FINRA Investigations — To Joint Rep Or Not To Joint Rep?

Law360, New York (March 12, 2013, 12:38 PM ET) — Q: Do you understand that your counsel represents both the firm you work for and other individuals in this matter?

A: Yes.

Q: Do you wish to proceed?

A: Umm … yes?

This exchange, or something similar, should sound familiar to any lawyer who has been retained by a company to jointly represent it and those of its employees who have been called upon by the Financial Industry Regulatory Authority to provide on-the-record (OTR) testimony in connection with an enforcement investigation. While FINRA understandably asks the questions to help maintain the integrity of the testimony and obviate possible future attacks by the witness on the enforcement process, these questions are nonetheless awkward for both the witness and counsel alike.

Irrespective of FINRA’s intent, its questions hint at potential conflicts with the joint representation and make witnesses apprehensive. Adding to the discomfort of the situation is that the questions are posed at the outset of the OTR and often times by a non-attorney investigator. But if the matter has progressed to this stage, however, with the witness already under oath, counsel for the witness has undoubtedly already concluded that no conflicts exist that would prevent the concurrent representation of both the company and the witness.

From an ethical standpoint, there is nothing inherently inappropriate about concurrently representing the company and its employees. Indeed, as one court aptly put it, an “appearance of impropriety must be something more than a fanciful possibility and must have some reasonable basis.”[1]

Rule 1.7 of the Model Rules of Professional Conduct states that “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest,” and that a conflict of interest exists if: “(1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.”

Rule 1.7 also specifically provides that a lawyer may represent a client notwithstanding the existence of a conflict of interest, if: “(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; and (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal.”[2]

As stated in the rule, a lawyer must conduct sufficient due diligence to “reasonably believe” that she will be able to “provide competent and diligent representation to each affected client.” Naturally, this must be accomplished before the lawyer agrees to jointly represent the company and its employees.

More often than not, the lawyer is able to establish a “reasonable belief” that the interests of the company and employee are aligned, thereby providing an ethical basis to competently represent both clients. And when the interests of the firm and employee are aligned, it is advantageous for myriad reasons for both to engage the same counsel during the investigation.

Rule 1.7 also provides that after satisfying the “reasonable basis” requirement, lawyers need to obtain informed written consent from each affected client that they intend to represent.[3] Things can go awry if the lawyer gives short shrift to this process. 

The New York City Bar, for example, has issued several instructive ethics opinions that provide certain best practices for lawyers who intend to engage in the joint representation of multiple clients.

In Formal Opinion 2001-03, “Limiting the Scope of an Attorney’s Representation to Avoid Client Conflict,” the New York City Bar opined:

In obtaining consent from the client, the lawyer must adequately disclose the limitations on the scope of the engagement and the matters that will be excluded.  In addition, the lawyer must disclose the reasonably foreseeable consequences of the limitation.  In making such disclosure, the lawyer should explain that separate counsel may need to be retained, which could result in additional expense, and delay or complicate the rendition of legal services.[4]

In 2004, the New York City Bar recognized that “it has become increasingly common for lawyers to be asked to undertake simultaneous representation of a corporation and one or more of its officers, directors, employees or other constituents (sometimes collectively referred to as “constituents”) in the context of a governmental investigation.”[5] The New York City Bar further noted in the opinion that:

  • before undertaking simultaneous representation of a corporation and one or more of its employees in the context of a governmental investigation, an attorney must carefully consider whether he can competently represent the interests of each client; 
  • the attorney must give careful, fact-specific consideration to the risks and advantages to multiple representation and discuss those factors fully with each client before seeking their consent to multiple representation;
  • throughout the representation, the attorney must remain alert to changing circumstances that may render continuation of multiple representation impermissible or inadvisable; and
  • the attorney should give consideration to whether there are ways in which the multiple representation can be structured so as to minimize adverse consequences to her clients should a conflict between them arise.[6]

The New York City Bar further noted in this opinion that as a general matter there is no ethical bar to seeking a waiver of future conflicts.[7]

Numerous courts have considered and addressed the issue of concurrent representation of multiple clients. In Flycell Inc. v. Schlossberg LLC, for example, the court held that an “attorney may represent both an organization as well as one of the organization’s directors, officers, employees, members, shareholders or other constituents, if the dual representation does not create an unwaivable — or an unwaived — conflict of interest. … [A]conflict exists if dual representation either involves client interests that are antagonistic to one another, or creates a possibility that the lawyer’s judgment or loyalty will be compromised.”[8] 

