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November 7, 2008 5:06 PM

Experts Say Treasury Conflict Rules Are Unprecedented

Posted by Zach Lowe

When The Am Law Daily read the client conflict rules in the Treasury Department's $5.5 million bailout contracts with Hughes Hubbard and Reed and Squire, Sanders & Dempsey, one clause struck us as particularly onerous: both firms agreed not to represent any bank or financial institution Treasury buys assets from as long as Treasury owns equity in that institution. Experts have estimated the capital purchase program may involve as many as 2,500 financial institutions. That's a lot of potential clients.

So we called two well-known ethics experts, New York University's Stephen Gillers and Boston University's Nancy Moore, and asked them about the conflicts provisions. Both agreed: they've never quite seen conflicts rules like these.

"Treasury is being very demanding," Gillers says. "They are putting the fear of God into these law firms."

It wasn't even the ban on representation that jumped out most at Gillers and Moore, though Moore says the clause "will definitely limit a firm's possible clients."

Gillers says he's never seen a contract requiring each attorney who works for the client to undergo ethics training in consultation with that client. Ditto for the next clause, which requires each attorney to disclose their "business interests" and those of their family members.

"This is remarkable," Gillers says. "This is unique and atypical. I take my hat off to whoever drafted this document."

It's unclear who that is; one of Treasury's contracting officers, Steven Gordon, signed the deals (which run through the end of April 2009), but the contracts designate Laurie Schaffer, Treasury's Assistant General Counsel for Banking and Finance Law, as the point person. Gordon and Schaffer did not respond to our messages; the partners who signed off on the contracts for the firms (Stephen Mahon for Squire Sanders and Ronald Abramson for Hughes Hubbard) declined to comment.

Gillers also was surprised Treasury took the time to warn the firms that they could be dismissed for failing to report conflicts or even for the appearance of a conflict.

"That's all superfluous," Gillers says, meaning that all parties know that going in. "It's (Treasury) reading them the riot act."

One warning states, "it is solely within the discretion of the Treasury Department to determine whether or not a conflict exists. Even the appearance of a conflict may result in the denial of a waiver or other appropriate actions." That language is troubling, Moore says, because it seems as if Treasury is claiming the right to unilaterally order the firms to stop representing other clients.

"The client (Treasury) always has the right to fire a firm for any reason at any time," Moore says. "What they can't do is force a firm to withdraw from representing another client, and that's what I think this  is designed to do. Ordinarily, a client can't just do that on their say-so."

Gillers says he's heard of Fortune 100 companies banning firms from representing rival companies altogether, even on innocuous matters. Both professors agree that Treasury--and the public--has a strong interest in making sure the firms' advice on asset purchasing is not motivated by any desire to eventually land a particular financial institution as a client.

"They don't want anyone to think a firm's representation is tailored to favor a potential client," Moore says.

You can download one of the contracts below; the conflicts rules are spelled out on page 17.

Download Hughes Hubbard Contract

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