Fordham Law


Lawyer Allowed to Testify Against Former Employer in Arbitration

Bruce Green in The New York Law Journal, January 25, 2010

Media Source

Nate Raymond

A lawyer who spent 29 years in-house at Bear Stearns & Co. Inc. has been given the green light by a Manhattan judge to testify as an expert witness in an arbitration against his former employer.

Lawyers for Bear Stearns had sought to block Raymond Aronson, a former senior counsel in the legal and compliance department, from testifying in an arbitration brought against the bank by Keefe, Bruyette & Woods Inc., over allegedly overpriced bonds sold by Bear Stearns' hedge funds nearly three years ago. Bear Stearns claimed that by testifying, Aronson, an in-house lawyer until 2004, would violate rules restricting lawyers from disclosing client confidences. (Read Keefe Bruyette's opposition brief.)

But after a hearing earlier this month before Manhattan Supreme Court Justice Alice Schlesinger (See Profile), the judge found it would be "inappropriate and unfair" to block Aronson's testimony. She also denied Bear Stearns motion to disqualify Keefe Bruyette's law firm, Eiseman Levine Lehrhaupt & Kakoyiannis, finding there was "no basis" to assume the law firm had received confidential information from Aronson.

Justice Schlesinger said there had been no showing the issues involved in the arbitration were issues about which Aronson acquired confidential information, according to a transcript of the Jan. 6 hearing.

She also sealed an affidavit Aronson submitted discussing the exact details of his testimony, saying its release would give Bear Stearns an unfair advantage in the arbitration, to take place before the Financial Industry Regulatory Authority. Justice Schlesinger made her findings at the Jan. 6 hearing and later released a one-page ruling in Bear Stearns Asset Management Inc. v. Keefe, Bruyette & Woods Inc., 114802-2009.

JPMorgan Chase & Co., which acquired Bear Stearns in March 2008, does not plan to appeal, a source close to the matter said.

The bank's lawyer, Stephen Sinaiko at Kramer Levin Naftalis & Frankel, did not respond to requests for comment.

Experts in attorney ethics said that though it may be unusual for a lawyer to testify as an expert against his former employer, as long as the attorney does not breach client confidences and does not give testimony on matters in which he was involved, the action likely would pass muster.

David Keyko of Pillsbury Winthrop Shaw Pittman, who writes and advises on legal ethics, said that while this situation was unusual, "it doesn't sound like this is beyond the bounds. This is really a fact-specific review."

Bruce Green, a professor at Fordham University School of Law, said Aronson would not be breaching confidences if he shares knowledge about the industry he learned from working in the industry, if he does not reveal particular facts about Bear Stearns as distinguished from any other brokerage firm, and does not discuss a prior matter in which he was involved as the firm's lawyer.

TRADING ADJUSTMENT

In December 2008, Keefe Bruyette, a New York-based investment bank specializing in the financial sector, filed a claim against Bear Stearns seeking nearly $820,000 plus interest in damages for a trading adjustment. Keefe Bruyette sought to hold Bear Stearns responsible for amounts it claimed were due on bonds it acquired in March 2007 from two hedge funds managed by Bear Stearns. Keefe Bruyette claimed it overpaid for the securities and that Bear Stearns has failed to fully settle the trade, which is a typical business practice.

In July 2007, the two Bear Stearns hedge funds, which invested heavily in subprime mortgages, collapsed.

Evidentiary hearings were scheduled for November 2009. A month before, the parties disclosed the experts they planned to call. On Keefe Bruyette's list was Aronson, a senior managing director of Sutter Securities Group Inc., to speak on the application of law and industry practices concerning prime brokerage and clearing transactions.

But Keefe Bruyette also disclosed that before Aronson worked at Sutter, he had spent 29 years as a lawyer at Bear Stearns.

Bear Stearns went to state court in an effort to bar Aronson from appearing as a witness and to disqualify Eiseman Levine.

Bear Stearns said Keefe Bruyette's claims relied on prime brokerage service agreements that went into effect in 2002, while Aronson was in-house. It also cited a severance agreement that restricted Aronson from disclosing confidential information.

Bear Stearns argued that areas in which Aronson had counseled the firm -- trade clearance, prime brokerage and hedge funds, among others -- were now at issue in the arbitration, suggesting a conflict. It contended that Aronson, in consulting with Eiseman before the arbitration, could have betrayed client confidences. At the least, Bear Stearns argued, Aronson's retention "gives rise to the appearance of impropriety."

At the Jan. 6 hearing, Sinaiko said the arrangement "creates, at a minimum, the appearance of impropriety." He questioned why Keefe Bruyette had hired Aronson instead of someone not connected to Bear Stearns. Had this issue arisen while he was at Bear Stearns, Sinaiko contended, Aronson "would have been one of the principal lawyers assigned to handle it."

"What is happening here is truly outrageous," Sinaiko said at the hearing. "There are probably dozens or hundreds of people who could have been selected to give this testimony."

Eric Levine, an attorney for Keefe Bruyette at Eiseman Levine Lehrhaupt & Kakoyiannis, said at the hearing that Aronson would not be asked during the arbitration how Bear Stearns handled situations like the one at issue, only to express an opinion about what Bear Stearns should have done under the circumstances.

Once terms in the severance agreement expired in September 2005, Levine said, Aronson was free to "give advice that relates to the general application of existing or contemplated rules, regulations or business conventions."

Justice Schlesinger found at the hearing that it was not enough to say Keefe Bruyette could have hired someone else. Bear Stearns had a "burden that you can't really sustain or at least haven't sustained," she told Sinaiko.

Aronson had a life before and after Bear Stearns, she said. And he also "had a life as a lawyer who was continually involved in issues which are apparently extant in this arbitration" and in which he has acquired an expertise, she said.

No date has been set for the arbitration, Levine said.