Metropolitan News-Enterprise


Thursday, July 8, 2010


Page 1


Court Clarifies When Talks With Corporate Counsel Are Privileged


By STEVEN M. ELLIS, Staff Writer


The Ninth U.S. Circuit Court of Appeals yesterday clarified when conversations between a corporate officer or employee and corporate counsel are subject to a jointly-held attorney-client privilege.

Applying a five-part test adopted by four other circuits, a three-judge panel said a district court did not err when it allowed attorneys who represented a Nevada company that offered health care benefits coverage to testify against a California man who used the company in an elaborate scheme to defraud individuals and small businesses.

Writing for the court, Judge Richard C. Tallman said “functional employee” James L. Graf did not hold a personal attorney-client privilege where he never made clear that he was seeking advice in his individual capacity. He also faulted Graf for failing to show that counsel agreed to represent him personally knowing a conflict could arise, or that the conversations’ substance did not relate to the company’s general affairs.

Guilty Verdict

A jury found Graf—the founder of, and ostensible consultant to, Employers Mutual LLC—guilty of conspiracy, mail fraud, misappropriation, conducting unlawful monetary transactions and obstruction of justice after the scheme came to the attention of the Employee Benefits Security Administration of the U.S. Department of Labor in 2001.

During its first year of operation, Employers Mutual collected approximately $14 million in payments from individuals and employers for medical coverage of some 20,000 plan members, but used only about $1.2 million of that to pay medical providers who treated members.

When the Department of Labor brought suit against the company in December of 2001, the amount of unpaid claims was over $20 million, and many of those purportedly covered by the plans were left with unpaid medical bills and ruined credit.

Graf founded Employers Mutual with his then-girlfriend, Kari Hanson, and William Kokott, since deceased, in 2000. The three lived in California and Graf originally operated Employers Mutual out of his home in Canyon Lake.

Kokott filed the incorporation paperwork, but Graf—who had been banned from insurance work in the state of California for misconduct in violation of state insurance laws—was not listed as an employee, officer or director.

Waiver By Company

When Graf was indicted for his role in the fraud in 2004, an independent fiduciary installed to run Employers Mutual waived the company’s attorney-client privilege in regard to all communications with the company’s counsel. Graf moved to exclude the testimony, arguing that he was a joint holder of the privilege, but U.S. District Judge Margaret M. Morrow of the Central District of California denied the request.

After a month-and-a-half long jury trial, Morrow sentenced Graf to 300 months’ imprisonment with three years of supervised release, ordered a $2,300 special assessment and imposed restitution of more than $20 million.

On appeal, Graf argued that Employers Mutual could not waive the privilege because he was an “independent consultant” and the attorneys’ joint client. Tallman, however, wrote that Graf—who was heavily involved in all facets of the corporation’s operations—was a “functional employee” as a matter of law.

The judge then opined that the proper standard for resolving whether a corporate employee holds a joint privilege over communications with corporate counsel was set forth by the Third U.S. Circuit Court of Appeals in In re Bevill, Bresler & Schulman Asset Mgmt. Corp. (1986) 805 F.2d 120, a decision which has been adopted by the First, Second and Tenth Circuits.

In Bevill, the Third Circuit said one seeking to invoke such a privilege must establish that he approached the attorneys for the purpose of seeking legal advice; that he made clear upon doing so that he was seeking legal advice in his individual capacity; that the attorneys saw fit to represent him personally knowing a conflict could arise; that the conversations were in confidence; and that the substance of the conversations did not concern matters within the company or its general affairs.

Applying that test, Tallman said Graf failed to meet the second, third and fifth factors as to all of the attorneys, and therefore did not hold a personal attorney-client privilege over any of his communications with them.

Judge Diarmuid F. O’Scannlain and U.S. District Court Judge Frederic Block of the Eastern District of New York, sitting by designation, joined Tallman in his opinion.

The case is United States v. Graf, 07-50100.


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