Opinion
96 Civ. 926 (CSH)
May 14, 2002
MEMORANDUM OPINION AND ORDER
This case is now fully submitted on the question whether Donald O. Clark, Esq. and his law firm, Reed Smith LLP, should be disqualified as attorneys for defendants Townsend Financial Services Corp., Townsend Investment Fund, LLC, Townsend Financial Group, Ltd., and Gerald Townsend (sometimes collectively "Townsend"). Plaintiff Klaus Renner moves for disqualification. Defendants resist it.
Familiarity with the Court's prior opinions is assumed. Most recently the record has been supplemented by affidavits submitted by Gerald Townsend and Clark, and deposition testimony of Townsend and Clark limited to this question. Counsel for the parties have submitted post-deposition supplemental briefs.
For the reasons stated in Renner v. Chase Manhattan Bank, No. 98 Civ. 926, 2002 WL 87665, at *2 (S.D.N.Y. Jan. 22, 2002), the question of disqualification "turns principally upon DR 1-502(D)." DR 1-502(D) provides:
The reference is to the Disciplinary Rules ("DR") of the Code of Professional Responsibility as enacted in New York State, to which federal courts sitting in New York look for guidance in ethical matters.
If, after undertaking employment in contemplated or pending litigation, a lawyer learns or it is obvious that the lawyer or a lawyer in his or her firm may be called as a witness on a significant issue other than on behalf of the client, the lawyer may continue the representation until it is apparent that the testimony is or may be prejudicial to the client at which point the lawyer and the firm must withdraw from acting as an advocate before the tribunal.
I. BACKGROUND
I turn to the pertinent factual background of the case as revealed by the expanded record. For reasons touched upon in the Court's prior opinions and amplified by the expanded evidentiary record, the Court will focus particularly upon a conference which took place in Clark's office on December 29, 1995; a letter of instructions sent by Gerald Townsend to Clark on December 30, 1995; and a telephoned rescission of those instructions by an associate of Townsend's on January 2, 1996. These events underlie plaintiffs contention that Clark must be called as a witness for plaintiff at trial. But some preliminary exposition is necessary.A. Events Preceding the December 29, 1995 Conference
Clark's professional involvement with Townsend came about through the initiative of one Charles Weaver. Clark, at the time a partner in the Washington, D.C. firm of Keck, Mahin Kate, had previously represented Roger Pol, a local developer and entrepreneur. Clark Affidavit dated December 11, 2001 ("Clark Aff."), at 1. "In 1992, Mr. Pol and Mr. Weaver formed a joint venture." Id. at 2. Clark and his firm did a minor amount of corporate work for the joint venture, which was dissolved in 1993. Id. Clark says in his affidavit that during this time "I did not know or meet Mr. Weaver. . . . I had no further contact with Mr. Weaver until he called me shortly before the December 29, 1995 conference to ask if I would meet with him and Mr. Townsend. He told me that Mr. Townsend, a CPA, would want to discuss offshore companies with me. I then met Mr. Weaver for the first time on the day before the scheduled December 29 conference. Mr. Weaver came to my office along with Mr. Atkins, to whom Mr. Weaver introduced me. On December 29, 1995, I met as agreed with Gerald Townsend (whom I did not know), Charles Weaver and Michael Atkins in one of my law firm's conference rooms." Id. at 2-3 (emphasis added).
Other evidence in the record suggests a somewhat different chronology. The Keck, Mahin time sheets for the matter the firm designated "Townsend Financial Group, Ltd. — "Hampstead Trust, Ltd." contain these entries:
The reader of the Court's prior opinions will recall that "Hampstead Trust, Ltd." is the vehicle set up by Gustav Susse, recently convicted in a French court for fraud, for attracting investors, including plaintiff Renner. Townsend's business relationships with Susse and Hampstead lie at the heart of this action for fraud by Renner against Townsend.
12/19/95 Office conference with Charlie Weaver, et al. DOC 1.50 hrs.
12/20/95 Telephone conference with M. Atkins; office conference with C. Weaver and M. Atkins; telephone conference with Gerald Townsend. DOC 1.80 hrs.
12/28/95 Telephone conference with Charlie Weaver; review document. DOC .50 hrs.
There is no dispute that the initials "DOC" stand for Donald O. Clark.
