Second Circuit Affirms Order Compelling Disclosure of Attorney-Client Communications Subject to the Crime-Fraud Privilege Exception

On Feb. 7, 2025, the U.S. Court of Appeals for the Second Circuit in In re Two Grand Jury Subpoenas Dated Sept. 13, 2023^[1] affirmed the Southern District of New York’s order compelling a partner at a law firm and the firm to produce documents originally withheld under a claim of attorney-client privilege, based on the crime-fraud exception. As the court explained, “[t]he crime-fraud exception strips the privilege from attorney-client communications that were made in furtherance of contemplated or ongoing criminal or fraudulent conduct.” In this case, the CEO of a publicly traded company allegedly hid hush money payments made to two former employees who had accused him of sexual misconduct. A grand jury subpoenaed the law firm partner and law firm for documents, including communications between the firm and the CEO. The court of appeals, in an opinion by Judge Gerard E. Lynch, held that the district court did not abuse its discretion in concluding that there was probable cause to believe that such communications were made in furtherance of an attempt to criminally circumvent the company’s internal controls, and, therefore, affirmed the order compelling production of the documents under the crime-fraud exception to the privilege.

Facts of the Case

Sealed Appellant 1 (Appellant 1) was the subject of a grand jury investigation by the U.S. Attorney’s Office for the Southern District of New York and is the former CEO and chairman of a publicly traded company (the Company). Sealed Appellant 2 (Appellant 2) is a partner at a law firm, and Sealed Appellant 3 (Appellant 3) is that law firm. Appellants 2 and 3 formerly represented Appellant 1. The government alleged that Appellant 1 made hush money payments to two victims of his sexual misconduct and then hid the agreements and the payments from the Company and its auditors. The grand jury was investigating whether Appellant 1 engaged in a criminal scheme to circumvent the Company’s internal accounting controls and mislead Company auditors when he concealed the sexual misconduct allegations as well as the agreements he reached and the payments he made to the victims.

In 2018, Victim 1 sent Appellant 2, the law partner, a demand letter alleging that Appellant 1 had sexually harassed and assaulted her. Following negotiations, the parties executed an agreement in which Appellant 1 agreed to pay Victim 1 $7.5 million in exchange for confidentiality and a release of claims against both Appellant 1 and the Company. The agreement was never disclosed to the Company, and the final agreement was stored in the files of Appellant 3, not those of the Company.

Appellants 1 and 2 negotiated and executed a similar agreement with Victim 2 in early 2022. Victim 2 alleged that Appellant 1 and another Company executive sexually assaulted her. The CEO and law partner exchanged text messages and phone calls about the agreement. The executed agreement indicated that Victim 2 would be paid $3 million in exchange for her resignation, confidentiality, and release of claims against Appellant 1 and the Company. Once again, this agreement was not provided to the Company.

As a public company, the Company was obligated to maintain accurate books and records as well as a system of internal accounting controls that support accurate accounting. Its principal officers, such as Appellant 1, were also required to certify that they maintained internal controls and designed these controls to ensure that material information was made known to the principal officers. Additionally, the outside auditors were under the impression that all contracts were reviewed by the Company’s legal department.

In March 2022, anonymous emails to the Company’s Board of Directors stated that Appellant 1 had a sexual relationship with Victim 2 and that the Company had paid Victim 2 for her silence. The Company’s Board then formed a Special Committee to investigate. Appellant 1 later disclosed copies of his agreements with the victims to the Company, and the Company corrected its financial statements for quarters in 2019 – 2022 to account for settlement payments that Appellant 1 had made or committed to make on behalf of the Company. In actuality, Appellant 1 did not use Company funds for his hush money payments, but neither agreement disclaimed the Company’s responsibility, and the language in the agreement with Victim 1 gave her a plausible argument that the Company would have been responsible for the payments had Appellant 1 failed to pay.

In September 2023, the government served grand jury subpoenas on Appellants 2 and 3 for documents reflecting communications between them and Appellant 1 concerning the victims’ allegations. On Dec. 12, 2023, Appellants 2 and 3 substantially completed their production of responsive documents, but they withheld certain documents on assertions of attorney-client privilege. On Jan. 13, 2024, the government filed a motion to compel production of these documents withheld by Appellants 2 and 3.

