Bressler Risk Blog

Kathryn Westmore, a senior research fellow at the Centre for Financial Crime and Security at RUSI (the Royal United Services Institute) writes: “Carrot or stick? The future for AML supervision of the legal sector” —

• “The events of the last year have resulted an unprecedented focus on the role of the legal sector in enhancing the UK’s reputation as a haven for dirty money.”
• “The sector has long been felt to have a problem with meeting its anti-money laundering (AML) regulatory obligations and there has always been an uneasy tension between AML and other core tenets like professional privilege and the right to legal representation.”
• “This system of supervising lawyers, and indeed other professions like accountants, is, however, in need of a “radical overhaul,” according to an influential group of backbench MPs. The campaign group Spotlight on Corruption has claimed that the UK’s legal sector “escapes effective supervision for money laundering”.”
• “The government has committed to a consultation later in 2023 on the future AML supervisory framework and recognised that “there is more to do”, proposing a number of options for reform in the way that the professions are supervised for AML purposes.”
• “The Economic Crime and Corporate Transparency Bill, currently working its way through the legislative process, has started to move the dial on AML supervision on the legal sector, introducing new fining powers for the Solicitors Regulation Authority (SRA) and Scottish Solicitors’ Discipline Tribunal and a new regulatory objective around preventing economic crime.”
• “Where firms consistently fail to understand and comply with their basic requirements, then yes, that’s exactly the type of behaviours that the SRA and the other supervisors should be cracking down on.”
• “And there are many, many more firms that simply get things wrong through ignorance, lack of resources or, frankly, a blasé attitude to compliance, than there are firms that are deliberately and willingly facilitating money laundering.”
• “The PBSs, by their own admission, generally favour a supervisory approach of engaging with the sector informally rather than more formal routes. There is a place for formal supervisory activity, and it can be used effectively both to punish breaches of the regulations and act as a deterrent to others in the industry.”
• “But as we look forward to the government’s consultation on AML supervision, what it should really be asking is not necessarily how we can increase the number of fines in the sector but what are the effective interventions that will really drive up the level of compliance in the sector.”
• “What tools, information and resources might the sector need to be able to fulfil their obligations that they don’t have at the moment?”

“Russian mercenary boss passed money laundering checks by using a bill in his mother’s name, report says” —

• “The head of the Wagner mercenary group, implicated in war crimes in Ukraine, was able to pass UK money laundering laws by using a gas bill in his 81-year-old mother’s name, according to the Financial Times.”
• “Yevgeny Prigozhin presented the document in response to a 2021 request by a London law firm for his identity documents, before accepting him as a client, the FT reported, citing leaked emails.”
• “The request was made before Russia’s invasion of Ukraine. But at the time Prigozhin was under UK, EU and US sanctions for funding mercenaries connected to human rights abuses elsewhere in the world, as well as attempts to interfere with the 2018 US elections.”
• “Prigozhin’s Russian lawyers sent Discreet Law a copy of his passport and a gas bill in his mother’s name, which had an address in the Russian city of St Petersburg, the FT reported.”
• “His lawyers wrote that ‘the bill is issued in the name of the claimant’s mother (Violetta Prigozhina) who actually lives at the client’s residential address and pays the bills.'”
• “A lawyer at Discreet Law replied by saying: ‘We are satisfied with the [anti-money laundering] documents,’ according to the FT. The firm was given permission to represent him in 2021 by the UK Treasury, the FT reported.”
• “Prigozhin had hired the firm to sue Eliot Higgins, founder of investigative news outlet Bellingcat, for libel after Bellingcat reported on the group’s activities and Prigozhin’s connections to the Kremlin.”
• “The case was later struck out, and Discreet Law applied to stop representing Prigozhin in March 2022.”

See also: “UK government ‘let lawyers bypass sanctions’ to help Putin ally sue journalist.”

