Risk Update

Risk News — Conflicts Firm Merger Groundhog Day? Lateral Departure Financial Risk Revisions (With Covid Considerations)

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The repeating nature of this one caught my eye. (It was just Groundhog Day after all.): “Two Troutman Pepper Partners Size Down for Boutiques Post-Merger” —

  • “As large firms grow larger, some partners are opting for smaller shops. In the past couple weeks, two partners have left Troutman Pepper Hamilton Sanders for boutiques, on the heels of last July’s merger between Troutman Sanders and Pepper Hamilton that created a 1,200-lawyer firm.”
  • “Mandel said client conflicts prompted his departure. He’d joined Troutman two years ago from Andrews Kurth after that firm merged with Hunton & Williams in April 2018 to form 1,000-lawyer Hunton Andrews Kurth, also because of client conflicts.”
  • “‘It was almost deja vu,’ Mandel said. ‘Before I joined Troutman I was seriously considering going to a boutique firm because of conflict issues.'”
    “‘Troutman is a great place with great people,’ he added. ‘I made sure Lewis Baach isn’t planning any large-scale mergers in the near future.'”

That had me thinking about pre-lateral terms with financial contingencies in the case of future conflicts. Maybe those already exist? Maybe they will? And then I spotted not quite this point but the related: “Law Firm Penalties On Departing Partners Just Got Riskier” —

  • “The D.C. Court of Appeals, on Feb. 4, issued an important decision that sharply limits the ability of law firms to penalize departing partners who leave for other law firms and take clients with them. Even before COVID-19, large law firms were experiencing significant volatility with partners changing firms. COVID-19 has escalated these lateral moves and the resulting economic hit that law firms will suffer.”
  • “Fortunately for departing partners, any substantial financial penalty that the law firms may impose will violate Rule 5.6(a) of state bar ethics rules and the American Bar Association’s Model Rules of Professional Conduct, which many states follow as guidance. The D.C. Court of Appeals, in Jacobson Holman PLLC v. Gentner, has now provided a clear road map for the numerous law firms in Washington, D.C., and their equity partners, and confirms that the law is continuing in the direction of prohibiting financial penalties on departing partners.”
  • “Historically, law firms had a range of so-called golden handcuffs that they could use to prevent their rainmaking partners from leaving, or to impose financial penalties on them if they did leave. The Model Rules of Professional Conduct and bar ethics opinions have had to respond to new strategies by law firms that violate the rules by interfering with the attorney-client relationship.”
  • “The most recent decision, from the D.C. Court of Appeals, involved an intellectual property litigation boutique, in which the two name partners informed the other partners in 2013 that they were going to dissolve the firm and do business under a new entity. Marsha Gentner and several other attorneys instead decided to leave the firm, and they demanded their accrued capital be returned to them.”
  • “Gentner had an accrued capital balance of $141,569, but the firm tried to offset that with (1) pending member bonuses and allowances; and (2) writeoff of accounts receivable unlikely to be paid, resulting in Gentner now owing $21,762 to the firm. Further, the firm asserted that if a court were to find a positive balance, it should be cut by 50% because clients followed Gentner to her new law firm, Dykema Gossett PLLC.”
  • “Judge Catharine Easterly, joined by Judges Roy McLeese and Eric Washington, held that although the firm’s partnership agreement allowed for adjustments to the year-end accrued capital balance, those adjustments could only be based on costs or events arising after the year-end financial statement. Here, the firm knew all along that it had to budget for bonuses and that it had numerous uncollectible accounts unlikely ever to be paid. The court held that allowing these adjustments would ‘simply invite the remaining equity members to make unpredictable, self-interested, post hoc changes to the firm’s financial statements.'”
  • “Thus, the law firm could not enforce the financial penalty provision of its partnership agreement against Gentner and other departing partners.”
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Risk Update

Risk Grab Bag — Evolving AML Rules, Sanctioned Cell Call, Pen Tests in Perspective

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Solicitors urged to review AML policies as new guidance launches” —

  • “It is finally here! You have all waited so patiently, but I am delighted to confirm that the Legal Sector Affinity Group’s (LSAG) revised and much updated anti-money laundering (AML) guidance has, after much anticipation, finally landed. The good news is the Law Society can help making getting through it all easier, but more on that at the end.”
  • “The review of the guidance was triggered by the European Union’s fifth money laundering directive, which came into force in January last year and brought in a raft of new requirements including changes to client due diligence and enhanced due diligence as well as a duty to collect proof of registration for companies and trusts.”
  • “Where possible the MLTF has sought to ensure regulatory expectations and burdens were tempered by practical reality. Balancing the many demands that practitioners are under while recognising the importance of our role in the fight against financial crime and the need for a minority to up their game.”
  • “The guidance is an effective and critical tool in supporting the profession. It is designed to help the legal profession navigate complex AML risks and challenges. It will guide you through what is a ‘must’, a ‘should’ and a ‘may’ to help ensure practices are able to understand and address AML risk to meet regulatory requirements, SRA expectations and identify good practice.”
  • “There is also additional advice on understanding and evidencing source of funds and wealth, a new technology section, which examines considerations to apply when using or exploring AML-related technology to effectively mitigate risk and revised, updated and expanded AML governance and internal controls sections.”

