Risk Update

Risk News — Strategic Conflict Causes Sanctions, Scout Conflict Settled

Posted on

Louisiana Personal Injury Firm Sanctions Upheld in Conflict Row” —

  • “A personal injury law firm in Louisiana convinced a state appeals court to affirm $7,500 in sanctions and attorneys’ fees in connection with a case in which the firm was accused of having a conflict of interest.”
  • “Rental equipment company Ahern Rentals Inc. sued former employees including Scott Helms and Chadd Turnage alleging theft of confidential information after they were hired by Ahern’s competitor, EquipmentShare.com Inc. Helms and Turnage were rehired at Ahern after losing their jobs at EquipmentShare, and Ahern moved to disqualify their former counsel at Veron Bice Palermo & Wilson LLC from representing the remaining individuals.”
  • “Veron opposed disqualification and sought sanctions, asking why Ahern hadn’t dismissed its employees from the action and raising concerns about confidential strategies in litigation. The trial court rejected the bid for disqualification, and granted the sanctions request in the amount of $7,500 in costs and fees.”
  • “The Court of Appeal of Louisiana, Third Circuit, affirmed that ruling Wednesday. The appeals court held that the evidence was sufficient to support the trial court’s ruling that Ahern was delaying the dismissal of Helms and Turnage as defendants in an attempt to gain information about EquipmentShare’s strategy.”
  • “‘There is evidence that the motion at issue in this case was filed to cause unnecessary delay and as an abuse of process,’ Judge Elizabeth A. Pickett wrote in the opinion.”

Sidley Austin Had No Conflict in Boy Scouts’ Bankruptcy Work” —

  • “Sidley Austin LLP had no conflict of interest in representing the Boy Scouts of America in its bankruptcy case despite the law firm’s connection to one of BSA’s insurers, the Third Circuit ruled.”
  • “Century Indemnity Co., a Chubb subsidiary, sought to have Sidley Austin disqualified from BSA’s bankruptcy case, arguing that the law firm had previously provided legal counsel to Century in certain reinsurance disputes.”
  • “The district court had upheld a similar conclusion by the US Bankruptcy Court for the District of Delaware, triggering Century’s appeal to the Third Circuit.”
  • “The bankruptcy court ‘looked carefully at the specific facts before it and reasonably approved BSA’s retention of Sidley,’ the Third Circuit said. ‘This is nowhere close to an abuse of discretion.'”
  • “The Boy Scouts, which filed for Chapter 11 bankruptcy in February 2020 following former scouts’ claims of sexual abuse, has negotiated with Chubb and other insurers for victim payouts.”
  • “Sidley is no longer actively involved in the bankruptcy case because the attorneys who represented the Boy Scouts moved to a new firm in September 2020.”
  • “The law firm separated itself from the BSA’s insurance coverage issues and didn’t receive any relevant confidential or privileged information, according to the appeals court’s opinion. Sidley’s work for Century did not affect its ability to work for the Boy Scouts, the court said.”
Risk Update

Risk News — Confidential Information DQ, EY Audit Adjustment May Remove Conflicts to Legal Growth

Posted on

Firm Properly Barred for Having Confidential Information” —

  • “The Ninth U.S. Circuit Court of Appeals has affirmed an order barring a law firm from continuing to represent the plaintiff based on the firm having received confidential information about the defendants from a disbarred lawyer who gained that information from them while purporting to be their counsel in earlier litigation.”
  • “In a memorandum opinion filed Thursday, a three-judge panel found that District Court Judge Percy Anderson of the Central District of California did not abuse his discretion in disqualifying the Mirch Law Firm of San Diego from acting for Seyed Zia Eddin Ahmadi Abhari and others in an action under the Racketeer Influenced and Corrupt Organizations Act against Elias Nakhleh and others.”
  • “At a business lunch in 2019—before the RICO lawsuit was filed and while cordial relations existed—Abhari told Nakhleh about his lawyer, Martin Reiner, recommending that Nakhleh utilize his services. Nakhleh took the advice, hiring Reiner and providing him with a $10,000 check for Nakhleh which he regarded as an Nakhleh attorney retainer fee.”
  • “Nakhleh eventually developed a suspicion that Reiner was not licensed to practice law and, on March 6, 2020, queried in an email: ‘Is it not true that you have been suspended from practicing law? You have represented being an attorney to me multiple times.'”
  • “[The Ruling Noted:] ‘The Court finds The Mirch Law Firm has committed several ethical violations. Based on the evidence provided, Mr. Reiner has falsely represented to Defendants that he was their attorney. The Mirch Law Firm is using Defendants’ privileged information, obtained by Mr. Reiner, to gain a tactical advantage in this case…'”
  • “The judge noted that The Mirch Law Firm insisted that Reiner merely acted as a witness for it and “that they have cut off contact with Mr. Reiner following this Motion,” but declared that ‘the damage has already been done’ by giving the firm ‘privileged information which has allowed Plaintiffs to wrongfully acquire an unfair advantage in this case.'”

