Armstrong v. McAlpin

• Decision Date: 12 September 1979
• Docket Number: No. 1010,D,1010
• Citation: 606 F.2d 28
• Parties: Fed. Sec. L. Rep. P 97,120 Michael F. ARMSTRONG et al., Plaintiffs-Appellees, v. Clovis McALPIN et al., Defendants-Appellants. ocket 79-7042.
• Court: U.S. Court of Appeals — Second Circuit

Page 28

606 F.2d 28

Fed. Sec. L. Rep. P 97,120

Michael F. ARMSTRONG et al., Plaintiffs-Appellees, v. Clovis McALPIN et al., Defendants-Appellants.

No. 1010, Docket 79-7042.

United States Court of Appeals Second Circuit.

Argued June 13, 1979.

Decided Sept. 12, 1979.

J. Robert Lunney, New York City (Michael J. McAllister and James J. DeLuca, Lunney & Crocco, New York City, on brief), for defendants-appellants.

Franklin B. Velie, New York City (Gordon, Hurwitz, Butowsky, Baker, Weitzen & Shalov, New York City, on brief), for plaintiffs-appellees.

The Securities and Exchange Commission (Paul Gonson, Principal Associate Gen. Counsel, John P. Sweeney, Sp. Counsel, Anne C. Flannery, Atty., Washington, D. C., on brief), for amicus curiae.

Before VAN GRAAFEILAND and NEWMAN, ^* Circuit Judges, and BONSAL, District Judge. ^**

NEWMAN, Circuit Judge:

This appeal from denial of a motion to disqualify the law firm that represents the plaintiffs raises an important issue of legal ethics: whether and in what circumstances the disqualification of a lawyer because of his prior role as a government lawyer requires the disqualification of his law firm.

Theodore Altman, Esq. served on the staff of the Securities and Exchange Commission from 1967 to October, 1975. For the last three years of his government service Altman was Assistant Director of the Division of Enforcement. Altman supervised and had direct, personal involvement in an SEC investigation of Clovis McAlpin, Capital Growth Company, S.A. (Costa Rica) ("Capital"), and other companies. SEC File No. N.Y. 5035. The investigation resulted in the filing of a complaint by the SEC on September 3, 1974, against McAlpin, Capital, and the other companies. Securities & Exchange Commission v. Capital Growth Co. (Costa Rica), 74 Civ. 3779 (S.D.N.Y.). The complaint sought injunctive relief for violations of § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, and also the appointment of a receiver. On September 24, 1974, Michael F. Armstrong was appointed receiver for Capital by Judge Charles E. Stewart, Jr.

Immediately after leaving the SEC in 1975 Altman became an associate with the New York firm of Gordon Hurwitz Butowsky Baker Weitzen & Shalov, of which he is now a partner. In March, 1976, Armstrong approached David M. Butowsky, a partner of the Gordon firm, and requested the firm to act as litigation counsel. Butowsky promptly pointed out to Armstrong the possible issue that might arise because of Altman's prior role with the SEC in the investigation of Capital and the related companies. Both the law firm and the Receiver studied the matter and ultimately concluded that the firm could represent the Receiver provided appropriate screening procedures were instituted to prevent Altman's participation. This followed the course outlined in Formal Opinion 342 of the Committee on Professional Ethics of the American Bar Association. Acting circumspectly, the firm presented the issue to Judge Stewart, who authorized the Receiver to retain the firm. In pursuance of the procedure suggested in Opinion 342, the firm also presented the issue to the SEC and was informed that the SEC had no objection to the Receiver's retention of the firm provided Altman was screened from any participation. The Receiver then retained the Gordon firm.

On September 17, 1976, the Receiver, represented by the Gordon firm, filed the suit in which the pending controversy has arisen. The suit seeks damages in excess of $24 million for violation of federal securities laws. There is no dispute that the alleged wrongful conduct detailed in the Receiver's complaint substantially overlaps the matters alleged in the SEC's enforcement action. Clovis McAlpin, defendant-appellant, alleged to be the principal beneficiary of the alleged fraud, was served in July, 1977. He and defendant-appellant Capital Growth Real Estate Fund, Inc. obtained extensions of time to appear and plead. On June 2, 1978, on their initial court appearance these two defendants moved to disqualify the Gordon firm because of Altman's prior SEC activity. Other defendants subsequently joined in the motion. The motion was denied by Judge Henry F. Werker on December 5, 1978. From that decision McAlpin and Capital Growth Real Estate Fund, Inc. appeal. ¹

While the standards of conduct governing attorneys practicing in the federal courts are ultimately matters for oversight by the federal judiciary, the American Bar Association's Code of Professional Responsibility has been recognized in this Circuit as a principal source of pertinent guidance. Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384, 1386 (2d Cir. 1976); Hull v. Celanese Corp., 513 F.2d 568, 571 n.12 (2d Cir. 1975). Canon 9 of the Code provides: "A lawyer should avoid even the appearance of professional impropriety." Ethical Consideration 9-3 provides: "After a lawyer leaves judicial office or other public employment, he should not accept employment in connection with any matter in which he had substantial responsibility prior to his leaving, since to accept employment would give the appearance of impropriety even if none exists." Finally, Disciplinary Rule (DR) 9-101(B) provides: "A lawyer shall not accept private employment in a matter in which he had a substantial responsibility while he was a public employee."

