Bressler Risk Blog

UIC School of Law, Chicago Professor Alberto Bernabe notes: “Breaking news: ABA House of Delegates approves changes to Model Rule 1.16” —

• “Last February, the ABA House of Delegates, which is comprised of 597 delegates from ABA entities and state, local and specialty bar associations, adopted a measure that updates the ABA’s policy that endorsed for the first time ‘reasonable and appropriate’ federal government efforts aimed at combating money laundering. The policy seeks to balance the longstanding attorney-client privilege with the demands of governmental entities seeking access to information on criminal activities.”
• “Following this policy, yesterday, the HoD adopted an amendment to Model Rule 1.16 ‘to protect lawyers from unwittingly becoming involved in a client’s or prospective client’s criminal and fraudulent activities.'”
• “Reportedly, there was a lengthy debate on the proposal but it was eventually approved by a vote of 216-102.”
• “The amendment creates a duty to ‘inquire into and assess the facts and circumstances of each representation to determine whether the lawyer may accept or continue the representation’ and adds a new (a fourth) case in which lawyers are obligated to refuse to represent a client or to withdraw from representing a current client.”
• “This section of the amendment states that the a lawyer shall not accept the representation or shall withdraw from representation if ‘the client or prospective client seeks to use or persists in using the lawyer’s services to commit or further a crime or fraud, despite the lawyer’s discussion pursuant to Rules 1.2(d) and 1.4(a)(5) regarding the limitations on the lawyer assisting with the proposed conduct.”
• “As you probably know, Model Rule 1.16(a) lists the circumstances when a lawyer is required to withdraw, while 1.16(b) lists the circumstances in which a lawyer may withdraw. Model Rule 1.16(b)(2) states that a lawyer may withdraw if ‘the client persists in a course of action involving the lawyer’s services that the lawyer reasonably believes is criminal or fraudulent.'”
• “The original proposal before the House of Delegates eliminated this discretionary duty and essentially converted it to an obligation. But, at some point in the process it was decided to keep section 1.16(b)(2), so now we have a mandatory duty related to a client’s intent to engage in fraud, etc, and a separate discretionary duty.”
• Read: Resolution and Full Report

“Dentons accused of AML regulation breach” —

• “Dentons has been accused of violating anti-money laundering (AML) regulations in a case set to go before the UK Solicitors Disciplinary Tribunal, reported the Law Society Gazette.”
• “The firm allegedly failed to conduct an adequate check on a client’s source of wealth when it represented a ‘politically exposed person or his associated entities’ from May 2013 to June 2017, as per a notice published by the UK’s Solicitors Regulation Authority (SRA). The tribunal certified the validity of the case brought against Dentons.”
• “In particular, the firm was accused of violating the Money Laundering Regulations 2007 with respect to compliance with legal and regulatory obligations, effective operation of the business in line with ‘proper governance and sound financial and risk management principles’ and compliance with AML legislation, the Gazette indicated.”
• “The conduct, according to the allegations, broke the public’s trust in Dentons and its legal services.”
• “Dentons confirmed in a statement that had ‘co-operated fully with the SRA throughout this investigation, which relates to a former client, and we will continue to do so.'”
• “‘As a firm we are committed to strict compliance with all laws, regulations and professional standards of the jurisdictions we operate in’, the firm said.”
• “The tribunal is set to hold a hearing later in the year.”

“Clyde & Co to Face SDT Over Alleged Breach of Money Laundering Regulations” —

• “Clyde & Co has been referred to the U.K.’s Solicitors Disciplinary Tribunal (SDT) for allegedly breaching money laundering regulations.”
• “In a decision published on the Solicitors Regulation Authority (SRA) website, the regulator said that the allegations related Clydes’ handling of a number of matters on behalf of a client and companies used by the client involving a ‘failure to comply with anti-money laundering procedures and breach of Money Laundering Regulations’.”
• “The SRA added that the alleged failures were ‘in relation to a number of matters spanning a period of over four years’.”
• “In a separate decision, also published on Wednesday, the SRA also referred former Clydes’ partner Edward Mills-Webb to the SDT, after concluding there was a case to answer in respect of allegations which also relate to matters arising from the handling of a number of matters on behalf of a client.”
• “In a statement, Clyde & Co commented: ‘In early 2019 we suspended a partner, Ed Mills-Webb and referred him to the Solicitors Regulation Authority of England & Wales in relation to matters concerning the application of the SRA Code of Conduct 2011 and the SRA Accounts Rules 2011. We assisted the SRA fully with its investigations and during that time Ed Mills-Webb resigned from the firm.”

“‘Shockwaves’ as [UK] Supreme Court rules litigation funding deals unenforceable” —

• “Litigation funders will have to redraft the terms of their agreements following a widely awaited ruling by the Supreme Court this morning. In PACCAR Inc & Ors v Competition Appeal Tribunal & Ors, four out of five justices ruled that such agreements fall within the statutory definition of damages-based agreements (DBAs). As they had been entered in to without satisfying conditions for DBAs, they were therefore unenforceable.”
• “In lead judgment today, Lord Sales ruled that litigation funding falls within the express definition of ‘claims management services’ – which includes ‘the provision of financial services or assistance’ – in the Compensation Act 2006. Lord Reed, Lord Leggatt and Lord Stephens agreed.”
• “Experts said the ruling would have significant implications for litigation funders. ‘The decision will send shockwaves through the funding industry and may lead to number of smaller operators going out of business,’ said Glenn Newberry, head of costs and litigation funding at international firm Eversheds Sutherland. ‘The decision is potentially a blow for the government as the collective funding of consumer claims has helped bridge the gap caused by the erosion of state funded legal assistance for civil claims. Funders themselves may well start to actively lobby to seek legislation which effectively reverses this decision.'”
• “Alice Darling, senior associate at magic circle firm Clifford Chance, said the decision ‘has rendered many funding agreements currently in place unenforceable.'”
• “Funders however said the industry would rapidly adapt. In a joint statement, the International Legal Finance Association and the Association of Litigation Funders of England and Wales said: ‘We are disappointed by this decision as it runs contrary to the accepted understanding that financing agreements are not damages based agreements.”