EY Dumping Audit Business Is Bad News for Law Firms” —

  • “News that Big Four accounting firm EY is considering spinning off its global audit business should sound a warning bell to law firms, as the big consultancies continue to encroach on the legal services business, according to industry observers.”
  • “While the development seems aimed at dodging the increasing regulatory scrutiny that audit businesses appear to be facing, it also solves the conflict of interest barriers that EY faces in providing legal services. And there’s speculation that, if EY succeeds in jumping through the substantial hurdles necessary to separate the units, its Big Four peers will follow.”
  • “James Jones, a senior fellow at the Center for the Study of the Legal Profession at Georgetown University Law Center, said accounting firms with audit businesses currently face a genuine constraint in moving seriously to legal because they cannot provide legal services for corporations that they audit.”
  • “But while law firm managing partners may believe that the Big Four will never go head to head with them on litigation or legal advice, Jankowski [director of the Pacesetter Research team at ALM Intelligence] said they are still an existential threat to law firms. Jankowski explained that the Big Four use their legal service offerings as a way to become stickier with their clients.”
  • “‘They approach clients when the client has a key event, such as M&A restructuring, an IPO, change management, or digital transformation projects,’ said Jankowski. ‘Being able to provide the legal services for these events is central to a law firm, but it’s a value add to an accounting or consulting firm.'”
  • “‘If I were a big global law firm, I would view this with a little bit of alarm. I think it’s removing the last major obstacle to these firms providing legal services,’ said Jones, explaining that the definition of ‘legal services’ introduces a gray area. For instance, in some practice areas, like tax, nonlawyers—CPAs, for example—draft documents all the time, and therefore compete with lawyers already.”
Risk Update

Conflicts News — Court Clerk Conflict Concern Curtailed, Superfund Super (Ethical) Screen (1989 Edition)

Posted on

Sonos cites ‘vexing’ Google ties but won’t seek new judge in patent fight” —

  • “Sonos Inc will not seek to disqualify San Francisco U.S. District Judge William Alsup or one of his law clerks in its patent dispute with Google LLC, the company said Friday, despite sounding alarms about the clerk’s ties to Google and its law firm.”
  • “Alsup’s disclosure that one of his clerks previously worked for Google and still owns Google stock has created a “vexing situation” for Sonos, the company said in a court filing. It said it also believes the unnamed clerk worked for the law firm that represents Google, Quinn Emanuel Urquhart & Sullivan, while the dispute was pending.”
  • “But since the judge has determined the clerk can be impartial, Sonos will not pursue a recusal bid, its lawyers wrote.”
  • “Alsup last week rejected Sonos’ request for more information about the clerk. He also told the parties that the clerk placed his Google stock in a blind trust.”
  • “In the case now before Alsup, Sonos sued Google in 2020, alleging its Chromecast streamers, Home speakers, Pixel phones, and other devices infringe its patents.”
  • [Ed: A few days later, the clerk was removed from the case by the judge.]

Saul Ewing Must Conduct Ethics Screen In Superfund Suit” —

  • “A Pennsylvania federal judge on Tuesday said that because of ‘an appearance of impropriety,’ Saul Ewing Arnstein & Lehr LLP must conduct an ethics screen in Superfund litigation to ensure that the firm’s work on a similar matter for clients now on the opposite side doesn’t present a conflict.”
  • “U.S. District Judge Gene Pratter said there’s no evidence of inappropriate conduct by Saul Ewing attorneys, but the fact that there is one who worked decades ago on litigation involving some of the same parties and the same site creates a situation that needs a remedy. Saul Ewing is currently representing heating and cooling company Fritch Inc. and industrial manufacturer O.F. Zurn Co., which have been sued by another group of potentially responsible parties — which raised the conflicts issue — over cleanup costs at the Metro Container Superfund cleanup site in Trainer, Pennsylvania.”
  • “‘Here, regardless of whether there is an actual conflict, there is arguably an appearance of impropriety,’ Judge Pratter said in an order. ‘Without a doubt, counsel from Saul Ewing could, and should, have identified and raised this issue preemptively to avoid the appearance of impropriety, or at least, the important sideshow that has ensued.'”
  • “The judge ordered Saul Ewing to implement a ‘comprehensive ethics screen’ of attorneys from the 1989 litigation.”
  • “Metro Container Group said Saul Ewing should be disqualified from representing Fritch and O.F. Zurn because the firm’s representation is adverse to its former clients and will necessitate the disclosure of confidential information from the prior representation.”
  • “Fritch and O.F. Zurn said Saul Ewing’s representation is not a conflict because the group that Saul Ewing represented in the prior action no longer exists, and that Metro Container Group waived its right to raise the issue because it waited years after Saul Ewing joined the present litigation to bring it up.”
  • “‘Even assuming that certain members of the current Metro Container Group are former clients, Metro has not met its burden as the moving party to ‘prove that [its former lawyer] has actually revealed information relating to the representation of’ them,’ the judge said. ‘It is unfair to require Fritch and Zurn to find new counsel four years into this litigation while discovery is underway and most of the parties have settled or requested a settlement conference.'”


