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U.S. Securities and Exchange Commission

before the

Rel. No. 2032 / April 24, 2002

Admin. Proc. File No. 3-10007

In the Matter of







The Commission instituted this proceeding against seven respondents, including Rudolph Abel and Donald C. Berry, on September 9, 1999. The Order Instituting Proceedings charged, among other things, that Abel and Berry, who successively served as Chief Investment Officer of Shawmut Investment Advisers, Inc. ("Shawmut"), aided and abetted and participated in a scheme involving the undisclosed use by Shawmut of brokerage commissions to obtain client referrals, in violation of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.1 The proceeding was stayed for a lengthy period due to the pendency of a parallel criminal proceeding. Five of the seven respondents, including Berry, have settled or defaulted.

Abel has neither settled nor defaulted. Abel's attorney, Daniel I. Small, Esq., also represents five individuals, including Berry, whom the Division of Enforcement intends to call as witnesses at the hearing. The Division states that it expects that Abel and Berry will accuse each other of responsibility for the situation at Shawmut leading to the undisclosed allocation of commissions. The Division also anticipates possible conflicts between Abel's testimony and the testimony of the other four witnesses represented by Small. Small has submitted written consents to the jointrepresentation by Abel and the five witnesses, waiving any alleged conflict.

On February 27, 2002, the Division filed an emergency motion asking the law judge to disqualify Small from representing both Abel and the witnesses to be called against him at trial, arguing that an actual or potential conflict of interest exists in the simultaneous representations.2 On February 28, the law judge denied the motion, holding that "[t]he Securities and Exchange Commission's (Commission) Rules of Practice, 17 C.F.R. §§ 201.100-.630, which govern Commission administrative proceedings, do not authorize an administrative law judge to take such a drastic action." Having found that she lacked the authority to disqualify Small, the law judge noted, with no explanation, that it appeared that Small had satisfied his duty under one of the American Bar Association's Model Rules of Professional Conduct ("Model Rules"), which requires attorneys to obtain the consent of clients as a condition of undertaking certain joint representations. The Division seeks interlocutory review of the February 28 order denying its motion.3

Interlocutory Review

Our Rules of Practice provide us with discretionary authority to review rulings of hearing officers on an interlocutory basis.4 We have determined to exercise that authority and grant review here. The law judge, believing that she lacked the authority to disqualify Small, did not fully evaluate the impact that allowing the joint representation to continue would have on the integrity of the proceeding.

This proceeding already has been delayed significantly because of the pendency of criminal proceedings. Remanding to the law judge to allow her to determine the disqualification issue in the first instance would cause additional delay.

As discussed below, we find that the law judge has the authority to disqualify Small under appropriate circumstances. Moreover, because those circumstances are present here, we conclude that disqualification is required.

Authority to Disqualify Counsel

Rule 111 of our Rules of Practice5 grants to the hearing officer "the authority to do all things necessary and appropriate to discharge his or her duties," including "(d) [r]egulating the course of a proceeding and the conduct of the parties and their counsel." Rule 103 of the Rules of Practice provides that the Rules are to be construed "to secure the just . . . determination of every proceeding."6

In ruling from the bench on the Division's motion, the law judge stated that disqualification of counsel was "such an unusual and drastic thing" that she did not think it could fall within Rule 111(d).7 We disagree. Rule 111(d) is broadly worded to permit the law judge to regulate the conduct of counsel in a proceeding. Disqualification of counsel under Rule 111(d) would be appropriate if a conflict of interest is of sufficient magnitude to render the proceeding unjust.8 We find that the law judge had theauthority to disqualify counsel if circumstances existed to justify the exercise of that authority.

