Ethics in Brief

Ethics in Brief is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members.

Be Wary of the Source of Your Fees

Criminal defense attorneys have to be especially wary about the source of the funds for their legal fees although that probably applies to all attorneys.1

A Northern California criminal defense attorney recently learned this lesson the hard way resulting in a federal district court decision disqualifying him from further representation of his client in a federal criminal investment fraud case. United States v. Murray, 2013 U.S. Dist. LEXIS 33394; 2013 WL 978191).

The defendant in the criminal case, separately made $410,000 in a short sale involving Netflix, using one of the accounts the government claimed was involved in the fraud. Interestingly, the short sale didn’t require any money, but the government said the money belonged to allegedly defrauded investors. (Of course, if the short sale had gone the other way, the loss would have to be covered with investor money, according to the government).

Predictably, a portion of that money went to the attorney in the case for his fees. Unfortunately, for the attorney, he was a little more involved than just receiving a fee from those funds. Turns out, at least according to documents presented by the government, $150,000 of the money was sent to the attorney, who in turn sent $100,000 to the defendant’s father who then sent a portion of the money back to the attorney and to others. The government called that money laundering. The defendant, through the same attorney, argued the money was not “tainted” and it didn’t create a conflict; but if it did, it wasn’t severe enough that it couldn’t be waived. The court disagreed.

The court found two major conflicts of interest by the attorney. First, the court stated the attorney had a personal interest in the alleged tainted funds which violated the American Bar Association Model Rules of Professional Conduct, namely rule 1.8(i).2  It states: "[a] lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client" with only limited exceptions. The court added that a conflict would arise if the defendant were to testify concerning the allegation that the money was tainted as he would risk waiving his Fifth Amendment rights in the criminal case. The attorney, of course, didn’t have the same interest in the criminal case as the defendant, causing a conflict.

Second, if the criminal defendant didn’t testify about the transaction because it would risk a Fifth Amendment waiver, then the attorney would have to testify as a witness which would violate ABA Model Rule 3.7(a) which provides that “[a] lawyer shall not act as advocate at a trial in which the lawyer is likely to be a necessary witness unless: (1) the testimony relates to an uncontested issue; (2) the testimony relates to the nature and value of legal services rendered in the case; or (3) disqualification of the lawyer would work substantial hardship on the client." Id. The court pointed to the multiple transfers of the money and the reasons for those transfers, i.e. were the transfers for innocent or money laundering purposes, would put the credibility of the attorney at issue when testifying about what he knew about the transfers.

But could this conflict be waived by the defendant? The seminal United States Supreme Court case on the issue is Wheat v. United States  (1988) 486 U.S. 153, 108 S. Ct. 1692, 100 L. Ed. 2d 140. There the Court said "while the right to select and be represented by one's preferred attorney is comprehended by the Sixth Amendment, the essential aim of the Amendment is to guarantee an effective advocate for each criminal defendant rather than to ensure that a defendant will inexorably be represented by the lawyer whom he prefers." Id. at 159.         

The Supreme Court went on to say, "[f]ederal courts have an independent interest in ensuring that criminal trials are conducted within the ethical standards of the profession and that legal proceedings appear fair to all who observe them." Id. at 160. The judge in the Murray case found that the potential breach of ethical standards would preclude a waiver.

It must have also sent a chill through the now disqualified attorney when the court cited a Second Circuit case which found a waiver by the defendant ineffective because the attorney and his law firm were the subjects of a grand jury investigation. The court called this a per se unwaivable conflict.

Lesson: be wary of the source of your fees.

- Michael Crowley 

**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis.  Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**

1  For example, if they are being paid in cash (or as the I.R.S. calls it “currency” or “cash equivalent” e.g. cashier’s checks, money orders, traveler’s checks etc.) in the amount more than $10,000, a Form 8300 must be filed with the IRS. 

2_/ ABA rules can be utilized in California for guidance when there is not an applicable California Rule of Professional Conduct or under the California Business and Professions Code. See, Cal. Rule of Prof. Conduct 1-100(A); Kennedy v. Eldridge (2011) 201 Cal. App. 4th 1197, 1210.