Should you and the firm use the same lawyer?
A repeating question at my web site comes from brokers who are named in an arbitration proceeding by a customer, and whose firm offers to provide the attorney to represent both the broker, and the firm. The question is always, do I need my own attorney? With the recent issues regarding analyst recommendations, the issue is being raised more frequently.
Unfortunately, the answer is not simple. In the 30 or so years that I have been handling securities arbitration and mediation cases I have been on both sides of the issue, representing a broker with another attorney representing the firm and representing the firm without representing the broker. However, far more common is the situation where I represent both the broker and the firm.
Sometimes, such as when the broker has claims against the firm, joint representation is impossible. When a broker has left the firm, and there are unresolved issues between the broker and the firm, the firm-broker dispute prevents the joint representation. Similiarly, when the firm has claims against the broker, even if the claims are unrelated to the customer claim being litigated, one lawyer should not represent both the firm and the broker.
However, such conflicts are rare, and in the overwhelming majority of cases, there is no conflict between the broker and the firm, and it is possible to use one attorney.
The question arises however, when the broker is not convinced that the attorney, who is usually selected by the firm, is going to zealously represent the broker’s individual interest, as well as the firm’s interest. In the largest sense, the broker and the firm both have the same interest – to defend the claim. The facts and legal principles which work in the broker’s favor also work in the firm’s favor. Additionally, in the usual case, the firm is only liable if the broker is liable, as the firm itself is not accused of committing a wrong, it is the broker who is accused. In that instance, the firm is only liable if the broker is liable, and there is truly a united interest.
In more complicated cases, the interest of the firm and the broker may be different. For example, in a case where there are the usual sales practice allegations mixed with a market manipulation case, the broker may feel that the case will focus on the market manipulation theories, for which he has no responsibility, and impact his defense of the sales practice case. The recent press reports regarding the dispute between firm policy and brokers over the handling of stock options demonstrates the conflict too clearly. Recent press reports indicate that Merrill Lynch may consider blaming its brokers for certain recommendations, and if that occurs, there is clearly a conflict between the firm and the broker, and the broker needs to have his own attorney.
In other instances, such as where the broker has left the firm, even if a dispute does not exist, joint representation may be precluded by a simple lack of trust between the firm and the broker. Another cause for concern is where the broker, by his contract with the firm, is responsible for the loss, and, regardless of the outcome of the arbitration proceeding, he will be forced to pay the award, as well as the attorneys fees.
In this instance, the broker is sometimes concerned that the firm will force him to settle the matter when he wants to defend himself, and that the attorney, selected by the firm, will take the firm’s “side” in a settlement dispute. Other times, the broker simply feels that having an attorney who was responsible for his aspect of the case would give him better legal advice.
First, the reasons not to use separate attorneys. In cases where the broker is still employed by the firm, the usual practice is for both to use the same attorney. Deviating from this norm may send the wrong signals to the customer and his attorney, inadvertently telling them that there is a dispute between the respondents. If the customer believes that such a dispute exists, he may press his claim with more zeal, he may not be willing to discuss settlement, or he may simply make unreasonable settlement demands because he thinks he has discovered a weakness in the defense.
Another reason not to use separate attorneys is the concept of having two quarterbacks. Arbitration is not a science. There is no one correct answer, and no one “right” strategy for defending a claim. Like a football team with two head coaches, a defense team with two lead attorneys can lead to difficulties in agreeing how to present the case, which witnesses to call, or not to call, and differences in the overall strategy.
Cost is also a factor. While using two attorneys does not necessarily mean that the costs are doubled, there is an obvious increase in the defense legal bill, and in the costs. While defense counsel will decide which attorney is going to take the lead, and will divide the work, there is an obvious overlap in effort, and thus costs.
The arguments in favor of using two attorneys are less compelling. The typical argument in favor of using a separate attorney is the thought that an attorney whose sole function is to represent the broker will do a better job representing the broker. There is some merit to the concept that an attorney who is only representing the broker will only have the broker’s interests at heart, but in reality, the position of the firm and the broker are so intertwined that it is impossible to represent one without considering the impact on the other.
I was involved in a FINRA enforcement investigation where this was amply demonstrated. FINRA was investigating a sales practice issue at a firm, and was investigating the firm, its compliance officers and some individual brokers. The compliance officers had their own attorney, as did the individual brokers. As FINRA was closing the investigation, the firm decided to settle. The firm’s attorney attempted to have the individuals settle as well, in order to make its own settlement more appealing to FINRA. The compliance officers and the brokers refused. The investigation closed with the firm paying a significant fine, and the investigation was dropped against the compliance officers and the broker. Who knows what would have happened if the firm’s attorney was representing the individuals.
The most important factor in making the decision is to be represented by an attorney who you trust and who you have confidence in. You also need an attorney who knows the securities laws, who understands the regulations and practices at issue, and who understands the arbitration or investigatory process. Typically, that will be the firm’s attorney, whether he is in-house, or outside counsel. However, if the firm’s attorney does not meet this description, I suggest a frank and honest conversation with the attorney, to iron out any issues or concerns. If that does not work, brokers should not hesitate to retain their own attorney, and deal with the costs and appearance issues later.
After all, the money spent on a second attorney pales in comparison to the money that can be lost in an arbitration.
Mark J. Astarita is a partner in the national securities law firm of Sallah Astarita & Cox, LLC and represents broker-dealers and individual brokers across the country in litigation, arbitration and regulatory matters. He is the founder of The Securities Law Home Page (www.seclaw.com), and can be reached at www.seclaw.com or at 212-509-6544 This article was updated in August 2021.
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.