Court Opinion

ID: 1030670
Source: CourtListenerOpinion
Date Created: 2013-07-05 08:18:34.618469+00
Date Added: 2024-06-11T08:03:37.967473
License: Public Domain

UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT

                               No. 08-4816

In Re:    GRAND JURY INVESTIGATION

--------------------------------

UNITED STATES OF AMERICA,

                 Petitioner - Appellee,

            v.

UNDER SEAL,

                 Movant – Appellant,

JOHN DOE A01-246,

                 Respondent.

Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria. Gerald Bruce Lee, District
Judge. (1:08-mc-00003-1)

Argued:   September 23, 2009              Decided:   November 20, 2009

Before TRAXLER, Chief Judge, WILKINSON, Circuit Judge,             and
Margaret B. SEYMOUR, United States District Judge for              the
District of South Carolina, sitting by designation.

Affirmed by unpublished per curiam opinion.

ARGUED: Douglas S. Laird, POLSINELLI SHALTON FLANIGAN SUELTHAUS,
PC, Kansas City, Missouri, for Appellant.    Gordon D. Kromberg,
OFFICE OF THE UNITED STATES ATTORNEY, Alexandria, Virginia, for
Appellee.    ON BRIEF: Dana J. Boente, Acting United States
Attorney, Steven P. Ward, Special Assistant United States
Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Alexandria,
Virginia, for Appellee.

Unpublished opinions are not binding precedent in this circuit.

                                2
PER CURIAM:

       This is an appeal from the district court’s order granting

the Government’s motion to compel compliance with a subpoena

duces tecum issued by a grand jury in the Eastern District of

Virginia. The district court granted the Government’s motion to

compel ruling that the Government had established a prima facie

case        that   the    crime-fraud   exception       to   the   attorney-client

privilege applied and that the documents in question were not

privileged. For the reasons set forth herein, we affirm. 1

                                           I.

       The     Corporation,      a   nonprofit,   was    incorporated    in   1983.

Counsel provided legal advice to the Corporation from 1983 to

2000.

       In      1997,     the   president   of   the     Corporation   established

another entity in the Isle of Man (“the Isle of Man Entity”).

Two of the Corporation’s three directors, one of which is the

Corporation’s president, were directors of a corporation also

established in the Isle of Man (“the Isle of Man Corporation”),

        1
       The documents and briefs in this case have                      been filed
under seal to protect the secrecy of the ongoing                       grand jury
investigation.   We therefore refer to the parties                     by generic
names to avoid the disclosure of their identities                      and do not
reveal more facts than are necessary to our analysis.

                                           3
which is the trustee of the Isle of Man Entity. Between 1997 and

2000, the Corporation transferred $22,523,478 of its assets to

the Isle of Man Entity. In 2000, the Corporation dissolved after

filing Articles of Termination and Articles of Dissolution with

the proper state authorities.

      Prior    to        the    Corporation’s            dissolution    and     continuing

thereafter,        the    Internal      Revenue          Service    (IRS)     conducted   an

audit of the Corporation.                 During the audit, the Corporation’s

president told the IRS that the transfers from the Corporation

to the Isle of Man Entity were made pursuant to opinion letters

from several law firms that these transfers were legal. One such

letter, which was written by Counsel, was provided to the IRS.

Counsel’s      letter          stated     that       a     qualified        United   States

charitable corporation can legally make a grant to a charitable

organization in another country so long as the funds are used

for   charitable         purposes.        The    IRS      audit    of   the    Corporation

concluded with a finding of “no issue raised.”

      In 2006, a grand jury convened in the Eastern District of

Virginia      to     investigate          the       monetary       transfers     from     the

Corporation to the Isle of Man Entity. The grand jury issued

subpoenas     duces        tecum     to     various        entities,        including     the

Corporation, seeking documents related to the transfers. When

the Corporation failed to have a representative appear before
                                                4
the grand jury, the court granted the Government’s motion to

hold the Corporation in contempt.

