United States v. Chen

Facts

Chen (Defendant) owns Sunrider Corporation and operates TF Chen Products, Inc., a Sunrider subsidiary. Sunrider imported goods from Asia and paid tariffs on the actual cost of the goods. Sunrider’s comptroller, Jau Hwa (Chen’s sister), then prepared false invoices on a Hong Kong affiliate’s letterhead showing the goods costing considerably more than they actually did. Sunrider paid income tax on the profit, which was the difference between the sale price of the goods and the fake costs. Defendant became concerned that the Internal Revenue Service (IRS) and U.S. Customs would communicate and learn about the difference in the cost of the goods shown on the tariff invoices versus the fake invoices. Customs allows importers to disclose underpaid tariffs without penalty or interest before Custom learns independently of the underpayments. Chen (Defendant) consulted his attorneys who advised him to file a Customs disclosure. This disclosure was actually fraudulent because Sunrider was not underpaying the tariffs, but instead, was not paying appropriate income tax. The attorneys were unaware of the alleged income tax evasion scheme. Jau Hwa left Sunrider and provided the Government (Plaintiff) with various incriminating documents. She also informed the authorities about the alleged tax evasion scheme. The Plaintiff indicted Defendant for conspiracy, tax evasion, and other crimes. The Plaintiff subpoenaed Defendant’s attorneys to testify about the disclosure statement and their knowledge of the fraudulent scheme, but the attorneys moved to quash based on attorney-client privilege. The trial judge denied the motion based on the crime-fraud exception to the attorney-client privilege, even though the judge found no evidence the attorneys were aware of the alleged scheme, as long as the testimony was limited. The attorneys appealed