“Big Law Firms Back Covington in SEC Fight Over Client Data” —

• “A total of 83 US law firms are backing Covington & Burling in its fight with the Securities and Exchange Commission over client data.”
• “The agency wants a federal court in Washington to force Covington to turn over the names of nearly 300 clients whose information may have been exposed in a 2020 cyberattack that impacted the firm.”
• “The SEC says it needs the information to help an investigation into whether hackers behind the cyberattack engaged in illicit trading. Covington has argued that confidentiality rules and a dearth of evidence of wrongdoing should shield them.”
• “Firms signing onto the new brief include Kirkland & Ellis, Latham & Watkins, Cravath Swaine & Moore, and DLA Piper, some of the highest-grossing law firms and competitors of the Washington-based Covington.”
• “‘Not only would the SEC breach well-established principles of confidentiality in the service of this fishing expedition, it would turn attorneys into witnesses against their own clients,’ they said.”
• “The filing comes amid a long-running fight between the SEC and Covington that could have significant implications for law firms. Covington and the other law firms have argued that a judgment in favor of the SEC could open the door to further weakening of attorney-client confidences.”
• “‘The mere identity of a client itself is something that can be privileged,’ said John Browning, a Spencer Fane trial partner. ‘Whether or not the court believes that under these circumstances merely revealing the identity is [protected], that remains to be seen.'”
• “Fordham Law School professor Bruce Green previously told Bloomberg Law that the narrowness of the SEC’s request—focusing on client names—could ultimately be hard to beat. ‘Privilege doesn’t protect every piece of information that a lawyer has related to a client representation,’ Green said.”
• “Covington has argued the client names are only a ‘first step’ in an attempt to pull more information out of the firm and its clients.”

“Troutman Pepper Hit With Cyberattack, Firm Acknowledges” —

• “Troutman Pepper Hamilton Sanders suffered a cyberattack on Wednesday [Feb 8] that left employees without access to their work email accounts and other management software. The attack was confirmed Thursday afternoon by a representative for the firm.”
• “Firm leaders went on to say that they have no indication any client data was compromised ‘at this time.'”
• “‘We will continue to work with outside experts to recover systems, investigate and respond accordingly,’ firm leaders said.”
• “A source in contact with Troutman Pepper, who declined to be identified for this story, said correspondence from the firm’s attorneys this week has come from their personal emails because their work emails were shut down.”
• “While the firm has ‘a great IT staff,’ the source said using personal emails for client matters is less than desirable.”
• “‘From a discovery standpoint, you’re sending documents and communicating with clients and other people and you’re going to have to search those emails in future,’ the person said.”
• “The source went on to say that requesting documentation for discovery is always frustrating but that now lawyers at Troutman Pepper may have to include their private emails, and those of their paralegals and associates, in discovery requests.”
  unavailable.”

Above The Law shares internal notices that went out, with additional detail: “Cybersecurity Incident Shuts Down Biglaw Network“

“Judge Dismisses Legal Mal Suit Against Cozen O’Connor for Second Time” —

• “A federal judge has again dismissed a legal malpractice suit against Cozen O’Connor after an appeals court determined the district court improperly analyzed the plaintiff’s complaint the first time around.”
• “The plaintiffs, Adam Potter and Moxie HC, filed suit against Cozen O’Connor in 2020 over an alleged conflict of interest in selling several companies in which the plaintiffs owned 100% membership interest.”
• “According to the Thursday opinion, then-Cozen O’Connor attorney Anne Blume advised Potter on the sale of his companies to another firm client. Potter claimed that Blume denied the existence of a conflict of interest surrounding the firm’s representation of both the buying and selling entities in the transactions.”
• “After the deal’s close, however, the shareholders allegedly learned their company had been sold substantially below market value, and that confidential information Blume learned while working with Potter had been used to aid the purchaser.”
• “The plaintiffs alleged they ‘have suffered millions of dollars in damages, representing the difference in the true value of the companies and the purchase price stated in the asset purchase agreement, a price that was negotiated by Blume.'”
• “But Alejandro ruled that because the terms of the asset purchase agreement stated the companies were to receive the purchase price, an allegedly unfair sale would harm the companies themselves. As shareholders, Alejandro held, the plaintiffs did not suffer direct harm and therefore did hot have standing to sue.”
• “‘The only damages that plaintiffs attribute to defendants’ alleged misconduct is the diminution of the amount of money (i.e., the purchase price) received under the asset purchase agreement by the non-party companies in consideration of the sale of their assets,’ she wrote.”
• “Alejandro dismissed the amended complaint in January 2021 for lack of subject-matter jurisdiction. Still, the U.S. Court of Appeals for the Third Circuit ruled that the analysis had been improper.”

