Bressler Risk Blog

This month’s sponsor thank you to our supporter as Accuity features the PDF summary and expanded commentary of another risk interview. This time Accuity’s Teddy Peck puts the podcast spotlight on Max Welsh from InOutsource.

Their discussion explores issues including: strategies for making the case to invest in risk management, training and developing conflicts staff and navigating Outside Counsel Guidelines.

Here’s a direct link to the PDF article: “In Discussion with A Law Firm Risk Expert” —

• “And that’s because it’s not uncommon for risk to be perceived as a complete cost center and drain on profits. Of course, there are leaders who intellectually understand that there is some benefit to the function in terms of loss prevention. But that can be hard to quantify in precise detail — particularly if risk management is being handled well and the firm isn’t having urgent issues, encountering problems or paying significant hard costs.”
• “It’s definitely ironic. Effective risk teams that have things well under control often struggle to get new investments made — budget, personnel or software — that they know they need to make to improve efficiency and to keep ahead of emerging issues.”
• “If your firm has had an incident or issue, that clearly provides strong support for investment. So if a firm has suffered something like disqualification due to a missed conflict, or information governance problem, like client documents that have been misplaced or retained well beyond a disposition deadline — that creates a clear basis for discussion about change. And that urgency is heightened further if the situation results in an insurance claim and that type of external review.”
• “Well, the broad rule I’d point to is that firms pay close attention to any area of change in policy, process, or even technology that starts to look like a trend or emerging standard. Firms never want to find themselves in a situation where there was an issue that could be traced back to some risk area, policy or capability that they were arguably behind in adopting or adhering to in some regard.”
• “It’s important that the people reviewing these [OCG] terms have both an accurate and a complete understanding of the firm’s capabilities. You don’t want the firm signing on to obligations they only have a 99% ability to implement. Or maybe they are 100% technically capable, but will struggle when it comes to demonstrating compliance or responding to a potential client audit.”

“Fine Increased For Corporate Conflicts Of Interest” —

• “The British Columbia Law Society Review Board increased the fine imposed for a corporate counsel’s conflicts of interest:
  • ‘The matter before this Review Board is the appropriateness of the $5,000 fine assessed against the Respondent for professional misconduct. The Respondent was found to have participated in conflicts of interest over the course of several years, in multiple situations involving his role as corporate counsel, while simultaneously acting for opposing shareholders. As well, he acted as legal counsel in a divorce for one of the shareholders, and in matters involving the arrangements concerning his client’s addiction issues.’
  • ‘In this matter, the Respondent acted for and against different shareholders of a company in two separate share sales while still purporting to act as corporate counsel. The Respondent also acted on behalf of one of the shareholders (“WD”) in a divorce proceeding from his wife, who was another shareholder, where the valuation of the company and the value of the shares would impact all the shareholders. Indeed, the Respondent’s ties to WD were further problematized when at one point, the Respondent held a power of attorney for WD for the sale of the matrimonial home. Finally, the Respondent acted in matters arranging for WD’s drug rehabilitation treatment program.’
  • ‘The Review Board finds that the failure of the Respondent, as a senior lawyer, to identify and avoid these conflicts of interest is serious misconduct.’
• Full decision here.

“Clark Hill Accused of ‘Whitewash’ In Cyber Malpractice Case” —

• “Clark Hill PLC is using a privilege “whitewash” to try to keep every document related to a successful attack on the firm’s network three years ago — including reports from cybersecurity experts hired to figure out how it happened — out of court, a Chinese dissident told a D.C. federal judge on Wednesday.”
• “Guo Wengui, who has accused his former firm of recklessly allowing his political enemies to steal his confidential asylum information, said in a motion to compel discovery that Clark Hill has refused to answer questions about its security systems or the scope of the cyberattack — or even to identify the consultants it hired in the wake of the breach.”
• “To do so, the firm has leaned on its retention of an outside law firm after the attack to justify a ‘blanket withholding’ of virtually all emails and reports about the attack and a forensic analysis of its origins. Wengui likened that to a building owner that hires a plumber and a lawyer after a pipe burst — and then asserts attorney-client privilege over every communication it had about pipes, tenants, repairs and the name of the plumber.”
• “In a motion to dismiss the suit in November, the 650-lawyer firm argued Wengui himself provoked a targeted cyberattack from his enemies by ‘personally announc[ing] the fact that he had applied for asylum in a video that he posted on the internet.'”