Risk Update

Conflicts News — Consulting, Accounting, Audits & Independence Edition

Posted on

SEC Probe Looms Over Auditors’ Fastest-Growing Businesses” —

  • “When the two top executives of a hot electric-vehicle startup made share purchases that later drew scrutiny, they were helped by accounting firm BDO USA, according to the auto company. BDO was also the auditor of the company they ran.”
  • “The dual roles that BDO played at Electric Last Mile Solutions Inc. are typical of potential conflicts of interest faced by auditors. Relationships like this one are under scrutiny by the Securities and Exchange Commission, people close to the inquiry said.”
  • “The car maker said it took an internal probe to figure out that BDO was advising its chairman, Jason Luo, and Chief Executive Officer James Taylor. Both executives resigned and their deals for company stock are being investigated by the SEC, the company said in March.”
  • “BDO is one of several midtier accounting firms caught in a sweeping probe by the SEC into conflicts of interest by auditors, one of the people close to the investigation said. The probe also includes the Big Four accounting firms Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers, The Wall Street Journal has previously reported.”
  • “BDO resigned as auditor of Electric Last Mile Solutions in February, citing concerns that an illegal act might have occurred. The company decided after its internal investigation that it needed to restate earlier financial statements that were audited by BDO, in the light of the share deals the accounting firm had allegedly advised on.”
  • “The SEC investigation reflects concerns about the increasing reliance by the big accounting firms on sales of consulting and tax services, which offer higher margins and greater growth potential than their core audit business.”
  • “A Deloitte spokesman said the firm’s multidisciplinary approach ‘enables us to deliver high quality audits for the benefit of the investing public.’ A PwC spokesman said ‘independence is core to the delivery of quality audits, at the heart of PwC’s culture and fundamental to everything we do.’ Representatives of KPMG and EY declined to comment.”
  • “In the U.S., senior SEC officials have in recent months publicly warned accounting firms not to ‘creatively apply the [independence] rules,’ and said sanctions may need to increase to deter rule breaking.”
  • “The agency’s ongoing conflicts-of-interest investigation is looking for breaches of rules banning accounting firms from selling specified services to audit clients, people close to the probe said.”

McKinsey & Co. worked with Russian weapons maker even as it advised Pentagon” —

  • “Russia has fired more than 2,000 missiles on Ukraine since invading in February. The engines for many of these missiles were manufactured by a massive state-owned enterprise called Rostec, and executives for that company hired the global consulting giant McKinsey & Co. in recent years for advice.”
  • “At the same time McKinsey was advising the Russian defense conglomerate, though not on any work directly involving weapons, the firm was carrying out sensitive national security contracts for the Defense Department and the U.S. intelligence community, according to an NBC News investigation.”
  • “McKinsey has come under scrutiny in Congress for its work with state-owned companies in China, with lawmakers questioning if the company should be awarded national security-related contracts given its extensive presence in China. McKinsey also faces accusations of ignoring possible conflicts of interest when it advised both opioid manufacturers and officials regulating opioids at the U.S. Food and Drug Administration.”
  • “By carrying out consulting work with a company like Rostec, McKinsey placed itself in a potentially risky position, given its work with the U.S. government, according to Scott Blacklin, a former head of the U.S. Chamber of Commerce in Russia and president of the consultancy Blacklin and Associates.”
  • “‘It’s really hard to understand how an American consulting firm … would want to be involved in sensitive areas of the Russian defense or intelligence or scientific establishment. And when you talk about Rostec, you’re talking about all of those mixtures,’ Blacklin said.”
  • “Sen. Maggie Hassan, D-N.H., told NBC News that McKinsey has displayed a ‘pattern of behavior’ in its consulting abroad and in Washington that raised ‘grave concerns about conflicts of interest.'”
  • “‘Whether it be the substance misuse crisis or work for state-owned enterprises in places like Russia and China, I am deeply concerned by McKinsey’s choices and by the fact that the U.S. government continues to contract with McKinsey despite those potential conflicts,’ the senator said.”
  • “But the company, which has its headquarters in New York, says it does not see its recent work in Russia as posing a conflict with its consulting for the Pentagon and other federal agencies. When asked by NBC News, a company spokesperson, Neil Grace, said McKinsey has strict rules and firewalls to safeguard against conflicts of interest, and that its work abroad is walled off from its work in Washington.”
  • “‘As we have stated previously, McKinsey complies with all applicable U.S. contracting laws, including those regarding conflicts of interest,’ Grace said. ‘When we serve the U.S. government, we do so through a separate legal entity with separate operational structures and separate information technology where required.'”
Risk Update

