Lessons from US v. Holmes: Limits of the Attorney-Client Privilege in Communications with Corporate Clients and their ExecutivesJune 24, 2021 – Herrick Restructuring Review
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On June 3, 2021, U.S. Magistrate Judge Nathanael M. Cousins ruled that ex-Theranos CEO Elizabeth Holmes could not assert attorney-client privilege to block disclosure of her communications with Theranos’s former counsel, Boies Schiller Flexner LLP, in connection with her upcoming criminal trial. Judge Cousins found that Holmes had not made it clear to Boies Schiller’s attorneys that she was seeking legal advice in her personal capacity, and as an executive of Theranos. As a result, her communications with Boies Schiller are protected only by Theranos’s corporate privilege, which the company had waived, and therefore could be used at trial against Holmes.
In 2011 Boies Schiller began representing Holmes and Theranos in connection with a number of matters. But Boies Schiller never signed an engagement agreement with Holmes and did not establish any guidelines outlining the scope of its representation of Holmes. Until she retained separate counsel in 2016 in connection with the SEC’s and DOJ’s investigations into Theranos, Holmes believed that Boies Schiller represented her individually, as well as Theranos.
Theranos was a start-up company that claimed to have devised blood tests that required only very small amounts of blood and could be performed very rapidly using small, automated devices the company had developed. However, these claims were later proven to be false. On June 14, 2018, Holmes and her co-defendant Ramesh “Sunny” Balwani, the former President and COO of Theranos, were indicted on two counts of conspiracy to commit wire fraud and nine counts of wire fraud. According to the indictment, the charges stem from allegations that Holmes and Balwani engaged in a multi-million-dollar scheme to defraud investors, and a separate scheme to defraud doctors and patients. Holmes and Balwani are alleged to have used advertisements and solicitations to encourage and induce doctors and patients to use Theranos’s testing services, even though they allegedly knew that Theranos was incapable of producing consistently accurate and reliable results for certain tests.
In June 2020, the government served Holmes with its exhibit list for trial, which included thirteen documents that Holmes claimed were protected by her attorney-client privilege with Boies Schiller. In ruling on that claim, Magistrate Judge Cousins applied the five-part test set forth in the Ninth Circuit decision U.S. v. Graf, 610 F.3d 1148, 1160 (9th Cir. 2010). Under Graf, an individual seeking to assert an individual attorney-client privilege where the corporate privilege would otherwise only apply must show: (1) “they approached counsel for the purpose of seeking legal advice,” (2) “when they approached counsel they made it clear that they were seeking legal advice in their individual rather than in their representative capacities,” (3) “that the counsel saw fit to communicate with them in their individual capacities, knowing that a possible conflict could arise,” (4) “that their conversations with counsel were confidential,” and (5) “that the substance of their conversations with counsel did not concern matters within the company or the general affairs of the company.”
In denying Holmes’s privilege claim, the court found that she failed to satisfy the second, fourth, and fifth elements of Graf because: 1) Holmes failed to show that she made it clear to Boies Schiller that she was seeking legal advice in her personal capacity in the communications at issue; 2) there was no engagement letter between Holmes and Boies Schiller, and Holmes could not show that she paid Boies Schiller personally and not from Theranos’s accounts; and 3) the court also noted that Holmes could not show that her conversations with Boies Schiller were confidential, because her communications at issue included not only Holmes and Boies Schiller attorneys, but also other senior Theranos employees and in-house counsel, whose presence was inconsistent with any potential privilege between Holmes and Boies Schiller. Finally, Holmes failed to show that the substance of her conversations with Boies Schiller did not concern matters within the general affairs of Theranos, because none of the communications discussed Holmes’s individual legal interests.
This decision highlights the importance of ensuring that corporate clients, and their executives and employees, understand the limits of the attorney-client privilege, and that the attorney-client privilege of a corporation may not extend to its executives in their personal capacity.
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