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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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Managing Joint Clients:
Protecting Everyone's Interests
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Pamela Phillips
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Pamela Phillips & Phyllis A. Jaudes
There are often very good reasons for an attorney to represent more than one client in a matter. Where clients' interests are aligned - and sometimes even if they are not perfectly aligned - having one lawyer represent all of them is usually more efficient and economical. But whenever a lawyer undertakes the representation of multiple clients in a matter, the lawyer must protect each client's individual interests. In addition, the lawyer should take care to minimize the lawyer's own risks, such as exposure to claims of conflicts of interest and claims of malpractice. Rather than focusing on any one jurisdiction's ethical rules, this article takes a common sense approach and advocates a conservative course designed to maximize protection for the lawyer.
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Phyllis A. Jaudes
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Potential Problems When Representing Multiple Clients
Each time a lawyer represents multiple clients in a matter, the lawyer should consider the following issues:
- Do all of the clients want to be kept equally informed about the matter?
- Who is supposed to give the lawyer instructions about how to proceed?
- What does the lawyer do if members of the group disagree about a particular issue?
- What if one client asks the lawyer to keep confidential some piece of information about the matter?
- What happens if an expected - or worse, - unexpected conflict of interest arises after the representation has begun?
- What if one or more of the clients decide to split off and hire separate counsel?
- What happens if the clients disagree about settlement demands (or offers) after the representation is underway?
- Who is going to pay the lawyer's fees?
Have a Written Representation and Fee Agreement
Many states require lawyers to have written representation and fee agreements, at least in certain situations. But in this litigious day and age, lawyers who represent multiple clients in a matter should, as a matter of self-protection, have a written representation and fee agreement signed by each of the clients, whether or not the law requires one. In the joint-client situation, a representation agreement can lay out the ground rules by which the lawyer and the clients will be governed, help prevent misunderstandings and serve as a "rule book" should disagreements arise. A representation agreement will also impress upon your clients the seriousness of what they are asking you to do. Ideally, the representation agreement should address each of the subjects in this article.
Establish Clear Lines of Communication
An attorney has an ethical obligation to keep a client informed about the status of the matter the attorney is handling, and to give the client sufficient explanations to permit the client to make informed decisions regarding the representation. Yet multiple clients often have differing levels of interest in the subject matter of the representation. Quite often, there is a "leader" who appears to be in charge, while the rest stay in the background. Sometimes, members of a group will tell the lawyer, "Don't bother to send me all of your letters, drafts of documents, etc. I trust [Mr. X] to take care of this for me." In other circumstances, an attorney might be asked to represent a group of clients without meeting all of the members of the group.
In joint-client representations, an attorney needs to clarify lines of communications. If you receive instructions from any member of the group not to send them copies of all of your communications with the others, document that in writing. In addition, if someone else takes responsibility for keeping the group informed, memorialize that in writing. Make sure to explain the communication ground rules to everyone in the group, and do it in writing.
Specify From Whom You Take Your Instructions
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Explain The Rules of Privilege and Confidentiality
It is a good practice to include a paragraph in your representation agreement explaining what the attorney-client privilege is, how it works and how its protection is lost if the client does not honor it. Joint clients may not understand that their discussions with each other, outside your presence, may not be privileged. You may also want to explain the joint-client exception to the attorney-client privilege - that is, should any one of them end up in litigation against the others on the subject of the representation, then none of them will be able to claim the privilege as to their communications with you on the subject of the joint representation.
Confidentiality is another issue you should discuss up front. Most clients have a general understanding that what they tell their attorney will remain confidential. But the rule is different when there are multiple clients in a single matter _ what one client tells you about the matter is normally "fair game" for disclosure to all of the other clients on that matter. (Obviously, an attorney has discretion as to what is worth disclosing and what is not, and can take individual personalities into account. For example, the attorney for multiple clients can use common sense in handling clients who "spout off," saying things that they do not really mean or later retract.)
You can use your representation agreement to help multiple clients understand the rules you will follow about confidences. Explain that you must be free, subject to the exercise of your discretion, to disclose to all of them what any one of them tells you about the matter on which you are representing all of them.
Identify and Resolve Conflicts of Interest
Identify conflicts. Lawyers are required to spot and resolve actual conflicts among multiple clients whenever they become apparent. But at the outset, lawyers should also explore whether there are any potential conflicts, and those can be harder to spot.
