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The 'Advice of Counsel' Defense

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"I asked my attorney who said it was lawful to proceed."

In our complex regulatory environment, this inquiry is an understandable action. Individuals who rely on the advice of counsel may be able to demonstrate good faith in their actions, and consequently negate the intent to deceive required to prove fraud. However, there are many limitations and pitfalls in asserting this defense.

The basic requirements to successfully assert "advice of counsel" are: (1) seeking the advice of counsel in good faith; (2) making a complete disclosure of all known relevant facts; and (3), undertaking reasonable reliance upon and in fact following the received advice.

A recent decision by a Magistrate Judge of the federal District Court for the Middle District of Florida in a case, U.S. ex rel. Elin Baklid-Kunz v. Halifax Hospital Medical Center and Halifax Staffing, Inc., illustrates the problems inherent in the advice of counsel defense. In this situation, merely collecting facts with a cover sheet addressed to general counsel and with each page stamped "Confidential Attorney-Client Privileged Information" was held to be insufficient to convey privileged status or indicate advice of counsel. The attorney did not comment on the recorded information nor was there an affirmative seeking of the advice of counsel. Additionally, many of the documents in question were not protected from discovery since they were not in fact part of a privileged communication to counsel.

Recent federal Court of Appeals decisions have denied the advice of counsel defense for the following reasons:

  • Failure to disclose to bankruptcy counsel that a restitution order derived from a criminal conviction.
  • Merely retaining counsel is insufficient.
  • An attorney prepared letter based upon information provided by the client does not indicate advice of counsel or reliance upon advice.
  • Merely asserting advice of counsel without supporting facts is unsatisfactory.
  • Failure to adequately follow-up to determine if the advice was being followed negates the defense.
  • Actions beyond the scope of the advice are not protected.
Executives relying on "advice of counsel" face a number of potential issues including: Were all the basic requirements of the defense met such as, for example, disclosing all known relevant facts to counsel? Is the attorney in question actually the individual's "counsel" and not that of the business? Did the individual consult an attorney with appropriate expertise in the subject matter in question? If the defense is asserted must there be public disclosure of everything communicated between the attorney and the client (privileged communication issue)? Were the communications also disclosed to third parties consequently waiving any privileged status so that they may be introduced into evidence in a court proceeding? Did the executive already know the anticipated action was unlawful thus negating justifiable reliance upon any contrary advice of counsel? Did the executive receive contradictory legal advice from more than one source, negating "good faith"? Many of these questions are factual matters for a jury to determine. While executives should consult legal counsel, executives should not expect that an assertion of legal advice favoring the proposed action will automatically prevent subsequent liability for fraud.