Risk Update

Conflicts Paradoxes, Problems and Probing — Shareholder Suits, Trump Tribulations, Law Firm Anti-AML Arguments (And Anti-Anti-AML)

Posted Dan Bressler

“The ‘Conflict of Interest’ Defense to Shareholder Derivative Standing” —

  • “In shareholder derivative litigation, defendants occasionally argue that the plaintiff – who ostensibly sues on behalf of the company and its owners in a fiduciary capacity – has some form of conflict of interest with the company or its remaining owners, so the court should disqualify the plaintiff from serving as plaintiff.”
  • “The classic, most simple conflict of interest is where the plaintiff herself has engaged in some form of wrongdoing against the company, for which the entity or its owners have lodged (or may lodge) counterclaims.”
  • “The theory is that if the plaintiff is herself a bad actor, she cannot be expected to be an adequate steward and representative of the legal rights and interests of the entity she herself has harmed.”
  • “Other disqualification cases in New York followed Steinberg. A fairly comprehensive discussion of the state of New York law (up to that time) of shareholder derivative plaintiff conflicts of interest was found in Pokoik v Norsel Realties, 55 Misc 3d 1208[A] [Sup Ct, NY County 2017]), in which former Manhattan Commercial Division (now Appellate Division – First Department) Justice Jeffrey K. Oing ruled that there was a ‘prototypical conflict of interest’ requiring disqualification because the plaintiffs purported to sue on behalf of an entity’s partners while at the same time suing them as defendants.”
  • “Similarly, in Delaware, there is a line of case law emanating from Katz v Plant Indus., Inc. (an unpublished 1981 Delaware Chancery Court decision) and Youngman v Tahmoush, 457 A2d 376 [Del Ch 1983]), both holding that Delaware’s class action statute, Court of Chancery Rule 23.1, applies to shareholder derivative suits, and that Delaware courts should under Rule 23 examine the plaintiff’s adequacy as a derivative plaintiff (both at the pre-answer dismissal stage and at the final approval of any derivative settlement), including whether any conflicts or ‘economic antagonism’ between the plaintiff, the entity, or the other owners.”
  • “Youngman announced the Delaware standard that ‘purely hypothetical, potential or remote conflicts’ are not enough, and that to prove the need to disqualify a derivative plaintiff, ‘a defendant must show that a serious conflict of interest exists, by virtue of one factor or a combination of factors, and that the plaintiff cannot be expected to act in the interests of others because doing so would harm his other interests.'”
  • “The Youngman standard has worked its way into New York jurisprudence, including a decision last fall from Manhattan Commercial Division Justice Joel M. Cohen, TNJ Holdings, Inc v Rubenstein (Decision and Order [Sup Ct, NY County Sept. 13, 2021]), in which the Court, applying Delaware law, dismissed a shareholder derivative suit for lack of standing under CPLR 3211 (a) (3) because the plaintiff brought a mix of direct and derivative claims, the value of the direct claims eclipsing the derivative claims.”
  • “In the past month and a half, a pair of decisions in both New York and Delaware have thrown cold water on the “conflict of interest” defense to shareholder derivative standing.”
  • [See the complete article for more detail on]:

“Trump’s Lawyers May Become Witnesses or Targets in Documents Investigation” —

  • “Two lawyers for former President Donald J. Trump are likely to become witnesses or targets in the investigation into how he hoarded documents marked as classified at his Florida estate — and secretly held onto some even after they claimed all sensitive materials had been returned, legal specialists said.”
  • “During the visit, Mr. Trump’s representatives turned over 38 documents with classified markings and indicated that all the records had been kept in a storage room, that no other records were stored elsewhere and that all available boxes had been searched, prosecutors said.”
  • “According to the statement, Ms. Bobb signed on behalf of Mr. Trump that ‘based upon the information that has been provided to me,’ all documents responsive to the subpoena were being returned after a ‘diligent’ search.”
  • “The sequence of events raises the question of whether the two lawyers knowingly misled the Justice Department. If so, they could be charged with crimes like obstruction and making false statements. But they could defend themselves by saying they in turn had been lied to by someone else and so did not know the statements were misleading.”
  • “It is not clear whom Ms. Bobb was referring to — Mr. Corcoran, Mr. Trump, both, or someone else — when she qualified her statement with the phrase “based upon the information that has been provided to me.” Investigators may seek to ask her that. If Ms. Bobb were to single out Mr. Corcoran, the focus would shift to him.”
  • “Notably, if either of them were to say that Mr. Trump had assured them that no other documents marked as classified remained at Mar-a-Lago, that would create a conflict of interest, specialists said: Mr. Trump’s defense would likely be to deny he had said that. If such a clash arises, it is doubtful they could continue representing him as a matter of legal ethics.”

In the United States: “Lawyers Fight Bill Forcing Them to Report Suspicious Client Acts” —

  • “Lawyers are pushing back against anti-money laundering legislation that would require them to report suspicious transactions by clients, as banks already must do.”
  • “Opponents worry the plan would disrupt attorney-client privilege and empower the Treasury Department to conduct random audits. ‘The audit power really is quite broad and unconstrained,’ Covington & Burling partner Nikhil Gore said in an interview.”
  • “The legislation, prompted in part by Pandora Papers disclosures last year, is aimed at shutting down what supporters see as loopholes in the Bank Secrecy Act that let oligarchs such as those allied with Vladimir Putin take advantage of US entities to launder money.”
  • “The American Bar Association said the legislation would regulate services law firms provide, such as trust formation and company registration, and interfere with attorney-client relationships.”

In Australia: “90% of lawyers concerned with money laundering” —

  • “More Australian lawyers are concerned about money laundering than ever; new research has revealed.”
  • “A new report conducted by anti-money laundering (AML) and counter-terrorism financing (CTF) platform First AML has shown that 90 per cent of lawyers and accountants are more concerned about money laundering since discussions around Tranche 2 — the name of the part of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 that applies to legal professionals, accountants, real estate agents and trust and company service providers.”
  • “According to the research, the two main reasons for this are that 79 per cent of Australian companies are increasing their focus on customer transparency and ethical customer onboarding, with 70 per cent preparing for expected Tranche 2 implementation. Other reasons include reducing siloed documentation (64 per cent), increased risk of fines (61 per cent) and external risks (47 per cent).”
  • “In addition, a whopping 95 per cent of respondents admitted that a money laundering incident would impact their company’s ability to attract new clients and retain existing ones and 89 per cent said they are proactively putting more rigid AML policies in place.”
  • “Compliance steps being put in place include technology, outsourcing services such as a policy consultant or external training and hiring AML experts.”