Since the firm's time sheets differentiate between an "office conference" and a "telephone conference," I draw the inference that Clark met with Weaver alone in Clark's Washington office on December 19, 1995, and with Weaver and Atkins on December 20: ten days and nine days respectively before the December 29 conference. One cannot reconcile that inference with Clark's statement in his affidavit that he met Weaver "for the first time on the day before" the December 29 conference.
Clark's deposition testimony, given on February 14, 2002, more closely tracks the time sheets. Clark testified that some time in 1995, Weaver telephoned him and said that "he was either considering or getting ready to go into some sort of business venture with Mr. Townsend and Mr. Atkins, and that he might have some business for us, for my law firm." Tr. at 16. Clark testified further that "[a]t some stage along the way, Mr. Weaver and I met, or Mr. Weaver and Mr. Atkins and I met." Tr. at 18. Townsend was not present. Id. It was agreed that "Gerald Townsend might be coming in to Washington, the three of them would be together, and if they were able to work out that schedule, then I would meet the three of them." Tr. at 22. Clark did so on December 29, 1995.
There is an additional source of evidence in the record as to how the December 29 conference came about. Charles Weaver executed an affidavit ("Weaver Aff.") which plaintiff submitted in connection with an issue unrelated to the present motion. Weaver says that in mid-1995, he, Atkins and Townsend discussed "forming an investment group, the Townsend Financial Group, which was to offer to investors a high yield investment program." Weaver Aff. at 2. Toward that end, in September 1995, Weaver, Atkins and Townsend met with Gustav Susse at Susse's home in Monte Carlo "to discuss a business relationship between the Townsend Financial Group and Susse's group, the Hampstead Partnership." Id. Following the group's return to this country, Weaver "introduced Gerald Townsend to Donald Clark so that Townsend could discuss with Clark how the Townsend Financial Group could represent Susse in the United States." Id. Weaver "further understood that Townsend was meeting with Clark to get advice about the appropriate structure for the Townsend Financial Group to do business with Hampstead overseas." Id. at 2-3.
The Weaver affidavit recites that it was sworn to "this 24th day of ___, 2001." The North Carolina notary public failed to fill in the month.
I have reviewed in Part L.A. the available evidence with respect to the manner in which the December 29, 1995 conference came about and its purpose. I turn now to the conference itself.
B. The December 29, 1995 Conference
The Keck, Mahin time sheet entry for this date reads as follows:
12/29/95 Review Hampstead Trust Contract; office conference with Messrs. Townsend, Weaver and Hagin. DOC 7.40 hrs.
"Hagin" is undoubtedly a misspelling of the name "Atkins," whose presence at the December 29 conference is not disputed.
The record contains evidence given by two of the four participants at the December 29 conference: Townsend and Clark. Both submitted affidavits. Both were deposed.
The accounts given by Townsend and Clark during their depositions are consistent with each other in several respects. They both testified in substance that the principal purpose of the conference was to obtain Clark's advice with respect to possible U.S. tax advantages in creating an off-shore company to receive any profits generated by the Townsend entities' dealings with a foreign client such as Hampstead (which was based in the United Kingdom). At the end of the discussion Clark advised Weaver, Atkins and Townsend that forming an off-shore company would not have shielded the venture from U.S. taxes because "under the tax law it would have been services income sourced in the United States, and it would have been subject to taxation, and so it wouldn't have worked, in my opinion." Clark Dep., Tr. at 50.
Townsend and Clark also agree in their deposition testimony that Clark did not give this advice in a vacuum. The "WAT" group described Hampstead to Clark in general terms. Thus Clark was told that "Hampstead had clients that asked Hampstead to trade, manage, we didn't know what arrangements they might have with their client, but that would be the source of funds; Hampstead would give funds to clients, and Hampstead would be asking us to help with transactions." Townsend Dep., Tr. at 661. The WAT group named Gustav Susse and Rabon Wolford as individuals involved with Hampstead, told Clark they had visited Susse abroad, and said that Hampstead used Chase Bank and Michelino Morelli of Chase, who "would be assisting with whatever banking arrangements we were making." Townsend Dep., Tr. at 673.
"WAT" is a designation Clark used throughout his deposition. It stands for Weaver, Atkins and Townsend. During the December 29 conference, Clark regarded all three individuals as potential clients. On December 30, 1995, Townsend sent Clark a $10,000 retainer. The check was drawn on an account maintained in a North Carolina bank by Townsend Financial Group, Inc.