“The Corporate Lawyer Moonlighting as a New York Assemblymember” —

• “Keith Brown makes $142,000 representing his Long Island district — and about half a million representing corporate real estate interests.”
• “He often takes big corporate clients, including a Wegman’s and a Marriott franchise. Since shortly before his election in November 2020, he has been the attorney of record for another warehouse landlord suing a town in a neighboring district over truck traffic rules. He filed a document in the case as recently as last month. His firm’s website lists Brown’s client as ‘the largest owner of industrial warehouse space on the East Coast.'”
• “New York lawmakers are officially part-time employees; they are permitted to earn outside income, and there is no indication that Brown has broken state ethics laws. In an email to New York Focus, Brown denied any impropriety.”
• “‘I take seriously the rules of the Legislature and there is absolutely no conflict of interest associated with this project,’ he wrote, referring to the warehouse development at issue in the September meeting. ‘My role is to provide legal services related to local zoning laws on the AIREF Logistics Center.'”
• “The developer Brown was representing at the September meeting was Ares Management, a global investment firm with a large real estate portfolio, which includes warehouses. Through a subsidiary, the firm is seeking to build a 500,000-square-foot distribution center in North Bellport, on Long Island’s south shore.”
• “It’s not clear whether, or how, Brown’s legal work has influenced his efforts in Albany. Of the 39 bills he’s introduced so far, none bear any immediate connection to commercial real estate interests.”
• “Blair Horner, executive director of the New York Public Interest Group, said lawmakers earning outside income have made efforts to “insulate” their business practices from their work in Albany, particularly since corruption charges brought down former Assembly Speaker Sheldon Silver and Senator Dean Skelos in 2015. But the wall is often thin, he said, underscoring the need for strict restrictions on outside income. Whether a lawmaker like Brown faced a formal conflict of interest or not, Horner added, ‘it would at minimum be a bad look.'”

“Plaintiff Lawyers Ask Finra To Build Database of Ejected Arbitrators” —

• “The Public Investors Advocate Bar Association is pushing for more transparency around how arbitrators are selected in the Financial Industry Regulatory Authority forums by providing public explanations when arbitrators are substituted due to a conflict of interest.”
• “The plaintiff lawyer-membership organization wants Finra to create a database that would include an explanation about why challenges to proposed arbitrators based on conflict-of-interest allegations succeeded or failed.”
• “‘​​Such release would provide helpful precedents for future parties to consider in evaluating potential arbitrators,’ PIABA’s President Hugh Berkson made the suggestion in a February 1 comment letter to the Securities and Exchange Commission.”
• “PIABA’s suggestion comes in response to Finra’s proposal in December to refine its arbitration-selection procedures. Names of specific arbitrators could be redacted for privacy reasons, Berkson wrote.”
• “Finra’s audit committee had in February 2022 tapped Lowenstein Sandler, LLP, to review its arbitration processes after allegations arose in a Georgia state court case about an improper side deal that allowed a lawyer representing Wells Fargo to rig the regulator’s arbitrator selection process. The Lowenstein report rejected those allegations, but recommended Finra provide ‘greater clarity’ to its arbitration process.”
• “Under the Finra proposal, which the SEC still has to bless, Finra would codify its existing practice of using both an algorithm and ‘conducting a manual review for conflicts of interest prior to sending an arbitrator list’ to disputing parties, it said in its filing.”

Hat tip to Lucian Pera from Adams and Reese, for sending in an update on a project he’s been working on: “Time to Renew America’s Lawyer Discipline System” —

(I just learned that the ABA Center for Professional Responsibility recently honored him with Michael Franck Award for his work in the field of ethics and professional responsibility throughout his career.)

Lucian writes:

• “A group of seven of us, ethics lawyers from across the country, have developed this proposal for the ABA to launch a once-in-a-generation review of the mechanics, structure, and reach of lawyer regulation – the infrastructure of lawyer regulation, rather than the substance of ethics rules.”
• “We want a group of experienced ethics regulators and professionals to be appointed to do this work. The article lays out the scope of the work we think needs to be done.”
• “We would also propose that this group steer clear of reviewing or considering changes to substantive ethics rule, including nonlawyer ownership and fee-sharing. Important as those issues are, those are NOT the issues we’re looking to have reviewed.”

Other contributors to this piece include:

• Mark Armitage, Michigan Attorney Discipline Board
• Lydia Lawless, State of Maryland
• Ronald Minkoff, Frankfurt Kurnit Klein & Selz
• Sari W. Montgomery, Robinson, Stewart, Montgomery & Doppke LLC
• Wendy Muchman, Northwestern University Pritzker School of Law
• Lynda Shely, The Shely Firm, PC

Also writing in this week is Leigh Isaacs, Sr Director Info Governance at DLA Piper, with a few IG resources to share. She says:

• “I wanted to reach out and make you aware of a legal IG roundtable I formed several years ago and host on a monthly basis. The group has grown from a handful of people and firms to over 170 participants representing approximately 100 different firms. I facilitate but the discussion is peer led.”
• “It’s only open to practitioners – no vendors or consultants as we want to promote an open and ‘safe’ space to share and ask questions about anything.”
• “There have been many who have said they get great benefit from it, even if only to have an hour of “IG therapy” once a month.”
• Folks interested in joining this community can contact Leigh directly at: leigh.isaacs@us.dlapiper.com

