Summary
Under ethics rules governing lawyer conduct, a lawyer must exercise loyalty and independent judgment as essential elements in the lawyer-client relationship. In most jurisdictions, the legal ethics rules generally require a lawyer may not proceed if there are significant risks that the representation will be materially limited by the lawyer's personal interest(s). Also, such interest conflicts usually cannot be waived by a client's knowing consent unless, despite such conflict, the lawyer reasonably believes the lawyer will be able to provide competent and diligent representation and other of the ethics rules are followed. Because lawyers already have a financial interest in the outcome of litigation, piling on more financial interests could terminally affect a lawyer's ability to represent a client.
Analysis
In a situation where an investor bankrolls a lawsuit, there is real danger that a lawyer's independent judgment will be compromised if the lawyer or law firm allows the investor or its influence to materially affect the outcome of the case. Law firms in financial difficulty especially are in danger of falling afoul of the ethic rules from such arrangements, and it is the client who stands to ultimately suffer. Under most states' rules, lawyers must avoid even the appearance of impropriety, and third parties with a financial interest who participate in litigation by financial underwriting may give just such such an appearance.
State legal ethics boards, legal ethics experts, and malpractice insurers must be first consulted before lawyers undertake such relationships with lawsuit-investors.
An alternate method of proceeding would be for the investment firm to deal with the client directly rather than with the lawyer or law firm, but this gives rise to another set of issues for lawyers: who then is the client? It also gives rise to corporate ethics and finance issues for shareholders whose companies become beholden to the investors in their lawsuits.
For lawyers, allowing third parties into a lawsuit to speculate on their performance presents a true ethical quagmire, and even if handled properly, risks malpractice suits that no insurer may want to underwrite.
