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In the 1980s, Bill Kennedy was telling his investors that precious metals were the best hedge against the destabilizing effects of communist aggression. As president of a bustling Colorado commodities firm, Kennedy was the archetype of right-wing financiers. With close ties to the Reagan administration, he published the Conservative Digest, raised funds for the Nicaraguan Contras and, when Iraq invaded in 1990, campaigned for U.S. military intervention on behalf of Kuwait. But by 1994, the way in which Kennedy had gone about burnishing his conservative credentials had earned him an unexpected reward: a 20-year federal prison sentence. He has now spent the past seven years in a privately run facility in Taft, Calif., serving time for money laundering, racketeering and fraud. His wife, Debbie, says her devoutly Christian husband remains unbowed. Although he was prosecuted by the Clinton administration, he doesn’t consider himself a victim of politics, she says. He blames his plight on the wholesale evisceration of his attorney-client privilege. Now he is looking to the U.S. Supreme Court for justice. On Feb. 13, his lawyers filed an appeal, hoping the justices will grant certiorari and use U.S. v. Kennedy as a vehicle to decide how far prosecutors can go in questioning members of a defense team before they invade the attorney-client privilege. “Where you have prosecutors who do engage in those kind of tactics, it could have a far-reaching impact on the adversary system,” says Miami criminal defense lawyer Neal R. Sonnett. “It has an enormous chilling effect on the ability of lawyers to strategize their cases.” A VEILED THREAT OF INDICTMENT? Instrumental to Kennedy’s conviction was one Keith Danley. Now a non-practicing attorney working in Rapid City, S.D., Danley played a key role in Kennedy’s conviction for running a $37 million Ponzi scheme through his Fort Collins, Colo., commodities firm, Western Monetary Consultants (WMC). Danley, who left the timber industry to go to law school in the late 1980s, clerked at the now-defunct San Diego law firm Brown & McDonnell, which at the time represented Kennedy in several civil suits brought by irate investors just before WMC’s 1988 bankruptcy. Having graduated from law school, Danley left the law firm in 1990 to work directly for Kennedy, who had moved to San Diego. Danley continued working for Kennedy for a year before returning to the timber industry, which led him to employment in Argentina. During this time, Kennedy had been the subject of two separate grand jury investigations, the second of which ended in his 1992 indictment. Kennedy’s current lawyer, Craig L. Parshall of Fredericksburg, Va., alleges that it was shortly after Danley left Kennedy in 1991 that he came to the attention of former Denver Asst. U.S. Attorney Stephen C. Peters. Parshall claims that AUSA Peters pushed Danley, under what Danley described as a veiled threat of indictment, to reveal allegedly privileged information about Kennedy’s businesses and defense strategy. That information, related both to Danley’s work at Brown & McDonnell and directly for Kennedy, claim Danley and Parshall, formed the basis of the government’s indictment and was ultimately responsible for Kennedy’s conviction. Parshall and his co-counsel, Daniel T. Smith of Denver, having only obtained Danley’s story last fall, are seeking a hearing to evaluate his allegations that privileged matters that he revealed to Peters can be linked to evidence produced at Kennedy’s trial. Kennedy sued Danley last year for breach of fiduciary duty related to his alleged disclosures. Danley was served with process when he left Argentina to visit the United States last summer. Danley, in California at his brother’s wedding, fought the suit until agreeing to a confidential settlement that included a substantial amount of money, according to Parshall, and an agreement to provide affidavits about his cooperation with federal prosecutors a decade earlier. Peters, who left the U.S. Attorney’s Office in 1994, and subsequent federal prosecutors who have fought off Kennedy’s appeals, have repeatedly denied this claim. The 10th U.S. Circuit Court of Appeals last fall agreed with them, denying Kennedy’s habeas corpus petition and request for a new hearing in what Parshall labels “a devastating blow to the concept of attorney-client privilege.” Peters, now at Denver’s Lindquist, Vennum & Christensen, had no sympathy for Kennedy’s allegations. “There were two U.S. judges assigned to these prosecutions,” Peters says. “Both judges