For those interested in learning more, she also pointed me at a recent interview she did with Jim Merrifield (Director of Information Governance & Business Intake at Robinson & Cole LLP) on his Infogov Hot Seat interview series: “IGHS4 – Interview with Leigh Isaacs, DLA Piper & Creator of the Legal Roundtable” —

• “This episode features Leigh Isaacs, Senior Director of Information Governance at DLA Piper & creator of the Legal Roundtable. Tune in to hear her answers to these 5 burning questions:
  • When did you start the Legal Roundtable and what made you do so?
  • What kind of topics does this group discuss?
  • How often do you meet?
  • Who can join? And how to join if interested?
  • How do you see the group itself evolving in the coming years?”

“‘Don’t Worry About That’?: Judge Refuses to Recuse After Hiring Former Assistant Federal Defender as Clerk” —

• “On Jan. 9, two days after ending a four-year career as an assistant federal public defender in the Western District of Virginia in Abingdon, an unidentified employee was hired as a law clerk for Senior U.S. District Judge James P. Jones—without a heads up to her former employer in the same district.”
• “Once discovered, the Federal Public Defender’s Office asked for Jones to be removed from nearly a dozen cases. In response, however, Chief Judge Michael F. Urbanski said the new law clerk was restricted from working on any matters handled by her former employer, according to Jones’ identical orders filed last week in several cases.”
• “The office stressed that it did not accuse the court or the employee of any misconduct, but that it was raising an issue that the court’s impartiality may be questioned and that recusal is appropriate under 28 U.S.C. 455.”
• “Jones disagreed, declining to recuse himself from any of the cases, noting that due to his new law clerk’s former employment, he ‘walled her off … forbidding her from being involved’ in cases handled by the federal public defender’s office, according to the judge’s orders.”
• “While the lead attorney declined to discuss specific employment details of the former employee, she said the office is a collaborative space.”
• “‘There’s almost no one in our office who doesn’t know what’s happening in the different cases even in the different divisions. That’s just not how our office operates, we operate as a unit, and the clients are represented by the Federal Public Defender Office. Individual attorneys may step into court to represent a client but the Federal Public Defender Office is who represents them,’ Scott said.”
• “A motion on the hearing was held Feb. 2. However, less than a week later, the judge declined the motion.”
• “‘… [i]t is well-established that a law clerk’s conflict is not generally imputed to the judge,’ Jones wrote. ‘A law clerk does not exercise discretion and acts only in service of the supervising judge. In other words, ‘[b]oth bench and bar recognize … that judges, not law clerks, make the decisions.’ Consequently, the isolation of the law clerk from the cases in which she has a conflict is usually the proper remedy.'”

“Committee seeks public comments on third proposed ethics opinion” —

• “Proposed Opinion 2023-3 (comment deadline 4/16/2023): Do the Texas Disciplinary Rules of Professional Conduct prohibit staff counsel employed by an insurance company from representing insured clients if the insurance company considers the results of performance surveys in deciding the lawyer’s compensation or continued employment?”

“Russian Citizen Indicted for Making Payments on Behalf of Sanctioned Russian Oligarch” —

• “On February 7, 2023, the U.S. Attorney’s Office for the Southern District of New York announced the unsealing of an indictment charging Vladimir Voronchenko (“Voronchenko”) with participating in a scheme to make payments in excess of $4 million dollars to maintain four properties located in the United States that were owned by Viktor Vekselberg (“Vekselberg”), a sanctioned Russian oligarch…”
• “The indictment alleges that Voronchenko is a long-time friend and associate of Vekselberg. Vekselberg was listed as a SDN by OFAC on April 6, 2018. Almost immediate thereafter, Voronchenko allegedly began to cause to be made approximately $4 million in payments to maintain four properties belonging to Vekselberg.”
• “The attorney who ultimately took receipt of the transferred funds, who is not named in the indictment, is alleged to have used those funds under the direction of Voronchenko to make payments to maintain and service the four properties, all without OFAC permission or disclosure.”
• “Additionally, the indictment alleges that Voronchenko attempted to sell two of those properties, all without disclosure or approval by OFAC. More specifically, one of the Panamanian shell companies controlled by Vekselberg, represented by the attorney, entered into agreements with real estate brokerage firms to sell the properties.”
• “Ultimately, however, both brokerage firms delisted the properties. During the time of the 25 payments and attempted sales, the attorney and Voronchenko allegedly communicated via the WhatsApp messaging app and openly acknowledged Vekselberg’s SDN status in those messages.”