“Ethics opinion to allow Florida lawyers to passively invest in out-of-state firms that include nonlawyer owners to be published for comment” —

• “The Board of Governors has approved publishing proposed Advisory Opinion 23-1, which would allow a Florida lawyer to be a passive investor in an alternative business structure (ABS) in another state that allows non-lawyer ownership of law firms.”
• “Last October, the PEC voted 26-9 to direct committee staff to work on a draft opinion using ABA Formal Ethics Opinion 499 for guidance. The committee was scheduled to hear the draft at the Bar’s Winter Meeting in January, but a lawyer for the inquirers requested more time to gather additional information to support the position.”
• “Meeting the day before, the Board Review Committee on Professional Ethics voted 6-0 to recommend that the board approve publishing the proposed opinion.”
• “As approved, the proposed advisory opinion states that a Florida lawyer may passively invest in an ABS in another jurisdiction, so long as: the ABS satisfies certain requirements. Specifically, the proposed opinion says the ABS cannot have any presence in Florida nor can it provide Florida legal services, the ABS must comply with all requirements of the jurisdiction that permits it, the Florida investor cannot have a managerial role, or provide legal services through the ABS, the Florida lawyer cannot be involved in the daily operations of the ABS, and the Florida lawyer may not have access to any confidential information regarding the ABS.”
• “The staff’s draft opinion also cautions that ‘it does not address the propriety of investing Florida lawyer’s firm receiving referrals from the alternative business structure as those referrals may implicate concerns regarding solicitation, impermissible ‘feeder’ arrangements, and payments in exchange for referrals,’ according to a staff analysis.”

“California Supreme Court Approves New Rule Compelling Attorneys to Report Misconduct by Other Attorneys” —

• “The California Supreme Court has approved a new rule of professional conduct, rule 8.3 of the California Rules of Professional Conduct, that requires California attorneys to report any lawyer who commits a criminal act, engages in fraud, misappropriates funds or property, or engages in conduct involving ‘dishonesty, deceit, and reckless or intentional misrepresentations.'”
• “The court’s decision was based on one of two recommendations (Alternative Two) approved for submission to the court by the Board of Trustees of the State Bar of California on May 18. The court modified the State Bar’s proposal by adding additional provisions and comments to the proposed rule, including:
  • Adding the courts as an additional avenue to report misconduct. When misconduct occurs during litigation, the court may have the power to investigate or act upon the alleged misconduct and to take appropriate corrective action.
  • Adding commentary to the new rule to note that a court’s finding of misconduct may be used as evidence to facilitate subsequent State Bar disciplinary proceedings.
  • Requiring attorneys to report others if their misconduct “raises a substantial question as to that lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects,” which is the same standard employed by other states with a similar reporting rule.
  • Citing another rule of professional conduct that requires a lawyer to take remedial measures if the lawyer knows someone who has or will engage in criminal or fraudulent conduct related to pending litigation.
  • Adding commentary to the new rule to make clear that a false report to the court, like a false report to the State Bar, can subject the lawyer to discipline or other criminal penalties.”
• “The new rule follows several other directives from the court for the State Bar, including on noticing about attorney suspensions; updating its conflict of interest code for the Board of Trustees; and to develop new rules requiring candidates for the Board of Trustees and State Bar Court be screened for potential conflicts of interest.”

“Ex-Congressman’s Insider Trading Sentencing Delayed Due to Last-Minute Notice of Conflict” —

• “U.S. District Judge Richard Berman of the Southern District of New York on Monday ordered a last-minute adjournment of former U.S. Rep. Stephen Buyer’s sentencing on insider trading charges, citing a potential conflict of interest issue that came to light in the days leading up to the scheduled proceeding.”
• “Berman said Buyer’s defense counsel, Orrick Herrington & Sutcliffe partner Henry Asbill, informed the court that Orrick also represents T-Mobile.”
• “Buyer, who was elected as an Indiana Republican and served from 1993 to 2011, was found guilty in March of insider trading in connection with the 2020 merger of Sprint and T-Mobile, along with a separate insider trader scheme involving the consultant firms Navigant and Guidehouse. He worked as a consultant for both T-Mobile and Guidehouse, according to his indictment.”
• “Assistant U.S. Attorney Kiersten Fletcher said Asbill represented that he was not aware of the potential conflict during Buyer’s trial.”
• “‘Mr. Asbill has represented that this was just brought to his attention in the last few days,’ Fletcher said.”
• “Asbill said attorneys at Orrick are working ‘as fast as we possibly can’ to sort out the issue and determine whether the conflict can be waived and whether negotiations ‘between us and Mr. Buyer or between us and T-Mobile’ will be required.”

