Update on the Zukerman Indictment - Potential Waivable Conflicts of Interest of Advocate as Witness (5/28/16; 6/21/16)

READERS SHOULD NOTE THE CLARIFICATION BELOW AS OF 6/6/16 AT 3:45 AM.

I recently posted on the Zukerman indictment: Prominent and Very Rich Investor Indicted in SDNY (Federal Tax Crimes Blog 5/24/16), here.  In that posting I have the following paragraph:

3. One of the obstructions charged relates to Zukerman passing false information to IRS Appeals through two attorneys at a Washington Law Firm.  That alone made me curious as to which firm and attorneys were used in the scheme, but I have not been able to find out that information.  And, the Government seems to have gotten access to the communications between Zukerman and the attorneys.  Since I assume that such information and documents were not given to the Government with Zukerman's consent, As the press release indicates, the attorney-client privilege was pierced by the Government pursuant to district court and Second Circuit opinions.  The Second Circuit opinion is  In re Grand Jury Subpoenas Dated March 2, 2015, 628 F. App'x 13 (2d Cir. 2015), here.  I discussed that Second Circuit opinion in a prior blog entry, Second Circuit Affirms Application of Crime-Fraud Exception to the Attorney-Client Privilege (Federal Tax Crimes Blog 10/10/15), here.

The prosecuting AUSA for SDNY, Stanley Okula, has written a letter, here, to the judge requesting a hearing, a so-called Curcio hearing (see United States v. Curcio, 680 F.2d 881 (2d Cir. 1982)).  The request is:

At that conference, the Government will request that the Court address potential conflicts issues relating to the defendant's current counsel, from the law firm of Williams & Connolly. More specifically, we will request that Your Honor conduct a Curcio proceeding, see United States v. Curcio, 680 F.2d 881 (2d Cir. 1982), which requires the Court to address with the defendant directly his desire to proceed with defense counsel who face potential waivable conflicts of interest - here, James Bruton and James Fuller, partners from Williams & Connolly, both of whom currently represent the defendant in this criminal case, and both of whom are potential witnesses against the defendant at any future trial or hearing. Mr. Bruton and Mr. Fuller are potential witnesses as a result of the defendant's use of those attorneys to convey false information to the Internal Revenue Service during a civil audit - offense conduct that is not only described at length in the Superseding Indictment (See Ind. ¶¶ 28-34) but was also the subject of a grand jury ''crime-fraud'' ruling by Judge Caproni that was affirmed by the Second Circuit Court of Appeals. See In re: Grand Jury Subpoenas, 2015 WL 5806060 (2d Cir. 2015) (upholding district court's crime/fraud ruling requiring attorneys for Zukerman to disclose attorney/client  communications that resulted in submission to IRS of tax protest letter that included false facts). 

In sum, we believe that the potential conflict can be waived by the defendant, but only after the Court conducts a proceeding pursuant to Curcio and its progeny. Consistent with the approach we have taken in prior proceedings of this sort, the Government expects to submit to Your Honor by early next week a set of questions that should be asked of the defendant at the Curcio hearing, in order to determine that the defendant understands the nature of the potential conflicts and that he knowingly desires to proceed with his counsel, notwithstanding the potential conflicts.

The letter is cc'd to the following:

James A. Bruton, III, Esq.
David Zinn, Esq.
(Counsel for the Defendant)
Henry Putzel, III, Esq.
(Conflicts Counsel for the Defendant)

Messrs. Bruton and Zinn are with the firm of Williams & Connolly ("W&C"), headquartered in Washington, DC.  I infer from the designation of Mr. Putzel, who is not with W&C, that he is an independent attorney advising Zukerman of the potential conflicts.

The letter has the following at the end, signed by the Judge (bold face in original):

GRANTED. The parties are directed to appear in Courtroom 15D of the United States
Courthouse, 500 Pearl Street, New York, New York, 10007, on June 8, 2016, at 4:45 p.m., for an initial conference and to address the potential conflict between Defendant and his counsel.
SO ORDERED.
Dated: May 24, 2016
New York, New York

The attorneys entering appearances for Zukerman, according to the docket entries viewed on 5/28/16 are:  Mr. Bruton, David Michael Horniack, and Mr. Zinn, all with W&C.  (All have requested admission pro hac vice to represent Zukerman in this case.)  I know Mr. Bruton, here, a prominent criminal tax defense attorney, and believe that he is competent, ethical and well-respected among his peers.  (So, I can understand why Zukerman would want him as his counsel in a criminal tax case; if I had that problem, Mr. Bruton would be on a list of perhaps 2 or 3 that I would want to consider representing me.)

