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Federal Appeals Court Rules CEO Cannot Hide Behind Attorney Client Privilege to Conceal Hush-Money Secrets

He thought the attorney client privilege would be an impenetrable moat for his hush-money secrets until a federal court ordered his lawyers to disclose his secrets to a grand jury. He is the CEO of a publicly traded company. His name is under seal and will be referred to here as CEO Doe as grand jury proceedings continue.

CEO Doe didn’t go down without a fight. He asked the United States Court of Appeals for the Second Circuit to quash the subpoenas served on his lawyer – Lawyer Doe and his law firm. However, on February 7, 2025, the Court of Appeals ruled that documents and messages CEO Doe shared with his attorneys who negotiated hush-money agreements to quiet sexual assault accusations, must be disclosed to the grand jury.

The attorney client privilege usually shields exchanges between lawyers and their clients from disclosure to third parties. However, in this instance, the New York based appellate court determined that the crime-fraud exception defeats the attorney client privilege. This is a reminder that not every attorney work product or confidential communication is protected.

A grand jury is investigating whether CEO Doe engaged in criminal activity to conceal his alleged sexual misconduct. You may be wondering how CEO Doe and Lawyer Doe found themselves in this predicament? It is not that the hush-money agreements are illegal. The way in which the CEO and his lawyers handled the negotiations, and the resulting agreements is what puts them in criminal jeopardy.

Publicly traded companies must have internal accounting controls. CEO Doe’s company requires major legal contracts to be reviewed by its in-house legal department, as part of internal accounting controls. CEO Doe publicly touted this safeguard to illustrate how rigorous the Company’s internal controls are to lure investors. However, when it came to the hush-money agreements that are considered major legal contracts, he dealt with outside lawyers and kept the in-house legal department in the dark. This violation of the internal audit controls is what is being probed by a grand jury as federal crimes.

Federal prosecutors contend that the CEO structured his relationship with his outside lawyers to circumvent the Company’s internal controls. In order words, he used the services of his lawyers to commit or conceal a crime. When they relied on the attorney client privilege as a shield, CEO Doe and Lawyer Doe overlooked the fact that there is a crime-fraud exception to the attorney and client privilege.

Why the Attorney Client Privilege is Defeated by the Crime-Fraud Exemption

The crime-fraud exception is a legal principle that removes the protection of attorney-client privilege for communications made in furtherance of a crime or fraud. This exception ensures that the confidentiality afforded to attorney-client communications does not extend to those made for the purpose of obtaining advice or assistance in committing a crime or fraud.

To apply the crime-fraud exception, courts generally use a two-part test. First, there must be an initial showing that the clients engaged in or were planning criminal or fraudulent conduct when they sought the advice of counsel, or that they committed a crime or fraud after receiving the benefit of counsel’s advice. Second, prosecutors must establish that the attorney’s assistance was obtained in furtherance of the criminal or fraudulent activity or was closely related to it.

The Court of Appeals found that the government established both elements in this case. There was probable cause to believe CEO Doe intentionally used his lawyer’s services to circumvent the legal contracts control. The CEO was aware of the control but took steps to conceal the agreements from the company’s legal department, including using external counsel and communicating via text message. The district court reasonably concluded these actions were intended to keep the company “in the dark” about the agreements.

A Hush-Money Lesson for Corporate Executives and Lawyers

If corporate executives want to protect their communication with outside counsel from disclosure, they must ensure that they comply with the Company’s internal accounting controls. For instance, in this case, one of the internal controls is that major contracts be reviewed by the Company’s legal department. Instead of submitting the contract of review by the in-house legal department, the CEO Doe hid the hush-money agreements from the in-house lawyers.

The concealment was material because the hush-money agreements were drafted in a manner that exposed the Company to liability. Though the CEO paid the hush money from his own funds, the court found that the agreement had ramifications for the Company.

Lawyers who provide legal services to officers of public companies must enquire what internal controls the company has that are applicable to the services they provide. If Lawyer Doe had used an intake procedure with proper due diligence, he would have been aware of the major contracts reporting requirement of the Company.

Once the lawyers are aware of the requirement for review by the in-house legal department, they had two choices. They could have complied with the review requirement to preserve their client’s confidentiality. Providing the hush-money agreements to the Company’s legal department would have removed the probability of fraud from the transaction. This would have protected other attorney work products and confidential communications.

If the client indicated a desire not to submit the agreement to the Company’s legal department, then the lawyers should have structured the agreement to evade that requirement.

It is important to note that the crime-fraud exception applies regardless of whether the attorney is aware of a client’s criminal or fraudulent intention. The focus is on the client’s intent to misuse the attorney’s services to further a crime or fraud. If the client sought legal advice to explore the legality of a proposed course of conduct, the privilege remains intact. However, if the client intended to use the attorney’s advice to perpetrate or conceal a crime or fraud, the privilege is forfeited.

Could Lawyer Doe be Liable for the Loss of the Attorney and Client Privilege?

The answer is yes. Lawyers have a duty to take necessary steps to protect the confidentiality of their clients. Lawyers also have a duty to engage in due diligence to acquaint themselves of required actions to protect their clients’ confidential communications. If a necessary step for that protection entails forwarding a major contract to the legal department of the Company, failure to do so could give rise to liability.

Further, Lawyer Doe should have documented his advice to his client about necessary actions the client must take. If the client declines to follow the advice that too should be documented.

If you are handling a major legal contract for a publicly traded company or one of its officers, you be aware of the Company’s internal accounting controls. In this case the Lawyer Doe was also the long-term lawyer for the Company. Therefore, he ought to be aware of the internal audit controls of the Company.

The failure to follow the internal accounting controls procedures could therefore expose Lawyer Doe to civil and criminal liability. Let’s wait to see how this one turns out.