William Mett (“Mett”) and Marvin Wiseman (“Wiseman”) appeal from jury convictions arising out of certain improper transactions involving pension benefit plans administered by them. Because highly prejudicial evidence was erroneously admitted against the defendants at trial in violation of the attorney-client privilege, and because this error was not harmless, we reverse the convictions. In order to assist the district court on remand, we also take this opportunity to clarify certain aspects of the scienter required for a pension fund embezzlement conviction pursuant to 18 U.S.C. § 664.
FACTS
These criminal prosecutions stem from certain transactions involving ERISA
CAG fell on hard times in the early 1990s. In 1990, as a result of a federal investigation into CAG’s sales practices,
On June 27, 1996, a federal grand jury returned a 16 count indictment against the defendants in connection with the pension plan withdrawals. At trial, the defense turned on whether the defendants possessed the requisite specific intent when they arranged the withdrawals. While admitting that they withdrew funds from the pension plans, the defendants characterized the withdrawals as “loans” necessary to carry CAG through rough financial times. According to the defendants, their actions were intended to benefit their employees, who would otherwise have been laid off and faced with unemployment. The defendants further argued that the employees implicitly authorized, or would have authorized the withdrawals had they known of them. On June 25, 1997, the jury convicted the defendants on 15 counts,
DISCUSSION
I. Admission of Attorney-Client Privileged Documents
Prior to trial, the defendants unsuccessfully sought to suppress on attorney-client privilege grounds three memoranda sent to them by their then-counsel, Mr. Thomas Foley (“Foley”). At trial, the government called Foley to testify, and two of the three memoranda were admitted into evidence. The defendants contend that the memoranda and much of Foley’s testimony relating to them should have been excluded in light of the attorney-client privilege, and that admission of these communications constituted an error requiring reversal of their convictions. The government responds by invoking the “fiduciary exception” to the attorney-client privilege.
A. The privileged communications
Foley and his firm, Foley, Maehara, Judge, Nip & Chang (“Foley, Maehara”), apparently wore many hats, serving at various times as counsel to Mett and Wiseman personally and in their capacities as ERISA plan trustees, to CAG as a corporation and in its role as plan administrator, and to the ERISA plans themselves.
The two memoranda at issue relate to the potential civil and criminal consequences of the 1990 and 1991 pension plan withdrawals. The first of the two memo-randa, dated August 19, 1991, was addressed to both Mett and Wiseman and explained the nature of the legal advice that was being provided:
You have asked our advice regarding the criminal and civil sanctions which may [sic] applicable to the following facts.
Facts
In order to sustain the company’s operations, you have borrowed approximately $800,000 from the Corporation’s Defined Benefit Pension Plan without adequate security and to date without any repayment. While you are prepared to execute a note and collaterally secure the note with corporate assets including debt free inventory of fine art, you have not done so.
The August 19 memorandum goes on to detail the potential civil and criminal exposure the defendants might face in light of the withdrawals, and for their failure to report the transactions on IRS Form 5500. The second memorandum, dated August 26, 1991, is a memorandum to file, prepared by one of Foley’s law firm associates, that further details the civil and criminal penalties associated with transactions by ERISA and related tax laws. Foley had a copy of this memorandum sent to Mett at his residence.
While on the stand, Foley testified as to the contents of these two memoranda, and provided the foundation for their admission into evidence. Foley also recalled speaking to Mett and Wiseman regarding the advice contained in the two memoran-da. He also testified that he advised both defendants that they could not continue to serve as ERISA trustees once convicted of a felony. In addition, Foley confirmed that the August 19 memorandum put the defendants on notice that the pension plan withdrawals needed to be disclosed to the IRS on Form 5500. Finally, Foley revealed that his firm had been forced to withdraw from representation of the ERISA plans on three separate occasions in light of the defendants persistent failure to submit annual Form 5500s to the IRS and the potential conflict of interest arising from the pension plan withdrawals.
B. Analysis
“[T]he attorney-client privilege is, perhaps, the most sacred of all legally recognized privileges.” Bauer,
The Ninth Circuit, however, has joined a number of other courts in recognizing a “fiduciary exception” to the attorney-client privilege.
