What is More Sacred in Unraveling a Ponzi Scheme: The Attorney-Client Privilege or the Government’s Right to Know?

What is More Sacred in Unraveling a Ponzi Scheme: The Attorney-Client Privilege or the Government’s Right to Know?

The consequences of Bernie Madoff's massive Ponzi scheme will linger for years and will test the boundaries of what we thought were established limits. The latest struggle is between the bank that handled most of Madoff's banking, JP Morgan, and the Office of the Comptroller of the Currency (OCC) over whether the bank should be required to turnover certain records to the government. Although no one seems to know specifically what the OCC is looking for, all indications are that the OCC wants to see communications between JP Morgan and its lawyers in connection with its investigation of the Madoff fraud.

JP Morgan contends that the requested information is protected by the attorney-client privilege. The dispute raises an important question over the sacredness of the attorney client privilege. As noted by Jennifer Zuccarelli, a JP Morgan spokesperson, "This dispute does not go to the merits of the matter but it does raise an important issue of principle: Whether we and other banks, large and small alike, have the fundamental right long recognized in this country to communicate freely with and seek confidential guidance from their lawyers."

On the other hand, the OCC has asserted that the OCC "could not do its work" if banks can withhold information on that basis. The OCC ha further stated that the bank's failure to produce records "will have to be seen as a continuing purposeful impediment to the authority of the OCC . . ." The OCC has given JP Morgan until January 11, 2013, to produce the documents or risk sanctions for impeding the OCC's investigation.

If the documents sought truly contain attorney-client privileged communications, should the government's investigation  -  which appears at the moment to be ill-defined in terms of purpose and scope - trump that privilege? 

In an unrelated dispute with federal regulators over documents, JP Morgan was allowed to invoke the attorney-client privilege to decline to produce certain emails that had been requested by the Federal Energy Regulatory Commission. A copy of the federal magistrate's decision can be read here. FERC had accused a JPMorgan unit of making "factual misrepresentations" and omitting material information in communications with the California Independent System Operator, which operates the state's power grid, and in filings to the commission. The FERC suspended the unit's electricity-trading authority for six months starting April 1. The court in that matter noted:

It is settled that the attorney-client privilege "'protects the confidential communications made between clients and their attorneys when the communications are for the purpose of securing legal advice.'" Id. (quoting In re Lindsey, 158 F.3d 1263, 1267 (D.C. Cir. 1998). "To be privileged, a communication must be 'for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding.'" Id. at *5 (citation omitted).

From available news reports, it appears that the OCC believes that investigation of a massive Ponzi scheme should limit the scope of the attorney-client privilege. JP Morgan and the OCC are trying to reach a resolution of this matter. If they are unable to do so, then we will see if a Ponzi scheme alters what we thought was otherwise fairly well-settled law regarding the nature of the attorney-client privilege.

Lexis.com subscribers can access enhanced versions of the opinion cited in this article:

In re Lindsey, 158 F.3d 1263

Read additional articles at The Ponzi Scheme Blog

Kathy Bazoian Phelps is the co-author of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes  (LexisNexis 2012), along with Hon. Steven Rhodes.  The Ponzi Book, recently reviewed by Commercial Crime International, is available for purchase at www.lexisnexis.com/ponzibook, and more information about the book can be found at www.theponzibook.com.

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