“Negotiating with Ransomware Gangs” —

• “For now, it seems that paying ransomware, while obviously risky and empowering/encouraging ransomware attackers, can perhaps be comported so as not to break any laws (like anti-terrorist laws, FCPA, conspiracy and others) ­ and even if payment is arguably unlawful, seems unlikely to be prosecuted. Thus, the decision whether to pay or ignore a ransomware demand, seems less of a legal, and more of a practical, determination ­ almost like a cost-benefit analysis.”
• “When confronted with a ransomware attack, the options all seem bleak. Pay the hackers ­ and the victim may not only prompt future attacks, but there is also no guarantee that the hackers will restore a victim’s dataset. Ignore the hackers ­ and the victim may incur significant financial damage or even find themselves out of business. The only guarantees during a ransomware attack are the fear, uncertainty and dread inevitably experienced by the victim.”

“What’s it really like to negotiate with ransomware gangs?” —

• “It might be the worst-kept secret in all of cybersecurity: the FBI says don’t pay ransomware gangs. But corporations do it all the time, sending millions every year in Bitcoin to recover data that’s been taken “hostage.” Sometimes, federal agents even help victims find experienced virtual ransom negotiators.”
• “That’s what Art Ehuan does. During a career that has spanned the FBI, the U.S. Air Force, Cisco, USAA, and now the Crypsis Group, he’s found himself on the other side of numerous tricky negotiations.”

“200 law firms suspended in UAE for failing to comply with anti-money laundering procedures” —

• “A total of 200 law firms in the UAE that had failed to comply with anti-money laundering procedures have been suspended from practicing for one month.”
• “The Ministry of Justice has also called upon law firms to take necessary measures against money laundering and terrorist financing, Wam reported. The necessary legal measures are outlined in Federal Decree 20 of 2018 with regard to money laundering, executive regulations, and relevant ministerial decisions. The decree is part of the UAE’s efforts to address the risks associated with financial crimes.”
• “The Ministry emphasised the importance of law firms’ role in combating money laundering, as well as the need for lawyers to assume their role in fighting such crimes. Lawyers must also handle clients carefully, report suspicious transactions, and maintaining proper records, the Ministry urged. It added that it had taken recent action against non-compliant lawyers, in addition to the law firm suspensions.”

“FCA: Working from Home Heightens Insider Trading Risks” —

• “In an October 12 speech, the Director of Market Oversight for the Financial Conduct Authority (FCA) emphasized the need to adapt insider trading controls to account for changes in working conditions due to COVID-19 restrictions.”
• “The Director’s speech started by discussing that global economic conditions have heightened the need for companies to raise capital, and that the UK has seen a significant portion of this activity, with the FCA citing the fact that ‘the UK saw a greater volume of follow-on equity issuance than the next 7 major European bourses combined.'”
• “While this situation presents novel issues for firms and professionals, the FCA emphasized the need for firms to adapt and implement effective insider trading controls. The Director emphasized, ‘[a]t a time where capital raising activity is vital to fuel much needed economic activity, we must be crystal clear that behaviours that risk disrupting that activity will not be tolerated.'”
• “In addition to capital raising, the rise in mergers and acquisitions has presented new challenges. The FCA warned that firms must ensure they have appropriate controls in place to protect against inappropriate activity with respect to mergers and acquisitions.”
• “The FCA highlighted concerns that home work arrangements could present difficulties in ensuring insiders are appropriately keeping information from partners or flatmates that now share workspaces. While these concerns have always existed, the extent of the current at-home worksite may increase those risks: ‘It is absolutely the case that this risk has always existed, but when the separation between work and home life is perhaps harder for some people to navigate, it may be all the more important and acute.’ This line may be harder to draw in a COVID-19 world.”

