F.D.I.C. v. O

Brief Fact Summary. A major law firm is accused of being complicit in serious corporate fraud.

Synopsis of Rule of Law. An attorney’s duty is to the corporation as an entity, not to its owners, managers, or officers.

Facts. Defendant, national law firm O’Melvany & Myers, assisted American Diversified Savings Bank (“ADSB”) in preparing lengthy documents designed to attract investors to various real estate projects. They were alleged to have done so knowing that ADSB’s officers were engaging in massive fraud and that the company’s net worth was nearly zero. Defendant argued that it had no duty to ADSB or its investors to expose the company’s own internal fraud.

Issue. How much of a duty, if any, does corporate counsel have to the corporation and its investors to expose ongoing fraud?

Held. An attorney’s duty to the corporation should always supersede any duty it may have to its officers and managers.
A corporate client’s fraud does not “cancel” the attorney’s fiduciary duty of due care.

The attorney’s duty of care to a corporate client includes a duty to its investors, not merely its managers and officers.

Attorneys always have an obligation to conduct investigations independent of what their clients have told them.

Discussion. While it is easy for attorneys in the Defendants’ position to lose perspective as to whom they are representing, firms should always remember that they are retained to represent the best interests of a corporation, even if this means acting against the wishes of its managers.