It is acknowledged in this case that Altman's activity with the SEC in connection with the Capital investigation disqualifies him from the Receiver's lawsuit. The issue is whether the disqualification extends to his law firm.

Prior to 1974, DR 5-105(D) provided that affiliated lawyers were disqualified whenever the lawyer in question was disqualified by DR 5-105, which concerns conflict of interests. At the February, 1974 mid-year meeting of the ABA, DR 5-105(D) was broadened to disqualify affiliated lawyers when the lawyer in question is disqualified by any of the disciplinary rules. The amended version provides: "If a lawyer is required to decline employment or to withdraw from employment under a Disciplinary Rule, no partner, or associate, or any other lawyer affiliated with him or his firm, may accept or continue such employment."

Though the textual relationship between DR 9-101(B) and amended DR 5-105(D) seems evident, it has been reported that the ABA committee that proposed the amendment did not consider the impact upon firms that included former government lawyers. Moskowitz, Can D. C. Lawyers Cut the Ties that Bind? Juris Doctor (Sept. 1976), at 34. ² Shortly after DR 5-105(D) was amended, the ABA's Committee on Ethics and Professional Responsibility was asked to consider the impact of the amended Disciplinary Rule on DR 9-101(B). On November 24, 1975, the Committee issued Formal Opinion 342, 62 A.B.A.J. 517 (1975). Opinion 342 concludes that a lawyer's disqualification under DR 9-101(B) does not inevitably extend to his law firm. The Opinion requires "screening measures" that will "effectively isolate the individual lawyer from participating in the particular matter and sharing in the fees attributable to it." Id. at 521. The Opinion permits the firm to accept or continue representation if the government agency with which the attorney in question was formerly employed approves the screening procedures and is satisfied that there is "no appearance of significant impropriety affecting the interests of the government." Ibid. In addition, the law firm must make "its own independent determination as to the absence of particular circumstances creating a significant appearance of impropriety." Ibid.

The issue has also received additional thoughtful consideration. The Committee on Professional and Judicial Ethics of the Association of the Bar of the City of New York has issued Opinion No. 889, agreeing with the ABA Opinion that for most cases screening of the former government lawyer will afford adequate protection. 31 The Record 552 (1976). The New York City Bar Opinion, however, would not leave the adequacy of screening procedures to the government agency, but would require approval by the tribunal before which the private lawsuit is pending. Id. at 566. In the District of Columbia, a draft report of the Committee on Legal Ethics of the District of Columbia Bar initially expressed the view that screening procedures could not suffice to prevent disqualification of a firm with which an attorney disqualified by DR 9-101(B) was affiliated. See Tentative Draft Opinion for Comment, Inquiry 19, District Lawyer (Fall 1976), at 39. Later the D.C. Committee recommended amendments to the Code that would permit screening when approved by the government agency that employed the disqualified attorney. District Lawyer (Aug.-Sept. 1978), at 44. Recently the Board of Governors of the D.C. Bar has recommended to the District of Columbia Court of Appeals adoption of Code amendments that would permit screening subject to challenge in court, but without the need for approval by the government agency. District Lawyer (Apr.-May 1979), at 47. That proposal is awaiting consideration by the District of Columbia Court of Appeals. Support for screening procedures has also been expressed to the D.C. Bar by the SEC, the Internal Revenue Service, and the Department of Justice, and the SEC supports that position in its Amicus brief filed in this case.

In the courts disqualification of a lawyer because of his prior government employment on a related matter has been strictly enforced under DR 9-101(B), General Motors Corp. v. City of New York, 501 F.2d 639 (2d Cir. 1974); Telos, Inc. v. Hawaiian Telephone Co., 397 F.Supp. 1314 (D.Haw.1975); Handelman v. Weiss, 368 F.Supp. 258 (S.D.N.Y.1973); see also United States v. Ostrer, 597 F.2d 337 (2d Cir. 1979); Traylor v. City of Amarillo, Texas, 335 F.Supp. 423 (N.D.Tex.1971); and under its predecessor, Canon 36 of the former Canons of Professional Ethics, Allied Realty, Inc. v. Exchange National Bank,...