Financial Regulatory Forum

Dewey & LeBoeuf collapse highlights importance to clients of safeguarding records

By Guest Contributor
June 1, 2012

By Martin Coyle and Julie DiMauro

NEW YORK/LONDON, June 1 (Thomson Reuters Accelus) – The collapse of U.S. law firm Dewey & LeBoeuf underscores the importance to financial companies of gaining access to their legal records, ensuring continuity of advice, and safeguarding privileged information, according to regulatory lawyers and experts. Dewey, once one of the largest U.S. law firms with deep ties to Wall Street, filed for Chapter 11 bankruptcy protection earlier this week after failing to find a willing merger partner, and its UK unit was placed under administration. The former legal giant was saddled with $100 million debts, a criminal investigation and the departure of senior staff. It is likely to be liquidated. The failure is the biggest in the history of U.S. law firms.

RECORD KEEPING

Firms represented by Dewey in the United States would have some protections to safeguard their records, said Susan Chapdelaine, co-founder of CCIM Consulting in Providence, R.I. In the United States, client records held by a law firm are considered the client’s property. “The law firm has a fiduciary and ethical obligation to safeguard client property,” she said.

Much of Dewey’s stable of attorneys decamped to other law firms. “Unlike other professional services, such as consulting firms, when an attorney leaves a firm, they typically take their client’s files with them. The client records are transferred to the new firm.”

Looking at Dewey & LeBoeuf and other law firms going through bankruptcy, the wind-down of the firm should include a review and appropriate disposition of client and other business records, Chapdelaine says.

Records for clients of attorneys moving to other firms would be transferred, as in the case of any lateral transfer. The issue of records pertaining to clients not associated with any departed attorneys is more problematic, because the firm has an obligation to notify such clients and arrange for the proper disposition of the records.

“The wind-down process should include this notification and disposition should occur as instructed by the client — which typically means a transfer to the new law firm or delivery to the client. Records for clients that do not respond to the notification — some may no longer be in business or deceased — will need to be reviewed and retained in accordance with the requirements in the jurisdictions where the law firm practices,” she said.

“Ensure that you don’t get left high and dry and nothing is outstanding.”

- Jonathan Herbst, partner at Norton Rose in London

In Britain, the records that a law firm kept about its clients legally belonged to the firm itself, said Rob Moulton, a partner at law firm Ashurst.

Sometimes financial services firms might have “subconsciously relied” on law firms to retain their records rather than keeping adequate documentation themselves, he said. He said that lawyers were expert at keeping records, while other firms might not be so exact.

“I, as a compliance officer, would want to understand whether my business has been relying on a law firm to keep our records for us. If they have, then that is our fault. That is a bad behavior pattern for people to slip into. Everyone needs to keep their own records,” he said. He said his comments referred to practices in general, and not specifically to Dewey’s case.

Britain’s financial industry regulator, the Financial Services Authority, has clear requirements for recordkeeping, Moulton said. Firms must have proper systems and controls in place and must organise their recordkeeping processes effectively. He said that instances where firms had sought advice from lawyers on whether or not to file suspicious transaction reports were prime examples of the types of legal records to which the FSA might need access.

There might be some practical issues relating to documentation in a bankruptcy situation, Moulton said. Although there was usually no problem with the client accessing much of that information, if the firm no longer existed then the situation might change. He added that the return of money to debtors was likely to be the number one priority for any administrator running down a law firm, not the return of documents.

“The commercial imperative on a lawyer to jump when a client asks it to is not replicated when you have an administrator running the business. Their statutory duty is not to prioritize returning documents to clients.

“Equally, they might say that is a service they can provide. They might say you could have kept your own records of the correspondence between you and the law firm and if you want us to go and collect records you will have to pay us a fee,” he said.

PRIVILEGED INFORMATION

A “core concern” for compliance officers should be the effect which such a collapse might have on any privileged information held by the law firm, Moulton said.

“Does it mean that the Financial Services Authority can get hold of documents in a way they couldn’t before hand? The answer is no. That privilege remains,” he said.

Moulton warned that in some instances a judge might need an explanation as to why a document was covered by the privilege badge. A firm and its lawyer might need to explain this in court. “That might be more difficult with a firm that no longer exists,” he said.

“The law firm has a fiduciary and ethical obligation to safeguard client property.”

- Susan Chapdelaine, co-founder of CCIM Consulting

He said that, legally and technically, little would change. “If the law firm goes down and is being run by an administrator that doesn’t affect the client’s right over the document. In other words you don’t need a live law firm to be able to rely on the privilege in the legal advice you were given,” he told Thomson Reuters.

Aside from issues of legal privilege the human factor is an element. The collapse of any large firm will undoubtedly lead to redundancies. Around 433 of Dewey’s 533 New York employees lost their jobs last month as a result of its financial woes, while 160 of its 300 partners jumped ship in the first quarter of 2012. Such departures can cause problems if those who might have had expert knowledge about how to assert privilege or return records.

“Do not assume that in 24 hours you would want to be able to get the records out of an administrator in the way you would out of a working law firm,” Moulton said.

CONTINUITY

Problems with access to documentation might make it difficult for firms to ensure continuity of legal advice. Firms could not assume that a partner who left a law firm would automatically have access to files and would take them to a new firm.

“As a client you have a right to ask for your files. If there is any problem with the administrators you would have to ask for your documents and get them passed on to the partner to carry on the work under a new mandate,” Jonathan Herbst, a partner at Norton Rose in London.

“It’s a bit like asking what happens when a Lehman’s or an MF [Global] happens. If the world is perfect and everyone has done what they are supposed to have done and money is paid out instantaneously it is all wonderful. In the real world none of this is true,” Herbst said.

He said he was not aware of the particular circumstances for Dewey’s clients, but he advised financial services companies facing such issues: “Ensure that you don’t get left high and dry and nothing is outstanding.”

Firms affected by the Dewey fallout or similar problems should immediately assess their own records, Moulton said.

They should then ask their new legal advisers to contact the administrators to ask for any records that were needed, and there might be a cost and timing element. Any new law firm would need time to get up to speed with issues faced by the firm and were likely to bill for this. Such “catch-up” costs were, he said, usually waived by a new firm if it won the business in a tender process. The same might not apply if business was picked up from a defunct firm, however.

Firms would need to get new engagement letters signed with their new advisers, Herbst said. These firms might also face conflict of interest issues if the partner they had been working with moved to another firm. The new firm might represent the other party in a transaction, for example.

Corporate compliance officers can take several steps to protect records from the fallout of a law firm’s collapse, Chapdelaine said. They include:

  • Working with their own firm’s legal department, information management and IT teams, to understand the extent of exposure and risks associated with potential law firm bankruptcy.
  • Reviewing the procedures for engaging with law firms. In addition to establishing the financial soundness of the firm, procedures for engagement should be reviewed to ensure that company assets held by the law firm are managed properly and protected. Engagement letters should clearly outline the law firm’s obligations relating to client records. While law firms have an ethical obligation to safeguard client property, any clarification of expectations within the engagement letter will provide added protection to the client.
  • Financial services firms should know what records are held by law firms on their behalf. This may require the company to keep an inventory of such record and depending upon the nature of the representation, it may include a decision to specify that client records be turned over in whole or part at the conclusion of the representation.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. <a href=”http://accelus.thomsonreuters.com/solut ions/regulatory-intelligence/compliance- complete/” target=_new”>Compliance Complete</a> provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

Martin Coyle is a London correspondent for Compliance Complete and Julie DiMauro is a New York-based commissioning editor for Compliance Complete.

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