“Germany seeks arrest of Panama Papers lawyers” —

• “Germany has issued arrest warrants for the founders of Panamanian law firm Mossack Fonseca more than four years after the publication of Panama Papers, an investigation led by the International Consortium of Investigative Journalists.”
• “The spokesperson said that the warrants related to probes that began in 2014 when authorities obtained a subset of data from Mossack Fonseca. The data provided ‘evidence of criminal offences in over 600 cases,’ the spokesperson said.”

We spent a cycle focused on audit letter response, coming out of the recent ILTA>ON virtual conference. Now comes two webinars on this topic, each featuring a case study presentation by a law firm, sharing their strategy, approach, results and peer advice:

Featuring presentations from the teams at WilmerHale  (Miranda Perkins, Knowledge Manager, and Mary Goldsmith, Business Relationship Manager) and Aurora North comes: “Focus on: Wilmer Hale’s Audit Letter Response Workflow Automation Solution”

• DATE: Tuesday, November 10 (12pm Eastern)
• “Finalists for ILTA’s “Transformative Project of the Year 2020,” the team at Wilmer Hale joins us to present an in-depth overview of their innovative workflow solution.”
• “They’ll share how they designed and implemented a solution to automate this burdensome process (using existing internal tools), with software-driven document creation and process workflow management (notifications, reminders, tracking, and reporting).”
• “We’ll explore the client and regulatory rules driving the need for consistent, comprehensive process execution (no matter the overhead involved). And there will be plenty of time for audience Q&A.”
• Click Here to Register

Featuring presentations from the teams at Ballard Spahr (Nicholas Weeks, Director of Risk Management, and Lisa Waldron, Risk Compliance Manager) and InOutsource comes: “Automating Client Litigation Audit Letter Response Workflow and Reporting: A Fresh Approach” —

• DATE: Friday, November 20 (1pm eastern)
• “When it comes to responding to voluminous client audit letter requests (litigation), law firms face tremendous risk, overhead and inconvenience. That pain typically hits many people, including: lawyers, legal assistants, intake/conflicts teams, finance teams and other operational players. Every detail must be gathered, reviewed and certified. And because firms have to certify their responses, no stone can be left unturned. So for every client, each matter must be identified and every practitioner surveyed on whether they have ‘reasonable knowledge’ about material factors.”
• “How do you collect and document all of that lawyer feedback comprehensively and consistently? How do you confidently identify whom to ask in the first place? And how much unbillable time is consumed along the way?”
• “If your firm is looking for a fresh approach to managing audit letter response, we have the answer. At this webinar we’ll dig into how organizations can use automated workflow, reporting and data integration to take the pain out of the process. We’ll explore a “day in the life” of an audit letter today, and what it could look like tomorrow at your firm.”
• Click Here to Register

(I’ll be at both.)

“Ohio Board of Professional Conduct (Opinion 2020-10): Law Firm Concurrent Representation of Adverse Clients in the Same Transaction” —

• “A conflict of interest arises from a lawyer’s concurrent representation of directly adverse clients in the same transaction. A law firm cannot avoid the imputation of a conflict of interest arising from the concurrent representation of two clients in thesame transaction by screening separate lawyers assigned to each client.”
• The steps proposed by the law firm in order to represent the two clients underscore the inherent nature of the conflict of interests that exist in the concurrent representation of two or more firm clients in the same transaction. The key features of the law firm’s proposal to resolve the conflicts, a combination of client consent and the screening of two groups of assigned lawyers, is not provided for in the Rules of Professional Conduct as a method to ameliorate conflicts arising from concurrent representation in the same law firm. The firm’s proposal would require a departure from the rules governing the imputation of conflicts that the Board is reluctant to endorse. For the foregoing reasons, the Board concludes that the law firm’s proposed concurrent representation of the two adverse clients in the same transaction is not permissible.

