Oral Testimony of Sydney M. Cone III - Center for Professional Responsibility

Oral Testimony of Sydney M. Cone III,

a partner with Cleary, Gottlieb, Steen & Hamilton

The first witness of the day was Sydney M. Cone III, a partner with Cleary, Gottlieb, Steen & Hamilton, who has spent over a decade in his firm’s Paris and Brussels offices and in the last few years has taught law. He has worked on the issue of the host-jurisdiction regulation of foreign lawyers in New York and at the ABA and is the author of the recently published International Trade in Legal Services (September 1996) that comprehensively reviews and analyses cross-border legal practice in the principal legal centers in North America, Europe and Asia. He presented to the Commission the points raised in his written statement to the Commission and focused on Model 5 of the hypotheticals. He identified the MDP problem as not merely that of written professional rules as these rules have a common law context; he considers the common law of legal practice a vital consideration because of the fiduciary relationship of lawyer to client. It’s this fiduciary duty that must be considered to understand the rules. He referenced the fiduciary duty portion of Judge Sotomayor’s 1997 decision, Estate of Joseph Re v. Kornstein, Veisz & Wexler 958 F. Supp. 907 (S.D.N.Y.), to comment on the likely less-than-subtle pressures from nonlawyer owners and managers of MDPs who might not even be familiar with the fiduciary duty of lawyer to client. Asking what kind of MDP the Big Five would like to create he said a representative of each of two of the Big Five told the Commission the duty (for example the attorney-client privilege) is that of the individual lawyer and not the firm. Mr. Cone says this is simply not the common law of legal practice in New York. He maintains that the New York rule change to firm liability three years ago (making it explicit that the duty runs not to the individual lawyer but the firm) simply codified what was the law all along. He found it surprising that the Big Five would say that the attorney-client privilege is not binding on firms as the auditors’ firms receive letters (crafted with the attorney-client privilege in mind) from law firms, signed by law firms all the time on which lawyers throughout the firm have collaborated. He dealt with the representatives of the Big Five handling of the imputation rule – "we deal with conflicts of interest by creating walls" – by noting the judicial skepticism, if not hostility, toward Chinese or firewalls and that there exists no wall, it’s a mere image. He thinks abolishing the imputation rule would be ethically wrong and not dealing with conflicts as a firm would violate the common sense of a client who does not want the firm simultaneously to be loyal to it and on the other side of some wall systematically betray it. Another problem with Model 5 is the training of lawyers as Mr. Cone thinks this training should not only be done by legal professionals but in a context where legal professionals are ultimately responsible for the firm that’s doing the training. The related question of legal competence encompasses who is in a position to determine what lawyer in a firm is competent to do what and who should bear the responsibility for lawyers being adequately prepared to discharge their duties as lawyers. "This ultimate responsibility can only be in lawyers, and lawyers who view the firm as theirs. That is what makes or breaks the reputation of a firm – the level of competence that it brings to bear on the client matters that it deals with. Only lawyers can do this, and they can’t do it properly unless they are directly and ultimately responsible for the process that assures that the lawyers who work on matters are competent to handle them." Of the hypotheticals he would reject Model 5 and would not be upset if Model 1 were accepted. He would need questions answered regarding Model 3 in order to be certain that lawyers have the control, the responsibility, necessary to ensure the practice structure works properly on behalf of clients and the legal system. Recounting that yesterday a representative of the Big 5 was asked whether Model 4 would be acceptable and he responded ‘no’ because it was not seamless Mr. Cone said our legal system, our society, the adversary system, are not seamless. The fundamental concepts – attorney-client privilege, conflicts of interest, fiduciary duty of lawyer to client – are not conducive to seamlessness. He hopes seamlessness is not the paradigm to which a presidentially appointed commission of the ABA is aspiring as the paradigm of a seamless legal system was once found in what was called a command economy. "I hope that is not the direction in which we are moving, toward a command economy. The proponents of seamlessness, I think unwittingly, no doubt, are proposing a command economy of all professional services. And to me, at least, it’s no mystery as to who they would like to see in command. I don’t think that this would be good for our legal system or our society. I talk about our society. Democracy is not seamless. Diversity is not seamless."