“The Powerful City Lawyer at The Center of a Private Equity Storm” —

• “Neel Sachdev has a reputation for going above and beyond to ensure his private equity clients get what they want. The power the London lawyer wields over Europe’s $2 trillion buyout market is testament to that, and a reflection of the dominant debt finance practice he has built at US law firm Kirkland & Ellis over the past decade.”
• “Now, however, tactics he has used to his clients’ advantage — such as influencing which law firms he comes up against in deal negotiations and even playing a role in the recruitment of lawyers into rival law firms — are facing scrutiny by market participants as the era of easy money ends.”
• “Originally heralded as a way to make the often-fractious buyout process more efficient, the widely-used designated counsel arrangement is now viewed by many, including some of Wall Street’s biggest names, as a potential conflict of interest. It allows private equity firms, guided by their lawyers, to appoint and pay for the law firms that represent the lenders funding their deals.”
• “The International Organization of Securities Commissions (IOSCO) has begun looking into the designated counsel arrangement as part of a wider probe into leveraged debt markets, a spokesperson for the regulator said. Other regulators such as the Financial Conduct Authority are involved in IOSCO’s work.”
• “Since the early 2010s, market pressures — and access to plentiful cheap money — meant many lenders lacked the negotiating power to push for stronger protections. Sachdev and his buyout clients have used this imbalance to convince lenders, like the credit units of private equity groups and Wall Street’s largest banks, to agree to lesser safeguards around debt levels and dividend payments on deals they help finance.”
• “The gradual erosion of these terms has allowed private equity firms to pile debt onto the companies they own, take out huge dividends and move valuable assets out of the reach of lenders.”
• “That sophisticated lenders — often the credit arms of the same private equity firms pushing for changes in deal terms — accepted such arrangements raises its own questions. But recent moves by creditors to hire their own counsel and actively avoid working with certain law firms suggest this goes beyond simple buyers’ remorse.”
• “Sabrina Fox, CEO of the European Leveraged Finance Association, a trade body representing debt investors, says the industry is scrutinizing the practice. ‘Potential conflicts of interest hinder independence and impartiality where it is necessary,’ she said. ‘Now more than ever, it is critical that these issues are addressed.'”
• “ELFA plans to engage with regulators – likely to include the FCA and the Solicitors Regulation Authority – to explore potential conflicts of interest in the use of designated counsel, Fox said.”
• “Kirkland & Ellis, which declined to comment for this story, is not the only law firm to use this arrangement. But its partners, led by Sachdev, are widely regarded by buyout firms, lenders and other lawyers as the most aggressive in deal negotiations. Being on the wrong side of them can result in law firms being frozen out of future deals, people familiar with how Kirkland operates said. They asked not to be identified as they did not want to jeopardize future relations with the firm.”
• “‘It is very difficult to feel you have independence when the other firm sitting across the table may have played a role in getting you your job,’ said Trevor Clark, a former finance lawyer, turned law lecturer at the University of Leeds. Clark, who specializes in the ethics and professionalism of corporate lawyers, was speaking generally about rival lawyers being involved in the hiring processes of other firms.”
• “Advocates of designated counsel argue that selecting a single law firm to represent all lenders in a deal means negotiations are less likely to get bogged down with multiple teams of lawyers arguing.”
• “But the arrangement encouraged some lawyers to develop close relationships with their counterparts acting on behalf of private equity groups. For some law firms that translated into repeat work and a lucrative stream of business, according to people working at credit funds and law firms, who did not want to speak publicly to avoid damaging institutional relationships.”
• “The extent to which some lawyers became dependent, at least partially, on this designated business has triggered concerns among a number of lenders about potential conflicts of interest.”
• “Early last year, Europe’s largest-ever direct lending deal came to market when two private equity firms wanted to refinance The Access Group, a software company, represented by Kirkland. Shearman worked for a large group of lenders including Arcmont Asset Management, Intermediate Capital Group and HPS Investment Partners, as designated counsel on the Access Group deal. During the negotiations, some of the lenders hired their own lawyers, in addition to Shearman. These so-called shadow lawyers were employed to give additional legal advice after concerns arose over the perceived independence of the sponsor designated counsel, people close to the talks said.””Deals where other law firms were appointed designated counsel have also prompted direct lending arms of groups such as Apollo, Carlyle Group Inc. and KKR & Co. to hire their own shadow lawyers, Bloomberg News reported last year.”
• “Some private lenders are now going one step further than hiring shadow counsels. Direct lending units at firms such as Blackstone – which declined to comment for this story – are said to be drawing up lists of preferred law firms to act as designated counsel and actively pushing back when certain law firms are selected for the role, people familiar with the matter said.”

