Friday, June 07, 2024

Cyber & LLP - EY partner cites right to silence on ATO court claims

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 Lawyers to the fore as courts tighten screws on privilege claims

Law firms will take on a heightened role in the immediate aftermath of corporate crises, practitioners say, as courts continue to tighten interpretations of legal professional privilege claims.

The full bench of the Federal Court last week reaffirmed a November ruling that simply “channelling material through lawyers” does not create privilege, rejecting a claim by Optus that a Deloitte report into its 2022 cyberattack should be kept secret.

A report by Deloitte – commissioned internally and then through Ashurst – will be made available to class actions lawyers after an LPP claim failed.  Nikki Short

But lawyers say enlisting professional advice should be a first port of call for businesses following a crisis to ensure documents and reports do not stray from the necessary dominant legal purpose, even if claiming LPP in the wake of a cyber breach may be “almost impossible”.

The Federal Court’s ruling comes during a period of heightened focus on the law surrounding privilege, following PwC’s exploits in the JBS caseand the tax leaks scandal, Tax Office concerns around the growth of law firms’ consulting divisions and a government review into the use of LPP in Commonwealth investigations.

Robert Wyld, a consultant and former litigation partner at Johnson Winter Slattery, said courts were taking a more critical view of “woolly” LPP claims.

In its unanimous 2019 judgment in Glencore, the High Court noted the need to confine the privilege “within strict limits”. The full bench last week further emphasised the importance of providing high-quality and precise evidence of a dominant legal purpose, beyond mere assertions.

“The quality and precision of the evidence adduced in support of a claim for privilege is relevant, and the dominance of purpose is not established by bare ipse dixit,” the full bench, comprised of Justices Murphy, Anderson and Neskovcin, said.

“Over the years, courts were far too relaxed and generally just accepted what the lawyers said and didn’t really dig into the circumstances [surrounding LPP claims],” Mr Wyld said.

“But now courts are far more cautious about privilege, as are regulators. Increasingly, they are requiring claims to be properly identified and justified in a way lawyers previously had not done.”

The Optus case turned on a conflict between the company’s public statements following its 2022 cyberattack and the evidence of its own general counsel.

In a media release following the attack, then-chief executive Kelly Bayer Rosmarin said Optus was engaging Deloitte to “find out what went wrong” and “inform the response to the incident”, with the hope the report may “help others in the private and public sectors”.

But, in seeking to claim LPP over the report amid a class action claim, general counsel Nicholas Kusalic said the report had been commissioned – first internally and then formally through law firm Ashurst – to assist in “giving legal advice and managing the legal risk” from the attack.

Cyber path narrows

Melissa Fai, a Gilbert + Tobin partner specialising in technology and data protection, said the wide-ranging impact and competing demands of cyberattacks on big companies made privilege claims almost impossible to make out.

“Claims of LPP are generally simple to make out, but once you involve consultants or cyber experts it becomes difficult to contain the legal element,” she said.

“I do query whether it’s possible.”

Ms Fai said clients would look to engage law firms sooner to establish a “tighter” basis for future LPP claims, after timing emerged as a key point of contention in the Optus case.

In the trial judgment, Justice Beach described a direction by Optus for Ashurst to formally engage Deloitte after work had already begun on the report as “artificial” and part of “endeavours to cloak the Deloitte review in legal professional privilege”.

“Even if a law firm is commissioning [external advice], it’s always going to be multifaceted. Ensuring the dominant purpose is the task,” Ms Fai said.

“Law firms will be trying to work out the best way forward [for clients], but it’s a huge challenge.”

James North, Corrs Chambers Westgarth’s head of media and technology, said it was important not to “mix purposes” in the response to a cyberattack.

“Lawyers aren’t sufficiently involved … in cyber response. Reports are being produced by IT teams which may make concessions as to liability … whereas if lawyers were involved and understood what was being produced, perhaps that information wouldn’t have been produced or would have been done under LPP,” he said.

The “multifaceted demands” of cyber response has seen law firms seek to take advantage of the market for technical and legal advice in the aftermath of an attack.

Major local law firms MinterEllison and Ashurst have opened and expanded their own in-house cyber response consulting arms, in an attempt to capture a greater proportion of client spend.

MinterEllison chief executive Virginia Briggs told The Australian Financial Review last month that clients were demanding integration between legal and technical advice on cybersecurity issues.

“It’s a big issue for our clients, and [we offer] that very complementary service offering so that, in essence, things don’t slip between the cracks for our clients,” she said.

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Maxim Shanahan is a professional services reporter at the Australian Financial Review. Email Maxim at

EY partner cites right to silence on ATO court claims

A former high-flying EY tax partner is seeking the right to silence, with his lawyers telling the Federal Court he risked incriminating himself by responding to several claims from the Australian Taxation Office. 
In court on Thursday lawyers for the former EY partner, who cannot be named due to court orders, revealed he had sought to make a number of claims of privilege over documents seized by the ATO. 
Justice Geoffrey Kennett heard EY had handed over nine documents to the ATO, as the tax office turned the screws on its investigations into the former partner who is alleged to have masterminded a $700,000 tax exploitation scheme. 
This came as the ATO prepared to hand over a redrafted version of its statement of claim to the former partner. 
But Russ Johnson, appearing for the former EY partner, said his client would seek not to respond to “certain pleading requirements” noting responding could exposure him to penalty. 
The ATO alleges the former partner’s tax schemes constituted a breach of the promoter penalty provisions of the taxation act, with the EY private clients consultant constructing tax loss schemes for clients between November 2016 and April 2021. 
Lawyers for the ATO told the court the former EY partner had made privilege claims against seven documents so far, noting they expected further challenges on the nine new documents. 
The ATO also pushed for the matter to go to trial, after being first filed in August 2023, seeking a date in the coming six months. 
The matter will be heard again on June 19. 
The latest tussle in the case comes after frantic attempts by the EY partner to suppress his name, after the man’s lawyer argued its publication would be harmful to his mental health. 
The partner has made repeated attempts across different courts.
The court only moved to allow EY to reveal the firm had formerly employed the partner in November last year, despite the firm being notified about the ATO’s investigations in June 2021. 
EY Oceania chief executive David Larocca previously said the ex-partner’s alleged conduct was “absolutely unacceptable”.
The ATO alleges the former partner assisted clients by establishing tax loss trust schemes, which saw beneficial interests in sites transferred at below market value, while tax losses were applied against the distribution of income from a trust. 
A former client of the EY partner is now suing the firm and the partner in the NSW Supreme Court alleging the scheme saw him face millions more in taxes and penalties after intervention by the ATO.