You can bring potential or actual problems to the surface by asking broad, open-ended questions: What are the clients' goals? What are their resources? Are they aware of any disagreements among themselves about how the matter should be handled, or about who is responsible for the situation in which they find themselves? Do any of them feel that they have claims against any of the others, or that they might have claims depending on how things develop? How and when would they like to resolve those actual or potential disputes? Are they willing to defer resolving those disputes until the current matter is resolved? Have any of them consulted with, or retained, another lawyer to advise them on the matter at hand? Do any of them have concerns about sharing a single lawyer and, if so, what are those concerns?
As you probe, listen for signs of discord, domination or reservations and then follow up as appropriate. In addition, explain the pros and cons of joint representation and the fiduciary duties that govern the lawyer's behavior _ such as the duty of undivided loyalty.
Resolve conflicts. Once you have identified any actual or potential conflicts, resolve them. Do not assume that they will work out. Do not leave it to the parties to work them out and then forget to ask them what resolution they reached. Make sure that you understand what the resolution is. For example, have they agreed that there really is no dispute after all? Have they agreed that there is a dispute, but that they will solve it by an indemnification agreement, or defer its resolution until later? Are you going to have a role in the indemnification process or in the deferred-resolution process? Do the clients understand that they may, or may have to, hire other counsel to handle any disputes between them? In certain circumstances, you may want to keep your distance from the dispute and refer them to separate counsel. Case law allows your participation in such disputes with appropriate disclosures and consents, but it is advisable to spell this out in advance in writing.
Document the conflict and its resolution. Clients have amazingly short memories when it comes to conflicts. The only practical protection an attorney has is to document what has been discussed and how the conflict has been resolved. (This is especially important if you have not met with all of the clients to discuss conflicts.) Even if not required, you may want to ask the client to sign the document signifying the client's consent to go forward with the representation notwithstanding any conflicts.
Plan Ahead For Future Disagreements
Even harmonious groups of clients can break apart unexpectedly. This can happen due to a conflict of interest, a personality dispute, a disparity in resources or other reasons that could not have been anticipated. If joint clients split up two or three years into the representation, and you have not specified what will happen if this occurs, problems can arise. For example, a departing client could challenge your right to continue to represent the remainder of the group. In this situation, you could risk disqualification and the other clients could experience disruption of their representation, as well as the unanticipated expense of having to educate new counsel.
In many jurisdictions, including California, you can remain in the matter even if some of the clients fire you or you fire them, particularly if you have advance client consent. With appropriate consent, you can even be adverse to the now-former client in the same matter.
It is a good idea to specify up front, in the representation agreement, what will happen if one or more clients leave the group for any reason. The agreement can specify which of the clients will remain as clients, or can simply say "those who choose to continue the representation" may do so.
Establish Payment Responsibilities
Your representation agreement should specify who is responsible for paying your fees and costs. Is it the entire group or only some of the clients? If one agrees to pay all of the fees and costs, but fails to, do you have any remedy against the others? None of this should be left to happenstance - discuss the arrangements and spell them out clearly in the representation agreement.
If you have any fee arrangement other than one in which each client pays its own pro rata share, use your representation agreement to explain the arrangement and ask each client to consent to it. Many jurisdictions specify that the attorney must not let the paying party influence or interfere with the attorney's independent judgment in the matter or the attorney's relationship with the actual clients. The attorney is, of course, obligated to protect the clients' confidences from third-party payors who are not themselves clients.
Watch Out For Conflicts at Settlement
Even when all of your joint clients get along during most of the representation, new problems may arise when the end is in sight - at the settlement stage. Various ethical issues come into play here. First, each state has rules requiring lawyers to inform their clients about settlement demands and offers; some jurisdictions make a distinction between oral and written offers. The lawyer representing multiple clients should make certain that all of the clients are promptly informed about settlement demands and offers, whether by telling them directly or through their agreed-upon intermediary.
Second, aggregate settlement offers can pit the joint clients' interests against each other. In many states, including California, a lawyer representing multiple clients in a matter may not enter into an aggregate settlement without all of the clients' written consent. If disputes arise at that point, then the attorney may need to step back from advising the clients and, instead, recommend that the clients engage in some separate process to resolve the dispute (such as mediation or arbitration). The lawyer may also need to recommend that the clients obtain separate counsel to advise them on the settlement.
