2nd Circuit disqualifies BakerHostetler from forfeiture case in rare mandamus grant

October 18, 2016

(Reuters) – For nine months spanning 2008 and 2009, John Moscow of BakerHostetler represented the U.S. hedge fund Hermitage Capital in the investigation of an epic, $230 million tax fraud in Russia. The alleged scheme is incredibly complicated, but for this story, all you need to know is that the U.S. Justice Department believes fraudsters in Russia co-opted Hermitage portfolio companies to effectuate their tax scam. In 2013, at Hermitage’s urging, the U.S. government brought a forfeiture action against the Cyprus-based company Prevezon, which the Justice Department accused of buying New York real estate to launder some of the proceeds of the Russian tax fraud.

Hermitage is not a party to the forfeiture action, but it lies at the center of the Justice Department’s allegations against Prevezon. The U.S. government regards Hermitage as a victim of the Russian tax fraud. Prevezon does not. In fact, Prevezon’s lawyers said in their brief opposing Justice’s motion for summary judgment that the company intends to defend itself in the forfeiture case by claiming that Hermitage’s founder, William Browder, cooked up the tale of the Russian tax scheme and promoted the story to the Justice Department in an attempt to thwart his own arrest on tax charges in Russia.

Who are the Prevezon lawyers making these claims about Hermitage?

None other than Hermitage’s own former counsel from BakerHostetler.

Actually, as of Monday, it is more appropriate to use the past tense to describe BakerHostetler’s client relationship with Prevezon. In a rare grant of a petition for a writ of mandamus, the 2nd U.S. Circuit Court of Appeals overturned decisions by U.S. District Judge Thomas Griesa of Manhattan that had allowed BakerHostetler and Baker partner John Moscow to defend Prevezon in the forfeiture case, despite protests from Hermitage. The 2nd Circuit panel – Judges Rosemary Pooler, Raymond Lohier and Susan Carney – remanded the forfeiture case with instructions to disqualify BakerHostetler. (While the appeal was underway, the case was transferred from Judge Griesa to U.S. District Judge William Pauley.)

The appeal presented a novel question for the 2nd Circuit: Can a law firm be disqualified for a potential conflict of interest involving a former client that is neither a party nor a witness in the case at issue? The appeals court concluded that even though BakerHostetler stopped representing Hermitage in 2009, its ongoing duty to its former client precludes it from representing Prevezon in the forfeiture. Lawyers “must preserve a client’s confidences even after the attorneyclient relationship ends,” the panel said. “A client cannot fully and candidly discuss its situation with counsel if the client must worry that such confidences could be used to implicate him in the very crimes for which he hired that attorney to defend him, significantly undermining the lawyerclient relationship.”

The panel also said that allowing BakerHostetler to defend Prevezon by leveling accusations at its former client would undermine the government’s ability to persuade crime victims to talk. “If crime victims fear that the attorneys they hire may turn against them, they may be less likely to assist government in its investigations,” the opinion said.

Judge Griesa changed his mind twice about BakerHostetler’s disqualification before the 2nd Circuit took up the appeal. Hermitage’s first attempt to block its former lawyers from representing Prevezon was in a complaint to the grievance committee of the Manhattan federal court. The committee declined to take action. Hermitage’s current lawyers at Susman Godfrey then moved in 2014 for BakerHostetler’s disqualification. The law firm said at the time that there was no conflict between Hermitage and Prevezon because both were innocent. Judge Griesa agreed, finding in 2014 that Hermitage’s conflict concerns were mere speculation.

After Prevezon’s response to the government’s summary judgment motion last December, Griesa agreed to bounce BakerHostetler, but then rescinded his own order the following month, concluding that the Russian tax fraud was “merely background information” in the Prevezon forfeiture case. Hermitage, he said, was “a mere spectator” whose interests were not directly at stake.

The 2nd Circuit found Judge Griesa had committed clear error. “Absent disqualification, there is a real risk of Hermitage’s confidences being misused,” the judges found.

Prevezon was represented at the 2nd Circuit by Michael Mukasey of Debevoise & Plimpton, who said in an email statement that the panel did not view the underlying facts the same way that Judge Griesa did – and the trial judge was much more familiar with those facts. He also said the panel decision is inconsistent with 2nd Circuit precedent and that Prevezon is considering its options.

(This post has been corrected. An earlier version incorrectly reported that Michael Mukasey represents BakerHostetler.)

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