In response to Professor Daly’s inquiry whether his views weren’t alarmist in the context of proposed multidisciplinary practice considering the in-house counsel experience, Mr. Cone said the major difference with law firms offering services to the public is that the single client employer is in a position to fend for itself whereas the public in many situations is not, and the conflict of interest/fiduciary relationship issues do not arise in the in-house context. Asked whether the Big Five’s representation that if there’s a conflict the MDP will go to the first client and ask for permission indicates client control, Mr. Cone pointed out that the papers of representatives of two of the Big Five say that situation is handled with firewalls, not consent, so there is a fundamental inconsistency. He said that the hard problems are when the lawyer must decline a representation and can’t tell the client why (can’t tell what he knows), and informed consent which he claims has meaning only for the in-the-present (easy) cases (i.e., will you waive any conflicts regarding XYZ subsidiary) and not when informing clients about the future. Professor Haddon posed the construct of lawyers in a separate division of an integrated MDP under lawyer supervision and control to deal with the problems of fiduciary relationship, to which Mr. Cone responded that the ultimate responsibility lodges in those who own and manage the operation who should be legal professionals who understand the legal system and are committed to it. Questioning how the profession is to police the divisional carve-up Mr. Cone raised the image offered by a New York judge (in a case Mr. Cone cited in his paper) rejecting the Chinese wall that was offered of the judiciary standing on the parapets day and night, all the time – the court has other things to do. That’s why, Mr. Cone maintains, lawyers are a self-governing profession, subject to rules of legal professionalism. The cited New York judge found screens to be a ‘trust me’ system that was unacceptable and this is in line with New York’s conclusion that firms must be disciplined as firms. Mr. Cone concurred with Mr. Mundheim that it was the ineffectiveness of walls as they relate to the loyalty issue rather than the flow of information issue that he was questioning. Having been drawn to the securities firm analogy of use of walls Mr. Cone said there exists in the securities industry no fiduciary duty to clients, it is unique to lawyers ("In the securities industry, if things get hot, you can call up a client and say we’re withdrawing, sorry. Lawyers can’t do that."). Asked by Mr. Mundheim to consult with the Commission to make Model 5 a more acceptable alternative by setting up within the MDP a division to provide legal services headed by a lawyer, Mr. Cone said there would have to be a procedure for holding the MDP and not just the division accountable, and that this would mean creating a disciplinary "Big Brother" with authority to deal with the MDP. Recognizing that there are a lot of people who are either lawyers practicing law where they’re not allowed to practice or nonlawyers practicing (this all turns on the ability to split fees) and the only authority to guard against violation of the rules is the highest court of the state, Judge Friedman proposed allowing lawyers to have multidisciplinary practices with other professionals and split fees as long as they meet the following conditions: supervision by a senior legal officer, training and other support to foster professionalism and independence of judgment in the legal division, ethics advisory run by lawyers, only lawyers tell lawyers what they can and cannot do, and the MDP being subject to an audit every five years by the highest court of the state to determine whether it can continue to function as an MDP. An MDP would be deleted from the list for failing to keep up its end of the bargain and because a full report on what it was doing was submitted by the MDP the Court would not need a big staff and could decide by a majority vote whether to allow an MDP to continue. Mr. Cone said the approach might be "all right" if, in addition to the audit every five years, the court had the power to require an audit whenever it had reasonable cause to believe it was appropriate. He also suggested that such an audit procedure might not make for low premiums for malpractice insurance. Mr. Cone clarified that his "all right" was speaking to the audit in isolation and he was "certainly not endorsing Model 5". He expressed discouragement when Judge Friedman spoke of the inevitability of MDPs and said it was a self-fulfilling characterization. He pointed to the Archibald situation in Paris and the Wilde Sapte acquisition breakdown to say that things may blow up – the Big