to control extraordinarily high proportions of the auctioned government securities and enabled Salomon to "squeeze" the secondary markets by reselling the securities at artificially inflated prices.
The plaintiffs are limited partnerships that trade financial futures contracts and government securities, the general partners of those partnerships, the trading manager for those partnerships and an introducing broker for the partnerships. Plaintiffs claim that they have purchased approximately $ 20 billion of government securities each year from Salomon Brothers. They contend in their complaint that Salomon's efforts to manipulate the market for government securities injured them in a variety of ways. Plaintiffs were allegedly forced to make higher bids for Treasury securities submitted through Salomon and also were forced to pay artificially inflated prices to cover their short positions in futures transactions.
Salomon Brothers has moved to disqualify Hickey's attorneys, the law firm of Schiff, Hardin and Waite ("Schiff" or "Schiff Hardin"), on the grounds that Schiff's continued representation of Hickey in this lawsuit would violate either Rule 1.7 (governing conflicts of interest with respect to current clients) or Rule 1.9 of the Rules of Professional Conduct (governing conflicts of interest with respect to former clients). Although the court concludes that Schiff in all likelihood did violate Rule 1.7, disqualification is not the proper remedy. Therefore, defendant's motion to disqualify is denied.
On November 20, 1991, Hickey, represented by Schiff, Hardin and Waite, filed this suit against Salomon Brothers. Prompting this suit was a press release dated August 9, 1991, in which Salomon admitted to irregularities and rule violations in connection with its submitting bids at certain Treasury auctions. Sometime not long thereafter, plaintiffs sought Schiff's advice and took steps to present their claim to Salomon. Schiff has provided a substantial amount of legal services to various of the plaintiff entities since 1982. Affidavit of Michael Meyer PP3-4.
Salomon Brothers' relationship with Schiff traces to October, 1989 when Marcy Engel, Vice-President and Counsel of Salomon Brothers, met Kenneth Rosenzweig, a Schiff partner, at a professional conference. Engel Affidavit P3; Rosenzweig Affidavit P3. Engel was impressed by Rosenzweig's work experience as a lawyer with the Commodity Futures Trading Commission (CFTC) and his knowledge of commodities law. Rosenzweig had worked for the CFTC for eight years prior to joining Schiff in 1987.
In May, 1990, Salomon authorized Engel to retain Mr. Rosenzweig to assist in putting together a compliance manual for Salomon's commodity futures trading operations. Rosenzweig worked on the project throughout 1990 and on November 20, 1990, he sent Salomon the final draft of Schiff's part of the compliance manual. During the course of the project, Rosenzweig met with a number of Salomon personnel and learned about the futures accounts of Salomon and Salomon's subsidiary, Plaza Clearing Corporation, and about the organization of Salomon's customer and proprietary futures business. Affidavit of Terry Randall, Vice-President and Futures Compliance Manager of Salomon, P4. According to Mr. Randall, Rosenzweig was also educated in detail about Salomon's management of customer order flow and its reaction to, or management decisions about, trading errors. Id.
In a letter dated November 20, 1990 accompanying the work product on the compliance manual, Rosenzweig wrote:
I have enclosed what I hope will be the final version (subject, as always, to legal and regulatory developments).
The November 20, 1990 letter, addressed to Terry Randall, concluded with Rosenzweig's stating that "I have enjoyed working with you and Marcy [Engel] on this project. . . ."
Salomon states that as far as it was concerned the compliance manual project was never fully completed and is still ongoing. Randall Affidavit P8; Engel Affidavit P5. In either July or August, 1991, Randall requested that Mr. Rosenzweig provide Salomon with a computer diskette including all the material that Rosenzweig had prepared for the futures compliance manual. Randall Affidavit P8; Rosenzweig Affidavit P7. Rosenzweig sent the diskette to Mr. Randall along with a letter dated August 30, 1991, in which he stated, "Best of luck in (finally) completing this project!"
Apart from the compliance manual, Schiff undertook a number of other discrete research projects for Salomon, answering commodity law questions when they cropped up. For example, on May 17, 1990, Ms. Engel asked for advice relating to the use of U.S. Treasury securities in meeting the margin obligations for futures contracts. In particular, she asked whether it was permissible for a customer that has received securities from Salomon in a repurchase transaction to post those securities to satisfy the margin requirement. Rosenzweig Affidavit P9; Engel Affidavit P6. Mr. Rosenzweig provided an answer in a telephone call to Ms. Engel on May 22, 1990.