Risk News — NCAA Conflict Called, Law Firm Insurance & Malpractice Trends

Posted on

NCAA Wants Firm Removed From Race Bias Suit Over Conflict” —

  • “The NCAA urged an Indiana federal court to disqualify Fegan Scott LLC from a proposed discrimination class action, saying one of the firm’s lawyers simultaneously worked for the collegiate organization’s document-review vendor.”
  • “The NCAA said in a Monday filing that Ravi Sakthivel’s conduct ‘violates the duty of loyalty owed to clients’ and poses a ‘substantial risk’ that factual confidential information from a client could be used by an adversary.”
  • “The lawsuit by former collegiate basketball player Troyce Manassa alleged the NCAA’s Academic Performance Program discriminates against student-athletes at historically Black colleges and universities.”
  • “Fegan Scott hired Sakthivel as a full-time attorney in September 2020, two months before Manassa’s lawsuit, the NCAA said. Sakthivel’s work as a document review attorney on the Manassa case began March 2 this year, when he was hired by the NCAA’s e-discovery vendor, Proteus, according to the NCAA.”
  • “The collegiate organization said it found out in late April that Sakthivel was also employed by Fegan Scott. The NCAA wrote to Elizabeth Fegan, the plaintiff’s lead co-counsel, to deliver the news on April 26. And in a response the same day, Elizabeth Fegan said Sakthivel had been placed on administrative leave.”
  • “In a May 2 letter to NCAA counsel Brian Casey, Elizabeth Fegan said she ‘unequivocally’ condemned Sakthivel’s actions. ‘To that end, I personally filed an attorney misconduct complaint regarding Ravi’s actions with the State Bar of California on April 27, 2022, and terminated his employment,’ Fegan said in the letter to Casey, included in the NCAA’s filing.”
  • “When he applied with Proteus, Sakthivel removed all references to Fegan Scott in his materials and said he was actually with another firm at the time, the NCAA said. He also attested in writing that he had no conflict of interest before starting work, according to the NCAA.”

Insurance Defense Counsel a New Target of Legal Malpractice Claims” —

  • “The size of payouts for legal malpractice claims reached an all-time high last year, and for the first time some of those claims were made by insurers against the defense attorneys they hire to represent their insureds, according to a new report [PDF here] by the Ames & Gough brokerage.”
  • “The growing claim severity in the legal professional liability line continues a years-long trend, but malpractice claims made by insurers against their own counsel are something new. Ames & Gough found no concern about claims in the insurance defense area of practice in its annual survey of insurers from 2010 to 2020, but found that 18% of responding insurers reported claims against defense counsel in 2021.”
  • “Ames & Gough said it surveyed 11 legal liability insurance companies that together insure 80% percent of the top 100 law firms. It found that 10 of those insurers participated in a claim payout that topped $50 million in the past two years, three paid a claim between $150 million to $300,000 million and four paid a claim of over $300 million.”
  • “The experience of the insurers surveyed only tells part of the story, Garczynski said. ‘Anecdotally, we know of five claims that settled north of nine figures, including one over $400 million.'”
  • “Conflict-of-interest complaints remained the leading cause of malpractice claims, with seven of the 11 carriers surveyed ranking such errors as the first or second most common cause of claims. Clerical errors ranked first or second by four insurers.”
  • “Garczynski said remote work assignments may be one source of errors. She said young attorneys working from home are not getting direct supervision and miss out on regular communication with more experienced lawyers.”
  • “The bulk of the legal malpractice claims stem for three practice areas: 73% of insurers reported claims in the area of trust and estates, 63% reported claims in the area of business transactions and 45% reported claims from the corporate and securities field. Taxation came in fourth, with 27% of insurers reporting claims in that area.”