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Five or six times a week you get a call from a colleague to let you know you’ve been referred a possible new client. Maybe two of those referrals results in an interview with your possible new source of origination. Maybe one of these referrals decides to hire you. If you’re like us, you do not like to turn down business. You submit your conflicts check and cross your fingers. The hard truth is that our desire to bring in new clients has to take second chair to our ethical obligation to avoid impermissible conflicts of interest. Adherence to the rules governing conflicts is critical; careful attention to this issue is the only way to serve our clients and avoid face time with disciplinary counsel. Because we find these issues come up with regularity in virtually everyone’s practice, we have decided to devote our next two columns to conflicts questions. We start with a topic that has been in both the local and national news lately: conflicts that arise when a lawyer accepts payment from a third party. Rules 1.8(f), 1.7, and 5.4(c) of the Pennsylvania Rules of Professional Conduct are directly implicated whenever a lawyer considers accepting payment for a representation from a third party. First, Rule 1.8 sets out the ground rules for third-party representation: The client must give informed consent; the third party may not interfere with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and the attorney-client privilege must be maintained. Because the third-party’s interests may not be entirely consistent with the client’s, the comment states that “lawyers are prohibited from accepting or continuing such representations unless the lawyer determines that there will be no interference with the lawyer’s independent professional judgment and there is informed consent from the client.” Rule 1.7 must also be consulted. This rule prohibits representation of a client when “there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to a third person.” Rule 5.4 cautions that “[a] lawyer shall not permit a person who recommends, employs or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.” Of course, in the criminal defense context another important rule is implicated: the Sixth Amendment. The Sixth Amendment guarantee of effective assistance of counsel includes two correlative rights, the right to adequate representation and the right to the attorney’s undivided loyalty free of conflict of interest. Counsel of one’s choice is part of these rights. The presumptive right to counsel of one’s choosing, however, can be overcome by a strong showing of serious potential for conflict. This showing can sometimes be made in cases where a third party is paying the defense lawyers’ fees. Third-party payer conflicts have received extensive judicial consideration in two recent, prominent cases: the prosecution of state Sen. Vincent Fumo here in Philadelphia and the prosecution of KPMG employees in New York. In the Fumo prosecution, the government sought to disqualify lawyers for two former state Senate employees, Leonard Luchko and Mark Eister. In the KPMG prosecution, the government actively interfered with KPMG’s decision to pay attorney fees for individual employees. In the Fumo case, the government asked the court to override Luchko and Eister’s waivers and disqualify their counsel, James C. Schwartzman, of Stevens & Lee (Luchko), and Brian J. McMonagle, of McMonagle Perri & McHugh (Eister), based on the payment of their legal fees first by the state Senate and then by a legal defense “trust fund.” In its motion to disqualify counsel, the government contended that Fumo arranged for the payment of both individuals’ legal fees by the Senate and that Fumo was instrumental in creating and soliciting funding for their legal defense trust fund. The government further contended that “it may be in the best interest of [Luchko and Eister] to cooperate [with the government investigation], but such cooperation may be adverse to the Senator’s interest.” During a hearing on the government’s motion to disqualify counsel, Judge William Yohn conducted colloquies of Luchko and Eister to determine whether they properly waived their right to conflict-free counsel of their choice. Based on the colloquies, Yohn was convinced that both individuals knowingly, intelligently and voluntarily waived any actual or potential conflicts relating to the Senate’s payment of their legal fees in accordance with rules 1.7 and 1.8 of the Pennsylvania Rules of Professional Conduct. Despite the waivers, McMonagle requested and was granted an appointment pursuant to the Criminal Justice Act (CJA) as an alternative to payment by the trust fund, as Eister was not employed. (Schwartzman did not make a similar request, because he did not believe the legal defense fund posed an unwaivable conflict and because Luchko would probably not qualify for a CJA attorney.) Concerning the payment of Luchko’s ongoing legal fees by the legal defense trust fund, Yohn assumed arguendo that Fumo was involved in setting up and raising money for the fund. The court further presumed that the trust’s anonymous donors were sympathetic to Fumo’s defense. Based on that assumption, Yohn found that counsel for Luchko had an actual conflict of interest under Rule 1.7(a) of the Pennsylvania Rules of Professional Conduct. Nevertheless, Yohn refused to grant the government’s motion to disqualify counsel because the court was convinced that counsel would continue to “zealously respect his client’s interests and give unbiased advice regarding the benefits of cooperating against other potential defendants regardless of the source of his payments.” In addition, Yohn reiterated that Luchko gave a knowing, intelligent, and voluntary waiver of the actual conflict of interest presented by the “trust fund” payments. The truth is that third party payment of fees is both standard and accepted in criminal cases. In the Stein case, United States v. Stein, et al., the issue was not whether a third party’s payment of fees caused a conflict, but whether the government’s interference with a third party’s duty to pay those fees violated the Constitution. The case began as an IRS investigation into KPMG’s sale of certain tax shelter devices. As a result of the IRS investigation, former KPMG deputy chairman Jeffery Stein and several other senior partners were asked to resign their positions at the firm. Stein’s severance package included an agreement that he “would be represented at KPMG’s expense, in any suits brought against KPMG or its personnel and himself, by counsel acceptable to both him and the firm.” The federal prosecutors suggested that in order to demonstrate its full cooperation with the criminal probe, KPMG should refuse to pay or advance attorney fees to those KPMG employees who refused to cooperate, invoked Fifth Amendment rights or were indicted, including Stein. The government’s implicit threat that the payment of attorney fees would be viewed in a negative light had its desired effect � KPMG not only refused to pay attorney fees for noncooperative employees, but also set a $400,000 cap on fees for any single individual and made clear that it would cease paying all fees in the event of an indictment. In 2005, following the negotiation of a “deferred prosecution” agreement between the company and the Department of Justice, six former KPMG partners, the former deputy chairman, and 10 other former KPMG employees were indicted for criminal tax fraud conspiracy. The individual defendants challenged the government’s interference with their indemnification agreements with the company. In a landmark opinion, Judge Lewis Kaplan, of the Southern District of New York, concluded that the government had violated the defendants’ Sixth Amendment right to representation by counsel of their choice. Far from finding a problem with KPMG, the third-party payer, the court found that interference with third party payment of fees was a constitutional violation. What, then, is the best way to avoid a conflict when your (broke) new client appears with a third party to foot the legal fees? Before accepting payment from a third party, obtain written informed consent from each potential client based on a full discussion of the identity of the payer, the proposed payment arrangement, the scope of the representation, any actual or potential conflicts of interest, the material risks involved, the likely consequences and any reasonably available alternatives to the proposed course of conduct. Also, write a letter to the payer. Make clear that you will not be able to discuss any information about any of the matters without first obtaining informed consent to do so from the client and that you will not accept instructions from the payer concerning the representations. Once the relationship with the client and the payer are clearly understood and agreed to, you are free to accept payment for your representation from a third party with a clear conscience and a clear conflicts check. Karen M. Ibach, an associate in the litigation department at Montgomery McCracken Walker & Rhoads, assisted in the research and drafting of this article. • Ellen C. Brotman serves as of counsel to Montgomery McCracken Walker & Rhoads’ white collar crime and government investigations group and chairwoman of its professional responsibility group, after several years of being a principal in the firm of Carroll & Brotman. Brotman is also a former assistant federal defender with the Philadelphia Community Defenders Organization. Michael B. Hayes is a senior litigation associate with the firm and is a member of the firm’s professional responsibility practice group. Prior to joining the firm, Hayes served as a law clerk to Justice Russell Nigro of the Pennsylvania Supreme Court.

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