Townsend testified at his deposition that the WAT group described to Clark "just [the] general terms" of the written agreement between Hampstead and Townsend. Tr. at 636. Clark stated in his "deposition that he had not seen any documents during the December 29 meeting but that references in the Keck, Mahin time sheets suggested that "minimal" attention was paid at the meeting to a document whose nature Clark still could not recall. Tr. at 35.
Townsend and Clark agree in their deposition testimony that no one told Clark that Hampstead's investment program involved medium-term debentures issued by major European banks. Despite the passage of time, Clark was quite certain he was not told that, because it would have produced a red-flag reaction: "I firmly, fervently believe that [if] any client said anything to me about medium-term notes investments, I would have said to that client, whoa, tell me about this in detail." Clark Dep., Tr. at 31. Clark stated further, in testimony consistent with Townsend's, "We really didn't get into the business of Hampstead Trust. The purpose for the meeting was international tax plan[ning]. In order to do the international tax planning, I had to make some inquiries as to what it was these three Americans were going to be doing. And in doing that, there was a discussion of this business opportunity. But as I recall, not in detail." Id. at 32.
Townsend and Clark also agree that Clark was not told at the December 29 conference that a month earlier, in November 1995, Townsend had received from Hampstead $5,000,000 which a Luxembourg entity, Gulf Capital Resources, S.A., had invested with Hampstead, funds which Townsend then doled out to a group of distributees which, given Gulf Capital's investment objectives, could charitably be regarded as questionable. See Renner v. Chase Manhattan Bank, No. 98 Civ. 926, 2001 WL 1356192, at *13-15 (S.D.N.Y. Nov. 2, 2001).
Lastly, Townsend and Clark agree in their deposition testimony that in general terms Clark advised his WAT visitors to check on the backgrounds of the individuals with whom they were dealing. Townsend testified, "I do recall the general suggestion or recommendation that we do — check into the background or the business of any people or entities that we were doing business with." Tr. at 672. Clark testified that "during the conversation that we had, there was a discussion of who is Hampstead Trust. That is the kind of thing I would normally ask someone. Who are these people with whom you're doing business?" Tr. at 33. Clark recalled stressing during the conference that "money was going to Hampstead Trust, and it would come from Hampstead Trust to them, and that they should pay attention making sure that they are protected with regard to Hampstead Trust ordering something different from what the investor might ask for." Id. at 53.
The December 29 conference came to an end. The Keck, Mahin time sheets reflect that Clark devoted 7.40 hours to the matter that day.
C. The December 30, 1995 Letter of Instructions
Weaver, Atkins and Townsend returned from Washington to Raleigh, North Carolina. On December 30, 1995, the day after the conference, Gerald Townsend faxed to Clark a letter of instructions bearing that date, together with a copy of a second letter and the face of a check drawn by Townsend Financial Group, Inc. to Keck, Mahin's order in the amount of $10,000 "for your fees in providing us with tax planning and tax advice." Townsend told Clark that he had sent this letter and the check by express mail.
The December 30, 1995 letter of instructions reads in pertinent part as follows:
Based on our meeting, our understanding is that you will be doing the following for us:
Sending us a letter (that we can provide to Hampstead) which will detail exactly what information/documents we need to obtain from Hampstead's clients before we accept any funds.
Making it clear what the "Account Instructions" on agreements between Hampstead and their clients need to say in order to make it clear that Hampstead's clients are asking us to follow exactly any and all instructions we receive from Hampstead and for us to avoid any potential liability to Hampstead's clients for following Hampstead's instructions to us.
Reviewing or drafting agreements between the securities firm and Chase and any trading instructions form that we might receive from Hampstead or that we might give ourselves to Chase. I plan to talk with Michael Morelli on Tuesday and discuss with him any forms/procedures that he is aware of. I will let him know that you will be needing to talk with him regarding this also.
Checking into the background of some of the individuals or companies that we are presently involved with.
Clark was ready to execute these instructions. He testified that "we were prepared to do all the various things that were enumerated here if we were, in fact, retained to do so." Tr. at 84. For example, in complying with the first paragraph of the instructions, Clark and his firm would have asked to see "[w]hatever documents existed between Hampstead and its clients so we could see what that underlying relationship was, if we could get it, plus documents between Hampstead and WAT." Id. at 82.
