Outside counsel needs sharp ethical eye while looking in

February 23, 2015

Westlaw Journals Commentary thumbAttorneys retained by a company to conduct an internal investigation need to uncover any possible fraud, say Breon S. Peace, Elizabeth Vicens and Sue S. Guan of Cleary Gottlieb Steen & Hamilton.

The authors say that in Kirschner v. K&L Gates LLP, 46 A.3d 737 (Pa. Super. Ct. 2012), the Pennsylvania Superior Court ruled that outside counsel may have an attorney-client relationship with the company that retained them, and any failure to uncover fraud can constitute malpractice, negligence and breach of fiduciary duty.

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The case, which settled last year, serves as a cautionary tale about two potential pitfalls: limiting the scope of an internal investigation, potentially leading to counsel’s failure to uncover significant wrongdoing, and failing to understand clearly to which entity counsel owes a duty.

“Prudent” lawyers should look to the ethics obligations in the Model Rules of Professional Conduct and Section 307 of the Sarbanes-Oxley Act for guidance, the authors recommend.

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Breon S. Peace and Elizabeth Vicens are partners in the New York office of Cleary Gottlieb Steen & HamiltonSue S. Guan is an associate in the firm’s New York office.