We will offer our opinion on the misconduct and speculate on the future with respect to these firms. However, much of this commentary may be applicable generally to the legal industry and helpfull to DOJ lawyers, legislators, and the media. Conflict of Interest issues, even when hidden, lie just beneath the surface of nearly every Mega Case. In this editorial analysis we will refer to Hennigan, Bennett & Dorman ("HBD") renamed as Hennigan Dorman ("HD") and the firm Dewey & LeBoeuf ("D&L").

We don't know the conversations behind closed doors, perhaps heated. We can only imagine how the SONICblue hit to earnings, client relationships, and insurance repercussions may have been a stinging jest at the stubbornly festering Aureal wound.

We don't know (at least officially) if honest partners at HBD who were uninvolved with the misconduct were incensed at having bonus or profit sharing reduced in order to establish adequate reserves. We also don't know what sort of special insurance coverage the partners at D&L obtained to offset any risk associated with the Bruce Bennett bankruptcy team's modus operandi or skeletons among the case files. Like the junior partners and associates at D&L must, we will have to assume that the senior members of D&L made fully informed business decisions as to the risks of bringing an entire bankruptcy team on board, given the history that it has.

• Nature of the Misconduct by the Bruce Bennett Bankruptcy Lawyer Team at Hennigan, Bennett & Dorman

Opinions may differ on this. More likely, members of the bankruptcy industry would rather ignore the fairly obvious and indisputable facts involved in order to avoid rendering any public opinion. Such a strategy is proving irrelevant as the notoriety of Bruce Bennett's "Outside The Box" team grows on this site. BankruptcyMisconduct already has a few pages the SONICblue misconduct, including the starring role of Suzzane Uhland as Bruce's leading lady, so we'll just give a quick intro on the Aureal prequel. Ironically, the SONICblue fiasco may have been avoided if only the California State Bar or the California Supreme Court took their duties seriously and beyond the reach of self regulatory corruption.

A pattern of conduct which clearly seems to violate the letter and spirit of California's regulations governing the legal industry is traced to HBD's own retention agreement. Section 2.6 of the initial complaint to the California State Bar against Hennigan, Bennett & Dorman lawyers Joshua M. Mester, Sidney P. Levinson, Steve Mitchell, James O. Johnston, Linda A. Kontos, Joshua D. Morse, Karen L. Kupetz, and Michael A. Morris specifically identifies the firm's fatally flawed standard blanket waiver as failing the clear and well settled standard of the California Rules of Professional Conduct (CRPC) Rule 3-310 requirement that conflicting client representations are avoided, or at a minimum, only released by all affected clients after they all receive and execute a fully informed written consent.

California and 9th Circuit case law is clear as to the high standard imposed upon lawyers who receive money from both sides of a legal dispute:

The burden to avoid a conflict, or at a minimum, to obtain a fully informed release applies regardless of whether the financial relationship between any California lawyers and their opposing clients arises from unrelated cases, or even from cases which are not concurrent.

These conflict of interest issues relate to any hidden flow of money by any of the parties to a dispute to any of their attorneys. For example: everyone understands that it is unethical for the same lawyer to represent both the husband and the wife in their joint divorce. But it is also unethical for the lawyer who secretly does lots of business with the husband, to then slyly accept the wife as a client in their joint divorce case. There is just too much incentive for such a lawyer to do a bad job for the wife on purpose in order to ingratiate the law firm to the husband. Such hidden conflicts are forbidden in bankruptcy cases. Given the public nature of a bankruptcy proceedings and the extraordinary power of the automatic stay against creditor's rights, Congress purposely established the heavy standard and mandatory requirement of an explicit affirmative statement by official counsel as to their disinterestedness and the non existence of their entire firm's representation of any adverse interest.

Thus, the blanket waiver filed by Bennett's team (a true copy of which appears at Exhibit D to the initial complaint) could never satisfy CRPC 3-310 and ironically establishes scienter. Furthermore, absent a complete "informed consent," every blanket assertion by HBD and its lawyers before any court to have "fully disclosed" the conflict is rendered a fraud upon the court.