D. Cancellation of the December 30, 1995 Instructions
Clark testified that before the Keck, Mahin firm had an opportunity to act under the December 30 letter of instruction, Clark was "subsequently told not to do anything that was in this letter." Tr. at 82. Clark's affidavit states that "Mr. Weaver called me on January 2 and told me that Mr. Townsend wanted us to disregard his letter of December 30, that we were not to proceed with any of the legal services requested therein until instructed to do so." Clark Aff. at 6. The Keck, Mahin time sheets for January 2, 1996 state, "Planning; telephone conversation with Charlie Weaver," and ascribe .50 hours of Clark's time to the matter. Clark testified at his deposition that Weaver said "they were still thinking about it, they would get back to me further, or what, but specifically we were not to move ahead." Tr. at 85. Weaver gave Clark no explanation for the cancellation of his instructions; Clark said of the cancellation that "I didn't expect it, I was pleased by the letter." Tr. at 85.
On the question of cancellation of the December 30 instructions, the affidavit of Gerald Townsend, given before his deposition, states only: "Following the December 29, 1995 meeting, I did not speak with Mr. Clark again until April 25, 1996. During this period I did not receive any documents or advice from Mr. Clark. In particular, I never had any communications with Mr. Clark about the issues raised in my December 30, 1995 letter to him." Townsend Aff. at ¶ 6. The impression thus created, of Clark inexplicably doing nothing in response to Townsend's December 30 letter of instructions while Townsend waited to hear from Clark, is at odds with Clark's affidavit and deposition testimony that Weaver ordered Clark to do nothing during the January 2 telephone call. At his deposition, Gerald Townsend could not recall anything about the cancellation of his instructions to Clark. Townsend did not recall conveying to Clark, directly or indirectly through Atkins or Weaver, that Townsend did not want Clark "to pursue the items listed in the 30th letter"; nor did he recall whether he spoke with Atkins or Weaver after December 30 as to whether Clark "would be doing the work outlined in the letter of the 30th," or whether Townsend either asked for or received from Clark a refund of the $10,000 fee payment made on December 30. Tr. at 741-42.
II. DISCUSSION
Counsel for plaintiff declare their desire and intention to call Clark as a witness on plaintiffs case in chief. Accordingly the case involves what has come to be known as "witness-advocate disqualification," April Broad., Inc. v. Smith, No. 95 Civ. 7664, 1996 WL 137487 (S.D.N.Y. Mar. 27, 1996), the subject considered by DR 5-102 of the New York Code of Professional Responsibility.
The Code "is recognized by this Circuit as prescribing appropriate guidelines for the professional conduct of the bar." Paramount Communications, Inc. v. Donaghy, 858 F. Supp. 391, 394 (S.D.N.Y. 1994) (citation omitted). However, the federal courts "are not bound by those rules, and the Second Circuit in particular has repeatedly indicated that they are not to be rigidly applied." Mercedes v. Blue, No. 00 Civ. 9225, 2001 WL 527477, at * 1 (S.D.N.Y. May 17, 2001). While "the only truly binding authority on disqualification is Circuit precedent," Skidmore v. Warburg Dillon Read LLC, No. 99 Civ. 10525, 2001 WL 504876, at *2 (S.D.N.Y. May 11, 2001), district courts routinely look for guidance to New York cases construing the Code. See, e.g., Parke-Hayden, Inc. v. Loews Theatre Mgmt. Corp., 794 F. Supp. 525, 527 (S.D.N.Y. 1992) (reviewing New York cases applying DR 5-102). The issue lies within the discretion of the district court. Norman Reitman Co., Inc. v. IRB-Brasil Resseguros, S.A., No. 01 Civ. 0265, 2001 WL 1132015, at *2 (S.D.N.Y. Sept. 25, 2001); United States v. Perlmutter, 637 F. Supp. 1134, 1137 (S.D.N.Y. 1986).
In view of the potential for use as a tactical device, motions to disqualify counsel are subject to "fairly strict scrutiny, particularly motions under" those provisions of DR 5-102 that apply when a party seeks to call an advocate as a witness against the interest of the advocate's client. Lamborn v. Dittmer, 873 F.2d 522, 531 (2d Cir. 1989). Although a literal reading of DR 5-102(D) would mandate disqualification merely on the showing that the potential testimony of a witness-advocate may be prejudicial to the party his firm represents, "under New York law the party seeking disqualification must demonstrate that it is likely that the testimony to be given by the witness is necessary and that it is substantially likely to be prejudicial to the party represented by his firm." Parke-Hayden, 794 F. Supp. at 527 (citations and internal quotation marks omitted). In determining the "necessity" of the testimony, "a court should consider such factors as the significance of the matter, the weight of the testimony and the availability of other evidence." Id. In Lamborn, 873 F.2d at 531, the Second Circuit quoted with approval this language from Rice v. Baron, 456 F. Supp. 1361, 1371 (S.D.N.Y. 1981):
For testimony to be "prejudicial" within the meaning of the disciplinary rule, the projected testimony of a lawyer or firm member must be sufficiently adverse to the factual assertions or account of events offered on behalf of the client, such that the bar or the client might have an interest in the lawyer's independence in discrediting that testimony. Furthermore, the moving party bears the burden of demonstrating specifically how and as to what issues in the case the prejudice may occur and that the likelihood of prejudice occurring is substantial.