Whether Counsel Should Be Disqualified Here

We have an obligation to ensure that our administrative proceedings are conducted fairly in furtherance of the search for the truth and a just determination of the outcome.9 Even the appearance of a lack of integrity could undermine the public confidence in the administrative process upon which our authority ultimately depends. This concern cannot be addressed by the consent of Small's clients to his representation of them.10 Rather, the issue is whether the Commission consents to the impact on its adjudicatory processes created by Small's multiple representation.11

Here, a single attorney, Small, is representing respondent Abel, former respondent Berry, and several non-respondent clients in this matter. The Division, after negotiating a settlement with the former respondent and after interviewing Small's non-respondent clients, placed those clients of Small on the Division's witness list to testify against Abel at the hearing. Assuming these witnesses are called to testify, there are two possible outcomes: Either the witnesses will give testimony that is inconsistent with Abel's theory of defense, as the Division anticipates, or they will give testimony that is consistent with Abel's theory.12

An attorney has a general duty to act in good faith, a duty that takes its shape from the larger object of preserving the integrity of the entire judicial process.13 As part of this duty, an attorney before any tribunal must advocate his client's position forcefully in order to advance the integrity of the proceeding.14 Here, however, Small's representation of Abel with respect to subject matters that are substantially related to his representation of the witness clients could result in divided loyalties that will prevent him from fulfilling his duty to act in good faith.15 This serious potential for prejudice to theintegrity of the proceeding leads us to conclude, therefore, that Small may not represent Abel as respondent while simultaneously representing any witness who may be called against Abel.

It does not alter our conclusion that an actual conflict has not yet been established. The "likelihood and dimensions of nascent conflicts of interest are notoriously hard to predict," especially in the case where an attorney represents multiple clients with respect to substantially-related matters.16 A "few bits of unforeseen testimony or a single previously unknown or unnoticed document may significantly shift the relationship" between multiple clients.17 We need not wait until an actual conflict taints the "adversarial presentation of evidence" where the nature of the multiple representation presents such a serious potential for conflict.18

In reaching this conclusion, we are sensitive to the rights of individuals to be represented by the attorney of their choice. However, this is not an absolute right.19 Here, the right to counsel of one's choice is outweighed by the necessity of ensuring that our administrative proceeding is conducted with a scrupulous regard for the propriety and integrity of the process.

We are also aware that our decision will necessitate further delay in a matter that has already been the subject of lengthy delay. Indeed, Small accuses the Division of having moved to disqualify him "solely to harass and as a dilatory tactic." In that regard we find it difficult to understand why this issue was raised so late in the proceeding. The possibility that Small's representation of multiple clients might taint the proceeding was evident at least by the time Abel was charged as a respondent and the Division became aware that Small's other clients might be used to make its case against Abel. Leaving the matter so late in the process compounds the necessary delay and repetition of effort as new counsel prepares for representation of a new client or clients, which could have been avoided by addressing this matter earlier. While we are mindful of these unfortunate consequences, however, we nonetheless must maintain the integrity of the proceedings we are empowered to conduct.

Accordingly, it is ORDERED that, pursuant to Rule of Practice 400(a), the February 28, 2002 order of the law judge denying the motion to disqualify Daniel I. Small on the ground that the Rules of Practice do not authorize an administrative law judge to take such action be, and it hereby is, submitted to the Commission for review; and it is further

ORDERED that Daniel I. Small be, and he hereby is, disqualified from representing both respondent Rudolph Abel and any witness to be called against Abel in this proceeding; and it is further

ORDERED that this matter be, and it hereby is, remanded to the law judge for action consistent with this order.

By the Commission.

