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Communications Between Law Firm and Former Broadcom CFO Suppressed

By Kristine L. Roberts, Litigation News Associate Editor – June 11, 2009

A federal judge in the criminal options-backdating case against Broadcom Corporation’s former chief financial officer has suppressed interview statements and referred the company’s law firm to the California State Bar. The ruling [PDF] serves as a stern reminder of the conflict issues that arise when a lawyer represents both a corporation and its employees. United States v. Nicholas.

Background of Nicholas
In May 2006, Broadcom hired Irell & Manella LLP to assist with the company’s internal investigation of stock option granting practices. That same month, the firm undertook to represent Broadcom’s CFO, William J. Ruehle, in two related shareholder lawsuits.

During the investigation, Irell & Manella lawyers interviewed Ruehle about Broadcom’s option-granting practices. The lawyers neither stated that they were not Ruehle’s lawyers nor suggested that Ruehle consult his own counsel.

At Broadcom’s direction, Irell & Manella revealed Ruehle’s statements to the Securities and Exchange Commission and the U.S. Attorney’s Office. Ruehle did not consent to the disclosures.

Two years later, in June 2008, Ruehle and Henry T. Nicholas III, Broadcom’s cofounder and former CEO, were indicted [PDF] on securities fraud and conspiracy charges related to backdated stock options. When federal prosecutors made known their intent to use Ruehle’s interview statements in the criminal case, Ruehle objected, arguing that his statements were privileged attorney-client communications.

U.S. District Judge Cormac J. Carney agreed. The government had argued that Irell & Manella gave Ruehle an Upjohn warning—a warning to corporate employees that the lawyer represents the corporation, not its individual employees, and that the corporation controls the confidentiality of communications.

Judge Carney expressed doubt that an Upjohn warning had been given, but said the issue was irrelevant because the firm represented both Broadcom and Ruehle. “An oral warning to a current client that no attorney-client relationship exists is nonsensical at best—and unethical at worst,” the court stated.

Loyalty to the Client
The judge also found “very troubling” breaches of the duty of loyalty. “Mr. Ruehle never gave Irell permission to jettison his rights for those of Broadcom and disclose the confidential information that he shared with Irell to the government and other third parties. For Irell to have done so without Mr. Ruehle’s consent was wrong and [was] a clear breach of its duty of loyalty to him,” the court said.

Judge Carney suppressed Ruehle’s interview statements and referred Irell & Manella to the California Bar for discipline.

Joint Representation and Consent
“The ruling highlights that when a lawyer undertakes a joint representation, the lawyer must always consider the best interest of both clients,” says Andrew S. Pollis, Cleveland, OH, cochair of the ABA Section of Litigation’s Ethics and Professionalism Committee.

“If the lawyer identifies a place at which the clients’ interests diverge, the dual representation must end,” Pollis says. “And depending on the circumstances, it may be impossible to continue to represent either client,” he notes.

David A. Soley, Portland, ME, cochair of the Section’s Trial Practice Committee, questions whether a law firm should ever undertake to represent a corporation and its officers. “Judge Carney’s decision is a powerful reminder that a firm cannot do so without at least comprehensive informed consent,” Soley says.

Conflict of Interest
“The conflict in Nicholas may not have been waivable,” argues Bruce A. Green, New York, NY, past cochair of the Ethics and Professionalism Committee. “Ruehle had information that Broadcom wanted to know and potentially disclose to the government. The law firm was both defending Ruehle in the shareholder litigation and acting adverse to him in the investigation,” Green says.

“Every lawyer should recognize the conflict of interest here,” says Soley. “Ruehle believed the firm’s lawyers were representing him during his interviews, and the lawyers never said otherwise or suggested he retain his own counsel,” he says.

Green agrees that it is easy to see how Ruehle could have misunderstood the lawyers’ roles.

Pollis recommends that a lawyer agreeing to represent both a corporation and its employee do as much as possible to anticipate future developments that might place the clients in an adverse position. “The safest course is separate counsel, with the option to work together in areas of common interest.” Pollis says.

“If the lawyer proceeds with joint representation, he or she should consider addressing potential conflicts in the engagement letter and what could happen if the lawyer must withdraw, including possible prejudice to the clients,” Pollis says.

Green also advises lawyers to continue to reevaluate conflicts as the case progresses.

Keywords: United States v. Nicholas, securities, joint representation, conflict of interest, Upjohn warning


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