Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc.

In 1973, the Securities and Exchange Commission (SEC) (plaintiff) opened an investigation into whether Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) (defendant) and 49 Merrill Lynch employees had 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, thus, that Merrill Lynch was responsible for the employees’ alleged violations. The law firm of Brown, Wood, Fuller, Caldwell and Ivey (Brown Wood) filed answers in the investigation on behalf of Merrill Lynch and 47 of the employees. The SEC’s enforcement division asked an administrative-law judge (ALJ) to address an alleged conflict of interest in Brown Wood’s simultaneous representation of Merrill Lynch and the employees. According to the enforcement division, Brown Wood had served as Merrill Lynch’s counsel for years, including defending Merrill Lynch in pending class-action proceedings regarding the sale of Scientific shares. The enforcement division alleged that given Brown Wood’s representation of Merrill Lynch, Brown Wood would not be able to give undivided loyalty to the defense of the individual employees and zealously advocate for the employees’ positions. Brown Wood asserted that it had previously represented the individual employees during the employees’ depositions by the SEC. Brown Wood also indicated that the employees knew about Brown Woods’ long-standing representation of Merrill Lynch and that each employee had decided to retain Brown Wood after being informed that the employee had the right to choose other counsel.