Which reminds me of the take taken overseas by the SRA in auction scenarios, worth a read for those curious about information barriers, multi-sided walls (and anyone seeking an LSAT-like logic problem involving A, B, C and D): “Conflict of interest (Published: 29 October 2019)” —

• “Your firm is acting for a company (A), which is participating in an auction process to acquire another company (B). The firm pre-emptively obtained informed consent from A, in writing, to the firm acting for other potential bidders, should the firm be approached to do so. Your firm has subsequently been asked to act for a financier (C), who is providing the financing needed by another potential bidder (D) for B should D’s bid be successful. Is your firm able to accept C’s instructions?”
• Nevertheless, it would be best practice, before accepting instructions from C, to make it clear that your firm (a) is free to act (and may already be acting) for other bidders/their financiers, (b) would use a separate legal team to represent C and (c) would put information barriers in place to prevent C’s confidential information being shared with the legal team acting for A and vice versa.

“O’Melveny Can’t Keep $9M From Bankrupt Co., 9th Circ. Told” —

• “Aletheia Research and Management’s bankruptcy trustee asked the Ninth Circuit Tuesday to reverse a judgment allowing O’Melveny & Myers LLP to keep over $9.4 million it was paid for legal services, arguing the trial judge erred in finding his bankruptcy claims had been resolved in an arbitration over malpractice claims.”
• “The appeal is the latest chapter in a hotly contested lawsuit that the liquidating trustee for the defunct Aletheia launched against its former law firm in 2014. The trustee sued O’Melveny after Aletheia was pushed into Chapter 7 bankruptcy in 2012 and alleged O’Melveny violated the firm’s fiduciary duties and the federal Bankruptcy Code, which prohibits fraudulent conveyances.”
• “O’Melveny represented both Aletheia and its former CEO Peter J. Eichler Jr. for years in their legal battles with the company’s former business partner, money management firm Proctor Investment Managers LLC, and the U.S. Securities and Exchange Commission. During that time, two O’Melveny attorneys left the firm and began working as in-house attorneys for Aletheia, before later returning to O’Melveny once the company went bankrupt in 2012, according to court documents.”
• “The trustee claims in his suit that the firm was aware of, and ignored, its conflict of interest in representing both Aletheia and Eichler in a contract dispute with Proctor, and should be forced to cough up the $4 million it was paid for legal services related to the dispute. In total, the trustee sought the recovery of more than $9 million paid to the firm from 2009 through 2012.”
• “… But the trustee urged the Ninth Circuit Tuesday to reverse the ruling and argued that regardless of whether the malpractice claims are viable, the law firm’s services were not reasonably worth the amount of money the firm received. ‘Even had O’Melveny provided perfect and non-conflicted services that provided $500,000 of value to Aletheia, such services were not reasonably equivalent to the more than $9.4 million of fraudulent conveyances that O’Melveny received,’ the brief says.”
• “Golden also argued that leading up to its bankruptcy, O’Melveny was improperly receiving payments and ‘enjoyed the benefit of insider-like status’ at a time when other creditors were going unpaid. The trustee added that O’Melveny’s legal counsel used “sleight of hand wording” and misrepresented its arguments in its efforts to beat the bankruptcy claims before the trial court.”

“International law firm Seyfarth discloses ransomware attack” —

• “International law firm Seyfarth Shaw announced on Monday [October 12] that it was the victim of a ransomware attack over the weekend… The incident occurred on Saturday, with the company describing it as a ‘sophisticated and aggressive malware attack.’ The timing is typical for cyber attacks, ransomware in particular, as companies have fewer employees working weekends.”
• “In its notification about the attack, Seyfarth Shaw says that as far as they know, ‘a number of other entities were simultaneously hit with this same attack.'”
• “The company states that its monitoring systems caught the unauthorized activity and the IT department was quick to stop the spread.”
• “‘Our clients remain our top priority, and we will continue to do everything necessary to protect their confidential information and continue to serve them. We are coordinating with the FBI and are working around the clock to bring our systems back online as quickly and safely as possible'”

