Very early in my career as a New Hampshire attorney, I had the opportunity to argue a case in front of the New Hampshire Supreme Court. Aside from being pummeled by Justice Souter, who was still on the bench at that time, it was one of the highlights of my career as a lawyer. But that experience was memorable for another reason as well. On my return to the office after the argument, I was handed a message to call the Clerk at the New Hampshire Supreme Court. Had my performance been that bad, I wondered? Am I to be summoned for some sort of discipline for having disgraced myself during oral argument? It turned out that Clerk Zibel wasn’t calling to chastise me. He was calling me to discuss a possible conflict of interest that had been discovered by the Judges after the oral argument. The defendant in our case was the old New England Telephone and Telegraph Company. After hearing the case, three of the sitting Justices realized that they each owned small amounts of stock in NET, as it was known then. Clerk Zibel was calling to disclose that fact to me, and to inquire whether we wanted the court to take steps to address the issue. We quickly concluded that the presence of a few shares of NET stock in the Justices portfolio was unlikely to color their judgment in the case. But that experience provided me with an early example of how cautious lawyers and judges have to be with respect to conflict of interest. I tell that story today because conflict of interest is all over the news these days. In the on-going Congressional hearings relative to conduct by Goldman Sachs that led to the company being sued by the SEC, the issue of whether Goldman traders were guilty of an impermissible conflict of interest has occupied much of the question and answer time. The SEC has accused Goldman and an executive of selling a financial instrument to an investor without disclosing to that investor that another Goldman client, a hedge-fund firm betting that the investment would decline, helped to pick some of the investment’s underlying mortgages. So, the argument goes, Goldman was selling the “up” side of the investment to one client, the “down” side to another client, and that client was allowed to participate in the structuring of the investment to help insure it won its bet. In the meantime, Goldman continued to manage the arrangement and clip millions of dollars of fees along the way. Goldman’s answer to the charges is simple enough: everything it did was in compliance with applicable SEC rules and regulations; the investors involved in the deals were sophisticated; and, everything was disclosed in writing and available for review by the parties and their representatives. As a business lawyer I can certainly see the merits of Goldman’s defense. But it also begs a couple of important questions. First, should disclosure of the conflict be sufficient to relieve Goldman of liability for what seems to be such an obvious and direct conflict of interest? Second, and perhaps more importantly, what sort of changes need to be made in the applicable SEC and banking regulations to prevent this sort of occurrence in the future? And so while Goldman’s defense may be simple, it raises complicated questions and concerns. On the one hand, it seems absurd that firms like Goldman should be permitted to design and sell mortgage related securities that the firm itself was betting would fall in value. On the other hand, these are sophisticated players we are talking about. If the transaction is clearly disclosed, should not the buyer beware? Furthermore, the economic reality is that investment firms and banks take hedge positions all the time that might seem in conflict with some investments held by clients. At hearings held by a Senate Judiciary Committee panel last week, some Senators felt that the regulations should be revised to impose a fiduciary duty on investment bankers and broker-dealers in dealing with their clients. That would require the folks at Goldman and elsewhere to constantly look out for their clients’ best interests, perhaps even at the expense of their own. While this may come as a surprise to some, currently these firms need only take steps to insure that a particular investment is “suitable” for the client. I’m not entirely sure where the line should be drawn, but in hindsight it is easy to see the gap in the current regulatory scheme that allowed these types of transactions to flourish. And that gap did significant damage to the world economy. Lawyers, of course, are no strangers to the concept of owing a fiduciary duty to the client. As fiduciaries, lawyers are subject to strict ethical rules for dealing with conflict of interest when it appears. In some instances the existence of a conflict of interest may be disclosed clearly in writing to the client, and the client can choose to waive the conflict of interest and permit the lawyer to remain involved in the case or matter. But in other instances, disclosure of the conflict of interest alone is not sufficient. Lawyers who continue in the face of that sort of conflict are subject to discipline and responsible for damages caused by the conflict. In other words, in the legal world, there are some conflicts of interest that are too direct and serious to be waived. It may be that our current banking and SEC regulations need to be amended to set forth the same sort of rule with respect to investors and their representatives.