SAN FRANCISCO -- Two pension fund trustees, convicted of embezzling plan assets in 1997, had their convictions overturned by a federal appeals court that ruled the lower court violated the attorney-client privilege when it allowed memos the trustees' attorney wrote about their withdrawals from the fund to be allowed into evidence.
ERISA legal experts said the case could be the start of a reversal of the trend that allowed a "fiduciary exception" to the attorney-client privilege in cases involving pension plan fraud.
"I think it is a classic example of what courts often do," said Steven Sacher, partner and chairman of the employee benefit practice with Kilpatrick Stockton, Washington. "They want to come out a certain way on an issue but they have precedent. So they characterize the facts the way they want to make the privilege apply," Mr. Sacher said.
"The court says: 'How can we characterize the facts to make the privilege apply? We'll say it wasn't plan administration.' That is what I think happened."
Mr. Sacher represents defendants in ERISA cases and said he plans to use the 9th U.S. Circuit Court of Appeals opinions in his arguments.
Beginning in 1982, prosecutors successfully used a "fiduciary exception" strategy to circumvent the attorney-client privilege. When applied to cases involving the Employee Retirement Income Security Act, the fiduciary exception provides that "an employer acting in the capacity of an ERISA fiduciary is disabled from asserting the attorney-client privilege against plan beneficiaries on matters of plan administration."
In the June 1 ruling in USA vs. William D. Mett and Marvin L. Wiseman, a three-judge panel determined the defendants' inquiry of their attorney about the fund withdrawals were personal and did not involve plan administration.
Messrs. Mett and Wiseman were found guilty of withdrawing $1.6 million from the pension fund for Honolulu-based Central Art Galleries between 1990 and 1991 and depositing the money into the company's general operating account.
The movement of the money came to the attention of prosecutors during an investigation that resulted in Messrs. Mett and Wiseman being convicted of felony art fraud.
Between March 1990 and November 1991, in order to meet Central Art Galleries' financial obligations, Messrs. Mett and Wisemen withdrew about $1.6 million from the pension fund and deposited the funds into the company's general operating account, according to the court opinion.
The defendants never informed their employees of these transactions nor did they disclose the withdrawals on the 1990 Form 5500 that is filed with the Internal Revenue Service, the opinion states.
The two men were indicted in June 1996 in connection with the pension fund withdrawals. Prior to trial the defendants unsuccessfully tried to suppress -- on attorney-client privilege grounds -- three memos sent to them by their attorney concerning the withdrawals.
Lower court agrees
The lower court sided with the prosecution's argument of a "fiduciary exception" and allowed two memos to be admitted into evidence and forced the defendant's attorney, Thomas Foley, to testify. The 9th Circuit panel ruled that was wrong.
The government has 14 days after the issuance of the opinion to petition for a re-hearing. Telephone calls to Assistant U.S. Attorney Lawrence Tong in Honolulu were not returned.
"Both the context and content of the Foley memoranda indicate that they ought to have been treated as privileged matter," wrote Judge Betty B. Fletcher. "As for the context of the legal advice, it came in the midst of CAG's financial crisis and hard on the heels of the federal investigation that resulted in the defendants' conviction for art fraud.
"Although no legal action was then pending against the defendants in connection with the pension plans, CAG employees had begun asking difficult questions regarding the financial conditions of the plans.
"Trouble was in the air," Ms. Fletcher wrote. "The defendants thus had good reason to seek advice from Foley regarding their personal exposure to additional civil and criminal liabilities arising from the pension plan withdrawals."
'A step backward'
Ronald Dean, an attorney who represents plan beneficiaries, but not those of Central Art Galleries, said the ruling was a step backward in the protection of plaintiffs.
"Plaintiff lawyers like me," said Mr. Dean, "are always looking to discover these communications; 'I've stolen money from the pension plan. How can I cover it up?'
"It's a hot topic," said Mr. Dean, who practices from Pacific Palisades, Calif.
Mr. Sacher said the decision could be the start of a trend in which the court is sympathetic to the defense.
"In the years since ERISA was enacted a pattern has occurred," Mr. Sacher said. "The plaintiff's lawyer comes up with a theory for an action they find offensive, and the initial reaction of the courts is to be sympathetic to that view and grant relief to the plaintiff.
"As time goes on, the courts begin to be more sympathetic to the defense. . . . I am not sure if the defense bar got better or whether the court started to see these cases differently."
Time will tell what the lower courts do with the ruling said Jeff Lewis, an ERISA attorney with Sigman, Lewis, Feinberg PC, Oakland, Calif.