Conflict of Interest

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					       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


       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.

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