Last week’s intervention by the city of New York to disqualify a law firm from a qui tam case involving alleged price fixing of municipal bonds brings conflicts of interest to the forefront of already prolonged and complex litigation.

Managing conflicts of interest is not only important for attorneys but for municipal advisors as well, who have conflict disclosure obligations under Municipal Securities Rulemaking Board and Securities and Exchange Commission rules.

In a Nov. 16 filing in New York’s state supreme court, New York City and the New York City Transit Authority requested to disqualify law firm Sidley Austin from representing Morgan Stanley in an ongoing case involving variable rate demand obligations (VRDOs).

The City of New York is not a party to the litigation, but if Morgan Stanley were required to pay damages to New York state, the city contends that “issuers would then seek a portion of [that] recovery from the State for their share of the harm suffered.”

Alleged damages in New York total around $374 million.

This action is part of a lawsuit like others filed in other states including Illinois, Massachusetts, New Jersey, and California, that stem from allegations made by a Minnesota-based municipal advisor, Johan Rosenberg. Rosenberg filed his lawsuits under the name Edelweiss Fund, LLC.

Edelweiss Fund alleges that banks were not properly resetting VRDO interest rates and were charging states millions of dollars for services they did not perform. The banks in each of the cases, have denied the claims in court filings.

The city’s motion stems from the fact that Sidley Austin and its predecessors, i.e. Sidley Austin Brown & Wood LLP and Brown & Wood LLP, had served as the city’s bond counsel for three decades: 1986 to 2016. The firm also served as counsel for the New York City Transit Authority for almost twenty years, i.e., 1997 to 2016.

In that capacity, according to the filing, Sidley Austin “was instrumental” in drafting and negotiating the bond remarketing agreements that are at issue in the current litigation.

Consequently, the city contends that the firm has an impermissible conflict of interest because the interests of Sidley’s current client, Morgan Stanley, are materially adverse to those of New York City and the New York City Transit Authority.

The City of New York also believes that allowing Sidley Austin to continue its representation of Morgan Stanley means that the firm would be in a position to “use privileged and/or confidential information about the drafting, negotiation, and interpretation” of the agreements at issue.”

This would, the city says, be to the benefit of Morgan Stanley and “to the detriment of its former clients (the city Issuers),” according to the filing.

The city cites Model Rules of Professional Conduct promulgated by the American Bar Association, which prohibit a lawyer who has formerly represented a client in a matter, from representing another person in the same or a substantially related matter, where that person’s interests are materially adverse to the interests of the former client.

An exception to that rule is where the former client waives the conflict by giving informed written consent to the lawyer.

New York has similar conflicts of interest rules reinforced by state case law. Essentially, “attorneys “must avoid not only the fact, but even the appearance, of representing conflicting interests.”

In its filing, the city claims that Sidley Austin did not seek its consent to represent Morgan Stanley. It also contends that Sidley Austin “failed to act promptly once the city brought this conflict to their attention.”

In a March 22 letter included with the city’s court filing, Daniel Neppl, Sidley Austin’s general counsel, outlined the firm’s stance that it does not have a conflict in defending Morgan Stanley in the VRDO case.

“The thrust of the complaint in the qui tam litigation is how the remarketing agreements were implemented by Morgan Stanley,” the letter states. “Sidley had no role in advising the city regarding the issue raised in the complaint and was not itself involved in any of those activities.”

Sidley Austin further argued in the letter that it has fully met its confidentiality obligations with respect to its representation of the city. The firm also notes that the attorneys who worked on bond matters for the city and for the transit authority are no longer with the firm.

The city sees the latter argument as insufficient in part because of an ABA rule, which says that a conflict stays with the firm, even if attorneys who worked on the conflicted matter(s) leave the firm.

“The fact that Sidley Austin’s public finance team left the firm … does not eliminate the conflict or the risk of harm to the City Issuers,” the filing states.

The City of New York also believes that allowing Sidley Austin to represent Morgan Stanley puts the firm in a position that could harm the city during litigation, according to the filing.

In its letter, Sidley Austin counters: “there is no risk of harm to the city that would result from Sidley continuing [to defend] Morgan Stanley.”

The city vehemently disagrees, contending that “the confidential information that the law firm still possesses could be used to write more persuasive briefs, ask more effective questions at depositions and serve more targeted document demands,” according to the filing.

For those reasons, the City of New York says that it was compelled to intervene and seek relief from the state supreme court.

The case is State of New York ex rel. Edelweiss Fund, LLC v. JP Morgan Chase & Co. et al.

Representatives for Sidley Austin and the City of New York did not immediately respond to requests for comment.