Bank of America’s new plan to seek reductions in its legal fees from certain outside law firms have some experts questioning the ethics of this unusual practice.  The bank is seeking a credit on its annual legal fees based on the amount of customer business it sends to the law firms.  According to the report, Bank of American has threatened to stop using law firms that refuse to sign onto the one year deal. 

The Bank of America agreement is believed to state that the credit sought is calculated based on the total amount of legal fees passed on to third-party customers.  Bank of America generally does not comment on specific arrangements with its legal providers; however, a source familiar with the agreement said that, the credit being sought is relationship based rather than percentage based. 

Cornelius Hurley, Director of the Boston University, Center for Finance, Policy, and Law opines that if the agreement is based on the amount of fees paid by customers, such an arrangement would be unethical and a “form of pay to play for the law firms.”  University of California’s Hastings Law School professor, Geoffrey Hazard explains that the agreement seems to violate the American Bar Association’s rules of Professional Conduct in a least two ways: (1) the bank is getting a reduction in legal fees; (2) and there is a referral in return for money.  

Not everyone sees this as an ethical issue.  Thomas Spahn, a commercial litigation partner at McGuireWoods in Virginia, said his law firm accepted the agreement and does not an issue.  He does not share the concern that this arrangement violates the rule that “a lawyer cannot give anything of value” to someone who sends him business.  Spahn’s reasoning is that “most law firms will give benefits to a company that sends them a lot of work such as free legal seminars or cocktail parties.”  He justified this position by stating that the agreement is sound as long as the credit is not tied to a particular fee. 

Bank of America does offer some notice to its customers that it is receiving a benefit.  Hurley feels the notice is “too vague and not a full-fledged disclosure...” and Hazard comments that “its getting the reduction that matters, not who knows about it.” 

The bank defended the agreement in a statement issued to Corporate Counsel.  “We do not require clients to retain particular law firms and we are committed to transparency in disclosing fee arrangements, as well as, potential benefits to our company.  We are confident that our agreements with external legal services providers are appropriate.”  Eric Cooperstein, a legal ethics practitioner in Minneapolis sees this agreement as raising serious ethical concerns as the rules do not have an exception for client consent.  “Quite simply, a legal client’s business cannot be bought and sold.”  




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This week, the FDIC and SEC approved the Volcker Rule and released a draft for public comments.  Bank regulators will have to solidify the Rule in the coming months, as the Rule is set to take effect in July, 2012 – although banks would have three years to comply with the Rule. 

Part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Volcker Rule limits the type of investments that banks can make with their own money.  A result of the financial crisis, the Rule seeks to reign in the behavior that caused banks to fail in 2008.  The Rule is named after former Federal Reserve Chairman Paul Volcker, a man who criticized bank practices long before the financial crisis.  The Rule applies to banks that have government guarantees and may even impose limits on financial companies supervised by the Federal Reserve Board.  

The Volcker Rule places two big limitations on banks.  First, the Rule prohibits banks from owning or controlling hedge funds and private equity funds: a bank cannot own more than three percent of a hedge fund or private equity fund, and cannot invest more than three percent of its capital in such funds.  

Second, the Rule prohibits banks from engaging in proprietary trading.  Proprietary trading occurs when a bank makes trades for its own benefit, rather than for the benefit of a customer.  There are a few exceptions to this rule though, including trades of foreign currencies, commodities, and government bonds.  Additionally, banks can engage in proprietary trading if they are hedging while trading on behalf of a customer.  And banks may still act as market-makers and underwriters.      
The Rule is not without problems though.  Even its supporters claim note that the Rule may not be strict enough, and may contain loopholes.  Also, it can be difficult to draw a line between proprietary trades and trades made for customers.  

Wall Street is certainly not happy with the additional regulations.  Compliance will create new costs; the Rule requires banks to create internal compliance programs overseen by executives.  And Moody's noted that the Rule gives certain companies, like investment firms and offshore banks, a competitive advantage because they are not subject to the regulations.  

At almost 300 pages, the Volcker Rule will likely receive several public comments in the next few months, including some very loud ones from Wall Street.  

William F. Auther is a partner with an active trial practice in business litigation and Kelly M. McInroy is a law clerk in the Phoenix office of Bowman and Brooke LLP.  

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Litigation Funding Equals Big Money

Posted on October 6, 2011 02:18 by Terrence L. Graves

The Wall Street Journal (“WSJ”) reported in the October 3, 2011 edition of the paper about the start-up of three brand new companies that were started with the purpose of entering what is considered the “fledging alternative litigation funding market.”  You can view the article here.  

The WSJ identifies the three new players in this market as BlackRobe Capital Partners, LLC, Fulbrook Management LLC, and Bentham Capital LLC.  What is ultimately interesting about the article is not that there are three new sources of alternative litigation funding now available, but the fact that it points out a level of investment in high stakes commercial litigation by alternative litigation funding companies of which many lawyers in smaller law firms are simply unaware.  

Many of us think of a sleazy operation that takes advantage of personal injury plaintiffs by lending them money at usurious interest rates in order to “tide them over” until they are able to settle their personal injury law suits when the term alternative litigation funding is used.  This practice is widespread throughout the United States and is only regulated in a few jurisdictions.  These include:  Ohio, Rhode Island, Florida, Maine, and Nebraska.  These states only mandate that the lending entity be licensed and that proper disclosures be made of the applicable interest rates.