The list of conflicted clients starts with the debtor in possession, Aureal, Inc., and grows, according to HBD's own belated filings, to a number of significant parties:

• Oaktree Capital et al. as the purportedly secured creditor as well as a major stockholder
• Argo Partners as a vulture investor and most prominent claims buyer in the case
• PriceWaterhouseCoopers who were themselves sanctioned for misconduct

How many releases did HBD need to obtain? Counting the Oaktree entities simply as one party and ignoring interparty conflicts, then at a minimum HBD would had to have executed three written conflict disclosures with the debtor Aureal and one each for Oaktree, PWC, and Argo. Thus, HBD would have entered into at least twelve agreements involving their impaired standing as official debtor's counsel in the bankruptcy case. Six agreements at the time of the initial impaired retention, and then six more agreements each time any matter involving their conflicted client ripened from a potential conflict to an actual conflict.

These agreements were required at the time of each retention, and then again each time a potential claim arose to an actual conflict of interest. In the case of Oaktree, an agreement was required for each conflicted matter, including the determination of the amount of Oaktree's claim, the investigation of the perfection of the security interest, and all issues related to the equitable subordination of the claim, as well as resolving necessary issues under various counter claims generally referred to as deepening insolvency and Lender Liability. HBD took extraordinary measures to benefit its conflicted client Argo Partners for one of Argo's purchased claims. This action was to the detriment of the estate, and HBD brazenly charged the estate for the dubious privilege of doing so.

We find it hard to believe that the ripened actual conflicts related to each of the dozens of claims held by Argo would have been released by a single omnibus release. Worse, we can't imagine the myriad of releases that would have been necessitated with the resolution of majority stockholder Oaktree's purportedly secured claim given the obvious equitable subordination issues, particularly in light of the case's primary effect of giving to Oaktree nearly all of the estate's assets in the form of cash from the rush liquidation.

The Devil's Advocate would question "But aren't these rules practically an insurmountable burden for a conflicted debtor's counsel? Yes - By Jove we think you've got it! The purpose of the California rule is to avoid conflicts. The purpose of the many laws of Congress is to prohibit hidden conflicts in bankruptcy cases, and to let any party have the information and ability to prohibit a conflicted lawyer from being in charge of their chance at getting paid. We didn't make the laws or the rules, but they are simple indeed.

California's Required Written Conflicted Representation Waivers Necessarily Imply Client Participation in Counsel's Fraud Upon The Court

Each of these agreements would have needed to contain complete written descriptions of "the actual and reasonably foreseeable adverse consequences to [each] client." Foreseeable consequences to the debtor would have to include the obvious issue: "In light of our conflicts with major creditors and title 11 of the U.S.C., we may be prohibited by law to be your counsel if any party in interest learns of our conflict and objects, or if the U.S. Trustee performs her duties". We have difficulty imagining even the most eloquent of dirty lawyers obfuscating the obvious consequence:

"By your tacit approval of our fraudulent declarations with our initial retention and at each fee request - you may subject yourself to criminal prosecutions under various federal laws including U.S.C. title 11 bankruptcy fraud and title 18 principals, accessory after the fact, misprision, as well as under the RICO ACT".

The misconduct by HBD is even more severe, and ensnares an even broader gamut of lawyers at other firms, had HBD in fact obtained the required fully informed written consents as their "fully disclosed" oaths declared. A bankruptcy case is a public matter. Every agreement between a debtor and another party that is not in the ordinary course must be on notice, motion, and approval by the Court. There can be no secret agreements between debtor and debtor's counsel, between debtor's counsel and the largest creditor, or a "three way" with a debtor and a creditor on either side of debtor's counsel.

The issue is not merely a little mistake on the order of "they failed to mention" something. No, Congress knew long ago that the peculiar nature of a bankruptcy case held too powerful an incentive for a law firm hired by the debtor to act covertly for the benefit of a secret client. Congress was smart enough to require a debtor's law firm to affirmatively state under oath that it has no undisclosed conflict of interest. It's not a matter of leaving something blank; it's a matter of affirmatively saying, "We checked and there is nothing to say." Congress requires a debtor's law firm to affirmatively re-swear its conflict status each time it asks for fees, be it every month or every week. Thus, the bankruptcy industry's polite misnomer "failure to disclose" is really an affirmative lie and better described as a "fraud upon the court."

