(Reuters) - BakerHostetler does not have to pay $1.4 million in sanctions in a high-profile forfeiture case involving a Russian-controlled company accused of laundering the proceeds of a $230 million tax fraud scheme, a judge ruled last week.
BakerHostetler was disqualified in 2016 from defending the company, Prevezon, because the engagement conflicted with its prior work for Hermitage Capital, an investment bank allegedly victimized in the Russian scheme.
On March 29, U.S. District Judge William Pauley in Manhattan said BakerHostetler should not be sanctioned for refusing to bow out of the case.
Judge Pauley said BakerHostetler had advanced a credible case against disqualification and did not act in bad faith when it litigated to remain Prevezon’s counsel.
Pauley’s ruling capped off a long-running dispute over BakerHostetler’s role in the litigation.
Hermitage first moved to disqualify BakerHostetler from representing Prevezon in 2014. Hermitage was not directly involved in the forfeiture case, but claimed the firm might use confidential information it had obtained from Hermitage in Prevezon’s defense.
After the trial court denied two motions to disqualify BakerHostetler, Hermitage appealed to the 2nd U.S. Circuit Court of Appeals.
The case presented a novel question for the 2nd Circuit: Can a law firm be disqualified for a potential conflict of interest involving a former client that is neither a party nor a witness?
The appeals court sided with Hermitage, holding that BakerHostetler had an ongoing duty to its former client.
Hermitage’s lawyers at Susman Godfrey then moved for sanctions from BakerHostetler, asking Judge Pauley to award the bank its costs in pressing the disqualification case.
Judge Pauley concluded that if BakerHostetler managed to convince a trial judge on two occasions that it deserved to stay in the case – and then presented the 2nd Circuit with a tough question of first impression – it should not have to pay a penalty for refusing to step aside.
Judge Pauley said it was “indecorous” for lawyers to discredit a former client to serve the interests of a new one. But to be sanctioned, he said, a firm has to be egregiously conflicted. Considering that it took Hermitage three tries and a million bucks to bounce BakerHostetler, the judge said, the conflict here was hardly egregious.
William Browder, Hermitage founder, said in an email that the "decision sets a terrible precedent for victims of crime.
He added that lawyers can now “switch sides from representing the victims to representing the perpetrators of the same crime and the worst that will happen is they get kicked off the case with no financial consequence.”
BakerHostetler partner Mark Cymrot said the firm had no comment on Pauley’s ruling.
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