“Court to Rule on Attorney Disqualification, Judge Recusal in Ritz Carlton Class Action” —

• “A Miami attorney and a federal magistrate judge are under the microscope. In dueling filings, litigators addressed a question a federal court posed: If attorney Peter Valori is disqualified from a case, can his former law firm colleague, U.S. Magistrate Judge Melissa Damian, who has since recused herself from the case, return to rule on future motions, including for class certification?”
• “‘Judge [Melissa] Damian’s rulings have established the legal rubric that will frame the eventual decision on class certification,’ the plaintiff’s counsel, which includes David M. Marco, a partner at Smith Marco in Sarasota, Florida, claimed in a supplemental briefing. Marco did not respond to a call or email requesting comment.”
• “They added: ‘Returning the case to Judge Damian, either by direct reassignment ordered by [U.S. Magistrate] Judge [Lisette] Reid or through a report and recommendation to the district judge that the case be reassigned, ensures the efficient management of judicial resources and avoids the appearance of manipulating the judicial assignment process that Mr. Valori’s appearance caused.'”
• “In response to the judicial question, the Ritz Carlton said, ‘the answer is no,’ and noted in its supplemental briefing that Valori has been ‘substantively involved’ in the case for over four months. Ritz Carlton said that the federal recusal statute, local rules, and internal operating procedures do not authorize the federal district court to ‘effectively overrule another judge’s recusal decision. Rather, they prohibit it.'”
• “‘The fact that Plaintiff is seeking an impossible reassignment (and a pointless disqualification), suggests the motion has an ulterior motive: Attempting to malign Ritz-Carlton and its counsel to distract from the meritlessness of the renewed certification motion,’ the Ritz Carlton asserted in its supplemental briefing.”
• “In the dispute, Fox will have the burden to prove that, based on the U.S. Court of Appeals for the Eleventh Circuit’s seven-factor test on disqualification, he has a compelling reason to override what the Ritz Carlton called its ‘right to counsel of choice.'”
• “Now, U.S. Magistrate Judge Reid will determine in a report and recommendation whether to reject or grant the motion for disqualification and, if the latter, whether Damian will return to preside over the case on future pre-trial motions. However, the ruling will ultimately rest with U.S. District Judge Raag Singhal.”

“A Viper’s Nest of Conflicts and Intrigue” —

• “On December 21, Big Law firm Sullivan & Cromwell filed a conflict disclosure with the U.S. Bankruptcy Court in Delaware, where it was hoping to be officially appointed as lead counsel for the bankruptcy estate of Sam Bankman-Fried’s collapsed crypto house of cards – FTX, Alameda Research and its more than 100 opaque affiliates.”
• “Judge John Dorsey signed the order making Sullivan & Cromwell lead counsel on January 20, despite a mind-numbing list of conflicts of interests, including extensive past legal work for the FTX group and personal legal work for its now indicted kingpin, Sam Bankman-Fried. The disclosure showed that in addition to FTX and Alameda Research, Sullivan & Cromwell had 10 other current crypto clients, including four major crypto competitors to FTX — BlockFi, Coinbase, Gemini, and Kraken.”
• “While this litany of crypto disasters does not paint a pretty picture of what is happening in general with Sullivan & Cromwell’s crypto clients, BlockFi is in a league of its own in terms of a viper’s nest of conflicts inside Sullivan & Cromwell and internecine intrigue.”
• “Under Bankruptcy Code Section 327(a), attorneys hired by the bankruptcy estate cannot hold or represent an interest adverse to the estate and must be ‘disinterested persons.’ The December 21 disclosure filed with the FTX bankruptcy court included a declaration from Sullivan & Cromwell partner, Andrew Dietderich, who told the court the following:
  • ‘Based solely on the conflicts procedures described herein, (i) S&C is not aware of any conflict between its representation of the Debtors and its representations of its Current Clients or Former Clients that would cause S&C not to be a ‘disinterested person,’ (ii) S&C does not represent any person or entity having an interest adverse to the Debtors in connection with these chapter 11 cases…'”
• “On the date of that declaration, December 21, Sullivan & Cromwell was well aware that its client, BlockFi, had an extremely adversarial relationship with the FTX group. On the compensation request submitted by Sullivan & Cromwell to the bankruptcy court last Wednesday, for legal work it performed for the FTX group in the last 19 days of November, the name BlockFi appears 57 times. In 6 of those instances, the billable hours were described as involving the ‘BlockFi adversary proceeding’ or ”BlockFi adversary action.'”
• “For example, on November 30, Sullivan & Cromwell law partner, Brian Glueckstein, billed 3.2 hours for what he described as follows:
  • ‘Analysis and strategy re: BlockFi claims (.80); call with S&C and Haynes Boone teams re: BlockFi claims issues (.50); follow-up correspondence to S&C team re: same (.20); meetings with A. Dietderich re: BlockFi claims (.40); correspondences to S&C team re: BlockFi adversary proceeding (.40); meeting with A. Dietderich and J. Bromley re: BlockFi strategy issues (.40); meeting with M. Porpora re: BlockFi adversary proceeding (.50).'”
• “Sullivan & Cromwell has conceded in a court filing that it represented Bankman-Fried in connection with this Robinshare share purchase. Making that transaction even more fraught for Sullivan & Cromwell is the fact that the Department of Justice believes that Sam Bankman-Fried may have been attempting to hide that half billion dollars he held in the publicly-traded common stock of Robinhood by setting up the offshore vehicle, Emergent Fidelity Technologies Ltd. in Antigua, to hold the shares.”
• “The documentation on how this transaction went down is a window into what was going on under the nose of Sullivan & Cromwell’s former partner, Ryne Miller, who became General Counsel to FTX US in August of 2021.”
• “Although Miller was General Counsel to FTX US, not Alameda Research or Emergent Fidelity Technologies Ltd., he listed himself as the contact person on the Securities and Exchange Commission filing for this Robinhood stock purchase.”

