Corporate Attorneys Mull Meaning of NY BigLaw Partner's Indictment (MORE, CLICK HERE)

By Anthony Lin
New York Law Journal - December 20, 2007

Has the indictment Tuesday of Mayer Brown partner Joseph P. Collins sent "a chill down the spine" of transactional lawyers everywhere, as Mr. Collins' defense lawyer said it should?

"It's definitely a wake-up call," said Mark S. Vecchio, a corporate partner in the New York office of Venable. "I'm sure a lot of lawyers read about this in the morning papers and said, 'Oh my God.'"

Mr. Collins was indicted for allegedly helping executives at commodities brokerage Refco Inc. hide massive losses from investors. When those losses subsequently came to light, Refco was forced to declare bankruptcy. In a statement Tuesday, Mayer Brown said Mr. Collins had been put on leave but that the firm stood by its work for Refco.

Four Refco executives, including CEO Philip Bennett, were also indicted. Yesterday, one of the executives, Refco Capital Markets President Santo Maggio, pleaded guilty to securities fraud and conspiracy charges and agreed to cooperate in the case.

Since Enron and the savings and loan crisis before that, corporate lawyers have been on the defensive about what responsibility they have, if any, for the misdeeds of their clients. Many have argued that even experienced lawyers cannot be expected to detect fraud in a complex web of transactions.

"If he was just careless, there's a hell of a chill running down my spine about this," said the head of one New York firm who asked to remain unnamed. Another prominent corporate lawyer, who also asked to remain unnamed, said the case would be watched closely in the darkening economic climate.

"When the economy takes a hit, there is a tendency to look for scapegoats to be taken out and shot," he said.

But most of the lawyers who spoke to the Law Journal yesterday are not ready to rally around Mr. Collins. Citing the damning report of the Refco bankruptcy examiner, they noted that it was indeed possible that he crossed a line in the course of his representation. "He may just be a bad apple," said Mr. Vecchio.

Indeed, in announcing the indictment, Southern District U.S. Attorney Michael Garcia seemed keen to allay fears among the profession. He stressed that it was not a crime to represent a client who had committed a crime and described Mr. Collins as a lawyer who had become a full co-conspirator.

"[Mr. Collins] was not merely a lawyer whose client was committing fraud and who should have caught on," said Mr. Garcia. "Collins instead played an active and crucial part in perpetrating the Refco fraud."

Where that line is drawn is a major issue of concern for corporate lawyers though. While criminal cases against corporate lawyers over client representation are extremely rare, high-stakes civil lawsuits alleging law firms participated in corporate fraud have become almost routine.

Mayer Brown itself was already facing a trio of big lawsuits over its Refco work. A securities class action, a bankruptcy trustee suit and a lawsuit by private equity group Thomas H. Lee, which bought a controlling interest in Refco allegedly due in part to misrepresentations by Mr. Collins, all loom over Mayer Brown. A guilty plea or conviction in the prosecution of Mr. Collins would no doubt hurt in all three civil cases.

British legal giant Clifford Chance is also facing civil allegations in federal court in Philadelphia that it participated in fraud that led to the bankruptcy of health-care finance company DVI Inc. Clifford Chance is being represented in that case by William J. Schwartz of Cooley Godward Kronish, who is also representing Mr. Collins.

According to a recent survey of British law firm partners by Legal Week, a London-based affiliate of the Law Journal, more than half of those polled said it was "possible" or "likely" that a major law firm would collapse due to a lawsuit.

Law firms are particularly vulnerable to lawsuits because their most valuable assets, lawyers, are highly mobile. Vinson & Elkins, Enron's chief outside law firm, managed to survive that scandal and the major lawsuits it spawned. But Jenkens & Gilchrist saw its lawyers depart in droves after the firm's tax shelter practice became the target of government probes and lawsuits. The firm shut down earlier this year.