(citations and internal quotation marks omitted).
Although one district court has said that "[s]imply showing that the testimony might be prejudicial is not sufficient," Tisby v. Buffalo Gen. Hosp., 157 F.R.D. 157, 166 (W.D.N.Y. 1994) (citation and internal quotation marks omitted), nonetheless "doubts should be resolved in favor of disqualification," Amalgamated Serv. and Allied Ind. Joint Bd. v. Supreme Hand Laundry, No. 94 Civ. 2904, 1996 WL 583351, at *2 (S.D.N.Y. Oct. 9, 1996); April Broad., 1996 WL 137487, at *3; and "where there is a substantial likelihood that the lawyer's testimony is or may be prejudicial to his client, disqualification of a lawyer and his firm is required." Bristol-Myers Squibb Co. v. Rhone-Poulenc Rorer, Inc., No. 95 Civ. 8833, 2000 WL 1006235, at *2 (S.D.N.Y. July 19, 2000) (citations omitted); see also Lamborn, 873 F.2d at 531 ("After carefully reviewing the record, we are convinced that [trial attorney] Stoller's testimony would likely have been materially prejudicial to his clients and thus that he should have been disqualified.").
The Ethical Considerations ("EC") contained in the Code provide at EC 5-10: "Where the question arises, doubts should be resolved in favor of the lawyer testifying and against his becoming or continuing as an advocate."
Recitation of these general principles is easy enough. Their application to a particular case is more difficult. The inquiry is fact-intensive. Analysis begins with identifying the issue involved. Plaintiff at bar says that "the core issue in this case is whether Mr. Townsend knowingly participated in the scheme to defraud perpetrated by Susse and Hampstead on Mr. Renner." That characterization seems fair enough. Plaintiff goes on to argue that the Townsend and Clark testimony "strongly suggests that Mr. Townsend intentionally and consciously hid from Mr. Clark the particulars of his relationship with Hampstead," by failing "to disclose that his firm had already realized substantial monies from Hampstead and performed specific actions involving the disbursement of monies at the behest of Hampstead," thereby demonstrating that Townsend "consciously and intentionally concealed from Clark the full extent of his involvement and the true nature of the Hampstead program." Post-Deposition Brief at 3, 5, 7.
Plaintiffs arguments properly focus upon Gerald Townsend's state of mind at the time Renner, Hampstead and Townsend entered into the Renner transaction. Specifically, the question is whether Townsend acted with knowledge of the fraudulent nature of Hampstead's operations and with the intent to participate in or aid and abet that fraud. Townsend's failure to tell Clark of the previous month's $5,000,000 entrusted by Belgian investors with Hampstead and then distributed through Townsend could reasonably be regarded by the jury as a conscious concealment on Townsend's part. It calls to mind the "conscious avoidance" jury charge in criminal cases, where the trial judge instructs the jury that a defendant's guilty knowledge of a particular fact "is established (1) if a person is aware of the high probability of its existence, (2) unless [the defendant] actually believes it does not exist." United States v. Feroz, 848 F.2d 359, 360 (2d Cir. 1988). Perhaps more closely analogous to the case at bar, a plaintiff in a securities fraud case may establish the defendant's scienter by proving "an intent to defraud, knowledge of falsity, or reckless disregard for the truth," Connecticut Nat'l Bank v. Fluor Corp., 808 F.2d 957 (2d Cir. 1987) (citations and internal quotation marks omitted) (emphasis added).
It seems plain enough that Townsend's selective description to Clark of his dealings with Hampstead, particularly omitting any reference to Townsend's highly suspect distribution of the $5,000,000 invested by Gulf Capital with Hampstead, is probative of Townsend's conscious avoidance of knowledge or reckless disregard of the fraudulent nature of Hampstead's operations. However, within the present context of attorney-witness disqualification, a factor to be considered is the availability of other evidence of the facts in question, whose existence militates against disqualifying counsel. In the case at bar, Townsend himself acknowledges having given Clark no details with respect to his prior dealings with Hampstead. That evidence is available to plaintiff, to make what use of it he can before the jury; and so the related but separate question of disqualification becomes whether Clark is in a unique position to contribute additional evidence, prejudicial to Townsend, on the material issue of Townsend's knowledge and fraudulent intent.
