Available at: https://scholarship.law.unc.edu/ncbi/vol29/iss1/19
Abstract/Introduction:
In 2023, consumers reported fraud losses in excess of $10 billion, a fourteen percent increase from the prior year, the first time fraud losses have reached that benchmark. According to the International Criminal Police Organization, “[f]inancial fraud is increasing worldwide as the public embraces new sophisticated technologies” such as artificial intelligence, large language models, and cryptocurrencies.
The successful fraud prosecutions of Sam Bankman-Fried, former CEO of the failed cryptocurrency exchange FTX, and Elizabeth Holmes, former CEO of the failed medical diagnostic company Theranos, have been widely reported on by major media outlets. Despite this notoriety popularizing these fraudsters into mainstream figures, the media attention has also heightened focus on financial fraud defense strategies, increasing the overall visibility and conversation around white-collar criminal litigation.
What particularly fascinated spectators in the Holmes and Bankman-Fried cases were the back-and-forth fights over the existence of fraudulent intent. Bankman-Fried and Holmes each sought to portray themselves as naïve entrepreneurs who were suckered into making the business decisions that placed them in handcuffs.This is a common strategy used by financial fraud defendants. Intent is subjective and circumstantial, rendering it difficult for the government to prove through direct evidence. Financial fraud defendants often take advantage of this ambiguity to argue that their conduct was not criminal because they acted in “good faith.”
Evidence of the defendant’s good faith may take various forms. The advice of counsel good faith defense garnered significant attention after it was invoked by Holmes and Bankman-Fried. This defense “is based on the common sense principle that a defendant should not be held liable for actions taken based on reasonable reliance on the advice of counsel.” Problematically for defendants, this defense seems not to work as well as it once did, bringing about the question of why. This Note will argue that the same digital technology that enabled the explosion of financial fraud has also destroyed criminal defendant’s ability to invoke the advice of counsel defense in financial fraud proceedings. This Note proceeds in four parts. Part II provides background on the element of intent in financial fraud cases, the good faith defense in general, and the advice of counsel good faith defense in particular. Part III analyzes how Holmes and Bankman-Fried used the advice of counsel defense. Part IV examines factors that have contributed to the declining effectiveness of the advice of counsel defense. Finally, Part V concludes that the advice of counsel defense no longer offers fraudsters a legal safe haven—and indeed may be heading towards extinction.
Summary:
Newman’s note opens with the modern paradox of white-collar prosecution: technology has made fraud both easier to commit and easier to prove. Using the recent prosecutions of Elizabeth Holmes (Theranos) and Sam Bankman-Fried (FTX), the author traces how the once-potent “advice of counsel” defense—long invoked to negate intent—has withered in the digital age.
The article begins by reviewing the historical development of the good-faith and advice-of-counsel defenses from Derry v. Peek (1889) through the evolution of U.S. fraud statutes. It highlights how the defense originated as an evidentiary rebuttal to the element of intent rather than a true affirmative defense, and how circuit splits emerged regarding jury instructions and prerequisites for invoking the doctrine.
Newman’s central argument is that the defense has become practically unworkable in modern white-collar cases. Two forces have driven this change:
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Technological transparency—Digital footprints, email archives, and ubiquitous data retention have given prosecutors direct access to internal deliberations that expose defendants’ intent despite any legal advice they may have received.
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Judicial tightening—Courts now require defendants to meet stringent evidentiary showings before mentioning counsel’s role, often demanding full waiver of privilege and limiting jury instructions under Rule 403 to prevent confusion or “halo effects” from attorney involvement.
Holmes and Bankman-Fried both attempted to argue that they relied on legal advice in structuring corporate partnerships, drafting terms of service, and handling disclosures. In each case, courts curtailed the defense—requiring formal proof of each element (full disclosure to counsel, genuine reliance, good-faith compliance) and pretrial notice. Ultimately, both were convicted, and Newman concludes that “the advice of counsel defense no longer offers fraudsters a legal safe haven—and indeed may be heading toward extinction.”
Commentary:
Reconsidering “Reliance on Counsel” After In re Sugar:
While Newman’s note reads the defense’s demise from the high-profile collapses of FTX and Theranos, it did not have the benefit of the more recent decision from the Fourth Circuit’s treatment of In re Sugar (2025), which shows that the doctrine remains alive—if properly cabined—in bankruptcy practice.
Judge Agee’s opinion remanded the case “so that the bankruptcy court can consider the effect of record evidence that [the debtor] acted on advice of counsel as part of its decision about the appropriate remedy for Sugar’s conduct.” That is not the language of extinction; it is a recognition that reliance on counsel can still mitigate culpability even when it does not negate a statutory violation. The Fourth Circuit drew a careful line: advice of counsel does not erase misconduct but does matter in calibrating sanction or discharge relief.
On remand, Judge David Warren applied that directive with remarkable candor. Three years after the original sanctions order, he held that “her reliance upon her prior counsel’s advice was justified and reasonable, and that the sanctions the court imposed, while properly based upon the facts, testimony and arguments of counsel at that time, are not supported by the uncontroverted facts that have now … been presented to the court.” In other words, once the evidentiary record finally showed genuine good-faith reliance, the court vacated its prior penalty and restored the debtor’s discharge.
A Different Kind of Reliance
What separates Sugar from the failed defenses of Holmes and Bankman-Fried is not merely scale but structure. Corporate officers invoke “advice of counsel” to deny criminal intent while still retaining privilege, often as a strategic gambit. Consumer debtors invoke it to explain compliance failures under the supervision of the court itself. The former tests the patience of juries; the latter goes to equity.
Judge Warren’s approach exemplifies how bankruptcy courts have long balanced accountability with rehabilitation. The debtor’s reliance on counsel did not immunize her from the Code’s disclosure duties—but once proven reasonable, it warranted restoration of her fresh start. That is precisely the moral space bankruptcy occupies between strict liability and moral blameworthiness.
Why Sugar Undermines Newman’s “Extinction Thesis”
Newman is right that digital evidence and judicial skepticism have narrowed the corporate use of the defense. Yet Sugar shows that in bankruptcy—the most transparent and supervised of all federal forums—the defense not only survives but is institutionally essential. Trustees and judges depend on it to distinguish between:
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Bad advice followed in good faith, which merits education and correction; and
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Bad faith disguised as reliance, which warrants denial of discharge or sanctions.
Far from “no longer a shield,” reliance on counsel remains a legitimate equitable factor in the Fourth Circuit, particularly where the debtor’s conduct occurred under mistaken but honest professional guidance.
Newman’s article, steeped in the spectacle of white-collar collapse, reads as an obituary for the defense. Sugar instead reads as a resurrection story—one more consistent with bankruptcy’s rehabilitative DNA than with criminal law’s retributive logic. Where the FTX and Theranos defendants wielded counsel’s advice as a weapon, the Sugar debtor offered it as an explanation. The difference is moral as much as doctrinal.
In short, if Holmes and Bankman-Fried buried the advice-of-counsel defense in the boardroom, Judge Agee revived it in the bankruptcy courtroom.
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