It is the oldest, the largest, and -- in the eyes of many -- the most prestigious law firm in Baltimore. Some of the country's biggest corporations adorn its roster of clients; among its partners and alumni are three sitting judges, a U.S. senator and a former U.S. attorney general.
In recent days, however, Venable, Baetjer & Howard has been in the spotlight for an unaccustomed reason -- as a recipient of harsh criticism in a state report on the origins of Maryland's savings and loan crisis. The report, issued Jan. 9, portrayed the 86-year-old firm -- one of the largest in the country -- as representing S&L- associated clients with conflicting interests and offering "ineffective" legal advice to one of the main bodies that regulated the thrift industry.
Those findings, laced through about 100 pages of the 457-page report, have stunned the city's close-knit legal community.
"From lawyers and lay people who talk to me now, I would say that the perception is that Venable is guilty of conflict of interest and guilty of poor legal advice, and that it's outrageous activity for a prestigious law firm to be involved in," said James S. Maffitt, an attorney at another Baltimore firm and president of the city's bar association.
While Maffitt said he had drawn no conclusions about whether Venable's actions were proper, "I would expect that our attorney grievance commission will make some inquiries as a result of the report," he said. "Either directly or by implication there are allegations of conduct that would be in violation of our code of professional conduct."
Former attorney general Benjamin R. Civiletti, who heads the 165-lawyer firm's Washington office and is serving as the firm's spokesman about the report, said an internal inquiry revealed no violations of ethical rules. An investigation by Venable's outside counsel, the Washington firm of Covington & Burling, reached a similar conclusion, he said. In addition, he said, the firm stands by its legal advice.
But Civiletti does not play down the toll such scrutiny has taken or contend that the firm's conduct was laudable. "The feeling throughout the firm is unhappy," he said. "I think there's a feeling that we should have done better, that we didn't meet our standards, and that had we to do it over again, we would have made sure . . . that things were done differently . . . . In hindsight, we undertook representations that . . . we should not have undertaken. We don't ever want anything like this to occur again." The Crisis Begins
The savings and loan disaster, which brought the state's $9 billion thrift industry to the brink of collapse, erupted publicly in May with a depositor run on Old Court Savings & Loan of Baltimore. The state took control of Old Court, then four other thrifts, and it still is keeping frozen about $1.2 billion in savings accounts of about 100,000 depositors.
The state report by special counsel Wilbur D. Preston Jr., a prominent Baltimore corporate lawyer, pinned the blame for the debacle on greedy thrift owners whose excesses were permitted by "captive" regulators and remained undetected by "all levels" of state government.
The Maryland Savings-Share Insurance Corp., the private insurer of S&L deposits with broad regulatory power over its member thrifts, and the state Division of Savings and Loan Associations "completely failed to regulate the industry," the report found. Established in 1962 to help police the industry, MSSIC instead tolerated insider deals, excessive fees and even criminal acts, the report said.
Venable served as MSSIC's general counsel, the report said, at the same time it did legal work for "persons who regularly violated . . . MSSIC's own rules and regulations" -- Old Court, subsidiaries of the thrift, and Old Court owners Jeffrey A. Levitt, Allan Pearlstein and Jerome Cardin.
Venable repeatedly failed to disclose its simultaneous representation of MSSIC and "habitual violators" of MSSIC rules, even after the system started to collapse, the report said. MSSIC officials said they relied heavily on Venable's advice, and at the few stages when Venable claims to have disclosed potential conflicts, MSSIC officials cannot recall the disclosures.
Venable billed Old Court, Levitt, Pearlstein and related entities $295,000 from 1982 though May 1985, according to the report; MSSIC paid Venable $321,000 during that period.
Civiletti said Venable's work for those companies and individuals did not include representing them before MSSIC but generally involved tax planning and advice on business transactions.
In addition, the state report said that:
*Jacques T. Schlenger, Venable's managing partner who was celebrated in a trade publication as one of the 100 most powerful lawyers in the country, provided incorrect legal advice that permitted MSSIC to insure deposits on an account-by-account basis. That move gave depositors virtually unlimited protection as long as they split their funds among different accounts, and it increased MSSIC's potential liability by $76 million at Old Court alone.
The MSSIC bylaw, which Schlenger advised MSSIC to defend as permitted by its state charter, was contrary to the clear intentions of the charter, the report said.
(Civiletti said that Schlenger's advice came only after the bylaw had been changed and that the bylaw was not singled out as a problem in later revisions of the savings and loan law.)
*The firm repeatedly violated its internal ethics and policy memorandum, which set out guidelines for the simultaneous representation of Old Court and Levitt.
*Gerald M. Katz, head of the firm's tax department, made a $184,000 profit in a real estate venture with Levitt and Pearlstein that should have been reported to MSSIC.
*Katz advised Levitt in another real estate transaction in which Old Court paid for two corporations later transferred to Levitt and others, "with Old Court receiving nothing in return."
The report reached no conclusion about whether Venable's conduct violated the code of legal ethics.
