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Selling law firm stock would create ‘ethical pitfalls’

By: dmc-admin//July 30, 2007//

Selling law firm stock would create ‘ethical pitfalls’

By: dmc-admin//July 30, 2007//

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Cade
Nate Cade

Writing this month’s column has not been easy. Yes, it is the summer, and I certainly could use my desire to play golf (really, really bad golf) as an excuse for not getting this column out as fast as I could. But in reality, my tardiness as been over my fascination with money — a lot of money.

In case you have not heard, a law firm in Australia has recently gone public. I kid you not; you can actually buy or sell shares in a law firm, which is the reason I have been fantasizing. Imagine the pay day one could get if you could sell your interest in a law firm for millions of dollars. I confess I am still perplexed at how the whole buying and selling would work for U.S. law firms. It is not the physical concept of buying or selling that perplexes me, but the investment strategy one would employ.

For example, if I wanted international exposure to enhance my portfolio, would I follow the great investor Peter Lynch’s advice about only buying stock in companies you know and buy stock in a firm like Foley & Lardner? Or should I take a flyer and buy stock in Jones Day?

Alternatively, if I wanted small cap exposure, do I concentrate in firms of less than 50? Would a micro-cap be less than 20 lawyers? How would you define large cap?

And lastly, and not the least perplexing, would potential investors, such as myself, have access to all of the latest information about potential lawsuits that have walked in the door, pitches the law firm was going to make, or whether a particular department in a firm met certain financial goals? Is this something Rupert Murdoch would want to provide coverage of to take on CNBC? Would we spend more time in front of the TV watching the stock symbols fly by rather than spending time working on our cases?

While I write this column tongue-in-cheek, do not believe for a moment that there are not people out there in our esteemed profession trying to figure out a way to make lots of money on this kind of a stock deal. After all, it worked well for the accounting firms, right? Right?

But I am not writing this column to mock the financial services industry, rather to point out the ethical pitfalls from this misguided strategy. First and foremost, allowing law firms in the United States to go public would require a complete overhaul of the Rules of Professional Responsibility (and didn’t we just do that with Ethics 2000, er, Ethics 2007?). Rule 5.4 certainly stands as an impediment.

Compare subsection (a), which provides that “A lawyer or law firm shall not share legal fees with a nonlawyer . . . “, with subsection (d), which states that “[a] lawyer shall not practice with or in the form of a professional corporation, association or limited liability organization authorized to practice law for a profit, if: (1) a nonlawyer owns any interest therein . . . or (3) a nonlawyer has the right to direct or control the professional judgment of a lawyer.”

Rule 5.4 clearly states that a nonlawyer cannot have any ownership interest in a law firm whatsoever, except in minor situations dealing with the estate of a deceased lawyer. This rule is a good one because it shows that lawyers are supposed to remain independent, a lesson many of our brethren involved in the corporate scandals of the last few years seem to have forgotten.

But I can imagine the wheels churning in the brains of several smart and enterprising lawyers thinking of ways around Rule 5.4. Perhaps we would not call the profits “legal fees” or disclaim that there is an ownership interest, instead calling it a depository share, much like many foreign corporations have for their particular shares on the New York Stock Exchange. But those wheels should continue to spin, because several other rules would limit this silly idea.

Rule 7.2, while not often used for discipline, also would be eviscerated under the selling concept. The rule states that a “lawyer shall not give anything of value to a person for recommending the lawyer’s services….” Does this mean that the members of a public law firms could be prosecuted for paying dividends to a shareholder who touts the strength of “their firm” on shows like Jim Cramer’s “Mad Money” on CNBC?

Alternatively, could you give your golf buddy a “tip” that Kirkland & Ellis is about to go long and profit from it? While this is the ranting of a deranged individual, perhaps you are not aware that the U.S. Attorney’s office charged someone with violating Ethics Opinion 00-04, something the drafters of that opinion never intended to happen. If there is a rule, anyone with the ability to prosecute will think up a way for a rule to have been violated. Would anyone really want that headache?

Lastly, and perhaps more importantly, Rule 1.6 serves as the proverbial “chop block” to those who would run roughshod over the Rules. As we know, that rule provides, in part, “[a] lawyer shall not reveal information relating to representation of a client unless the client consents after consultation….” In truth, this particular rule is what makes us lawyers. Under very limited circumstances is an attorney allowed to reveal anything about a client. Those who would entrust us to do their legal work are confident that any information given to their lawyers remains guarded, and that a lawyer risks penalty, discipline, censure or even disbarment for the disclosing of confidences absent permission or a limited exception.

Selling of an interest in a law firm would change that for many reasons. First, “investors” in law firms would have to disclose far too much information to the market about their clients in order for the market to properly price the shares. A firm could not hide behind the confidentiality moniker.

Law firms that would go public would risk the ire of the plaintiff’s bar for failing to adequately disclose information. I personally cannot think of a more sympathetic group of people than lawyers who are sued for failing to adequately disclose (sarcasm duly noted). Surely the average juror in America’s courtroom can relate to the tales of woe of a lawyer. While the irony of lawyers suing other lawyers for a failure to disclose information about confidential information would be a boon for my practice and certainly is not lost on me, the fact that it sounds distasteful is a minor understatement.

Moreover, firms also would have a duty to disclose their work product to the market, as it too is rooted in the concept of client confidentiality. Absent client confidences, or some other means to protect the information, such as through copyright or patent, would be necessary. Perhaps the Patent and Trademark Office could be convinced that the way Nate Cade writes a brief or argues a motion is deserving of a business method patent, as my wife is convinced, but it is unlikely that the PTO would issue such a patent. So absent a patent, feel free to mimic me in court.

In short, law firms going public, in my not-so-humble opinion, is a bad idea. While it may work in Australia, it cannot (and should not) work here. Indeed, let’s not forget that Australia originally was f
ounded as a penal colony, not birthplace of Foster’s beer. And if you want to have exposure to international, learn to speak Chinese and stick to an index fund.

Nate Cade is a partner practicing in litigation at Michael Best & Friedrich LLP, where he is a member of the firm’s Tort Liability Practice Group. He can be reached at [email protected].

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