Organizations routinely seek the advice of counsel in complying with the complex, evolving Federal regulatory scheme.  But a recent Federal prosecution for government-contracting fraud illuminates the stark difference between seeking compliance advice in good faith and seeking advice as a means to violate the law.

In a four-count indictment for conspiracy and wire fraud, the Justice Department alleged that David Gorski had made false statements about the ownership, operation, and control of Legion Construction, Inc. to obtain Federal contracts set-aside by law for Service-Disabled Veteran Owned Small Businesses.  Gorski, a non-veteran, allegedly used veterans as corporate figureheads while he maintained functional control of, and the financial proceeds from, Legion.  In response to recent amendments to the small-business regulations, Gorski had retained a law firm to provide compliance advice and to restructure Legion; Gorski also had obtained advice from his personal attorney with the restructuring.

During the prosecution, the Justice Department subpoenaed not only Legion (which was not charged) but also Gorski’s personal legal counsel, seeking documents related to the restructuring.  After an in camera review of the documents and an ex parte hearing with defense counsel, the district court ordered the production of Gorski’s communications with  Legion’s counsel under the “crime-fraud” exception to the attorney-client privilege but refused to order disclosure of Gorski’s communications with his personal counsel.  On appeal, the United States Court of Appeals for the First Circuit affirmed the order compelling production of the communications with Legion’s counsel and, reversed the district court on the production of the communications with personal counsel.

The First Circuit concluded that the record established a “reasonable basis to believe” that Gorski “was engaged in (or was planning) criminal or fraudulent activity” when the communications with both Legion’s counsel and Gorski’s personal counsel took place.  The indictment alone, the Court explained, satisfied the reasonable-basis prong.  The court then held that the communications were “intended by [Gorski] to facilitate or conceal the criminal or fraudulent activity,” citing as support Gorski’s communications with an accountant in which he had solicited ways to obtain additional hidden compensation from Legion.  The Court drew this inference despite Legion’s contention that it was merely seeking to ensure compliance with the regulations from a “reputable law firm” and, even though there was no suggestion that Gorski had lied to or failed to disclose information to counsel.

The case illustrates an important lesson.  In analyzing whether to pierce the attorney client privilege, the focus is not on the attorney’s conduct and motivations—rather, the touchstone for piercing the privilege rests with the organization’s and its employees’ intent, measured by the relatively low bar of the “reasonable basis to believe” standard.  Given the frequency by which attorneys and clients communicate on the subject of regulatory compliance in the procurement system and the Government’s focus on ridding the system of fraud, waste, and abuse, this will not be the last time that prosecutors attempt to pierce the privilege.

The case is United States of America v. David E. Gorski, Nos. 14-1963, 14-1964, and 14-2074 (1st Cir. Dec. 9, 2015).