In a statement released the day of the report, the firm said, "We have uncovered no venal activity by anyone in our firm, nor was any action of any lawyer here illegitimate or the cause of any loss on the part of any depositor."
However, one of Venable's clients, the Baltimore Sun, did not see things that way. "We have always held the firm in highest regard," the Sun wrote in a lead editorial last week. "But we have to say we find its role in the savings and loan scandal improper. The law firm helped contribute to the disaster the state is now trying to overcome."
The state attorney general's office is seriously considering legal action against Venable based on the findings of the Preston report, according to civil division chief Dennis J. Sweeney.
The Maryland Code of Professional Responsibility, which governs conduct by Maryland attorneys, says a lawyer may represent clients whose interests are likely to conflict only "if each consents to the representation after full disclosure of the possible effect of such representation." That rule extends to all attorneys within the same firm.
Like any major law firm, Venable had elaborate mechanisms to ensure its compliance with the code, and it had an ethics committee that reviewed situations that posed a potential problem.
At Venable, Terry F. Hall, 39, a Phi Beta Kappa graduate of the University of Pennsylvania Law School, was the partner primarily responsible for representing MSSIC. Hall spoke to MSSIC President Charles Hogg II "almost daily" and attended most MSSIC board meetings since 1981, according to the Preston report.
However, "despite almost monthly discussions of Old Court and Levitt at MSSIC board meetings," Hall -- as far as MSSIC directors say they can recall -- "never disclosed" at the meetings that his firm did legal work for Levitt, Pearlstein and Old Court. The representation, the report said, was "substantial and persisted into 1985, apparently ending, if at all, only because of the Old Court problems."
Hall told the Preston investigators that he revealed the representation of Old Court and Levitt in a five-minute telephone call to Hogg on Jan. 11, 1983 -- years after the firm started doing legal work for Jerome Cardin and Levitt and several months after it started doing legal work for Old Court on a regular basis. A Venable memorandum dated Jan. 11, 1983, stated that MSSIC had consented to the simultaneous representation.
Hogg, however, "denied under oath that this phone call ever occurred," the report said. He is said to have told investigators that the first time he learned about Venable's representation of Old Court or its owners was in a "brief face-to-face conversation with Hall" about April 1984 informing him -- without offering any alternatives -- that Katz was advising Levitt on tax matters.
Hall reportedly told the investigators that he disclosed the firm's representation of Levitt and Old Court at a MSSIC board meeting. However, according to the report, MSSIC board members "do not recall any such discussion, nor do the minutes reflect it . . . . Chairman of the Board [George W.H.] Pierson stated that, if he had known of the simultaneous representation, he would not have permitted it." Potential Conflict Noted
In December 1984, when Old Court's repeated violations of MSSIC rules were a subject of extensive discussion at MSSIC meetings, Hall concluded that Venable "was entering a potential conflict position," according to the report. Managing partner Schlenger told Hall to discuss the matter with Katz, who represented Old Court, Levitt and Pearlstein. But Katz was not in his office when Hall went to see him. "He did not return to see Katz," the report said, "or raise his concerns with anyone else."
As described in the Preston report, Venable's legal advice to MSSIC consistently erred on the side of lenience in dealing with thrifts, including those that were Venable clients or were controlled by the law firm's clients:
*In 1978, MSSIC became concerned about possible mismanagement at First Progressive Savings and Loan Association, a Baltimore thrift where a Venable client, Stewart J. Greenebaum, was vice president. The MSSIC board, pondering what action to take against First Progressive, consulted Venable, its general counsel, for legal advice.
A Venable lawyer prepared two internal memos recommending that MSSIC take steps to terminate First Progressive's insurance, a drastic measure. Handwritten on the front of the second memo, according to the Preston report, were the words, "Stewart J. Greenebaum VB&H Client."
Venable eventually advised MSSIC not to take the action recommended in the memos.
Civiletti said the Venable lawyer made the note about Greenebaum in order to remind himself to inform MSSIC about the representation, that Venable never represented Greenebaum on First Progressive matters, and that Venable's final advice said merely that MSSIC should withhold action pending a hearing by the state Division of Savings and Loan Associations.
*In 1982, Venable clients Levitt and Pearlstein were moving to take over management of First Progressive -- a change that required MSSIC approval. Hall, who advised MSSIC on the issue, did not inform MSSIC President Hogg that Levitt had been suspended from the practice of law for a year for lying to a Baltimore judge.
Hall also did not tell MSSIC that Levitt was the subject of another disciplinary inquiry by the bar after a First Progressive borrower who applied for a loan complained that Levitt told him "he would have to pay Levitt, personally, $5,000 cash for putting the loan through," according to the report.
Venable had represented Levitt in those disciplinary proceedings. MSSIC's Hogg told the Preston investigators that he had been unaware of Levitt's suspension or a separate criminal case against him.
In a footnote, the report stated that "it would have been proper to advise MSSIC of the reported opinions" regarding Levitt.