UNETHICAL MISTAKE: Big Firm Sanctioned as Partner Violated Ethics Rule When Calling TCPA Plaintiff in an Effort to Disprove Ownership of Phone” —

  • “A big firm partner just got his law firm sanctioned by calling a TCPA Plaintiff in a putative class action in the hopes of proving someone else actually owned and used the phone line. Talk about a bad day at the office.”
  • “Setting the stage here—TCPA plaintiffs often sue callers for purported wrong number calls when they (the Plaintiff) actually set up the lawsuit by allowing someone else to use the phone, enter the number, or otherwise have a relationship with a third party that the caller was trying to reach. Its dirty unethical stuff, and it happens all the time.”
  • “Defense counsel constantly look for tactics to try to detect and reveal this unsavory behavior to the court. But the one thing most defense lawyers know not to do is to call the Plaintiff’s phone number in an effort to somehow prove that someone else actually uses the phone.”
  • “There is a very clear ethical rule that forbids lawyers from talking to represented opposing parties about the substance of the case. This is a big clear bright line that any lawyer that passed their ethics exam has seared into their memory.”
  • “And while dialing a number in the first instance might not—in and of itself—violate the rule, having a discussion (even a brief one) with a represented party is a huge no no.”
  • “Plaintiff asked to have the attorney’s law firm disqualified from representing the Defendant but the Court felt that was too harsh a penalty. Instead the firm was ordered to pay the cost of Plaintiff’s motion work to address the ethical violation.”
  • ore details and decision: In Moore v. Club Exploria, LLC

For those looking to dig into security, see: “Security Assessments and Pen Tests for Law Firms” —

  • “The new norm has created an operating environment that hackers once could only dream of. What has been proven over the past year is that cybercrime rises during times of crisis and law firms are still slow to respond. Ransomware is the number one cybersecurity threat that we now face. The perfect storm has been created and is heading towards your firm if it hasn’t arrived already.”
  • “What exactly do we mean? Users are now accessing confidential client files from their kitchen or home office through personal computers, tablets, and outdated Wi-Fi that has not had the configuration updated since the Internet Service Provider installed it. Employer-provided systems are not universal, even among the largest of firms. Users are now responsible for keeping their software and operating system patched with critical updates.”
  • “Law firms recognize that there are security problems within their networks. Many just don’t know where to start to identify and fix them. Others accept the risks of taking no action. All is not lost. There are steps that law firms can take now to get control of the situation, to identify where the problems exist and remediate them. The first step is realizing that something needs to be done. The next step is finding where the problems exist, and that is accomplished through a security assessment.”
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Risk Update

Law Firm Security Breach — Third Party Vendor in Spotlight, Forensic Expert On Deck

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Hat tip to a loyal reader who sent word yesterday of: “Goodwin Points to 3rd-Party Vendor as Root of Data Breach” —

  • “Goodwin Procter found itself the victim of a cyberattack, the firm acknowledged Tuesday, after a vendor to the firm that handles large file transfers was hacked, allowing the intruders to access data the third party had handled for the law firm.”
  • “Bettencourt stated in the memo that the firm believes Goodwin was not the only client of the vendor that was affected by the breach.”
  • “The memo stated that after being notified of the breach, Goodwin disconnected the vendor from its network and ‘halted use of service for any transfers,’ hired an independent forensic security expert and opened its own investigation into the matter.”

Goodwin Procter Hit With Data Breach Via Vendor Hack” —

  • “The investigation also revealed that a few Goodwin workers were impacted by the breach, the memo said. It did not appear that the firm’s human resources system or any firm resources, other than the file transfer service, were impacted, according to the memo. The firm believes that the vendor’s security issue impacted several of the vendor’s customers, not just Goodwin, the memo said.”
  • “‘Please know that we were running the most current version of the service and following all directions to ensure the proper maintenance of the system,’ the memo said. ‘This included deploying security patches as soon as [they] were made available to us.'”

Thinking of that eventual report brings to mind recent news about security forensics privilege matters.

