Ethically Speaking: Does privilege attach when there is fraud?

By now, most attorneys are familiar with the “Nigerian investor” scam and you have probably received at least one email of this type, if not more.

One variation of this type of fraudulent scheme involves a potential client, a purported real estate investor, contacting a law firm and seeking its assistance in closing a real estate deal. The lawyer is instructed to deposit a large check, minus attorney’s fees, into an overseas bank account purportedly belonging to someone involved in the transaction. Later, after the funds are wired, it is determined that the check is fraudulent and the unsuspecting law firm is held liable for the shortfall.

But does privilege apply to the communications with the purported client in this scenario?

The New York State Bar Association’s Committee on Professional Ethics, in Opinion 923 (May 18), recently addressed this very issue when an attorney inquired whether privilege attached to communications with the respective parties in such a situation, where the attorney suspects fraud.

The inquiring attorney wondered whether the following were privileged and thus could not be turned over to investigating authorities: (a) the original check; (b) a cover letter and envelope from a third party which included a check from the purported real estate investor; and (c) the emails with the purported investor.

At the outset, the committee concluded that the check and cover letter from the third party could be turned over since that party was an intermediary and never indicated an intention to retain the lawyer’s services.

The committee then turned to the communications between the attorney and the prospective client and concluded that if the purported real estate investor’s main goal from the very start was to defraud the attorney, and thus he did not have a bona fide intent to retain the attorney’s services, then an attorney-client relationship did not exist and no confidentiality attached to their communications: “If the purported client was not actually seeking legal services, then he did not, in reality, discuss with the inquirer the possibility of forming a client-lawyer relationship, but merely pretended to do so. … [He] is therefore not entitled to the protection of the confidentiality rules.”

Of course, the catch 22 with this conclusion is that it presumes that an attorney definitively knows of the intent to defraud, which is rarely the case. Instead, the more common scenario is that the attorney simply has a strong suspicion that things are going awry.
Accordingly, the committee cautioned that a “lawyer should exercise diligence and great care before concluding that a purported prospective client is making a bogus inquiry and is therefore not entitled to the confidentiality enjoyed by genuine prospective clients. The presumption of confidentiality gives way only if and when the lawyer reasonably concludes that the purported client was not actually seeking legal services.”

Finally, the committee noted that a legitimate client’s decision to defraud an attorney can sometimes occur after legal representation has commenced. In that case, some communications may, in fact, be privileged: “If a person who contacts a lawyer was, at the outset of the relationship, actually seeking legal services, then that person may be entitled to those confidentiality protections enjoyed by prospective clients, or, depending on how the relationship develops, the protections enjoyed by actual clients.  The fact that the actual or prospective client, then or later, also may have sought to defraud the lawyer does not necessarily undercut those protections.”
In other words, it’s not always clear cut. Thus, an attorney who suspects that fraudulent activity may be afoot should tread lightly and carefully assess the situation prior to disclosing potentially confidential information to investigating authorities. Likewise, it’s equally important for lawyers to stay abreast of popular scams so that they can easily recognize such scenarios and avoid falling prey to them. Why not stay one step ahead of the scammers? Better safe than sorry.

The Hon. John E. Bernacki is a Pittsford Town Court Justice. His law firm, John E. Bernacki Jr. PC, is located in Pittsford. He can be reached at www.johnbernackilaw.com.