were very careful to protect his rights. I am categorically confident that his constitutional rights were not violated.” One lawyer well-acquainted with Danley at the time of the Kennedy trial questioned the truth of the allegations. “I bet [the confidential settlement] was for 47 cents and the affidavits,” the lawyer sneers. FLIGHTS FROM ARGENTINA Prosecutors said WMC was engaged in an elaborate Ponzi scheme in which money from new buyers of precious metals was used to pay off old investors, with funds skimmed at various stages. When WMC filed for bankruptcy protection on March 28, 1988, it had 600 client creditors with unfilled orders worth $37 million. In July 1992, a Denver federal grand jury handed up a 109-count indictment of Kennedy and 18 of his associates. The indictment charged that, between 1984 and 1988, client money was also diverted to Kennedy’s conservative causes, including $2.5 million to Conservative Digest and $105,000 for the purchase, refurbishment and transport of a helicopter to Nicaragua’s right-wing Contra rebels. Kennedy was also alleged to have used client funds to speculate on his own, losing more than $2 million. Much of this money also came from WMC’s “war colleges,” which were high-pressure sales seminars directed at wealthy conservatives who were urged to invest in precious metals as a hedge against “inflation and the threat of communism,” the indictment says. But with the exception of Kennedy, all of the defendants indicted in the case were eventually acquitted or had their charges dropped. Parshall says the government’s case was nowhere before Danley came along. “There was nothing in the facts at the time, except that the prosecution had enlisted this law clerk as a witness in the tandem case involving Kuwait,” he says. “They assured [Kennedy's first] attorney that they had erected a Chinese wall, that it just involved the Kuwait case.” The Kuwait case, as U.S. v. Zakhem was known, was a separate matter that paralleled the WMC prosecution but went to trial two years later, in 1995. Kennedy and a former ambassador to Bahrain, Sam Zakhem, a Colorado Republican Party darling at the time, were indicted for their alleged effort to lobby the U.S. government on behalf of Kuwait after the August 1990 Iraqi invasion. Prosecutors said the defendants used much of the $7 million paid by Kuwait for the effort for their own personal benefit. Danley claims he was forced to provide Peters with privileged information about WMC because of the unspoken threat that he would be prosecuted as an accomplice of Kennedy in the Kuwait case if he did not. “Mr. Peters used me as a major source of information for his case,” says Danley in an affidavit. “The information that I provided to him from privileged attorney-client/attorney-work product sources changed the direction of the prosecution, resulted in his modifying his theory of the case, and led to his presenting substantial evidence at trial and utilizing and examining witnesses in a substantial portion of his case.” In pleadings, the government counters that the information that Danley “speculated” was gleaned from his interviews with Peters was actually accessed by prosecutors from public filings in Kennedy’s bankruptcy and civil cases. Parshall says that Danley’s work directly for Kennedy was also privileged because he was working as his “in-house counsel,” although he had yet to pass the bar. But Danley contradicts Parshall and, as do prosecutors, says he was merely hired as a business associate and did no legal work. Peters says his initial investigation of Kennedy was sparked by investor lawsuits and WMC’s 1988 bankruptcy, all of which happened before Danley appeared on his radar screen. Danley, 53, works for a lumber company in Rapid City. Although he says he is “a lumberman” first, in 1986 he decided to “do something different,” enrolling at California Western School of Law in San Diego and eventually clerking at Brown & McDonnell. “I was given the stacks and stacks of Kennedy cases … . This was a law student’s dream,” he recalls thinking at the time. He says he became a clearinghouse of information on Kennedy’s legal woes, coordinating the efforts of his civil and criminal attorneys. When the FBI first called on him in the summer of 1991, Danley says, he was “scared to death.” They “related me back to the old WMC, which I wasn’t even a part of. Like the proverbial moth, I was afraid that I had gotten too close to the fire,” he says. In September, he says, he went to Denver to meet Peters for the first time. The interviews continued for two years, including several