Five are big but not omniscient. Ms. Garvey, referencing her legal services for the poor/new forms of service delivery background, mentioned registering the organization as is done with group legal service plans, audit as is fundamental in financial institution regulation (random audit is a good enforcement device) and very stringent rules regarding control (legal control) with respect to what the outside influence can do (these restrictions between the third-party payor, the U.S. government, and the those who perform the services and the board are commmon to boards of legal service entities). She clarified to Mr. Cone that she was commenting on the structure that might surround the practicing lawyer. Mr. Cone, being told that the proposed structure would accommodate, among other things, permitting the Big 5 to acquire law firms continued his objection. Ms. Katz commented on the testimony of those who noticed a decline in the use of legal services because people don’t want to get embroiled in the legal context with its rules and asked whether the rules weren’t paternalistic. Mr. Cone did not see a Model 5 MDP as responsive to the problem that people are not trustful of the legal profession. Asked whether the duties regarding conflicts and other ethical rules fail to give consumers the benefit of the doubt in terms of good judgment and impose the legal profession’s own protectionist view on the consumer Mr. Cone said a consumer finding him or herself in a position where a particular rule would be helpful might change his or her mind on this point. Asked by Ms. Lamm his opinion of law firms that have CFOs and CEOs who are not lawyers Mr. Cone said he is not familiar with such firms and that at Cleary Gottlieb the administrative people don’t carry the title of CFO or CEO and know who they’re working for. Mr. Cone clarified to Mr. Nelson his earlier statement regarding confidentiality versus loyalty concerns in conflicts by saying he thinks these fictitious walls should be condemned because they don’t work. Failure of a wall in a financial house that separates bankers from traders would not produce the same consequence as a lawyer would have. Mr. Traynor asked whether MDPs were making clear to their clients 1) their duty of loyalty does not embrace being precluded from taking non-conflicting representations, and 2) their duty of confidentiality does not embrace an inability to assert an attorney/client privilege. If not, should they be required to? Mr. Cone described the classic situation of a client coming in, wanting to do a deal, not wanting to talk about anything other than going forward to close the deal, - and that little problem with privilege and those conflicts, who cares about that - let’s get this deal done. A year later the client is unhappy for some reason and there is a look back at the fundamentals. It is up to the lawyer in the first instance to think through the problems of privilege, conflicts and loyalty and protect the client from itself. As Dean Powell thought the thesis of Mr. Cone’s testimony and paper to be that there is a common law notion of the firm that creates a professionalism web and permeates everything that lawyers do he expressed concern that this obligation of the firm is not self-enforcing – it requires firm members, disgruntled clients and fellow lawyers to report misconduct. Mr. Cone said that his basic premise is that the Commission should not merely look at the rules but also the jurisprudence that underlies them. He considers it retrograde in terms of what the realities are to suggest, as have representatives of the Big 5, that the profession move backward from holding firms responsible and fragment responsibility to individuals. He does not consider it in the interests of anybody, except possibility the people making the suggestion, to move backward in that way. The policing that goes on in firms, he maintains, shouldn’t be underestimated as it encompasses more than the rules and is very conscientious, very thorough, as a firm can’t be successful unless it has an earned and deserved image of being not only competent, but trustworthy. He felt a segregated operation within an MDP couldn’t be as solicitous of its ethos and image because its executive committee did not consist of people who understood what it is to be a lawyer and the fiduciary relationship of lawyer to client. The concerns of an executive committee of nonlawyers would be different. The lawyer’s duty to deal fairly, honestly and with undivided loyalty superimposes on the lawyer-client relationship a set of special and unique duties and, thus, the lawyer’s obligations transcend those prevailing in the commercial marketplace. The dean and Mr. Cone concurred that law firms make working in an ethical, responsible manner possible.