“Judge Who Thought His Obvious Conflict Of Interest Wasn’t A Conflict Of Interest Told In No Uncertain Terms: Yea, It Was A Conflict of Interest” —

• “It has been a very long time since Alvin Hellerstein graduated from law school (67 years, to be precise), and it shows in at least one aspect of his jurisprudence: Conflicts of interests.”
• “As we’ve discussed, the aged Manhattan federal judge got more than his fair share of the voluminous proceedings emanating from ethically- and legally-challenged (albeit, on the latter, not quite as legally-challenged as prosecutors thought) hedge fund Platinum Partners.”
• “As it turns out, Hellerstein knew all about the Platinum mess, on account of the indictment and subsequent cooperation of his sort-of surrogate son, the hedge fund’s marketing chief, having advised the boy on his situation and options. None of that latter bit seemed to Hellerstein worth mentioning when first he landed the bribery trials of Platinum co-founder Murray Huberfeld and former New York City corrections union chief Norman Seabrook, and later the sentencing hearing for the literal leather bagman standing between the two, Jona Rechnitz.”
• “Seabrook was duly tried, convicted and sentenced to just a hair under five years in prison. In the meantime, Huberfeld pleaded guilty, with Hellerstein sending him up the river for five times as long as prosecutors asked. Finally, 10 months later, he got around to Rechnitz. In spite of prosecutors praising Rechnitz as ‘one of the single most important and prolific white collar cooperating witnesses’ and insisting he had no idea that Platinum was up to no good, ‘or even that it was a bad investment,’ Hellerstein rejected the Probation Office’s suggestion that Rechnitz pay only the $1.2 million the corrections’ and NYPD unions paid in management fees to Platinum and insisted on half the $19 million lost when Platinum eventually collapsed.”
• “Then Huberfeld found out about Hellerstein’s relationship to Andrew Kaplan, the ex-Platinum executive. Well-versed as he was in matters of facilitating them via bribery, that sounded an awful lot like a conflict of interest to Huberfeld.”
• “Meanwhile, Rechnitz got wind of Huberfeld’s reassignment, and decided he’d like a new judge, too. Just 16 days after decided not to resentence Huberfeld, however, Hellerstein said he saw no reason to hand off Rechnitz’s sentencing, even if he had given Kaplan a few pointers on how to negotiate with prosecutors and judges, and even if for unstated reasons he’d decided not to resentence Huberfeld. And even after Kaplan asked him to think it over a while, Hellerstein still said there wasn’t even the appearance of impartiality in Rechnitz’s restitution order, and what’s more he wasn’t allowed to appeal the matter to those nitpickers on the Second Circuit. And with good reason, ‘cuz when they heard about in spite of the lack of writ of mandamus, they were not pleased:
  • ‘We conclude that the district judge abused his discretion by not reassigning the case…. That relationship was not only remarkably close; it was with a person who was directly involved in Rechnitz’s bribery case. Kaplan was mentioned in Rechnitz’s testimony—both in the initial joint trial of Seabrook and Huberfeld and in the retrial of Seabrook before Judge Hellerstein—several times as one of the Platinum employees involved in securing the COBA investment. That relationship alone, in light of these factual circumstances, was sufficient to raise serious questions about the need for recusal.
  • ‘But the facts here are even more complicated. The district judge did not merely have a close personal relationship with Kaplan; he advised Kaplan on his criminal case arising out of the Platinum collapse…. This close relationship, and the district judge’s advisory role, is further problematic in light of the restitution question, because Kaplan and Rechnitz’s interests are plausibly adverse on that issue. COBA, of course, can recover its losses only once, even though two groups—those involved in the bribery scheme and those involved in the fraud—arguably caused them. It therefore remains uncertain from whom COBA will recover the $19 million it lost. Because Kaplan is a defendant in the Platinum case, it is possible that he will be ordered to pay restitution. There is thus a reasonable and apparent relationship between COBA’s recovery from Rechnitz, Seabrook, and Huberfeld (the defendants in the bribery case) and its possible recovery from the defendants in the Platinum case (including Kaplan): the more COBA recovers from the bribery defendants, the less it will need to recover from the Platinum defendants.'”

“Special counsel asks if Nauta’s attorney has too many Mar-a-Lago clients” —

• “Special counsel Jack Smith has asked Judge Aileen M. Cannon for a hearing to discuss whether the lawyer who represents one of Donald Trump’s co-defendants in the classified documents case has too many conflicts to provide adequate legal advice to his client.”
• “In a court filing Wednesday, prosecutors said Stanley Woodward — the lawyer for Trump valet Waltine ‘Walt’ Nauta — has represented at least seven other clients whom prosecutors have interviewed about Trump’s alleged efforts to keep classified documents in defiance of the government’s demand they be returned. Two of Woodward’s clients could be called as government witnesses in the trial, the filing said.”
• “‘The conflict may result in the attorney’s improper use or disclosure of the client’s confidences during the cross-examination,’ the filing reads. ‘The conflict may cause the attorney to pull his punches during cross-examination, perhaps to protect the client’s confidences or to ‘advance the attorney’s own personal interests.’”
• “Smith asked Cannon to hold a hearing in which the judge would inform Nauta and the two witnesses, whose names have not been made public, of their legal rights and the potential conflicts their attorney poses. Lawyers are generally required to flag to a judge any potential conflicts of interest they encounter.”
• “If there is a conflict, Nauta would be asked if he still wants Woodward to represent him and if he waives his right to conflict-free representation. Cannon should then determine whether to accept that waiver. Smith suggested that Cannon arrange for an independent lawyer to be at the hearing to advise Nauta and the witnesses if they want.”
• “‘How is Woodward going to cross-examine the Trump employee when he is not waiving his rights?’ said Joseph A. DeMaria, a former federal prosecutor in Miami who now works as a private attorney.”
• “The potential conflict highlights how a relatively small group of lawyers are representing a large share of the people entangled in Trump’s legal battles. In addition to the classified documents indictment, the former president was charged Tuesday with conspiracies in connection with the effort to overturn the 2020 election results. He also faces state charges of falsifying business records, and is under investigation in Georgia for trying to block Joe Biden’s victory in that state.”