The Second Circuit (which includes the SDNY in which Zukerman was indicted) has described the Curcio hearing as follows (United States v. Perez, 325 F.3d 115, 119 (2d Cir. 2003)):

At such a hearing, the trial court (1) advises the defendant of his right to representation by an attorney who has no conflict of interest, (2) instructs the defendant as to the dangers arising from particular conflicts, (3) permits the defendant to confer with his chosen counsel, (4) encourages the defendant to seek advice from independent counsel, (5) allows a reasonable time for the defendant to make a decision, and (6) determines, preferably by means of questions that are likely to be answered in narrative form, whether the defendant understands the risk of representation by his present counsel and freely chooses to run them. See id. at 888-90. The ultimate goal of these procedures is to permit the court to determine whether the defendant's waiver of his right to conflict-free counsel is knowing and intelligent.

It seems clear that the two attorneys through whom Zukerman allegedly passed allegedly fraudulent information to the IRS (a centerpiece of the tax obstruction charge in the indictment) were with W&C.  Mr. Okula identifies those attorneys as James Bruton and James Fuller.  Only Mr. Bruton has entered an appearance to represent Zukerman in the criminal case.

The conflict in issue identified by Mr. Okula is that Mr. Bruton and Mr. Fuller (Bruton's partner at W&C) apparently are necessary or appropriate witnesses in the criminal case.  Having an advocate testify in any case, civil or criminal, raises all sorts of red flags.  The red flag identified by Mr. Okula is the potential for conflict of interest with the party the advocate represents.  The advocate's role as a witness can potentially impair the effective representation of the party the advocate represents.  That is solely a conflict of interest issue that would require that the represented party be fully advised of the potential conflict and make a knowing waiver of the potential conflict, including the risks involved.  As stated by Mr. Okula, resolving that potential issue to insure a knowing waiver will be the purpose of the hearing.  I assume that the presence of conflicts counsel indicates that Zukerman is prepared to make a knowing waiver and that defense counsel and Zukerman think that the Court will so hold after the Curcio hearing.

CLARIFICATION ON 6/616 AT 3:45 AM:

In the balance of the original posting (which I keep below), I addressed potential issues that could arise should these counsel have to testify in the case in chief.  As it turns out, in a letter to the Court on May 31, 2016, here, AUSA Okula advised the Court (the content is short so, I quote it all but the bold-face has been supplied by me):

Enclosed please find a set of questions we respectfully propose that the Court utilize at the June 8, 2016 Curcio proceeding in the above-referenced case. As we noted in our letter of May 23, 2016, we believe the Curcio hearing is necessary in order for the Court to explore (1) the nature of the potential conflict of interest faced by the defendant’s current counsel, James A. Bruton, III, and James T. Fuller, III, from the law firm of Williams & Connolly; (2) the defendant’s awareness and understanding of the potential conflict; and (3) the defendant’s desire,after consulting with independent counsel, Henry Putzel, III, to knowingly waive any conflict or potential claim arising therefrom. 

As our proposed questions make clear, the potential conflict stems from the fact that both Mr. Bruton and Mr. Fuller were required, pursuant to a “crime fraud” ruling made by Judge Caproni, to disclose to the grand jury their written and oral communications with the defendant concerning a tax Protest Letter prepared by Bruton and Fuller and submitted to the civil branch of the Internal Revenue Service. That letter endeavored to challenge certain audit determinations previously made by an IRS auditor with respect to one of the defendant’s corporate entities. Both Mr. Fuller and Mr. Bruton were also required to testify as witnesses before the grand jury that voted the charges against the defendant. 

Based on our discussions with defense counsel, we understand that the defendant wishes to sign a plea agreement and schedule a plea proceeding. Before taking either step with current counsel, however, we respectfully submit that the potential conflict issue must be addressed and successfully navigated.

