Fund of Funds, Ltd. v. Arthur Andersen & Co.

567 F.2d 225, 1977 U.S. App. LEXIS 10883
CourtCourt of Appeals for the Second Circuit
DecidedNovember 7, 1977
DocketNo. 311, Docket 77-7387
StatusPublished
Cited by137 cases

This text of 567 F.2d 225 (Fund of Funds, Ltd. v. Arthur Andersen & Co.) is published on Counsel Stack Legal Research, covering Court of Appeals for the Second Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Fund of Funds, Ltd. v. Arthur Andersen & Co., 567 F.2d 225, 1977 U.S. App. LEXIS 10883 (2d Cir. 1977).

Opinion

IRVING R. KAUFMAN, Chief Judge:

The unusual facts of this case, which we shall present with painstaking care, impel us to the irresistible conclusion that counsel for the plaintiffs have failed in their duty to comply with both the letter and spirit of Canons 4, 5 and 9 of the Code of Professional Responsibility and must be disqualified. We hasten to add that the lawyers involved in this dispute are individuals who enjoy the [227]*227high regard of the profession. Compliance or noncompliance with Canons of Ethics frequently do not involve morality or venality, but differences of opinions among honest men over the ethical propriety of conduct.

Arthur Andersen & Co., an international accounting concern, charges that, in 1973, its regional counsel, Morgan Lewis & Bocki-us, a firm of repute, accepted a retainer from Fund of Funds1 with the knowledge that Andersen might be implicated in securities actions brought on behalf of the Fund, and that such representation constituted a breach of the Morgan firm’s duty of undivided loyalty to its client, Andersen. Andersen now asserts that Robert Meister, an able member of the bar and partner in the firm of Milgrim Thomajan & Jacobs, also a respected firm of lawyers, had served throughout as the Morgan firm’s “understudy,” and emerged from the wings in February, 1975, when the action against Andersen was commenced. It is claimed Meister and his firm Milgrim Thomajan aided and abetted Morgan Lewis & Bockius’s breach of fiduciary duty and thereby violated Canons 4, 5 and 9 of the Code of Professional Responsibility.2 We agree, and believe that in light of the interesting background of this case, Meister or his firm cannot continue to prosecute the underlying action. Accordingly, we reverse that part of Judge Stewart’s holding which permits Meister to proceed on behalf of the Fund. We affirm, however, Judge Stewart’s denial of the ancillary relief requested by Andersen.3

I.

It is a longstanding rule that,
When dealing with ethical principles, we cannot paint with broad strokes. The lines are fine and must be so marked. Guideposts can be established when virgin ground is being explored, and the conclusion in a particular case can be reached only after painstaking analysis of the facts and precise application of precedent.4

We approach our task in this factually complex case conscious of this oft-repeated admonition and with the recognition that in deciding questions of professional ethics men of good will often differ in their conclusions.

At the outset, it is necessary to describe the two actions which are at the heart of this case; Fund of Funds v. King and Fund of Funds v. Arthur Andersen & Co. Both actions assert violations of the federal securities laws and arise out of a common series of transactions involving the purchase, valuation and revaluation of certain natural resource assets. The King complaint, filed by Meister for Milgrim Thomajan on May 8, 1974, with the Morgan firm designated “of counsel,” alleged that Edward Cowett (a [228]*228director of Investors Overseas Ltd.) conspired with John King and A. Rowland Boucher (who jointly controlled King Resources Inc.)5 to have King Resources sell natural resource assets to the Fund at highly inflated prices.6 Those assets were thereafter revalued to an even higher figure so that Investors Overseas Ltd. (IOS Ltd.), the Fund’s management advisor, could be paid a performance fee equal to 10% of such upward revaluation.7 This alleged conspiracy was effected through the creation of a Natural Resources Fund Account to pay for the assets on behalf of the Fund. The Bank of New York, the account’s manager, was also named as a defendant in the King action. Finally, the attorneys for Fund of Funds, the venerable law firm of Willkie Farr & Gallagher, were sued for their failure to advise the Fund’s directors of the alleged wrongdoing.

The Andersen complaint, filed by Meister for Milgrim Thomajan on February 4, 1975, claimed that Andersen, as the independent auditor for Fund of Funds, IOS Ltd., and King Resources was aware of this fraudulent scheme and neglected to disclose it to the Fund’s directors. Moreover, the complaint stated that Andersen actively participated in the wrongdoing by certifying the Fund’s financial statements.

A..

The tortuous history leading to the institution of these actions began in the winter of 1973 when a group of German investors formed an organization called the International Association of Shareholders of IOS Funds, referred to by the acronym “IA-SIF.” On January 8, 1973, IASIF retained Morgan Lewis & Bockius as its counsel, empowering it to bring lawsuits in the United States regarding the fraudulent transactions in natural resource assets. No action was taken, however, until June 28 or 29, 1973, when Park Dilks, Jr., a partner of the Morgan firm, met with other representatives of Fund of Funds shareholders in Luxembourg. It was there determined that Fund of Funds would be liquidated under Ontario law8 and that the liquidator, appointed by the Supreme Court of Ontario, would sue the persons and firms allegedly responsible for FOF’s losses. John Orr, a partner in the accounting firm of Touche, Ross Ltd., was appointed as liquidator and he, in turn, named Borden & Elliot as his [229]*229general solicitors. Andersen stresses that the Morgan firm conceived and executed these appointments to ensure that it would be named counsel for the liquidator in the United States, and there is testimony in the record which would support Andersen’s claim.9 Indeed, Morgan Lewis was retained as American counsel soon after Borden’s appointment. In accepting the retainers from IASIF and John Orr (through Borden & Elliot), certain members of Morgan Lewis were aware that the firm’s client of 15 years, Arthur Andersen & Co., might well be implicated in the natural resources scheme. Indeed, on July 22, 1974, Park Dilks, Jr. (the partner at Morgan Lewis in charge of FOF matters) wrote to Riño Stra-diotto (a partner at Borden & Elliot), and commented on the choice of liquidator:

On July 20, 1973, you . . . and I, while having dinner at the Union League, discussed who should be liquidator and considered various accounting firms as alternatives. . . . We ticked off Price Waterhouse, Peat Marwick, Ernst & Ernst, Coopers & Lybrand, and AA (Arthur Andersen). When we got to AA we remarked that, even though we were regional counsel for them and might otherwise want to favor them, they had been auditors for FOF . . . and would probably end up being sued.

In a partial response to this nascent ethical dilemma, Morgan Lewis, whose representation of Andersen involved a variety of matters unrelated to Fund of Funds, made it a policy of the firm that no attorneys involved with Andersen matters would ■ work on the Fund of Funds case.10

For the next nine months, a squadron of Morgan Lewis attorneys investigated the allegedly fraudulent transactions. John Lewis, a partner with the Morgan firm, noted, in an affidavit submitted in King,

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Bluebook (online)
567 F.2d 225, 1977 U.S. App. LEXIS 10883, Counsel Stack Legal Research, https://law.counselstack.com/opinion/fund-of-funds-ltd-v-arthur-andersen-co-ca2-1977.