The advice of counsel defense has been making the news as high-profile defendants have attempted to assert something like a partial defense, grabbing the benefits of the defense without its burdens. FTX crypto-exchange founder Sam Bankman-Fried (“SBF”), currently on trial for a series of fraud charges arising from the collapse of the exchange, remarked periodically that he relied on the advice of lawyers, which prompted federal prosecutors to ask the judge to bar SBF from mentioning advice of counsel in his opening statement.1 And earlier this month, in the federal election interference case against former President Trump, federal prosecutors asked a judge to require the former president to say whether he would blame poor legal advice for his attempts to overturn his 2020 election loss.2 This alert explains the contours of the formal defense and assesses the risks and benefits of asserting the defense both formally and informally.
The Advice of Counsel Defense
The advice of counsel defense is based on the common sense principle that a defendant should not be held liable for actions taken based on reasonable reliance on the advice of counsel. Such reliance negates wrongful intent. The defense contains four elements: (1) The defendant made a complete disclosure to counsel concerning the matter at issue, (2) the defendant sought advice as to the legality of his conduct, (3) the defendant received advice that his conduct was legal, and (4) the defendant relied on that advice in good faith.3 A defendant who asserts the defense must, of course, waive the attorney-client privilege, which is why defendants often prefer to allude to the involvement of lawyers without formally asserting the defense. Even those defendants who earnestly want to assert the defense face a difficult hurdle of showing that they made a complete disclosure to counsel concerning the matter at issue.
Recent Cases Highlighting the Defense
The motion in the SBF trial related to an informal assertion of the defense. SBF sought to introduce evidence of counsel’s involvement in decisions related to (among other things) auto-deletion policies at FTX; the formation and incorporation of certain entities; loans given to FTX and Alameda executives; and the terms of intercompany agreements between FTX and Alameda.4 Rather than prove the four requisite elements of the formal defense, SBF sought to demonstrate that he was aware of counsel’s involvement and that because of that knowledge, he did not believe what he was doing was unlawful. The government sought to preclude SBF “from unduly focusing on the fact of attorneys’ involvement” in such matters or “suggesting that attorneys blessed, for instance, the loans, bank documents, or message deletions.”5
In barring SBF from referencing attorney advice in his opening, Judge Kaplan pointed to other cases that found that informal references to advice of counsel often appear designed to imply that the attorney blessed the conduct at issue. Judge Kaplan analyzed several cases that addressed the informal defense. For example, in S.E.C. v. Lek Securities Corporation, the court excluded references to counsel communications in the absence of a formal “advice of counsel” defense, reasoning that otherwise the defendant would enjoy all the benefits of an advice of counsel defense without the burdens of having to waive privilege or prove the elements of the defense.6
The court also explained that the SEC would be prejudiced by such references, as there was a significant risk that the jury would be confused and misled by the suggestion that counsel for defendants were fully informed and approved of the transaction at issue.7 On the other hand, in United States v. Tagliagferri, the judge ruled in limine to bar evidence that the defendant relied on attorney advice8 but allowed defendant to elicit testimony of attorney involvement and to argue that this involvement affected his state of mind, casting doubt on fraudulent intent.9 When the defendant took the stand at trial, however, the judge expressed concern about juror confusion on the issue and limited the defendant’s line of questioning.10 After discussing relevant case law, Judge Kaplan determined that the risk of juror confusion and unfair prejudice to the government was “palpable” if SBF were permitted to focus on the presence or involvement of lawyers at or for FTX and Alameda.11 At the same time, he noted there were circumstances in which lawyer presence, involvement, or advice known to the defendant at the time of his alleged misconduct could bear on whether he acted with fraudulent intent.12 Judge Kaplan therefore allowed that the defendant might be able to revisit the issue (with proper notice to the government) at some later point during the trial.13
In the election fraud case, although the issue has not yet been the subject of motion practice, challenges to asserting the defense, and the risks of asserting it, are particularly significant. One fundamental challenge is the former president’s public statements that deny any attorney-client relationship with anyone deemed unloyal by him, as occurred most recently with Trump’s statements about Sidney Powell.14 Another is that several of the attorneys have themselves pleaded guilty. Even if the defense could be asserted, any waiver would likely unearth a flood of cautionary communications from other attorneys with whom the former president also consulted, and a defendant cannot pick and choose favorable advice in support of his defense when that advice comes from multiple sources and is a mixed bag.15
The challenges of asserting an advice of counsel defense—whether formally or informally—in litigation do not necessarily apply in an informal, investigation context. Particularly in negotiating a resolution of a government investigation, highlighting legal advice or the involvement of lawyers can be beneficial. Even if the legal defense may not be available, it can show a subject’s good faith, raise fairness concerns when it comes to charging decisions, and even highlight litigation risk for the government. And if demonstrating the involvement of lawyers does not eliminate potential charges, it may go a long way toward reducing the severity of a charge or potential sanctions.
Finally, for an individual to assert an advice of counsel defense in any form requires that an attorney-client relationship exist specifically with the individual asserting it, a fact that executives and board members should consider carefully in deciding whether to retain separate counsel in an investigation. Advice provided by the company’s counsel will not do; the privilege belongs to the company and can be waived only by the company. So a CEO who relied on guidance from company counsel may find herself unable to refer to that advice if her conduct is later challenged. She may even know of emails from company counsel that would be useful to defending her conduct, but be unable to access or produce them if the company maintains the privilege.
If you have any questions regarding the foregoing, please contact your primary attorney at Seward & Kissel LLP.