The lenders discussed in the WSJ article are looking for what are described as “huge, untapped market[s] for betting on high stakes commercial claims.”  It was reported that companies that would be involved in litigation will spend $15.5 billion in commercial litigation and an additional $2.6 billion on intellectual property litigation.  The practice apparently has what is described as “cautious backing” from several “big law” firms, including Latham & Watkins, LLP, Patton Boggs LLP, and Cadwalader, Wickersham & Taft LLP.  The bottom line is that many firms see this as a way to engage in litigation while making sure that legal fees are paid in a timely fashion.  

There is no question that allowing smaller companies to tap this source of funding would allow them to potentially go against much larger companies in litigation and, might be considered to be a way of leveling the playing field.  On the other hand, critics of this practice have indicated that allowing alternative litigation funding increases the likelihood of frivolous claims and would continue to mean an increase in litigation that would continue to deplete resources from what many already consider to be an over-whelmed legal system.

In some cases, the litigation that is generated is between the alternative litigation funder and the borrower.  This circumstance is discussed in a companion article found as an insert in the Wall Street Journal here.  The case that is the subject of this article resulted in a law suit in which the alternative litigation funder is seeking to recoup its “investment” of $3 million that was provided to fund litigation involving the plaintiff’s international arbitration claim against the nation of Romania.  

No matter which side of the debate you come down on with regards to alternative litigation funding, one thing is clear.  This is a subject that is gaining momentum in the legal community on several levels.  The DRI’s Public Policy Committee, chaired by John C. Trimble of Lewis Wagner, LLP in Indianapolis is looking at this issue and will be providing recommendations to the Executive Committee of DRI in the near future.  

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On May 25, the Securities and Exchange Commission adopted new rules concerning the whistleblower program implemented under Section 922 of the Dodd-Frank Act.  In a party-line divided vote of 3-2, the SEC took a “middle of the road” approach to the controversial aspect of the rule of whether to require a whistleblower to first inform his or her company of the alleged conduct.  While the SEC did not require whistleblowers to take this step, it provided additional monetary incentives for those who do and guaranteed whistleblower status to those who report internally where the company subsequently discloses the conduct to the SEC.  The new rules, which become effective 60 days after publication in the Federal Register, require a whistleblower provide the SEC with original information that results in the successful enforcement by the agency in a federal court or administrative proceeding where the SEC obtains more than $1 million in sanctions. 

The requirement for internal reporting of alleged conduct has been hotly debated.  Senior Vice President and General Counsel of the Association of Corporate Counsel Susan Hackett characterized the SEC’s new rules as a “Pandora’s box.”  Likewise, public companies have criticized the SEC’s new rules and foreshadowed the potential damage to internal compliance and reporting systems. 

In contrast, SEC Chairman Mary Schapiro commented that the rules “are intended to the break the silence of those who see a wrong” and that the SEC found the proper balance between encouraging whistleblowers to report internally, but also gave them the option to contact the SEC directly.

Read the SEC Press Release in its entirety here.


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On November 3, the Securities and Exchange Commission issued a proposed rule implementing a program to pay eligible whistleblowers rewards for providing information about federal securities violations.  Under Section 21F of the Securities and Exchange Act, which was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Commission is required to promulgate rules establishing a program to pay whistleblowers rewards for providing original information leading to successful judicial or administrative enforcement actions.  Under the Act, if the Commission obtains at least $1 million as a result of the whistleblower's information, then the whistleblower is entitled to receive ten to thirty percent of the monetary sanctions obtained by Commission and other regulatory agencies. 

While these provisions necessarily evoke comparisons to qui tam actions brought under the False Claims Act—and apprehension regarding the massive settlements routinely obtained by qui tam relators—the Commission's whistleblower program does not authorize citizen suits.  Rather, the Commission's program solely provides rewards for disclosing evidence of securities violations, without delegating its enforcement authority.  Though this will prevent disgruntled employees from directly bringing actions against their current or former employers, it creates strong incentives to disclose violations to the Commissions instead of bringing them to the management's attention.  Though the Commission has expressly provided that employees may report violations to management and still remain eligible to receive whistleblower rewards, this proposed rule appears to incentivize whistleblowing over internal compliance mechanisms. 

However, these rules should not discourage companies from fully investigating potential violations because the proposed rule prevents employees conducting compliance-related tasks from receiving whistleblower rewards, e.g., employees who receive information about a violation through an internal investigation are similarly ineligible.  More importantly, a company's legal and accounting team may not obtain whistleblower rewards for violating their confidential relationships.  While this may become a boon to the SEC enforcement, most companies criticize this program as undermining the costly Sarbanes-Oxley Act compliance improvements. 

The Commission has requested comments on these proposed rules; all comments must be submitted by December 17, 2010, and can be submitted on line at

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Categories: Financial System

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The July 2010 Exposure Draft, Contingencies (Topic 450): Disclosure of Certain Loss Contingencies, which would require enhanced and more detailed disclosures about litigation involving public traded businesses entities, will not take effect this year. The Financial Accounting Standards Board (FASB) has now received 347 letters from a wide range of affected or interested parties generally opposing important aspects of the liberal disclosure standards.

Lawyers for Civil Justice (LCJ), a coalition of DRI, FDCC, and IADC, submitted Comment Letter 283 opposing the proposed changes.

FASB posted their decision to delay implementation of this standard and to re-deliberate the standard on their Website today. The July draft, itself, was the refinement of a 2008 proposal, which also was met with considerable opposition.

Watch this blog, it will keep you informed of further developments on this important issue.

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Categories: Financial System

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Citing the recent bailout of AIG, Senator Richard Shelby (R-AL), the highest ranking Republican on the Senate Banking Committee, last week indicated that the insurance industry must be part of any comprehensive overhaul of the federal regulations dealing with the state of the current financial system. Click here for more information.

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