The opinion of the court was delivered by: STEWART
Presently before the Court is an attorney disqualification motion in Fund of Funds, Limited, et al. v. Arthur Andersen & Co., et al., ["FOF v. Andersen" or "Andersen action"]. To fully evaluate this motion, the Court must examine the circumstances surrounding the investigation of both this case, and Fund of Funds, Ltd., et al. v. John M. King, et al., 74 Civ. 1981 ["FOF v. King" or "King action"]. Both FOF v. Andersen and FOF v. King arise out of a common series of transactions including the purchase, valuation, and revaluation of certain natural resource assets, and the payment of a management fee on the revaluation of these assets.
FOF v. King was brought by The Fund of Funds, Limited, F.O.F. Proprietary Funds, Ltd., and IOS Growth Fund, Limited, a/k/a Transglobal Growth Fund, Limited,
who are represented by the law firms of Morgan Lewis & Bockius ["Morgan Lewis"] and Milgrim Thomajan & Jacobs ["Milgrim Thomajan"]. All of the principals allegedly involved in the natural resource asset transactions were sued in FOF v. King, with the exception of Arthur Andersen & Co., ["Andersen" or "Arthur Andersen" or "AA"], the auditors for all plaintiffs and for IOS.
Andersen was sued separately nine months after the King complaint was filed,
with Milgrim Thomajan listed as counsel of record for the plaintiff Funds. Presently before the Court is defendant Andersen's motion to disqualify Milgrim Thomajan and Morgan Lewis from any further participation in the conduct of the FOF v. Andersen action.
The basis of Andersen's motion is that Morgan Lewis, who had acted as Andersen's regional counsel in the Philadelphia area for at least 15 years prior to the filing of this suit, agreed to conduct an investigation for FOF with full knowledge that its own client, Andersen, would probably be implicated in any investigation. Defendant claims that Morgan Lewis not only investigated, but ultimately sued, its own client. While Morgan Lewis is not named as the attorney of record on the Andersen complaint, Andersen claims that Milgrim Thomajan, the attorney of record, is just a "hand-picked stand-in or alter ego"
of Morgan Lewis.
Milgrim Thomajan, on the other hand, claims that Morgan Lewis is not functioning as counsel for FOF in the Andersen action, and has had no involvement with either the investigation or institution of this action. It claims that from the very inception of Morgan Lewis' relationship with FOF, Morgan Lewis made it clear it would not consider or participate in any investigation or discussion involving whether or not FOF had any claim which could be asserted against Arthur Andersen. Milgrim Thomajan claims that it conducted the Andersen investigation and wrote the complaint without in any way consulting Morgan Lewis.
Milgrim Thomajan asserts that it is a separate and distinct entity from Morgan Lewis, and that it has no connection to Arthur Andersen or Morgan Lewis which would create a conflict of interest.
To put the motion in context, it is necessary first to summarize the history of the Fund of Funds suits, the relationship of the attorneys and the parties, and the investigation which led to the complaints in the King and Andersen actions.
On June 28 and 29, 1973, in Luxembourg, a meeting of international regulatory authorities was held to discuss what these bodies could do in common to safeguard "the interests of the investors in the socalled I.O.S. Dollar Funds."
It was agreed at that meeting that
"... each of the Dollar Funds should be liquidated in accordance with the laws of the jurisdiction of its organization. ... Accordingly, the Banking Commissioner of Luxembourg stated his intention to institute proceedings in Luxembourg for the appointment of a liquidator for IIT and its Management Company, and the Chairman of the Ontario Securities Commission expressed a similar intention in respect of The Fund of Funds, Limited and Transglobal Growth Fund, Limited."