That omission would render unavailable the defense of advice of counsel, which Townsend has not asserted. To invoke the advice of counsel principle, Townsend would have to show "that he made complete disclosure to counsel, sought advice as to the legality of his conduct, received advice that his conduct was legal, and relied on that advice in good faith." Markowski v. S.E.C., 34 F.3d 99, 105 (2d Cir. 1994) (citation omitted) (emphasis added).
It seems to me that this question must be answered in the affirmative, for a number of reasons.
First, plaintiff needs Clark's testimony to get the Keck, Mahin time sheets into evidence and develop further evidence with respect to them. Those time sheets are probative in several respects. First, they strongly support the proposition that despite Townsend's and Clark's professed failures of recollection, Clark and the WAT team considered the Hampstead/Townsend contract at some length and in detail during the December 29 conference. The time sheets designate the matter as "Townsend Financial Group — Hampstead Trust, Ltd.," which suggests a certain familiarity with and prominence of the Townsend/Hampstead agreement. The time sheet for December 20 reflects that Weaver came to Clark's office for a conference on that day. The December 28 entry says: "Telephone conference with Charlie Weaver; review document." The jury could reasonably find that Weaver delivered this document to Clark on December 20. The jury could further reasonably find that the document in question was the Townsend/Hampstead agreement, particularly since the time sheet entry for the December 29 conference begins with the phrase "Review Hampstead Trust Contract," and then refers to an "office conference with Messrs. Townsend, Weaver and [Atkins]" which lasted 7.40 hours. The significance of this evidence lies in its tendency to place in context and to highlight Townsend's concealing from Clark Townsend's dissipation of the Gulf Capital Resources $5,000,000 investment with Hampstead only the month before.
Second, the Keck, Mahin time sheet for January 2, 1996 corroborates Clark's testimony that Weaver telephoned him on that day with respect to the Townsend/Hampstead matter.
According to Clark's affidavit and deposition testimony, the substance of that January 2 telephone call consisted of Weaver's instructions to Clerk to perform none of the tasks Townsend requested in his December 30, 1995 letter. That instruction Clark specifically ascribes to Gerald Townsend; Clark's affidavit states that on January 2 Weaver called "and told me that Mr. Townsend wanted us to disregard his letter of December 30, that we were not to proceed with any of the legal services requested therein until instructed to do so" (instructions which were never forthcoming). Clark's account differs significantly from Townsend's, who said he was unaware of any instructions to Clark not to proceed, conveyed either by Townsend directly or by Weaver or Atkins indirectly.
Accordingly, plaintiff needs Clark's trial testimony to show the jury the timing and the manner in which Townsend's instructions in the December 30 letter to Clark were cancelled. The facts are material because they are probative of Townsend's conscious avoidance and reckless disregard of knowledge of Hampstead's fraudulent practices. The several lines of inquiry outlined in the December 30 letter, if pursued energetically by experienced and sophisticated counsel such as Clark and his firm (and which Clark was quite prepared to undertake), would in all likelihood have revealed truths about Hampstead and Gustav Susse alarming to honest business associates. That Townsend cancelled these inquiries before they could be made is probative of his pre-existing knowledge of Hampstead's fraudulent operations (derived from the Gulf Capital Resources transaction) or his reckless disregard of what should have been apparent to him. Either scenario satisfies the scienter element in civil fraud cases under Second Circuit law; and Clark's testimony is necessary for plaintiff to lay the factual predicate for both of them.
For the foregoing reasons, I conclude that Clark is a necessary witness for plaintiff whose testimony on a material issue will be prejudicial to his clients, the Townsend interests.
Accordingly Mr. Clark and his firm are disqualified from further representation of the Townsend defendants. The defendants are directed to arrange for the appearance of successor counsel on or before June 14, 2002. Further scheduling orders are held in abeyance pending that event.
For the reasons stated in text, I do not think the question is particularly close. But even if it were, I would accept the advice of the drafters of the Code as expressed EC 5-10 that "doubts should be resolved in favor of the lawyer testifying and against his becoming or continuing as an advocate."
It is SO ORDERED.