The fiduciary exception is rooted in two distinct rationales. See generally Rust E. Reid, William R. Mureiko & D’Ana H. Mikeska, Privilege and Confidentiality Issues When a Lawyer Represents a Fiduciary, 30 REAL PROP. PROB. & TR. J. 541 (1996). First, some courts have held that the exception derives from an ERISA trustee’s duty to disclose to plan beneficiaries all information regarding plan administration. See, e.g., Long Is. Lighting,
On either rationale, however, it is clear that the fiduciary exception has its limits — by agreeing to serve as a fiduciary, an ERISAutrustee is not completely debilitated from enjoying a confidential attorney-client relationship. For example, the seminal English opinion from which the fiduciary exception sprang distinguished between two items of legal advice: one dispensed to trustees prior to any threat of suit, advising them regarding the propriety of paying advances to the children of the testator, and one dispensed after the commencement of suit, aimed at advising them “how far they were in peril.” Talbot v. Marshfield, 12 L.T.R. 761, 762 (Ch. 1865). The English court required the trustees to produce the first item, but not the second. See id.; see also RESTATEMENT (SECOND) of TRUSTS § 173, comment b (a trustee “is privileged to refrain from communicating to the beneficiary opinions of counsel obtained by him at his own expense and for his own protection”).
The leading American case, Riggs National Bank v. Zimmer,
Id.
Thus, the case authorities mark out two ends of a spectrum. On the one hand, where an ERISA trustee seeks an attorney’s advice on a matter of plan administration and where the advice clearly does not implicate the trustee in any personal capacity, the trustee cannot invoke the attorney-client privilege against the plan beneficiaries. On the other hand, where a plan fiduciary retains counsel in order to defend herself against the plan beneficiaries (or the government acting in their stead), the attorney-client privilege remains intact.
On which side of the spectrum do the Foley memoranda fall?
Both the context and content of the Foley memoranda indicate that they ought to have been treated as privileged matter. 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 condition of the plans. Trouble was in the air. 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.
It is the content of the memoranda themselves, however, that forecloses the application of the fiduciary exception. The memoranda were plainly “defensive on the trustees’ part,” Riggs,
The government would prefer a more expansive interpretation of the fiduciary exception, arguing that the attorney-client privilege should be defeated whenever otherwise privileged legal advice “relates to” fiduciary matters. Certainly, Foley’s advice to Mett and Wiseman could be viewed as “related to” the administration of the plan in the broadest sense. After all, the withdrawals from the pension plans could
This expansive view of the fiduciary exception, however, must be rejected for at least four reasons. First, this view of the fiduciary exception threatens to swallow the entirety of the attorney-client privilege for ERISA trustees. After all, any legal advice concerning an ERISA plan could be construed as relating, at least indirectly, to the administration of the plan. On this view, the fiduciary exception could easily extend, for example, to communications between ERISA trustees and their trial counsel in a civil suit arising from a denied benefits claim, or even to the communications between the defendants here and their defense counsel. This is not the law. See Wildbur v. ARCO Chemical Co.,
Second, the expansive view unmoors the fiduciary exception from its justifying rationales. When an ERISA trustee seeks legal advice for his own protection, the legal fiction of “trustee as representative of the beneficiaries” is dispelled, notwithstanding the fact that the legal advice may relate to the trustee’s administration of the trust. Similarly, where a fiduciary seeks legal advice for her own protection, the core purposes of the attorney-client privilege are seriously implicated and should trump the beneficiaries’ general right to inspect documents relating to plan administration.
Third, and most importantly, where attorney-client privilege is concerned, hard cases should be resolved in favor of the privilege, not in favor of disclosure. As the Supreme Court has repeatedly cautioned, “[a]n uncertain privilege, or one which purports to be certain but results in widely varying applications by the courts, is little better than no privilege at all.” Upjohn,
Finally, from a policy perspective, an uncertain attorney-client privilege will likely result in ERISA trustees shying away from legal advice regarding the performance of their duties. This outcome ultimately hurts beneficiaries — all else being equal, beneficiaries should prefer well-counseled trustees who clearly understand their duties. In addition, a trustee’s fear that her lawyer will be used against her may well translate into either an unwillingness to serve at all, or an insistence on contractual protections aimed at diluting the trustee’s accountability. Neither option serves the, interest of beneficiaries.
