This week, news broke that a former lawyer for the New York-based firm Skadden, Arps, Slate, Meagher & Flom had pled guilty to lying in the special counsel’s Russia investigation. The firm stated that it had fired Alex van der Zwaan last year and was cooperating. So what happens when a “good” client uses a firm for bad?
IADC member Mark Fucile posed this question in an in-depth piece for the Defense Counsel Journal, calling clients using legal services for Ponzi schemes or similar fraud a “law firm nightmare” and “catastrophic.”
According to Fucile, when a firm discovers this wrongdoing, three questions arise.
- Must or should the firm withdraw?
- What can the firm disclose in its defense?
- What are the areas of potential exposure and what practical steps can a firm take in advance to better protect itself?
Per Fucile, there are four items to consider around whether or not a firm must or should withdraw: ABA Model Rule 3.7 (the “lawyer-witness rule”); the “crime-fraud” exception to the attorney-client privilege; “the mastermind may contend that the law firm was representing him or her as an individual in addition to the corporate client involved in an effort to create a disqualifying conflict or to exclude evidence allegedly subject to a personal attorney-client privilege”; and “the law firm may simply be ‘too close’ to the situation to give professionally objective advice.”
Moving on to the second question, what can the firm disclose in its defense? When a client confidentially reveals its wrongdoing, ABA Model Rule 1.6(b)(2) permits a lawyer to reveal the information “to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer’s services[.]” Similarly, ABA Model Rule 1.6(b)(3) allows counsel to reveal the information in order “to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client’s commission of a crime or fraud in furtherance of which the client has used the lawyer’s services[.]”
Fucile states that ABA Model Rule 1.6(b)(2) and ABA Model Rule 1.6(b)(3) are discretionary and that a firm could withdraw without ever having to reveal the fraud.
Finally, the types of claims a firm may face depend on the facts and jurisdictional law. With regard to how a firm may reduce the risk, Fucile advises systematically implementing three risk management approaches: “be wary about allowing firm lawyers to participate in the promotion of the investment involved — either directly or implicitly”; “carefully define the scope of the firm’s representation in a written engagement agreement”; and “avoid making statements on the firm’s own website about being a client’s ‘general counsel.’”
In summary, Fucile advises when a client is revealed as a fraud, in most instances the firm should withdraw and seek experienced counsel of its own. If the firm “has been careful not to co-market its services” and has a written engagement agreement that clearly defines its role, the chances increase for “early and favorable disposition” in subsequent litigation.