In Mercedes v. Blue, the court considered former New York Disciplinary Rule 105[9] and held that the rule “permits joint representation even if the lawyer’s professional judgment ‘will or is likely to be adversely affected,’ provided that two conditions are satisfied — (1) that ‘it is obvious that he can adequately represent the interest of each’ client and (2) that each client consents to such joint representation after a full explanation by the lawyer of ‘the possible effect of such representation on the exercise of his independent professional judgment on behalf of each.’”[10]

Accordingly, there are several factors that lawyers should consider memorializing in writing with employee clients to satisfy the “informed consent” requirement, including that:

  • the lawyer will jointly represent the company and employee;
  • the interests of the company and employee are aligned based on information available at the time;
  • the representation is limited to the specific matter;
  • the company will pay the lawyer’s fees;
  • information learned from the employee can be shared with the company;
  • if a conflict is subsequently discovered then the employee consents to the hiring of separate counsel to represent them, and will not object to the lawyer’s continued representation of the company; and
  • the employee waives any conflict that may arise in the future with respect to the lawyer continuing to represent the company in other matters, including matters that may be adverse to the employee.

Following these best practices should help safeguard a lawyer from the unpleasant situation of a conflict being discovered while concurrently representing the company and employee.

One prominent law firm, however, recently found itself embroiled in a multimillion-dollar dispute regarding concurrent representation and discovery of a conflict during the course of a FINRA Enforcement matter. That firm is now a defendant in a lawsuit that was filed in New York State Court by a former company employee whom the law firm was concurrently representing with his company employer in the enforcement matter. 

According to the complaint, the former employee alleges, among other things, that the law firm disclosed privileged communications, permitted testimony by others that was adverse to the employee, disclosed information to others that was learned during the course of the law firm’s representation of the employee, and violated the Rules of Professional Conduct, including Rule 1.7.

The complaint also sets forth the following purported fact pattern: (1) the former employee of a broker-dealer engaged the law firm to represent him in connection with a FINRA investigation; (2) the law firm was at the time also representing the broker-dealer on other matters, but advised the former employee that it did not see a set of circumstances where the former employee would likely be adverse to the broker-dealer; (3) the law firm sent the former employee a formal engagement letter, but the letter allegedly did not mention the potential conflict of interest arising from the law firm’s joint representation; (4) the letter failed to identify what rights the former employee would have if a conflict materialized; and (5) the law firm subsequently agreed to represent the broker-dealer in the same FINRA investigation. 

The complaint further alleges that at some point during the FINRA investigation, the law firm advised the former employee that it could no longer represent him in the investigation, but would continue to represent the broker-dealer and other of the broker-dealer’s employees. In response, the former employee purportedly demanded that the law firm terminate its representation of the broker-dealer and not share with the broker-dealer any of the privileged information learned from the former employee. The former employee ultimately retained separate counsel to represent him in the FINRA investigation. The law firm continued to represent the broker-dealer.

It will be interesting to see how this recently filed lawsuit plays out. But in the interim, counsel should not be surprised if FINRA investigators are a bit more emboldened to “suggest” separate representation. Thus, lawyers should continue to approach this area with care by asking themselves what Hamlet would no doubt have asked himself if he was a lawyer, “to joint rep or not to joint rep?”

–By Dimitri Nemirovsky and Bryan I. Reyhani, Reyhani Nemirovsky LLP

Dimitri Nemirovsky and Bryan Reyhani are the founding partners of Reyhani Nemirovsky LLP in New York. The firm specializes in representing financial services clients in enforcement investigations, regulatory proceedings and private client arbitrations. Nemirovsky and Reyhani also advise clients on regulatory and compliance matters. 

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] State v. Loyal, 164 N.J. 418, 429, (N.J. 2000) (internal citations and quotation marks omitted).

[2] Rule 1.7 of the Model Rules of Professional Conduct.

[3] Id.

[4] New York City Bar Formal Opinion 2001-3.

[5] New York City Bar Formal Opinion 2004-2.

[6] Id.

[7] See also, New York City Bar Formal Opinion 2006-1: “Multiple Representations; Informed Consent; Waiver of Conflicts.”

[8] Flycell, Inc. v. Schlossberg LLC, 2011 U.S. Dist. LEXIS 126024, at *13 (S.D.N.Y. 2011). 

[9] On April 1, 2009, New York replaced its Code of Professional Responsibility with the Rules of Professional Conduct, which is aligned with the ABA Model.

[10] Mercedes v. Blue 2001 U.S. Dist. LEXIS 6468, at *1 (S.D.N.Y.  2001).