In arguing that the Foley memoranda fall within the fiduciary exception, the government also points to an April 12, 1993 letter in which Foley describes the scope of his engagement as limited to representing CAG and the defendants in their roles as plan sponsor and fiduciaries. The government’s reliance on this letter, however, is misplaced. First, Foley wrote the letter almost two years after authoring the memoranda at isshe; the scope of the engagement in 1993 tells us little about the nature of the representation some two years before. See Long Is. Lighting,
The government’s argument, however, suffers from a more fatal flaw. As the Second Circuit recently pointed out in Long Island Lighting, the application of the fiduciary exception is not simply a question of conflict of interest, resolved “by multiplying the number of lawyers.” Id. In other words, it is not the terms of an engagement letter, but rather the nature of the particular attorney-client communication that is dispositive. This communication-by-communication analysis, while perhaps untidy, is crucial if the attorney-client privilege and the fiduciary exception are to coexist. On the one hand, the attorney-client privilege demands that a communication, obtained for a trustee’s
In the end, the government misconstrues the fiduciary exception as stating a “not one drop” rule- — in their view, the fiduciary exception applies to all fiduciary-attorney communications unless the fiduciary can demonstrate that the advice was solely related to personal, non-fiduciary matters. This conception stretches the fiduciary exception far beyond its foundations, threatening to swallow the fiduciary’s attorney-client privilege whole. The authorities suggest that the exception has a more modest reach: while the fiduciary exception does apply to advice on matters of plan administration, the attorney-client privilege reasserts itself as to any advice that a fiduciary obtains in an effort to protect herself from civil or criminal liability. Because the Foley memoranda come within the latter category, the district court erred in admitting the memoranda and Foley’s related testimony into evidence.
C. Was the error harmless?
Because the Foley memoranda and the testimony concerning those documents were admitted in error, we must determine whether the error was harmless:
Because a violation of the attorney-client privilege is not an error of constitutional magnitude, the Government must show that the prejudice resulting from the error was more probably than not harmless. That requires the Government to show a “fair assurance” that the verdict was not substantially swayed by the error.
Bauer,
In Bauer, the defendant was convicted of concealing assets and making false statements in connection with his bankruptcy petition. See Bauer,
The parallels between Bauer and the instant case are striking. As in Bauer, the defense in the instant case turned on the issue of specific intent. As in Bauer, the government put the defendants’ attorney on the stand in order to demonstrate that the defendants were advised that their conduct was illegal, and yet continued to engage in the prohibited activity. Tellingly, the government here elicited scienter information from Foley as to each of the counts against the defendants: Foley testified that he advised the defendants that (1) the pension plan withdrawals were “prohibited transactions” that might result in civil and criminal liability, (2) the failure to inform the IRS of these transactions would result in independent criminal liability, and
Given the facts of this case, the error in admitting the Foley memoranda and related testimony cannot be considered harmless, or, put another way, it appears more likely than not that the jury may have been substantially swayed by the improper evidence. Accordingly, we reverse the convictions of the defendants on all counts and remand for a, new trial or other appropriate disposition.
II. Implied Authorization Defense
As noted earlier, the central issue at trial in connection with the embezzlement counts was whether the defendants possessed the requisite specific intent when they made the pension plan withdrawals. The defendants, borrowing from authorities rooted in union fund embezzlement cases brought under 29 U.S.C. § 501(c), sought to attack the government’s scienter showing on two related fronts. First, they argued that the CAG employees, more concerned with the survival of the company than with illegal uses of their pension funds, implicitly authorized the pension fund withdrawals. Second, the defendants maintained that they had the best interests of the employees at heart. On this view, the withdrawals were intended to confer a benefit on CAG’s employees, rescuing them from impending unemployment. The parties and the district court struggled with the scope and viability of these “authorization” and “participant benefit” theories both in evidentia-ry rulings and in the formulation of jury instructions. In order to assist the district court on remand, we address the extent to which evidence relating to “authorization” or “participant benefit” is relevant to ERISA embezzlement charges under 18 U.S.C. § 664.