But if HBD did actually obtain such releases, and kept them secret along with all of the opposing counsel: Conspiracy and Bankruptcy Fraud

So, if we assume for the sake of argument that HBD did obtain a fully informed consent in writing between HBD and each of its conflicted clients in the Aureal, Inc. matter, initially--and each and every time a conflict arose--HBD would have willfully lied to the Court about conflicts, and secret agreements, and the existence of secret terms to its own retention. As such, each attorney for a party to one of these secret agreements would have aided and abetted HBD's false affidavits under criminal codes of accessory after the fact and misprision of felony.

Either way, HBD lied a whole bunch of times. A Federal Special Prosecutor could quickly determine if the criminal issues expand beyond HBD to ensare the lawyers at other firms which aided the conflict fraud. But in any event, at a minimum, every non-HBD lawyer involved in the case who remained silent in the face of the unwaivable conflict issues is akin to the incomprehensible dolts who cheer the naked emperor as he parades in his "new clothes." The "honor among thieves" mentality of our nation's legal industry is the foundation of our current financial crisis.

What is past is prologue

It appears that Bruce Bennett learned something from the original complaint, as revised to include himself. Bruce learned that having a conflict of interest is really, really bad. Unfortunately, it appears that Bruce used that knowledge to "pressure" opposing counsel in the SONICblue case for favorable treatment under some sort of threat of disclosing a conflict problem burdening the opposing counsel. Maybe "extortion" is a better word. Read what one of the few honest lawyers in America, with balls, had to say about Bruce Bennett's conduct. Read what the judge had to say. We can't make this stuff up.

• What is the dollar amount of risk for HBD, HD, and D&L?

We've got three different short answers.

The first answer is that you are asking the wrong question. The issue is not simply money but one of incarceration and disbarment. Arguably, this answer is less applicable to some of the executive team at D&L as compared with the lawyers involved in the conduct or cover up at HD and at D&L. However, as the executive committee and regular partner members of D&L become aware of the acts, their ability to isolate themselves from fallout diminishes.

The second answer is that the conduct likely falls under the RICO Act. The conduct clearly spans a succession of acts involving the transmission of false documents by mail and or wire. The predicates for a RICO case appear clearly met. Thus the answer to "how much does it cost?" becomes "how much do you have?" Our simple explanation is that Congress allows the forfeiture provision of RICO to encompass all resulting funds of the crime, as well as "clean" dollars which can be traced to have originated in any part with ill gotten gains.

• Future Effects on Firm P&L and Client Exposure

P&L would be affected by three main factors: Damages, Insurance & Stigma.

We don't really know how large Damages could be for the firms involved. However, damages could exceed the enterprise values, if not their liquidity, and thus future P&L could be eliminated via cessation of the going concern.

P&L could be reduced by increases in Insurance Expense such as business insurance, malpractice insurance, and D&O insurance. Usually insurance companies require that they be notified of a potential coverage incident as soon as the client (one of these law firms) is aware of same. While this may be the only route such a law firm can take to find some protection, obviously the insurance company may use such information to either raise rates or decline future coverage.

Stigma may have a negative affect on P&L for both continuing firms. As the nature of the misconduct becomes more widely known, clients may withdraw or avoid representation by the firms in question. If current or potential clients come to identify firms with misconduct, they may choose to avoid doing business with the law firms. Perhaps the most pernicious element of Stigma relates to potential negative risk exposures to clients of the firms, as described later. Clearly, BankruptcyMisconduct is only one of a large (and growing) number of voices drawing attention to the misconduct in the Aureal, and in particular, the SONICblue cases. Any future action by regulatory or prosecutorial offices may result in severe stigma.

As a phenomenon of society, heightened in the omniscient and enduring social networking era of today, Stigma transcends the finality of the legal industry's clear cut, though self-serving, self regulation paradigm.