      The    grand      jury    then      issued      a     subpoena    duces     tecum     to

Counsel     requesting        “any    and    all      documents     relating       to     [the

Corporation].”        Counsel        produced        some    documents      and    withheld

others on the ground that they were protected by the attorney-

client privilege. The Government moved to compel the production

of the withheld documents, arguing both that the attorney-client

privilege      does     not    protect       the      communications        of    dissolved

corporations      and    that,       if   the       attorney-client      privilege        does

apply,      the   crime-fraud             exception         to    the    attorney-client

privilege allows access to the withheld documents.

      The     district     court       granted        the    Government’s        motion     to

compel      finding     that    the       attorney-client         privilege       does    not

protect the communications of a dissolved corporation when there

is    no    authorized        officer      available         to   validly    assert        the

privilege. Counsel timely appealed this decision (No. 07-2024).

In ruling on this initial appeal by Counsel, this court vacated

the district court’s decision and remanded the case, instructing

the district court to consider the Government’s argument that

the    crime-fraud       exception         to       the   attorney-client         privilege

applies to the withheld documents. See In re Grand Jury Subpoena

#06-1, 274 F. App’x 306, 309 (4th Cir. 2008).
                                                5
     On remand, the Government argued that it had established

the applicability of the crime-fraud exception to the withheld

documents based on violations of both 26 U.S.C. § 7206(1) (1982)

and 18 U.S.C. § 371 (1994). In addition, the Government argued

that the Corporation had waived the attorney-client privilege

with respect to the withheld documents.

     The   district   court   conducted   an   in   camera   hearing   to

examine the Government’s ex parte submission of the grand jury’s

evidence against the Corporation and Counsel’s privilege log.

The privilege log details for each withheld communication, the

type of document withheld and the date on which it was written.

     Thereafter, the district court conducted a hearing on the

applicability of the crime-fraud exception and held that the

Government had made out a prima facie case for a violation of 26

U.S.C. § 7206(1). 2 The district court specifically found that the

     2
       Section 7206(1) makes it a violation of the Internal
Revenue Code for any person to “willfully make or subscribe any
return, statement or other document which contains or is
verified by written declaration that is made under penalties of
perjury and which he does not believe to be true and correct as
to every material matter.” The elements of a prima facie case
for a violation of § 7206(1) are: 1) a tax return was filed
containing a written declaration, 2) the tax return was made
under penalties of perjury, 3) the defendant did not believe the
return to be true and correct as to every material matter; and
4) the defendant acted willfully. United States v. Aramony, 88
F.3d 1369, 1382 (4th Cir. 1996).

                                   6
Corporation         impermissibly         represented           that     it      had      no

relationship with the Isle of Man Entity “when in fact this was

false.”       The    court     based    this     finding    on    the    Corporation’s

response of “none” on line 22 of Form 990 of its tax returns,

which required the Corporation to disclose a relationship with a

donee if the donee was an individual. In addition, the district

court     found      that      the     withheld     documents          bore      a     close

relationship        to   the   alleged     violation       of    §     7206(1)       because

Counsel’s advice was used to “cloak the Corporation’s transfers

to the Isle of Man Entity in legitimacy.”                        The district court

thus found that the crime-fraud exception vitiated the attorney-

client privilege and again granted the Government’s motion to

compel. The district court incorporated its initial holding that

the     attorney-client              privilege     does         not      protect         the

communications of dissolved corporations into its decision for

the purposes of appeal.              The district court declined to address

the Government’s waiver arguments because they were outside of

the   scope   of     the    court’s     mandate    on   remand.         Counsel      timely

appealed.

                                           II.

      This court has previously acknowledged that the invocation

of a recognized privilege is grounds for refusing to comply with
                                            7
a grand jury subpoena. See In re Grand Jury Proceedings # 5, 401

F.3d 247, 250 (4th Cir. 2005). The attorney-client privilege is

one     such       recognized        privilege         that     protects         confidential

communications between attorney and client. Id.