It is not clear from the record what the other projects were, exactly when they were performed or what went into them. Ms. Engel refers to Schiff's having worked on "not fewer than six matters involving various compliance and regulatory issues." Engel Affidaviat P6. Schiff apparently researched a variety of discrete legal questions mostly relating to commodity futures trading. These projects are referenced in various bills sent by Schiff to Salomon in 1990 and 1991. A review of the bills makes plain that none of these projects required extensive work on Schiff's part. With the exception of one research project concerning the legality of tape-recording customer telephone orders, Mr. Rosenzweig avers that the assignments Schiff did for Salomon related solely to the permissibility of various practices under the commodity laws. Rosenzweig Affidavit P11.
Schiff most recently worked on a Salomon project on June 24-25, 1991. On June 24, Ms. Engel called Mr. Rosenzweig. During her telephone call, Engel posed a number of questions about the use of customer-owned Treasury securities in meeting futures contract margin requirements. Engel Affidavit P6; Rosenzweig Affidavit P10. Rosenzweig answered those questions in a letter to Engel dated June 25, 1991. The legal fees billed by Schiff to Salomon amounted to a grand total of 39,149.46 representing 214 hours of service extending over a thirteen month period (May, 1990 to June, 1991).
Since June 25, Schiff has not performed any legal work for Salomon. Nonetheless there has been a fair amount of contact between the two. In addition to the diskette request discussed above, Salomon personnel and Rosenzweig have corresponded on a number of matters. Tellingly, on August 13, 1991, Mr. Rosenzweig telephoned John Shinkle, then-General Counsel of Salomon, in order to receive his consent allowing Schiff to represent a commodity trading advisor in negotiations with Salomon. Rosenzweig Affidavit P10. After Rosenzweig assured Shinkle that the matter was wholly unrelated to the work Schiff had done for Salomon in the past, Rosenzweig obtained Salomon's consent. Id. Rosenzweig states in his affidavit that "in making that request, I was proceeding in the mistaken belief that Salomon's consent was required even though my last assignment from Salomon had been completed nearly two months earlier." Id.
Rosenzweig has also sent two billings since June 25. The first of the two billings, sent on July 22, 1991, was accompanied by a letter from Mr. Rosenzweig to Ms. Engel in which he wrote:
I appreciate the opportunity to provide legal services to you, as do others within our firm who participate in these matters. Please do not hesitate to contact me if you have any questions regarding the enclosed.
On September 13, 1991, Rosenzweig again sent Ms. Engel copies of previously submitted, unpaid bills for services rendered by Schiff in May and June, 1991. Rosenzweig's accompanying letter of September 13 lacked the hint of availability that was part of his July 22 letter.
The last batch of correspondence between Rosenzweig and Salomon concerned a proposed rule change by the CFTC. During the course of a conference on commodities law held on October 16-18, 1991, Rosenzweig spoke with Engel and Randall about a proposed new rule submitted to the CFTC by the Chicago Mercantile Exchange. That rule was actively opposed by another client of Schiff's and Rosenzweig had prepared a comment letter on behalf of that other client. Mr. Rosenzweig attempted to enlist Salomon's support for the comment letter both at the conference and in two follow-up letters.
Rosenzweig enclosed with the first of the two letters, dated October 22, 1991, the comment letter sent to the CFTC on behalf of the other client, a copy of the proposed rule, and a description of what Schiff considered to be some of the practical effects of the rule. At the end of the letter, he wrote, "Please feel free to call me if you would like to discuss this further."
On December 17, 1991, Mr. Rosenzweig again encouraged Ms. Engel to send comments to the CFTC on behalf of Salomon Brothers. He again included the comment letter that Schiff had drafted for another client and again closed his letter stating, "Please feel free to call me if you have any questions or if you would like to discuss this further."
Meanwhile, Schiff attorneys pursued their representation of Hickey, a representation directly adverse to Salomon Brothers. In fact, several meetings were held between the plaintiff, Schiff and Salomon Brothers legal personnel. On September 16, 1991, two months before the complaint was filed, plaintiffs' agent Robert Hickey and his attorney Roger Pascal of Schiff met with Salomon's newly appointed General Counsel, Robert Denham, and William McIntosh, Salomon's Director of New York Sales Management. Denham Affidavit P4. Following that meeting, lawyers representing Salomon communicated with Schiff in efforts to reach a settlement or to find an alternative dispute resolution mechanism that would obviate the need for civil litigation. Id.; Affidavit of Alan Bersin P2; Affidavit of Bradley Phillips P2. Schiff, however, apparently never informed Salomon during those communications that it had ever represented Salomon on any matter. For its part, Salomon's lawyers conducted negotiations with lawyers from Schiff unaware of, or at least without taking note of, Salomon's relationship with Schiff.
