Staying in or going out? Identifying potential pitfalls for banking’s in-house counsel

Law & Order, meet the modern in-house banking counsel

“House counsel”

In one of Law & Order’s “ripped from the headlines” episodes titled “House Counsel,” a juror in a mob trial is found dead. Law enforcement investigates and learns that the mobster tampered with the juror in order to avoid a conviction, then killed him to keep him quiet. The lawyer defending the mobster is a good friend of Assistant District Attorney Jack McCoy. Later in the investigation, McCoy discovers that his friend may have played a role in the jury tampering. When he suspects his friend is involved, McCoy sees an opportunity to get the mobster and prosecutes the attorney for the murder to leverage information about the mobster. In the end, the lawyer is convicted and the attorney-client privilege between the lawyer and the mobster is dissolved. 

In the case that allegedly inspired the episode, prosecutors moved to remove a mobster’s attorneys from a case because there was evidence that the attorneys knew the crimes that were committed. Therefore, the attorneys could be called as witnesses. Prosecutors contended that the attorneys were in fact “house counsel” for the mob. The attorneys were removed.  

Law & Order, meet the modern in-house banking counsel. Since 2008, the banking industry has been under particularly close scrutiny by regulators and law enforcement. The added scrutiny is resulting in increasing enforcement actions against the banks. As part of recent enforcement actions in other industries, law enforcement and regulators have taken actions against the in-house counsel personally.  

An effective way to mitigate the risk to in-house counsel is to retain outside counsel to deal with subpoenas and investigations, and work with in-house counsel on responses to formal and even some informal government inquiries. Outside counsel can also assist in sensitive areas where the attorney-client privilege might be an issue. This offers an independent voice to the bank and can provide cover for the in-house counsel whose independence and status as an attorney might be later questioned. This three-part series of articles will examine the challenges that in-house counsel face that can pose significant risks for them, examine cases in which in-house counsel were targeted, and examine ways outside counsel can mitigate these risks.   

Unique challenges

In-house counsel play a critical role in the operation of a bank. They provide invaluable services in meetings with regulators, advising on compliance issues, and providing general services to the bank. However, in-house attorneys also face a number of unique challenges. First, the general counsel may have both legal and business responsibilities. Counsel may be part of the executive leadership team and provide business advice. In some cases, the in-house counsel may even have an additional title that reflects those business opportunities.

This can complicate questions regarding privilege. If the executive team is meeting and the general counsel is in the room, does privilege attach? Maybe … but maybe not. The analysis depends on several things, including whether the client is seeking legal advice. A client may believe that just by having the attorney present, privilege attaches, and this is not necessarily the case.

Second, the in-house lawyer is required to be competent.  The ABA Model Rule of Professional Conduct (ABA Model Rule) 1.1 states, “A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.” Management may resist spending the money to go outside, meaning an in-house attorney may be asked take on an assignment for which the attorney may not be well-equipped to handle.  

Third, in-house counsel are literally employees of the client. In a traditional attorney-client relationship, the attorney is hired by the client to provide a service, but there is no employment relationship. An in-house attorney may feel pressure to “go with the flow,” even when that flow leads right over a legal Niagara Falls, to demonstrate he or she is a team player. This may include not providing an appropriate degree of scrutiny to legal questions or even looking the other way on some issues.

This can have ethical and even criminal consequences for the attorney. ABA Model Rule 1.2(d) states, “A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.” A lawyer under pressure to comply with the status quo could find him or herself running afoul of this rule and of prosecutors.

Another complicating factor is Section 307 of Sarbanes-Oxley, which requires an attorney to report “material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent” to the general counsel, CEO and, if necessary, the board of directors. If no action is taken, the attorney can report it to the Securities and Exchange Commission. While ABA Model Rule 1.6(b)(3) allows the attorney to reveal privileged information “to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client has used the lawyer's services,” this may result in the creation of an uncomfortable work environment. So, some prosecutors and regulators may ask, is the in-house counsel really independent?   

Given the difficulty in navigating these unique challenges, in-house counsel have been increasingly targeted as part of governmental investigations and regulatory actions. This is especially true in cases where the government believes the in-house counsel was not acting as an attorney and can provide useful information against the client. In Part II, we will look at some of these examples.

Contributing Author

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Colleen M. Murphy

Colleen M. Murphy is a partner in the law firm of Goldberg Segalla. She has nearly 20 years of experience counseling and defending clients that include...

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Contributing Author

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Aaron J. Aisen

Aaron J. Aisen is an associate at Goldberg Segalla where he focuses on financial regulatory issues and litigation.  Prior to joining Goldberg Segalla, he was...

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