        However, under the crime-fraud exception to the attorney-

client       privilege,       “when    a    client          gives    information      to        an

attorney for the purpose of committing or furthering a crime or

fraud,” the privilege is lost. United States v. Under Seal, 102

F.3d    748,       750-51     (4th   Cir.    1996)         (citing    In    re    Grand    Jury

Subpoena, 884 F.2d 124, 127 (4th Cir. 1989)). For the crime-

fraud exception to apply, “it is enough that the communication

furthered,         or   was   intended      by       the    client    to    further   .    .     .

illegality.” In re Grand Jury Proceedings # 5, 401 F.3d at 251.

The burden is on the party asserting the crime-fraud exception,

here the Government, to make a prima facie showing that the

exception applies. Id.; see also In re Grand Jury Proceedings,

33 F.3d 342, 348 (4th Cir. 1994).

       The     invocation       of    the   crime-fraud         exception         requires       a

prima    facie      showing     that    “(1)         the   client    was    engaged       in    or

planning       a   criminal     or    fraudulent           scheme    when   he    sought       the

advice of counsel to further the scheme, and (2) the documents

containing the privileged materials bear a close relationship to

the client's existing or future scheme to commit a crime or
                                                 8
fraud.”   In    re   Grand      Jury   Proceedings    #   5,   401   F.3d    at   251

(citations omitted). A party invoking the crime-fraud exception

can satisfy the first prong of this test by making a prima facie

showing of evidence, which, if accepted by the trier of fact,

establishes the elements of an ongoing or prospective violation

of the law. Id. The second prong of this test is satisfied with

a   showing     of    a     close      relationship    between       the    withheld

communications and the alleged violation. Id. Once a sufficient

showing has been made, the attorney-client privilege ceases to

protect   any    of       the   communications       related   to     the    alleged

violation. In re Grand Jury Subpoena, 419 F.3d 329, 345 (5th

Cir. 2005) (citing In re Sealed Case, 676 F.2d 793, 812 n.74

(D.C. Cir. 1982)).

     As this court described in its initial remand order, the

district court could decide whether the crime-fraud exception

applies in either of two ways. See In re Grand Jury Subpoena #

06-1, 274 F. App’x at 309. One approach permits the district

court to examine the withheld documents in an in camera hearing

after the Government makes a factual showing that would support

a good faith belief by a reasonable person that an examination

of the withheld documents would reveal evidence of a violation

of the law. Id. at 310 (citations omitted). In the alternative,

the district court could make a determination that the crime-
                                           9
fraud exception applied without examining the withheld documents

by conducting an ex parte and in camera examination of evidence

from     the    Government.    Id.     This      second    alternative        does       not

require that the Government make a threshold factual showing of

the basis for the application of the crime-fraud exception. Id.

In determining whether the crime-fraud exception applies, courts

may rely on evidence not ordinarily admissible at trial. In re

Grand Jury Subpoena, 884 F.2d at 127.

                                        III.

       “A district court's determination that the government made

a prima facie showing of crime or fraud should be upheld absent

a   clear      showing   of   abuse    of    discretion.”      In     re    Grand    Jury

Proceedings #5, 401 F.3d at 254. In addition, we may affirm on

any ground appearing in the record whether or not the district

court relied on it. Scott v. United States, 328 F.3d 132, 137

(4th Cir. 2003).          While this court expresses no opinion as to

whether     the    district    court’s      application       of    the     crime-fraud

exception based on a violation of § 7206(1) was an abuse of

discretion, we find that the totality of the evidence supports

the    application       of   the     crime-fraud         exception        based    on    a

violation of 18 U.S.C. § 371 as was argued by the Government

below.
                                            10
                                            IV.