“Conflict of interest draws suspension for West Des Moines lawyer” —

• “A lawyer who has spent two decades representing various Iowa cities and counties has agreed to a 30-day suspension of his law license due to admitted conflicts of interest.”
• “In an affidavit filed with the Grievance Commission of the Supreme Court of Iowa, Brick acknowledges that while representing the city of Muscatine, he shared with the then-city administrator, Gregg Mandsager, information about the City Council’s plans to fire Mandsager. Brick also acknowledges he counseled Mandsager on how to set up the mayor and council for a claim of retaliation Mandsager could file against them.”
• “Court records indicate that the situation grew out of a 2017 case in which a district court judge ruled the City Council had illegally removed the mayor, Diane Broderson, from office, and Mandsager filed a defamation lawsuit against Broderson and the city.”
• “In April 2019, aware that some council members wanted him fired, Mandsager contacted Brick asking for advice about settling his defamation claim against the city. In his affidavit, Brick admits that he outlined a few options as to how the city administrator could proceed and then wrote, ‘Either way, you would want to make a big public statement about how much you look forward to working with the mayor and the council so you can set them up for a retaliation claim.'”
• “Brick admits that in the months that followed, as the lawsuit was settled and the council moved forward with plans to fire Mandsager, he provided advice to the council but also continued to communicate with Mandsager, sharing information about the council’s plans and providing advice to Mandsager on how best to proceed with a lawsuit against his client, the city.”
• “Despite that, Brick states in his affidavit, he wrote to a council member and assured him that if Mandsager was to ask for any legal assistance he would tell Mandsager he worked for the council and so Mandsager would need to obtain his own attorney.”
• “Brick acknowledges that even as he provided such assurances to the council, he continued to give advice to Mandsager. At one point, Mandsager was watching a livestream of a council meeting and texting Brick at the meeting, asking Brick to address certain matters. ‘Hold on,’ Brick texted back, ‘I’m trying to save your job.'”
• “A few weeks later, Brick admits, he texted Mandsager to alert him to the fact that one council member ‘just outed me as someone working behind the scenes on your behalf. I’m not sure any of them would be surprised by that, but it certainly makes it even less likely that they would take my advice.'”
• “In his affidavit, Brick admits that when the council drafted, with Brick’s help, an order terminating Mandsager’s contract with the city, Brick didn’t tell the council that the order’s wording was, in his opinion, legally insufficient — but he did alert Mandsager to that fact.”
• “In response to Brick’s affidavit consenting to a 30-day suspension, the Iowa Supreme Court Attorney Disciplinary Board agreed that such a penalty was warranted.”
• “The board said Brick’s ‘more than 20 years of experience as an attorney’ and his ‘deliberate deception of his client’ were aggravating factors in the case.”

“Dentons to Face UK Disciplinary Tribunal Over AML Regulation ‘Breaches’” —

• “International law firm Dentons has been referred to the U.K.’s Solicitors Disciplinary Tribunal (SDT) and accused of breaching money laundering regulations.”
• “The Solicitors Regulation Authority published a decision to prosecute the firm before the SDT, after it accused Dentons of failing ‘to take adequate measures to establish [a] client’s source of wealth and/or funds’ while acting for a ‘politically exposed person or his associated entities between approximately May 2013 and June 2017.'”
• “The client in question has not been named, but Dentons will face a SDT hearing on the matter later this week.”
• “The regulations in question state that a relevant person who proposes to have a business relationship, or carry out an occasional transaction with a politically exposed person, must ‘take adequate measures to establish the source of wealth and source of funds which are involved in the proposed business relationship or occasional transaction.'”
• “They also state that ‘where the business relationship is entered into, [the person must] conduct enhanced ongoing monitoring of the relationship.'”
• “The SRA goes on to accuse Dentons of having ‘failed to comply with its legal and regulatory obligations,’ and ‘run the business effectively in accordance with proper governance and sound financial and risk management principles.'”

Just published by SRA, an excellent and extensive update on the subject: “Sectoral Risk Assessment – Anti-money laundering and terrorist financing” —

• “We are responsible for the supervision of authorised firms for their anti-money laundering (AML) compliance, and we take our responsibilities very seriously. We owe a duty to society at large, and to protect the integrity of the legal sector through tackling intentional and inadvertent enablers of money laundering.”
• “What is the purpose of this document? A risk-based approach is embedded in UK legislation and AML best practice. It means that firms should assess their risks and target their resources to the areas or products that are most likely to be used to launder money. Similarly, we take a risk-based approach to directing our resources, focusing effort most on supervising the firms that are most likely to be used to launder money.”
• “We ask to see firms’ written risk assessments and policies, procedures and controls as part of our proactive supervision programme, or in response to specific information we have received. Your firm’s risk assessment should not be disclosed to customers, or third parties, because it may be useful to those who are seeking to launder money. This document sets out information on money laundering and terrorist financing risk that we consider most relevant for firms we supervise.”
• “All firms that are within scope of the regulations must comply with the all the requirements of regulations. This includes taking appropriate steps to identify, assess and maintain a written record of their risk of being used for money laundering or terrorist financing.”
• “The sanctions regime has expanded recently, mainly due to the Russian invasion of Ukraine in 2022. The long-standing involvement of Russian interests and beneficial owners in British business, and vice versa, has meant that many firms have been exposed to the sanctions regime for the first time.”
• “It is important to remember, however, that there are a large number of thematic and geographic sanctions regimes beyond Russia and Belarus. Firms cannot assume that sanctions are not relevant to them. There are a significant number of British nationals subject to sanctions.”
• “Amendments to the regulations in 2022 mean that all firms must now carry out an assessment of their exposure to the risk of proliferation financing.”
• “Simply put, this means the risk of the firm being involved with the global proliferation of nuclear, chemical, biological or radiological weapons by groups and countries which are not permitted to have them under international treaty. This includes both materials for weapons, and also ‘dual-use goods’. These are goods which are not manufactured as weapons but could be used in weapons or to produce them, for example fertiliser.”
• “There are, however, some sectors which have heightened exposure to proliferation financing, and where we would expect a firm to undertake a more thorough risk assessment, either as part of the AML firm-wide risk assessment or as a standalone document.”
• “There are similar risks in the use of new types of financial technology, eg fund transfer systems and crowdfunding platforms. Any use of new technologies should be preceded by an assessment of the risks they may introduce and effective mitigation of these risks where possible.”
• “This greater use of technology in all respects also heightens the importance of cyber security. Cyber security breaches could allow criminals to gain total access to both client’s sensitive data and the firm’s systems, allowing them to be used for laundering money.”
• “We have also observed that while larger firms may have greater resources to protect them from money laundering risks, risk-based information is often kept by a separate team or systems and is unavailable to others within that firm. This can mean that those working on a file may:
  • lack ready access to the underlying risk assessment and due diligence documentation and information and
  • be prevented from conducting effective ongoing monitoring of risk.”
• “Firms should remain vigilant and make sure their policies, controls and procedures adequately protect the firm against the risk of money laundering and terrorist financing.”
• “The risk posed by your client also extends to the risk posed by the beneficial owner, if applicable. You need to be confident you know who your client is and why they are asking for your services, and any risk that you do not should be duly considered.”
• “You should also not assume that existing clients are necessarily lower risk. Clients might seek to onboarded with you for low-risk work, and then transition to higher risk work in order to bypass more stringent checks at the point of onboarding.”