“Big Law Operating Model Threatened in Baker McKenzie Mine Case” —

• “A Swiss structure that lets law firms affiliate to jointly market services is facing a second legal test in less than a year that threatens the viability of the model.”
• “Baker McKenzie, the first major US law firm to adopt the Swiss verein structure, is accused of legal malpractice through an alleged Russian member of its network. London-based Lehram Capital Investments faults the law firm for its loss in ownership of a Siberian coal mine.”
• “Baker contends that the Russian law firm that handled the mine matter, Baker & McKenzie-CIS Ltd., was a separate entity. A failure to prove that could have Baker facing tens of millions of dollars or more in damages.”
• “The case shows that a key selling point of the verein structure—that affiliates are completely separate from one another on matters such as profits, pay and taxes—could be undermined when it comes to the critical matter of legal liability.”
• “The lawsuit, if pressed successfully, would mark the second legal finding in less than a year that works against the model. The Ohio Supreme Court in August declined to review a $32.3 million malpractice award against Dentons that was tied to the work of one of the firm’s verein affiliates.”
• “Baker says on its website that ‘the use of the name Baker McKenzie is for description purposes only and does not imply that the member firms are in a partnership or are part of a LLP.'”

“Judge’s financial conflict does not require reopening case, 10th Circuit finds” —

• “A federal judge did violate the law when he failed to recuse himself from a case, but there is no need to reopen the lawsuit or overturn his rulings, the federal appeals court based in Denver decided on Thursday.”
• “In what appears to be the first ruling of its kind from the U.S. Court of Appeals for the 10th Circuit, a three-judge panel confronted the fallout from a bombshell Wall Street Journal report in September 2021 that found 131 federal judges across the country presided over cases in which they or their family had an undisclosed financial stake in one of the corporate parties to the litigation.”
• “U.S. District Court Senior Judge R. Brooke Jackson was among them, handling approximately 36 lawsuits against companies such as Home Depot and Facebook, even though Jackson and his wife owned stock in those defendants. Failing to recuse himself, even if Jackson was unaware of the conflict, was a violation of federal law.”
• “In the wake of the revelations, a small number of litigants sought a review of their cases, which another judge stepped in to address. Although U.S. District Court Senior Judge John L. Kane agreed Jackson should never have handled the cases, he found the error did not affect Jackson’s rulings.”
• “[U.S. Court of Appeals for the 10th Circuit Senior Judge Mary Beck Briscoe noted] Further exploration of Jackson’s conflict is unnecessary, she added, because Kane acknowledged the conflict existed and still detected no effect on Jackson’s decision-making.”

