Conflicts of Interest

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Conflicts of Interest

Sections within this essay:

Background
Handling Conflicts of Interest
Field of Law
Lawyers
Judges

Accounting
Stock Analysis
Business
Medical and Scientific Research
Federal Employment
State Law Applying to Elected Officials
Additional Resources
Organizations
American Bar Association
National Conference of State Legislatures

Background

Conflicts of interest arise in several different environments. A conflict may arise when the personal interests of someone in a position of trust clashes with the person's professional interests. A conflict may also arise when a person has different professional responsibilities and those responsibilities collide. A person who has these types of competing interests may have difficulty in fulfilling professional obligations.

Examples of professionals that may face conflicts of interest are numerous, although such conflicts generally arise in some professions more than others. For instance, judge may have personal interests that could be affected by the outcome of a case. Likewise, an attorney or law firm may have interests that conflict with the interests of a client. Similar problems may arise in the fields of accounting, stock analysis, education, and business, as well as federal employment. Elected officials also face conflicts of interest in fulfilling their duties and are subject to rules of ethics that regulate how the officials must handle these conflicts.

Handling Conflicts of Interest

A person who faces a conflict of interest may not be able to avoid the conflict. In such an instance, the person may be required to take certain steps by law or may need to follow certain practices in order to avoid any appearance of impropriety. The following are some of the means by which conflicts of interest may be handled, either by law or as good professional practice:

Duty of Loyalty: In partnership law, for example, a partner is bound by a duty of loyalty, which forbids the partner from personally engaging in a business transaction to the detriment of the partnership.
Fairness: Some laws, such as those governing conflicts of interest within corporations, require that transactions involving such conflicts are fair.
Full Disclosure: Many professionals, such as lawyers and government officials, are required by law to give full, written disclosure of any conflicts of interest.
Recusal: Decision-makers, such as judges or members of government agencies, may choose to recuse themselves in situations where the subject of a decision involves a conflict of interest.
Third-Party Evaluations: In some situations, such as where majority shareholders in a corporation decide to buy out minority shareholders, a neutral third party may be used to determine a fair market price for the minority shares.

Field of Law

Lawyers

A lawyer's relationship with a client is based largely on trust and confidence, such that the lawyer can provide the best possible representation of the client. Because of the nature of this relationship, a lawyer may frequently encounter a conflict of interest with the client. One instance may occur when one of the lawyer's clients has an interest that clashes with an interest of another client.

The American Bar Association's (ABA) Model Rules of Professional Conduct, which have been adopted by the majority of states, forbid or restrict lawyers from representing a client if a conflict exists. Under the Model Rules, a "concurrent conflict of interest" exists when: (1) the lawyer's representation of one client will be directly adverse to another client; or (2) the lawyer's representation of one or more clients runs a significant risk of being materially limited by the attorney's representation of another client, a former client, or a third person.

The Model Rules allow a lawyer to represent a client notwithstanding a conflict of interest when each of the following four criteria are met: the lawyer reasonably believes that he or she can still provide competent and diligent representation in spite of the conflict; the lawyer's representation of the client is not prohibited by law; the representation does not involve an instance where a claim by one of the lawyer's clients is brought against another of the lawyer's clients in the same litigation or other proceeding before a tribunal; and each affected client provides consent in writing after being informed of the conflict.

Under the Model Rules, a lawyer may neither engage in a business practice with a client nor acquire an ownership, possessory, security, or other pecuniary interest that is adverse to the client. The exception to this rule applies when the terms of the transaction are reasonable and fair to the client and are fully disclosed in writing; the client is advised in writing that he or she should seek the advice of independent legal counsel regarding the transaction; and "the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction."

