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special to the national law journal Attacking the attorney-client privilege, once a rare legal tactic, has become a standard tool of government lawyers these days and a cause for increasing concern among corporate defense attorneys. In the latest flexing of the federal government’s muscle to pierce attorney-client privilege, the Treasury Department is trying to force the Dallas-based law firm of Jenkens & Gilchrist to reveal the names of more than 600 clients who used certain tax shelters that the Internal Revenue Service considers abusive. The IRS wants to audit the investors. Other agencies seeking privileged information include the Securities and Exchange Commission (SEC), the Department of Justice (DOJ) and the Federal Trade Commission (FTC). Some lawyers, including those of Jenkens & Gilchrist, are fighting back. They accuse the government of moving dangerously close to damaging the centuries-old privilege that lies at the heart of this country’s adversarial legal system. The IRS obtained the summons against Jenkens & Gilchrist on June 19 in U.S. District Court in Chicago, in an ex parte proceeding. “The IRS approach to this issue is a novel legal theory that has yet to be challenged in court,” said William P. Durbin, managing partner of the firm. “We have advised the IRS that we simply cannot comply with that request, because to do so would be a violation of our ethical, moral and legal duties.” Durbin explained that the privilege belongs to the client, not the firm. If it is broken, “The client might choose to withhold or misstate material facts necessary to render sound, accurate advice. The confidential/trust relationship between the client and her attorney would be lost or destroyed.” An IRS spokesman said Jenkens & Gilchrist is “choosing to disobey a court order,” and that tax attorneys are evaluating what steps to take next, including seeking an enforcement action in court. In a speech last month before the Texas Federal Tax Institute, IRS Deputy Chief Counsel Emily A. Parker defended the agency’s approach. She characterized law firms that provide tax shelters as “promoters” and their clients as “customers,” in claiming that the traditional attorney-client privilege does not apply. DOJ follows SEC The spark for this pierce-the-privilege trend seems to have begun with passage of the Sarbanes-Oxley Act last year. The SEC then adopted guidelines that reward companies under investigation if they voluntarily disclose privileged information. The DOJ followed with its own guidelines in January, saying that disclosure can help a corporation avoid criminal prosecution as a company. The guidelines did not entice some companies to bite. Tyco International Ltd., for example, has chosen not to disclose, and the SEC probe of Tyco is ongoing. David Boies of Boies, Schiller & Flexner conducted an internal investigation for Tyco, but he declined to discuss in an interview why the company would not waive its privilege. “The attack on privilege is not new,” Boies said, “but you have this reaction to instances of corporate abuse right now, and the government is being given a lot of leeway.” If the attacks continue, Boies added, “there is a danger that privilege could be unduly restricted in a way that it becomes meaningless.” But Enron Corp., for one, decided to disclose privileged information to the SEC and DOJ. William Powers Jr., dean of the University of Texas School of Law in Austin, led the group that conducted Enron’s internal probe and that convinced the Enron board to waive its privilege. “Enron was a very specific situation,” Powers explained. “In order to write a full, impartial and credible report, we had to discuss privileged information and to share those documents with the SEC and with the public.” Or, as another lawyer put it: “When you have a seriously problematic case like an Enron or a WorldCom, you should be prepared to waive privilege, to show the government you have cleaned house and remedied the problem. That way, the company can get leverage and goodwill in a crisis situation.” WorldCom Inc. also chose to share privileged information with the SEC and DOJ. Paul C. Curnin of New York’s Simpson Thacher & Bartlett declined to discuss WorldCom’s decision. But in general, Curnin said, “In my experience, waiver is becoming more routine in government inquiries and can have a significant impact on how the government reviews a client’s cooperation.” One securities lawyer, who asked not to be named, said, “The idea that a company has to squander a valuable asset such as attorney-client privilege to get a fair hearing is just wrong. And breaking privilege has gone from being something extraordinary to becoming the tool of the moment.” Paul Berger, associate director of enforcement at the SEC, defends the “tool.” Berger said a company should reap benefits when its voluntary actions allow an investigation to move further and faster, saving federal resources and taxpayer money. Lawyers fight back But momentum seems to be shifting. First, the SEC has quietly pushed aside its hotly contested “noisy withdrawal” proposal that would have required attorneys with knowledge of a company’s fraud to resign and announce the reason. Although that rule could arise later, the SEC instead has chosen to require attorneys with knowledge of fraud to report “up the ladder” to company executives. The “up the ladder” rule takes effect on Aug. 5. Then, the IRS recently backed off a demand that the Houston law firm of DeGuerin, Dickson & Hennessy identify the names of its criminal clients who paid their fees with at least $10,000 in cash. DeGuerin v. U.S., No. 01-1053 (S.D. Texas). “I’m very concerned that we are in dangerous times,” partner Dick DeGuerin said. “The IRS and others want to find out who lawyers are representing, and use [that information] as a road map to investigate them.” DeGuerin said the IRS agreed in a recent mediation to let the firm pay a financial penalty, which he did not disclose, but not to name the clients. In another case involving privilege, an administrative law judge in June reversed an earlier ruling and said the FTC cannot pierce attorney-client privilege to obtain documents in its antitrust case against a computer chip company, Rambus Inc. In the Matter of Rambus Inc., No. 9392 (FTC). The FTC accused Rambus and its attorneys of engaging in an unlawful patent scheme to monopolize certain computer memory chips. It sought to pierce the privilege by obtaining documents, work product and other materials to prove the scope, intent and illegality of the scheme. Sean Royall, deputy director of the FTC’s Bureau of Competition and lead trial counsel in the case, said the ruling was very fact-specific to that case. In his experience, Royall said, the attorney-client privilege issue does not arise often in FTC litigation and he could not comment on any trend. Then, in another June decision upholding privilege, a U.S. district court judge in New York ruled that discussions between attorneys and consultants on a case can be privileged. In re Grand Jury Subpoenas Dated March 24, 2003 Directed to (A) Grand Jury Witness Firm and (B) Grand Jury Witness, No. M11-189. The U.S. attorney’s office had sought to interrogate public relations experts hired by an attorney regarding an unidentified, high-profile client who was a grand jury target. But perhaps the most encouraging news for critics of the government were court actions in two tax shelter cases. The IRS issued four summonses for lists of tax shelter clients-one to Jenkens & Gilchrist and the others to the accounting firms of KPMG, BDO Seidman and Arthur Andersen. Those firms, too, are fighting disclosure under a privilege akin to the attorney-client privilege. In April, the 7th U.S. Circuit Court of Appeals in Chicago remanded the BDO Seidman case, saying that a privilege similar to that under the attorney-client privilege is part of the tax-advice privilege. The court said the privilege protects the clients’ identities if identifying them would reveal their motive for seeking tax advice. United States v. BDO Seidman, nos. 02-3194, 02-3915, 2002. On June 30, the U.S. District Court in Chicago cited the Seidman remand in holding that the IRS could not pierce the privilege to obtain the names of Arthur Andersen’s clients. United States v. Arthur Andersen. (Although Andersen closed its business operations last year upon conviction in the Enron scandal, the entity still exists until all assets, creditors and other matters are resolved.) In the wake of the Andersen decision on privilege, the IRS said it is evaluating its next step. Durbin of Jenkens & Gilchrist called the Andersen decision “a strong affirmation of our firm’s position on this issue” and said the firm would cite it if the IRS goes to court to try to enforce its summons. He added, “Without a strong attorney-client relationship, the quality and accuracy of legal advice could be severely compromised, and the relationship between a client and attorney would be forever changed.”

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