“ABA House adopts host of new policies, including support for ethics code for U.S. Supreme Court” —

• “In wrapping up its ABA 2023 Midyear Meeting, the American Bar Association’s House of Delegates approved today first-time policies endorsing ‘reasonable and appropriate’ federal government efforts aimed at combating money laundering as well as a code of judicial ethics binding on justices of the U.S. Supreme Court.”
• “Resolution 400, which was a late proposal, urges the Supreme Court to adopt a code of judicial ethics binding on its justices that is comparable to the code of conduct for other U.S. judges adopted by the Judicial Conference of the United States. Advocates of the change say the absence of a clearly articulated, binding code of ethics for members of the highest court in the country imperils the legitimacy of the court as well as the judicial system.”
• “‘It’s high time to set (a code of conduct),’ said Stephen Saltzburg, a law professor and former U.S. Justice Department official. ‘The Supreme Court should have a code of ethics. Exclamation point. The end.'”
• “The new anti-money laundering policy seeks to balance the longstanding attorney-client privilege with the demands of governmental entities seeking access to information on criminal activities, such as money laundering, terrorism financing, human trafficking and other corrupt conduct. It follows a lengthy review by the ABA Working Group on Beneficial Ownership, and recognizes efforts by Congress, which has passed legislation to combat criminal activity. A recent law, for example, requires certain business entities to file, in the absence of an exemption, information on their beneficial owners with the Financial Crimes Enforcement Network of the U.S. Department of Treasury.”
• “A beneficial owner is a person who enjoys the benefits of ownership although an asset’s title is listed in another name. Under federal financial regulations, a beneficial owner is anyone with more than 25% ownership of a legal entity, or anyone who controls the legal entity.”
• “The new policy urges that any governmental disclosure requirements protect constitutional rights and confidentiality interests, and not conflict with the ethical duties, professional conduct requirements and regulations imposed on the legal profession by other governmental entities. It also says these requirements should ‘not undermine the applicable rules of professional conduct to which lawyers are subject.'”

As always, thank you Bill Freivogel:

• Hong v. Hong, 2023 ABCA 33 (CanLII) (Alb. Ct. App. Feb. 1, 2023).
  • “This case is a dispute among family members over ownership and/or possession of certain real estate. Plaintiff moved to disqualify Law Firm for Defendants. Law Firm had earlier represented Plaintiff jointly with certain of Defendants in an appeal to the Tax Court of Canada.”
  • “The trial court held that the issues in the tax appeal were sufficiently related to the issues in this case to justify disqualification. In this opinion the appellate court rejected that finding, noting that whatever of Plaintiff’s confidences were disclosed to Law Firm in the tax appeal would also have been known to certain Defendants due to their family relationship with Plaintiff. However, the appellate court did uphold disqualification of Law Firm because the need for one of its members to testify was ‘highly likely.'”
• Reid v. Samsung SDI Co., Ltd., 2023 WL 1096333 (Ga. App. Jan. 30, 2023).
  • “A Samsung SDI lithium-ion 18650 battery exploded in Plaintiff’s pocket. Plaintiff, represented by Lawyer, is suing Samsung SDI for Plaintiff’s injuries. Samsung moved to disqualify Lawyer because Lawyer had for a number of years worked in-house for the insurance company (“Insco”) that insured Samsung SDI for product liability. (The name Samsung appears in Insco’s name, but the court does not explain that coincidence.)”
  • “In Lawyer’s Insco role Lawyer supervised, or otherwise handled, many cases against Samsung SDI, including cases involving the 18650 battery. The very fact-specific opinion contains way more information about how Lawyer interacted with Samsung SDI lawyers. We will leave it at that. In this opinion the appellate court affirmed the trial court’s order disqualifying Lawyer.”
  • “The opinion does three things. First, the court found that Lawyer’s role at Insco was tantamount to representation of Samsung, thus triggering Rule 1.9. Second, the court found that the earlier work at Insco was substantially related to this case. Last, while not mentioning it by name, the court seemed to be applying the ‘playbook doctrine’ emphasizing Lawyer’s familiarity with 18650 battery litigation and with Samsung SDI’s personnel and procedures.”
• Veloz v. Jiddou, 2023 NY Slip Op 00292 (N.Y. App. Div. 1st Dept. Jan. 24, 2023).
  • “Plaintiff was driving an auto, and her young daughter was a passenger. They were allegedly rear-ended, and both, represented by Lawyer, sued the driver of the other vehicle. The defendant counterclaimed that the accident was the fault of the plaintiff/driver. The trial court disqualified Lawyer from representing both plaintiffs. In this opinion the appellate court noted that the plaintiffs did not appeal the disqualification and said ‘plaintiffs have been advised to retain new and separate counsel.'”