Firm Statements on the Matter:

• October 19: “All of the firm’s critical systems are now restored and fully operational, and we remain confident that none of our client or firm data was accessed or removed. We continue to work with leading forensics experts to complete the forensic investigation of the incident.”
• October 15: “After locking down our systems over the weekend, our team of experts has worked tirelessly the past few days and done everything necessary to protect our clients’ and our firm’s confidential data and prevent its destruction and removal. We still have no evidence that any client or firm data was either accessed or removed. We are now in the restoration phase and have been able to bring our email system fully back online. We will continue to work through the weekend, and, based on the progress we have made so far, we expect to have full restoration of all of our critical systems by early next week.”
• October 13: “Our team continues to work around the clock to resolve this incident. As reported earlier, we have found no evidence that any of our client or firm data was accessed or removed. We will update this page as we have more information. Thank you for your continued patience.”

“Seyfarth Cyberattack Spotlights Gaps In Law Firm Security” —

• “In Seyfarth’s case, the firm was able to stop the attack soon after detection, but not until after many of its systems, including email, were encrypted by malware, according to the firm. Such encryption means Seyfarth cannot access its files without the decryption keys, and the firm either has to pay the attacker to regain access or restore its data from a backup.”
• “A September report by Coalition, one of the largest providers of cyber insurance services in North America, showed that the first half of 2020 has been particularly hard for many organizations, with 41% of all claims paid out related to ransomware attacks, noted Anne Hasenstab, an Oregon-based executive risk practice leader for Ward Insurance.”
• “Coalition’s report also showed that the frequency of ransomware attacks against its policyholders rose 260% in the first six months of 2020, while the average ransom demand increased 47% from previously recorded numbers.”
• “The shift to remote work — and the increased dependence on online technology — means that when systems are held hostage, ‘it does put companies at a significant level of misery,’ Hasenstab said. She and other experts encourage law firms to incorporate infrastructure changes into their cybersecurity policies, considering the technical differences when conducting assessments or testing.”
• “As for how to prevent cyberattacks, Hasenstab recommends that law firms of all sizes implement multifactor authentication for important information and create ‘a culture of inclusion’ that puts cybersecurity in the firm’s risk management portfolio, including cyber insurance.”

A few weeks ago I had the pleasure of moderating a webinar featuring a panel comprising Michael Misiewicz, assistant general counsel in the legal department at JPMorgan Chase, and two risk consultants from Wilson Allen. Those consultants, Patrice Kennard and Mike Madden, have published an excellent summary of the exchange: “Evolving Law Firm Risk: Inside the Minds of Clients and Firm Management” —

• “What do law firm management and client leaders consider to be the most effective conflicts and risk policies, practices, and priorities? We sought to answer that question during a recent panel session Wilson Allen hosted that brought together conflicts and risk experts from both sides of the client and law firm equation.”
• “Misiewicz shared that, with conflicts waiver requests being only one of many things on his plate on any given day, he’s looking for law firms to make his client experience as easy as possible. How? Consistency – especially in the procedural aspects of waiver requests:
  • Designated Contacts – less is more; your client’s work is easier with a regular point of contact
  • Communications – it is helpful for your client to be speaking with someone fluent in conflicts
  • Format – follow the terms enumerated in your client’s services agreement”
• “A centralized model is the best way to protect a law firm from such risks because it employs an established, consistent methodology using firm-wide checks and balances. Centralization streamlines conflicts, and the benefits extend to conflicts subprocesses such as the firm’s client waiver requests.”
• “With centralization, staff members perform analysis that keeps the big picture in mind. As the panel agreed, from a law firm perspective, a centralized conflicts team becomes the subject-matter expert on conflicts clearance, unlike a lawyer who may need to clear conflicts only periodically.”
• “Staffing under this model is a gift that keeps on giving. Centralized conflicts career paths offer job satisfaction and professional development opportunities that can encourage longevity. It’s to a firm’s advantage to retain institutional knowledge and develop people armed to help the firm transition through changes, like adding new conflicts procedures for new practice areas.”
• “Making a case for investment is about bringing the benefits to the attention of senior management. In a partner-driven firm, it isn’t easy to justify a significant expenditure that erodes into partners’ capital. From an equity partner’s point of view, it’s about return on investment. Thus, making a case requires being able to demonstrate what kinds of benefits a product can offer.”

