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In a decision that legal ethics experts say could affect a variety of civil lawyers, the 5th U.S. Circuit Court of Appeals has ruled that an attorney has a duty to investigate the funds with which a client pays — especially if a court injunction has frozen the client’s assets. In a case of first impression, the 5th Circuit ruled in Federal Trade Commission v. Assail Inc., et al. that the same general ethics rules that require criminal defense attorneys to audit clients to ensure the lawyers are not being paid in tainted fees should also apply to civil attorneys. The result of the 5th Circuit’s May 19 ruling is that two attorneys will lose substantial retainers. Assail involves two lawyers who defended a pair of businessmen accused by the FTC of engaging in a telemarketing scheme in violation of 5(a) of the Federal Trade Commission Act. When the FTC filed the civil action before U.S. District Judge Walter Smith of Waco in 2003, the agency obtained a temporary restraining order, instructing the defendants to refrain from continuing their telemarketing scheme and freezing their assets. Smith also appointed a receiver in the case that took control of Utah-based Assail Inc. Assail’s business leader, Kyle Kimoto, later hired Robert Draskovich, a Las Vegas solo, to defend him in the case. Kimoto paid Draskovich a $210,000 retainer — Alliance Solutions, another company, wired a majority of those funds, according to the opinion. Kimoto assured Draskovich that the money was not tainted, according to the opinion, and the Alliance funds had nothing to do with the telemarketing investigation. Smith issued a judgment against Kimoto for $106 million. All funds from the liquidation of Kimoto’s assets were ordered to be paid out as consumer redress. But it also ordered Draskovich to return the $210,000 retainer to the receiver, because the FTC alleged that Kimoto had violated the court’s freeze order. Draskovich’s retainer came from other Kimoto-controlled entities — funds that were subject to the freeze order — according to the opinion. Draskovich, along with another Las Vegas solo, Dean Kajioka, who lost $50,000 of a retainer from a client he represented in the same FTC case, appealed the trial court decisions. The 5th Circuit in its opinion commented that Kajioka might be less culpable, because the trial court ruled that he could keep $10,000 of the retainer. But the 5th Circuit ruled that both attorneys had accepted retainers improperly, and the 5th Circuit wrote that Draskovich should have known better. “The circumstances of Draskovich’s fee payment should have alerted him that something was awry,” wrote Chief Judge Carolyn Dineen King, in an opinion joined by Judges Emilio Garza and Fortunato “Pete” Benavides. “He knew that his client was accused of perpetrating massive telemarketing fraud, that all of his assets were frozen, and that supposedly unrelated third parties were paying his fees,” King wrote. “These facts should have raised Draskovich’s suspicions.” Draskovich and Kajioka did not return a telephone call seeking comment before press time. Greg White, who represents Draskovich and Kajioka, says his clients did nothing wrong and have not decided whether to appeal the case. White believes the decision is a troubling one for civil lawyers. “The biggest problem I have is the language that says lawyers should be auditing their clients,” says White, who is a partner in Waco’s Naman, Howell, Smith & Lee. “That is a loaded term. And in our present business climate, it is impossible to comply with that standard.” If the accounting firm Arthur Andersen had trouble keeping track of Enron Corp.’s funds, White says, how can a lawyer be expected to do that task? “And I mean that in the very literal sense. It’s impossible,” White says. But John Singer, a staff attorney for the FTC, says the opinion really means that “a lawyer can’t make himself willfully ignorant of a situation where his funds may be coming from.” If it appears that a client has done something illegal, and the source of the attorney fees is “unclear or cryptic at best,” Singer says, “the defense attorney has an obligation to find out what the true source of those funds are.” BROAD EFFECT Three legal ethics experts say the Assail opinion could apply to all manner of civil lawyers, from divorce attorneys to corporate litigators — any attorney who litigates over a disputed source of funds. The opinion is a broad one that may require civil lawyers to ask some tough questions of their clients about fee payments, says Jim McCormack, a former State Bar of Texas general counsel who now is a partner in Austin’s Tomblin, Carnes, McCormack. “Exactly how far does the lawyer have to examine that money in order to keep it?” McCormack asks. It’s a question the 5th Circuit doesn’t answer, he says. “Hopefully the court would apply a common-sense standard to this obligation, so that a lawyer does not have to routinely question where every dollar is coming from over the course of a representation,” McCormack says. And sometimes that’s not possible, because clients often look for legal help at the last minute, McCormack says. But the opinion really outlines what any ethical lawyer should be doing in the first place, says Linda Eads, a professor at Southern Methodist University Dedman School of Law who teaches professional responsibility. “This is not the first case where courts have said “Lawyer, give back the money. It’s not yours,’” Eads says of the 5th Circuit decision. “And believe me, in the area of legal ethics, the line ‘I didn’t know’ comes along a lot,” Eads says. “But the courts have said that if you consistently avoided knowledge, then we’re going to say you knew.” WHAT TO DO? There are plenty of lessons to be learned from the Assail opinion, says Jeff Tillotson, a partner in Dallas’ Lynn, Tillotson & Pinker who is a securities litigator. “Financial management for lawyers 101 is you always ask, ‘Can you pay me?’” Tillotson says. “And it appears the second question you should ask is, ‘Why can you pay me?’” And if that second answer isn’t satisfactory, it might be best to show the client the door, Tillotson says. “Even though they have funds, they may have trouble retaining lawyers of their choice,” he says. Patrick Reardon, a Fort Worth solo who also is a securities litigator, agrees with Tillotson. “First of all, if somebody is committing fraud — if they’re lying to the public — they’re probably lying to their lawyer. Just the accusation should put you on notice,” Reardon says. “Looking at the check and looking from where the check came from is the first thing you want to do.” (While Reardon says it is easy for him as a solo to turn away business, because he has no one to answer to but himself, the pressures may be different for lawyers at large firms.) “If you’re in a big law firm and it’s a huge client, it’s a tough decision to go to the managing partner and say, ‘I don’t think something is right with this client,’” Reardon says. Randy Johnston, a legal malpractice attorney and partner in Dallas’ Johnston Tobey, says it’s interesting to note that the opinion only requires that a lawyer must investigate whether the fee paid by a client is tainted. It doesn’t go any further than that, he says. “It imposes an obligation on the lawyer to investigate. But it doesn’t make the lawyer be right,” Johnston says. “If you reach the wrong conclusion reasonably, you get to keep the money.” And Johnston questions whether a lawyer needs to investigate if the client is a longtime customer of a lawyer. “If you’ve got a client that’s been completely trustworthy, and you’ve represented them for years, and the client says this money is not tainted, I’d think you could rely on that,” Johnston says. But when a client presents to his or her lawyer a huge retainer of questionable origins, the decision of whether to accept it is fairly simple, Eads says. “The truth is, as it always is, when a lawyer wants to do what’s right, he comes up with these solutions pretty easily,” Eads says. “It’s only when he wants the money that he doesn’t think it through.”

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