Civiletti said MSSIC already had "a world of information about Levitt's conduct" on which to base its decision.
*In April 1984, Old Court was trying to get out of an agreement that gave MSSIC added controls over the thrift. Hall represented MSSIC in drafting the document ending the agreement, a document that the report suggested was overly generous to Old Court. Although he did not disclose the fact to MSSIC, the report stated, "Hall's firm had an attorney-client relationship with every party to the termination agreement" -- Levitt, Pearlstein, Cardin and MSSIC.
"Our sole representation was MSSIC -- first, last and always," and Venable's work for the others was on unrelated matters, Civiletti said.
However, he said, "Without regard to legal niceties . . . we should even do better than that. We should make sure . . . that the kind of questions that are raised now don't get raised."
*Real Estate Deals Noted
Also, the report detailed instances in which Venable lawyers represented or participated with Levitt in real estate deals that should have been reported to MSSIC.
In one instance, in 1979, Levitt, Pearlstein, and Venable partner Katz invested in a real estate development in Harford County. They sold the property four years later to a developer who financed the purchase with an Old Court loan; each received a taxable gain of $184,000, according to the report.
"By the transaction, Levitt and Pearlstein were able to directly profit from doing business with the association they controlled," the report stated. At a MSSIC meeting in which the development was discussed under the assumption that it was an "arm's-length transaction," Hall "made no mention of his partner's, Levitt's or Pearlstein's involvement in the . . . deal."
In November 1984, Venable partners Katz and James D. Wright handled a real estate deal in which an Old Court subsidiary -- with a $7 million loan from Old Court -- bought a major residential development in South Carolina.
Old Court owners Levitt, Pearlstein and Cardin and another investor, Edward R. Oppel, were given ownership of two of the corporations in exchange for promising to contribute money to the companies. "Thus, although Old Court paid for the recreation and utility companies, they were given to Old Court's stockholders with Old Court receiving nothing in return," the report stated.
According to the report, Katz and Wright told Preston's investigators that Old Court benefited from giving away the two companies because the companies were worthless. The report disagreed. The Venable lawyers' claim of worthlessness, it said, "is belied by the fact" that Katz advised Levitt that he faced a "substantial tax risk" in accepting stock in the two corporations, which Katz said could be valued at more than $2 million.
That transaction violated Venable's ethics guidelines, which stated that the firm would not represent Levitt in transactions related to Old Court.
Referring to the two deals, Civiletti said, "If they came up tomorrow, not one of those transactions would we be associated with . . . . Those are the things that, looking back, we don't want to do."
However, he said of his partners, "They are good lawyers . . . and couldn't be at all influenced by the fact that some other partner someplace else in the firm on some other transaction or event represents somebody else."
Civiletti refused to deny speculation in the Baltimore legal community that Katz and Hall are likely to resign from the firm. "We're taking our steps one step at a time . . . " he said. "We will have to examine everything."
John J. Capowski, who teaches legal ethics at the University of Maryland School of Law, said he believed that Venable's dual representation raises serious ethical questions.
The criticisms of Venable's legal advice to MSSIC, Capowski said, "clearly show how a lawyer's or a firm's representation of other clients can either actually change the advice or have the potential of looking as though the advice given to one client was in part influenced by . . . taking into account the interest of other clients." Firm Grew Rapidly
Lawyers outside Venable point to the firm's rapid growth -- it jumped from 113th to 98th in the annual National Law Journal survey of the country's largest firms, and it recently opened two Northern Virginia offices -- as a possible explanation for how the conflict-of-interest problems could have developed and persisted.
"The pressures of running any law firm and meeting overhead and making a profit can lead to some carelessness in decisions surrounding the conflicts question," said Maffitt, the city bar association president. "If there is a way to . . . continue representation, certainly almost any firm is going to try to do that."
Added a lawyer close to the firm, "Part of it is just a function of ego -- no one wants to give up their client. You have to realize that these relationships become very close personal relationships, so that Hall and Hogg might well be very close friends at the same time Levitt was a very active client."
Civiletti attributes the problem to "pridefulness" among lawyers that their advice to one client could never be swayed by the knowledge that another individual was a client of the firm; to a failure to appreciate the "fragile nature of the environment" in which the thrifts were operating, and to a failure "to speak out strongly enough if we had doubts . . . . We didn't say, 'Hey wait a minute, we ought not to be doing that.' "
The atmosphere among lawyers at Venable is one of anguish and anxiety. Civiletti addressed the issue in a firm-wide meeting the night the Preston report was released; the firm sent copies of the report to each of its lawyers. Tomorrow, Civiletti is scheduled to outline a new system of monitoring conflicts to make certain that the MSSIC situation does not recur.
Civiletti said he thinks that the firm will weather the storm over the Preston report. "I don't think the public is going to really feel that our law firm are the ones that . . . ran away with the money," he said. "They may say, 'You didn't do what we would have liked to have done,' but I think they will recognize that we were not the decision makers. With effort . . . I think the firm will do well." But, he said, "It's been a very hard lesson . . . . "