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Over eight years, the law firm Kelley Aldrich & Warren in West Palm Beach, Fla., earned more than $4 million in fees defending Dean Witter against lawsuits brought by investors who claimed the New York-based financial services firm gave them bad advice. Now, to the investment broker’s dismay, the law firm has switched sides and is representing a disgruntled investor of Morgan Stanley Dean Witter, the company created when the two investment giants merged in 1997. But Morgan Stanley is trying to block the law firm from doing so, claiming that it is unethical for the firm to use its detailed knowledge of a former client against that client. The dispute shines a spotlight on a murky area of legal ethics: When is it a conflict of interest for an attorney to represent a client in an action against a former client involving the same issues on which the attorney used to defend the former client? The securities dealer filed suit March 15 against the law firm in U.S. District Court in West Palm Beach, asking for an injunction to prohibit the firm from continuing to represent the investor in a pending arbitration action before the New York Stock Exchange. “It is without question that [Kelley & Warren] gained access to information during its representation of Morgan Stanley which it can now use to the disadvantage of Morgan Stanley,” the securities dealer’s lawyer, Joseph Coates III, a partner at Greenberg Traurig in West Palm Beach, wrote in a court pleading. But Kelley & Warren — Peter Aldrich left the firm in 1999 — says that’s a matter for the arbitrator, not a judge. And it says it isn’t using confidential information against its former client. “We wouldn’t do that,” says Rick Warren, a partner in Kelley & Warren. The Florida Bar’s Rules of Professional Conduct directly address the issue. Under the rules, a lawyer who has formerly represented a client is not supposed to take the case of a new client in a substantially related matter that is adverse to the interests of the former client, without the former client’s consent. Still, how the issue is resolved may ultimately ride on how strictly U.S. Magistrate Ann Vitunac interprets the meaning of relevant confidential information, says Arne Vanstrum, assistant ethics counsel at the Florida Bar. If Kelley & Warren knows some of Morgan Stanley’s secrets, but they don’t bear directly on the case at hand, the magistrate may rule for the law firm. “It could be interpreted either way,” says Vanstrum, who was unfamiliar with the particulars of the case. Morgan Stanley is invoking the Florida Bar rule against Kelley & Warren. “In this circumstance, [Kelley & Warren] has gone from counsel for Morgan Stanley, to counsel against Morgan Stanley, in an action involving the same issues as those cases which defendant had previously handled for Morgan Stanley,” Coates wrote in a motion for a preliminary injunction. He declined to discuss the case with the Daily Business Review. In its work for Dean Witter between 1990 and 1998, Coates wrote in the federal lawsuit, Kelley & Warren gained confidential information about the company. This included the company’s claims and litigation philosophy, methods of defending against claims, approaches to settlement, negotiation techniques and other information that would give the law firm an advantage in representing Morgan Stanley Dean Witter customer Randy Steeves. Steeves, a former auto dealership service adviser, began having Morgan Stanley handle his investments in 1999, according to court records. Morgan Stanley employee Adrian Rowles oversaw Steeves’ retirement investment, Steeves contends. At first, Rowles invested his funds in a mix of securities that were 60 percent conservative and only 10 percent high-risk, he says. But in February 2000, when Rowles allegedly told him she could double his money within two years, Steeves agreed to a higher-risk strategy. Rowles, who subsequently left Morgan Stanley, “commenced recommending more and more speculative equities, and Mr. Steeves did not have the experience to assess the increased risk,” Steeves’ lawyers said in a letter to the New York Stock Exchange. Described by his lawyers as a high school graduate who lacks financial sophistication, Steeves invested $140,099 with Morgan Stanley in 1999 and 2000, and he lost all but $2,717, his lawyers say. The bulk of the invested money came from the sale of a home. Steeves hired Kelley & Warren last year to represent him in arbitration. He accuses Morgan Stanley of negligence, misrepresentation and breach of fiduciary duty, and is seeking damages of about $138,000. “It is astonishing that at no time did management from [Morgan Stanley] make an effort to assess Mr. Steeves’ understanding of the transactions in his account or the objectives he was trying to accomplish,” the letter continued. “These were supposed to be the funds for his lifetime, not … funds used in a game of roulette.” Steeves, who lived in West Palm Beach at the time Morgan Stanley handled his investments, could not be reached for comment. ASKED LAW FIRM TO WITHDRAW Morgan Stanley says it became aware last July that Kelley & Warren was representing Steeves in his arbitration case. On July 25, Morgan Stanley attorney Bradford Kaufman wrote to Lonnie Martens, of counsel at Kelley & Warren, asking the firm to withdraw from representing Steeves and a second Morgan Stanley customer. Kaufman, a shareholder at Greenberg Traurig in West Palm Beach, said that Kelley & Warren had a conflict of interest due to its prior work for Morgan Stanley dealing with unhappy customers. In fact, Kaufman wrote, one-third of the hours billed by Rick Warren were spent working on matters concerning the same Morgan Stanley branch office where Steeves and the second investor had accounts. That office is not identified in the lawsuit. The next day, Martens wrote back, saying that Kelley & Warren disagreed about there being a conflict. “Your client is free to take that matter up with the Bar,” she said. That could take some time, however, and Morgan Stanley says it wants Magistrate Vitunac to take immediate action to stop Kelley & Warren’s representation of Steeves and prevent the law firm’s use of confidential information. Rick Warren rejects Morgan Stanley’s conflict claim. “We don’t believe we’re in possession of any information” that could create a conflict, he says. “We haven’t done work … for Dean Witter on a customer-related dispute for more than five years.” Coates, however, cites rulings in which courts found that a conflict existed several years after a law firm had ended its representation of one client and begun representing another client with interests adverse to the former client. In the Morgan Stanley case, “the corporate structure and litigation practices have certainly not changed substantially in the intervening period so as to render what [Kelley & Warren] has learned regarding Morgan Stanley obsolete,” he wrote. FORMER PARTNER DID THE WORK? Further complicating the dispute is disagreement about who at the law firm did the bulk of the work for Dean Witter when Kelley Aldrich & Warren represented the securities dealer. The law firm billed Dean Witter for about 385 hours of work in 1998 alone, the securities dealer says. Of that, 300 hours were billed by Rick Warren, and 85 hours by his partner, Glenn Kelley, according to the company. But Warren says that former partner Peter Aldrich handled most of the work. Because he no longer works for the law firm, Warren contends, Kelley & Warren has no confidential information about Morgan Stanley Dean Witter, and faces no conflict in representing Steeves. Aldrich did not return a call seeking comment. Morgan Stanley is asking that Steeves’ arbitration hearing be delayed until it receives a ruling from Magistrate Vitunac on the issue of Kelley & Warren’s representation, due to the potential for irreparable damage. “Once the confidences are disclosed in the course of defendant’s representation in the arbitration,” Coates wrote, “there is no putting the ‘cat back in the bag.’”

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