“Due Diligence Missteps Are Costly, and Smaller Firms Are Often Less Prepared” —

• “Skimping on due diligence when it comes to working with new clients can bear heavy consequences for law firms, such as Eckert Seamans Cherin & Mellot, which is in the midst of negotiating a $45 million settlement to make up for a former attorney’s alleged role in helping a merchant cash loan business and an investment services firm defraud investors of nearly $500 million.”
• “The law firm and former partner John Pauciulo are in hot water for their representation of an investment firm that solicited investors for Par Funding, a Philadelphia lending outfit whose owners are now subject to a raft of criminal charges. In the process of going after Par and investment firm A Better Financial Plan, the Securities and Exchange Commission censured Pauciulo for omitting details of risks in materials he prepared for potential investors.”
• “Meanwhile, the owner of the investment firm says in a malpractice suit that Eckert Seamans was negligent in its oversight of Pauciulo, who himself was allegedly negligent in either knowing and not disclosing or else not knowing about the criminal history and shady business practices of the owner of Par.”
• “However, not every firm has the same resources available to conduct proper and thorough due diligence when it comes to clients or affiliated businesses; according to law firm leaders and consultants, smaller firms have fewer resources to dedicate to diligence efforts, often resulting in added risk for the firm. Eckert Seamans, ranked No. 187 in the most recent Am Law 200 rankings, declined to comment on its own due diligence approach for this report.”
• “The firm is also fighting a long-running breach-of-fiduciary-duties lawsuit brought by a former gaming client in Pennsylvania federal court, which alleges it also represented a competitor in matters where the two had adverse commercial interests.”
• “Conversations with consultants and law firm leaders indicated that there is no set industry standard when it comes to law firms conducting due diligence.”
• “Even with fewer resources, there are several warning signs early on in an interaction with a client that might flag future problems for the firm, including one’s ‘Spidey sense’ about a client and its legal needs.”
• “Eileen Garczynski, senior vice president and equity partner at business insurance and risk management firm Ames & Gough, added that she felt ‘firms should be using checklists’ to make sure they address all concerns with a client.”
• “Her checklist of red flags included lack of information about an organization or client, a client having inexplicable revenue growth, a client’s refusal to provide information, stalling tactics, including rescheduling meetings early on, and having an advisory board full of people who don’t actually play a real role in the business.”
• “Garczynski also said that a client having frequent changes in professional relationships, such as switching counsel on a regular basis, might be an indicator of an issue.”
• “Even when attorneys are well-versed in spotting these red flags, however, things might still be missed when firms conduct due diligence. Garczynski pointed to a desire for speed as a possible reason behind neglecting or skipping thorough intake procedures.”
• “‘[There’s] a lot of motivated reasoning that can prevent the lawyer from seeing the warning signs,’ she said. But even larger firms are subject to missteps too. Levin pointed to the stress of the ‘eat-what-you-kill model,’ flagging it as a reason why attorneys may look the other way when red flags pop up.”
• “‘The problem with intake is it’s always so early… there may be a rush to it, so you might not get as much information as you really need,’ [University of Connecticut School of Law professor Leslie] Levin said. ‘Every firm in this country, big, little, no exceptions, has been unpleasantly surprised by a client engaging in fraudulent activity.'”

With a hat tip, as always, to the “Godfather of Conflicts,” here are the latest sightings of interest from Bill Freivogel:

• Medtronic, Inc. v. Becton, Dickinson & Co., 2023 WL 4370686 (D. Kan. July 6, 2023).
  • “Medtronic made a motion to compel Becton to produce certain materials. Becton defended the motion to compel, in part, by claiming Medtronic’s lawyers had a Rule 1.7 conflict of interest.”
  • “In this opinion the magistrate judge rejected that defense, saying Becton could have made a motion to disqualify those lawyers. Because Becton did not, the court said it was ‘unnecessary’ to resolve the conflict issue. The court went on to grant in part, and deny in part, Medtronic’s motion to compel on other bases.”
• Boozer v. Fischer, No. 22-0050 (Tex. June 30, 2023).
  • “This opinion is a mini-treatise on escrow agreements. We will focus on the one conflicts-related issue: Whether a lawyer for one party may act as an escrow agent for both parties.”
  • “Party A put $1 million in escrow for later payment to Party B if Party B prevailed in court. A’s lawyer (‘Lawyer’) was the escrow agent. Lawyer stole the money.”
  • “In this opinion the court ruled that the risk of loss fell on Party A. In the course of the opinion the court ruled that one party’s lawyer can be the agent in an enforceable escrow arrangement, provided, in part, that the agent’s interests do not conflict with those of the principal (in this case, Party A).”
• In re Valentino, 2023 IL App (1st) 221155-U (Ill. App. 1st Dist. July 14, 2023).
  • “Son petitioned for guardianship for Son’s 90-year-old father (‘Father’), against Father’s wishes. Lawyer represented Father. The case settled, and Lawyer petitioned for fees. Son objected.”
  • “The trial court granted the fee request, and Son appealed. Son claimed that Lawyer had a conflict because Lawyer had done some things at Father’s request that benefitted Father’s lady-friend (‘Ms. G’). An issue in the case is whether Ms. G had wrongfully taken money from Father.”
  • “In this opinion the appellate court affirmed the fee order, holding that there was no evidence of a lawyer-client relationship between Lawyer and Ms. G, and that Lawyer’s doing things at Father’s request that benefitted Ms. G did not make Ms. G Lawyer’s client.”
• Wheatley v. County of Orange, 2023 WL 4443011 (Cal. App. Unpub. July 10, 2023).
  • “The Wheatley law firm (‘Wheatley’) had a contract with Orange County to defend workers’ compensation cases. The county terminated the contract, and, in this case against the county, Wheatley is claiming the contract termination was wrongful.” The Lynberg law firm (‘Lynberg’) is defending the county.”
  • “As a result of the county’s termination, Wheatley let go one of its lawyers. That lawyer sued Wheatley for wrongful employment termination. Wheatley hired Lynberg to defend that case before this case went to court.”
  • “For a time, Lynberg was representing the county in anticipation of this case against Wheatley and representing Wheatley in the employment case. The opinion does not reveal how Lynberg missed the conflict. In any event, Wheatley moved to disqualify Lynberg in this case. The trial court granted the motion to disqualify. In this unpublished opinion the appellate court affirmed. Because this case involves a current client conflict, the court said rules relating to successive representation or screening are not applicable.”

“It’s the ‘Golden Age’ for Lawyers Seeking Corporate Board Seats” —

• “Public companies are increasingly looking for lawyers to become corporate directors, bringing legal expertise to the boardroom and prestige to attorneys who can navigate potential conflicts.”
• “Lawyers have long served on the boards of privately held companies and nonprofits. US public companies are coming to see the value of having more legal know-how in the boardroom as the web of compliance and regulatory requirements grows, said Susan Hackett, a former top lawyer for the Association of Corporate Counsel.”
• “Jeh Johnson, the former Homeland Security Department chief, is a prominent example. He serves as director at three companies—United States Steel Corp., MetLife Inc., and Lockheed Martin Corp.—while also working as a partner at Paul, Weiss, Rifkind, Wharton & Garrison. Robert Kimmitt, another former government official, serves on the board of Facebook parent Meta Platforms Inc. while working as senior international counsel for Wilmer Cutler Pickering Hale and Dorr.”
• “Roughly 1,500 board seats become available each year, many of them with annual cash-and-stock compensation packages averaging $300,000, said Wendeen Eolis, a veteran legal recruiter.”
• “Law firms have become more open to the potential business opportunity that comes with putting their lawyers on corporate boards, and less worried about conflicts that could impact current business.”
• “‘You’re going to be in the presence of a significantly credentialed, capable, and highly respected group of fellow board members, many of whom are CEOs of other companies,’ Eolis said.”
• “Williams and Eolis said the conventionally understood threshold for maximum number of directorships a lawyer can hold is likely three for public companies. While many firms appear to have loosened their restrictions, Williams said lawyers still ‘have to be very cautious on the conflicts side.'”
• “Increased exposure fueled by merger mania in Big Law and an uptick in lateral hiring has compelled firms to address and resolve all kinds of conflicts, including those that arise from board service, Eolis and Hackett said.”
• “Some companies require that lawyer-directors wall off or recuse themselves from legal matters involving their firm to ensure independence. But partners are compensated from the shared revenue of the firm where they work, said Goldstein. They could also supervise or oversee other lawyers that could be doing work for a company on whose board they serve, he said.”
• “ISS recommends that companies avoid choosing directors from firms that are also their outside counsel. Providing legal services requires ‘close collaboration with senior management,’ Goldstein said.”
• “Lawyers who retire from a firm can be considered for a board seat with a firm client, Goldstein said. This workaround allows some former Big Law partners to take on board roles and retain of counsel, senior counsel, or other roles with their firm that doesn’t include a share of the firm’s revenue and does not receive any form of compensation from the firm in excess of $10,000 a year.”

Rhode Island Supreme Court Ethics Advisory Panel Op. 2023-4 (Lawyers Weekly No. 75-016-23) (2 pages) (July 17, 2023): “Attorneys – Conflict of interest – Simultaneous representation” —

• “Where (1) an attorney’s law firm was recently appointed as the town solicitor for a municipality and (2) the law firm is also legal counsel to a management agency that makes consistency determinations for certain development projects, the law firm’s simultaneous representation of the municipality and the agency does not present a conflict of interest despite the Town Council’s approval of a resolution in opposition to the certain type of development project that the agency is tasked with reviewing.”
  • ‘The inquiring attorney’s law firm was recently appointed as the Town Solicitor for a municipality (‘Town’). The law firm is also legal counsel to a management agency with regulatory functions (‘Agency’). As part of its regulatory functions, the Agency reviews and makes consistency determinations for certain development projects. It has recently conducted one such review and anticipates it will be conducting another such review in the future.’
  • ‘At a recent Town Council meeting, the Town Council approved a resolution in opposition to the certain type of development project that the Agency is tasked with reviewing. The inquiring attorney was present at this meeting, along with an associate from his/her law firm and both submitted a recusal form to the clerk and recused from the matter. The inquiring attorney advises that the resolution did not mention the Agency and was not forwarded to the Agency. Rather, it was forwarded to other municipalities and certain elected officials.’
  • ‘The inquiring attorney asks whether his/her law firm’s simultaneous representation of the Town and the Agency presents a conflict of interest.’
  • ‘It is the Panel’s opinion that there is no conflict of interest because, on the facts presented, the Agency and Town do not have adverse interests.’
  • ‘The inquiring attorney’s law firm has a lawyer-client relationship with the Town. Therefore, under Rule 1.7, he/she may not represent clients with interests adverse to the municipality. However, based on the facts described by the inquiring attorney, it is the Panel’s opinion that the Agency’s interest is not adverse to the Town or its Town Council. The Town Council simply took a position on the type of development project that the Agency is tasked with reviewing. In the absence of competing interests, there is no concurrent conflict of interest.’
  • ‘The Panel emphasizes, as it has done in the past, that whether a conflict of interest exists is determined on a case by case basis. While the Panel sees no conflict of interest based on the facts presented, it does caution the inquiring attorney to be mindful of the possibility of such a conflict arising in the future.’
• PDF of the full opinion here.