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Risk Update

Money Risk — Private Equity, Playbook Conflicts? Overbilling + Insurance Probe

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Paul Hodkinson, Editor-In-Chief of Law.com International and Legal Week opines: “In a Market Gone Mad, High-End Private Equity Hires Have Gotten Out of Hand“–

  • “The demand for private equity partner hires has never been greater. It makes perfect sense, in a way. With more than $1.5 trillion available to spend, the private equity industry has become the most powerful driver of global mergers and acquisitions and economies ravaged by the coronavirus look ripe for a surge of investment. High-level hires are deemed an essential way for law firms to get in on the action because buyout firms rarely operate formal legal rosters, meaning it is crucial to have partners who hold those relationships.”
  • “Such a fluid market does not offer any benefit to clients, who no doubt feel frustrated by so many changes. And—I say this as gently as possible—it also has to be asked whether all this hiring is really worth it for law firms.”
  • “The chances of consistently winning all the work from any one client are slim—regardless of how close a partner’s relationship is—as there are often so many bidders in auction processes that conflicts are rife.”
  • “Individual lawyers face conflict challenges, too. Some of the market’s most prolific private equity lawyers privately admit they sometimes get asked by clients what the other side might be thinking because they’re so familiar. Don’t be surprised if a court claim features such discussions one day.”

Insurer Seeks To Dodge Mass. Firm’s Overbilling Probe Fees” —

  • “An insurance company on Thursday asked a Massachusetts federal court to declare that it is not responsible for paying attorney fees incurred by Thornton Law Firm LLP when the firm faced an investigation over alleged overbilling in a $300 million State Street Corp. settlement.”
  • “Continental Casualty Co. should not be obligated to pay Thornton Law the unspecified amount of fees the firm paid to its legal counsel for representation throughout the investigation, along with the unspecified amount the court ordered to be deducted from the firm’s fee award to help cover the investigation’s costs, according to Thursday’s complaint in the District of Massachusetts.”
  • “Continental argues that Thornton Law did not take out insurance that would require the insurer to defend or indemnify the firm in the investigation. The company noted that the investigation was not a claim triggered by an ‘act or omission in the performance of legal services’ by Thornton Law, nor does it leave open the possibility of covered damages, according to the complaint.”
  • “The investigation’s findings — that Thornton Law and Labaton Sucharow LLP repeatedly violated the rules of professional conduct in part by overbilling — meant that the insurance policy’s ‘intentional acts exclusion’ is also triggered, according to the complaint.”
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Risk Update

Side-switching Conflicts Allegations — SLAPP Malpractice, Med Billing Fraud

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Court Rejects Carrington Coleman’s Legal-Mal Appeal in Case Hinged on Anti-SLAPP Law” —

  • “Signaling support for a ruling that said a Big Law firm can’t use the Texas anti-SLAPP law to dismiss a legal-malpractice lawsuit, the Texas Supreme Court on Friday rejected review on an appeal by Carrington, Coleman, Sloman & Blumenthal.”
  • “Randy Ackerman, managing partner at Ackerman Law Firm in Houston who represented White Nile, said that hypothetically if the Supreme Court had taken the case and reversed the ruling, it would have ended all legal-malpractice cases in Texas. ‘If they are saying that the anti-SLAPP had stood, then this would have gone out the door, and this is a pure malpractice case: an attorney representing an entity, and then changing sides,” Ackerman said. ‘This was as pure a malpractice case as there ever was to be.'”
  • “In 2018, White Nile filed a lawsuit against Carrington Coleman for professional negligence, breach of fiduciary duty, aiding and abetting breach of fiduciary duty and conspiracy.”
  • “The basic allegation was that Carrington Coleman had a conflict of interest in representing both White Nile and its directors. White Nile claimed the firm didn’t fully investigate the company’s rights and failed to plead claims or defenses for the company. Among other things, Carrington Coleman failed to tell an independent governance board about conduct by the company directors that Carrington Coleman also represented.”
  • “On appeal, White Nile argued that the anti-SLAPP law wasn’t meant to dismiss legal-malpractice lawsuits that claim a lawyer had a conflict of interest between its clients. The law firm countered that the litigation centers around its statement or document in a judicial proceeding, and the Texas Citizens Participation Act should protect it.”