After reviewing the withheld documents in camera, District Judge Valerie E. Caproni granted the motion to compel in part. The court “found probable cause that communications included in the documents were made in furtherance of a crime or fraud” — the circumvention of the Company’s internal controls and creation of false books and records that concealed the victims’ claims and settlement agreements and led to false and misleading statements to the Company’s auditors. Two of the Company’s internal controls were implicated: “(1) the control that Sealed Appellant 1 had described to auditors in 2019, which required that the legal department review ‘all significant contracts’ and (2) another control that required the legal department to provide information about potential legal contingencies to the accounting department.” As a result, the court held that the crime-fraud exception to attorney-client privilege applied to all but two of the documents withheld by Appellants 2 and 3. Although the court’s order was stayed pending an appeal, Appellants 2 and 3 then produced the subpoenaed documents. Appellants 1, 2 and 3 all appealed.

The Second Circuit’s Opinion

As a threshold matter, the court rejected the government’s argument that the court lacked appellate jurisdiction. Although ordinarily federal appellate jurisdiction extends only to appeals from final decisions (which would not include interlocutory disclosure orders), the court concluded that the exception, first established by the Supreme Court in Perlman v. United States, 247 U.S. 7 (1917), over 100 years ago, had continued validity. That exception “allows the subject of a grand jury investigation to appeal a privilege order directly when the subject’s privileged information is in the hands of a third party that is likely to disclose the information rather than subject itself to contempt.”

The court also concluded that the appeal was not moot, notwithstanding that Appellants 2 and 3 had already produced the requested documents. The court stated that it could still provide relief by ordering the government to return the documents and not to present the documents to the grand jury or use them at trial.

As to the merits, the court noted that a “party seeking to invoke the crime-fraud exception must demonstrate that there is probable cause (1) that the client communication or attorney work product in question was itself in furtherance of the crime or fraud and (2) to believe that the particular communication with counsel or attorney work product was intended in some way to facilitate or to conceal the criminal activity.” The attorney does not need to be aware that the advice sought was in support of an improper purpose.

For the first of these requirements, the court pointed out that “it is a federal crime to willfully circumvent . . . a system of internal accounting controls or . . . falsify any book, record, or account.” It then concluded that “the district court properly held that probable cause exists to believe that the Company’s internal controls included a requirement that its legal department review all significant contracts” in part because Appellant 1, in a formal interview with auditors, stated as much. The court similarly determined that the district court “properly held that there was probable cause to believe that the victims’ settlement agreements were ‘significant contracts’ for purposes of this legal contracts control,” given that Appellant 1 was the Company’s CEO and chairman and that the victims were former Company employees.

Second, the court concluded that “the district court properly held that there was probable cause to believe that Sealed Appellant 1 intentionally used Sealed Appellant 2’s legal services to circumvent the legal contracts control.” Appellant 1 took efforts not to provide the contracts to the Company, its legal department or its auditors, and the executed agreements were kept in the files of Appellant 3, not those of the Company. Therefore, the court affirmed the district court’s order.

Takeaways

The opinion serves as an important reminder that the protections of the attorney-client privilege are not absolute and that there are exceptions to the privilege’s application, including crime-fraud. In addition, given that appellate decisions delineating the parameters of the doctrine are not frequent, the opinion contains a useful summary and description of the applicable law. However, the application of the crime-fraud exception in cases investigating books and records, internal controls, and similar regulatory requirements may be subject to further development. Public companies have, for example, broad responsibilities to create accurate books and records and to maintain adequate and functioning internal controls. Virtually any alleged financial misconduct might arguably implicate the accuracy of a company’s books and records. It is therefore an important limiting principle of the crime-fraud doctrine that the communication with counsel “was intended in some way to facilitate or conceal the criminal activity,” as opposed to seeking legitimate advice as to the legality of the conduct and whether or how an entry needs to be booked or recorded. 

^[1]_{Nos. 24-1588-cv, 24-1589-cv, 2025 WL 428359 (2d Cir. Feb. 7, 2025).}