Conflicts of interest after White & Case
Graham Reid unpicks the reasoning behind the SDT's decision to issue reportedly its highest ever fine, and looks at the lessons to be learned by other firms
When a law firm is fined £250,000 by the Solicitors Disciplinary Tribunal for conflicts and confidentiality breaches, this should be taken as a warning to others.
There were two respondents to the SDT’s decision dated 7 August 2017: White & Case LLP, the London office of the international law firms of that name, and Mr Goldberg, one of its partners. Both admitted the allegations.
The facts behind the decision are complex and best understood by first reading the decision of Mr Justice Field in Georgian American Alloys v White & Case LLP [2014] EWHC 94, followed by the SDT decision (case no. 11592-2016).
In summary, the London office of White & Case (an LLP incorporated in England and Wales) and Goldberg started work on a litigation matter for a Mr P in September 2010. Its targets were a Mr B and a Mr K. By December 2010 there had been some kind of settlement and the matter had gone quiet.
In April 2011, the New York office of White & Case (an LLP incorporated in New York, USA) started work on a corporate restructuring matter. This corporate matter concerned companies ultimately owned by B and K. It was a big matter ($900,000-odd in fees) and many lawyers were involved. They acquired detailed information about the assets of B and K, but B and K were not clients. The New York office did conflict checks before starting and identified the litigation matter as a possible concern, but Goldberg said it was finished.
Most of the work on the corporate matter was done between May and September 2011 but some aspects continued until its closure in May 2013. Meanwhile, the litigation matter revived in May 2012. Goldberg forgot he had earlier been asked about conflicts on the corporate matter and did not carry out a new conflicts check when reviving the litigation matter (problem no. 1).
He also did not put up information barriers around the two matters so as to prevent the risk of leakage of confidential information from the corporate matter to the litigation matter (problem no. 2). That was important because P wanted to sue B and K and the nature and whereabouts of their assets were therefore relevant.
In November 2012, Goldberg carried out a conflict check, identified the corporate matter, and escalated the situation to White & Case’s general counsel. After discussing the position with the partners on both matters, the general counsel concluded there was no conflict (problem no. 3). It seems he relied in part on conflict waivers provided by the clients.
No information barriers were put up at that time (problem no. 4). Finally, in March 2013, at around the time of issue of proceedings on the litigation matter, information barriers were put around the two matters.
In October 2013 the clients on the corporate matter expressed concern about the situation, applied for an injunction against both White & Case firms in November 2013, and, despite opposition, succeeded in obtaining the injunction in January 2014. White & Case then self-reported the situation to the Solicitors Regulation Authority.
Human error
The first thing to note is that there was a process within the White & Case firms for conflict checking, as one would expect: it did operate, it picked up the existence of possibly conflicting matters, and the potential conflicts were reviewed and resolved. The first failure of that process was therefore human error: Goldberg forgot to refresh the conflict checks when the litigation matter revived in May 2012. That is very easily done.
Other firms should take heed of this risk and address it. For example, White & Case has now introduced a safeguard that prevents fee earners from working on matters that have been inactive for more than 90 days without first forcing them to undertake full conflict checks.
Different offices
The second salient feature of the case is that the SDT did not distinguish at all between the different LLPs involved. The New York and London offices of White & Case seem to have been treated as a single firm despite possessing separate corporate identities (and, presumably, the New York entity was not even regulated directly by the SRA).
The reasons for this are not apparent but it’s difficult to imagine the point was overlooked. The likeliest answer is that the firms had such seamlessly joined-up working and compliance arrangements that, in effect, the firms had to be treated as one for conflicts and confidentiality purposes. This raises the interesting question whether other international law firms that do not resolve conflicts on the fiction that all offices are one should reconsider their position in light of this case.
Client conflict
The third important aspect concerns the treatment of K and B for the purposes of conflicts. They were not clients of the White & Case firms: the SDT described them as persons “connected to existing clients on a related matter”. However, that didn’t stop the SDT from finding, on admission, that there was a “client conflict” between K and B and P for the purposes of outcome 3.5 of the SRA Code of Conduct.
This is troubling. A “client conflict” in both legal and regulatory terms refers to duties owed to clients. If a company is a client of a law firm then there is no case-law basis for saying that its directors, shareholders, or ultimate beneficial owners will automatically become clients of the firm as well for the purposes of conflicts. That is not to say that on a fact-specific basis there may be such a degree of trust and confidence between the law firm and the (non-client) ultimate beneficial owner of a company that there arises a fiduciary relationship between them (as to which see Lord Justice Millett’s comments in Mothew v Bristol & West Building Society [1996] EWCA Civ 533).
However, if the SDT decided that there were special reasons to conclude that B and K were clients for the purposes of the conflict rules then these are invisible in the reasoning. The result is that the case provides a platform for arguing (incorrectly in the view of the author) that a client conflict can routinely arise in respect of “persons connected to existing clients”.
The relevance of B and K for the purposes of protection of confidentiality is a different matter: the court in Georgian Alloys held that the information held about their assets was confidential, and deserved protection on the basis of the principles set out in Bolkiah v KPMG [1999] 2 AC 222, even though they were not clients.
Information hygiene
The fourth lesson to be learned from the decision is the importance of information hygiene when resolving conflicts. The respondents were found to have breached client confidentiality by allowing the partners on both matters to discuss the position in November 2012 at a time when the firms were seeking to resolve the perceived conflict. The solution is clear: any issue of client conflict or risk to client confidentiality should be resolved by an independent compliance function within a firm, and only that compliance function should be able to acquire and assess all relevant information gathered from the respective matter teams.
Conflict waivers
The fifth point is that conflict waivers don’t work. White & Case included a term in their engagement letters whereby clients waived in advance any potential conflict of interest between them and other current or future clients of the White & Case firms. This appears to have played a part in the reasoning of the general counsel in November 2012 that there was no conflict, but it was not put forward as a defence in court or before the SDT (and rightly so: such a term cannot amount to the necessary degree of informed client consent to a risk of conflict of interest).
SDT fine
Finally, there is the issue why the SDT chose this case to make its (reportedly) largest ever fine. This is distinctly unclear. Without seeking to belittle the admitted breaches, they are nonetheless failures in implementing processes and the author suggests that the absence of proper processes ought usually to be seen as a more serious matter. The respondents admitted they had been reckless in certain respects but there were no allegations that they had been dishonest or acted without integrity; this suggests “reckless” here means a particularly serious – but nonetheless inadvertent – series of mistakes.
There is a distinct suggestion that the level of the fine was in part influenced by the “substantial revenues” generated by White & Case but it is unclear why the general commercial success of a firm should affect the nature or gravity of its misconduct. The decision also refers repeatedly to the impact of the case on the reputation of the professional internationally, but that cannot be a good reason to conclude the matter was more serious than, say, a scenario where the impact on professional reputation was domestic in nature.
Despite its uncertainties, all firms should read the White & Case SDT decision with concern and, above all, introspection. It is vital that those firms seek as much as possible to mitigate conflict and confidentiality risks. Clearly these are taken very seriously by the regulator and the disciplinary tribunal.
Graham Reid is a legal director at RPC