Schiff first informed a Salomon officer of the potential conflict in early December, 1991. Sometime in the first two weeks of December, Terry Randall called Mr. Rosenzweig. Randall states that he called in order to learn the status of the CFTC comment letter and to wish Rosenzweig a happy holiday. Randall Affidavit P10. Then, Randall avers, "near the beginning of the call, Mr. Rosenzweig informed me that he could not discuss the comment letter . . . [and] that he could no longer advise Salomon due to a conflict." Id. Rosenzweig remembers the call somewhat differently. According to Rosenzweig, Randall never mentioned the proposed CFTC rule change. Rosenzweig states that at the outset of the call, he informed Randall that if Randall was calling for substantive legal advice, he could not help because of a conflict. Rosenzweig averred, however, that he would have been willing to discuss the comment letter written on behalf of another client as any such discussion would have been in furtherance of representation of that other client and presumably would not have been time billed to Salomon. See Rosenzweig Affidavit P18. Rosenzweig asked whether Randall was aware that Schiff represented Hickey in the present lawsuit. Randall responded that he was aware of the suit but not of Schiff's involvement in it. Randall Affidavit P10. Rosenzweig then stated that he had enjoyed working with Engel and Randall and hoped that he could resume doing work for Salomon once the Hickey lawsuit concluded. He also indicated that if Randall wished to continue the relationship, Salomon should discuss the matter internally. Id.
According to Richard Scribner, Salomon's Director of Compliance, Mr. Randall promptly informed him that Schiff was involved in the Hickey suit against Salomon Brothers and that therefore Schiff could not advise Salomon in connection with the proposed new CFTC rule. Scribner Affidavit P2. Mr. Scribner states that he "was unaware of exactly what matters were involved in the Hickey suit, and [that he] simply did not focus on the conflict issue but put it temporarily out of [his] mind." Id. P3.
On January 3, 1992, Frederic Krieger, Salomon's newly appointed Vice-President and Chief Compliance Counsel, made a social telephone call to Burton Rissman, a senior partner at Schiff. During the course of the social call, made to exchange New Year's greetings and to discuss Krieger's recent employment by Salomon, Krieger mentioned that he was aware that some Schiff attorneys were working on the commodities futures compliance manual. Mr. Rissman responded by reminding Krieger that Kenneth Rosenzweig was the attorney who had worked on the project and that Mr. Rosenzweig had completed his work on it. Krieger also states that Mr. Rissman told him that Schiff was unable to do further work for Salomon due to Schiff's representation of an unidentified party adverse to Salomon. Krieger Affidavit PP4-5.
On January 7, 1992, Ms. Engel and Mr. Scribner called Andrew Klein, a partner at Schiff's Washington, D.C. office for the purpose of retaining his services on a matter unrelated to either the Hickey suit or the subject of Rosenzweig's work. Mr. Klein called Mr. Scribner on January 9, 1992 to inform him that there was a potential conflict of interest problem in light of Schiff's participation in the Hickey litigation. Klein asked Scribner whether Salomon would be amenable to a waiver and Scribner replied that a waiver was probable. Scribner Affidavit P5.
On January 9, 1992, both Mr. Krieger and Mr. Scribner spoke with Robert Denham, Salomon's General Counsel, about the conflict. Scribner Affidavit P5; Krieger P6; Denham P7. According to Mr. Denham, he was unaware prior to January 9, 1992 that there was any connection between Schiff and Salomon Brothers outside of the Hickey lawsuit. Denham P7. The following day, January 10, 1992, Salomon notified Schiff and this court of the possibility of the present disqualification motion which was brought on January 30, 1992.
A. Salomon Was a Present Client
Salomon Brothers contends that Schiff's adverse representation of Hickey violated Rule 1.7 of the Rules of Professional Conduct for the Northern District of Illinois. Rule 1.7(a) regulates an attorney's ability to undertake representation adverse to a present client. It provides:
A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:
(1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and