Fascinating find and analysis from Baker McKenzie partners Jacob M. Kaplan and David Zaslowsky: “Arbitration. Vacatur of Award. District court vacates arbitration award due to evident partiality because one of the arbitrators failed to disclose that he was a former client of the attorneys for one of the parties to the arbitration” —

• Equicare Health Inc. v. Varian Med. Sys., Inc., 5:21-mc-80183-EJD, (N.D. Cal. April 19, 2023) [click for opinion]
• “When sales of Equicare’s software plummeted, Equicare claimed that Varian breached this duty and alleged that Varian instead promoted its own competing product. Equicare therefore initiated arbitration proceedings against Varian through the American Arbitration Association (the ‘AAA’).”
• “The AAA appointed a three-member panel to adjudicate the dispute, including Mark Dosker. As per its rules, the AAA required each arbitrator to respond to a series of conflict-of-interest questions. Mr. Dosker responded ‘NO’ to all thirty-one conflicts questions, including ‘Do you have, or have you had any attorney-client relationship with a party or lawyer for a party?'”
• “However, this statement was not true. Counsel for Varian, Ms. Quyen Ta, had served as counsel to Mr. Dosker and his law firm, Squire Sanders, five years prior, in a 2013 legal malpractice suit. Ms. Ta immediately disclosed this potential conflict of interest to the AAA. Despite Ms. Ta’s disclosure, the AAA did not share this information with Equicare or its counsel. Neither party objected to Mr. Dosker’s appointment to the panel.”
• “The arbitration proceeded to a hearing, after which the panel issued a final award in favor of Varian. The panel found that, while Varian breached the ‘commercial best efforts’ clause in the contract, there was insufficient evidence of damages. In so ruling, the panel chose not to accept an independent auditor’s findings that Varian owed about $1.9 million to Equicare.”
• “After receiving this decision, Equicare began an investigation into the background of the panel and independently discovered the former attorney-client relationship between Mr. Dosker and Ms. Ta. Equicare therefore filed a petition in the United States District Court for the Northern District of California to vacate or correct the arbitration award based on evident partiality arising out of the former attorney-client relationship.”
• “The court granted the petition and vacated the arbitration award. The court applied the legal standard found in Section 10(a)(2) of the Federal Arbitration Act (the ‘FAA”), which permits a district court to vacate an arbitration award where, inter alia, “there was evident partiality or corruption in the arbitrators.” 9 U.S.C. § 10(a)(2).”
• “The court also noted that Mr. Dosker’s failure to conduct an adequate investigation in the first instance breached the independent duty on arbitrators to investigate for potential conflicts, a violation that ‘may result in a failure to disclose that creates a reasonable impression of partiality.'”

“Sexual relationship between judge and prosecutor entitles murder defendant to new trial, court rules” —

• “The top criminal court in Oklahoma has ruled that a defendant convicted of murder in 2021 is entitled to a new trial because the judge and one of the prosecutors had a prior sexual relationship.”
• “The judge, Judge Timothy R. Henderson, had admitted to consensual ‘sexual conduct’ with the prosecutor that ended before the trial but said the relationship didn’t affect his rulings. The prosecutor was identified only as ‘K.C.’ in the Oklahoma Court of Criminal Appeals’ decision.”
• “Because of the undisclosed relationship, Hashagen was deprived of the right to a fundamentally fair trial that created a potential for bias, the appeals court said.”
• “Henderson resigned his judgeship in spring 2021—after the prosecutor and two other lawyers accused him of sexual misconduct, according to Law & Crime.”
• “Henderson acknowledged a sexual relationship with two prosecutors, but he said it was consensual, according to past coverage by the Associated Press. A special prosecutor declined to bring charges in connection with the allegations.”

Amy G.McClurg, Assistant Counsel at Thomson Hine writes: “Rule 1.8(h): Permissibly limiting your malpractice liability or unwittingly violating ethics rules?” —

