I have been wanting to address the issue of conflicts in representation, and the post yesterday by Kevin LaCroix, who writes The D&O Diary, entitled "A Case of Divided Loyalties" provides me with that opportunity. On the surface, the issue is straightforward: the possibility that a conflict of interest could develop when a lawyer or firm represents a corporation and one or more of its officers or directors. I would expand the scope to include the representation of witnesses who are employees of a corporation.
Kevin’s post focuses on a recent California federal court decision in U.S. v. Nicholas, 2009 WL 890633 (C.D. Cal. 2009), which arises from the Broadcom Corporation options-backdating case. In Nicholas, the law firm of Irell & Manella represented Broadcom and its CFO, William Ruehle.
As Kevin reports, the Court found "at least" three clear violations of Irell’s duty of loyalty to Ruehle:
- it failed to advise him of the conflict and obtain his written waiver;
- it interrogated him for the benefit of another client (Broadcom, his employer); and
- it disclosed without Ruehle’s consent his privileged communications to a third party.
This paragraph from the Court’s opinion sums up the situation (I apologize for its length, but it’s worth it):
Irell’s ethical breaches of the duty of loyalty are very troubling. Mr. Ruehle’s confidential and privileged information has been disclosed to numerous third parties, most notably the Government in connection with its criminal prosecution against him. The Government’s case against Mr. Ruehle is a serious one, and Mr. Ruehle faces a significant prison sentence if convicted on all counts charged in the indictment. It must be disconcerting to Mr. Ruehle to know that his own lawyers at Irell disclosed his confidential and privileged information to the Government, lawyers whom Mr. Ruehle trusted and believed would never do anything to hurt him. And now the Court has had to intervene and suppress relevant evidence in the Government’s case against Mr. Ruehle. The Government’s burden is not an easy one, as it has to prove the charges against Mr. Ruehle beyond a reasonable doubt. Suppressing relevant evidence is obviously not helpful to the Government in that regard, but more importantly, it hinders the adversarial process and the jury’s search for the truth. Irell should not have put the parties and the Court in this position. The Rules of Professional Conduct are not aspirational. The Court is at a loss to understand why Irell did not comply with them here. Because Irell’s ethical misconduct has compromised the rights of Mr. Ruehle, the integrity of the legal profession, and the fair administration of justice, the Court must refer Irell to the State Bar for discipline. Mr. Ruehle, the Government, and the public deserve nothing less.
You read that correctly. The Court referred the firm — not just the lawyers involved, but the firm — to the State Bar for discipline. How would you like to be the managing partner or ethics partner who has to inform the firm’s malpractice carrier about this opinion?
The case I had been thinking about, which Kevin also mentions, involves Laura Pendergest-Holt, who was the chief investment officer for the Stanford Financial Group. That company and related entities have been charged in an $8 billion Ponzi scheme.
As part of the SEC’s investigation into the Stanford Financial Group, Pendergest-Holt testified and was represented by Thomas Sjoblom of Proskauer Rose, LLP, who also represented Stanford Financial Group. After Pendergest-Holt testified before the SEC, she was charged in a criminal complaint with obstructing its investigation by giving false testimony, and was arrested.
She has sued Sjoblom and Proskauer for malpractice, and alleged that she was not informed of her Fifth Amendment right against self-incrimination, nor was she informed that she had no attorney-client relationship with Sjoblom, nor that her interests were adverse to her employer’s (Sjoblom’s client). Here is Pendergest-Holt’s amended complaint against Sjoblom and Proskauer.
According to Zach Lowe’s story from last month in The AmLaw Daily, entitled "Lessons From the Stanford Scandal: Bring Your Own Lawyer," Sjoblom took pains to advise the SEC that he was representing Pendergest-Holt "insofar as she is an officer or director of one of the Stanford-affiliated companies," but did not explain to her that he was not representing her personally. Sjoblom has since withdrawn from the case.
These cases teach that the safest practice is for an officer or director to request or obtain his or her own counsel. Some corporations (and their counsel) will simply want to assign another lawyer from the corporate counsel’s firm to represent the officer or director, and theoretically that can work (the Chinese wall approach).
But my opinion is that the individual’s lawyer should be from another firm, so that the representation is truly independent. I think some firms fear that if they refer an officer or director or employee to another firm for representation, the new firm may gain access to the corporate client. And they may be right. But that doesn’t mean that the officer or director or employee shouldn’t have separate, independent counsel. And if you don’t think so, ask William Ruehle or Laura Pendergest-Holt.