Jonathan G. Katz

1 15 U.S.C. §§ 80b-6(1), 80b-6(2).
2 The Division advised Small of its concerns about the potential conflict in November 2001. At that time, settlement negotiations with Abel were pending. The Division filed its emergency motion upon learning that the proposed settlement would not be concluded.
3 The Division asked the law judge to certify her February 28 order for interlocutory review. The law judge denied that motion on March 8, 2002.
4 See, e.g., Jean Paul Bolduc, Securities Exchange Act Rel. No. 42096 (Nov. 4, 1999), 70 SEC Docket 3224 (granting review of interlocutory order pursuant to Rule 400(a) of the Rules of Practice, 17 C.F.R. § 201.400(a)).
5 17 C.F.R. § 201.111.
6 17 C.F.R. § 201.103.
7 The law judge did not address Rule 111(d) in her written order on the motion. We agree that Rules 102(e) and 180 of the Rules of Practice, which the law judge did address, do not authorize a law judge to award the relief sought here. See 17 C.F.R. § 201.102(e) (authorizing the Commission, after notice and a hearing, to, among other things, deny the privilege of appearing or practicing before it to a person who is found to have engaged in unethical or improper professional conduct); 17 C.F.R. § 201.180 (authorizing hearing officers to suspend or exclude persons from hearings or proceedings for contemptuous conduct).
8 In Scattered Corp., 53 S.E.C. 948 (1998), we recognized that representation of conflicting interests by counsel could render a disciplinary proceeding conducted by a self-regulatory organization unfair. Although Scattered involved a proceeding conducted by a self-regulatory organization, rather than a hearing before a law judge, the possibility that a conflict of interests may have an impact on the rendering of a just result exists in bothcontexts.
9 New York State Dairy Foods, Inc. v. Northeast Dairy Compact Comm'n, 198 F.3d 1, 13 (1st Cir. 1999) (citing Gibson v. Berryhill, 411 U.S. 564, 579 (1973); In re Murchison, 349 U.S. 133, 136 (1955)) (noting that a fair trial in a fair tribunal is a basic requirement of due process that applies in the context of administrative proceedings), cert. denied, 146 L. Ed. 2d 777 (2000); Utica Packing Co. v. Block, 781 F.2d 71, 77 (6th Cir. 1986).
10 Cf. Wheat v. United States, 486 U.S. 153, 162 (1988) (holding that a trial court may refuse waivers of conflicts of interest to ensure the adequacy of representation, to protect the integrity of the court, and to preserve the trial judge's interest to be free from future attacks over the adequacy of the waiver and the fairness of the trial).
11 Cf. United States v. Ross, 33 F.3d 1507, 1523 (11th Cir. 1994) (noting that courts have an independent interest in ensuring that the integrity of the judicial system is preserved and that trials are conducted within ethical standards).
12 There is a third possibility, that the witnesses may be called to authenticate evidence, but that does not appear to be the case here.
13 United States v. Shaffer Equip. Co., 11 F.3d 450, 458 (4th Cir. 1993).
14 See, e.g., Shaffer Equip. Co., 11 F.3d at 457 (noting that the adversary system rests on the "unshakable foundation that truth is the object of the system's process" and that "because no one has an exclusive insight into truth, the process depends on the adversarial presentation of evidence, precedent and custom, and argument to reasoned conclusions -- all directed with unwavering effort to what, in good faith, is believed to be true on matters material to the disposition").
15 For example, if the witnesses give testimony inconsistent with Abel's theory of defense, that suggests either that the position Small is advocating on behalf of Abel is untrue, or that the testimony being provided by his other clients is untrue.

If, on the other hand, the witness testimony at the hearing is consistent with Abel's case, then it will apparently be inconsistent with statements, albeit unsworn, made to theDivision in its prehearing interviews with Abel's non-respondent clients. It will also create an appearance of the possibility of improper collusion among the witnesses and Abel.

16 Wheat, 486 U.S. at 162-63 (noting difficulty of predicting conflicts of interest where attorney represents multiple criminal defendants).
17 Id. at 163 (commenting on impact of unforeseen evidence on relationship between multiple criminal defendants represented by same attorney in the course of balancing the Sixth Amendment's guarantee of effective assistance of counsel with a defendant's right to choose counsel).
18 Id.
19 See id. at 164 (1988) (holding in a criminal case that notwithstanding the importance of the right to counsel of one's choice, that right is not absolute and may be overcome by a showing of an actual conflict or a serious potential for conflict).


Modified: 04/24/2002