It is not every day that two prominent lawyers are
brought before a federal grand jury and directed to provide documents and
testimony about conversations they had with a wealthy client.
But that is what happened with two partners at
Williams & Connolly, the prestigious Washington law firm, who are
representing Morris E. Zukerman, a former Morgan Stanley banker and oil
investor. Last month, Mr. Zukerman was accused of failing
to pay $45 million in income and sales taxes on works of art
and profits from the sale of an oil company.
A series of court filings in Mr. Zukerman’s pending
criminal case in Federal District Court in Manhattan shines a light on the
often-unseen role lawyers can play in nonpublic tax investigations by the Internal Revenue
Service and federal
prosecutors. In the filings, federal prosecutors in Manhattan raised the
prospect of potential conflict of interest for the two lawyers, who are trying
to negotiate a plea deal for Mr. Zukerman.
Typically, lawyers cannot be compelled to testify or
produce evidence against a client in a grand jury investigation. But in rare
cases, judges can require it, if there is evidence that clients’ communication
with their lawyers was done purposely to further a crime or a fraud. In the
law, it is known as the crime-fraud exception to the attorney-client privilege.
The indictment of Mr. Zukerman comes as the leak of
the Panama papers — confidential documents from Mossack Fonseca, a law firm in Panama
that catered to the very rich — has helped renew interest in the lengths to
which wealthy people will go to avoid paying taxes.
Federal prosecutors
contend that Mr. Zukerman, 71, failed to report a profit from the sale of an
oil company that would have generated $31 million in income taxes and misled
his accountants and lawyers in the course of an I.R.S. audit. He also had
expensive paintings that he bought for his Upper East Side home shipped to
Delaware and New Jersey to avoid paying sales tax, prosecutors say. He is
expected to plead guilty later this month.
The two lawyers from Williams & Connolly, James A.
Bruton III and James T. Fuller III, are both seasoned white-collar defense
lawyers who specialize in tax law. They were ordered last summer by a Manhattan
federal judge to appear before a grand jury that was investigating Mr. Zukerman
to determine whether he had used the lawyers during the course of that I.R.S.
audit and inquiry to conceal his activities.
Prosecutors, in a filing with the court, said Mr.
Zukerman had the lawyers prepare “a tax protest letter” that challenged
“certain audit determinations previously made by an I.R.S. auditor.”
A federal appeals panel upheld the judge’s directive
to the lawyers in a decision last October. The brief ruling from the United
States Court of Appeals for the Second Circuit did not name either of the
lawyers or Mr. Zukerman because the grand jury investigation was continuing at
the time.
Federal prosecutors working for Preet Bharara, the
United States attorney in Manhattan, asked another federal judge on Wednesday
to decide whether Mr. Bruton’s and Mr. Fuller’s appearances before the grand
jury pose a potential conflict of interest and whether Mr. Zukerman was
sufficiently aware of those potential conflicts.
Wearing a dark suit and round tortoiseshell glasses,
and using a cane, Mr. Zukerman told Judge Analisa Torres of the Federal
District Court in Manhattan that he was aware of a conflict of interest and was
waiving his right because he was “the source of the information” his lawyers
gave the I.R.S.
The judge pressed him several times but eventually
allowed Mr. Zukerman to waive his right to raise the conflict as a future
issue.
The so-called Curcio hearing is used in federal court
to make sure a criminal defendant is fully aware of the ramifications of
retaining a lawyer who may have a potential conflict of interest.
Prosecutors said in one
letter that Mr. Bruton and Mr. Fuller could be witnesses at Mr. Zukerman’s
trial “as a result of the defendant’s use of the attorneys to convey false
information to the Internal Revenue Service during a civil audit.”
It is uncommon for the government to subpoena lawyers
to testify before a grand jury, said Daniel C. Richman, a professor of criminal
law at Columbia University.
“This case itself highlights the complications
obtaining such testimony can create. And it involves a target apparently ready
to plead guilty,” Mr. Richman added.
There is no suggestion in the court filings that
either lawyer did anything wrong.
But the unusual series of events underscores potential
conflicts that can occur in tax evasion cases involving wealthy individuals who
rely on a bevy of legal and accounting experts to give them advice and help
find ways to minimize tax burdens.
In light of the potential conflict, Mr. Zukerman had
reached out to another lawyer, Henry Putzel III, who was at the hearing.
Representatives for Williams & Connolly declined
to comment for this article.
The seemingly awkward situation between the lawyers
and a client stems from a 2012 audit by the I.R.S. related to Mr. Zukerman’s
sale of a stake in an oil company for $275 million, according to the
indictment. But when he was audited, Mr. Zukerman failed to provide documents
to his accountant. He later employed Mr. Bruton and Mr. Fuller at Williams
& Connolly to challenge the I.R.S.
The two lawyers interviewed Mr. Zukerman on June 1,
2012, over the phone. In that interview, he lied about his company’s sale of
the oil company, according to the government. When he was later asked to
provide the documents to support those claims about the sale, Mr. Zukerman
emailed, promising to provide the lawyers with all the documentation, which he
said was in storage, the indictment says.
Yet Mr. Zukerman failed to do so by June 22, when his
appeal letter was scheduled to be sent to the I.R.S., and so the final letter
sent by Williams & Connolly and signed by Mr. Zukerman was based on false
assertions, the indictment says.
For two more years, Williams & Connolly sent at
least four requests to Mr. Zukerman to provide the documents supporting his
claims.
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