BakerHostetler Booted in Suit Involving$230M Russian Fraud

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By Joan C. Rogers

Oct. 18 — BakerHostetler can’t represent defendants accused of laundering the proceeds of a massive fraud scheme where the defense strategy turns on proving that a former BakerHostetler client perpetrated the fraud, the U.S. Court of Appeals for the Second Circuit held Oct. 17 ( United States v. Prevezon Holdings, Ltd. , 2016 BL 344867, 2d Cir., No. 16-132-cv, 10/17/16 ).

The court disqualified BakerHostetler and partner John W. Moscow as defense counsel for Prevezon Holdings Ltd. and related entities that allegedly bought real estate holdings in Manhattan using proceeds from a complex scheme that defrauded the Russian treasury of $230 million.

The firm’s representation of Prevezon is substantially related to Moscow’s earlier work investigating the fraud for Hermitage Capital Management Ltd., an investment advisory firm allegedly victimized by the fraud, Judge Rosemary S. Pooler said.

The case applies the “substantial relationship” test for former-client conflicts of interest in the context of high-stakes parallel proceedings. Also, the decision clarifies the Second Circuit’s position on the availability of appellate review when a district court denies a motion for disqualification.

The ruling arose out of a civil forfeiture action the United States is pursuing against Prevezon to seize certain real estate holdings allegedly purchased with proceeds from the Russian treasury fraud.

The government claims that a group of corrupt Russian officials raided Hermitage’s Moscow office and stole documents used to perpetrate the crime, but Prevezon contends that Hermitage participated in the wrongdoing.

The district court initially disqualified BakerHostetler but changed its mind after briefing. The earlier and current representations aren’t substantially related because the Russian treasury fraud is just background information, and Hermitage is merely spectator to the current suit, the district judge said.

Potential Misuse of Confidences

The court decided that the circumstances here met the requirements for a “writ of mandamus"—that is, an order commanding the district court to disqualify Moscow and BakerHostetler.

Hermitage has no other remedy, the court said. An appeal after final judgment wouldn’t be useful if confidences disclosed to BakerHostetler provide grist for Russian authorities pursuing Hermitage and its chief executive officer, Pooler said.

And a protective order that bars BakerHostetler from disclosing Hermitage’s confidences wouldn’t prevent the firm from using that information to shape trial strategy and questioning, the court said.

First Impression

The court also said the case implicates a question of first impression in the Second Circuit: “disqualification of counsel on the basis of a conflict of interest posing a potential harm to a nonparty non-witness.”

Clients can’t be candid with their attorney if they have to worry that their confidences can be used to implicate them in the very crimes for which they hired the lawyer, the court said.

Also, crime victims will be less likely to assist government investigations if they have to be afraid the lawyers they hire may turn against them, the court said.

DQ Necessary Here

The court concluded that the district court was clearly wrong in not disqualifying BakerHostetler. The firm’s earlier representation of Hermitage and its current representation of Prevezon are substantially related because they involve the same facts and circumstances, it found.

The court said that once a substantial relationship is established between successive representations in which the same lawyer participated, it’s not necessary for the former client to show that it imparted confidences to the lawyer; instead, there’s an irrebuttable presumption that confidences were shared.

The district court incorrectly shifted the burden to Hermitage to identify confidences it had shared with BakerHostetler, the court said.

The court also said BakerHostetler’s continued involvement could taint the trial because Prevazon’s defense rests on proving that the firm’s former client committed the fraud.

No Right to Immediate Appeal

The court also addressed an important jurisdictional issue. Hermitage could seek review of the order denying disqualification only by petitioning for a writ of mandamus, not by filing an immediate appeal, it decided.

An order denying disqualification isn’t appealable under the collateral order doctrine because that kind of order doesn’t resolve an important issue completely separate from the merits of the case, the court ruled.

Pooler pointed out that in Richardson-Merell, Inc. v. Koller, 472 U.S. 424 (1985), the Supreme Court held that orders disqualifying counsel aren’t completely separate from the merits, and it rejected the idea of making that determination on a case-by-case basis.

That reasoning in Richardson-Merell applies equally to orders denying the disqualification of counsel, and the court adopts it here, Pooler said.

Judges Raymond Joseph Lohier Jr. and Susan L. Carney were also on the panel.

Susman Godfrey LLP represented Hermitage Capital Management Ltd. The U.S. Attorney’s Office for the Southern District of New York represented the United States. Debevoise & Plimpton LLP represented Prevezon Holdings Ltd. and other defendants.

To contact the reporter on this story: Joan C. Rogers in Washington at jrogers@bna.com

To contact the editor responsible for this story: S. Ethan Bowers at sbowers@bna.com

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