Lawyers are also limited from engaging in specified conduct that would involve conflicts of interest. These types of conduct include the following:

Using information relating to the representation of a client to the disadvantage of the client unless the client gives informed consent.
Soliciting any substantial gift from a client, including a testamentary gift, unless the client is related to the lawyer.
Negotiating an agreement that gives the lawyer literary or media right to a portrayal or accounted based on information relating to the representation.
Providing financial assistance to a client in connection with pending or contemplated litigation, except that a lawyer may advance court costs on behalf of a client or pay the court costs and expenses of an indigent client.
Accepting compensation for representing a client from someone other than the client, unless the client gives informed consent, the payment of compensation does not interfere with the lawyer's independence of professional judgment or with the lawyer-client relationship, and the information pertaining to the client remains confidential.
Acquiring a proprietary interest in a client's cause of action or the subject matter of a client's case, except in certain situations.
Having sexual relations with a client unless a consensual sexual relationship existed between the lawyer and client when the lawyer-client relationship began.

The Model Rules also restrict lawyers from representing a client where a conflict of interest may exist between the prospective client and another member of the firm. The Model Rules likewise limit lawyers from representing someone who has interests that are adverse to one of the lawyer's former clients.

Judges

Perhaps even more so than in the case of attorneys, conflicts of interest can prevent judges from carrying out their responsibilities. The Model Code of Judicial Conduct, which was drafted by the ABA and has been adopted by the majority of states, strictly forbids a judge from taking part in a case where the judge's interest may conflict with his or her professional responsibilities. According to Canon 2 of the Model Code, "[a] judge shall avoid impropriety and the appearance of impropriety in all of the judge's activities." In a more specific provision, the Model Code states, "A judge shall not allow family, social, political or other relationships to influence the judge's judicial conduct or judgment. A judge shall not lend the prestige of judicial office to advance the private interests of the judge or others; nor shall a judge convey or permit others to convey the impression that they are in a special position to influence the judge. A judge shall not testify voluntarily as a character witness."

A judge who faces a conflict of interest in a case is expected to recuse himself or herself from the case. A judge who presides over a case where the judge has a conflict of interest could face impeachment from the bench.

Accounting

The accounting industry faced a great deal of criticism in 2001 and 2002 following a scandal involving Enron Corporation and its auditors. During the fall of 2001, Enron was the seventh-largest company in the United States. Over the period of a few months, however, the company collapsed due to accounting fraud and other instances of wrongdoing. In the aftermath of the scandal, Arthur Andersen, an accounting firm hired by Enron as an outside auditor, shredded hundreds of documents related to Enron. The firm was later convicted of obstruction of justice.

Prior to these scandals, accountants and accounting firms often engaged in consulting work, earning considerable fees in the process. Critics charged that accountants were reluctant to challenge clients about questionable financial activities because the accountants earned such large fees from these clients. The Enron scandal and other events that followed led to the enactment of the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745, which addressed these concerns.

The Sarbanes-Oxley Act restricts accounting firms from engaging in consulting work that could result in a conflict of interest. The statute also forbids a public accounting firm from performing an audit on a company where the accounting firm previously employed an officer of that company and the officer participated in an audit of the same company.

Stock Analysis

In addition to conflicts of interest in the accounting industry, critics during the early 2000s became concerned about conflicts that occurred with respect to stock analysts in securities firms. These concerns arose because analysts made recommendations regarding the potential value of securities in public communications. A conflict could occur in several situations, such as where a stock analyst firm had a financial relationship with a company that issued securities.

In 2002, the U.S. Securities and Exchange Commission approved rule changes that addressed conflicts of interest that may arise with respect to stock analysts. These rules include provisions relating to the following:

Analysts are prohibited from offering or threatening to withhold a favorable rating or price target with respect to stock in order to induce companies to employ the analyst for investment banking purposes.
Research analysts may not be supervised by a company's investment banking department. Rules also restrict communications between investment banking personnel and research analysts.
Securities firms may not tie in an analyst's compensation with a specific investment banking transaction.
A securities firm must disclose in a research report that it received compensation for investment banking services from a company that is the subject of the report.
A stock analyst may not personally invest in a company's securities prior to the company's initial public offering if the company is in the same business sector that the analyst covers.
Stock analysts are required to disclose whether they own shares in companies that they recommend.

