Lawyers in the Dock Part 2: SDNY Judge Issues Notable Decision on Sufficiency of Evidence Against Lawyer Accused of Tax Fraud

In a recent speech, NYU Professor Stephen Gillers makes the point that in our highly regulated society it would be impossible to operate Bernie Madoff’s business without the help of lawyers and accountants.  “Did none of them know?” he asks.  “Did none have suspicions?  Did they look the other way?”  The questions could be asked not just of Madoff’s Ponzi scheme, but any number of other recent corporate scandals that have roiled the financial markets.  Of course, it’s one thing to question the ethics of the professionals who have facilitated schemes that have led to catastrophic losses.  It’s another to prosecute them.  The cautionary tale of United States v. Ruble, 2009 WL 911035, (S.D.N.Y. April 2, 2009), is a notable landmark in the jurisprudence relating to the prosecution of lawyers for acts of advocacy.  It illustrates the fine line between creative advocacy and criminal conduct, and is likely to lead to a significant appellate decision on the quantum of proof necessary to convict a lawyer for participation in his clients’ fraud.   

Facts

Ruble, a former partner at two major New York law firms, was convicted of tax fraud arising out of his issuance of “opinion letters” validating the legality of purported investment schemes that permitted the investors to report large tax losses.  Prosecutors described it as the largest tax fraud prosecution in U.S. history, generating hundreds of millions of dollars in phony tax losses and costing the U.S. treasury more than $1 billion in lost tax revenue.  Ruble moved for a judgment of acquittal, arguing that the evidence was insufficient to permit the jury to find, beyond a reasonable doubt, that he acted willfully.  The motion was denied from the bench.  In this decision, SDNY Judge Kaplan explains his reasoning. 

Holding

In order to establish that the tax shelters at issue lacked economic substance for criminal tax purposes, the court held, the government had to prove, among other things, that “the relevant taxpayer had no business purpose for engaging in the transaction apart from creating the tax deduction” and “there was no reasonable possibility that the transaction would result in a profit.”  Here, the jury was entitled to conclude that “Ruble knew or consciously disregarded the fact that the investors had no non-tax reason for doing the deals and that the deals, as designed and implemented, offered no reasonable possibility of any profit apart from their tax benefits” (my emphasis).  In fact, when he later sentenced Ruble to 6 ½ years in prison, Judge Kaplan noted that the scheme “didn’t pass the smell test from Day 1.”

The court also noted that “the intimacy of the relationship” among Ruble and participants in the scheme supported the finding.  There was “abundant evidence” that these other participants “were well aware that the taxpayers had no business purpose and that there was no reasonable opportunity for profit” and “the jury was entitled to find that [they]  imparted this information to Ruble.”

Comment

It would be ironic if Ruble had been convicted on a conscious avoidance theory.  After all, in an adversarial system, conscious avoidance is what advocates practice.  We argue the good facts; our adversary the bad.  In Ruble’s case, however (like the situation of the authors of the Bush administration’s torture memos), his advocacy would not be probed and challenged by others.  Rather, it would be filed away by the client, to be dusted off in the event the conduct was ever challenged.  Should your advocacy be subjected to higher scrutiny because you’re preaching, unopposed, to the choir?  When must a lawyer stop advocating his/her client’s case and instead police it? 

Under the rules of ethics, a lawyer may not disclose a client’s fraud without actual knowledge of it.  Under Second Circuit precedent, however, a lawyer may be prosecuted for participation in a client’s fraud, where the lawyer deliberately turned a blind eye to the client’s wrongdoing.  In other words, what may pass muster ethically may nonetheless expose the lawyer to criminal liability.  The line between zealous advocacy and criminal conduct may be easy to discern in a fraud that doesn’t pass the smell test, but other frauds may not be so obvious.  And clients aren’t always forthcoming with all the critical facts, especially if they have only retained the lawyer to give them cover.