occasions when Peters flew Danley to Denver from Argentina, where he was working as a timber industry consultant at the time. “I figured I could trust him, and I liked his style. So, [I was] scared but comfortable,” he said. “In the first meetings, we were very, very careful [about attorney-client privilege], but mainly with documentary evidence, not discussion,” he says. “Later … things kept getting looser and looser.” Peters says that his memory of the events described by Danley is hazy, and that Rule 6(e) of the Federal Rules of Criminal Procedure constrains him from talking about matters that were before the grand jury. One of the most revealing pieces of WMC-related information that Danley claims he relayed to Peters was a description of a mock grand jury examination of Kennedy that he conducted on Sept. 14, 1989. “They arrived at two conclusions,” says Parshall of the mock exam. “Kennedy doesn’t know what’s going on in his company, doesn’t know what the finance committee is doing, and he is a bad witness.” They decided they would not put him on the stand before the grand jury. Asst. U.S. Attorney Charlotte J. Mapes argued in a brief last year to the 10th Circuit that Peters made every effort to avoid privileged information, that Danley did not testify at Kennedy’s trial, and that “no information provided by Danley was used at … trial.” On Sept. 20, the three-judge panel held that “government intrusions into pre-indictment attorney-client do not implicate the Sixth Amendment,” and that because Danley had left Kennedy’s employ by the time of the 1992 indictment, anything he provided post-indictment was also not privileged. In their petition to the Supreme Court, Kennedy’s lawyers say the case “presents the troubling scenario of a federal prosecutor who collaborated with a former member of a defendant’s legal team, and knowingly breached the attorney-client privilege and attorney-work product privilege … in order to build a criminal case … .” Parshall contends that the 10th Circuit applied the wrong standard for determining when a government intrusion into the attorney-client privilege creates enough prejudice to justify a new hearing during a post-conviction appeal. He points the high court to a conflict among the circuits, in which the 7th, 9th and 10th “have adopted the rule that the government may, with impunity, violate the attorney-client privilege of criminal defendants without violating the Sixth Amendment as long as it targets only former attorneys or their former law clerks to be informants of confidential defense information.” For many defense lawyers, the case raises a thorny yet increasingly familiar issue: how the attorney-client privilege binds nonlawyers, and the ethical constraints that govern prosecutors seeking to use them as informants. Chicago lawyer George A. Kuhlman, ethics counsel for the American Bar Association, says there have been similar cases but there are no formal ethics standards governing paralegals or clerks. Nevertheless, he says that privilege exists to benefit clients, and thus flows through all employees of a firm. “Its the law of ethics, but [it] is a very complicated area that is also at least arguably unsettled,” he says. David Lane, Kennedy’s trial lawyer, says, “[I]f you have a good-faith belief that there is privilege, the privilege applies. Danley … held himself out as an attorney — he was giving legal advice to Kennedy.” Lane accuses Peters of being “inappropriately overzealous … [he] was a dog on a bone.” Miami lawyer Neal Sonnett says the case is part of a broader Justice Department trend to skirt the attorney-client privilege to pursue both clients and their lawyers — especially in drug cases. “There are obviously concerns among the defense bar that the increasing tactic of prosecuting attorneys is harming the adversary system,” Sonnett says. Denver lawyer Larry Pozner, a former president of the National Association of Criminal Defense Lawyers, says, “The court cannot breed respect for the privilege when it turns a blind eye toward a lawyer who threw in the towel,” referring to Danley. In the Kuwait case, in which Danley testified, Pozner defended conservative journalist Scott Stanley Jr., who was cleared along with Kennedy and Zakhem. Debbie Kennedy says she hopes the Supreme Court will come to her husband’s defense and grant a hearing. “Bill has forgiven Mr. Peters,” she says, adding that he has forgiven Danley, too. “However, Bill and I also feel that justice needs to be done. Forgiveness doesn’t mean that justice can be twisted.”

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