Congress enacted 18 U.S.C. § 664
In this circuit, neither lack of authorization nor lack of good faith belief in union benefit is an essential element of union fund embezzlement under 29 U.S.C. § 501(c). See United States v. Thordarson,
The trouble is that the defendants’ “authorization” and “participant benefit” arguments here depend on authorization from the wrong source and benefit of an improper variety. In the words of one treatise, “[a] fundamental tenet of ERISA policy is that pensions earned in fact be available at retirement.” ABA SECTION OF LABOR AND EMPLOYMENT LAW, EMPLOYEE BENEFITS LAW 168 (1991). This goal requires that employees be protected not only from unscrupulous trustees and administrators, but also from themselves. ERISA plans must, therefore, contain an “anti-alienation” provision, providing that participants may not assign or alienate their benefits, except in certain special circumstances. See ERISA § 206(d) (codified at 26 U.S.C. § 401(a)(13)). In light of this anti-alienation principle and our understanding of the purposes of ERISA generally, we conclude that those who embezzle from ERISA pension funds cannot argue that their otherwise illegal transactions were “authorized” by the plan participants because the participants themselves lack the legal power to “authorize” such a diversion of pension monies. Consequently, when a pension fund embezzler argues that the plan participants “authorized” the embezzlement, it is little different from arguing that complete strangers “authorized” the illicit transactions. This sort of evidence is simply irrelevant to the scienter inquiry required to support a conviction under 18 U.S.C. § 664.
The “participant benefit” theory fares no better. Once contributions have entered into an ERISA pension plan, the funds are committed to securing a particular long-term benefit — the payment of pension benefits. Mett and Wiseman suggest that their intent to substitute an alternate, short-term benefit — the prospect of continued employment — should immunize them from embezzlement liability. We disagree. We are confident that Congress, by imposing strict fiduciary responsibilities on ERISA trustees and enacting 18 U.S.C. § 664, meant to impose criminal liability on employers who willfully arrogate to themselves the authority to sacrifice an employee’s pension in favor of short-term benefits of their own devising.
We do not disturb the general rule: in both the pension fund and union fund contexts, facts pertaining to authorization and benefit (whether to plan participants or the union) may be relevant to the question of intent. See Thordarson,
For the foregoing reasons, we REVERSE Mett and Wiseman’s convictions on all counts and REMAND for a new trial.
Notes
. Employee Retirement Income Security Act, 29 U.S.C. § 1001 etseq.
. Pursuant to applicable tax laws, CAG as plan administrator was required to file Form 5500 annually in connection with one of the CAG plans, the Defined Benefit Plan. In completing a Form 5500, a plan administrator generally must report any transactions with parties in interest.
. One count was dismissed at the close of the government’s case.
. The last count, involving the false filing of an annual report relating to an ERISA plan, named only Mett.
. The district court had jurisdiction over this criminal matter pursuant to 18 U.S.C. § 3231. Both defendants timely filed their respective notices of appeal. This court has appellate jurisdiction pursuant to 28 U.S.C. § 1291.
. The government does not contest the existence of an attorney-client relationship between Foley and the defendants, nor does it dispute that the communications at issue constituted the sort of legal advice that would generally come within the scope of the attorney-client privilege.
. Neither Foley nor his firm represented the defendants in connection with the instant criminal prosecution.
. But see Huie v. DeShazo,
. As an initial matter, it is worth noting that, in the instant case, it is not the plan beneficiaries, but rather the government, that seeks access to the attorney-client communications. Our precedents, however, have extended the fiduciary exception to permit the government to assert the exception in the beneficiaries’ stead when prosecuting malfeasance in ERISA plan administration. See Doe,
. 18 U.S.C. § 664 provides that:
Any person who embezzles, steals, or unlawfully and willfully abstracts or converts to his own use or to the use of another, any of the moneys, funds, securities, premiums, credits, property, or other assets of any employee welfare benefit plan or employee pension benefit plan, or of any fund connected therewith, shall be fined under this title, or imprisoned not more than five years, or both.
As used in this section, the term "any employee welfare benefit plan or employee pension benefit plan” means any employee benefit plan subject to any provision of title I of the Employee Retirement Income Security Act of 1974.
. We are not persuaded that United States v. Todd,