It is arguable that Hennigan Dorman may have achieved a significantly improved stigma outlook upon the exit of Bruce Bennett's bankruptcy team. It is conceivable that Dewey & LeBoeuf could limit or avoid Stigma costs if it were to quickly jettison the Bruce Bennett bankruptcy team. It is more speculative to assume that members of Bruce Bennett's team might be burdened with future stigma solely in proportion to their specific involvement in any adjudicated misconduct.

"Can a 'GOOD BOY' Become Personally Liable?" - Sid Levinson

Smarter persons than those who write for BankruptcyMisconduct have already posed the question of various circumstances when innocent, good faith parties might unsuspectingly, perhaps arguably unfairly, fall prey to liability from events not of their own making. All lawyers at D&L, whether vying for a partnership, a junior partner, senior partner, or managing partner are potentially affected by this sort of negative externality harming their professional relationship with their own clients.

One of these risks to the client is that his counsel's time, energy, and resulting effectiveness may become diminished if problems or proceedings arise from misconduct. The specific lawyers working for the client, or even the law firm itself, could become distracted or have their ability to deliver legal services halted. One undesired outcome is for the client to suffer the complete loss of counsel, even from events far short of incarceration. Such a client would suffer delay (if tolerated in a proceeding) and duplication of costs in bringing replacement counsel up to speed.

A client could lose its counsel for seemingly unwarranted reasons. For example, lawyers suffering conflict of interest stigma may overcompensate in the middle of a representation - as an overreaction to concerns about conflict issues amidst heightened scrutiny by regulators, the media, or other clients. Such an overreaction would leave an innocent client without counsel. Similarly, honest lawyers within the afflicted firm, whose clients happened to be one of those terminated in an overabundance of caution, would suffer financially and professional for misdeeds by other lawyers. Such an unfortunate result must be a specially bitter pill to swallow for those honest lawyers of a law firm when a conflict cloud arrives with newly joining partners.


As Stigma Follows Lawyers, Unconnected Clients Can Be Harmed

Let's consider how regulatory and prosecutorial downside may affect the clients of a law firm which acquires lawyers with a misconduct or criminal cloud. The risk to a client of a firm under such stigma lies in having their own profile raised for possible investigation by government regulators, or from a Federal Special Prosecutor. Thus lawyers with a clouded past, even if their future conduct is strictly legal and ethical, may still expose clients of their law firm to undesired regulation or prosecution. At the extreme, clients of a firm under a cloud may be swept up in a special prosecutor's aggressive thrust. Once the predicates to a RICO case have been established, intent is not as essential as tracing the flow of money. Clients who believe themselves fully innocent could find themselves spending their scarce resources on legal defense instead of making widgets. Or worse.

An Obligation to inform Clients & Insurance Carriers

BankruptcyMisconduct finds the issues interesting yet poorly addressed by the legal industry media.

• What due diligence standard must a hiring law firm meet?
• Does a hiring law firm bear an obligation to inform its insurance carriers of such a circumstance?
• Might a hiring law firm lose coverage if it's carrier argues negligent hiring or failure to disclose such issues?
• How are profits shared when different revenue streams are burdened with vastly different risk exposure?
• How is partnership status granted among candidates burdened with differing risk exposure?

Considering your own clients:

• Are you obligated to inform your clients when your firm accepts lawyer employees who suffer, even merely, from a colorable cause of unethical or criminal behavior?
• Might your legal career (or freedom) be harmed if your client suffers from such a circumstance, even when all of your explicit actions were beyond reproach?
• Are your labors best rewarded working for a law firm whose executive committee is willing to accept such risk?
• Might it be prudent to engage in some proactive career management or enforcement CYA for the benefit of yourself and your loved ones?

Statute of Limitation? Not!

We can't offer any estimation as to if or when Stigma, potential Damages, or the threats of Incarceration or Disbarment may fade in the case of lawyer misconduct. However, in instances of any Fraud Upon The Court there exists no statute of limitation. Case law is well settled in viewing extrinsic fraud by an officer of the court as being so severe that no time limitation may protect such crimes.

Our nation's dire financial circumstance only seems to beg the question of when a federal task force will be established to comb through PACER and banking records so that many billions of dollars of legal fees would be forfeited to the Feds.