First assignment: The case study about conflict of Interest

The relationship of this case is as below:

Also, it is important to knowing that: 1. The McHugh family doesn’t know that Donald Rosenthal operated a business brokerage business, and the business now has conflicts of interest towards the McHugh family. 2. The equipment of Silver’s Gym was fully depreciated and the plant was in need of costly repairs, and a brand new Johnny Z’s Gym opened up on nearby, lured over 50% of the prior membership of Silvers’ Gym away. All in all, that means buying Silver’s Gym for $600,000 is really a bad mistake for the unknowledgeable McHugh family.
Questions for Discussion & Analysis 1. What are the ethical considerations involved for Donald Rosenthal, his business brokerage firm and his law firm?
Donald Rosenthal is the stakeholder of Arnold, Quisling & Brutus, and at the same time, Donald Rosenthal also operates a business brokerage firm as a stakeholder. When there is a potential conflict of interest on those two entities, Donald Rosenthal will face to a dilemma to make business decisions. This dilemma will possibly affect an individual’s actions or decisions, result in lack of independence, objectivity and unethical behavior. As mention in this case, Donald Rosenthal fail to act integrity, loyalty, prudence and care to the asset management of McHugh, make unsuitable investment decision to achieve his own profit.
Donald Rosenthal’s business brokerage firm has a business relationship to Edward Deegan and his Silver’s Gym. When Donald Rosenthal makes biased investment suggestion to buy the Silver’s Gym, the brokerage firm may violate several ethical rules by the employee’s conducts.
When Mr. McHugh engages the law office, the law firm should work for their client’s interest; exercise supervisory duty and fiduciary duty to McHugh. By one of the employee’s unethical conducts, the law office also faces to some ethical problems. 2. What type of conflicts of interest are involved?
The type of conflicts of interest is actual conflict of interest that contains the combination of referral fees and self-dealing in this case. As Donald Rosenthal can receive 10% of the total amount that McHugh paid to Edward Deegan, and Rosenthal never disclosure this agreement to McHugh, the referral fees will cause conflicts of interest. Also, Donald Rosenthal has a great influence on the McHugh, if this transaction is successfully done, Rosenthal is making a deal to his own business. 3. Should Silver’s Gym fail, what are the legal ramifications to Donald Rosenthal and his two firms?
Donald Rosenthal may have both ethical and legal ramifications by those conducts. First of all, as a partner of law office Arnold, Quisling & Brutus, Donald Rosenthal should follow the RPC (Rules of Professional Conduct). In this case, Donald Rosenthal violates several rules such as: diligence, referral fees and conflict of interest. By violating those rules, Donald Rosenthal will face to penalties from the law industry institute. Secondly, Donald Rosenthal makes a suggestion to McHugh of buying the Silver’s Gym, but he clearly know that this business is not suitable to McHugh and may let them lost a fortune of money. From the facts listed upon and before the question, if Silver’s Gym fails, Donald Rosenthal may face prosecution by the conducts of business fraud.
As separate the unethical and illegal behavior of Donald Rosenthal to his two offices, we can find that: 1, the law office may violate the institution professional conduct as fail to act fiduciary duty to client and supervisory duty to employee, and may also violate the Contract Law by their employee’s misconduct. 2, the brokerage firm may face to business fraud as Donald Rosenthal, an employee of the firm cheat to a potential client, make misrepresentation to gain illegal profit. 4. What other options could Donald Rosenthal pursued at the time of these transactions?
If Donald Rosenthal still wants to make the transaction done without violating laws and rules of professional standards, he should act legal and ethical as following: 1, fully disclosure the position of brokerage firm and the referral fees from the transaction; 2, act independence and objectivity in analyzing the business that he recommendation, do not make any misrepresentation and stand for the McHugh’s benefit; 3, after fully disclosure and analysis, let the McHugh make their own investment decision. 5. What potential professional disciplinary sanctions might Donald Rosenthal face?
As analyzed in question 3, there may have two kinds of professional disciplinary sanctions Donald Rosenthal may face to. One of them is ethical punishment from the RPC (Rules of Professional Conduct) as violating the industry’s profession conduct. It may result in penalty, warning or cancellation of the business license. Also by the conduct of business fraud, Donald Rosenthal may be charged and convict to crime. The legal judgment may include penalty, community service and even be sent to jail.