John Orr was subsequently appointed by the Supreme Court of Ontario as the Canadian permanent liquidator of the Fund of Funds, Limited, F.O.F. Proprietary Funds, Ltd., and IOS Growth Fund, Limited, a/k/a Transglobal Growth Fund, Limited, the three plaintiffs in this action. Orr then appointed the law firm of Borden & Elliot of Toronto, Canada, to be his general solicitors
"... with the power to appoint such other solicitors in other jurisdictions as they deem advisable" (Orr Dep. Exhibits 4 and 5). Shortly thereafter, Morgan Lewis was appointed to assist Borden & Elliot in the United States (Cihra Dep. p. 32; Orr Exhibit 16).
Morgan Lewis claims that from the inception of its representation of the liquidator it made it clear that it could not take part in any investigation or action regarding Arthur Andersen.Morgan Lewis took this position because it was then Arthur Andersen's regional counsel in the Philadelphia area and had been such for approximately 15 years. While the Court does not know the details of Morgan Lewis' representation of Arthur Andersen for those 15 years, it is clear that the firm never represented Andersen with respect to any matters concerning the defendants in FOF v. King or any of the persons, entities or transactions involved in the purchase, valuation or revaluation of the natural resource assets involved in this case.
However, Morgan Lewis did acquire through its representation, knowledge of Andersen's trade practices and procedures, and had at least some access to Andersen's files and internal memoranda.
Letters written by Borden & Elliot several months after Morgan Lewis was appointed cast doubt on how clearly Borden & Elliot understood the extent and nature of Morgan Lewis' conflict.
However, Morgan Lewis knew of its representation of Andersen at the time the firm accepted the appointment to assist Borden & Elliot and also was aware of Andersen's possible liability.
As a result of this awareness, Morgan Lewis informed Borden & Elliot that it would not institute or evaluate claims against Andersen.
Immediately after Morgan Lewis' appointment, it commenced an investigation for the liquidator,
"... to analyze, examine and review all substantial transactions affecting the interests of the plaintiff funds [fund of Funds, Limited, and IOS Growth Fund] and their shareholders which had occurred during the period prior to the appointment of the Permanent Liquidator, i.e., during the Cornfeld and Vesco eras" Ross affidavit, Exhibit E.
This investigation led to the institution of approximately 18-20 suits on behalf of the liquidator in the United States. One of these suits was FOF v. King. Morgan Lewis spent nine months investigating the natural resource asset transactions prior to bringing the King action on May 8, 1974. This investigation involved reviewing thousands of documents that had been amassed from several different sources. Morgan Lewis did not look into the involvement of Arthur Andersen during this investigation; rather, every time the firm found a paper mentioning Andersen, it was put aside and subsequently sent to Borden & Elliot.
Any investigation by Borden & Elliot of Andersen's role was held in abeyance until long after the King suit was filed.
About a month before the institution of the King suit, John Lewis of Morgan Lewis contacted Robert Meister of Milgrim Thomajan to ask if Milgrim Thomajan would assist in contemplated litigation involving Bank of New York ["BONY"], Wilkie Farr & Gallagher ["Willkie Farr"] and others (the defendants in FOF v. King).
Meister agreed and spent the next month going over documents and reviewing a draft of the complaint (Meister Dep. pp. 86-106). As local counsel, Milgrim Thomajan signed the King complaint, with Morgan Lewis listed "of counsel."
Shortly after the complaint in FOF v. King was filed, a problem arose which caused Borden & Elliot and Morgan Lewis to consider the possibilities that Arthur Andersen might be joined as a third party defendant in King, or, depending on the structure of the case, might be directly sued in King, thereby obviating the necessity for a separate suit against Andersen. Either possibility raised a question concerning Morgan Lewis' ability to continue to prosecute the King action for FOF because of Morgan Lewis' apparent conflict in continuing the prosecution of a suit in which its own client would be a defendant. The problem was discussed at a meeting held in Toronto on May 23 and 24, 1974, attended by representatives of Borden & Elliot, Morgan Lewis and Martin Mensch,
New York counsel for Global Natural Resources Properties Limited ["Global"].