Although I am not an expert in this area, although the concerns I originally expressed seemed to be raised, it now appears that, if Zukerman pleads guilty as indicated in the letter, the only issue is the conflict issue which, as AUSA Okula originally noted can be waived.  I should have anticipated that result since most tax crimes cases result in a plea which has often been negotiated by the time the indictment is filed or, if sealed, unsealed.  Still, if AUSA Okula had a concern about these attorneys even representing Zukerman in the plea proceeding, it would seem to me that he should have had that concern in the negotiations.  Perhaps he did and felt the presence of conflict counsel was sufficient for him to do that, with the intention of presenting the issue to the Court when the indictment was unsealed.

AUSA Okula's  proposed Curcio hearing questions are here.

Update on 6/9/16 2:30pm:

The Curcio hearing was held on 6/8/16. The New York Times has this article on the hearing:  Matthew Goldstein & Alexandra Stevenson, Lawyers Ordered to Testify on Client’s Tax Evasion Case (NYT 6/8/16), here.  The article is a good one.  Basically, it appears that the conflict was waived and the client will plead guilty to  one or more of the charged crimes with what appears will be a very large tax loss.  The article does give some of the detail, principally from the indictment, about the defendant's use of the lawyers to communicate false information to the IRS.  I may post further information on this latter after I have time to pull any additional filings from Pacer.

Update on 6/21/16 9:30am:

Peter Hardy has an excellent discussion of the crime-fraud exception at Zukerman Case Raises Issues Regarding Crime Fraud Exception to Attorney Client Privilege (Procedurally Taxing Blog 7/17/16), here.

NOTE THE FOLLOWING DISCUSSION IS NOT RELEVANT IN LIGHT OF ZUKERMAN'S APPARENT INTENT TO ENTER A GUILTY PLEA.  I KEEP IT ONLY FOR POTENTIAL FUTURE REFERENCE IN OTHER CASES.

But, the advocate as witness in a case raises other issues than the potential for conflict.  ABA Model Rule 3.7, Lawyer as Witness, here, address those other issues as follows:

Rule 3.7 Lawyer As Witness 

(a) A lawyer shall not act as advocate at a trial in which the lawyer is likely to be a necessary witness unless:

(1) the testimony relates to an uncontested issue;
(2) the testimony relates to the nature and value of legal services rendered in the case; or
(3) disqualification of the lawyer would work substantial hardship on the client.

(b) A lawyer may act as advocate in a trial in which another lawyer in the lawyer's firm is likely to be called as a witness unless precluded from doing so by Rule 1.7 or Rule 1.9.

The Model Rules do not control the appearances in the Zukerman case, but seem to parallel the rules that are applicable (noted below).  Accordingly, the Commentary to the Model Rule, here, might be useful reading.

The Second Circuit has this discussion of the applicable rules and their concerns (Murray v. Metro. Life Ins. Co., 583 F.3d 173, 177-79 (2d Cir. 2009), here):

IV 

Plaintiffs make the separate argument that disqualification of Debevoise is proper by virtue of the witness-advocate rule set  out in Rule 3.7 of the New York Rules of Professional Conduct. Subsection (a) of the Rule provides, with certain exceptions, that "[a] lawyer shall not act as an advocate before a tribunal in a matter in which the lawyer is likely to be a witness on a significant issue of fact." N.Y. R. Prof'l Conduct § 3.7(a). Subsection (b) is broader, as it addresses imputation: "A lawyer may not act as an advocate before a tribunal in a matter if . . . another lawyer in the lawyer's firm is likely to be called as a witness on a significant issue other than on behalf of the client, and it is apparent that the testimony may be prejudicial to the client." See N.Y. R. Prof'l Conduct § 3.7(b)(1).  

Rule 3.7 lends itself to opportunistic abuse.  "Because courts must guard against the tactical use of motions to disqualify counsel, they are subject to fairly strict scrutiny, particularly motions" under the witness-advocate rule. Lamborn v. Dittmer, 873 F.2d 522, 531 (2d Cir. 1989). The movant, therefore, "bears the burden of demonstrating specifically how and as to what issues in the case the prejudice may occur and that the likelihood of prejudice occurring [to the witness-advocate's client] is substantial." Id. "Prejudice" in this context means testimony that is "sufficiently adverse to the factual assertions or account of events offered on behalf of the client, such that the bar or the client might have an interest in the lawyer's independence in discrediting that testimony." Id. 

