Two bank traders under investigation for “suspicious” transactions are fighting a federal grand jury subpoena for information from their former lawyer, arguing it would pierce the protections of attorney-client privilege.

The grand jury investigation and subpoena fight have largely unfolded in secret. Redacted filings in the U.S. Court of Appeals for the Fourth Circuit, where the traders are now challenging the subpoena, reveal new details about the investigation.

A grand jury in 2013 sought documents and testimony from the traders' former lawyer. A federal district judge in North Carolina ruled that the attorney-client privilege did not apply and that the government presented sufficient allegations that the traders gave false information to their attorney to cover up—and continue to carry out—their criminal scheme.

The district court's decision marked “a novel, substantial, and unwarranted expansion in the crime-fraud exception” to attorney-client privilege, the traders' lawyer, Jeffrey Wall of Sullivan & Cromwell, wrote in court papers this summer in the Fourth Circuit. The Justice Department counters that the attorney-client privilege wasn't meant to shield clients who lie to counsel to conceal alleged criminal activity.

The appeals court is set to hear arguments on Oct. 27. This week, lawyers for the traders asked the court to seal the hearing to further minimize public disclosures about the grand jury proceedings. The attorneys previously lost their request to seal the entire docket. The subpoena dispute was sealed in its entirety in Charlotte federal district court.

The traders are under investigation for transactions that involve alleged “front-running” of customer block futures trades, according to court filings from the U.S. Attorney's Office for the Western District of North Carolina. “Front-running” is a transaction executed by a trader who, with knowledge about a customer's upcoming order, buys or sells in advance to make a profit.

In the pending case, the names of the traders under investigation are redacted. One of the government's filings said the traders, described as “senior” employees, worked for a bank. The traders denied the front-running allegations, and neither has been charged to date, according to court papers.

The court filings do not identify the regulatory bodies investigating the traders. Several court filings referenced the CME Group Inc., a Chicago-based company that runs a futures exchange. CME also conducts what it calls “market regulation investigations” to detect potential violations. One of the government's briefs in the subpoena case identifies a “CME inquiry,” and the traders' papers reference allegations of a violation of “CME rules.”

The full name of the traders' former lawyer is redacted in court papers. In three places, however, the U.S. Department of Justice identified the lawyer's last name as “Mandel” and, in one instance, said he was “of counsel” at his firm. The traders noted in one of their filings that the lawyer was subject to the New York Rules of Professional Conduct.

Two law firms—Foley & Lardner and Wyatt & Blake in Charlotte—are listed on the Fourth Circuit docket as having an unspecified connection to the subpoena case. Foley of counsel Barry Mandel in New York, chairman of the firm's securities enforcement and litigation practice, declined to comment when asked Thursday afternoon about the full identity of the “Mandel” named in court papers. “I'm not at liberty to talk about that,” he said. (A Foley partner in New York with the same last name, Mark Mandel, said he was not the “Mandel” referenced in filings.)

James Wyatt III of Wyatt & Blake declined to comment. Assistant U.S. Attorney Amy Ray in the U.S. attorney's office in Asheville, North Carolina, a lead attorney in the case, said the government would not discuss pending litigation.

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Grand jury secrecy

The traders' former lawyer did not fight the grand jury subpoena, but two of the four traders under investigation unsuccessfully contested it in the U.S. District Court for the Western District of North Carolina. A magistrate judge and district judge rejected the traders' challenge to the subpoena; the traders appealed to the Fourth Circuit.

Wall, co-leader of Sullivan & Cromwell's appellate team and the attorney who will argue for the traders, did not return a request for comment Thursday. Winston & Strawn; Willkie Farr & Gallagher; and Parker Poe Adams & Bernstein also represent the traders in the Fourth Circuit.

In court papers asking the Fourth Circuit to hold arguments in secret, Wall urged the court to protect the federal rule that addresses grand jury secrecy.

“Opening the oral argument here clearly would be at odds with Rule 6(E) because it would threaten to disclose details about matters occurring before the grand jury, including appellants' identities as targets of the investigation,” Wall wrote.

The Justice Department opposes closed oral argument, Wall said in court papers. The government's response to the traders' request for a sealed hearing is due Sept. 29.

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Judges find no privilege

U.S. Magistrate Judge David Keesler, rejecting the traders' effort to quash the subpoena for their lawyers' documents, found that the materials were not covered by attorney-client privilege, according to a summary included in the Fourth Circuit briefs. The judge held that the traders provided information to their lawyer with the intent to convey that information to a third party—in this case, regulatory investigators.

Keesler also found that the “crime-fraud” exception to attorney-client privilege applied. He found that the government's allegations and evidence “strongly” suggested that the traders knowingly lied to their lawyer to conceal and continue the alleged criminal scheme. The traders appealed to U.S. District Judge Max Cogburn Jr., who upheld the magistrate's findings.

The grand jury sought documents related to the lawyer's representation of the four traders, including their communications before the traders' interviews with investigators and a letter the lawyer sent to an investigating entity in December 2010. In that letter, the lawyer denied that the traders engaged in illegal trading, according to filings in the Fourth Circuit.

“That is all the stuff of routine representation in response to a regulatory investigation,” Wall wrote in a brief. “Lawyers across this country do as much every day without waiving the attorney-client privilege—which is why the government has been tying itself in knots for years trying to find a theory to justify disclosure.”

The traders' lawyers said in their Fourth Circuit court papers that the documents subpoenaed by the grand jury “lie at the heartland of the attorney-client privilege; they involve clients discussing matters with their counsel that fall squarely within the scope of the attorney's representation.”

The crime-fraud exception didn't apply, they argued, because there was no evidence that the traders sought legal advice to further their criminal scheme or that they used advice from their lawyer to commit misconduct.

Ray, the Asheville federal prosecutor, countered that the traders used their lawyer “as a conduit for false information and did so knowingly and intentionally.”

“The traders predict a parade of horribles that would arise if clients were not allowed to freely lie to their attorneys during the course of an ongoing criminal scheme in order to conceal it or to confess to their attorneys for purposes of obtaining advice on the best way to conceal their scheme so that it can continue unchecked,” Ray wrote in court papers. “It is hard to imagine the public interest served by protecting either of these behaviors from disclosure.”