“Morgan Stanley Launches Conflict-of-Interest Probe” —

• “Morgan Stanley has announced it is conducting an in-house conflict-of-interest probe. The firm’s chief executive officer Philip Purcell, speaking at the Securities Industry Association’s national conference in Florida this past week, said Eric Dinallo, a former aide to Eliot Spitzer, would be leading the ‘conflicts examination effort…with the support of every business leader in our firm.'”
• “Separately, Merrill Lynch engaged in some house cleaning of its own, fining two senior executives responsible for supervising a trio of brokers fired for allowing hedge funds to engage in late trading.”
• “Dinallo, who joined Morgan Stanley in September, was instrumental in Spitzer’s investigations into the research and investment banking malpractices at brokerage firms.”
• “Spitzer’s investigation accused firms, including Morgan Stanley, Merrill Lynch and Citigroup, of allowing investment-banking concerns to corrupt the research of their analysts. The firms settled in April for $1.4 billion and a package of reforms intended to prevent these abuses in the future. Morgan Stanley agreed to pay $125 million for its part.”
• “Separately (and more recently), the NASD fined the firm $2 million for encouraging managers and brokers to compete over the sale of in-house mutual funds. When it announced the fines in September the NASD said Morgan Stanley ‘failed to have any supervisory systems or procedures in place to detect and prevent this widespread misconduct.'”
• “In his speech to the SIA, Purcell referred to a ‘conflicts crisis’ on Wall Street and said there is no easy way to fix the problem. ‘The conflicts are not always readily apparent,’ said Purcell. ‘So the first step in disclosure is disclosure to ourselves.'”
• “Morgan Stanley did not wish to comment further on the probe. Brokers at the firm were either unaware of the probe or tightlipped about its progress.”

“Family Ties Could DQ Judge From Hawaii Wildfire Litigation” —

• “The federal judge overseeing a proposed class action brought against Maui County, Hawaii, departments by Lahaina residents whose homes were destroyed in a devastating August 2023 wildfire has indicated she is ‘inclined’ to grant a recusal bid.”
• “U.S. District Judge Jill A. Otake indicated in a docket entry on Wednesday that she would be willing to step back from the case, one day after the plaintiffs filed a motion to disqualify her. Her brother Thomas M. Otake is an attorney representing individual plaintiffs in a separate suit that could soon be subject to a global settlement.”
• “Named plaintiffs Sean Stover, Cassandra Fairall, Mark Prevot, Eva Marie Adam and Randy Brock said in their Tuesday motion that Judge Otake must be disqualified from the case under the U.S. Code, which states the judge must step away because Thomas Otake ‘is known by the judge to have an interest that could be substantially affected by the outcome of the proceeding.'”
• “The named plaintiffs said that if the proposed global settlement pending before the state Supreme Court is approved, they intend to challenge it in their federal suit, which could affect attorney fees paid to Otake’s brother in his clients’ individual suit against the defendants. Whether such a challenge would be permitted is not clear.”
• “In her brief docket entry, Judge Otake asked the defendants to bring forward any objections to her recusal by Feb. 18, noting that ‘because the question of whether Judge Otake has the power to review the state court settlement would also warrant her recusal, any objections should not address that question.'”
• “The proposed class of Lahaina residents sued Maui County officials and several entities in July 2024, alleging the defendants variously failed to deenergize power lines, did not post fire watches and committed other negligence that led to wrongful forcible displacement of up to 12,000 local residents. Those named include the county itself, its emergency management agency and fire and public safety department, trustees of a massive land trust called the Estate of Bernice Pauahi Bishop, and local telecommunications and electric companies.”
• “The plaintiffs told Judge Otake in their motion that her brother’s clients could soon be implicated, if the federal suit causes the global settlement to be nullified.”
• “‘It is obvious that, if the [global settlement agreement] is approved in state court, there will be a challenge by us in federal court to the GSA on the procedures involved in state court in adopting the GSA and the adequacy of representation of absent class members by the [class plaintiffs’] attorneys in state court,’ the proposed class told Judge Otake in the motion.”
• “‘If our challenge to the GSA succeeds, under the terms of the GSA, defendants will probably declare the GSA to be null and void because of the substantial monetary claims of the Stover class plaintiffs,’ they added. ‘If the GSA is declared null and void, attorney Otake stands to lose his attorney’s fees in the state court proceeding as part of the GSA. On the other hand, attorney Otake’s fee is protected if our attack on the GSA in federal district court fails (although the GSA may fail if we prevail on appeal).'”

“Dentons’ UK Case Could Have ‘Chilling’ Effect on Anti-Money Laundering Enforcement” —

• “Dentons, the world’s largest law firm, is at the centre of a pivotal battle between England’s legal regulators over a ruling that it is claimed could allow law firms to bypass anti-money laundering laws with impunity.”
• “The extraordinary High Court case in London—involving the Solicitors Regulation Authority (SRA) and Solicitors Disciplinary Tribunal—revolves around Dentons U.K. and Middle East and a banker known only as ‘Client A’ who was eventually sentenced to 15 years imprisonment and ordered to pay $39 million to the bank he’d chaired.”
• “In 2024, the Tribunal found that Dentons, which maintains its innocence, breached money laundering regulations by failing to properly investigate the source of the banker’s wealth. The tribunal decided there was no breach of SRA principles or code of conduct, however. No sanction was given and the case was dismissed. The SRA then appealed to the High Court with a hearing held in late January.”
• “‘If the (Dentons) judgment is permitted to stand, it might send a very unhelpful message to the profession—that law firms can fail in their obligations under the Money Laundering Regulations 2007 (MLR 2007) and get away without any regulatory sanction,’ the SRA argued in its written court submission distributed at a January 29 hearing. ‘That is particularly unhelpful given the financial incentives for law firms to act in high-value transactions or for high net worth politically exposed persons.'”
• “The SRA furthermore argues that the Tribunal’s decision creates uncertainty as to whether or when the legal regulator should take regulatory action against law firms for breaches of anti-money laundering legislation. ‘If the judgment were permitted to stand, it might create a chilling effect on the SRA’s willingness to take regulatory action for breaches of anti-money laundering legislation,’ it warned.”
• “Dentons has argued that it adhered to MLR 2007 (eventually replaced by the Money Laundering Regulations 2017) to establish the source of the client’s funds and wealth, and that any breach was inadvertent.”
• “The Dentons case is the latest flashpoint in an ongoing battle between England’s legal regulators over disciplinary powers, with many of London’s top firms keen to avoid getting caught in the crossfire.”
• “Dentons isn’t the only law firm under scrutiny. The SRA crackdown on law firm money laundering has led to 23 cases involving £75 million being referred to the National Crime Agency, while the U.K. Treasury investigated two additional cases of suspected Russian sanctions breaches totaling over £300,000, according to SRA figures provided to Law.com in October. Another 410 matters have been flagged as potential risks.”