For more detail on the “making the case for investment in risk” thread of the discussion, see the complete summary.

Next up, not a conflicts matter, per se. But the latest from the reputation risk category, via the New York Times: “Berkshire Hathaway Says Blue Chip Law Firm Aided Fraud” —

• “Berkshire Hathaway may have found a way to get back some of the hundreds of millions of dollars it lost after buying a seemingly solid German pipe maker that turned out to be on the verge of going bust.”
• “The conglomerate, led by Warren E. Buffett, is suing Jones Day, the law firm that represented the owners of the pipe maker when it was sold to a Berkshire Hathaway subsidiary in 2017. The lawsuit, filed late last month, accuses Jones Day of helping to trick Berkshire Hathaway into paying five times what the German company was worth.”
• “‘The fraudulent transaction would never have occurred without Jones Day’s substantial assistance,’ according to the lawsuit, filed in U.S. District Court in Houston on behalf of Precision Castparts, a Berkshire Hathaway subsidiary that makes components for aircraft. The lawsuit accuses Jones Day of withholding documents that would have exposed Wilhelm Schulz’s perilous financial state and calls the firm a ‘co-conspirator’ in a ‘massive fraud.'”
• “The [NY arbitration] panel found in April that Mr. Schulz and other managers had used false sales invoices, computer hacks and phantom customers to make Wilhelm Schulz look healthier than it was and hoodwink Precision Castparts into paying a grossly inflated price. The deal was a rare misstep for the organization run by Mr. Buffett, who is considered one of the savviest investors in the world.”
• “Normally a law firm’s communications with clients would be considered privileged, offering a degree of protection to Jones Day. The firm has asked a Texas court to seal the case on those grounds. But Precision Castparts argues that lawyer-client confidentiality cannot be used to cover up fraud under German or United States law.”
• “In addition, the claims against Jones Day are based on files discovered in Wilhelm Schulz offices after the acquisition, according to the lawsuit. Finders keepers, in other words.”
• “Jones Day also did not disclose a report by the consulting firm KPMG, commissioned by Schulz, which concluded that the company faced an “imminent liquidity crisis,” according to the lawsuit. Nor, the suit says, did Jones Day inform Precision Castparts that a German lawyer had warned Wilhelm Schulz managers that they were legally obligated to declare bankruptcy.”

“McGuireWoods Out Of Hartford Suit For Conflict Of Interest” —

• “An Indiana federal judge dropped McGuireWoods LLP from a trade secret suit brought by a Hartford insurance unit against OneCIS Insurance Co., ruling that the firm can’t represent OneCIS without Hartford’s consent because Hartford is also a McGuireWoods client.”
• “U.S. District Judge Debra McVicker Lynch granted Hartford Steam Boiler Inspection and Insurance Co.’s bid to disqualify McGuireWoods from representing its adversary party OneCIS, finding Friday that Hartford has never agreed to a conflict waiver as a client of McGuireWoods.”
• “Without consent, attorneys are not allowed to represent a client when ‘the representation of one client will be directly adverse to another client,’ the judge said, terminating attorneys A. Wolfgang McGavran, Meghaan C. Madriz and Yasser A. Madriz from representing OneCIS in the suit.”
• “McGuireWoods previously argued that Hartford “prospectively waived conflicts” for issues not related to the legal work the firm does for Hartford. The judge disagreed, saying that waiver only applies in matters when Hartford is not involved as a party.”

