Paul Manafort arrives at court in Washington DC

A report that Skadden Arps Slate Meagher & Flom could face government action over the work of former partner Gregory Craig has surprised some in the legal industry, with lawyers unable to cite many similar cases in the past.

For any law firm to be named directly in a US Government action – as opposed to individual lawyers being targeted – the scope of the alleged conduct would be likely to need to extend broadly and reach a firm's upper levels, said Justin Danilewitz, a partner at Saul Ewing and a former federal prosecutor.

"It's not inconceivable that a firm could be liable, in a way similar in which companies are liable for the conduct of their employees," Danilewitz said.

A former Skadden associate, Alexander van der Zwaan, was sentenced this spring for repeatedly lying to Robert Mueller's team investigating Russia's interference in the 2016 presidential election. By then, Skadden had already faced unwanted press attention for months as a result of Craig's work with Paul Manafort, and The New York Times reported as far back as a year ago that prosecutors had asked the firm for information and documents related to its work in Ukraine.

But a CNN report published on Friday (14 September) contained the most explicit suggestion yet that Skadden may be facing government action.

CNN, citing three sources, reported that Southern District of New York prosecutors are considering a civil settlement or a deferred prosecution agreement with Skadden. Craig himself is facing potential charges over failing to register as a foreign agent, according to CNN.

The report said prosecutors have not concluded that they have adequate evidence to take action, and ALM could not independently confirm the report's details. A Skadden spokeswoman declined to comment, and the firm's general counsel, Lawrence Spiegel, did not return a call for comment.

It is not just remarkable for a firm of Skadden's stature – now ranked the fifth largest law firm in the US by revenue, generating $2.58bn last year – to be embroiled in such a high-profile matter. It would also be uncommon for a large law firm to be directly named in any government action.

In one of the most recent cases in memory, in July 2008, federal prosecutors reached a settlement with class action law firm Milberg after several partners pleaded guilty to criminal charges relating to the payment of kickbacks to individual plaintiffs in shareholder cases. The deal called for the firm to pay $75m in fines in exchange for the dropping of criminal charges.

"It's very rare," for a firm to face action by prosecutors, said legal ethics adviser Roy Simon, speaking generally about such situations. "You have to find the management of the law firm was complicit, that the management of the firm knew of unlawful conduct was going on and decided to conceal it or not do anything about it."

Even though the top three executives of Dewey & LeBoeuf faced criminal charges and US Securities & Exchange Commission claims for allegedly deceiving firm investors and lenders, the now-defunct firm was never named in a government complaint as a defendant.

The scrutiny of Skadden is tied to its work for the former government of Ukraine. In 2012, Manafort, a longtime lobbyist and Republican operative, retained the firm to craft a report that evaluated the trial of Yulia Tymoshenko, the political rival of one of Manafort's top clients, former Ukrainian President Viktor Yanukovych, ALM has reported. Craig oversaw the firm's effort.

Manafort, Donald Trump's former campaign chairman, pleaded guilty on Friday to two conspiracy counts that covered a variety of offences, including money laundering and failing to disclose his lobbying work for Ukraine as required under the Foreign Agents Registration Act (FARA).

In court filings last week in Manafort's case, prosecutors said it was not disclosed that the law firm, in addition to being retained to write the report, was retained to represent Ukraine itself, including in connection with the Tymoshenko case, and to provide training to the trial team prosecuting Tymoshenko.

Prosecutors with the office of special counsel Robert Mueller said Manafort arranged to have the firm – identified in press reports as Skadden – disseminate hard copies of the report to government officials, including US executive and legislative branch officials.

But Craig's lawyers have said their client did not take part in this. "Craig never disseminated Skadden's report on the Tymoshenko trial to US Government officials, and he did not discuss Skadden's findings with officials in the executive branch or the Congress or their staffs," said William Taylor and William Murphy, Craig's lawyers, and partners at Zuckerman Spaeder. "He was not required to register under FARA."

Prosecutors also said in court filings that more than $4.6m was paid to the law firm for its work and Manafort used one of his offshore accounts to funnel $4m to pay the firm.

FARA wake-up call

Even if no action comes against Skadden or Craig, the controversy could serve as a wake-up call for lawyers and firms to comply with FARA, a law that has been on the books for about 80 years.

A limited liability partnership structure doesn't inoculate law firms from liability, said Danilewitz. "If there's evidence to support a prosecution of an entity, then the mere fact that it's a law firm will not immunise the entity from prosecution," he added.

Danilewitz pointed to an advisory opinion letter by a Department of Justice unit just this month that responded to a law firm's inquiry about "the possible obligation" of the firm to register under FARA. According to the opinion, the inquiry is from an international law firm that has been approached about a potential engagement with a foreign government to conduct an analysis and provide recommendations.

The letter shows that "law firms are increasingly sensitive to the possibility that they could be targeted under FARA and that they're seeking guidance", Danilewitz said.

Firms and lawyers "have got to be much more attentive to FARA than ever before", he added. While a 2016 report found that the number of FARA registrations has declined in the past two decades, and prosecutions and other enforcement actions are rare, Danilewitz said that may be changing, in light of the Mueller investigation and allegations against the Trump administration of collusion with the Russian government.

Those who knew Craig, a former White House counsel, described his outstanding reputation and high regard within Skadden. Still, the firm "cares enormously about its reputation and anything that reflects ill on it is something they [consider] seriously", said a lawyer close to the firm. ALM has previously reported that the firm asked Craig to leave after federal prosecutors notified him that he was the subject of an investigation.

Beyond any legal liability, Skadden's main concerns related to its Ukraine work are likely to hinge on the potential harm to its elite brand, both among clients and in its recruiting efforts. Law firm management consultant Peter Zeughauser said if any legal action was filed against Skadden, it may affect some "client impressions".

"Firms have made big mistakes," he added. "This will be a blip. What I suspect is any partner at Skadden will be deeply embarrassed, but the firm won't be taken off its trajectory of being one of the top firms in the world. These firms are bigger than any one partner, they're bigger than any one matter."