## Facts

- In 1973, the Securities and Exchange Commission (SEC) opened an investigation into whether Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) and 49 Merrill Lynch employees violated the Securities Exchange Act of 1934 and the Securities Act of 1933 by issuing misleading information about Scientific Control Corporation (Scientific).
- The SEC asserted that Merrill Lynch had failed to supervise the employees and therefore could be responsible for the employees’ alleged securities-law violations.
- The law firm Brown, Wood, Fuller, Caldwell & Ivey (Brown Wood) filed answers in the SEC proceeding on behalf of Merrill Lynch and 47 of the employees.
- The SEC’s Division of Enforcement raised a conflict-of-interest objection and asked an administrative law judge (ALJ) to address whether Brown Wood could ethically and fairly represent both Merrill Lynch and the employees in the same SEC matter.
- Enforcement argued that Brown Wood had represented Merrill Lynch for years and was defending Merrill Lynch in pending private class actions involving the sale of Scientific shares, creating a risk that Brown Wood could not provide undivided loyalty and fully advocate for each employee.
- Brown Wood responded that it had already represented the individual employees during SEC depositions and stated that each employee had been told about Brown Wood’s long-standing relationship with Merrill Lynch, informed of the right to separate counsel, and nevertheless chose to retain Brown Wood.

## Issues

1. Whether, in an SEC enforcement proceeding, a law firm may simultaneously represent a broker-dealer and dozens of its employees when the firm’s interests and the employees’ interests may diverge (including on supervision and responsibility for the alleged misconduct).
2. Whether the employees’ stated consent to joint representation—after disclosure of counsel’s relationship with the broker-dealer—was sufficient to permit Brown Wood to continue representing both Merrill Lynch and the employees in the SEC matter.
3. Whether the SEC, through its ALJ (and on review by the Commission), could restrict or bar the joint representation to protect the fairness of the proceeding.

## Decision

- The SEC (through its administrative process) concluded that Brown Wood’s simultaneous representation of Merrill Lynch and the employees presented a serious conflict risk in light of Brown Wood’s long-standing ties to Merrill Lynch and its role in related private litigation.
- The SEC therefore restricted the joint representation and required separate representation to address the conflict concerns, rather than allowing Brown Wood to continue to represent both the firm and the individual employees in the same matter.

## Legal Principles

- A lawyer’s long-term, ongoing representation of a corporate client—especially when combined with representation of that client in parallel private litigation arising from the same events—can create a substantial risk that the lawyer cannot provide undivided loyalty to individual employees in a related enforcement proceeding.
- In an enforcement matter where the entity faces potential liability for failure to supervise, the entity’s defense strategy may conflict with employees’ defenses; the possibility that one client’s best position may involve blaming another can make joint representation improper.
- Employee consent to joint representation after disclosure does not necessarily resolve a conflict in an SEC proceeding; the SEC may determine that the risk of constrained advocacy or impaired judgment is too great to permit the arrangement.
- The SEC has authority in its administrative proceedings to address conflicts of interest that could affect the fairness and proper administration of the proceeding, including by limiting or disallowing conflicted representation.

## Conclusion

Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc. concerns the SEC’s challenge to Brown Wood’s effort to represent both Merrill Lynch and dozens of employees in an SEC proceeding arising from allegedly misleading information about Scientific Control Corporation; the SEC determined that the circumstances created an unacceptable conflict risk and imposed limits requiring separate representation rather than allowing the joint defense arrangement to continue unchanged.


Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc., [1973-1974 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 79,608 (1973)