        A. PRIMA FACIE SHOWING OF VIOLATION OF 18 U.S.C. § 371

       Counsel argues that the district court erred in holding

that    the    Government        established       a     prima       facie    case    for    a

violation     of    §   7206(1)       because     line    22   did      not    require      the

Corporation to disclose a relationship with a donee when the

donee was a company and not an individual. Title 18, United

States Code, Section 371, however, makes it a crime to engage in

a conspiracy to commit any offense against the United States or

to defraud the United States. The elements of a prima facie case

for a conspiracy to defraud the United States under 18 U.S.C. §

371 are: (1) an agreement to accomplish an illegal objective

against   the      United      States,      (2)    one    or     more    overt       acts    in

furtherance of the illegal purpose, and (3) intent to commit the

substantive offense, i.e., to defraud the United States. United

States v. Douglas, 398 F.3d 407, 413 (6th Cir. 2005).

       In its ex parte submission, the Government has provided the

court   with       prima      facie    evidence     that       the    Corporation,          its

principals     and      the    Isle    of   Man    Entity      had      an    agreement      to

defraud the United States Government in contravention of § 371.

The Government’s submission provides prima facie evidence that

the Corporation and the Isle of Man Entity entered an agreement

to defraud the United States both by concealing the ultimate
                                            11
disposition of the Corporation’s funds through the transfer of

assets overseas and by using the Corporation’s tax-exempt status

to     circumvent    the    collection             of    taxes    on   the    profits    of

individuals. Such a purpose falls directly within the confines

of § 371.       The transfer of $22,523,478 to the Isle of Man Entity

would be an overt act in furtherance of this purpose.

      B. CLOSE RELATIONSHIP BETWEEN THE COMMUNICATIONS AND ALLEGED

                                       § 371 VIOLATION

       Counsel    also     argues      that        the     district    court    erred     in

finding that the withheld documents bore the requisite close

relationship        to     the    allegedly              false    statements       on    the

Corporation’s tax returns.                  The         crime-fraud        exception      is

limited to those communications and documents in furtherance of

future or ongoing criminal or fraudulent conduct. In re Grand

Jury    Subpoena,    419    F.3d       at    343.       Therefore,     a   party   seeking

access     to    materials       via         the        crime-fraud    exception        must

demonstrate a close relationship between the desired materials

and an alleged criminal or fraudulent conduct. In re Grand Jury

Proceedings # 5, 401 F.3d at 251. However, in making the close

relationship determination, courts must take into account that

the     party    invoking        the        crime-fraud          exception,    here     the

Government, does not know exactly what the material will show.
                                              12
See In re Grand Jury Investigation, 842 F.2d 1223, 1227 (11th

Cir. 1987). Courts can base a finding of the requisite close

relationship on an examination of an in camera submission of

evidence by the party invoking the exception so long as the

court    has    some     evidence   of    the    contents     of     the    withheld

material. See In re Grand Jury Proceedings, 33 F.3d at 351; cf.

In re Grand Jury Proceedings # 5, 401 F.3d at 255.

      In making this finding we review both the Government’s ex

parte submission of evidence and Counsel’s privilege log, which

references documents from as early as 1986. The Government’s

evidence indicates that the Corporation’s scheme to defraud the

United States dates back as far as 1984 and that the Corporation

sought       Counsel’s    legal     advice      for    the    sole    purpose     of

facilitating its scheme to defraud the United States. Therefore,

all     of    the    withheld     documents     bear    the    requisite       close

relationship to the alleged violation of § 371 because they were

in furtherance of the alleged scheme.                   We conclude that the

Government has made a prima facie showing that there is a close

relationship        between   the   withheld     documents     and    the    alleged

violation of § 371.

                                         13
                              C. CONCLUSION

     Based on the forgoing analysis, we find that all of the

documents in Counsel’s privilege log fall within the crime-fraud

exception   to   the   attorney-client   privilege.   It   follows   that

Counsel must produce these documents to the Government pursuant

to the grand jury subpoena.

     Because we find that the crime-fraud exception vitiates the

privileged status of these documents, we do not reach the issues

of whether the attorney-client privilege applies to dissolved

corporations or whether the attorney-client privilege was waived

by the Corporation in this case.

                                  V.

     For the foregoing reasons, we affirm, on alternate grounds,

the district court’s order granting the Government’s motion to

compel.

                                                               AFFIRMED

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