Business

Owners and managers of businesses may encounter conflicts during the course of the business. Laws governing these businesses handle conflicts by several different means. For instance, partners in a partnership are bound by a duty of loyalty that prevents the partner from competing in a business to the detriment of the partnership.

A conflicts of interest is often the result of a transaction between a business, such as a corporation, and a manager of the business. The manager may take advantage of this relationship and complete a transaction that benefits himself or herself and not the corporation. In the majority of U.S. jurisdictions, the resolution of a conflict of interest for a controlling shareholder, director, or officer of a corporation focuses on the fairness of the transaction. The person who is involved in the transaction must prove that the transaction is the result of fair dealing and demonstrates a fair price.

Medical and Scientific Research

Because the publication of research is so important in the medical and scientific communities, conflicts of interest may interfere with the dissemination of accurate information. For example, a pharmaceutical company that is producing a drug may fund research that is the subject of an article that is published in a reputable journal. Due to the possibility that the company's funding causes a conflict of interest with the person or entity conducting the research, most medical journals require researchers to disclose the sources of funding for their research.

Federal Employment

Under a federal criminal statute at 18 U.S.C. § 208, federal employees are forbidden from participating "personally and substantially in his official, governmental capacity in a matter" where the employee "knew that he, his spouse, or another statutorily-listed person had a financial interest" in a particular matter. The Office of Government Ethics (OGE) has promulgated regulations that have clarified to some extent the terms of this statute.

In order to participate "personally and substantially" in an action, a federal employee must have done more than participated in a ministerial or procedural role. Prosecutors may prove that the defendant had requisite knowledge by proving that the defendant knew about the forbidden financial interest, even if the employee did not intend to violate the statute. Courts and the OGE have further established that the statute applies only where there is a "real possibility" of gain or loss as a result of the matter.

State Law Applying to Elected Officials

Members of state legislatures are subject to a number of rules pertaining to conflicts of interest, most of which relate to disclosure of specified types of information. According to the National Conference of State Legislatures, every state except for Idaho, Michigan, and Vermont requires members of the legislative body to file personal financial disclosures. The majority of states also require disclosure of other types of information, such as the names of clients or the names of certain debtors or creditors. The following is a summary of some of these requirements.

ALABAMA: State law does not require the disclosure of the names of individual clients. Legislators must reveal any indebtedness to banks, savings and loan associations, insurance companies, mortgage firms, stockbrokers, bond firms, or other specified organizations.

ALASKA: State law requires disclosure of names of clients who have an interest in legislation or in other specified instances. Legislators must reveal the names and addresses of the sources of loans or loan guarantees. Certain gifts must also be disclosed.

ARIZONA: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain debtors and creditors. The names of the sources of gifts of more than $500 must also be disclosed.

ARKANSAS: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain debtors and creditors. The sources and amount of gifts of more than $100 must be disclosed.

CALIFORNIA: State law requires disclosure of the names of certain clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of any gift of more than $50 must be disclosed.

COLORADO: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain cred-itors. The name of the source of certain gifts of more than $25 must be disclosed.

CONNECTICUT: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain creditors.

DELAWARE: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of any gift of more than $250 must be disclosed.

FLORIDA: State law requires disclosure of the names of certain clients. Legislators must reveal every liability that is greater than the legislator's net worth. The name of the source of any gift of more than $100 must be disclosed.

GEORGIA: State law does not require the disclosure of the names of individual clients. The sources and actual amounts of honoraria must be disclosed.

HAWAII: State law requires disclosure of the names of certain clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of certain gifts of more than $200 must be disclosed.

IDAHO: State law does not require a personal financial disclosure.

ILLINOIS: State law does not require the disclosure of the names of individual clients. The name of the source of any gift of more than $500 must be disclosed.

INDIANA: State law requires disclosure of the names of clients who the legislator has represented before a state agency for a fee. The name of the source of certain gifts of more than $100 must be disclosed.

IOWA: State law does not require the disclosure of the names of individual clients.

KANSAS: State law requires disclosure of the names of certain clients. The name of the source of any gift of more than $500 must be disclosed.

KENTUCKY: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of any gift of more than $200 must be disclosed.