Conclusion
Representing multiple clients in a single matter requires a great deal of attention to issues other than the merits of the matter. But with some careful planning up front, the lawyer can steer a course around the obstacles so that joint representation works well for the clients, and for the lawyer representing them.
Pamela Phillips and Phyllis A. Jaudes specialize in representing lawyers and law firms on legal ethics and legal malpractice matters at the law firm of Rogers, Joseph, O'Donnell & Quinn in San Francisco, California. Ms. Phillips chairs the firm's Professional Liability Practice Group.
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The Evolving Insider Trading Debate
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Robert Charles Friese
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Robert Charles Friese & Zesara C. Chan
Insider trading, commonly defined as trading in securities while having knowledge of significant undisclosed information about the company, remains an important target in private securities litigation and of the Securities & Exchange Commission ("SEC"). Understanding the evolving legal requirements is critical for corporate insiders and their counsel, because insider-trading violations can result in a disgorgement of profits and a treble penalty. Furthermore, the stigma of an insider trading violation can effectively bar an individual from serving as an officer or director of a public company, even where the SEC has not sought such a bar in an enforcement proceeding. Exploring all the motivating factors for relevant purchases or sales has become increasingly important in counseling clients prior to litigation and in defending pending claims.
While insider trading charges are usually brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, the courts have not been uniform in interpreting certain key statutory language, such as whether a causation element is required. Two recent cases, SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), and U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), cert. denied, 142 L.Ed. 2d 664 (1999), have refined the legal landscape by emphasizing that "use" of the material information is an essential element of an insider trading violation. Under these recent cases, the SEC must show that the material nonpublic information was "used," i.e., caused the alleged wrongdoer to trade. The Adler and Smith decisions rejected the SEC's position that an insider's mere possession of important nonpublic information taints a trade in the company's stock. The Adler and Smith cases shift the factual battleground to whether the inside information was used to buy or sell and what other pre-existing motives may have caused the trade.
Serious civil and criminal penalties can be imposed against alleged illegal traders. Under the Insider Trading Sanctions Act of 1984, 15 U.S.C. 78u-1, the SEC may seek a civil penalty of up to three times the profit gained (or loss avoided) by parties who unlawfully trade in securities or "tip" others to trade. The SEC has broad authority to investigate possible violations of the federal securities laws and can use its subpoena power to compel witnesses to testify or produce written records or other evidence. In practice, the SEC normally pursues alleged insider traders with injunctive actions that also seek disgorgement of illegal profits and civil penalties. The SEC can also refer a matter to the Department of Justice or the local U.S. Attorney to determine whether criminal proceedings are warranted.
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Zesara C. Chan
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The Origins of the Use vs. Possession Debate
Over the years, the courts have set no uniform standard concerning whether the confidential material information must have some causal relationship to the insider's trade. Senior personnel within a public company are necessarily exposed to nonpublic information in the course of their work, so some courts have suggested that mere knowledge of such information while trading is not enough to show misconduct. Insiders may be motivated to trade for reasons that are separate and unrelated to nonpublic information (e.g., as part of pre-planned, periodic programs to exercise and sell stock options) that may help remove any taint from the trading in question.
Since the 1960's, the SEC has often argued that an insider's mere possession of material nonpublic information prior to trading in the company's stock was enough to make the trades illegal. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur, Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). This position was expressly adopted by the SEC in In re Sterling Drug Inc., [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,570 (1978), where the SEC declared that "Rule 10b-5 does not require a showing that an insider sold his securities for the purpose of taking advantage of material non-public information If an insider sells his securities while in possession of material adverse non-public information, such an insider is taking advantage of his position to the detriment of the public." Id. at 80,298.
Since Cady and Texas Gulf Sulphur, some U.S. Supreme Court decisions have supported a "use" theory by finding that mere possession of inside information while trading is not enough for liability. In Chiarella v. United States, 445 U.S. 222 (1980), Chiarella was employed by a printing company that prepared solicitation materials for bidders in tender offers. After deducing codes used to disguise the target company's name, Chiarella profited from the purchase of the target company's stock. The Court repeated the familiar principle that, under Section 10(b), a corporate insider has a duty to disclose material nonpublic information or abstain from trading on the information. Id. at 226-228. However, Chiarella's conviction was reversed because he had no fiduciary duty to sellers of the target company's stock. Id. at 232-233. The Court thus rejected a liability theory based solely on a person's informational advantage. In fact, the Court stated that "a duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information." Id. at 235. The Court also stated that the "federal courts have found violations of 10(b) where corporation insiders used undisclosed information for their own benefit." Id. at 229 (emphasis added).
