## Facts

- Shawmut Investment Advisers, Inc., a registered investment adviser, was alleged to have directed client brokerage commissions to certain broker-dealers to compensate them for referring client accounts, without proper disclosure.
- The alleged conduct occurred from mid-1993 through March 1996 and involved directing over $1.8 million in client commissions to thirteen brokerage firms for referrals.
- A substantial portion of the commissions (about $1 million) allegedly went to East West Institutional Services, Inc. in connection with a large pension fund account referral.
- The SEC instituted administrative proceedings in 1999 against multiple respondents, including Clarke T. Blizzard and Rudolph Abel, and the proceeding was stayed for a lengthy period due to a parallel criminal matter.
- By the time of the Commission’s 2002 order, most other respondents had settled or defaulted; Abel had not.
- Abel’s counsel, Daniel I. Small, simultaneously represented Abel and five individuals the Division of Enforcement expected to call as witnesses against Abel, including a former Shawmut officer.
- The Division anticipated that Abel and at least one witness would take adverse positions and potentially blame each other for the challenged conduct.
- The Division filed an emergency motion before the administrative law judge (ALJ) to disqualify counsel due to actual or potential conflicts of interest; the ALJ denied the motion, concluding the Rules of Practice did not authorize disqualification and noting counsel had obtained client consents.
- The Division sought interlocutory Commission review of the ALJ’s ruling.

## Issues

1. Whether the SEC may grant interlocutory review of an ALJ ruling concerning attorney conflicts in a pending administrative proceeding.
2. Whether the SEC and/or an ALJ has authority to disqualify counsel in an SEC administrative proceeding to address conflicts of interest.
3. Whether client conflict waivers are sufficient to permit one attorney to represent a respondent and multiple anticipated adverse witnesses where testimony is expected to conflict.

## Decision

- The Commission granted interlocutory review under its Rules of Practice.
- The Commission rejected the ALJ’s conclusion that disqualification was unauthorized, holding that the agency may take appropriate steps, including disqualification, to address conflicts that threaten the fairness and integrity of the proceeding.
- The Commission determined that simultaneous representation of Abel and multiple witnesses expected to offer adverse or conflicting testimony raised conflict concerns serious enough to require corrective action to ensure separate representation as needed for a fair hearing.
- The Commission treated client waivers as not dispositive where the conflict risk could compromise reliable fact-finding and the integrity of the administrative record.

## Legal Principles

- The SEC has discretionary authority to review interlocutory rulings by hearing officers when necessary to protect the proper conduct of administrative adjudication.
- The SEC’s adjudicatory authority includes the power to regulate attorney conduct in proceedings before it, including disqualification when conflicts of interest threaten fairness or the integrity of the record.
- Client conflict waivers do not foreclose the SEC from ordering remedial measures where the public interest in fair proceedings and reliable evidence outweighs private preferences.
- Joint representation is especially problematic when counsel represents an accused respondent and multiple witnesses expected to provide conflicting accounts or to shift responsibility among themselves.

## Conclusion

The Commission held that it may intervene on an interlocutory basis to address counsel conflicts and that its authority includes disqualifying conflicted counsel where joint representation of a respondent and expected adverse witnesses risks impairing fair adjudication and the reliability of the evidentiary record, even if the clients have executed written waivers.


In re Clarke T. Blizzard & Rudolph Abel, Investment Advisers Act Release No. 2032 (SEC Apr. 24, 2002)