Thursday, April 9, 2015

Risk News: Law Firm Insider Trading, Disqualification Discussions



Several interesting updates to share. First, an interesting question and paper flagged by the always excellent Legal Ethics Forum: "When Should eDiscovery Vendors Be Disqualified?" --
  • "As a general proposition, courts have inherent authority to disqualify parties and their representatives and consultants from participating in litigation. Attorneys, expert witnesses, and litigation consultants may face disqualification motions in the event of a conflict of interest. With the rapid expansion of the eDiscovery industry, however, a new question has arisen: If an eDiscovery vendor has a potential conflict of interest, when should it be disqualified? What standard should apply?"
  • "To put the problem in perspective, imagine that you manage discovery at a law firm representing the defendant in a contentious wage and hour dispute, and you recently hired an eDiscovery vendor to assist you in scanning and coding your client’s documents, at a cost of $50,000. Two months later, you receive notice from your vendor that the plaintiff’s counsel has requested its services in connection with the same case. How would you react? Would you expect a court to disqualify the vendor if it accepted the engagement? This scenario occurred in Gordon v. Kaleida Health, resulting in the first judicial order squarely addressing vendor disqualification. The Kaleida Health court ultimately denied the defendant’s motion to disqualify, allowing the vendor to continue participating in the case."

Next, two partners at McKenna Long raise several interesting issues in an article well worth the read : "Who Should Represent a Law Firm Against a Motion To Disqualify?" --
  • "When disqualification motions do come, attorneys should be prepared, hopefully having foreseen the issues.  But  “going it alone,” and not seeking the representation or advice of independent counsel, is the one most common mistake that increases the chance of turning a potential conflict of interest into a lost representation, a bar complaint and/or an action for legal malpractice.  Below are a few reasons why this approach is not the most effective."
  • "A Fool for a Client: Some may say that a law firm defending itself against a motion to disqualify has a fool for a client.  Here is what happens. When a motion to disqualify is filed, the targeted law firm ends up with two clients in the litigation.  The law firm continues to represent its original client.  In addition, however, the law firm now represents its own interests in attempting to continue the representation of the client."
  • "The law firm is not listed on the pleadings as a party, but it nonetheless has an interest in the outcome.  At that moment, the law firm has two clients whose interests may not completely align."
  • "In some situations, the law firm’s client might be better served financially or otherwise by other counsel.  On the other hand, in most situations, the law firm’s best interests are likely best served by the continuation of the representation.  The stage is set for, at the very least, a perceived potential conflict."
  • "The safer course is for the law firm to advise the client of any potential differing interests, including the advantages and disadvantages of hiring a new firm to contest the motion to disqualify.  Because the law firm has a financial (and potentially other) interest in the outcome, the law firm should avoid giving any advice in connection with the client’s decision on how to proceed."
  • "These risks could include members of the law firm being called as witnesses, unexpected fees and costs, or unknown restrictions imposed as a condition of the law firm’s continued participation.  The firm should not put itself in the position of  advising both itself and its client on these issues absent the full disclosure and consent required for multiple representation."

Fiually, another story of loose lips: "Insider Trading Case Involves Legal Secretary" --

  • "...a law firm administrative assistant had to work long hours and her boyfriend asked her why. She said her boss, a law firm partner, needed help with the merger of two insurance companies (Harleysville Group and Nationwide)... The boyfriend told his father. According to the SEC the father, Joel J. Epstein, then illegally traded on that information in advance of the deal going public."
  • "Epstein settled the civil action, according to the SEC. He will pay a total of $495,627, which is how much he and the four other tippees gained from the trading, a civil penalty plus prejudgment interest."
The Legal Intelligencer added:
  • "No charges have been filed against the son or the law firm administrative assistant and no allegations were made that the law firm did anything wrong."
  • "The girlfriend allegedly told her boyfriend about the deal and how it was causing her extra work and stress. She expected him to keep it confidential given their past history and practice of sharing confidences, according to the complaint."
  • "And, as in Epstein's case, the cases don't always involve firm employees misappropriating information. In a 2011 case, the SEC charged the father of a law firm attorney after the father, unbeknownst to the daughter, misappropriated information on a deal from documents the daughter brought home to work on over the holidays."
  • "Attorneys familiar with the work of the unit said these types of cases put professional service firms on notice that the SEC is paying attention to the misappropriation of insider information."

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