As this definition suggests, the showing of prejudice is required as a means of proving the ultimate reason for disqualification: harm to the integrity of the judicial system. We have identified four risks that Rule 3.7(a) is designed to alleviate: (1) the lawyer might appear to vouch for his own credibility; (2) the lawyer's testimony might place opposing counsel in a difficult position when she has to cross-examine her lawyer-adversary and attempt to impeach his credibility; (3) some may fear that the testifying attorney is distorting the truth as a result of bias in favor of his client; and (4) when an individual assumes the role of advocate and witness both, the line between argument and evidence may be blurred, and the jury confused. Ramey v. Dist. 141, Int'l Ass'n of Machinists & Aerospace Workers, 378 F.3d 269, 282-83 (2d Cir. 2004) (internal citations and alterations omitted). These concerns matter because, if they materialize, they could undermine the integrity of the judicial process. See Hempstead Video, Inc. v. Inc. Vill. of Valley Stream, 409 F.3d 127, 132 (2d Cir. 2005) ("The authority of federal courts to disqualify attorneys derives from their inherent power to preserve the integrity of the adversary process.") (internal quotation marks omitted); see also id. (emphasizing "the need to maintain the highest standards of the profession") (internal quotation marks omitted). 

In imputation cases (Rule 3.7(b)), the witness is not acting as trial counsel; these concerns are therefore "absent or, at least, greatly reduced." Ramey, 378 F.3d at 283 (internal quotation marks omitted); see also A.B.A. Model Rules of Prof'l Conduct § 3.7 cmt. 5 ("Because the tribunal is not likely to be misled when a lawyer acts as advocate in a trial in which another lawyer in the lawyer's firm will testify as a necessary witness, [Model Rule 3.7(b)] permits the lawyer to do so except in situations involving a conflict of interest."). Accordingly, disqualification by imputation should be ordered sparingly, see Kubin v. Miller, 801 F. Supp. 1101, 1114 (S.D.N.Y. 1992), and only when the concerns motivating the rule are at their most acute. 

Therefore, we now hold that a law firm can be disqualified by imputation only if the movant proves by clear and convincing  evidence that [A] the witness will provide testimony prejudicial to the client, and [B] the integrity of the judicial system will suffer as a result. This new formulation is consistent with our prior efforts to limit the tactical misuse of the witness-advocate rule. See, e.g., Lamborn, 873 F.2d at 531.

It is important for readers to make the key distinction between the advocate acting as witness (addressed in the Rule subsection (a)) and the advocate's partner acting as witness (addressed in subparagraph (b), referred to as imputation).  The Court says that motions to disqualify under under Rule 3.7 potentially lend themselves to "opportunistic abuse," particularly focusing on subsection (b), where the advocate's partner is a witness).  For subsection (b) cases, the Court creates a substantial burden of proof (clear and convincing evidence) of prejudice to the client and damage to the integrity of the judicial system. It is not clear what the burden might be under subsection (a) which is the more sensitive of the situations addressed.  

As I read Mr. Okula's letter, two W&C attorneys may have to testify -- Mr. Bruton and Mr. Fuller.  Mr. Bruton is counsel in the case, thus subject to subsection (a).  Mr. Fuller is not counsel in the case, thus subject to subsection (b).  Of course, Mr. Okula raises only the potential conflict issue.  He does not raise at all the other issues/problems to which subsections (a) and (b) are directed involving the integrity of the judicial process.  The Court can raise those issues on its own.  Perhaps that is why Okula is pressing the conflicts issue with the notion that the Court itself may raise the issue.  But that is nothing more than my speculation, for I have no way to read Mr. Okula's mind.  I can only read what he said in his letter, and he said nothing beyond the issue of conflicts which, he assures the Court, are waivable.

Another speculative possibility is that Mr. Okula believes Zukerman will clear the conflicts hurdle and permit Mr. Okula to take extra advantage of the W&C attorneys.  I presume, for example, that when the two are called in the case in chief, the Court will likely treat the two as sufficiently close to hostile witnesses that it will permit Mr. Okula to lead them.  (My experience, though, is that attorneys, particularly smart attorneys, are not easily led.)  And, I can imagine other things that might happen, but I won't burden readers with my imaginings, which nobody is willing to pay me for.

I look forward to the results of the hearing on June 8.