• “Rule 1.8 addresses conflicts that can arise between a lawyer and client (as opposed conflicts between clients). Prior to the adoption of Model Rule 1.8 in 1983, the ABA Model Code flatly prohibited agreements limiting liability.”
• “This rule was in stark contrast to the rules governing many others, including large accounting firms and lawyers in Europe, who often had agreements limiting their liability to clients for their work on deals alongside American lawyers who could not limit their liability (which raised numerous problems with potential disproportionate liability for deals gone bad).”
• “In 2002, the ABA again amended Model Rule 1.8(h)… Model Rule 1.8(h)(1) now states that ‘A lawyer shall not make an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless the client is independently represented in making the agreement.'”
• “Approximately 28 states have adopted the language in Model Rule 1.8(h)(1) entirely. Seven states have similar language to that of the Model Rule but have added the requirement that such agreement must also be “permitted by law”. Nine states still outright prohibit such prospective agreement. The seven remaining states have language that does not squarely fit into any of the aforementioned categories.”
• “The reasons for wanting to limit your liability in any given situation are likely obvious, but whether or how you should pursue such endeavor is far less clear.”
• “Choose your language wisely . Attorneys licensed in multiple jurisdictions and law firms spanning across multiple states must be keenly aware of any differences in the applicable rules… Using the wrong language could subject the lawyer to additional rule violations.”
• “Merely refraining from plugging in prospective agreements into your engagement letters will not ensure Rule 1.8 compliance. Lawyers barred in jurisdictions like DC, where such agreements are forbidden, must still examine less obvious conduct that may constitute a Rule 1.8 violation.”
• “While New York similarly prohibits lawyers from prospectively limiting malpractice liability, one New York opinion found that 1.8(h) is not violated simply due to a lawyer advising a client to accept a plea deal that includes waiving an ineffective assistance of counsel claim on appeal.”
• “Prospectively limiting malpractice liability is a conflict of interest and compliance requires satisfaction of the Rule 1.8 conditions. Lawyers must be careful in choosing which words should or shouldn’t be used in the agreement.”

“A Steak Dinner Keeps Ethics Questions Sizzling in J&J’s Talc Bankruptcy” —

• “On the second day of a hearing on whether to dismiss Johnson & Johnson’s talc bankruptcy, lawyers supporting the Chapter 11 case headed off to Ruth’s Chris Steak House for dinner in Princeton, New Jersey. They weren’t alone.”
• “Someone took a photograph of them dining with Randi Ellis, appointed to represent future claimants in the bankruptcy filed by Johnson & Johnson subsidiary LTL Management LLC. And Clay Thompson, of Maune Raichle Hartley French & Mudd in New York, who questioned some of the attorneys on the stand earlier that day, then attached the photo to his July 12 motion to disqualify Ellis as the future claims representative. The dinner, he argued, showed a ‘significant appearance of impropriety and collusion.'”
• “‘Appearances matter,’ Thompson wrote. ‘Dining out with the half-trillionaire tortfeasor’s lawyer —as that tortfeasor is attempting to capture future victims and cram down current ones—is too much to stomach.'”
• “On Monday, lawyers for Ellis sent a letter asking U.S. Chief Bankruptcy Judge Michael Kaplan to consider sanctioning Thompson, who unsuccessfully moved to disqualify Ellis months earlier on separate collusion allegations.”
• “‘The motion is nothing more than a continuation of Mr. Thompson’s campaign to smear, threaten and intimidate the FCR and erode the public’s confidence in this court and the integrity of the bankruptcy process,’ wrote Mark Falk, of Walsh Pizzi O’Reilly Falanga in Newark, New Jersey. ‘Mr. Thompson has repeatedly and baselessly harassed the FCR and invoked rhetoric that risks eliciting continued threats directed at this court and the FCR. His behavior has repeatedly crossed the boundaries of advocacy.'”
• “Such ‘outrageous antics appear intended to create sensational headlines,’ Falk added, noting that Thompson had not taken photos of Ellis in meetings with lawyers for the official talc claimants committee.”
• “In a statement, Liza Walsh, of Walsh Pizzi O’Reilly Falanga, said Ellis meets with all parties in the case. ‘The motion itself is not worthy of comment as the motion is frivolous, malicious, unprofessional,’ she wrote.”
• “The disqualification motion is the latest example of the vitriol that prompted Kaplan to caution lawyers to tone down the rhetoric earlier this year. But it is also emblematic of a sharp divide within the plaintiffs’ bar now brewing over whether to approve the Chapter 11 plan.”

“Pot Co. Wants Rival’s Atty DQ’ed Over Alleged Conflict” —

• “Two cannabis businesses accused of backing out of a deal to sell Bob Marley-branded products are seeking to disqualify the general counsel of the company suing them in Washington federal court, saying the attorney was once ‘intimately involved’ with the defendant entities when they were all under the same corporate umbrella.”
• “Tilray Inc. and its subsidiary High Park Holdings Ltd. accused Patrick Moen on Thursday of violating ethics rules by aiding Docklight Brands Inc.’s breach-of-contract litigation against the pair of companies, alleging that he drafted the licensing agreement in dispute when all three companies belonged to Privateer Holdings.”
• “Though Moen has not filed for appearance to represent Docklight in the case, he has signed several declarations submitted by Docklight.”
• “Tilray, a global group of brands that sells cannabis and hemp consumer goods, said in the motion that its relatively new management did not understand until discovery the scope of Moen’s past work for Tilray and High Park.”
• “‘But defendants’ privilege review of documents in April 2023 revealed that Mr. Moen was deeply involved in negotiating the license on behalf of High Park and Tilray, in structuring High Park and Tilray, including through Tilray’s IPO, and in preparing and approving Tilray’s public filings that are subject to Docklight’s claims of breach of confidentiality,’ Tilray and High Park said in the Thursday motion.”
• “Upon discovering the conflict of interest, Tilray and High Park claim they asked that Moen recuse himself and Docklight amend a protective order to prevent him from accessing confidential information produced during litigation. But Moen and Docklight allegedly refused.”
• “‘Defendants’ further investigation revealed that this is not the case of a general counsel of a parent company that occasionally weighed in on legal matters of the subsidiaries,’ Tilray and High Park said. ‘Rather, Mr. Moen had his own Tilray email account, provided advice and privileged materials to Tilray’s board using that email address, and had significant involvement in Tilray’s legal affairs.'”
• “Moen, now senior vice president for corporate development and legal affairs at Docklight, was general counsel for Privateer from November 2013 through March 2021, according to Tilray’s motion. During that time, as Moen advised the parent company on all legal and compliance affairs, Docklight and Tilray were formed as subsidiaries of Privateer.”