment, and opinion of others, including but not limited to legal and compliance professionals.”[3]  In an attempt to support that defense, Present subpoenaed F-Squared’s emails and other documents he exchanged with F-Squared’s attorneys.[4]  F-Squared moved to quash the subpoena because the the attorney-client privilege protects the responsive documents.

District Court Analysis and Ruling Regarding Control of Corporate Attorney-Client Privilege

The district court acknowledged the predicament facing corporate officers in Present’s position, but it granted F-Squared’s motion to quash, thereby mandating that F-Squared was not required to supply the documents to Present.

To aid its ruling, the court asked to see five of the documents in question “in camera” (meaning in chambers only to aid in ruling on the motion, and not submitted to a jury). That review led the court to acknowledge that the subpoenaed information was relevant to Present’s defense because it suggested that Present consulted with counsel on the subject matter over which he was being prosecuted.  Thus, the policy of allowing a defendant to pursue the defense of his or her choosing favored disclosure of the document.

That general policy, however, could not override the fact that F-Squared held the privilege, and forcing production and turn over to the SEC would constitute a waiver.  Under agency principles, Present was not in a position to waive the privilege on behalf of F-Squared.  Present attempted to argue that “fairness” compelled disclosure of the information when one balanced the “substantial prejudice” he would face without the documents against F-Squared’s “practically if not entirely nil” need to maintain the privilege, given the fact that it was out of business (a contention that F-Squared disputed).[5]  The court declined to engage in such balancing, holding that it was not permitted to do so.  It appeared somewhat troubled by that conclusion, noting:

The Court observes a tension arising from legal rules that encourage corporate officials to seek legal advice about their actions on behalf of the corporation, and protect those communications from disclosure, but, as here, prevent the corporate official from defending himself personally based (possibly) on the very advice he received when the corporation and the official differ on whether to waive the privilege.

No doubt Present seeks disclosure of communications to which he was privy for the sole purpose of defending the legality of conduct which the government has challenged as a violation of various non-criminal statutes.[6]

The Court found that it was bound by controlling precedent, and refused to compel F-Squared to turn over the documents.

Corporate executives who interact with corporate counsel will likely view the outcome of the Present opinion as troubling.  It serves as a stark reminder that counsel represents the company and executives cannot view counsel as providing advice to the executive personally.  Therefore, the executive cannot exert control over the attorney-client privilege.  In certain instances, it might be appropriate for executives to hire their own counsel, whose attorney-client privilege it would control.

 


 

 

[1] Russell C. Silberglied (silberglied@rlf.com) is a director of Richards, Layton & Finger, P.A.  The views expressed in this article are those of the author and not necessarily those of Richards, Layton & Finger or its clients.  Mr. Silberglied and RL&F represented F-Squared in its chapter 11 case, but were not counsel of record in the SEC action described in this article.

[2] Securities and Exchange Commission v. Present, 2015 WL 9294164 (D. Mass. Dec. 21, 2015).

[3] Id. at * 1.

[4] Because Present no longer worked for the company, he might not have had access to certain of the emails he requested even though he originally sent or received them.  But even if he did have access, the question still would have been whether he could use the documents, for the reasons described below.

[5] Id. at * 2.

[6] Id. at * 3.