Holland & Knight Accused Of Conflict In Med Billing Fraud Suit” —

  • “Holland & Knight LLP is ‘playing both sides’ in a $17 million personal injury protection fraud suit in Florida federal court, a defendant argued Monday, saying the firm is conflicted and must be disqualified.”
  • “Chintan Desai, a physician being sued along with several others by State Farm Automobile Insurance Co. and State Farm Fire and Casualty Co., said Holland & Knight, the plaintiffs’ counsel, is representing him in a separate but similar lawsuit and therefore should be disqualified.”
  • “Desai is named as a medical director at Path Medical. In his filing Monday, he said he retained the firm in November 2019 in a case involving his Florida company Radiology Imaging Specialists. The representation included the sharing of confidential client information, according to Desai.”
  • “‘The scope of this ongoing representation involves complaints and issues related to the practices and procedures employed in connection with my radiological interpretations of pathology demonstrated by patients receiving PIP benefits,’ the affidavit said. ‘I employ these same practices and procedures in connection with my role as a medical director for a Path Medical radiology clinic.'”
  • “‘Dr. Desai has not provided informed consent or otherwise waived his confidences, which Holland & Knight is obligated to protect,’ the motion said.”
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Risk Update

Risk Roundup — Covid Practice Policies, “Invisible” Lawyers Practicing Across Jurisdictions, Biden’s Brother…

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ABA Formal Opinion OKs Lawyers Who Sit in One Jurisdiction But Are Licensed in Another” —

  • “The American Bar Association’s (ABA) Formal Ethics Opinion 495 confirms what many have said is the law under ABA Model Rule 5.5 for a while now: Lawyers can sit in a jurisdiction in which they are not licensed so long as they are licensed in a U.S. jurisdiction and are ‘invisible’ as a lawyer where they sit. Still, this confirmation will come as welcome news to many who have either been forced or chosen to relocate outside of their licensed jurisdiction due to the COVID-19 pandemic.”
  • “The Formal Opinion does caveat that it does not apply to those jurisdictions that have already affirmatively barred such “invisible lawyering,” though it does not identify any such jurisdiction.”
  • “The ABA’s conclusions are consistent with a recent advisory opinion issued by The Florida Bar’s Standing Committee on the Unauthorized Practice of Law, which concluded that a lawyer licensed in New Jersey could live and practice law in Florida without violating RPC 4-5.5 because his presence for purposes of practicing law was in New Jersey and would in no way involve Florida clients, cases, parties, courts, etc. FAO #2019-4, Out-Of-State Attorney Working Remotely from Florida Home (Aug. 17, 2020).”
  • “Lawyers who suddenly found themselves working from a new jurisdiction in 2020 can generally cross ‘take the ____ bar’ off their list for 2021 thanks to ABA Formal Opinion 495.”

Davis Wright Tremaine Will Require All Employees To Get a COVID-19 Vaccine Before Returning to the Office” —

  • “Davis Wright Tremaine will require its attorneys and staff to be vaccinated if they are to return to the firm’s office, according to firm guidelines announced on Thursday. It is the first Am Law 200 firm to publicly announce such a requirement.”
  • “The new policy requires that firm employees provide proof of vaccination ‘in the coming months’ to be allowed to return to the office or attend firm-sponsored events. Those who cannot get vaccinated due to disability, advice of a medical provider or religious beliefs will be asked to contact the firm’s Human Resources department to work out ‘reasonable accommodations.'”
  • “If possible, the firm said it will set up a vaccination clinic onsite, as it does with annual flu shots, and will cover the cost of vaccination if an employee’s insurance, or the United States government, does not.”
  • “But if law firms won’t mandate their attorneys be vaccinated, courts may. Texas state court officials, for example, have made it clear that judges, attorneys and court staff will have to be vaccinated for in-person jury trials to resume. Even then, people who will be required to come to court, such as jurors, will need to be vaccinated as well.”

Biden brother’s law firm touts his connection to the president, creating an early headache for administration” —

  • “The Florida law firm that employs President Biden’s brother Frank ran a newspaper ad on Inauguration Day touting the brothers’ relationship and shared values, a move that is causing an ethics headache for the administration less than two weeks after Biden took office.”
  • “Press secretary Jen Psaki, speaking from the White House podium Friday, addressed the subject broadly, without mentioning the ad in particular. ‘It is the White House’s policy that the president’s name should not be used in connection with any commercial activities’ that would suggest or imply ‘his endorsement or support,’ she said. The ad featuring Frank Biden arguably runs afoul of that edict.”
  • “The two-page “advertorial” ran on Jan. 20 in the South Florida-based Daily Business Review to promote the work of the Berman Law Group, which employs Frank Biden as a ‘non-attorney senior adviser.'”
  • “President Biden has issued a wide-ranging executive order imposing ethical restrictions on his administration’s appointees, but that policy does not speak to his family members. Shortly before the inauguration, a Biden official told The Post that the White House would adopt procedures to ensure that activities by family members would not create a conflict of interest, or even the appearance of one.”

 

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