LOUISIANA: State law does not require the disclosure of the names of individual clients.

MAINE: State law requires disclosure of the names of certain clients. Legislators must reveal the source of any unsecured loan of $3000 or more. The name of the source of any gift or honoraria must be disclosed.

MARYLAND: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of certain gifts of more than $100 must be disclosed.

MASSACHUSETTS: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of certain gifts of more than $100 must be disclosed.

MICHIGAN: State law does not require a personal financial disclosure.

MINNESOTA: State law does not require the disclosure of the names of individual clients. Officials may not accept gifts from lobbyists.

MISSISSIPPI: State law does not require the disclosure of the names of individual clients.

MISSOURI: State law does not require the disclosure of the names of individual clients. The name of the source of any gift of more than $200 must be disclosed.

MONTANA: State law does not require the disclosure of the names of individual clients.

NEBRASKA: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of any gift of more than $100 must be disclosed.

NEVADA: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of any gift of more than $200 must be disclosed.

NEW HAMPSHIRE: State law does not require the disclosure of the names of individual clients. The name of the source of any gift or honorarium of more than $50 must be disclosed.

NEW JERSEY: State law does not require the disclosure of the names of individual clients. The sources of any fees, honoraria, travel expenses, or other prepaid expenses must be disclosed.

NEW MEXICO: State law does not require the disclosure of the names of individual clients.

NEW YORK: State law does not require the disclosure of the names of individual clients. The name of the source of any gift of more than $1000 must be disclosed.

NORTH CAROLINA: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain creditors.

NORTH DAKOTA: State law does not require the disclosure of the names of individual clients.

OHIO: State law requires disclosure of the names of certain clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of any gift of more than $75 must be disclosed.

OKLAHOMA: State law requires disclosure of the names of clients who the legislator has represented before a state agency for a fee. The name of the source of any gift of more than $200 must be disclosed.

OREGON: State law requires disclosure of the names of certain clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of any gift of more than $100 must be disclosed.

PENNSYLVANIA: State law requires disclosure of the names of certain clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of any gift of more than $250 must be disclosed, as well as the source of any travel reimbursement of more than $650 for a single trip.

RHODE ISLAND: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of any gift of more than $100 must be disclosed.

SOUTH CAROLINA: State law requires disclosure of the names of certain clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of certain gifts of more than $200 per year must be disclosed.

SOUTH DAKOTA: State law does not require the disclosure of the names of individual clients.

TENNESSEE: State law does not require the disclosure of the names of individual clients. The name of the source of certain gifts must be disclosed.

TEXAS: State law requires, in some instances, disclosure of the names of legislator's clients who are also lobbyists. Legislators must reveal the names and addresses of certain creditors. The name of the source of any gift of more than $250 must be disclosed.

UTAH: State law does not require the disclosure of the names of individual clients.

VERMONT: State law does not require a personal financial disclosure.

VIRGINIA: State law requires disclosure of the names of certain clients, including lobbyists. The name of the source of certain gifts and travel expenses must be disclosed.

WASHINGTON: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of any gift of more than $50 must be disclosed.

WEST VIRGINIA: State law does not require the disclosure of the names of individual clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of any gift of more than $100 must be disclosed.

WISCONSIN: State law requires disclosure of the names of certain clients. Legislators must reveal the names and addresses of certain creditors. The name of the source of any gift of more than $50 must be disclosed.

WYOMING: State law does not require the disclosure of the names of individual clients.

Additional Resources

Alleged Conflicts of Interest Because of the "Appearance of Impropriety." Rotunda, Ronald, Hofstra Law Review, Summer 2005, 1141.

Financial Conflicts of Interest: The Impact on Contractors and Federal Employees. Soller, Mary Lou and Brian A. Hill, Procurement Lawyer, Spring 2005, 1.

How to Deal with Conflicts of Interest. Kerns, Peggy, State Legislatures, July/August 2004, 36.

Senators to Battle Over Accounting. Hirsch, Jerry, Los Angeles Times, May 20, 2002.