Commercial Division Blog

Posted: March 21, 2022 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Seth D. Allen, Joshua Wurtzel, Channing J. Turner / Categories Commercial, Fraud/Misrepresentation, Privilege/Work Product

Information about Law Firm's Other Clients Irrelevant to Plaintiffs' Claim that Firm Fraudulently Induced Them into Bogus Tax Shelter Scheme

In a Decision and Order dated February 4, 2022, in Berman v. Holland & Knight, Index No. 652466/2015, Justice Cohen denied plaintiffs' motion to compel its former attorneys from identifying clients who were advised about the same tax shelter strategy as were plaintiffs. Plaintiffs alleged that Holland & Knight lured them and other clients into investing millions of dollars in a bogus tax shelter scheme by giving them knowingly false legal advice in opinion letters. Denying the motion, the Court found that the privileged information that was sought was not relevant to their fraud claim:
To prove its claim for fraud, Plaintiffs must establish the existence of a material misrepresentation, scienter, reliance, and injury (Small v Lorillard Tobacco Co., 94 NY2d 43, 57, 720 N.E.2d 892, 698 N.Y.S.2d 615 [1999]; Perrotti v Becker, Glynn, Melamed & Muffly LLP, 82 AD3d 495, 498, 918 N.Y.S.2d 423 [1st Dept 2011] [to maintain a claim of fraudulent inducement, a complaint must allege "a false representation, made for the purpose of inducing another to act on it, and that the party to whom the representation was made justifiably [*9] relied on it and was damaged."], citing Lama Holding Co. v Smith Barney Inc., 88 NY2d 413, 668 N.E.2d 1370, 646 N.Y.S.2d 76 [1996]). Plaintiff's theory of fraud hinges entirely on the specific opinion letters Defendant issued to them. Underscoring this, the Complaint asserts that Defendant "made a series of false statements to Plaintiffs" (Compl. ¶59 [emphasis added]), knowing "these statements were false" (id. ¶60 [emphasis added]), on which "Plaintiffs reasonably relied" (id. ¶62 [emphasis added]), causing injury to Plaintiffs (id. ¶63). None of the elements needed to prove fraud, therefore, depend on Defendant's representation of any other clients. The invasive personal information sought by Plaintiffs here — not only the names and addresses of possible Holland & Knight clients, but also details about their past and current job titles and business affiliations — serves no valid purpose. Despite what Plaintiffs contend, the personal information itself does not help prove the element of scienter, "that is, the requirement that the defendant knew of the falsity of the representation being made to the plaintiff[s]" (Houbigant, Inc. v Deloitte & Touche LLP, 303 AD2d 92, 98, 753 N.Y.S.2d 493 [1st Dept 2003]). Plaintiffs insist that "the existence of a number of these other clients would go toward establishing the extent of [**8] Defendant's involvement in the broader [*10] Derivium fraud scheme," and "[t]he scope of a defendant's involvement in a broader scheme is directly relevant to establishing scienter" (NYSCEF 47 at 3-4). But this reasoning does not add up. To begin with, Defendant's responses to the Interrogatory would not show whether any of the clients had actually been defrauded. A client may have received legal advice about Derivium, for example, without ever investing in the scheme. And even if the number of persons listed in the Interrogatory response did, somehow, correlate with the number of additional fraud victims, the existence of "a large number of other persons" (id.) is not a stand-in for scienter.
. . . 
Interrogatory No. 2 is, at bottom, a reconnaissance mission. Plaintiffs argue that the information sought is relevant because "[t]he other clients know whether they were given the same bogus advice as Plaintiffs" (NYSCEF 47 at 3). That statement reveals the true end game [**9] here. With the identifying information in hand, Plaintiffs can then contact current and former Holland & Knight clients to question them about their own communications with the law firm. There are a couple of serious problems with this plan, starting with client privacy (also discussed supra). A person who turned to Holland & Knight seeking advice about the legality of a tax shelter 20 years ago presumably did so with the expectation of confidentiality. Even setting those privacy concerns aside, Plaintiffs' attempt to canvass non-parties about sensitive, privileged communications still runs into the basic problem of relevance. This is not a class action. While the Complaint mentions, vaguely, "other victims" of Defendant's alleged fraud (id. ¶61), Plaintiffs do not purport to stand in those victims' shoes or to vindicate those victims' rights. And "Mlle court will not allow discovery in this [*12] case to be used as an investigative tool for future potential lawsuits" (Pac-Rim, 40 Misc 3d 1240[A], *7).
The Court further held that the crime-fraud exception, which eliminates privilege over communications with counsel that were "in furtherance of a fraudulent scheme, an alleged breach of fiduciary duty or an accusation of some other wrongful conduct", is inapplicable in part because "[i]t is the client's intent to engage in criminal activity, not counsel's, that is relevant".
The attorneys at Schlam Stone & Dolan frequently litigate disputes concerning fraud and protection of privileged information.  Contact the Commercial Division Blog Committee at if you or a client have questions concerning such issues.