Mensch had previously asserted that Global, not FOF, owned all the claims arising out of investments in the natural resource assets. Mensch had stated that he was going to bring a suit on behalf of Global against various defendants in the King action and against Andersen as well, since he felt that any suit had to include Andersen.
While an accommodation was ultimately worked out between FOF and Global, Morgan Lewis' conduct at this meeting was noteworthy. At one point during the meeting Mensch started to discuss the natural resource asset claims, including one he felt should be brought against Arthur Andersen. At the mention of Andersen's name, the attorneys from Morgan Lewis left the meeting, stating that they could not participate in any discussion involving Andersen.
During their absence, Mensch stated that if Andersen was not joined in the FOF v. King suit, Fund of Funds might not be able to sue Andersen later, since the failure to join Andersen might leave plaintiffs vulnerable to the defense that they had thereby split the cause of action.
Borden & Elliot were upset when they heard this opinion, as they had not meant to forfeit any claim against Andersen. Thus they insisted that the Morgan Lewis attorneys return to the meeting, be filled in on what had transpired in their absence, and given an opinion on the "splitting the cause of action" theory.
Morgan Lewis not only gave an oral opinion at the meeting, but also furnished a written opinion on June 10, 1974.
In response to Mensch's suggestion that Andersen be joined as a defendant in FOF v. King, Morgan Lewis developed a "contingency plan," which Park Dilks, Jr., the Morgan Lewis partner in charge of Fund of Funds matters, described as follows:
"One solution... seemed to be that, if AA [Arthur Andersen] objected to our continued participation, we would drop out of the Natural Resource case but would have so equipped Bob Meister in the meantime that he could carry on. As a precaution we cleared with Meister that he would have no conflict if AA were joined." (Orr Exhibit 21, [*] 10.)
During July and August, letters
were exchanged between Borden & Elliot and Morgan Lewis discussing (1) the contingency plan, (2) the possibility of Mensch bringing his own suit against Andersen and Morgan Lewis ratifying it for FOF (and Mensch ratifying FOF v. King in return), or, (3) the possibility of getting Andersen's consent to Morgan Lewis' remaining in the suit even if Andersen were brought in.Donald Scott, the Morgan Lewis partner who had been in charge of Andersen's account for several years, was brought into the discussions with the Morgan Lewis partners handling the FOF account. Scott helped draft Morgan Lewis' responses to Borden & Elliot,
and was present at Morgan Lewis discussions involving the possibility of Mensch or Meister bringing suit against Andersen (Scott Dep. pp. 42-43). At the end of July, Scott told Andersen of Morgan Lewis' representation of Fund of Funds
and attempted to get Andersen's consent to Morgan Lewis remaining as counsel if Andersen were named as a third party defendant. Andersen did not consent, being concerned about Morgan Lewis' possible conflict. (Lewis Exhibit 5; Boand Affidavit [n.*] * 7-9).
Throughout the spring and summer of 1974, Orr had requested that the question of bringing a separate suit against Arthur Andersen be held in abeyance. In an opinion letter written in August, Morgan Lewis had advised Borden & Elliot as to the applicable statute of limitations for a suit against Andersen, assuring the firm that suit could be brought at a later date.
In September and October, 1974, John Warren and George Cihra, Borden & Elliot attorneys, finally began to look into whether or not the evidence supported such a suit (Cihra Dep. p. 292). On January 23, 1975, Borden & Elliot asked Robert Meister of Milgrim Thomajan
to consider whether a suit should be brought against Arthur Andersen in the Southern District of New York.
The circumstances surrounding the choice of Meister to represent the liquidator in the suit against Andersen is hotly disputed by the parties. Morgan Lewis claims it had nothing to do with the choice, although it had mentioned Meister's name to Borden & Elliot several times. At the May, 1974, meeting in Toronto when the possibility of Andersen being brought into the King action as a defendant was first discussed, Morgan Lewis suggested that Milgrim Thomajan could replace Morgan Lewis if a conflict developed.