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FLEGO v. PHILIPS

May 21, 1981

Joan FLEGO, Plaintiff,
v.
PHILIPS, APPEL & WALDEN, INC. Richard Henrickson and Merrill Lynch Pierce Fenner & Smith, Inc., Defendants



The opinion of the court was delivered by: WHIPPLE

This matter is before the Court on defendant Philip Appel & Walden, Inc.'s motion to disqualify plaintiff Joan Flego's attorney, William A. Despo, Esq. In the underlying action, plaintiff alleges that defendants, various broker-dealers registered with the Securities and Exchange Commission, violated section 17(a) of the Securities Act of 1933, and sections 10(b) and 15(c) of the Securities Act of 1934, by engaging in, among other things, unauthorized trading and churning of her stock accounts. Plaintiff also asserts common law claims for fraud, breach of fiduciary duty, and conversion. Plaintiff has retained as her attorney William A. Despo, a former compliance attorney with the American Stock Exchange (hereinafter referred to as "AMEX"). In that capacity, Mr. Despo investigated various practices of the Wayne, New Jersey office of defendant Philips, Appel, & Walden, Inc. (hereinafter referred to as "PAW-Wayne"). Consequently, PAW-Wayne now moves this Court to disqualify Mr. Despo on the ground that his representation violates Disciplinary Rule 9-101(B) of the Code of Professional Responsibility. This Court has reviewed all of the moving papers, affidavits, and oral argument. For the reasons which follow, defendant PAW-Wayne's motion is denied.

In order to fully consider defendant's motion to disqualify plaintiff's attorney, it is necessary to understand the background of this proceeding. Mr. Despo was employed as a compliance attorney at the AMEX from approximately December 7, 1978 until April 31, 1980, at which time he entered private practice and established his own law firm. Early in 1979, Mr. Despo was assigned by his supervisor to investigate certain customer complaints relating to PAW-Wayne. These complaints had been uncovered through an inspection by AMEX's Options Inspection Department. Specifically, Despo was directed to determine whether PAW-Wayne had violated any AMEX rules. Due to the minor character of these complaints, Despo recommended that they not be investigated; however, he was directed to combine these complaints with another customer complaint being processed by the Options Inspection Department. In that complaint, a customer of PAW-Wayne alleged that PAW-Wayne, its office manager, Ramon McLeod, and one of its account executives, Samuel Confalone, had engaged in churning and unauthorized and unsuitable trading of his options accounts, and was suing for one million dollars.

 By affidavit, Mr. Despo states that his investigation of PAW-Wayne at that time focused on a review of the latter lawsuit, a general review of the remaining customer complaints, and a general review of branch office supervision of options accounts. He formally interviewed Mr. Confalone, Mr. McLeod, and Mr. Kowitski, a second account executive. Partial transcripts of these interviews have been submitted to the Court.

 Subsequent to this investigation, Mr. Despo entered private practice, and in October, 1980, undertook the representation of Ms. Flego in the instant matter against PAW-Wayne and others.

 In analyzing this motion for disqualification, this Court turns for guidance to the Code of Professional Responsibility and the Canons and Disciplinary Rules therein. *fn1" At the same time, this Court is cognizant of its responsibility to preserve a reasonable balance between the need to ensure ethical conduct on the part of lawyers appearing before it and other social interests, which include the litigant's right to freely chosen counsel. Woods v. Covington County Bank, 537 F.2d 804, 810 (5th Cir. 1976); General Motors Corporation v. City of New York, 501 F.2d 639, 649 (2d Cir. 1974).

 Canon 9 of the Code of Professional Responsibility provides that: "A lawyer should avoid even the appearance of professional impropriety." In this regard, Disciplinary Rule 9-101(B) admonishes that: "A lawyer should not accept private employment in a matter in which he had substantial responsibility while he was a public employee." The purpose underlying this interdiction, as indicated by the ABA Comm. on Professional Ethics, Opinions, No. 37 (1931) is: *fn2"

 
(To avoid) the manifest possibility that his action as a public legal official might be influenced (or be open to the charge that it had been influenced) by the hope of later being employed privately either to uphold or to upset what he had done.

 Id., reprinted in ABA Opinions on Professional Ethics 280, 282 (1967); see also General Motors Corp. v. City of New York, supra at 649. More recently, the ABA Committee on Professional Ethics, in Formal Opinion No. 342 (1976), articulated the policy considerations of DR 9-101(B) as follows: the treachery of switching sides; the safeguarding of confidential governmental information from future use against the Government; the need to discourage government lawyers from handling particular assignments in such a way as to encourage their own future employment in regard to those particular matters after leaving government service; and the professional benefit derived from avoiding the appearance of evil. *fn3" Id., reprinted in M. Schwartz, Lawyers and the Legal Profession, at 360-61 (1979).

 It is undisputed that Despo's representation of plaintiff in this action is private employment. As used in DR9-101(B), "private employment" merely refers to employment as a private practitioner. ABA Comm. on Professional Ethics, Opinion No. 342 (1976).

 The parties sharply contest, however, whether Despo's tenure at AMEX qualified him as a "public employee", and further, whether the instant case is a "matter" in which Despo had substantial responsibility within the meaning of DR9-101(B).

 Policy considerations underlying the AMEX indicate that its attorneys should be deemed public employees for the purpose of DR9-101(B). AMEX ostensibly is an independent, self-regulatory body; however, by definition, a national securities exchange is a compliance arm of the Securities and Exchange Commission. Section 6(b) of the Securities Exchange Act of 1934 (The "Act"), 15 U.S.C. § 78f(b)(1), provides:

 
(b) Prerequisites to registration. An exchange shall not be registered as a national securities exchange unless the Commission determines that
 
(1) Such exchange is so organized and has the capacity to be able to carry out the purposes of this title (15 USCS §§ 78a et seq.) and to comply, and (subject to any rule or order of the Commission pursuant to section 17(d) or 19(g)(2) of this title (15 USCS § 78q(d) or § 78s(g)(2))) to enforce compliance by its members and persons associated with its members, with the provisions of this ...

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