Envision yourself, six months into the representation, trying to decide a major issue and every single member of the group has a different opinion about how you should proceed. Such differences of opinion might amount to a conflict of interest that needs to be dealt with in accordance with the rules governing conflicts. But that is not necessarily so, and if it is not, whose instructions do you follow? Wherever possible, describe this possible scenario to your group of clients at the outset, explain the difficulties that such a logjam could create and then get the group to agree upon a decisionmaking mechanism. Specify who has the power to break deadlocks and how that person or persons should do so in a fair manner. Memorialize this in writing, preferably in your representation agreement.
Other Supreme Court cases indicate, at least indirectly, that the use, not the possession, of the confidential information formed the crux of liability. United States v. O'Hagan, 521 U.S. 642, S.Ct. 2199 (1997), involved an attorney who misappropriated information relating to an imminent tender offer by Grand Metropolitan to acquire Pillsbury Company. Grand Met had retained O'Hagan's law firm as counsel. In breach of his fiduciary duty to his law firm and its client, O'Hagan purchased call options for Pillsbury stock, which rose dramatically after Grand Met publicly announced its tender offer. The Court ruled that insider trading liability arises "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a `deceptive device' under 10(b)." 117 S.Ct. at 2207 (emphasis added). In O'Hagan, the Court ruled that "the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities" O'Hagan, 117 S.Ct. at 2209. In finding against the defendant attorney the Court confirms that persons other than literal insiders within a company may still be liable for insider trading where the duty and use elements are present.
Other courts have supported a "possession" approach to liability. In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), cert. denied, 510 U.S. 976 (1993), the Second Circuit affirmed the convictions of tippees who traded while in possession of information that was misappropriated by their tipper. Although the Court affirmed the conviction based on harmless error, the Court supported the "knowing possession" standard advocated by the SEC in dictum. Under the SEC's approach, an insider who trades in securities while having material nonpublic information is liable for securities fraud, whether or not the inside information caused or influenced the trade. The court declined to adopt the alternative "use" approach, because requiring a "causal connection between the information and the trade could frustrate attempts to distinguish between legitimate trades and those conducted in connection with inside information". Id. at 121.
The Adler and Smith Cases Refine the Issue
The Ninth and Eleventh Circuits have rejected the SEC's position that mere possession of material inside information is sufficient to impose liability. In SEC v. Adler, the SEC brought a civil action against several current and former executives of Comptronix Corporation for insider trading violations. Certain executives' sales of stock were made only days after a Board of Directors meeting at which negative sales information was discussed. Some defendants contended that their stock sales were made as part of a pre-existing plan and presented evidence of pre-Board meeting discussions with a broker about selling the stock and of a "lock up" restriction that had prevented selling earlier. Defendants secured judgments in their favor. On appeal, the SEC argued that the possession of inside information was sufficient for liability and that no causal relationship between the information and the trade need be proven. Id. at 1332. The Eleventh Circuit rejected the SEC's position and adopted a rule that actual "use" of the alleged inside information was necessary, but reversed the judgments in favor of defendants and returned the matter to the trial court for further proceedings. Id. at 1343-44. Reviewing the language of Section 10(b) and Rule 10b-5, the Court concluded that the statutory emphasis on "fraud and deception" was more consistent with a "use" standard. Id. at 1337-38. Adler rejected the SEC's possession test, in part for fear that it would cast too wide a net and would go beyond situations involving actual fraud. Id. However, to address the concern that an unduly difficult burden of proof would otherwise be imposed on the SEC, the Court held that a "strong inference of use" arises from proof that an insider traded while in possession of insider information. Id. The insider can attempt to rebut the inference with evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used. Id.
The Adler court also noted the possibility that the SEC could promulgate a rule adopting the knowing possession standard, as it had done in the tender offer context. Id. at 1337, n. 33. While this comment appears to be dictum, it may give rise to a new controversy over the SEC's authority to overturn precedent through its rulemaking authority.
In United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), a criminal action for insider trading was brought against Richard Smith, the Vice President of PDA Engineering. Smith sold all his company stock and shorted 35,000 additional shares after discovering a BGCOLOR="#FFFFFF" link="#009966" vlink="#663399" text="#000000">
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NORTHERN CALIFORNIA
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Volume 8 no. 2/Mar '99
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