And, “Judicial Ethics Opinion 20-89: A judge may not mail congratulatory letters to a graduating high school class” —

• ” Our core concern is the likely public perception of such activity as political in nature, and a possible appearance that the prestige of judicial office is being used to advance the judge’s purely private interests.”
• And the NY Courts website has a quiz on judicial ethics, for those who like testing.

Yesterday’s update on conflicts stemming from personal relationships had me digging for related examples. And that meant seeing what Bill Freivogel had in his risk roster of record. While more in the realm of a lateral rather than personal relationships, there were a few interesting stories that were news to me and worth sharing, starting with: “Hinker v. County of Cape May, 2020 WL 205901 (D.N.J. Jan. 13, 2020)” —

• “Law Firm P represents Plaintiffs. Law Firm D represents Defendant. Firm P assigned Lawyer to represent Plaintiffs. Lawyer contacted Firm D about employment there. Firm D made Lawyer an offer.”
• “Shortly after the offer, lawyers at Firm D realized that two matters, including this one, created conflict issues. Thus, Firm D withdrew its offer. Lawyer had a melt-down (our phrase). He begged Firm D to resolve the conflict issues so he could join Firm D after all. He even wrote disparaging descriptions of the size and merits of this case.”
• “Lawyer left Firm P but did not join Firm D. Plaintiffs moved to disqualify Firm D. In this opinion the magistrate judge denied the motion. The pivotal issue was whether Lawyer had become ‘associated’ with Firm D within the meaning of New Jersey Rules 1.9 and 1.10. In a fact-specific analysis the judge concluded that Lawyer had not become associated with Firm D, and, thus, Rules 1.9 and 1.10 did not apply.”

Bill also flags this writeup by law professor Keith Swisher, from a few years ago: “DQ Case of the Week: Negotiating to Work for the Opposing Firm” —

• “An associate represented the debtor-in-possession in a Chapter 11 bankruptcy, and essentially two secured creditors had claims to virtually all of the debtor’s assets. The firm representing one of the secured creditors gave the associate a job offer, which the associate accepted on March 11, 2015. The associate failed to disclose the accepted offer to his supervising attorney until April 20, 2015.”
• “Furthermore, “[b]etween March 11, 2015 and June 5, 2015, [the associate] continued to sign and file all pleadings on behalf of the Debtors. ‘It was during this time that the debtor and creditors entered into a settlement agreement, divvying up the debtor’s previously liquidated assets among the secured creditors and stipulating to dismiss the bankruptcy case.'”
• “On June 5, the associate moved to withdraw (without disclosing the conflict), and on June 15, the supervising attorney ‘filed a Supplement to Application for Employment of Attorneys [under 11 U.S.C. 327], for the first time informing the Court of [the associate]’s acceptance of an employment offer with [the secured creditor’s law firm].’ The U.S. Trustee in response filed a motion to disqualify and to deny all compensation to the debtor’s firm.”
• “The court then noted that ‘accepting a position at a law firm representing one of the largest creditors in a case where one represents the debtor must be disclosed, [and] . . . the connections between the firms and the parties at a minimum created the appearance of impropriety.'”
• “The court therefore concluded that, ‘under § 327(a) and Rule 2014(a), there is no question [the associate] and his firm . . . had the fiduciary duty and responsibility to disclose [the associate]’s move to [the secured creditor’s firm]. It is also undisputed [they] failed to do so for over three months. The failure to disclose the connection between [the associate] and [the creditor’s firm] warrants denial and disgorgement of fees and expenses.'”
• “The court proceeded to penalize the associate’s former firm by denying all compensation for work done on and after March 11, 2015 (the date on which the associate had secretly accepted the offer of employment), even though the supervising attorney did not know about the conflict until over a month later.[4] The court refused to disqualify the firm, however, reasoning in essence that the associate ‘created the conflict here, and he has left’ the debtor’s firm (and the creditor’s firm has apparently been screening the associate since his arrival).”
• Text of decision available here.